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November 13, 2014

Con Ed Complaint Against PJM Raises Difficult Issues of Transmission Cost Allocation

On November 7, 2014, Consolidated Edison of New York (Con Ed) filed a 50-page Complaint with the FERC under Federal Power Act Section 206 claiming that it will have to pay excessive portions of the costs of two new transmission projects in northern New Jersey under recent PJM actions.[1]Con Ed does not challenge the tariff provisions under which PJM acted, but asserts that PJM’s implementation of those provisions is resulting in unjust and unreasonable rates. A recent Deficiency Letter issued by FERC Staff to PJM in a related case suggests that Staff finds some credence in Con Ed’s arguments.

While Con Ed’s service territory is in the NY ISO footprint, its transmission needs are closely linked to those of neighboring Public Service Electric & Gas Company of New Jersey (PSE&G). In the 1970s, Con Ed and PSE&G entered into coordination agreements that reduced the need for the companies to upgrade their systems separately. In 2010, as part of a modification of those agreements, Con Ed agreed to be subject to PJM’s tariff provisions relating to the allocation of costs of transmission projects in PJM’s Regional Transmission Expansion Plan (RTEP).

The tariff provisions are an outgrowth of FERC Order 1000, which required transmission providers to adopt methods to allocate the costs of regionally-planned transmission upgrades. The methods must satisfy six principles set forth in the Order. Under Order 1000-based tariff revisions approved in 2013, PJM’s method of allocating the costs of reliability projects included in its RTEP depends on whether the projects are “Regional Facilities” (which generally operate at 345 kV or higher) or “Lower Voltage Facilities.” For the former, PJM allocates 50 percent of the costs on a “postage stamp” basis (i.e., in proportion to each zone’s load, regardless of the load’s demands on the grid); and 50 percent on a “distribution factor” or “DFAX” basis, which seeks to reflect actual usage of the upgrade by zonal load. PJM allocates 100 percent of the cost of Lower Voltage Facilities on a DFAX basis.

The two projects that are the subject of the Complaint are the Bergen-Linden Corridor and the Sewaren Project. The Bergen-Linden Corridor includes the conversion of an existing 138 kV line to 345 kV and the addition of second 345 kV line, and is designed to address risks associated with short circuits. PJM divided the Bergen-Linden Corridor into 26 sub-projects, of which 15 are Regional Facilities subject to 50/50 postage-stamp and DFAX cost allocation; and the remaining 11 are Lower Voltage Facilities subject only to DFAX-allocation. Con Ed alleged that it is being allocated $629 million (82 percent) of $765 million in total DFAX-allocated costs of the Corridor under this approach.

The Sewaren Project is a Lower Voltage Facility, all of whose costs are allocated on a DFAX basis. It is a major component of PSE&G’s efforts to rebuild from Superstorm Sandy. PJM allocated just over 50 percent of the project’s $101 million cost to Con Ed, and the remainder to an independent generation facility.

Con Ed offers two major arguments in support of its claim that these allocations are excessive: first, that the allocations are not commensurate with Con Ed’s benefits, as required by court and Commission precedent; and second, that PJM did not comply with a requirement in its tariff to determine whether or not the results of its cost allocations are “objectively unreasonable” and, if so, to redo the allocations using “an appropriate substitute proxy.”

The first argument is fact-intensive, and its success may depend on whether FERC decides that the issue of cost-causation was put to rest when FERC found that PJM’s Order 1000 tariff revisions (which Con Ed does not contest) satisfied the Order’s Principle No. 1, which requires that tariffs allocate costs to those within the transmission planning region that benefit from those facilities in a manner that is at least roughly commensurate with the estimated benefits.[2] Con Ed asserts that the Bergen-Linden Corridor was designed to remedy short circuits at four 230 kV substations which Con Ed will rarely use for deliveries from PSE&G once the Corridor is built. In addition, PSE&G will receive substantial benefits in the form of relief of overloads, reduced contingency thermal loading, and improved voltage response and reactive power supply. Thus, while PJM is forcing Con Ed to bear the lion’s share of the DFAX-based costs, PSE&G is receiving most of the benefits.

Similarly, Con Ed argues that PSE&G will reap most of the benefits of the Sewaren Project since that project was designed primarily to address weaknesses in (or damages to) PSE&G’s grid that were exposed or caused by Superstorm Sandy.

