This week: Troutman Sanders LLP - Transmission Planning and Cost Allocation Final Rule

New York, July 22, 2011. Today, the FERC voted 5-0 to issue a final rule on Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities (“Final Rule”). Commissioner Moeller stated he will issue a partial dissent to the Final Rule but it is clear from his comments that his disagreements are limited to a few discreet issues. Currently, only the Commissioner statements, a press release and staff’s talking points have been released and we will supplement this Advisory after the rule, itself, has issued.

The Final Rule establishes the following:

Three requirements for transmission planning

Each public utility transmission provider must participate in regional transmission planning process, which produces a single regional transmission plan and satisfies the principles under Order 890; Each transmission planning process at the local and regional level must consider transmission needs driven by federal or state laws or regulations; and Public utility transmission providers in neighboring transmission planning regions must coordinate concerning more efficient or cost-effective solutions. Three requirements for transmission cost allocation

Each public utility transmission provider must participate in a regional transmission planning process, which has a regional cost allocation method for new transmission facilities that satisfies six regional cost allocation principles; Public utility transmission providers in neighboring planning regions must have a common interregional cost allocation method for new interregional transmission facilities, which satisfies six regional cost allocation principles; and Participant funding of new transmission facilities is permitted but not as part of the regional or interregional
cost allocation method. Federal Rights of First Refusal must be removed from Commission-approved tariffs and agreements subject to four limitations.

The requirement would not apply to a transmission facility not selected in a regional transmission plan for purposes of cost allocation; The requirement would not apply to upgrades to transmission facilities (ie: tower change outs or reconductoring); The rule would allow, but not require, competitive bidding to solicit transmission projects or developers; and Nothing in this
requirement impacts state or local laws concerning construction of transmission facilities, including siting or permitting. Additional requirement

Each public utility transmission provider must add a tariff provision that requires the provider to reevaluate the regional transmission plan to determine if alternative solutions need to be evaluated when there is a delay in the development of a transmission facility. Such alternative solutions can include those proposed by the incumbent. Compliance

All public utility transmission providers would be required to make a compliance filing within 12 months of the effective date of the final rule; compliance filings for the regional planning and cost allocation requirements will be due in 18 months. Comments made by the Commission:

Chairman Wellinghoff

Policy drivers behind the draft Final Rule include changes in the transmission system since Order No. 890 and the need for reliable transmission service at just and reasonable rates.

The existing transmission system was not built to accommodate the shifting transmission fleet.

Enhancement to procedures required today will provide for fair allocation of costs for new facilities needed for reliability. Planning requirements are technology neutral - costs must be allocated roughly commensurate with benefits, and no costs should be allocated outside a region unless that region agrees. Commissioner Moeller

Noted the Final Rule does not address the issues of siting, or the fact that it takes way too long and is way too expensive to site transmission. The draft Final Rule also does not address any state laws, or the fact that it in some cases it is Federal agencies which are delaying transmission.

Commission Moeller identified areas where the rule could have gone further. Apparently these will be the areas covered in his partial dissent: Specific right of an incumbent to build in its footprint when the project is needed to meet reliability requirements; and A right of first refusal is not a
right to forever not build a project. Commissioner Spitzer

The Federal Right of First Refusal is a barrier to entry.
Commissioner Norris

Stresses the importance of reliability as a main driver for new transmission development. Commissioner LaFleur

The United States has underinvested in transmission infrastructure.The draft Final Rule requires adoption of a backstop mechanism to ensure that delays in development of a regional facility will not prevent incumbents from complying with reliability of service obligations. Based on the public
statements it appears that:

The rule does not impose one-size-fits all requirements for either regional planning or cost allocation. Regional differences will likely be reflected in compliance filings. In many ways, “the devil will be in the details” regarding how the Commission acts on such compliance filings. Cost allocation must be “roughly commensurate” with expected benefits. This seems to rule out any eastern or western interconnection-wide rolling in of transmission costs, which some in the industry advocated, but many opposed. Costs can only be allocated outside of a region with the agreement of the neighboring region. The Commission appears to expect that such seams issues be dealt with on a negotiated basis. Overall, FERC will make many fact specific decisions on the compliance filings that are submitted. This is consistent with the way FERC implemented Order Nos. 888 and 890.