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FERC to Review Justness of PJM Zonal Rates

The Federal Energy Regulatory Commission last week called for a review of rates imposed by the PJM Interconnection, saying they may be unjust, unreasonable and otherwise unlawful.

In an order issued last Tuesday, FERC set for hearing PJM's modified zonal rates that are assessed based on the embedded cost of the transmission facilities in the transmission pricing zone where the load is located. It called on PJM and its transmission owners to address the justness and reasonableness of the zonal rate design in the hearing. The Commission directed Chief Judge Curtis Wagner to convene a prehearing conference within approximately 15 days [ER04-156].

A number of transmission-owning utilities within PJM urged the Commission to continue the zonal rate design for PJM. But the FERC order said, "We recently found, in evaluating two competing rate proposals for a new transmission rate design to supersede through and out rates, that neither proposal, including the zonal rate design, had been shown to be just and reasonable and might be unjust and unreasonable."

Moreover, "we also view the arguments put forward by AEP as potentially demonstrating that modified zonal rates are, in fact, not just and reasonable in a situation such as that faced by AEP and other new PJM entrants now," the order noted. American Electric Power of Columbus, OH, contends that while it has provided significant new 500 kV transmission capacity to the PJM system, under modified zonal rates the bulk of the costs for that contribution will be recovered from load in AEP's transmission zone despite the fact that it is now serving all PJM members.

AEP further argued that once the Seams Elimination Charge/Cost Adjustments/Assignments (SECA) mechanism previously adopted by the Commission expires in March 2006, it will no longer be able to collect a significant portion of the charges for external transactions that it is now recovering through SECA.

But other PJM transmission owners said that retaining the existing rate design would enhance rate stability, reduce uncertainty and avoid unintended consequences, particularly at a time when PJM and the Midwest ISO are developing a joint and common market.

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