In support of its second argument, Con Ed cites language in the tariff stating that “If Transmission Provider determines in its reasonable engineering judgment that, as a result of applying the [DFAX provisions], the DFAX analysis cannot be performed or that the results of such DFAX analysis are objectively unreasonable, the Transmission Provider may use an appropriate substitute proxy for the Required Transmission Enhancement in conducting the DFAX analysis…”

Con Ed contends that this language must be construed to require PJM to make a determination of whether applying the DFAX analysis is producing results that are objectively unreasonable and, if so, PJM must redo the allocation using a substitute proxy. In Con Ed’s view, to construe the language as permitting PJM to redo the allocation, rather than requiring it to do so, would lead to the absurd conclusion that PJM could find a cost allocation unreasonable but choose not to remedy it. While PJM has taken the position in related proceedings that it is bound to use the tariff DFAX cost allocation formula unless DFAX cannot be performed, Con Ed argues that that position is inconsistent with the above-quoted tariff language.

Con Ed further argues, based on an expert affidavit, that any reasonable observer would have expected the DFAX analysis to allocate substantial costs to PSE&G (and relatively little to Con Ed) in light of the facts that (a) the projects are in PSE&G’s service territory, (b) PSE&G customers comprise most of the load in that territory, and (c) the projects address basic reliability issues that would have arisen even if Con Ed did not receive some service over PSE&G transmission facilities. On that basis, Con Ed contends, the results of the PJM’s DFAX analysis, which allocated most of the costs to Con Ed, are objectively unreasonable, and PJM is required to redo them using a substitute proxy.

Con Ed identified the proxy that it would have the Commission adopt. Under its proxy, PJM would allocate one half of the DFAX costs to PSE&G as a means of overcoming the failure of its DFAX analysis to account for short circuit benefits to PSE&G’s system resulting from the Projects. For the remaining one half of the DFAX costs, Con Ed would be treated as a part of the PSE&G transmission zone and allocated a load ratio share of the total costs allocated to that zone. This would eliminate other distortions inherent in the tariff-based approach and result in Con Ed being allocated $26 million for the Bergen-Linden Corridor and $3 million for the Sewaren Project, for a total of $29 million.

As noted above, Con Ed distinguishes the PJM tariff provisions implementing Order 1000, which FERC has already approved, from PJM’s implementation of those provisions in this case. As to the latter, Con Ed contends that a Section 206 Complaint is “procedurally appropriate.” PJM’s argument in a related proceeding supports Con Ed’s position. PJM originally filed the results of its cost allocation for the Bergen-Linden Corridor in Docket No. ER14-972-000. Con Ed protested that filing, advancing some of the same arguments it makes in its Section 206 Complaint. In response, PJM argued that a protest was out of order, and that the proper forum for Con Ed to raise its objections was a Complaint under Section 206 of the Federal Power Act.[3]

PJM filed the results of its cost allocation for the Sewaren Project in Docket No. ER14-1485-000, which also triggered a protest by Con Ed. On June 6, 2014, FERC issued a Deficiency Letter to PJM in which it asked (among other things) for an explanation of why the substitute proxy language of the cost allocation tariff would not apply to the Sewaren Project. On July 7, 2014, PJM responded, advancing the position that the tariff only contemplates use of proxies when thermal flows cannot be calculated due to the nature of the upgrade. Any other interpretation, according to PJM, would open the door to endless litigation over cost allocation determinations. PJM subsequently asked that proceedings in that docket be held in abeyance pending settlement negotiations, and no further Commission action has occurred. Nonetheless, the Deficiency Letter suggests that FERC Staff sees possible merit in Con Ed’s argument that PJM’s tariff contemplates the use of substitute proxies when the results of DFAX allocation are unreasonable.

Devising acceptable formulas to allocate costs of networked transmission systems in proportion to benefits is almost invariably contentious. Even when initially agreed upon, those formulas often produce results at odds with parties’ expectations. Con Ed’s Complaint is an example of that phenomenon. In the event it is not settled, the Commission may have a difficult time balancing Con Ed’s interest in a reduced cost burden with the broader interests of promoting certainty and minimizing litigation.

[1] Docket No. EL15-18-000, Complaint of Consolidated Edison (November 7, 2014).

[2] PJM Interconnection, LLC, 142 FERC ¶ 62,214, P 336 (2013).

[3] Docket No. EL14-972-000,  Motion for Leave to Answer and Answer to Protest and Comments of PJM Interconnection, Inc. (March 7, 2014), p. 9.

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