D.C. Circuit Upholds FERC Cost Allocation Orders for PJM Artificial Island Transmission Project

On March 2, 2021, the United States Court of Appeals of the District of Columbia Circuit ('D.C. Circuit') denied petitions for review of three FERC orders addressing cost allocation by PJM Interconnection, L.L.C. ('PJM') for a high-voltage transmission line connecting three nuclear power plants on Artificial Island in New Jersey to the Delmarva transmission zone ('Artificial Island Project'). In a 2016 order, FERC upheld PJM's use of a hybrid cost allocation method including the 'Solution Based DFAX' method to assign 90 percent of the costs of the Artificial Island Project to PJM's Delmarva transmission zone; FERC reversed its position in a 2018 rehearing order. In dismissing the petitions for review filed by certain PJM transmission owners including Public Service Electric and Gas Company ('PSE&G'), the New Jersey Board of Public Utilities, and the New Jersey Division of Rate Counsel, the D.C. Circuit's March 2 opinion held that FERC reasonably concluded that assigning nearly 90 percent of the Artificial Island Project costs to the Delmarva transmission zone would not be commensurate with the benefits that zone received, and that FERC's change in position was adequately explained and supported by substantial evidence.

Artificial Island in New Jersey is home to three nuclear power plants owned by a subsidiary of PSE&G. According to the D.C. Circuit's March 2 opinion, the plants have long been plagued with operational issues due to an insufficient number of transmission lines connecting Artificial Island to the grid, creating reliability and stability problems. To remedy these issues, PJM selected the Artificial Island Project to connect the plants to a substation in Delaware. PJM allocated costs for the project according to its hybrid cost allocation method, in which it assigned half the costs of the project pro rata based on the level of customer demand in each of PJM's transmission zones (also referred to as the 'postage stamp method'), and half the costs using the 'Solution Based DFAX' method, which relies on a power flow analysis to assign costs according to the relative use of the new facility as measured by the amount of power flowing over the new facility to each transmission zone.

PJM's hybrid cost allocation method caused nearly 90% of the costs of the project to be allocated to the Delmarva transmission zone. The states of Delaware and Maryland subsequently filed a complaint at FERC in which they argued that applying the DFAX cost allocation method was unjust and unreasonable because 'when used to allocate costs of a facility that addresses inadequate outlets for generation output,' the DFAX method would 'invariably link cost-responsibility with the zone that just happens to be the end-point for the new or expanded generation output.' FERC initially denied the complaint in a 2016 order (see May 16, 2016 edition of the WER), but reversed its decision in a 2018 order on rehearing. In the 2018 order, FERC concluded that the DFAX method was unjust and unreasonable in the context of the Artificial Island Project because stability issues are 'analytically unique' and the benefits of a facility built to stabilize a specific generating unit are not necessarily captured by measuring power flows.

Petitions of review were filed at the D.C. Circuit after FERC denied rehearing in 2019 (see May 15, 2019 edition of the WER). In the March 2 decision denying the petitions, the D.C. Circuit pointed to FERC's findings that the DFAX method was unjust and unreasonable as applied to the Artificial Island Project, and that the Delmarva transmission zone neither caused the need for the line nor benefitted from the nuclear plants' generation, given that its transmission system was already adequate to serve its load without the Artificial Island Project. Rather, the Delmarva transmission zone was the 'unlucky zone that happened to end up as the sink point for the project.' The court concluded that, it was reasonable as a result of these findings for FERC to conclude that assigning nearly 90 percent of the Artificial Island Project's costs to the Delmarva zone would be unjust and unreasonable because it would not be commensurate with the benefits that zone received from the project. The Court also rejected the petitioners' arguments that FERC failed to adequately explain its departure from the cost allocation approved in the 2016 order, holding that FERC's change in position was conscious, adequately explained, and supported by substantial evidence.

Finally, the court rejected petitioners' arguments that FERC's cost allocation decision was contrary to Order No. 1000's directive to set cost allocation rules ex ante in order to prevent ad hoc decision making. The D.C. Circuit observed that Order No. 1000 is a regulation that governs cost allocation methodology for transmission owners and does not constrain FERC's statute-based ability to reform a rate that is unjust and unreasonable or unduly discriminatory or preferential. Accordingly, the D.C. Circuit upheld FERC's determination that the DFAX method was inconsistent with Order No. 1000's core cost allocation principles in the context of the Artificial Island Project, and found that the decision to grant rehearing to reverse its 2016 order was not in violation of Order No. 1000.

The D.C. Circuit's March 2 order is available here.