United States: FERC Issues Orders Regarding SPP's Allocation Of Existing Facility Transmission Costs For New Transmission Owners

On March 15, 2018, FERC issued three interrelated orders regarding the creation of a new Transco within the Southwest Power Pool, Inc. ("SPP"), the integration of a new Transmission Owner within SPP, and the allocation of existing transmission costs for new transmission owners within the region. The package of orders stems from South Central MCN LLC's ("South Central") acquisition of transmission facilities from a public power entity, the City of Nixa, Missouri.

Turning to the Complaint Order first, the Commission denied a complaint from several SPP Transmission Owners ("Complainants"). The complaint was filed by the incumbent SPP Transmission Owners, and raised the issue of whether or not a new transmission owner required the creation of a new transmission pricing zone within a Regional Transmission Organization ("RTO") structure. This situation was precipitated by South Central's decision to not create a new pricing zone but to simply have its transmission revenue requirement to be recovered through (added to) an existing transmission pricing zone.

FERC concluded that the Complainants had not met their burden of proof to establish that SPP's Open Access Transmission Tariff ("Tariff") was unjust and unreasonable. In particular, the Complainants argued that the SPP Tariff provisions surrounding integration of new transmission owners into SPP were unjust and unreasonable because, when a new transmission owner is included within an existing transmission pricing zone, all of the costs of the new transmission owner's transmission facilities are allocated across the entire pricing zone through network service rates.

Since SPP's establishment as an RTO in 2004, SPP has used a so-called "license plate" transmission rate design to prevent transmission facility cost shifting between SPP members (see October 24, 2017 issue of the WER). Under this type of rate design, transmission owners are placed in their own sub-regional zone and the transmission service charges for customers within that zone are based on the costs of the transmission owners' facilities. When a new transmission owner is added to an existing zone in SPP, its annual transmission revenue requirement ("ATTR") is added to the existing zone's total ATTR, resulting in a new total ATTR and a new amount of total load for the zone.

In the Complaint Order proceeding, Complainants asserted that the incorporation of a new transmission owner's ATTR into SPP's existing rates through the zonal, ATTR pricing system is inconsistent with FERC's long-standing cost-causation and allocation principles. In denying the complaint, FERC determined that the Complainants had not met their burden to prove that the Tariff is unjust and unreasonable. Specifically, FERC explained that, consistent with its precedent, it does not reject tariff provisions simply because they do not prohibit cost shifts. Rather, FERC noted that a judgment on the allocation of costs "involves judgment on a myriad of facts," and therefore, FERC concluded that automatically finding potential cost shifts per se unjust and unreasonable would deprive FERC from considering the unique circumstances and "myriad of facts" involved in each cost allocation proceeding. To that end, FERC stated that "issues like these are case-specific and must be considered to determine whether zonal placements, including any resulting rate impact, are just and reasonable."

Furthermore, FERC also noted that it had already dealt with the issue of the potential for cost shifts when approving SPP's Tariff provisions to implement its current cost allocation process. In particular, FERC noted that a protestor argued on rehearing of its order approving SPP's Tariff revisions that FERC had not considered the cost shifts that would occur. In denying rehearing on that point, FERC stated, "The Commission considered the possibility of resulting cost shifts and the effects on the entire SPP system and found that, on balance, the definition [of transmission facilities] is reasonable." Therefore, FERC stated that it was aware of the potential for costs shifts as it relates to the addition of new transmission owners, but nevertheless approved the Tariff revisions.

Many of the issues addressed in the Complaint Order were also addressed in a separate, but related, Transaction Order and Formula Rate Order. In the Transaction Order, FERC approved a transaction between South Central and the City of Nixa, Missouri for South Central to acquire certain transmission lines and other assets ("Nixa Assets") of the City of Nixa and include the cost of service for those assets in SPP's rates. South Central stated that though the final purchase price would be more than the estimated net book value of the Nixa Assets, South Central's ATTR for the Nixa Assets would be based on the actual net book value of the assets. Based on this representation, FERC approved the transaction because it concluded the transaction "does not seek to recover through rates any amounts paid to the City of Nixa for the Nixa Assets in excess of their estimated net book value."

Similarly, in the Formula Rate order, SPP proposed to include the Nixa Assets and their associated ATTR in SPP Zone 10's rates. SPP stated that its analysis showed that the inclusion of the Nixa Assets in Zone 10 would increase Zone 10's rates for network service by approximately 46 percent and rates for Point-to-Point transmission service by approximately 67 percent. In the formula rate order, FERC found that SPP had not met its burden of proof under section 205 of the Federal Power Act, which requires that rates be just and reasonable and not unduly discriminatory or preferential. As a result, FERC accepted SPP's proposed Tariff revisions subject to refunds, suspended them for a nominal period, and set the rates for hearing and settlement judge procedures.

A copy of FERC's Complaint Order can be found here. A copy of the Transaction Order and the Formula Rate Order can be found here and here, respectively.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Christopher Zentz
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