WHO PAYS FOR NEW TRANSMISSION LINES?

The Answer is Not as Straightforward as You Might Think

New transmission lines can be quite expensive. Depending on the length and voltage (higher voltage lines are much more expensive), new lines can cost from hundreds of millions to billions of dollars. So, who pays the costs of those new lines?

As a bit of background, most electric systems offer what is called network transmission service, which essentially means a system’s entire transmission network is used to deliver electricity from generators to customers. For this service electric systems charge a single rate based on the costs of all of their transmission facilities. Utilities buy this service and use it to transmit electricity from generation facilities to their customers. Utilities then include the cost of the network service in their retail rates. Included in the rates for network service are the costs of new transmission facilities.[1]

Because retail customers pay for the cost of new facilities in their retail rates, the literal answer to my question is that customers pay the costs of new transmission lines. But which customers? Most new transmission lines, particularly the more expensive ones, serve more than one electric system in more than one state. And because the new lines benefit more than one electric system, the costs of those lines must be allocated among the various transmission systems they benefit before those costs can be passed on to retail customers.

When hundreds of millions, or billions, of dollars of costs are allocated among different electric systems, there can be a strong incentive for the customers of each system to attempt to point the finger to the other systems in an effort to reduce their own share of the costs. I have first-hand knowledge of many of these disputes from my time working at the Federal Energy Regulatory Commission (FERC), which has jurisdiction over the allocation of transmission costs. When I was the Senior Legal Advisor to one of the FERC Commissioners, I had to help figure out how to resolve several of these disputes. And when I subsequently moved to the FERC Solicitor’s office, I had a couple of cases—both of which I won—where I had to defend FERC’s cost allocations against attacks in the Courts of Appeals.

The general rule for allocating transmission costs sounds simple enough. The allocation of the costs of new transmission lines should be allocated roughly in accordance with the benefits that will accrue from the new line. For example, if ten percent of the benefits of a new line go to one electric system, then ten percent of the costs of the new line should be allocated to that electric system. No one could object to this proposition as a matter of theory. What could be more fair? But in practice this rule has proved to be difficult to implement. How exactly are the benefits of a new transmission line measured?

There are two different justifications used to support the construction of new transmission lines. The first is that the new line will increase access to low cost generation and, as a result, reduce the rates customers pay for their electricity. It is not too difficult to apply the general rule for these so-called “economic” lines. The justifications provided for the approval of economic lines include projections of the cost effects of the new line at different locations. For example, the projections might show that the cost of electricity is reduced by $100 million for Utility A and by $50 million for Utility B. It is a relatively easy task to use these projections to develop cost allocations. For example, if the studies show ten percent of the cost reductions expected to result from a proposed line will be realized in one electric system, then it would be appropriate to allocate ten percent of the costs of the line to that system. There can be disputes over which projections are the most accurate, but the basic principle is not hard to apply.

The second justification for a new line is that it will improve system reliability. Reliability issues can have numerous different causes, such as an increase in customer loads in parts of an electric system or in the system as a whole, or problems caused by aging transmission or generation facilities. The great majority of new transmission lines are constructed for reliability purposes rather than economic purposes. This is because it is more difficult to obtain the necessary approvals to spend the large sums necessary to construct a new line simply to reduce the cost of electricity when the system can continue to operate reliably without the new line. But regulators are reluctant to reject proposed lines if the rejections will lead to blackouts.

Allocation of the costs of new reliability lines is much more difficult than allocation of the costs of economic lines. How, exactly, do you quantify the amount of additional reliability a new transmission line provides or place a dollar value on the benefits of that increase in reliability? Multiple cases have addressed this issue. And from these cases it is perhaps possible to objectively determine whether a transmission line provides very little or no benefits to an electric system. But there is no objective method for determining whether the cost allocation for a proposed reliability transmission line allocates costs to each electric system that are roughly proportionate to the line’s benefits.

An extreme example is the PJM Regional Transmission Organization’s (RTO) proposed cost allocation method for transmission facilities operating at 500 kilovolts and above. These were extremely expensive lines, with a combined total cost in excess of six billion dollars. The proposed methodology allocated the costs of these lines equally among all customers in the 13-state PJM region, even though the proposed transmission lines were all located solely in the eastern part of the region. There are several large utilities in the midwestern part of PJM, and the equal allocation approach led to more costs being allocated to these midwestern utilities—located hundreds of miles away from the lines--than to some of the eastern utilities where the lines were actually located.

Not surprisingly, this allocation of billions of dollars of costs to utilities located hundreds of miles away from the new transmission lines created a tremendous incentive to litigate the cost allocation. FERC upheld the proposed methodology, but provided little justification for allocating costs to the western utilities other than that, as a general matter, building large new lines would increase the reliability in the entire RTO. Over a 16 year period, FERC’s approval of the methodology was reversed on three separate occasions before the dispute was finally resolved in a settlement. There have been numerous other disputes over the allocation of the costs of new transmission facilities, although none have been quite as protracted.

Disputes over the allocation of the costs of transmission lines represent more than just a technical rate issue. There is general agreement today that it is important to upgrade and expand the US grid’s transmission system. Transmission expansion is necessary both to hook up new renewable facilities and to address the rapidly increasing demand for electricity to power artificial intelligence, bitcoin mining, and data centers. But new transmission lines must be approved in each state in which the line will be located. And because new transmission lines are so expensive, it is difficult to obtain state approvals if the state regulatory agencies whose approval is required believe that the costs allocated to that state are too high. Cost allocation therefore can become a crucial factor in determining whether needed new transmission lines are constructed.

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[1] There are some transmission lines that are not part of an electric system but are built to transmit electricity from a specific location outside of an electric system—for example from wind farms in remote locations—to a transmission system, which delivers it to customers. These types of lines are relatively rare and I am not going to discuss how their costs are allocated in this post.