FERC rejected a complaint that the Kentucky Public Service Commission and attorney general filed against American Electric Power over a cost-allocation dispute involving the AEP East Operating Cos.’ transmission agreement (EL25-67).
AEP East provides transmission service to its utilities in PJM and some transmission-only affiliates in the region in an arrangement that started in 1984, predating the utility’s membership in the RTO, which began in 2004. The allocation of transmission costs for lines of 69 kV and above is shared among its utilities in Kentucky, Indiana, Michigan, Ohio, Virginia and West Virginia under a deal approved by FERC in 2010.
The deal covers all PJM projects, even “supplemental” transmission that transmission owners use to plan for their own, local needs. Under its Attachment M-3, PJM allocates the cost of supplemental projects only to the utilities that build them, but the 2010 Transmission Agreement allocates them across AEP’s utilities in the region.
Kentucky complained that setup is not fair because its residents do not benefit from supplemental transmission investments made in other states.
“Since 2019, AEP East has added $3.4 billion in AEP East Attachment M-3 Projects to rate base, of which more than $75 million has been allocated to Kentucky electricity consumers,” the order said. “Complainants aver that few, if any, of those AEP East Attachment M-3 Projects have any relationship to serving Kentucky Power retail or wholesale customers.”
The transmission agreement has been around since 1984 and in addition to joining the RTO, AEP stopped centrally planning its generation, the latter of which was a key part of FERC’s reasoning for approving the arrangement in the first place.
AEP argued that Kentucky consumers still use all of the AEP East transmission system and the benefits they get are roughly commensurate with the costs they paid. The utility holding company approaches local planning as if the AEP East utilities were a fully integrated system.
“AEP East states that this means making transmission investments at the local level with the purpose and effect of benefiting the entire AEP East transmission system, as reflected in AEP East’s transmission planning guidelines, and asserts that the AEP East transmission system was developed to be, and remains, a system within a system,” the order said.
FERC found that the complaint failed to prove the 2010 Transmission Agreement’s rules for allocating supplemental projects were unjust and unreasonable. Commission rules require that consumers pay for transmission that benefits them and allocations are done in way “at least roughly commensurate with benefits.”
Cost allocations do not have to be done with “exacting provision,” but FERC needs a plausible reason for why they are roughly commensurate with assigned costs. The commission previously explained it has a strong policy of requiring rolled-in costs when any degree of integration has been shown.
“Complainants point to a selection of 26 AEP East Attachment M-3 Projects that they argue do not provide benefits to Kentucky customers that are commensurate with the approximately $15 million per year in costs allocated to Kentucky customers for those projects,” FERC said. “As discussed above, providing a selection of projects as evidence that a cost-allocation framework is no longer just and reasonable is not sufficient to overturn a cost-allocation framework approved by the commission.”
It still makes sense to allocate supplemental projects across all of AEP’s operating companies in PJM because while different utilities might have created the need for the upgrades, to the extent another firm benefits from them — it can be said to have “caused” part of the costs.
“Complainants focus on which entities drive the initial need for a transmission project, but that is not the end of the cost-causation analysis — rather, the cost-causation principle requires that the costs for a transmission project be allocated to those who benefit from the project,” FERC said.
“As discussed above, the commission has rejected challenges to cost allocations for specific transmission facilities where those facilities formed part of the integrated transmission system. Kentucky Power’s system is part of AEP East’s integrated transmission network. Thus, it is reasonable to conclude that Kentucky Power’s customers benefit from the AEP East Attachment M-3 Projects that become a part of that transmission network.”
