Perhaps the most contentious transmission financing issue is cost allocation for new interstate transmission lines—that is, determining which customers must bear the costs of building and operating new transmission lines that cross several states. This report provides background and analysis of current transmission cost allocation policy and issues. A review of the transmission planning and cost allocation reforms in Order No. Background and History

		The Federal Power Act

The authority of the Federal Energy Regulatory Commission (FERC) to regulate interstate electricity transmission is derived primarily from Sections 205 and 206 of the Federal Power Act (FPA). Development of the Interstate Transmission Grid and FERC Oversight Prior to Order No. FERC Order No. 890, issued by FERC in February 2007. The processes were usually accepted by FERC as filed or accepted with requirements for amendment to ensure compliance with Order 890's planning principles. First, there is no uniformity in the cost allocation procedures, and at least to date FERC has declined to go beyond establishing general principles. In Illinois Commerce Commission v. FERC , the U.S. Court of Appeals for the Seventh Circuit heard a challenge to FERC's approval of a cost allocation proposal for certain new transmission facilities in the PJM Interconnection. However, in recent years Members of Congress have introduced legislation intended to provide a tighter framework for FERC's transmission cost allocation policy. The Commission noted that its "best remaining opportunity to eliminate barriers to new transmission construction may therefore be to provide greater certainty in its policies for allocating the cost of new transmission facilities, particularly for facilities that cross multiple transmission systems ." 1000 on July 21, 2011. 1000 further requires that each transmission provider participate in a regional transmission planning process that includes both a regional cost allocation method for the cost of new transmission facilities selected in a regional transmission plan and an interregional cost allocation method for the cost of certain new transmission facilities located in two or more neighboring transmission planning regions. 1000 establishes three additional requirements for transmission cost allocation:
Regional transmission planning process must have a regional cost allocation method for a new transmission facility selected in the regional transmission plan for purposes of cost allocation. 1000, FERC has issued regulations which seek to add state and federal public policies as a factor in the decision-making process concerning which transmission projects emerge from planning processes as construction projects. Such entities could also be impacted by aspects of requirements from the Final Rule. General Comments

Order No. The Final Order comes as state renewable portfolio requirements and the upcoming U.S. Environmental Protection Agency (EPA) regulations for coal power plants may increase demand for new transmission lines. The uncertainty regarding the implications for generation resources of upcoming EPA regulations has caused some utilities to delay decisions on building new generation, with plans to satisfy (at least interim) power needs from power markets until the regulatory clarity they seek is provided. FERC acknowledges that some key questions may only be answered in the compliance filing process.
Perhaps the most contentious electricity transmission financing issue is cost allocation for new interstate transmission lines—that is, deciding which electricity customers pay how much of the cost of building and operating a new transmission line that crosses several states. This report provides background and analysis of current transmission cost allocation policy and issues.
For many years, the Federal Energy Regulatory Commission (FERC) declined to go beyond establishing general principles as set forth in its Order No. 890, which addressed "undue discrimination and preference" in the providing of transmission services. Transmission cost allocation proposals made by transmission service providers were therefore reviewed by FERC to ensure compliance with the general principles outlined in Order No. 890 and the Federal Power Act (FPA). However, there were calls for FERC to provide a clearer framework for cost allocation. The decision of the Seventh Circuit in Illinois Commerce Commission v. FERC, to reject a cost allocation plan approved by FERC which would have permitted "socialization" of the costs for some new transmission projects (i.e., allowing the costs to be spread widely among ratepayers in the PJM Interconnection, even those who do not substantially or clearly benefit from a project) encouraged FERC to seek more clarity with respect to cost allocation. Congress also entered the fray in the form of legislative proposals that would amend the Federal Power Act to include new transmission cost allocation guidelines that FERC would be required to follow.
In 2009 FERC decided to take an in-depth look at cost allocation and other transmission planning issues as part of a new docket. FERC observed that its "best remaining opportunity to eliminate barriers to new transmission construction may therefore be to provide greater certainty in its policies for allocating the cost of new transmission facilities, particularly for facilities that cross multiple transmission systems." FERC requested comments from stakeholders on transmission planning issues.
After receiving and reviewing comments from stakeholders and offering a proposed rule in 2010, FERC published Order No. 1000, a final rule reforming FERC's transmission planning and cost allocation requirements for transmission service providers, on July 21, 2011. The final rule required transmission service providers to (1) participate in a regional transmission planning process; (2) amend their transmission tariffs to provide for consideration of public policy; (3) remove from their tariffs a federal right of first refusal for certain new transmission facilities; and (4) improve coordination between neighboring transmission planning regions.
The Final Order comes as state renewable portfolio standards and the upcoming U.S. Environmental Protection Agency (EPA) regulations for coal power plants may drive demand for new transmission lines. The uncertainty regarding the implications for generation resources of upcoming EPA regulations has caused some utilities to delay decisions on building new generation, with plans to satisfy (at least interim) power needs from power markets until the regulatory clarity they seek is provided.
This report analyzes recent developments concerning transmission cost allocation leading up to Order No. 1000, as well as the contents of the order and their potential impact on the transmission planning process in the future. FERC acknowledges that some key questions may only be answered in the compliance filing process.