Many studies have identified the US’ need for tens of billions of dollars of investments in new electric transmission facilities. Facilities are need to improve system reliability, to eliminate choke points in the transmission grid that cause consumers to pay higher rates, to move renewable power to markets and to address the requirements of the “Smart Grid.” However, transmission investment has been constrained by the lack of regional planning, the failure to integrate grid planning with state and federal policy objectives and battles over how the cost of new transmission facilities should be allocated.
On June 17, 2010, the Federal Energy Regulatory Commission (FERC), the entity charged with regulating the interstate electric transmission system, proposed new rules that are designed to further its “open access” policy goals. These proposed rules, which build upon FERC’s earlier initiatives in transmission planning1, development and cost allocation and recent orders in the Primary Power2 and Central Transmission3 cases, are intended to improve “the effectiveness of regional transmission planning and the efficiency of resulting transmission development.” Comments on the proposed rulemaking are due 60 days after the proposed rules are published in the Federal Register. If adopted, the proposed rules would significantly alter the transmission planning and development process and cost allocation for new transmission investment.
The proposed rules suggest important reforms in five critical areas:
- Transmission Planning. FERC has proposed that each jurisdictional transmission provider participate in a regional transmission process that produces a regional transmission plan meets the following criteria: (i) coordination; (ii) openness; (iii) transparency; (iv) information exchange; (v) comparability; (vi) dispute resolution; and (vii) economic planning studies. The process must allow all parties to participate meaningfully.
- Public Policy Considerations. Transmission planning often is focused on reliability, the elimination of load pockets and similar technical matters. It often fails to account for state and federal “public policy” requirements, such as renewable portfolio standards. Therefore, FERC has proposed that the transmission planning process must explicitly consider such policy requirements.
- Non-Incumbent Providers and Transmission Development. FERC raised concerns that certain planning processes provide incumbent transmission providers with clear advantages when the opportunities to build new projects are awarded. These advantages include, in some areas, a right-of-first-refusal for an incumbent transmission provider to build any project in its area. FERC has proposed that the standards for eligibility to build a new project be clearly stated and structured not to favor incumbents. This includes removing any right-of-first-refusal and a requirement that incumbents and non-incumbents be provided the same opportunity to recover the costs of their projects through regional cost recovery mechanisms.
- Inter-regional Coordination. Many projects have inter-regional effects, whether intentionally—a project is build to move power from a resource rich area to a market—or as a result of the physics of power transmission. FERC has concluded that the current process does not adequately address these issues. Therefore, FERC has proposed that transmission providers must develop a plan to coordinate with their neighboring transmission providers.
- Cost Allocation. The allocation of costs of new transmission facilities has been one of the most contentious issues before FERC: leading to litigation and great uncertainty. Therefore, FERC has concluded that cost allocation must be considered as part of the transmission planning process, rather than after the fact, and, whether intra- or inter-regional, must reflect certain core principles.
To this end, FERC has proposed that each transmission tariff must set forth the principles on which cost allocation will be determined. Cost allocation must reflect “cost causation,” address “free rider” problems, ensure that all beneficiaries contribute to cost recovery and assign costs among regions (for inter-regional projects). Further, FERC proposed that cost allocation principles be explicit and address six related criteria: (i) costs must be allocated to those that benefit from the facilities in a manner that is at least roughly commensurate with the benefits; (ii) those who receive not benefits should not be involuntarily allocated costs; (iii) the benefit-to-cost threshold used for planning should not be so high as to exclude projects with net benefits; (iv) costs should not be allocated outside the affected region (or regions) without consent; (v) the cost allocation must be transparent; and (vi) recognizing the complexity of the grid, different allocation methodologies may be used for different types of projects, such as projects for reliability, congestion relief or public policy goals.
If adopted, the proposed rules would create greater transparency, would open the doors to new entrants to transmission planning and development and would provide greater certainty on cost allocation and recovery for transmission investment. However, even minor changes in the final rules that are adopted by FERC could have significant consequences for developers, transmission users and consumers. As a result, affected parties and others interested in these matters should consider participating in the comment process or at least closely following the development of the final rules.
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