Electric Transmission 201: Cost Allocation

Multiple factors are changing and intensifying the demands on our aging grid infrastructure, including a projected 20+ percent growth in power demand over the next 20 years, a focus on bringing more renewable energy to market, and an ongoing effort to foster workable interstate power markets. The cost of reliability projects within a single utility or state are usually recouped from ratepayers who are directly served by the utility. But in the absence of clear policy or agreed-upon methodologies, cost allocation debates have become barriers to development for lines that are built for economic purposes, are proposed to cross multiple systems or states and serve many markets, or are built to serve location-constrained renewable resources.

This briefing was the fourth in a series co-sponsored by EESI and WIRES. The other briefings were "How the Grid Works", "Policy Challenges to Grid Expansion", "Upgrading the Grid", "Integrating Variable Renewable Resources" and "Planning to Expand and Upgrade the Grid".

On March 9, 2010, the Environmental and Energy Study Institute (EESI) and WIRES (Working group for Investment in Reliable and Economic electric Systems) held a briefing on a major challenge facing the modernization of our nation’s high voltage grid: cost allocation. Regional transmission organizations (RTOs) and individual utilities in bilateral markets are devising various methods of allocating grid expansion and upgrade costs in light of local political, regulatory, and grid operational realities. If methodologies vary widely in their objectives and results, how will federal regulators apply the requirements of the Federal Power Act to them? This briefing explored the basic concepts of cost allocation, why the issue is critical to the future of the grid, and what needs to be resolved by the Congress, Federal Energy Regulatory Commission (FERC), and other stakeholders to reduce the regulatory uncertainty about who will pay for the coming build-out.

• The U.S. electric grid is aging and needs an estimated $200-300 billion of investment to meet future demand, especially for new renewable energy resources. The Energy Information Administration expects a 27 percent increase in residential electricity demand and a 49 percent increase in commercial electricity demand by 2030.
• Many new jobs are expected to come from the development of renewable energy. Investments in wind, solar, geothermal, hydro, and biomass energy can reduce our reliance on carbon-intensive coal and oil and provide big dividends for years to come.
• Five examples of current cost allocation methodologies were discussed:

1. “License plate” where each utility recovers the costs of its own transmission investments.
2. “Beneficiary pays” allocates costs to the transmission organizations that benefit from a project. Then the transmission organizations recover the costs from their customers through tariffs.
3. “Postage stamp” transmission costs are recovered uniformly from all customers in the same market area.
4. “Direct assignment” means that interconnection transmission costs are assigned to the requesting entity.
5. “Merchant cost recovery” applies to investments outside of regulated tariffs (specified customers) and largely applies to direct current (DC) lines where transmission can be controlled.

• It is impossible to measure who benefits from new transmission lines for cost allocation purposes, because cost allocation occurs before construction begins. It is even difficult to project the beneficiaries because we don’t know how the grid will be used decades from now.
• Several speakers felt that federal regulators need to take a strong leadership role in making tough decisions about cost allocation. Localities and states should be allowed to offer solutions, but the Federal Energy Regulatory Commission (FERC) needs to be a backstop. Without federal leadership, improvements to the grid are unlikely.
• Sen. Harry Reid (D-NV) introduced the Clean Renewable Energy and Economic Development Act (S. 539) in March 2009 to give FERC authority to step in if states cannot agree on cost allocation.
• Sen. Byron Dorgan (D-ND) offered the National Energy Security Act of 2009 (S. 774) in April 2009 with provisions to increase FERC’s transmission siting authority and to spread the costs of transmission projects if states can’t come to a decision on cost allocation.
• An amendment to the American Clean Energy Leadership Act of 2009 (S.1462) to require FERC to allocate only those costs that are reasonably proportionate to measurable benefits from new transmission was introduced by Sen. Bob Corker (R-TN) and adopted by the Senate Energy and Natural Resources Committee last summer.
• Federal court decisions have a strong influence on FERC's options to address cost allocation. In the case of Illinois Commerce Commission v. FERC, the Seventh Circuit Court wrote “FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members.”