FERC Issues NOPR re Transmission Planning and Cost Allocation

At its monthly meeting on June 17, 2010, FERC issued a Notice of Proposed Rulemaking (“NOPR”) in which it proposes to amend the transmission planning and cost allocation requirements established in Order No. 890.  The NOPR proposes fundamental changes in the way transmission projects are planned and constructed and in the way the costs of those projects are allocated to customers.  The proposal will affect both public utilities and non-public utilities, including utilities in RTOs and ISOs and stand-alone utilities.  Each utility that owns or operates transmission facilities or that plans to own or operate transmission facilities in the future should consider filing comments on the NOPR.  Comments on the NOPR are due 60 days after publication in the Federal Register, which should occur within a week.

Background

According to the Commission, “[t]he proposed reforms are intended to correct deficiencies in transmission planning and cost allocation processes so that the transmission grid can better support wholesale power markets and thereby ensure that Commission-jurisdictional services are provided at rates, terms and conditions that are just and reasonable and not unduly discriminatory or preferential.”

In Order No. 890, the FERC established new requirements with respect to transmission planning.  It required each public utility to develop a transmission planning process that satisfied nine principles and to include that process in its open access transmission tariff (“OATT”).  The nine principles are (1) coordination; (2) openness; (3) transparency; (4) information exchange; (5) comparability; (6) dispute resolution; (7) regional participation; (8) economic planning studies; and (9) cost allocation for new projects.  The FERC issued a significant number of orders requiring transmission providers to modify their proposed transmission planning processes to comply with Order No. 890.

In the NOPR, the FERC stated that transmission planning processes have improved significantly, but that the siting, permitting and cost allocation of transmission facilities still face significant challenges.  FERC stated that deficiencies that remain include (1) the lack of a requirement for a regional transmission plan; (2) the absence of coordination between transmission planning and public policy requirements such as reliance on renewable energy resources; (3) obstacles to the participation by nonincumbent transmission developers in regional planning; (4) the relative lack of coordination between transmission regions; (5) the existing transmission cost allocation methods, which may inhibit the development of efficient, cost-effective transmission facilities; and (6) uncertainty as to whether companies that are considering transmission investment will have a reasonable opportunity to recover their costs.

Key Aspects of the NOPR

• FERC proposes to require each public utility transmission provider to participate in a regional transmission planning process that produces a regional transmission plan meeting specific planning principles.
• FERC proposes to require consideration of public policy requirements in transmission planning processes.
• FERC proposes to require transmission providers to remove from their OATTs and jurisdictional agreements any provisions establishing a federal right of first refusal for an incumbent transmission provider.
• FERC proposes to require that a project’s sponsor have the right to construct and own its proposed facility, and that a nonincumbent transmission developer have an opportunity comparable to that of an incumbent transmission owner to recover the costs associated with developing and constructing a facility.
• FERC proposes to require interregional transmission planning agreements between public utility transmission providers in neighboring regions.
• FERC proposes to require the development of intraregional and interregional cost allocation methods for the costs associated with new transmission facilities included in the transmission plan produced by a utility’s transmission planning process.
• FERC also proposes to require non-public utility transmission providers to comply with the regulations in order to remain in compliance with reciprocity and safe harbor requirements and avoid Section 211A actions.

Transmission Planning Reforms

Participation in the Regional Planning Process:  FERC proposes to require each public utility transmission provider to participate in a regional transmission planning process that produces a regional transmission plan.  The process must meet seven of the transmission planning principles established in Order No. 890:  (1) coordination; (2) openness; (3) transparency; (4) information exchange; (5) comparability; (6) dispute resolution; and (7) economic planning studies.  Specifically, FERC proposes to require regional planning processes to consider and evaluate transmission facilities and non-transmission solutions and develop a plan that identifies the transmission facilities needed to meet the needs of transmission customers and other stakeholders in the region.  FERC explains that the current lack of a requirement for a regional transmission plan could inhibit construction of new transmission facilities, and may prevent the identification of the facilities best suited to meet the needs of a particular region.

FERC seeks comment on any issue of interest or concern related to these requirements.

