benefit of counsel: the perfect is the enemy of the good

Kenneth M. Simon, Dickstein Shapiro Morin & Oshinsky

As an energy lawyer for more than 25 years, I’ve had many opportunities to participate in the formulation of new energy policies. Recently, I had a chance to revisit one of those policies-the Federal Energy Regulatory Commission’s (FERC)transmission pricing policy-and how it is being implemented in New York. It was not pretty. A straightforward transmission pricing policy, known as the “or” policy, turned into a nightmare of complexity.

When Northeast Utilities proposed to acquire Public Service of New Hampshire in 1990, my firm represented the New England generators in the FERC merger case. We asked FERC to bar the merged company from charging generators for both the direct costs of network upgrade facilities (or incremental rates) and rolled-in rates for transmission service. “Pick one method or the other,” we said, “but not both.” FERC agreed, and, in subsequent proceedings, required “or” pricing for all transmission services. Over time, FERC modified its policy, first by allowing transmission owners to charge upfront for system upgrades, but requiring transmission owners to credit direct payments plus interest against transmission charges, so that the present-value cost to generators equaled rolled-in rates. FERC recently limited the scope of transmission services to which the credit applies, but the principle remains intact, with one exception: FERC now allows regional transmission organizations to depart from “or” pricing, so as to utilize more flexible and creative approaches approved by FERC.

The New York Independent System Operator (NYISO), relying on this exception, developed an alternative cost allocation method through its stakeholder process. NYISO’s concept seems simple. First, calculate the costs of system upgrades needed for transmission system reliability during a five-year period and charge these “anyway” costs to transmission owners. Second, calculate the costs of system upgrades needed to interconnect new generators for the same period. These “but for” costs are netted against the “anyway” costs, and allocated to generators based on individual system impacts.

While easy to describe, NYISO’s system proved impossible to implement fairly. The problem stems from the need for a “fantasy” plan to identify upgrades required for reliability. “Anyway costs” are not based on a real transmission expansion plan, but on a conceptual plan built largely on surmise. Development of the plan raises hard questions. For example, when new generation is needed, which plants should be assumed? Transmission owners argue for plants that cost the least to interconnect, even if the plants could never generate power cost-effectively. Developers want to include costs of interconnecting generation actually built to maintain reliability, even if more costly to connect than hypothetical alternatives.

Another set of questions concern timing. When does this hypothetical planning process begin? What happens when no reliability solutions are feasible in the time remaining? Can transmission owners avoid upgrade costs by invoking “operational procedures” until new facilities come on-line? These are only a few of the many difficult questions presented by the NYISO process.

After NYISO issued its first (and so far only) cost allocation report in May 2002, litigation began about several issues as they affected the allocation of the currently estimated $124 million cost of upgrades for heavily congested New York City. After a lengthy FERC hearing, administrative law judge Jeffie J. Massey issued a blistering decision in May 2003 urging major reforms of the process. Judge Massey’s decision lead to settlement negotiations among NYISO, Con Edison, New York Power Authority, SCS (an independent developer), affiliates of KeySpan, Reliant, PSEG, and FERC trial staff, under the guidance of settlement judge Carmen A. Cintron. The negotiations culminated in settlement agreements in June 2004 that are now pending FERC approval. Meanwhile, the NYISO’s cost allocation process, which was to have been an annual event, has practically ceased to function, and nearly everyone involved agrees that major issues must still be addressed, even if FERC approves the settlements.

NYISO is now in the process of putting together a transmission expansion planning process for upgrades required to meet reliability. Perhaps the answer to New York’s cost allocation problems lies in using the real plans for cost allocation purposes. In the meantime, one yearns for the straightforward “or” policy.

Simon is the head of the energy group at Dickstein Shapiro Morin & Oshinsky LLP. He would like to thank Charles Pratt, a partner in Dickstein Shapiro, and Shannon Torgerson, a summer associate, for their contributions to this article.

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