Cost Allocation
To achieve the equitable allocation of the costs of transmission facilities and operations across the shared transmission network.
WIRES supports the adoption of appropriate cost allocation rules to ensure adequate planning of and investment in transmission. All too often questions about how to allocate the cost of any given transmission project lead to disputes among stakeholders that look at the potential immediate dollar impact on them and that fail to see the value of the project as part of an overall, well-planned transmission grid. It is well recognized that proposed transmission facilities crossing utility, state and regional boundaries have sometimes foundered because the proponents were not able to devise a cost allocation method that would satisfy critical regulatory and policy requirements.
As FERC moves to establish regional planning (which WIRES strongly supports), cost allocation becomes ever important. Regional transmission plans typically include hundreds of individual projects, and transmission owners and interested stakeholders will be unable to achieve the needed added investment in the transmission grid if cost allocation decisions continue to be made on a project-by-project basis.
Beyond the need for a clear upfront mechanism for allocating costs over a wide variety of projects that is expected to come through the planning process, there is a need to avoid cost allocations that would tend to discourage transmission investment. Although WIRES would not preclude consideration of any cost allocation method in specific circumstances, widespread application of so-called participant funding (which would directly assign the costs of all expansions of or upgrades to an integrated system to specific customers or classes) may tend to increase the cost recovery risk of new transmission projects and could deter needed investment.
Allocating transmission costs appropriately requires both an understanding of the dynamic nature of the transmission system as well as the practical need to make decisions in a timely manner to ensure that the business of investing in the transmission grid goes unimpeded. Investors obviously need upfront certainty in ensuring how their investments will be recovered. There also needs to be recognition of the unique nature of the transmission grid as a networked system. The benefits are often diffuse, and the beneficiaries and use of the network change dynamically over time. Therefore, efforts to pin down with particularity the beneficiaries of a particular project over its life-span may ultimately prove futile, and will likely add to continuing debates.
The debilitating effect of the so-called “reliability vs. economics” debate is one example of how theoretical hair-splitting can have real-life consequences for transmission projects. The U.S. transmission grid is an integrated system that is critical to our national economy. No one can dispute that the grid must expand both to accommodate economic growth and to preserve reliable service. Efforts to distinguish who pays for facilities on the basis of whether transmission projects have an economic benefit or a reliability benefit delay investment through uncertainty and unnecessary disputes. WIRES contends that many so-called economic projects will become reliability projects as demands on the grid grow and change. Today’s economic transmission projects will contribute to reliability tomorrow. Over time, it makes more sense generally to spread the costs of these transmission projects broadly to reflect their broad benefits rather than to try to identify individual beneficiaries at a particular point in time, as these beneficiaries will change over the life of the project.
While FERC would be well-served not to dictate to each region a specific cost allocation method, WIRES urges the Commission to minimize regulatory uncertainty, which might inhibit consensus on cost allocation and ultimately transmission investment. Transmission owners/providers should set out cost allocation methods in their tariffs under certain FERC-established cost allocation principles. These principles are:
- A cost allocation method should be stated upfront and should be pragmatic. It should assign costs of projects on a broad basis to all beneficiaries rather than attempting what will be false precision or improperly assigning all costs through participant funding.
- Neither direct assignment nor socialization or regionalization should be the default method for all facilities, but the regions should strive for a mix of these approaches to ensure that the costs of planned transmission are fairly allocated and that the transmission will be built.
- A cost allocation method should be based on pragmatic categories of new facilities and functions and a reasonable approximation of the beneficiaries of such types of facilities. For example, the methodology employed by ISO-New England provides a concrete basis for determining what types of facilities would be considered “regional benefit upgrades,” “local benefit upgrades,” and other upgrades (such as generator interconnection related upgrades, merchant transmission or elective upgrades) with a generally applicable default cost allocation methodologies applied to each category -- regional postage stamp, license plate, and participant funding, respectively.
- Case-by-case analysis of each project and the constant reevaluation of cost allocation over the life of a project should be avoided.
- There should be greater regulatory alignment between federal and state policies on allocation and recovery of transmission costs.