Appeals court again rejects PJM ‘postage stamp’ cost allocation

The U.S. Court of Appeals for the Seventh Circuit has once again set aside the Federal Energy Regulatory Commission’s (FERC) approval of the PJM Interconnection methodology for allocating the costs of certain high voltage transmission projects planned and approved by PJM before Feb. 1, 2013.

In a two-to-one decision issued June 25, a three-judge panel for the 7th Circuit found FERC’s latest approach to divvying up the individual cost and benefits for major PJM transmission projects lacking.

The case is a follow-up to the 2009 case Illinois Commerce Commission versus FERC (ICC I), according to an analysis by the Van Ness Feldman law firm.

In that case, the 7th Circuit set aside FERC’s 2007 approval of PJM’s cost allocation methodology with respect to high-voltage transmission lines that operate at 500 kV and above. PJM’s method was to allocate those costs to entities across its entire footprint, based on each entity’s load share the “postage stamp” methodology, according to an analysis led by Van Ness Feldman partner Douglas Smith.

The first ICC decision was remanded to FERC for assurance that the costs imposed on a PJM member for new transmission are roughly commensurate with benefits to that member.

Subsequently, in response to Order No. 1000, PJM’s Transmission Owners filed a revised cost allocation methodology for new 500 kV and above transmission facilities (and 345 kV and above double-circuit facilities) that allocates 50% of the cost of such facilities using the postage stamp methodology, and 50% using a flow-based analysis to identify beneficiaries.

“In a majority decision by Judge Richard Posner (the author of the majority opinion in ICC I), the court once again rejected the ‘postage stamp’ methodology as inadequately supported,” Van Ness Feldman said. “The court emphasized that it was not rejecting the methodology itself, but was simply responding to ‘the absence from the Commission’s orders of even an attempt at empirical justification,’” the law firm said in its analysis.

The court dismissed FERC’s observations that during the 40-year lives of the high-voltage projects costs and benefits would likely shift, and utility territories would be redrawn. These future contingencies were insufficient reasons, in the court’s view, not to use a cost-benefit analysis.

Judge Richard Cudahy, formerly a Wisconsin public utility commissioner, dissented from the majority decision, as he did in the first ICC case. In his view, “the majority is charging the Commission with lack of commitment in pursuing a ‘two plus two equals four’ solution, but the Commission is dealing with incommensurable forces and conditions as skillfully and honestly as it can.”

Cudahy said in his dissent that cost allocation is a judgmental matter and that FERC is in better position than the court to make the necessary judgment.

ICC versus FERC involved case Nos. 13–1674, –1676, –2052, –2262. The litigation was argued before the court on April 22.

About Wayne Barber 4201 Articles
Wayne Barber, Chief Analyst for the GenerationHub, has been covering power generation, energy and natural resources issues at national publications for more than 20 years. Prior to joining PennWell he was editor of Generation Markets Week at SNL Financial for nine years. He has also worked as a business journalist at both McGraw-Hill and Financial Times Energy. Wayne also worked as a newspaper reporter for several years. During his career has visited nuclear reactors and coal mines as well as coal and natural gas power plants. Wayne can be reached at wayneb@pennwell.com.