Public Policy Driven Projects:  Under FERC’s current transmission planning requirements, a public utility transmission provider has no specific obligation to evaluate a proposed transmission project based on its potential to facilitate the achievement of public policy requirements established by state or federal laws or regulations.  FERC explains that failure to account explicitly for public policy requirements in the transmission planning process could result in undue discrimination and rates, terms, and conditions of service that are not just and reasonable.  In the NOPR, FERC proposes to require each public utility transmission provider to amend the transmission planning processes in its OATT to explicitly provide for consideration of public policy requirements established by state or federal laws or regulations that may drive transmission needs.  A public utility transmission provider may also choose to include additional public policy objectives not required by state or federal laws or regulations.  Each public utility transmission provider must specify in its OATT how it will evaluate projects proposed to achieve public policy requirements.

FERC seeks comment on any issue of interest or concern related to the proposed requirements, in addition to the following:

• Whether public policy requirements established by state or federal laws or regulations should be considered in the transmission planning process.

• How planning criteria based on public policy requirements should be formulated, including whether it is more appropriate to use flexible criteria instead of “bright line” metrics when determining which projects are to be included in the regional transmission plan, whether the use of flexible criteria would provide undue discretion as to whether a project is included in a regional transmission plan, and whether the use of “bright line” metrics may inappropriately result in alternating inclusion and exclusion of a single project over successive planning cycles and therefore create inappropriate disruptions in long-term transmission planning.

Nonincumbent Transmission Developers:  Probably the most controversial aspect of the NOPR is the FERC’s proposed series of reforms that are intended to eliminate opportunities for undue discrimination and preferential treatment against nonincumbent transmission developers, and to encourage participation by nonincumbent developers in the regional transmission planning process.  FERC is concerned that an incumbent transmission provider’s first refusal rights with respect to the construction of transmission projects is a disincentive to merchant or independent transmission developers to propose projects, because of the possibility that they will not be able to recover their investment if the incumbent takes on the project itself.

• First, FERC proposes to require each public utility transmission owner to include in its OATT qualification criteria for determining an entity’s eligibility to propose a project in the regional transmission planning process.
• Second, FERC proposes to require each public utility transmission provider to include in its OATT a form to be used by prospective project sponsors to provide project information for evaluation in the planning process.
• Third, FERC proposes to require each public utility transmission provider to participate in a planning process that evaluates proposals through a transparent and not unduly discriminatory or preferential process, and to describe the evaluation process in its OATT.
• Fourth, FERC proposes to require removal from a transmission provider’s OATT or jurisdictional agreements of any provisions that establish a federal right of first refusal for an incumbent transmission provider.  Each public utility transmission provider must amend its OATT to describe how the regional transmission planning process in which it participates provides for a project’s sponsor to have a right, consistent with state or local laws or regulations, to construct and own that facility.
• Fifth, FERC proposes to require that a sponsor have the right to develop a project under the above rules if the sponsor resubmits a project that was not included in a prior regional transmission plan.
• Sixth, FERC proposes to require that a nonincumbent transmission developer have an opportunity comparable to that of an incumbent transmission owner to recover the costs associated with developing and constructing a transmission facility.

FERC limited its proposed elimination of the right of first refusal in several respects.  It emphasized that its proposal does not override state or local law concerning the construction of transmission facilities; it simply eliminates any federal basis for a transmission provider to assert a right of first refusal to construct transmission facilities.  FERC also stated that these reforms would apply only to facilities that are evaluated in a regional planning process and selected for inclusion in a regional transmission plan, and would not apply to existing obligations of transmission providers to build unsponsored projects.  Also, FERC stated that it would not require independent transmission developers to participate in the regional process, noting that a merchant transmission developer could choose to not participate in the process because it bears all the risk of development of its project.  Finally, FERC made a preliminary finding that an incumbent utility’s obligation to construct new facilities if called upon to do so is not dependent on whether it also has a right of first refusal to construct transmission facilities.

