Midwest Power Rates Generate Split Ruling

     (CN) – The 7th Circuit sided with one of two challenges over the Federal Energy Regulatory Commission’s decision on rates for existing power lines and new high-voltage power lines in the Midwest.

     The case involves the costs of transmitting electricity over lines owned by utilities in a power pool called PJM Connection.
     “PJM’s region stretches east and south from the Chicago area, primarily to western Michigan and eastern Indiana, Ohio, Pennsylvania, New Jersey, Delaware, Maryland, the District of Columbia and Virginia,” the ruling states.
     The Chicago-based appeals court said FERC correctly determined that power companies can’t shift the sunk costs of their existing power lines to the utilities that deliver electricity from the Midwest to the east through Ohio.
     American Electric Power Service Corp. and the Public Utilities Commission of Ohio had sought to include the cost of existing power lines in its electricity rates. FERC refused, and the 7th Circuit agreed.
     “[S]hifting the financial burden created by the cost from one set of shoulders to another will have no direct effect on service or investment,” Judge Richard Posner wrote.
     However, FERC and the court noted that power companies can raise their prices for new and upgraded power lines that benefit customers outside their areas. “It is permitted to charge for the service – just not to include in the charge its sunk costs,” Posner explained.
     Midwestern utilities also challenged FERC’s approval of a financing plan for new power lines capable of transmitting 500 kilovolts or more.
     FERC approved PJM’s proposed method of sharing the costs of the high-voltage power lines among all PJM utilities, regardless of how much each utility stood to benefit from the new lines.
     The commission said it wanted to return to the pro rata sharing agreements entered into by some of its eastern members more than 40 years ago. FERC also explained that figuring out who benefits from a new power line and by how much is too difficult and generates lawsuits. Finally, it claimed that everyone benefits from high-capacity power lines, because they increase the reliability of the whole network.
     But the Ohio commission and its Illinois counterpart argued that there’s a marked difference between the voltage needs in the eastern and western portions of the region.
     In the western portion, power plants are typically closer to customers, requiring relatively low-voltage transmission lines. In the eastern region, where power plants are much farther away, higher-voltage lines are needed to cover the distance.
     Judge Posner agreed that few, if any, high-voltage lines would be built in the Midwest as a result of this asymmetry.
     Nonetheless, FERC claimed that all utilities should split the cost of new high-voltage lines, because the eastern utilities wanted it that way in 1967.
     “[T]he fact that one group of utilities desires to be subsidized by another is no reason in itself for giving them their way,” Posner wrote.
     He said lawyers for FERC reluctantly conceded that it would be unreasonable to require a utility to chip in $480 million for a high-voltage line that might provide it $1 million in benefits.
     FERC doesn’t have to “calculate benefits to the last penny,” Posner said, but it does have to provide some sort of cost-benefits analysis.
     Judge Cudahy agreed with the majority’s approval of the rates for existing power lines, but expressed “concern” over the court’s opinion on the cost allocation for new high-voltage lines.
     “However theoretically attractive may be the principle of ‘beneficiary pays,'” Cudahy wrote, “an unbending devotion to this rule in every instance can only ignite controversy, sustain arguments and discourage construction while the nation suffers from inadequate and unreliable transmission.”

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