Déjà Vu, All Over Again: Seventh Circuit Again Remands PJM’s Cost Allocation Methodology for New, High-Voltage Transmission Facilities to FERC

On June 25, 2014, the U.S. Court of Appeals for the Seventh Circuit, with Judge Richard A. Posner writing for himself and Judge John Daniel Tinder, granted petitions for review of Federal Energy Regulatory Commission (FERC) orders addressing, and remanded to FERC for the second time, the cost allocation methodology for new, 500 kV and higher-voltage transmission facilities in the PJM Interconnection, L.L.C. (PJM) region. Judge Richard D. Cudahy dissented. The decision is the most recent milestone in a lengthy battle among PJM stakeholders and suggests that uncertainty in this area could continue.

Background

In 2009, the same Seventh Circuit panel, also divided in that instance, held that FERC had not adequately supported its decision to approve the socialization, through a “postage-stamp” cost allocation methodology, of the costs of new, 500 kV and higher-voltage transmission facilities based on PJM utilities’ load-ratio shares. Under that approach, the costs of the facilities would be allocated to all PJM utilities in proportion to the amount of load served in each transmission zone. Previously, such costs had been allocated on a “beneficiary pays” basis according to the benefits that each PJM utility would receive from the new facilities. The court remanded the rate design issue to FERC, which in March 2012 reaffirmed the “postage-stamp” methodology, concluding that it is just and reasonable and not unduly discriminatory or preferential. FERC denied rehearing in March 2013 and these appeals followed.

Judge Posner’s Majority Opinion

Framing the issue as “the extent to which the members of PJM in its western region . . . can be required to contribute to the costs of [approximately $2.7 billion in] newly built or to-be-built 500-kV lines . . . primarily in the eastern part of PJM,” Judge Posner panned FERC’s analysis on remand, noting that FERC’s insistence upon a regional “postage-stamp” approach is “guaranteed to overcharge [PJM’s] western utilities, as they will benefit much less than the eastern utilities from eastern projects that are designed to improve the electricity supply in the east.” In sum, the majority held that FERC had again failed to:  (1) provide a quantifiable estimate, or even attempt empirical justification, of the benefits that PJM’s western utilities would receive from new, high-voltage transmission facilities in eastern PJM that “will confer only future, speculative, and limited benefits;” or (2) show that providing such an estimate or empirical justification would be impossible.

Judge Posner several times invoked the court’s 2009 guidance to FERC that, if it cannot quantify the benefits to western PJM utilities from new 500 kV or higher-voltage facilities in eastern PJM, “‘but it has an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities’ share of total electricity sales in PJM’s region, then fine.’” (Emphasis added.) But, the majority again concluded that FERC failed to meet that standard. The majority readily acknowledged that “some of the benefits of the new high-voltage transmission facilities will indeed ‘radiate’ to the western utilities,” but criticized FERC for failing to attempt a cost-benefit analysis, let alone offering an estimate of those benefits, noting that “cost-benefit analysis has been used in more difficult cases than this one.”

Instead, Judge Posner wrote, FERC has “given up the struggle” and assumed, without demonstrating, “that the benefits of the eastern 500-kV lines are proportionate to the total electric-power output of each utility.”  The “basic fallacy” of FERC’s analysis, he wrote, is “to assume that the 500-kV lines that have been or will be built in PJM’s eastern region are basically for the benefit of the entire regional grid. Not true . . . .”

Judge Cudahy’s Dissent

Judge Cudahy supported FERC’s approach below and disagreed with the majority’s “impression that somehow there is a mathematical solution to this problem,” arguing that the court should defer to FERC’s technical analysis. He noted that cost allocation, especially for extra-high-voltage facilities, “is far from a precise science,” and opined that, “[i]n fact, the postage stamp methodology is the only one that can be mathematically verified,” as other methodologies, such as cost-benefit analysis and distribution factor, or DFAX, analysis only provide approximations.

Judge Cudahy also questioned why the majority did not follow the court’s decision in Illinois Commerce Commission v. FERC, 721 F.3d 764 (7th Cir. 2013), which upheld “postage-stamp” cost allocation for high-voltage transmission facilities needed primarily to transmit power from remote wind-powered generators to load within PJM’s neighboring RTO. (The distinction, as the majority described it, is that there was evidence in that case that the facilities “would not yield highly disparate benefits to the utilities asked to contribute to their costs.”)  For Judge Cudahy, that decision bears more precedential weigh than the majority afforded it.

Finally, Judge Cudahy accused the majority of “substituting [its] findings in these technical matters for the Commission’s,” and, not wanting only the majority to second-guess FERC, offered his own rationale for upholding the “postage-stamp” approach, focusing on the broad, albeit sometimes difficult to quantify reliability and efficiency benefits of high-voltage facilities to the entire grid.

Implications

First, with the remand, uncertainty regarding the allocation of costs of new, 500 kV and higher-voltage transmission facilities in PJM likely will persist as the case works its way back through FERC and, possibly, another round of judicial review.

Second, transmission service providers such as PJM, and FERC, in ruling on future transmission cost allocation proposals, will need to focus more on facilities’ quantifiable costs and benefits. Even where some benefits are likely, or even obvious, quantification and careful comparison likely will become increasingly important. Here, in directing FERC to “try again,” the majority indicated that, if FERC “continues to argue that a cost-benefit analysis of the new transmission facilities is infeasible, it must explain why that is so and what the alternatives are.”

Third, it could be easier for FERC on this second remand to reach a conclusion that would be acceptable to the court, which provided clearer guidance in this decision regarding its requirements. Specifically, the court stated that, if FERC “after careful consideration concludes that the benefits can’t be quantified even roughly, it can do something like use the western utilities’ estimate of the benefits as a starting point, adjust the estimate to account for the uncertainty in benefit allocation, and pronounce the resulting estimate of benefits adequate for regulatory purposes.”

 

 

Topics:  Appeals, Cost Allocation, Energy, Energy Market, FERC, PJM, Transmission Grid, Utilities Sector

Published In: Administrative Agency Updates, Civil Procedure Updates, Energy & Utilities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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