PJM Transmission Owners, HTP, others file comments with FERC on cost allocation in PJM

PJM Transmission Owners and Hudson Transmission Partners (HTP), as well as state agencies from New Jersey, Maryland and Delaware are among the entities that have submitted pre-technical conference comments to FERC regarding cost allocation in PJM Interconnection.

As TransmissionHub reported last November, FERC has directed staff to hold a technical conference to explore whether there is a category of reliability projects within PJM for which the solution-based distribution factor (DFAX) used for allocating costs of transmission projects may not be just and reasonable.

Solution-based DFAX is ‘objective, neutral and non-discriminatory’

In their comments, submitted in advance of the technical conference scheduled for Jan. 12, the PJM Transmission Owners said that to aid FERC in addressing the issue, they have developed a list of questions for consideration as part of the technical conference, including:

  • What is the proper way to measure benefits for baseline reliability projects, including those that address operational performance, in PJM?
  • Can categories of baseline reliability projects be defined in a neutral, consistent and objective manner, for purposes of cost allocation?

The owners claimed that if those questions are posed to all participants in the technical conference, the answers will lead to the conclusion that the current cost allocation methodology, including Solution-based DFAX, is an objective, neutral and non-discriminatory cost allocation methodology that balances the need for clear, ex ante rules and compliance with FERC’s cost allocation principles established in FERC Order 1000.

The owners said that the PJM cost allocation methodology is an integrated package that creates a just and reasonable cost allocation plan applicable to the wide-ranging and multi-faceted baseline reliability projects that are developed through the PJM planning process and approved by the PJM Board of Managers for inclusion in the PJM Regional Transmission Expansion Plan (RTEP).

The regional and intergenerational fairness of the current cost allocation methodology for baseline reliability projects also explains why its adoption was the key to ending years of cost allocation litigation with considerable concessions by all parties, the owners said.

The owners also said that answers to the questions listed in their comments will counsel caution before changing the methodology, because upsetting the delicate balance achieved by that compromise could lead to further litigation and delays in transmission development.

That does not mean that the current methodology can never be altered, the owners said, adding that any re-balancing or adjustment to elements of the cost allocation methodology necessarily affects some parties differently than others, and would, in all likelihood, create new complainants arguing unfairness and seeking further changes.

Accordingly, changes should only be undertaken incrementally and prospectively after ample evidence has been accumulated supporting the objectivity, fairness, and wisdom of making a change, the owners said.

Addressing the first question listed, regarding the proper way to measure benefits for baseline reliability projects, the owners said that as recognized by FERC, a causation-based cost allocation methodology has several shortcomings, including the inability to identify the causers of multiple constraints, and Solution-based DFAX avoids those shortcomings.

Because cost allocation is an art and not a science, no allocation methodology will provide an exact match between costs and benefits, the owners said. However, the methodology must be able to be applied consistently across all projects of the same type, they added.

Among other things, the owners said that Solution-based DFAX avoids the pitfalls of a causation-based methodology and establishes a consistent metric for measuring use that can be applied across the broad range of baseline reliability projects and can be updated based on changes in the use of the transmission system over time.

‘Solution-based DFAX methodology is not working’

HTP, which owns the Hudson Transmission Project, an approximately eight-mile, 660 MW merchant transmission facility (MTF) connecting PJM to the New York ISO that is under the operational control of PJM, said that PJM assigned HTP an automatic cost allocation of 100% for all the transmission facilities costs on the basis of “cost causation” without considering other beneficiaries of the new transmission facilities.

PJM’s Solution-based DFAX methodology is not working, HTP claimed, adding that it has not resulted in fair allocation of costs to HTP, nor other MTFs in PJM. HTP claimed that the current methodology results in grossly disproportionate allocation of costs to MTFs in proportion to purported benefits, much less actual benefits.

HTP said that FERC should ensure that any cost allocation methodology produces allocations to customers that reflect either the costs actually caused by those customers, or the measurable benefits received by those customers.

The proper use of cost allocation principles would require PJM transmission owners and MTFs like HTP to pay only for the costs of new transmission facilities for which they have some causation for, HTP said, adding that it does not contest that MTFs should be allocated just and reasonable costs for new PJM transmission facilities, but those costs should be allocated reasonably based on cost causation and in proportion to benefits, as required by federal court and commission rulings.

Noting that it is a merchant facility without captive customers and without a rate base, HTP said that it is only able to recover its “costs” from the sale of energy and capacity purchased in PJM and sold at higher prices in the NYISO. For that reason, HTP said its “benefits” from new PJM transmission facilities can only stem from buying energy and capacity at lower prices in PJM, selling energy and capacity at higher prices in NYISO, or selling more energy and capacity at the same price differential.

While it may be difficult to quantify energy and capacity price reductions from new RTEP transmission facilities that would inure to the benefit of MTFs, those benefits would seem to be incidental benefits to all users of the PJM transmission system, HTP said.

In addition, given the static nature of HTP’s MTF load, HTP said it believes an MTF cannot be the direct “cause” of a needed new PJM transmission facility, although it may garner incidental benefits from the upgrade.

FERC could consider allocating costs to MTFs based on the MTF’s load ratio share as a possible proxy and surrogate for this incidental benefit, HTP said. For example, if the PJM RTEP cost allocation is based on allocating a portion of the costs based on “cost causation” and the remainder of the costs based on “incidental benefits” (e.g., using the load ratio share methodology), then MTFs should share in the “incidental benefits” (load ratio share) portion of the RTEP cost allocation, HTP said.

