In a predictable move, the U.S. Court of Appeals for the 7th Circuit kicked the Illinois Commerce Commission v. FERC can back to Washington today.

This case has been dragging on for nearly 5 years.  When it first started, ratepayers in PJM's Illinois territory were looking at sharing a huge chunk of the cost of PJM's multi-billion dollar Project Mountaineer collection of unneeded transmission projects.  Although the bill has shrunk considerably with the cancellation of PATH and MAPP, the argument has only grown.

It centers on PJM's 2006 adoption of the "postage stamp" cost allocation methodology.  This method assigned costs of new transmission 500kV or greater to all ratepayers in the region based on their share of regional electricity sales.  The more power an area used, the greater its share.  PJM did this to spread out (socialize) the cost of its Project Mountaineer venture over more customers so it could get that transmission built before the hoi polloi noticed, "before it became common dinner table talk."

However, it's important to realize that PJM no longer uses the 100% "postage stamp" cost allocation method and hasn't since last year.  Today's 7th Circuit decision will have no effect on any proposed or future transmission projects in PJM, or any other RTO.  Today's decision will only affect those projects that were built (or not!) before last year's new allocation method went into effect.  PJM's new, FERC-approved cost allocation methodology relies on a 50-50 split of two different methods for transmission lines of at least double-circuited 345kV or greater.  The first 50% is allocated according to the old postage stamp method, and the remaining 50% is allocated either to the cost causers or the beneficiaries, depending on the reason for the project.  Costs for transmission projects based on "public policy" clean energy state laws will be allocated to the states that require them under PJM's "State Agreement Approach."  If a state doesn't agree to shoulder the cost burden for a project designed to meet its renewable portfolio standard, then it will not be built.

Today's decision echoed the first remand from the 7th Circuit, that found that FERC had not done enough to show that utilities in "western PJM" received benefit from Project Mountaineer that was commensurate with their cost responsibility under the old "postage stamp" allocation method.

FERC dealt with the first remand by rolling its eyes and making up more crap about how "western PJM" benefited from Project Mountaineer.
  It pulled an even bigger diva act on rehearing.  But FERC just can't out-diva Judge Posner of the 7th Circuit.

Posner hates coal, and transmission lines that carry it.  But, he loves postage stamp rates for transmission lines that are supposed to be "for wind."

This Sybil act must also be confusing to FERC, but hopefully they can get it right this time... because third time's a charm, right?

Go ahead, read today's decision.  It's quite chatty and reads like some guy's geeky blog post about electricity and cost-benefit analyses, until you get to the 9-page dissent by
Judge Cudahy, who seems to be writing from the other side of the political spectrum.  It's fairly entertaining.  However, I suspect FERC is not as amused as you are.

After enough wrangling to make a cowboy cry, the Senate Energy and Natural Resources Committee confirmed the nomination of Norman Bay as Chairman of FERC... as long as he keeps the training wheels on his regulatory tricycle for the next 9 months.

Bay can be a FERC Commissioner, as long as Acting Chairman Cheryl LaFleur gets to continue to "act" for the first 9 months of Bay's tenure.

RTO Insider has the best coverage of today's events here.

RTO Insider notes that our own Plastic Senator Joe Manchin sold out in a hurry.
Among those who had expressed concern over Bay’s limited energy policy experience was Manchin, who helped sink the bid of Obama’s previous nominee, former Colorado regulator Ron Binz.

That sparked a flurry of negotiations over the last several days among the White House, Murkowski and Energy committee Chair Mary Landrieu (D-La.), which resulted in the president’s concession not to appoint Bay chairman immediately.
Poor, old Plastic Joe.  Some days, he just can't seem to make up his mind.
After two years of Dominion refusing to do any publicity on its Mt. Storm - Doubs transmission line rebuild, rival FirstEnergy has swooped in to take all the credit for the project.

