Commissioner Moeller Statement March 30, 2012 Docket No. EL05-121-006

The PJM Remand Order

"As described in the Commission’s order, the methods for assigning the actual costs of transmission lines are divided into two categories – one based on actual power flows today and one based on the unpredictability of future power flows – and both approaches are criticized by parties in this proceeding. Given these two approaches, this Commission needs to flexibly apply its expertise so that it can adopt the best methodology based on the specific configuration of a transmission network. But before describing how the Commission can exercise its flexibility, we should consider why cost assignment is so difficult for transmission assets.

I. Identifying the Costs and Benefits of Transmission

Long-distance transmission lines are constructed because they greatly reduce the cost of electricity in comparison to the alternatives. Without long-distance transmission lines, energy consumers would need to construct enough local generating plants to ensure the availability of power. The cost of building smaller and local generating plants can be overwhelming in comparison to the cost of building a new transmission line. The cost can be especially high when local requirements make the construction of a generating plant effectively impossible. And because of the essential nature of electricity to all modern economic activity, the cost of a single blackout can quickly overwhelm the cost of building a transmission line that would have avoided the blackout.

In addition to the often overwhelming benefits of building a network of long-distance transmission lines, energy consumers at both ends of a transmission line often receive substantial benefits from the line. Even when a transmission line is directional, in the sense that power on the line tends to flow from regions where power is less costly to regions where power is more costly, energy consumers receive benefits on both ends of the transmission line. These benefits on both ends of the line derive generally from economies of scale and the efficiency of sharing the power that can be produced by generating plants. For example, the linkage of two cities by a transmission line can result in lower power prices in both cities due to the lower costs associated with the need to have fewer generating plants “spinning” as a reserve, but prices can also be reduced by building larger generating plants and by expanding the options for locating plants, so that plants can be located and sized at lowest cost.

More generally, linking regions that have more consumers and less generating plants to regions that have less consumers, but more generating plants can also result in benefits to energy consumers in all regions. That is, throughout the network, transmission lines allow consumers to purchase power where it is least costly at any given moment. While energy consumers in regions with less generating plants and greater population can often expect the greatest reduction in power costs, energy consumers in other regions can also pay lower power prices due to their expanded opportunity to purchase power, and the fact that the most efficient and lowest cost power is sometimes in a region with fewer generating plants and more consumers. This is especially the case at night and other non-peak periods, and when certain generating plants or transmission lines are not in operation due to maintenance, upgrades, emergency, or other factors.

Even under an assumption that prices to some energy consumers will rise as a result of a new transmission line, the FERC, as a regulator concerned with interstate commerce, cannot favor prices in one state at the expense of the region. Plus, it is difficult to raise prices merely by increasing the ability of the power grid to transfer energy. Using a simple example in a different market, strawberries are not more expensive in California because strawberries can also be shipped to New York. Rather, strawberry farmers will grow fewer strawberries if they cannot sell strawberries to New York.¹ But even assuming that local power prices are higher when markets expand, lower power prices are not the only benefit associated with transmission. Arguably the most important benefit of the transmission network is not the access to markets, but the increase in the reliability of the entire network. As stated above, the benefits of avoiding one blackout can far exceed the entire cost of a transmission line.

As regulators, certainty and simplicity of calculation serve to make our decisions both legitimate and understandable. But in physics, the characteristics and power flows on the grid change from moment-to-moment. In one moment, a region may benefit substantially from the existence of a transmission line, and then if a generating plant trips off-line, that line may actually become a limitation on power flows. And in one month, power may flow in one direction on a line, but in the next month, power may flow in the opposite direction because a generating plant or another transmission line is not operating due to upgrades or maintenance. And for several years a region may benefit substantially from a line only to have those benefits reversed with the completion of a new generating plant that was not contemplated when the transmission line was built. Regulators are placed in a difficult position when they determine just and reasonable rates, based solely on predicted benefits over the lifespan of transmission lines that are in service for decades.²

Finally, the benefits of a transmission line extend only so far. That is, at some point far enough away from the endpoint of a particular transmission line, the benefits become vanishingly small. However, because the physics of electricity is not comparable to the more commonly understood physics of how mechanical forces act upon physical objects, the public can be surprised at how dramatically an electrical disturbance hundreds of miles away can have an immediate local impact. In short, the speed of light is very fast.

II. Allocating the Costs of Transmission

Thus, we arrive at two basic conclusions about transmission lines that are built within the network. First, the benefits of a needed transmission line can overwhelm its cost. Second, energy consumers at both ends of a networked transmission line will receive benefits, but calculating those benefits is complex because those costs depend on moment-to-moment changes in the configuration of the power grid. These two basic conclusions help to explain why arriving at a proper assignment of costs has proven to be difficult.

Regarding the first point, because benefits can overwhelm cost, looking to allocate costs based solely upon immediate benefits can result in less than an optimal amount of transmission installed into the system. Using an example, if five sub-regions benefit from a transmission line, where each sub-region benefits by an amount ranging between $500 and $100, and if the cost of the line is $50, then the benefits overwhelm the costs and the line should be built regardless of how the costs are allocated among the five sub-regions.

