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Wws 402 Final Mcgrath

Wws 402 Final Mcgrath

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Published by: Faaez Ul Haq on May 04, 2011
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02/03/2012

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P
RINCETON
U
 NIVERSITY
 
WWS402s: Renewable Energy and the Electric Grid in the United StatesProfessor Harold Feiveson
Shocks to the System:
 Assessing the Impacts of Pricing Alternatives, Legal Challenges, Competitive Renewable EnergyZones, and Independent System Operators on Electrical TransmissionKayley McGrath3 May 2011This assignment represents my own work in accordance with University regulations.Signed, Kayley McGrath
 
McGrath 1
 
EXECUTIVE SUMMARYNational Policies: FERC and Cost Allocation
 Prior to the mid-1990s, investor-owned utilities constructed new transmission lines, andpricing was generally a single averaged rate, available to all ratepayers in a local area. Such costsocialization methods have become obsolete on a grid governed by Regional TransmissionOrganizations (RTOs), where cost-bearers and beneficiaries of new transmission projects do notalign so precisely. The Federal Energy Regulatory Commission’s (FERC) Order No. 2000-Aestablished these regional power pools of concentrated utilities. FERC has been increasinglyrelying upon broad, general principles in determining cost allocation policies while delegating moreauthority to regional operators. In February of 2007, FERC passed Order 890, which aimed toincrease the transparency and fairness of cost allocation by standardizing transmission capacitycalculations among utilities and creating incentives for RTOs to construct new, multi-jurisdictiontransmission lines, which are often precluded by narrow, local interests. Although FERC mustapprove a region’s cost allocation proposals, state and regional regulators still hold the primary jurisdiction in determining what projects are pursued and who pays for them. These authorities willoverwhelmingly consider their personal losses or benefits when approval is pending for a project.Thus, incentives to pursue multi-state or interregional projects are lacking, and impede FERC’sefforts to pursue projects that may impose diffuse costs on the national level – namely, renewableenergy initiatives.
Regional Initiatives: Cost Allocation
Various regional Independent System Operators (ISOs), including the New England ISO(NE-ISO), and California ISO (CAISO), Florida Power and Light Company (FPL), the NorthCarolina Transmission Planning Collaborative (NCTPC), PJM Interconnection, and CompetitiveRenewable Energy Zones in Texas and California (CREZ initiatives), provide insightful strategiesfor cost allocation that may be useful in revamping national policies. In particular, the FPL and theNCTPC provide the most flexible strategies and incentives for allocating funding for new projects.The former bases a utility’s cost recovery ability for undertaking new transmission projects on thelikelihood its project will disrupt the grid. This standard motivates utilities to propose high-qualityexpansions to the grid at the risk of bearing any fallout costs. Similarly, the NCTPC pushes the costburden of new projects onto non-initiating utilities in proportion to their savings in not having toundertake the initial project that would likely benefit all – at least marginally – in reliability upgrades.
Legal and Political Developments in Cost Allocation Policy
The holding in
Illinois Commerce Commission v. FERC (2009)
indicates the Court’saversion to backing broad cost socialization policies. The U.S. Court of Appeals, Seventh Circuit,ruled that PJM’s uniform allocation policy for all ratepayers funding projects exceeding 500 kilovoltswas not a proportional or appropriate strategy. The Electric Transmission Customer Protection Act,proposed in the Senate in February of 2011, also endorses a “measurable reliability or economicbenefit” standard for a project to merit funding from a party. These measures demonstrate apolitical distaste for broad national authority under FERC that supports diffusely borne electricitycosts. Perhaps the approaches of the FPL and NCTPC will prove to be more legally tenable intaking proportional risks and economic benefits of utilities and customers into account. FERC candraw from these policies in formulating national standards. Such considerations are necessary, ascontinued regional policy discontinuity will undermine renewable energy initiatives that requirenational cooperation. Thus, FERC should strive to retain its authority, and endorse policies thattrend toward national uniformity.
 
McGrath 2
 
INTRODUCTION
Perhaps the most contentious electricity transmission financing issue is cost allocation for newinterstate transmission lines.”
1
 This controversial dynamic is attributable to the fact that the pricing of electricaltransmission has become increasingly complicated. Electrical providers and consumer beneficiaries have, historically, aligned geographically. However, post-1996 open-accesstransmission policy reforms under the Federal Energy Regulatory Commission (FERC) havedissociated utilities from their ratepayers.
2
Moreover, FERC delegates ample regional authority totransmissions owners and operators in determining cost allocation methods, further exacerbatingthe lack of national policy uniformity and clarity.
3
These policies have ultimately reduced thetransparency of electrical energy pricing, and are stalling efforts to integrate renewable energy intothe grid in pursuit of greenhouse gas emissions reductions for the energy sector. Renewableenergy incorporation requires inter-regional transmission lines and concerted power lineconstruction and funding to connect the remote sources of wind, solar, or geothermal energy topopulated load centers.
4
While various Independent System Operators (ISOs) and RegionalTransmission Organizations (RTOs)
5
have proposed several alternative pricing schemes, thelegality of these proposals is uncertain. Currently, as evidenced by the landmark decision in
IllinoisCommerce Commission v. FERC 
(2009), courts seem hesitant to endorse cost socializationpolicies, in which all customers in a regional interconnection pay the price of a new project,
1
Stan Mark Kaplan,
Electric Power Transmission: Background and Policy Issues
, Rep. Congressional ResearchService, 14 Apr. 2009. Web. 20 Mar. 2011. <www.crs.gov> 20.
2
Stan Mark Kaplan and Adam Vann,
Electricity Transmission Cost Allocation
, Rep. Congressional Research Service,19 Apr. 2010. Web. 21 Mar. 2011. <http://www.wiresgroup.com/images/WIRES_Report_CostAlloc_041910.pdf> 3-4.
3
Ibid. 6.
4
Ibid. 10.
5
Federal Energy Regulatory Commission (FERC), "Regional Transmission Organizations (RTO)/Independent SystemOperators (ISO)," Federal Energy Regulatory Commission (FERC), 24 Mar. 2011. Web. 25 Mar. 2011.<http://www.ferc.gov/industries/electric/indus-act/rto.asp>.

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