Cue the irony.
While Dominion has been doing a great job with directly affected landowners, the company has completely failed to disseminate any information about its project to the greater community.  As if folks don't notice the access roads, the helicopters, the construction traffic, the road closures, the implosive splicing...  I've gotten mighty tired of having to reassure people that this is not the PATH project, that this is a permitted activity, and that the world is not exploding.  But I do it, not for Dominion, but for the people who are the victims of Dominion's "secret" rebuild project.

Mt. Storm - Doubs (MSD) is a smarter, better solution than building the PATH project ever was.  So, let's get 'er done, fellas,  so that I can stop having this distraction sitting on the edge of a rather full plate

The MSD transmission line begins in Mt. Storm, West Virginia
and ends at the Doubs substation in Frederick County, Maryland.  The 96 miles of the line located in West Virginia and Virginia are owned by Dominion.  The last 3 miles of the line in Maryland are owned by FirstEnergy.  Each company is responsible for permitting and constructing its own segment of this project.  Dominion has been working on its portion of the project for more than 4 years.  FirstEnergy only recently got off it's corporate ass to do its part on the last three miles.

Well, yay, FirstEnergy!  You da man!  Fourteen transmission towers and 3 miles of line? 
Awesome!  Put Toad Meyers in a hardhat and push the "on" button.  That should ameliorate your billing and meter reading fiasco, right?


Back in 2010, while the PATH was still madly attempting to get it's 300 mile, 765kV transmission line sited and permitted
on new right of way, Dominion dropped a bombshell on transmission planner PJM Interconnection.  Dominion proposed several alternatives to the PATH project (which was never actually "needed").  One of the alternatives involved rebuilding MSD because of deteriorating towers.  A rebuilt and modernized MSD would increase the thermal capacity of the existing line 66% and make the addition of PATH's capacity unnecessary.  Both PJM and PATH partners FirstEnergy and AEP tried to deny the proposal and insist that PATH was still necessary.   That was the beginning of the end for PATH.  The Virginia SCC got mighty suspicious and ordered PJM to re-run some data on the necessity for PATH if MSD was rebuilt.  Low and behold, the data showed that there really wasn't a need for PATH after all and PJM suspended (and later cancelled) the PATH project.  PATH withdrew all its project applications and went into hiding, after wasting a quarter billion dollars of consumer funding on the project.

Ahhh... good times!  :-)

Now FirstEnergy says "look at me!" and give me credit for modernizing the electric grid.

Kind of makes you wish that someone would drop a load of insulators on Toad's hard hat, doesn't it?

Oh, what would I do if I didn't have this little outlet...

"Transmission siting fatigue."  I ran across this rather apt phrase recently while poking through a FERC docket.

FERC defines "transmission siting fatigue" as:
Transmission siting fatigue is the idea that, after a transmission line is sited and permitted in an area, it will be significantly more difficult to get an additional transmission line sited and permitted in that same area.
Reasons for this were noted as:
  1. Regulatory concerns - A state public utility commission will begin to look skeptically at multiple projects vying for permission to accomplish very similar goals. 
  2. Environmental concerns - Multiple new rights of way through environmentally sensitive areas are going to cause trouble with Big Green.
  3. Urban areas - There's only so much open land available in urban areas.  Having it all clogged up with multiple transmission lines means there may not be room for more!

Let's add to that list, shall we?
Once an attempt is made to site a line through a community, the people get informed and organized and will oppose the transmission project.  Siting a second project in the same community would likely rekindle this knowledge base and organization.

In the past, opposition groups would rise up when transmission was proposed.  But after the immediate, personal threat to each individual was ameliorated, interest would fall away, and the momentum and assembled knowledge would be lost.  This is why routing changes were often effective tools for transmission developers, because with each new route, new opponents would have to start all over again with the education and organization process.  With each new route, the time available for the opposition becomes shorter, and, like a game of hot potato, someone finally ends up with the transmission line on their land.