New Jersey, Maryland, Delaware agencies submit comments

In their pre-technical conference comments, the New Jersey Board of Public Utilities and New Jersey Division of Rate Counsel said that all projects to ensure the reliability of the bulk transmission system are related to flow, including the projects leading to the instant technical conference, such that FERC should not distinguish RTEP projects on that basis.

All projects intended to ensure the reliability of the bulk transmission system have a flow component in one respect or another; whether it is overload conditions due to too much flow, short circuit conditions due to draw, or voltage and/or frequency fluctuations due to line conditions, the agencies said. In the simplest of terms, albeit a somewhat imprecise analogy, PJM describes “the bulk power grid like an interstate highway” that “stays open, keeping the flow of electricity moving across the large footprint even though some specific areas may experience temporary outages,” the agencies said.

Power flow is related to PJM’s entire planning process, the agencies said, adding that one of PJM’s primary functions as the RTO is to conduct the transmission planning process that culminates in the RTEP. PJM’s planning analyses for the RTEP are based on a consistent set of fundamental assumptions regarding load, generation and transmission built into power flow models, the agencies said, adding that projects included in the RTEP to optimize the operation of the bulk transmission system are no less flow-related.

FERC references challenges that the Artificial Island project is not flow-related, but rather driven by “operational performance” and generation output issues somehow unrelated to the flow of electricity, the agencies said. Although it is undisputed that PJM has been experiencing operational performance challenges in the Artificial Island area, those challenges cannot be viewed separately from the flow of electrons across the system, the agencies said. The Artificial Island area has historically been stability-constrained, the agencies said, adding that in other words, it is hard to get the electricity flowing out of the area while maintaining bulk transmission system stability. Such issues, and the intended solution, are inextricably related to flow of electricity over the bulk transmission system operated by PJM, the agencies said.

FERC should not exempt projects from the solution-based DFAX cost allocation methodology based on characterization that some projects, and not others, are unrelated to flow, the agencies said.

Among other things, the agencies said that FERC must not be tempted to resolve these cases by establishing an unjust and unreasonable cost allocation methodology that would unduly discriminate against New Jersey ratepayers.
The cases leading to the technical conference do not criticize Solution-based DFAX as faulty, but rather decry it as unjust and unreasonable “as applied” to certain projects, they said.

As PJM has noted, “of the 316 baseline upgrades assigned cost responsibility utilizing the solution-based DFAX methodology since January 1, 2014, and submitted to the commissions for approval, approximately 95% of those cost allocation where not protested,” the agencies said.

Also submitting pre-conference comments were the Delaware Public Service Commission (PSC), Maryland PSC, Delaware Division of Public Advocate and Maryland Office of People’s Counsel (collectively, the state agencies), which said that their interest in the proceeding is focused on the Artificial Island Project, given the direct economic impact on Delaware and Maryland of the proposed cost allocation for that project.

That project falls squarely into a "definable category of reliability projects within PJM for which the solution-based DFAX cost allocation method may not be just and reasonable," the state agencies said, adding that the project falls into a unique category for which the solution-based DFAX cost allocation method has been shown to be unjust, unreasonable, and unduly discriminatory in light of the wide disparity between the costs that would be allocated to customers in those areas and the corresponding benefits those customers would receive.

An exception to the solution-based DFAX approach is necessary for the Artificial Island Project to satisfy the "roughly commensurate benefits" test that appellate courts have established for assessing proposed cost allocations, the state agencies said.

The premise underlying the use of the solution-based DFAX cost allocation method is that flows on certain transmission facilities serve as an understood and acceptable proxy for the determination of the benefits associated with those facilities, the state agencies said.

For projects that are driven by the need to remedy thermal violations and voltage/reactive violations, that assumption may not be unreasonable, the state agencies said. For example, if a new transmission line increases the import capability into a constrained area, it is reasonable to conclude that the customers in the constrained area would benefit and that the costs of that facility would be allocated to the customers in that constrained area, the state agencies said.

For projects that are driven by the need to correct stability violations, by contrast, among the primary beneficiaries are the generators that experience an increased ability to generate and sell energy, they said. Consequently, some allocation of new transmission facility costs to those generators would not be unreasonable, the state agencies said, adding that the remaining amount of such costs, or the entire amount of the project costs if FERC is not inclined to include generators among those responsible for project costs, should be allocated in a manner that aligns cost responsibility with benefits.

Among other things, the state agencies said that in the case of the proposed cost allocation for the Artificial Island Project costs, neither cost allocation driver justifies the proposed cost allocation for the Delmarva Zone – i.e., the Delmarva Zone did not cause the Artificial Island Project costs to be incurred, nor will it benefit from the project at a level that is anywhere near being roughly commensurate with the allocated costs.

About Corina Rivera-Linares 2841 Articles
Corina Rivera-Linares, chief editor for TransmissionHub, has covered the U.S. power industry for the past 14 years. Before joining TransmissionHub, Corina covered renewable energy and environmental issues, as well as transmission, generation, regulation, legislation and ISO/RTO matters at SNL Financial. She has also covered such topics as health, politics, and education for weekly newspapers and national magazines. She can be reached at clinares@endeavorb2b.com.