FERC seeks comment on any issue of interest or concern, as well as the following:

• Whether FERC should establish a single set of qualification criteria for determining an entity’s eligibility to propose a project that would apply in all regional transmission planning processes, and if so, what those criteria should be.
• How the reforms proposed would affect the rights, obligations, and responsibilities of incumbent and nonincumbent transmission providers.
• The relationship or lack of relationship between a right of first refusal and an obligation to build.
• Whether it would be appropriate to retain a federal right of first refusal.  If not, why not?  If so, would it be appropriate to retain an obligation to build for an incumbent transmission provider while removing a federal right of first refusal for that incumbent?

FERC’s proposals in the NOPR are consistent with its finding in an unrelated order issued at this month’s meeting.  In Central Transmission, LLC v. PJM Interconnection, L.L.C., FERC found that a nonincumbent transmission owner is eligible to be designated by PJM to build facilities approved through PJM’s Regional Transmission Enhancement Plan process and to seek cost-of-service rate treatment as would any other transmission owner.  (Central Transmission, LLC v. PJM Interconnection, L.L.C., 131 FERC ¶ 61,243, at PP 2, 46 (2010).)  The NOPR and the Central Transmission order together indicate a shift in FERC’s transmission planning policy to give transmission developers the right to build transmission in the service territories of public utility transmission providers.

Interregional Coordination:  FERC also proposes to require public utility transmission providers to coordinate with the public utility transmission providers in neighboring transmission planning regions.  This coordination must be reflected in an interregional transmission planning agreement, which must be filed with the Commission.  This agreement may be developed on behalf of transmission providers within multiple planning regions, and FERC encourages providers to explore possible multilateral interregional transmission planning agreements among several regions within an interconnection.  FERC proposes a number of elements that must be included in the interregional planning agreement, and proposes a procedure to identify and jointly evaluate transmission facilities located in multiple regions.

FERC seeks comment on any issue of interest or concern related to the requirements proposed, as well as on the following:

• The proposed required elements of an interregional transmission planning agreement and any other elements that should be part of such an agreement.
• How an interregional transmission planning agreement would be implemented in non-RTO/ISO regions.
• The impact that an interregional transmission planning agreement would likely have on the development of interregional transmission facilities.

Cost Allocation Reforms

FERC proposes to amend its regulations regarding cost allocation to more appropriately account for the benefits associated with new facilities, and to ensure rates that are just and reasonable and not unduly discriminatory or preferential.

• First, FERC will more closely align transmission planning and cost allocation processes.  To do this, FERC proposes to require public utility transmission providers to have in place a method for allocating costs of new transmission facilities that are included in the transmission plan produced by its transmission planning process to the beneficiaries of those facilities.  Entities may have a single cost allocation method for all new facilities or different methods for different types of facilities.  For example, a method may distinguish among facilities needed to maintain reliability, to relieve congestion, or to achieve public policy requirements.  FERC would allow an entity to choose whether to distinguish among these types of facilities, as long as each of them is considered in the planning process and there is a means for allocating the costs of each type to beneficiaries.
• Second, FERC will require each public utility transmission provider within a planning region to develop a cost allocation method for new interregional transmission facilities between the two neighboring regions in which the facility is located or among beneficiaries in the two regions.
• Third, FERC will evaluate each cost allocation method based on the principles set out separately below for intraregional and interregional facilities.

If no agreement can be reached by public utility transmission providers in consultation with customers and other stakeholders, FERC will develop a method based on the record developed in the compliance filing proceeding.

Intraregional Cost Allocation:  Intraregional cost allocation methods must satisfy the following principles:

• The cost of facilities must be allocated to those within the region that benefit from those facilities in a manner at least roughly commensurate with estimated benefits.
• Those that receive no benefit from facilities must not be involuntarily allocated costs of those facilities.
• Any benefit to cost threshold used must not be so high that facilities with significant positive net benefits are excluded from cost allocation.  Specifically, the threshold may not include a ratio of benefits to costs that exceeds 1.25 unless the transmission provider justifies and the Commission approves a greater ratio.
• The allocation method for the cost of an intraregional facility must allocate costs solely within that region unless another entity or region voluntarily agrees to assume a portion of the costs.
• The cost allocation method and data requirements for determining benefits and identifying beneficiaries must be transparent.
• A transmission planning region may choose to use different cost allocation methods for different types of transmission facilities.

