US FERC clears PJM plan for review, analysis of transmission cost commitments

Washington — The cost commitments transmission developers propose to strengthen their competitive bids for projects in the PJM Interconnection footprint must remain voluntary and the grid operator must assess the quality and effectiveness of those binding commitments in its review of project proposals, the US Federal Energy Regulatory Commission said in an order granting PJM's request to clarify this process.

The competitive proposal window process used to develop PJM's regional transmission expansion plan (RTEP) requires developers to submit engineering studies, proposed construction schedules, cost estimates and other details to aid the grid operator's review and analysis of project proposals.

An existing transmission owner or non-incumbent developer may also present "other advantages" it possesses tied to the construction, operation and maintenance of the proposed project, including commitments to adhere to cost caps if its proposal were selected as the more efficient or cost-effective transmission solution.

PJM's operating agreement gives it authority to consider an array of criteria when deciding what projects to recommend to the PJM board of managers for inclusion in the RTEP. But a stakeholder process identified language that PJM in September sought FERC approval to add to its operating agreement. The proposed operating agreement changes (ER19-2915) commit "PJM to undertake a comparative review and analysis of any cost commitment voluntarily presented as part of a proposal submitted in a competitive window," the September filing said.

FERC in a recent order found the changes to be just and reasonable and accepted PJM's filing, effective back to January 1.

The commission said the operating agreement revisions "add clarity that such cost commitments must at all times remain voluntary, that developers are to submit information to define the binding elements of the proposal, and that PJM will include in its assessment of a project's cost-effectiveness the quality and effectiveness of any voluntarily-submitted binding cost commitment proposal."

FERC added that the "revisions provide transparency into how PJM will determine the cost and overall cost-effectiveness of competing proposals, including any binding cost commitments." It concluded that the filing would "assist PJM in its selection of the more efficient or cost-effective transmission solution and provides additional transparency of PJM's evaluation of competing proposals."

Cost commitments, under the filing, include provisions that cap project construction costs, project total return on equity including incentive adders or capital structure. The filing specified that PJM's evaluation of cost, ROE or capital structure in a binding cost containment proposal would not be tantamount to a determination that those provisions result in just and reasonable rates.

PUSHBACK

Though the operating agreement revisions were developed through a stakeholder process and garnered a sector-weighted vote of 4.28 in favor, wherein just a 3.335 vote is required for endorsement or approval, PJM's filing was met with a fair share of pushback.

A coalition of transmission owners including subsidiaries of American Electric Power, FirstEnergy, PPL Electric Utilities, Public Service Electric and Gas and Transource Energy called PJM's filing unworkable, ill-defined and opaque. They asserted that the proposed evaluation criteria would require PJM "to compare apples to oranges to bananas to grapes."

A separate protest from PSEG insisted that the filing's consideration of capped ROEs as cost commitments would force PJM into "assuming the role of the ratemaker and deciding which ratemaking elements are most favorable or appropriate."

And another group of critics including AEP, FirstEnergy and PPL contended that the operating agreement changes infringed on developers' exclusive rights to make Federal Power Act Section 205 filings concerning transmission rates, revenue requirements and cost recovery.

ARGUMENTS REJECTED

FERC was not persuaded by any of those arguments.

Because cost caps are voluntarily pursued by developers, who also determine the binding characteristics of those caps, FERC said it saw no infringement of Section 205 filing rights.

It disagreed with the premise that the filing put PJM into a ratemaking role as the grid operator would evaluate cost containment proposals and overall projects on their ability to meet transmission needs, not on whether the resulting rate is just and reasonable.

"While it is true, as PSEG states, that the rates the commission reviews are dependent on the project selected by PJM, we disagree that this fact confers a ratemaking role to PJM," FERC said. "Instead, it is consistent with PJM's role under its existing tariff in that PJM selects the more efficient or cost-effective transmission proposal, and the commission reviews any resulting rates."

The commission added that "nothing in PJM's proposal suggests that any other entity except the commission will be determining rates."