By Rich Heidorn Jr.
PJM Insider
WASHINGTON, D.C. (March 21, 2013) — The Federal Energy Regulatory Commission today rejected a bid by PJM transmission owners to retain their rights of first refusal over transmission reliability projects while approving the owners’ proposed “hybrid” cost allocation for new high-voltage lines.
In Order 1000, the commission reversed previous FERC policy that allowed “incumbent” utilities rights of first refusal (ROFR) to add new lines. The commission said it would review transmission owners’ objections to the removal of ROFR individually.
In their Oct. 25 compliance filing (ER13-195-000) the PJM transmission owners said their ROFR privileges are embedded in the Transmission Owners Agreement and Operating Agreement. They said those rights are protected by the Supreme Court’s Mobile-Sierra standard, which presumes the validity of terms in freely negotiated wholesale energy contracts unless the contract “seriously harms the public interest.”
But the commission said the Mobile-Sierra protections apply only to contracts between parties of differing interests, in which there is a presumption that the negotiated terms are just and reasonable. The PJM agreements carry no such presumption because of the like interests of the transmission owners that formed the organization.
“We didn’t think it could be applied to this type of agreement. It’s not like a contract at arm’s length,” Chairman Jon Wellinghoff said in a news conference after the meeting. “What you have are multiple parties that formed an organization.”
The commission’s 3-2 decision, which came in response to compliance filings required by FERC’s landmark Order 1000, won’t be the last word on the issues. The right of first refusal is among the issues cited in more than a dozen challenges to Order 1000 that have been filed in the U.S. Court of Appeals for the District of Columbia.
“Hybrid” Cost Allocation Approved
The commission was more sympathetic to transmission owners’ proposed revisions to PJM’s transmission cost allocation rules. The new rules expand the definition of Regional Facilities to include double 345kV lines in addition to those 500kV and higher.
Costs for such lines will be allocated on a hybrid approach: one-half allocated on a postage-stamp basis (to zones on a load ratio share basis and to merchant transmission facilities in proportion to awarded Firm Transmission Withdrawal Rights) and the other half allocated to specifically identified beneficiaries of each project.
For reliability projects, beneficiaries will be identified based on the results of a revised distribution factor (“DFAX”) analysis.
For economic projects, beneficiaries will be identified based on each zone’s and each merchant transmission facility’s share of the zonal decreases in load energy payments that result from the new facility. This is the same methodology PJM currently uses for lower voltage economic projects.
The new allocation rules will also apply to lines below the voltage threshold that must be constructed or strengthened to support new Regional Facilities, so-called “Necessary Lower Voltage Facilities.”
The costs for lower voltage facilities not necessary for Regional Facilities will be allocated 100% to beneficiaries based on the same rules.
The proposal replaces the current violations-based DFAX analysis to a “solution-based” evaluation. The violation-based DFAX evaluates the contribution of load and merchant transmission facilities to flows on the facility that requires improvements to avoid reliability violations.
In contrast, the new solutions-based approach determines the relative use that load in each zone and withdrawals by merchant transmission facilities are projected to make of the new facility. Uses of the new facility in both directions are taken into account.
Munis Welcome ROFR Removal
Order 1000 required transmission providers to remove from their FERC tariffs and agreements any provisions that grant a federal right of first refusal to transmission facilities that are selected in a regional transmission plan for cost allocation. The order doesn’t affect the right of an incumbent transmission provider to build and recover costs for upgrades to its own transmission facilities. Also unaffected were incumbent transmission providers’ use and control of their existing rights of way
Municipal utilities welcomed the elimination of the preference as a way for them to share in ownership of new facilities and thus reduce the cost impact on their ratepayers. Load-serving utilities without transmission say incumbents have used the preference to block or delay new transmission needed for them to access competitors’ generation.
Independent transmission developers say they are reluctant to invest time and money developing transmission projects because incumbents can take control of the project after its benefits have been demonstrated.
High Standard of Proof
The commission’s determination that PJM’s ownership and operating agreements were not arm’s-length contracts allowed regulators to sidestep the high hurdle the Supreme Court for rejecting Mobile-Sierra contracts. The court said that rates set by a freely negotiated wholesale energy contract are presumed to be just and reasonable unless FERC concludes that the contract “seriously harms the public interest.” The D.C. Circuit has called the public interest standard “practically insurmountable.”
The transmission owners had hoped to force FERC to meet the standard. The owners noted that PJM transmission owners have built $5 billion in transmission expansions and upgrades since PJM became an RTO. “The Commission has not disallowed any of these costs. In other words, the ROFR has produced no costs in excess of what is just and reasonable.”
Transmission owners in New England, the Midwest ISO and the Southwest Power Pool also cited the Mobile-Sierra standard in seeking to retain their ROFRs. Transmission owners in MISO said that eliminating their rights to construct new transmission within their own systems could result in “substantial erosion” of company revenue.
Split Vote
Commissioners Philip D. Moeller and Tony Clark dissented on the PJM and MISO votes, saying they believed the orders will impede efforts to accelerate transmission construction.
Moeller said the commission’s PJM order was likely to discourage transmission construction. “As I observed in my partial dissent on Order No. 1000, `instead of encouraging more regional cooperation, the rule could ultimately discourage such cooperation by encouraging more local transmission projects,’” he wrote.
Clark wrote that he disagreed with the majority’s finding that allowing PJM “to acknowledge the reality of certain state and local laws in its planning process was a violation of these Order No. 1000.” As a result, he said, “PJM will be compelled to approve projects that may have no legal possibility of ever being built.”
“The Commission’s decision puts PJM on a collision course for litigation, as opposed to a pathway towards transmission development,” he added.
The commission found that PJM, MISO and WestConnect “partially comply” with Order 1000 but will need to make additional filings to clarify and refine their plans.
PJM was ordered to provide more detail on the solution-based DFAX and how planners will evaluate the impact of the RTO’s upgrades on neighboring regions. The commission also asked for more information on how PJM will determine whether new direct current transmission lines qualify for regional cost allocation.
MISO was ordered to provide more detail on how it will qualify and select transmission developers to build future projects. Wellinghoff said MISO gave costs only a 30% weighting in the selection criteria. “Other selection criteria seemed more like qualification criteria.”
WestConnect has the most work to do in its next compliance filing. The commission rejected WestConnect’s cost allocation plan, saying it cannot be voluntary.
