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FERC Announces Major New Rule on Electric Transmission Planning and Cost Allocation

Publisher: Day Pitney Alert
August 1, 2011

On July 21, 2011, the Federal Energy Regulatory Commission (the "Commission") issued its Final Rule in its rulemaking proceeding on Transmission Planning and Cost Allocation ("Order No. 1000"). Order No. 1000 is intended to remedy perceived deficiencies with respect to transmission planning processes and cost allocation methods that inhibit the development of new transmission infrastructure. Order No. 1000 is a landmark order that was unanimously supported by the Commission (with a few dissenting comments from Commissioner Moeller). In their open meeting on the order, the Commissioners expressed the view that Order No. 1000 will profoundly affect the nation's transmission system for decades to come. By providing for greater clarity and certainty regarding transmission planning and cost allocation, the order will likely lead to greater investment in transmission infrastructure throughout the nation. Order No. 1000 establishes certain minimum requirements and sets of principles that must be followed but then allows for considerable flexibility in achieving compliance consistent with those principles.

As briefly summarized below, Order No. 1000 proposes the following major reforms to the requirements of the Open Access Transmission Tariff:

Planning Reforms

The rule establishes three requirements for transmission planning:

  • Each public utility transmission provider must participate in a regional transmission planning process that satisfies the transmission planning principles of Order No. 890 and produces a regional transmission plan.
  • Local and regional transmission planning processes must consider transmission needs driven by public policy requirements established by state or federal laws or regulations. Each public utility transmission provider must establish procedures to identify transmission needs driven by public policy requirements and evaluate proposed solutions to those transmission needs. This requirement will significantly increase the involvement of state entities in the interstate transmission planning process.
  • Public utility transmission providers in each pair of neighboring transmission planning regions must coordinate to determine if there are more efficient or cost-effective solutions to their mutual transmission needs. While requiring this coordination between neighboring regions, Order No. 1000 does not require the development of interregional or interconnection-wide transmission expansion plans.

Cost Allocation Reforms

The rule establishes three requirements for transmission cost allocation:

  • Each public utility transmission provider must participate in a regional transmission planning process that has a regional cost allocation method for new transmission facilities selected in the regional transmission plan for purposes of cost allocation. The method must satisfy six cost allocation principles: (1) costs allocated must be "roughly commensurate" with estimated benefits; (2) those who do not benefit from transmission do not have to pay for it; (3) benefit-to-cost thresholds must not exclude projects with significant net benefits; (4) costs may not be allocated outside a region unless the other region(s) agrees; (5) cost allocation methods and identification of beneficiaries must be transparent; and (6) different allocation methods could apply to different types of transmission facilities.
  • Public utility transmission providers in neighboring transmission planning regions must have a common interregional cost allocation method for new interregional transmission facilities that the regions determine to be efficient or cost-effective. The method must satisfy the six cost allocation principles. 
  • Participant funding of new transmission facilities is permitted but is not allowed as the regional or interregional cost allocation method.

Nonincumbent Developer Reforms

  • Public utility transmission providers must remove from Commission-approved tariffs and agreements a federal right of first refusal ("ROFR") to build and own a transmission facility selected in a regional transmission plan for purposes of cost allocation, subject to two areas where the ROFR could still apply: (1) transmission facilities that are not selected in a regional transmission plan for purposes of cost allocation; and (2) upgrades to existing transmission facilities. Additionally, the removal of the ROFR allows, but does not require, public utility transmission providers in a transmission planning region to use competitive bidding to solicit transmission projects or project developers. Nothing in this requirement affects state or local laws or regulations regarding the construction of transmission facilities, including but not limited to authority over siting or permitting of transmission facilities.
  • The rule recognizes that incumbent transmission providers may rely on regional transmission facilities to satisfy their reliability needs or service obligations. The rule requires each public utility transmission provider to amend its tariff to require reevaluation of the regional transmission plan to determine if delays in the development of a transmission facility require evaluation of alternative solutions, including those proposed by the incumbent, to ensure incumbent transmission providers can meet reliability needs or service obligations.

Some Key Features and Implementation Issues of Order No. 1000

  • Regional planning. While ISO/RTO regions generally already have well-developed regional planning processes in place, non-ISO/RTO regions are less well prepared to comply. In the absence of an ISO/RTO, what will these regions use to organize their efforts to conduct regional planning? Planning for public policy requirements will substantially change the kinds of transmission projects that will be proposed and the process for identifying such projects, including a FERC process that will have much more state involvement. What stakeholder and other process changes within regions will be needed to accommodate planning for public policy requirements, including involvement by state entities?
  • Interregional planning. While several neighboring regions already loosely coordinate their transmission planning activities, there has not been much analysis of interregional solutions that are more efficient or cost-effective than individual regional solutions to mutual transmission needs. How will this additional analysis change what transmission is actually built, and how will the analysis take into account different market structures in neighboring regions?
  • Cost Allocation. A clear, comprehensive cost allocation methodology is the most important factor in getting new transmission built. For many regions of the country, agreement on such a methodology has been the hardest transmission expansion issue to resolve. Will FERC's flexibility and principle-based requirement lead to the clear, comprehensive cost allocation methodologies that are needed to spur investment? What degree of cost-benefit analysis will be needed to meet the "roughly commensurate" test? To what extent will the FERC's principles affect the development of multiregional build-out of transmission?
  • Nonincumbent Transmission Development. This reform was one of the most controversial aspects of the order. It removes the right of first refusal of the incumbent transmission owner to develop new regional projects located in its territory, subject to limitations, and opens the door for nonincumbent transmission developers to develop regional transmission projects regardless of location. How disruptive will this change be to existing processes, and will it lead to more efficient or cost-effective transmission development? How can nonincumbents best take advantage of this reform? How does this reform relate to merchant transmission development? These and many other questions will have to be thought through as this reform is implemented.

Compliance

  • Order No. 1000 takes effect 60 days from publication in the Federal Register.
  • Each public utility transmission provider is required to make a compliance filing with the Commission within 12 months of the effective date of Order No. 1000.
  • Compliance filings for interregional transmission coordination and interregional cost allocation are required within 18 months of the effective date.
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