A National Perspective on Allocating the Costs of New Transmission Investment: Practice and Principles

Abstract:

The United States electric system has served the nation well with decades of reliable and universal electricity service. However, there is an increasing and broad recognition that significant amounts of investment in the transmission system will be needed in the near and long term if the system is to continue to provide the kind of electricity service that Americans desire and on which the nation’s economy depends.

Attracting new investment in transmission in recent years has become more complicated than in the past because of the nation’s transition from a traditional era of utility regulation to a new era of national policy supporting “open access” to transmission. While the wholesale electricity market has changed fundamentally, the framework for enabling and encouraging investment that will better enable the grid to serve growing competitive markets has not yet fully emerged. One area still largely unresolved is how the costs incurred in transmission expansion will be allocated among users. While it is clear that many traditional cost-allocation approaches are no longer appropriate, new principles governing the allocation of cost responsibility for new transmission investment have yet to be fully articulated and implemented. It is the articulation of principles for that cost allocation that is the subject of this paper.

This White Paper focuses on the principles for determining the benefits of new transmission investments, and for allocating the costs efficiently and equitably among those who benefit from the enhancement. While for the most part Federal regulators have been attempting in recent years to accommodate the differences of opinion on these topics by adopting transmission cost-allocation proposals resulting from settlement discussions or negotiated agreements among stakeholders in specific geographic areas, this approach suffers from the lack of common, predictable principles supporting transmission investment for the interconnected grid that serves broad regions of the nation. While the acceptance of different regional approaches is understandable from a pragmatic point of view because such settlement processes often allow issues to be resolved with less contentiousness, that approach is inadequate to the task of creating a sustainable and viable environment for continuing attraction of capital into transmission projects. Indeed, it is unlikely that the widely divergent methods proposed and accepted for allocating transmission costs can produce a body of policies that together both meet the legal standard of just and reasonable results and also prove to be the foundation for sustainable investment for the long term, particularly when these allocations interact across 2 regional boundaries. Finding a principled basis for cost allocation that relies on more than lowest common denominators would certainly provide a more appropriate and sustainable basis for public policy.