Reaffirming PJM’s current “license plate” rate design for allocating the cost of existing facilities and new owner-initiated facilities, FERC late last week reversed the findings of an administrative law judge (ALJ) in a July 2006 initial decision. The judge had found that utilities should pay a uniform “postage stamp” rate for access to the regional transmission grid.

“This has been a long and complicated proceeding. By modifying the PJM cost allocation rules we provide regulatory certainty that should encourage greater investment in the regional grid,” said Joseph T. Kelliher, chairman of the Federal Energy Regulatory Commission (FERC). “Our order also takes care to avoid imposition of large costs shifts among the transmission systems of PJM utilities.”

Under a license plate design, each utility pays for transmission service based on the costs of transmission facilities located in the same, sub-regional zone in which the utility is located. The Commission agreed with the judge’s finding that, although the grid currently is operated on an integrated basis, that fact alone “does not support a reallocation of sunk transmission costs within PJM. The current license plate rate design remains just and reasonable because it reflects the prior investment decisions of the individual transmission owners,” the Commission said, adding: “[T]hese facilities were built principally to support load within the individual transmission owners’ zones and continue to serve those loads.”

Kelliher reiterated that no two regions are alike, adding that the Commission has taken varying approaches toward transmission cost allocation in different regions, such as it did last month for the Midwest ISO. “That reflects differences among the regional grids,” he said. “It also reflects the nature of the just and reasonable standard and the reality that cost allocation is an inexact science. In other regions where we have addressed transmission cost allocation, there was regional consensus. Given the inexact science of cost allocation and the flexibility of the just and reasonable standard, we were able to grant regional preference. Here, there was no regional consensus so it was impossible to provide regional preference.”

The Commission affirmed the ALJ’s initial decision, in part, regarding PJM’s approach for allocating the costs of new PJM-planned facilities, which provides that those benefiting from the project must pay its costs. However, the Commission found the methodology determining who benefits is not in PJM’s tariff, and the methodology was not sufficiently detailed. As a result, rates are “subject to relitigation each time a new project is proposed. This deprives both investors and customers of any certainty regarding the allocation of the costs of new transmission facilities,” the Commission said.

In a separate companion order (Docket No. ER06-1271, et al.), the Commission directed PJM to develop a detailed methodology to be included in PJM’s tariff for determining who benefits from, and therefore, who pays for new facilities — both reliability projects and economic projects — below 500 kV. The methodology may use different criteria for reliability versus economic projects, “if justified on the record,” FERC said.

However, the Commission also determined Thursday that the costs of all new PJM-planned facilities that operate at or above 500 kV — both reliability projects and economic projects — should be shared on a region-wide basis. “The benefits of new facilities at or above 500 kV are sufficiently broad that a region-wide postage stamp rate is appropriate,” the Commission said, noting that these facilities provide broad, regional benefits and the region-wide sharing of associated costs would encourage the development of a robust transmission grid.

PJM is a regional transmission organization that ensures the reliability of the electric power supply system in 13 eastern states and the District of Columbia.

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