FERC Approves Cost Allocation Proposal for Cross-Border Facilities

On November 3, 2009, the Federal Energy Regulatory Commission (“FERC” or the “Commission) accepted revisions to the Joint Operating Agreement (“JOA”) between the PJM Interconnection, L.L.C. (“PJM”) and the Midwest Independent Transmission System Operator, Inc. (“Midwest ISO”) that allocate the costs of economic cross-border facilities. The economic cross-border allocation provision affects facilities that are built within the borders of one Regional Transmission Organization (“RTO”), but provide economic or congestion benefits to another RTO. Thus, some of the costs are shared between the RTOs.

On November 18, 2004, the Commission ordered the Midwest ISO and PJM to submit a proposal that allocates the costs of economic cross-border facilities between the two parties. While the Commission accepted their cost allocation proposal for reliability needs in January 2008, the Commission asked for more information on the cost allocation methodology concerning cross-border facilities built for economic purposes. Specifically, the Commission also asked the RTOs to address how they would allocate the cost of upgrades for parallel flow problems, such as the problems in the Northern Indiana Public Service Company (“NIPSCO”) system caused by west-to-east transmission within PJM. The Commission also stated that it wanted one proposal that could be applied generally to all transmission upgrades, but recognized that the NIPSCO system might require a separate cost allocation provision.

Under the JOA, the shared cost of an economic cross-border project will be allocated to each RTO in proportion to the present value of the RTO’s share of annual benefit received from the project. To qualify as an economic cross-border project eligible for cost sharing, the project must be: 1) worth $20 million or greater; 2) evaluated under a Coordinated System Plan or joint study process; 3) meet a present value cost/benefit ratio of 1-to-1.25; 4) qualify under PJM’s Regional Transmission Expansion Plan and as a Regionally Beneficial Project under the Midwest ISO’s Transmission Expansion Planning Protocol; and 5) address one or more constraints that meet specific characteristics.

The Commission found the JOA cost allocation proposal to be just and reasonable for two reasons. First, the proposed economic cross-border benefit formula is based on criteria that the Commission has previously accepted for RTOs to measure the benefits of adding new transmission. Second, it is reasonable to require that each economic cross-border project meet both Midwest ISO and PJM’s internal costs allocation formula because it ensures that the project meets the requirements of any non-cross-border economic project.

Meanwhile, both RTOs stated that the NIPSCO problem is unique. As such, they proposed to address the parallel flow problem separately. The Commission agreed as NIPSCO, the RTOs, and other market participants all agreed to resolve the issue separately in a NIPSCO-specific cost allocation filing.

The Commission’s order is available at www.ferc.gov under Docket No. EL04-135-112.