But that was then, this is now.

Because of "transmission siting fatigue" and today's quick and easy sharing of information via the internet, transmission opposition no longer has to re-invent the wheel each time a transmission route threatens.  "NIMBY" is no longer part of the game and opponents from many different projects have joined forces against their common enemy.

The growing transmission opposition knowledge base can easily be accessed to jump start new opposition groups, and effective opposition strategies can be quickly passed from one group to the next.  Nothing draws kindred souls together like the threat of eminent domain and new transmission rights of way.  Opposition is a brotherhood, a private club, a state of mind that outsiders don't understand.  We are one cohesive unit.

Transmission siting fatigue is everywhere and can no longer be avoided.   It's here to stay!
Over the past year, confidential settlement discussions have been held at FERC between PATH and parties to the consolidated case of PATH's request to recover $121M of  abandoned plant, and the three Formal Challenges filed by Ali & Keryn seeking return of $11M they allege was wrongly recovered by PATH between 2009 - 2011.

This morning, the settlement judge issued a report informing the Commission that the parties "
...have reached an impasse in their efforts to reach a settlement in Docket Nos. ER09-1256-000 and ER12-2708-000.  Accordingly, I recommend termination of settlement proceedings..."

Therefore, the next step is for the cases to proceed to "a public trial-type evidentiary hearing."

Ever listened to an investor owned utility's earnings call?  They're an acquired taste, because your first one sounds like complete and utter gibberish.  Are these people speaking English?  Is there some fancy 1% business speak language that they didn't teach you in school?  Nope.  I think company management just plain ol' makes crap up to keep the investment analysts guessing.

Case in point -- Nick Akins and his "block and tackle spending." 
And then, when you look at the other capital that we're spending, it's block and tackle spending that typically is recovered from a regulated standpoint.
Blink.  Blink.  What?  Just for shits and giggles I plugged "block and tackle spending" into google.  I got a wikipedia description of block and tackle that describes it thus:  "...a system of two or more pulleys with a rope or cable threaded between them, usually used to lift or pull heavy loads," and a whole bunch of boating websites.  So, Nick is going to rig up some contraption that spends money using a system of pulleys and rope?  Sounds complicated.  I guess that's why they pay him the big bucks!

Anyhow... once you realize that the emperor has no clothes and that these corporate elitists are really not speaking in some special language, like pig latin, that your plebeian self doesn't understand, earnings calls are quite entertaining.  AEP's 4Q 2013 call on Monday was no exception.

AEP's CFO finally gets around to admitting that energy efficiency has flattened out residential demand growth and it's not expected to recover.
Residential sales, shown in the upper left quadrant, were up 0.9% for the quarter, which brings the annual sales flat to 2012. We continue to see modest customer growth in our Western service areas, while our East customer accounts were essentially flat. Average usage per customer has been impacted by home energy efficiency programs. For these reasons, we are expecting normalized residential sales to be down nearly 1% in 2014.
Too bad he's arriving late for the party.  How much do they pay this guy to make these brilliant conclusions?

AEP also got some apt questions about its planned "transmission spend," such as what it's going to take to make AEP fall out of love with transmission as an investment vehicle... oh, say, maybe as a little section 206 complaint or two:
Michael J. Lapides - Goldman Sachs Group Inc., Research Division
Yes, 2 questions unrelated. First, on the transmission side. We've seen in the MISO and in New England dockets where interveners are seeking lower transmission base ROEs. If same things happens in some of -- whether it's the Southwest Power Pool, whether it's in PJM, how -- what do you think that tipping point is where we change or, I don't know, you're incentive or your desire to be a sizable investor in transmission in the U.S.?

Nicholas K. Akins - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Policy Committee
I think, as long as transmission is, at a premium or equal to the state rates, we're in good shape. And I think, clearly, there is an incentive being placed on building transmission. We're happy with that. And if -- really, once again, the FERC needs to send some messages here that from a policy perspective that we want to continue building transmission in this country. And as long as that premium is at or above the state rates, then we're in good shape.

