By Rich Heidorn Jr. & Michael Brooks

PJM may have to refund millions in transmission costs to Midwest utilities following a federal appellate court ruling last week, but the RTO’s current cost allocation method for regional transmission projects shouldn’t be in jeopardy, PJM officials said yesterday.

The Seventh Circuit Court of Appeals ruled Wednesday that the Federal Energy Regulatory Commission had failed in its second try to demonstrate that the “postage-stamp” cost allocation method formerly used for high-voltage transmission lines in PJM’s eastern region is fair to the RTO’s Midwestern utilities.

In a 2-1 ruling, the court remanded the case to FERC for the second time, ordering it once again to justify why utilities in the Midwest should be billed under the same “socialized” method as utilities in the east for the construction of 500-kV lines that are exclusively in Mid-Atlantic states.

New Hybrid Cost Allocation Formula

The postage-stamp method in dispute was supplanted last year with an Order 1000-compliant hybrid formula that allocates only half of the cost of regional projects using the postage-stamp socialization. For reliability projects, the remainder of the allocation is determined by a solution-based distribution factor (DFAX) analysis. Changes in load energy payments determines the balance for economic projects.

PJM General Counsel Vince Duane said the RTO is waiting to see how FERC responds to the remand before determining the RTO’s next step. “It’s unclear whether FERC will throw the towel in or attempt to justify” the postage-stamp allocation, Duane said.

If FERC concedes, PJM will likely have to rebill its transmission customers for payments received until 2013, when the hybrid formula took effect. PJM Chief Financial Officer Suzanne Daugherty yesterday asked PJM’s billing department to calculate how much money is at stake.

The case originally involved plans for 18 new projects. Currently at issue are 15 projects: 11 completed, one under construction and three more under study, according to the court.

Among the projects affected are the TrAIL, Susquehanna-Roseland and Carson-Suffolk lines, as well as cancellation costs for the MAPP and PATH lines, according to PJM. The total cost of the affected projects is $2.7 billion, but PJM would have collected only a fraction of that through 2013 because the allocations are collected over the projects’ useful lives.

Rebilling Method in Question

One question yet to be answered is what allocation formula would be used in any rebilling. Dayton Power & Light Co., which was assessed $66 million under the postage-stamp formula, would see its allocation drop to $1 million under a 100% DFAX formula, the company’s attorneys stated in a reply brief earlier this year.

Regardless of how the rebilling issue is settled, Duane said he was confident that the current hybrid formula will survive.

“I think this current method is more defensible. It seems to be more in line with what the court is looking for,” he said.

In addition to reducing the socialized portion of the allocation by half, the new method expands the definition of “regional” projects to include not just lines of 500 kV and above but also double 345-kV circuits, which are more prevalent in western PJM, Duane said.

“We’re not back to square one” on cost allocation, he said.

Order 494

The appellate court case stems from an April 19, 2007 FERC ruling (Order 494) that replaced PJM’s former “license-plate” method with the postage-stamp method, which bills all utilities in proportion to their sales.

The court ruled that FERC had again failed to show how a western utility would benefit as much as an eastern utility from new transmission facilities in the east. The court called FERC’s argument that it was too difficult to quantify the benefits western utilities would receive “a feeble defense.”

“We conclude, with regret given the age of this case, that the commission failed to comply with our order remanding the case to it,” Judge Richard A. Posner wrote for the majority. “It must try again. If it 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.”

The court said that it was unlikely that much electricity will be transmitted from the eastern to the western utilities via the new transmission lines because the west is a net exporter.

Illinois’ Complaint

The Illinois Commerce Commission, which filed the complaint on behalf of Commonwealth Edison, did not dispute that the construction of high-voltage transmission lines in the east would provide some benefit to western utilities. For example, ComEd would be able to reduce its reserves, as the increased transmission capacity in the east would reduce the likelihood of outages there.

“So some of the benefits of the new high-voltage transmission facilities will indeed ‘radiate’ to the western utilities, as the commission said, but ‘some’ is not a number and does not enable even a ballpark estimate of the benefits of the new transmission lines to the western utilities,” Posner wrote. The ability to obtain and deliver electricity and reducing reserve capacity “are not equivalent benefits, though treated by the commission as equivalent. The only explanation for why it did that is that, having failed to conduct a cost-benefit analysis, it had no basis for treating the benefits as other than equivalent.”

Instead of the postage-stamp approach, the ICC argued that the western utilities’ contribution to the costs should be based solely on a DFAX analysis. FERC argued that this approach was an underestimate and the court agreed, calling it “the opposite extreme.”

In his dissent, Judge Richard D. Cudahy called a mathematical solution to the cost-allocation problem a “complete illusion. Despite the frequency with which cost-benefit analysis is used, it does not resolve the difficulty of accurately or meaningfully measuring the costs and benefits involved with these grid strengthening projects. Cost allocation, particularly at these extraordinarily high voltages, is far from a precise science, and there are no mathematical solutions to determining benefits region by region or subregion by subregion.”

The majority acknowledged “that the benefits of the new facilities to the western utilities may prove unquantifiable because they depend on the likelihood and magnitude of outages and other contingencies, and that likelihood and that magnitude may for all we know baffle the best analysts.”

“If the commission 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,” Posner wrote. “If best is unattainable, second best will have to do, lest this case drag on forever.”