On July 13, 2016, FERC issued an order partially lifting a long-standing pricing limitation for energy exports from the Midcontinent Independent System Operator, Inc. (“MISO”) to the PJM Interconnection, LLC (“PJM”) in relation to Multi-Value Projects (“MVPs”). The order—released in response to a remand from the U.S. Court of Appeals for the Seventh Circuit (“Seventh Circuit Court of Appeals”)—resolves a multi-year-long process and debate over how to allocate costs for MISO transmission projects that benefit customers inside of the PJM region.
The central issue decided by FERC was, in light of current system, market, and technological conditions impacting these two Regional Transmission Organizations (“RTOs”), whether it was still necessary to maintain a restriction on export charges for MVP-enabled energy deliveries that originate in MISO and sink in PJM. FERC imposed this limitation in 2003 following an order the year prior allowing certain major utilities to join the PJM region. Because that decision risked “islanding” Wisconsin and Michigan from the rest of MISO, thereby leading to inefficient “rate pancaking”— that is, multiple transmission charges for energy transfers between both systems—FERC imposed a zone-based transmission rate structure (“license plate” scheme) for energy transfers between MISO and PJM. FERC also directed the two RTOs to propose a method for allocating the costs of cross-border transmission facilities—i.e. those facilities that are built in one RTO, but also provide benefits to customers in the other.
In July 2010, MISO and its transmission owners submitted tariff amendments to identify and allocate the costs of MVPs as a certain type of cross-border facility that— as asserted by the MISO parties—facilitate robust transmission system development as well as economic and reliable energy deliveries. MVPs are particularly useful, they argued, in interconnecting remote wind generation resources in support of energy mandates, such as state renewable portfolio standards. In an order issued that same year, FERC generally approved MISO’s proposed MVP charge for export and wheeled-through transmission, except for exports that sink in PJM. As FERC saw it, applying the MVP charge to these PJM exports would result in impermissible rate pancaking.
A group of petitioners including utilities and state public utility commissions challenged FERC’s decision to exempt MVP charges for PJM transmission exports as unjustified and petitioned for review in the Seventh Circuit Court of Appeals. In a 2013 decision, the court agreed that the exception was unjustified. As the court noted, in contrast to the localized benefits of transmission projects built around the time of FERC’s 2003 Order, MVPs support the entire regional transmission system, and benefit customers inside and outside the RTO, including those located in PJM. Because PJM utilities do not shoulder the costs for MVPs in proportion to the benefits that they receive from such system improvements, the court remanded the export pricing question for FERC to determine “in light of current conditions what if any limitation on export pricing to PJM by MISO is justified.”
On remand, FERC solicited comments from a variety of parties throughout MISO and PJM. Advocates for extending MISO’s MVP charge to PJM exports pointed to several changed circumstances since FERC broadly prohibited regional rate pancaking in 2002, including: technology and real-time market advancements and a more robust inter-regional transmission planning process following a Joint Operating Agreement between MISO and PJM and the requirements of FERC’s Order No. 1000. Critics of the MVP charge argued that, despite these system improvements, the underlying rationale behind the rate-pancaking prohibition remained valid because imposing additional transmission charges would discourage efficient energy trades along the MISO-PJM seam.
In its final order, FERC found that the MVP charge advocates had the better argument. FERC was particularly persuaded by the recent demand growth for large-scale wind generation, the need for PJM entities to access those renewable resources, and the ability of MVPs to meet those needs. Ultimately, FERC found it appropriate to allow a pancaked transmission rate on MISO exports to PJM through a MVP usage charge and gave MISO thirty days to apply the MVP charge these exports and submit the necessary compliance filings.
The full Commission Order can be viewed here.
A more detailed version of this post first appeared on the Troutman Sanders’ Washington Energy Report. Readers interested in further explanation of the historic “seams” issues in the MISO-PJM relationship should refer to the version linked to above.