FERC recognizes that several approaches may satisfy the above principles.  For example, postage stamp rates may be appropriate where all customers benefit from the use or availability of a facility or class or group of facilities, such as all facilities at 345 kV or higher.  In addition, voluntary participant funding would be permitted.  FERC also stated that if a region cannot agree on a cost allocation method, the FERC would do so based on the record developed in the utilities’ compliance filing.  Finally, FERC clarified that a utility cannot unilaterally invoke regional cost allocation for a project that is located solely within its service territory, but that regional cost allocation would be permitted if the regional planning process determines that the project provides regional benefits.

Interregional Cost Allocation:  FERC proposes to require that public utility transmission providers located in each pair of neighboring transmission planning regions develop a mutually agreeable method for allocating the costs of interregional transmission facilities.  A group of three or more planning regions within an interconnection may agree on and file a common cost allocation method, but FERC does not propose to require such agreements among more than two neighboring regions.  Interregional cost allocation methods must satisfy the following principles:

• The costs of a new interregional facility must be allocated to each region in which the facility is located in a manner at least roughly commensurate with the benefits of that facility in each region.
• A planning region that receives no benefit from a facility located in that region, either at present or likely in the future, must not be involuntarily allocated any costs of that facility.
• Any benefit to cost threshold ratio used must not be so large that facilities with significant positive net benefits are excluded from cost allocation.  Specifically, the threshold may not include a ratio of benefits to costs that exceeds 1.25 unless the transmission provider justifies and the Commission approves a greater ratio.
• Costs allocated for an interregional facility must be assigned only to transmission planning regions in which the facility is located.
• The cost allocation method and data requirements for determining benefits and identifying beneficiaries must be transparent.
• The public utility transmission providers located in neighboring regions may choose to use a different cost allocation method for different types of interregional facilities.

FERC proposes to allow methods for allocating the costs of new interregional facilities to differ among pairs of regions, and to differ from the method used by providers located in a region to allocate the costs of new intraregional facilities.  In addition, the cost allocation method used by providers located in a region to allocate the costs of new intraregional facilities can differ from the method used in the same region to further allocate costs to be borne by the region pursuant to an agreed-upon allocation method for the costs of interregional facilities.

FERC seeks comment on any issue of interest or concern related to the proposed requirements, including the following:

• The appropriateness and application of the proposed cost allocation principles with respect to new intraregional and interregional transmission facilities.
• If commenters believe that additional principles should apply to cost allocation for either intraregional or interregional transmission facilities, FERC asks commenters to submit and explain the need for those principles.

Applicability to Non-Public Utilities

FERC emphasized that it expects non-public utility transmission providers in RTOs and outside of RTOs to participate in the regional transmission planning and cost allocation process.  The Commission stated that it does not believe that it is necessary to invoke its authority under Section 211A of the Federal Power Act on a generic basis to ensure that this happens, but that it will take such action on a case-by-case basis if it finds that non-public utility transmission providers are not participating in regional planning and cost allocation.   

Non-public utility transmission providers should give serious consideration to participating in the regional planning and cost allocation processes.  Unlike the situation that existed with respect to Order No. 890, the tariff modifications and procedures that the Commission is proposing in this proceeding will affect non-public utilities regardless of whether they adopt them.  This is because the Commission is placing increased emphasis on intraregional and interregional transmission planning, and it expects that cost allocation will occur on a regional basis as well.  If a non-public utility does not participate in the planning and cost allocation process within its region, regional transmission projects may be approved without its input, and it therefore may not obtain any benefits from those projects.  Non-public utilities that do not participate in the cost allocation process also may find that costs have been allocated to them without their input into the issue of whether those projects provide benefits to them.  While the regional process could not by itself force a non-public utility to accept the cost allocation, the failure to do so would almost certainly trigger a Section 211A proceeding.  Therefore, non-public utilities should file comments on the NOPR and expect to begin participating in regional planning and cost allocation processes after the regulations become final.

Update:  FERC issued a notice on August 10, 2010 extending the comment period to September 29, 2010.

Comments are due on September 29, 2010.

To access the NOPR, click here.

To access the Commission's press release, click here.

To access the Notice Extending Comment Period, click here.