Court upholds FERC on MISO transmission project cost allocations

The U.S. Seventh Circuit Court of Appeals on June 7 affirmed orders from the Federal Energy Regulatory Commission related to assignment of costs for multi-value transmission projects needed to support wind energy development.

Two Regional Transmission Organizations (RTOs) are involved in this case—the Midcontinent Independent Transmission System Operator (MISO) and PJM Interconnection. The opinion was from a three-judge panel, making the appeal venue from here either a hearing before the full appeals court or a direct appeal to the U.S. Supreme Court.

In 2010, MISO sought FERC’s approval to impose a tariff on its members to fund the construction of new high-voltage power lines that it calls “multi-value projects” (MVPs), beginning with 16 pilot projects. The tariff is mainly intended to finance the construction of transmission lines for electricity generated by remote wind farms.

Many of the states in the MISO region expect or require utilities to obtain between 10% and 25% of their electricity needs from renewable sources by 2025, the court noted.

Most of the best wind farm sites in the MISO are in the Great Plains, because: electricity produced by wind farms there is cheaper despite the longer transmission distance; the wind flow is stronger and steadier; and land is cheaper because population density is lower. The cost of the multi-value projects is to be allocated among utilities drawing power from MISO’s grid in proportion to each utility’s share of the region’s total wholesale consumption of electricity.

Before 2010, MISO allocated the cost of expanding or upgrading the transmission grid to the utilities nearest a proposed transmission line, on the theory that they would benefit the most from the new line. But wind farms in the Great Plains can generate far more power than that sparsely populated region needs. So MISO decided to allocate MVP costs among all utilities drawing power from the grid according to the amount of electrical energy used, thus placing most of those costs on urban centers, where demand for energy is greatest.

FERC approved (with a few exceptions) MISO’s rate design and pilot projects in two orders, precipitating several petitions for review filed at the appeals court.

Six issues are presented in these appeals:

  • the proportionality of benefits to costs;
  • the procedural adequacy of the commission’s treatment of proportionality;
  • the propriety of apportioning the cost of the multi-value projects among utilities on the basis of their total power consumption while allocating no MVP costs to the plants that generate the power;
  • whether MISO should be permitted to add the MVP fee to electricity transmitted to utilities that belong to the PJM rather than to MISO;
  • whether MISO should be permitted to assess some of the multi-value projects’ costs on departing members of MISO; and
  • whether the commission’s approval of the MVP tariff—which if implemented will influence decisions by state utility commissions regarding the siting of transmission lines—violates the Tenth Amendment to the Constitution by invading state prerogatives.

Court turns back arguments of Illinois parties

The appeals court said the Tenth Amendment challenge is “frivolous” and easily gotten rid of.

In this case, various Illinois parties, including the Illinois Commerce Commission, contended that the criteria for determining what projects are eligible to be treated as MVPs are too loose, and that as a result all MISO members will be forced to contribute to the cost of projects that benefit only a few.

The court noted that FERC has required MISO to provide annual updates on the status of the 16 initial projects. Should the reports show that the benefits anticipated by MISO and FERC are not being realized, the commission can modify or rescind its approval of the MVP tariff.

Illinois also complains that MISO has failed to show that the multi-value projects as a whole will confer benefits greater than their costs, and it complains too about FERC’s failure to determine the costs and benefits of the projects subregion by subregion and utility by utility.

“But Illinois’s briefs offer no estimates of costs and benefits either, whether for the MISO region as a whole or for particular subregions or particular utilities,” said the court. “And in complaining that MISO and the Commission failed to calculate the full financial incidence of the MVP tariff, Illinois ignores the limitations on calculability that the uncertainty of the future imposes. MISO did estimate that there would be cost savings of some $297 million to $423 million annually because western wind power is cheaper than power from existing sources, and that these savings would be ‘spread almost evenly across all Midwest ISO Planning Regions.’ It also estimated that the projected high voltage lines would reduce losses of electricity in transmission by $68 to $104 million, and save another $217 to $271 million by reducing ‘reserve margin losses.’ That term refers to electricity generated in excess of demand and therefore (because it can’t be stored) wasted. Fewer plants will have to be kept running in reserve to meet unexpected spikes in demand if by virtue of longer transmission lines electricity can be sent from elsewhere to meet those unexpected spikes. It’s impossible to allocate these cost savings with any precision across MISO members.”

