1. Allocating Transmission Line Costs Case Study of: ICC v. FERC 576 F.3d 470 Presented 11/29/09 by: Daniel Hergott email: drhergott@gmail.com

2. ICC v. FERC Presentation Overview 1.The Problem 1.FERC Ruling 2.7 th Circuit Majority Holding 3.7 th Circuit Dissent 4.Consequence and Remaining Questions Relief on Chicago sub station across from the Daley Center built in the1930’s during WPA

3. U.S. electric grid is old and needs to be updated But to what end? DOE Map showing Mid-Atlantic Area Congestion Corridor 1. The General Problem: We Need More Transmission Lines

4. Transmission Line Challenges Mitigating Environmental Impact – Wide right of ways – Aesthetics Siting – Physical Geography – Easements – Local opposition Coordinating – State & Local Agencies – RTO Members And...

5. Expensive to Build – Who Pays? How should the pay structure be designed? What role do regulators play in rate design? How do we regulate the regulators?

6. The Specific Problem: PJM’s “Project Mountaineer”

7. “Project Mountaineer” 550 to 900 miles of 500 kV and 765 kV transmission lines (all in the East) Cost: $3.3 to $3.9 billion Who should pay?

8. License Plate Rate Design Utilities in the sub- regional zone Utilities that benefit from the new transmission Transmission lines are paid by:

9. According to PJM: “Although a large number ($3.3 to $3.9 billion), if such costs are spread to all customers within the PJM footprint, the cost to a typical retail customer would amount to only one mill/kwh.” -- Karl V. Pfirrmann, president of the PJM Western Region*

10. Postage Stamp Rate Costs are rolled-in and allocated to all customers according to each customer's share of the region's load

11. “Project Mountaineer” “Super-highway” to Bring Low Cost Coal Resources to Market “PJM[‘s] new initiative [utilizes the] regional transmission planning process to... develop an efficient transmission “super- highway” to bring low cost coal resources to market.” -- Karl V. Pfirrmann, president of the PJM Western Region*

12. How Much Does Chicago Benefit From “Project Mountaineer”? New Market For Energy Sales Increased Reliability in the PJM Network Cost Sharing for All Lines Above 500 kV

13. 2. FERC’s Ruling: PJM Interconnection, L.L.C., 119 F.E.R.C. ¶ 61,063 (2007) Cost allocation is not an exact science It involves judgment of a myriad of facts We all benefit from a more reliable grid 500 kV and above transmission creates sufficiently broad benefits J. Wellinghoff, FERC Chairman

14. FERC’s Rate Plan: New facilities at or above 500kV: Region-wide Postage Stamp Rate New facilities below 500 kV: License Plate Rate Design

15. FERC’s Policy Goals: Encourage the development of “backbone” infrastructure Provide cost certainty to support new investment Eliminate recurring litigation over cost allocation Provide incentives to construct new transmission

16. 3. ICC Takes its Complaint to the 7 th Circuit “Not so fast Wellinghoff!” J. Posner of the 7 th Cir.

17. Federal Power Act 16 USCS § 824e(a): Whenever the Commission... shall find that any rate... is unjust, unreasonable, unduly discriminatory or preferential... the Commission shall determine the just and reasonable rate. Power of Commission to fix rates and charges:

19. 7 th Circuit Holding: Remanded “[Under the APA] our review is deferential, we require only that the agency have made a reasoned decision based upon substantial evidence in the record.” “Not even the roughest estimate of likely benefits to the objecting utilities is presented.” “FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits.”

20. Calculating Benefit The Commission has a duty to: – Compare the costs assessed against a party to the burdens imposed or benefits drawn by that party If it cannot quantify the benefits: – But has articulable and plausible reasons to believe that the benefits are at least roughly commensurate with those utilities’ share of total electricity sales, then fine; – But FERC cannot avoid comparing the costs and benefits

21. 4. Dissent: J. Cudahy FERC did not explain how PJM’s members benefit from a reliable network because no court has ever required it to do so. Upgrades to the grids reliability were presumed to benefit all of the network’s members.

22. Big Picture U.S. grid is inadequate and urgently needs to be upgraded Grid was not built for long-distance transmission Demand for renewable energy poses additional transmission challenges Long-distance transmission is accomplished most efficiently by the highest levels of voltage—500 kV and above

23. Electricity Grid Needs a “Backbone” R. Nader, Presidential Candidate

24. U.S. Power Grid

25. Dissent’s Final 2 Points FERC isin a better position to improve a deficient transmission grid than this court “Explanations come to an end somewhere” – L. Wittgenstein L. Wittgenstein

26. 5. Consequence and Remaining Questions How would the Supreme Court rule? Who is in the best position to improve the electric grid? How should it be improved? – Renewable Energy – Smart Grid (efficiency and conservation) – Cost/Benefit Analysis

27. C.J. Roberts May Know Grant Cert? Circuit Split? How do we regulate the regulators (Chevron Analysis)? “There is no neutral or inherently fair allocation of fixed costs, as the history of rate design amply demonstrates.” J. Roberts D.C. Circuit* C.J. Roberts

28. Chevron 2-Step 1.Ambiguity: Has Congress directly addressed the question at issue? 2.Reasonable: Is the agency's action based on a permissible construction of the statute?

29. Administrative Law is not for SISSIES! Nino is WRONG. I DON’T MAKE PREDICTIONS!

30. Who Is In the Best Position to Improve the Electric Grid? FERC: – Expertise – Promote Renewable Energy – Develop Smart Grid Courts: – Incremental Change – Protect Regional Concerns Congress: – Address National Issues – Set Clear Policy Goals – Democratic Accountability

31. How Should the Grid Be Improved? Bigger is Not Necessarily Smarter – Distribution Improvements – Decentralize – Environmental Impact Renewable Energy – State Renewable Portfolio Standards – Long-Distance Transmission Cost/Benefit Analysis – Carbon Tax – Economic Benefits – Follow the Money

32. Goals for a BRIGHT FUTURE Reduce GHG’s Reduce Reliance on Fossil Fuels Improve Grid Reliability, Energy Efficiency, and the Economy