Concerning the second point, since energy consumers at both ends of a transmission line receive a complex set of benefits based upon the moment-to-moment configuration of the power grid, the regions that are asked to pay for the costs of a transmission line can dispute the allocation of costs in an effort to gain competitive advantage. The regions of this nation are in economic competition with each other, and energy costs can be a significant component in deciding where to engage in business activity. Using the above example, all five sub-regions have an incentive to pay an amount closer to zero than $50, as the economic gains to the region from a lower rate for transmission can be a multiple of the actual reduction in the rate.

For this reason, even though the benefits of building a transmission line may make economic sense regardless of how the costs are allocated, the individual sub-regions may perceive an advantage to delaying construction of the line in order to seek competitive advantage. And if they cannot delay construction of the line, they may litigate the amount of costs that they should pay.

III. The Experience of PJM

The above concepts are supported by the actual experience of PJM. The order describes several significant transmission projects that have been approved in the PJM planning process. Of the projects at 500 kV or more, the TrAIL project is most significant because it is newly placed in service and its cost was in excess of one billion dollars. Other projects costing in excess of one billion dollars are Susquehanna-Roseland, PATH, and MAPP; but unlike TrAIL, those projects have not been completed.

The TrAIL project illustrates the overwhelming benefits of certain large transmission lines as future congestion costs across PJM should be dramatically less with the line than without. Based on the data in PJM’s 2010 RTEP Plan, it appears that the billion-dollar TrAIL project, in conjunction with other transmission improvements installed across PJM, will be reducing congestion costs by about one-billion dollars by year 2013. This means that power lines that will be paid for over decades could pay for themselves within a few years.³

The Susquehanna-Roseland project also illustrates the overwhelming benefit of building transmission, but from a different point of view than TrAIL. Because it awaits a permit from the National Park Service, the local utilities cannot yet begin construction on Susquehanna-Roseland. Given the reliability problems associated with not having the needed transmission line in service, PJM plans to operate in real time to certain criteria violations, adjusting generation and demand response as appropriate.⁴ The delay in commencing this highly beneficial transmission project may soon raise rates dramatically.

More generally, the RTEP plans approved by PJM illustrate the complexity of determining the extent of benefits that arise from an individual transmission project, regardless of the benefits that can be assigned to individual regions. The benefits of a transmission project depend on assumptions regarding where generating plants will be located in the future, whether other transmission projects will be in service, and where energy is consumed.⁵

IV. A Just and Reasonable Approach to Cost Allocation

Despite the difficulty in assigning transmission costs, the Commission is still required to engage in this task. By flexibly applying our expertise, and by relying on stakeholders to make their best arguments on the record, the Commission should apply its discretion carefully and cognizant that its approach may be one of many just and reasonable approaches.

Given the need for simplicity and certainty, I have long expressed my preference for the postage stamp cost allocation method, based upon the load ratio share of a region. And while I recognize that this proceeding involves allocating transmission costs at thresholds of 500 kV and above, my preference for the postage stamp method extends to lower voltages. The hybrid approach of looking to a combination of postage stamp and a flow-based model is also attractive, as that approach acknowledges (1) the historical reasons why individual transmission projects are approved (by using a flow-based model), and (2), the broad and unpredictable future benefits of needed transmission projects (by using a postage stamp method).

Yet in any event, consensus is more important than the preferences of any one individual Commissioner. Because of the inherent flexibility of the just and reasonable standard, if consensus develops around a methodology that is just and reasonable, I am inclined to accept that methodology. Thus I encourage the ongoing efforts of stakeholders in PJM to find consensus on the methods for allocating transmission costs. However, recognizing that consensus is often difficult to achieve, and given the overwhelming benefits of needed transmission projects to the power grid, and the absolute critical nature of the power grid to economic opportunity in the United States, this nation should be able to allocate its limited resources to more important matters than litigating the costs of transmission assets."

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1. While strawberries need to be consumed quickly or they become worthless, electricity differs in that it must be used instantly due to constraints imposed by physics. Also, while preparing land and acquiring water rights for strawberry farming can be capital intensive and requires advance planning, power plants involve substantial risk in that they require extensive capital investment long before revenues can be recovered.

2. This discussion applies to network transmission lines, not to transmission lines and other assets that only move power from a generating plant to energy consumers. Those lines are known as “lead lines”, and while persons on both sides of a lead line benefit from the line, the methods used to allocate costs on lead lines differ from that of network transmission lines due to the fact that energy consumers are found on only one end of a lead line. This proceeding does not involve lead lines.

3. See Section 13 of the 2010 RTEP Plan, and in particular, figure 13.2, available on PJM’s website at: http://www.pjm.com/documents/reports/rtep-report/2010-rtep.aspx

4. See Book 3, page 12 of the 2011 RTEP Plan, at Section 1.2.1, available on PJM’s website at: http://www.pjm.com/documents/reports/rtep-report.aspx .

5. See Book 1, page 12 of the of the 2011 RTEP Plan, at Section 2.0.4, available on PJM’s website at: http://www.pjm.com/documents/reports/rtep-report.aspx .