MISO, SERTP cost allocation proposal rests on avoided cost methodology

The Midcontinent ISO’s (MISO) cost allocation proposal developed with the Southeastern Regional Transmission Planning (SERTP) region is an avoided cost model, MISO said.

The regions developed a proposal to comply with the interregional requirements set forth in FERC Order 1000 and agreed to a common approach and parallel tariff language in their respective open access transmission tariffs. There is currently no joint operating agreement between MISO and SERTP. 

According to the proposal, an interregional transmission project will be included in MISO’s and SERTP’s regional transmission plans after each region has performed all evaluations included in their respective regional processes and has obtained all requisite approvals and agreements from the regional processes necessary for the project to be included in their transmission plans, MISO said.

The project category that MISO will rely on for evaluating and approving interregional projects is market efficiency projects (MEPs), MISO said. MEPs use a benefit-to-cost ratio threshold of 1.25 or greater.
 Once selected, an interregional project may be removed from the affected region’s plans “if it fails to meet requisite project milestones, if it is removed pursuant to the regional reevaluation procedures, or if the project is removed from the neighboring region’s regional plan for purposes of cost allocation,” according to MISO’s interregional proposal with SERTP.

MISO has asked FERC to approve an extended comment period on its proposal ending Sept. 9, 2013, and an effective date of Jan. 1, 2015. MISO submitted its interregional compliance filing to FERC on the July 10 deadline. 

Cost allocation methodology

Under the proposal, MISO and SERTP would calculate the cost of regional transmission projects identified in their respective regional plans that would be displaced by a proposed interregional transmission project, MISO said in its filing with FERC (Docket No. ER13-1923).

“Stated differently, the benefits of an interregional project would be the cost savings received by displacing the higher-cost regionally planned transmission project(s) in both regions with a more efficient and/or cost effective proposed interregional project(s) that addresses regional needs previously intended to be addressed by the displaced project(s),” MISO said in the filing. “MISO and the jurisdictional SERTP sponsors who have their regional transmission projects displaced by the proposed interregional project, and thereby would receive costs savings, would be the beneficiaries themselves or would benefit on behalf of their customers.”

These cost savings would be allocated on a pro rata basis between the regions and would be based on the ratio of each region’s displaced or avoided costs compared to the total displaced or avoided costs for both regions where the facility would be located, MISO said.

Acknowledging the amount of lead time it can take for a project to be developed, MISO proposed that cost allocation would be made according to the most recent regional benefits calculation performed prior to the project’s selection for regional cost allocation processes in the pertinent regional plans. 

Intraregional cost allocation is not addressed in MISO’s compliance filing, the RTO said.

Six interregional cost allocation principles 

Under Order 1000, an interregional compliance filing must comply with six principles: allocation must be commensurate with benefits; costs may not be allocated to a region that does not want to pay for them or in which a facility is not located; the benefit-cost threshold must be 1.25 or higher; the cost allocation process must be transparent; and there must be flexibility to use single or multiple methodologies for different projects.

Principle One (costs must be commensurate with benefits): MISO said its avoided cost approach complies with FERC’s requirements as the commission specifically approved such a methodology for allocating reliability project costs within a region.

“Moreover, the commission has not made a determination concerning the sole use of the avoided cost method in the context of interregional cost allocation,” MISO said.
The avoided cost methodology is also consistent with the jurisdictional SERTP sponsor’s regional compliance filings, MISO said.

“Utilizing an avoided/displaced cost allocation metric facilitates the comparison of the costs of an interregional project with a project(s) which has already been determined to provide benefits to the planning region,” MISO said. “Therefore, replacing an already identified regional project with a comparable, or more cost efficient, interregional project ensures that the cost and benefits are roughly commensurate in a manner that identifies cost-effective and efficient solutions to address transmission needs.”

Principles Two and Four (costs may not be allocated involuntarily to a region that does not benefit or in which a project is not located): MISO’s proposal meets these principles because “only a transmission provider or transmission owner in the regions in which the facility would be located that avoids transmission costs would be allocated the cost of the regional project,” the RTO said.

Under its proposal, any MISO transmission owner that withdraws from the RTO will remain responsible for its share of the cost of an interregional project that is a MEP and is approved by MISO’s board of directors before the effective date of the transmission owner’s withdrawal, “even if no portion of the MEP is located in the transmission planning area to which the transmission owner will transfer.”

Principle Three (cost-benefit ratio threshold): For a transmission project to be eligible for interregional cost allocation purposes within the MISO and SERTP regions, the project should have a combined benefit-to-cost ratio of 1.25 or higher, which is consistent with Order 1000, MISO said.

“While not specifically on point, it also bears noting that the avoided cost approach provides that proposed interregional cost allocation projects must be accepted in the respective regional processes,” MISO said.

Therefore, if a regional process requires a benefit-to-cost ratio threshold, such as MISO’s 1.25 threshold for MEPs, the portion of the project allocated to such region would be required to satisfy such a threshold, which is also independently required to meet Order 1000’s limitations on any regional benefit-to-cost ratio threshold, MISO said.

Principle Five (transparency): The nature of the avoided cost approach is intrinsically transparent, as the benefits that form the basis of cost allocation are readily quantifiable, MISO said.

Principle Six: The flexibility to use single or multiple methodologies for different projects would apply to all interregional projects proposed for cost allocation purposes, MISO said.

MISO and SERTP said they would “continue to explore the development of or the potential for additional cost allocation methodologies that might also prove suitable and will make appropriate filings with the commission should such efforts result in the identification of other suitable methodologies.” 

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.