The promotion of wind power by the MVP program deserves emphasis, the court added. Already wind power accounts for 3.5% of the nation’s electricity, and it is expected to continue growing despite the downsides of wind power. The use of wind in lieu of power generated by burning fossil fuels reduces both the nation’s dependence on foreign oil and emissions of CO2, the court noted.

“No one can know how fast wind power will grow,” the court added. “But the best guess is that it will grow fast and confer substantial benefits on the region served by MISO by replacing more expensive local wind power, and power plants that burn oil or coal, with western wind power. There is no reason to think these benefits will be denied to particular subregions of MISO. Other benefits of MVPs, such as increasing the reliability of the grid, also can’t be calculated in advance, especially on a subregional basis, yet are real and will benefit utilities and consumers in all of MISO’s subregions.”

The court added: “It’s not enough for Illinois to point out that MISO’s and FERC’s attempt to match the costs and the benefits of the MVP program is crude; if crude is all that is possible, it will have to suffice.”

Michigan loses arguments based on its relative isolation

Michigan (consisting of Michigan utilities plus the state’s electric power regulatory agency) argued that unique features of the state’s power system will cause

Michigan utilities to pay a share of the MVP tariff greatly disproportionate to the benefits they will derive from the multi-value projects. A Michigan statute forbids Michigan utilities to count renewable energy generated outside the state toward satisfying the requirement in the state’s “Clean, Renewable, and Efficient Energy Act” of 2008 that they obtain at least 10% of their electrical power needs from renewable sources by 2015.

Michigan further argued that it won’t benefit from any multi-value projects constructed in other states because its utilities draw very little power from the rest of the MISO grid, as a consequence of the limited capacity to transmit electricity from Indiana to Michigan. It argued that for these reasons it should be required to contribute only to the costs of multi-value projects built in Michigan.

The second argument “founders” on the fact that the construction of high-voltage lines from Indiana to Michigan is one of the multi-value projects and will enable more electricity to be transmitted to Michigan at lower cost, the court ruled. “Michigan’s first argument—that its law forbids it to credit wind power from out of state against the state’s required use of renewable energy by its utilities—trips over an insurmountable constitutional objection,” it added. “Michigan cannot, without violating the commerce clause of Article I of the Constitution, discriminate against out-of-state renewable energy.”

The court said that one answer to both the substantive and procedural questions about proportionality is that MISO members who think they’re being mistreated by the MVP tariff “can vote with their feet.” Membership in an RTO is voluntary and though there’s a “departure fee,” it is an unexceptionable feature of membership in a voluntary association, designed to prevent a departing member from reaping a windfall by leaving costs for which it is properly liable to be borne by the remaining members, the court said. A departure fee will not prevent a discontented MISO member from “decamping” to an adjacent RTO, the court noted.

Court holds off on arguments over FirstEnergy, Duke

Two former members of MISO, FirstEnergy (NYSE: FE) and Duke Energy (NYSE: DUK), announced their intention to quit MISO before the MVP tariff was announced. MISO wants, though, to allocate some MVP costs to them. FERC has ruled that allocation to departing utilities is proper in principle, but has not yet determined which if any costs may be allocated to the two utilities in particular. FirstEnergy and Duke respond that they can’t be made liable for any such costs because their membership contract with MISO does not provide for the imposition of such costs.

“When a firm withdraws from an association owing money to it, its withdrawal does not terminate its liability; an example is an employer who withdraws from a multiemployer ERISA plan,” the court noted. “The same may be true of withdrawal from a Regional Transmission Organization. If MISO began to incur costs relating to the MVPs (including the pilot projects) before the departing members announced their departure, those utilities may be liable for some of those costs. MISO contends that they are liable, but the Commission has reserved the question for a separate proceeding, as it is authorized to do.”

The court said it won’t rule, though, on the FirstEnergy and Duke liability issue since FERC has not rendered a final decision in the matter.

About Barry Cassell 20414 Articles
Barry Cassell is Chief Analyst for GenerationHub covering coal and emission controls issues, projects and policy. He has covered the coal and power generation industry for more than 24 years, beginning in November 2011 at GenerationHub and prior to that as editor of SNL Energy’s Coal Report. He was formerly with Coal Outlook for 15 years as the publication’s editor and contributing writer, and prior to that he was editor of Coal & Synfuels Technology and associate editor of The Energy Report. He has a bachelor’s degree from Central Michigan University.