FERC Upholds Postage Stamp Cost Allocation Methodology

Countering an earlier remand from the Seventh Circuit, the Commission explains why a regional transmission organization should use a postage stamp methodology to allocate the costs of its new high-voltage transmission lines.

In an order issued on March 30,1 the Federal Energy Regulatory Commission (FERC or Commission) issued an order requiring "postage stamp" pricing to allocate the costs of new 500 kV and above transmission projects in the PJM Regional Transmission Organization Region. PJM Interconnection, L.L.C., 138 FERC ¶ 61,230 (2012). The Commission acknowledged that other just and reasonable cost allocation methodologies may exist to allocate the costs of high-voltage transmission facilities. It concluded, however, that PJM Interconnection, L.L.C.'s (PJM's) use of a static-flow-based model is unjust and unreasonable.

The Commission's March 30 order responds to a criticism from the U.S. Court of Appeals for the Seventh Circuit. In Illinois Commerce Commission v. FERC, 576 F.3d 470 (7th Cir. 2009), the Seventh Circuit had remanded an earlier FERC order finding that a postage stamp methodology was an appropriate way to allocate the costs of new high-voltage transmission projects included in PJM's Regional Transmission Expansion Plan (RTEP). The court held that FERC's imposition of a postage stamp methodology was not supported by the record in the proceeding. The court was particularly troubled by the Commission's decision to justify its imposition of a postage stamp methodology on the grounds that the relative benefits to the various parties from 500 kV and above facilities are difficult to measure. Concluding that cost allocation must have some connection to the benefits resulting from the project, the court found that FERC had failed to provide "even the roughest of ballpark estimates of those benefits."

PJM's static-flow methodology measures the flows across constrained facilities prior to the addition of a new transmission upgrade and identifies the effect of the various system loads on that constraint. PJM then uses the measure of each load's effect on the constraint to allocate the costs to resolve that constraint. In responding to the Seventh Circuit's remand, FERC stated that such models do not capture all the benefits resulting from high-voltage transmission projects. According to the Commission, allocating the costs of high-voltage transmission facilities to all transmission customers based on a uniform rate for service or...