Brian X. Tierney - Chief Financial Officer and Executive Vice President
FERC was clearly, Michael, looking to attract a capital into this space. And what they've done with their ROEs has done exactly what FERC wanted to happen. So as long as they, as Nick was saying, as long as they continue to send a signal that they want increased investment in this area, we'll respond to that signal.

Nicholas K. Akins - Chairman, Chief Executive Officer, President, Member of Executive Committee and Member of Policy Committee
Okay, I think it's good -- I think, it continues to be part and parcel to the overall grid expansion that's going on in the resilience of the grid. And there's going to continue to be spin regardless. The question is, do you really want to satisfy that precursor of transmission being build out to respond to the generation retirements and so forth to optimize the grid so that you can do that as a prerequisite and then focus on the rest of the underlying system. That's what key. I think you got to get through this transitional process we're at in this industry. So transmission needs to be incentivized in that regard because that will provide the greatest benefit in terms of resiliency of the grid, but also in terms of the optimization of the resources that are attached to the grid.
Blah, blah, blah, grid expansion, transmission build out, blah, blah, what could go wrong?

What about fierce, organized opposition to AEP's transmission plans?  The people have spoken and their action has seriously complicated or delayed many of AEP's transmission plans, in the past, currently, and in the future.  In fact, opposition is getting more organized and more knowledgeable.  And we're not going away.

AEP needs a new business plan.  Transmission is not the carefree investment vehicle Nick thinks it is...
Frederick County Commissioner Billy Shreve is asking Potomac Edison to donate some land for a park; specifically, the 150-acre Browning Farm, where the utility was planning to build a substation for the Potomac Appalachian Transmission Highline.

He called it a win-win for First Energy and county citizens.
Frederick County citizens commenting on the article agree.  Potomac Edison has a lot of public image issues in Maryland right now stemming from the Maryland PSC's investigation of its billing and meter reading practices.

What do you think about the county's proposal?
Remember Jonathan Fahey?  He wrote an article in 2011 headlined Shocker: Power demand from US homes is falling that pioneered the idea that even though we're using more electric "gadgets" than ever, power use is dropping.  Well, now he's back with a similar article, Home electricity use in US falling to 2001 levels.
The trend Fahey first reported in 2011 continues, more than 2 years later.

Have utilities gotten any smarter since then?  Partially.  It took them forever to admit that dropping demand wasn't tied to the economy and that a rebound of electric use wasn't just over the horizon.  However, some utilities have simply moved on to other unsound business plans that continue to bank on the same old ideas that are no longer sustainable. 

Now utilities have moved on to transmission investments as their savior.  This is pretty puzzling, considering that long-distance transmission champion AEP concluded a year ago that enormous projects built across multiple states were an impossible dream.
Mr. Akins said he wants to avoid the bruising battles that delayed or doomed big projects in the past, like the 275-mile Potomac-Appalachian Transmission Highline project from West Virginia to Maryland. AEP and partner FirstEnergy Corp. dropped development plans for the complex project in 2011.

"Sometimes, we were just dreaming" that the companies could get enormous power lines built across multiple states, Mr. Akins said. He said AEP now is focusing on shorter projects blessed by federal regulators that eliminate grid bottlenecks. "It's where you want to put your money," he said.
The transmission investment gravy train has also left the station.  The sheer number of new transmission projects proposed combined with today's ease of online information sharing and social media tools has led to an explosion of knowledgeable, interconnected transmission opposition groups who are combining resources across the country to delay or stop unneeded projects altogether.

Instead of embracing innovation and new technology to make the existing grid smarter, some utilities are intent on merely building more of the same old dumb grid, or actively attempting to stifle innovation by forcing us all into an historic "consumer" position where we must funnel money to incumbent utilities in order to survive.  Ultimately, this plan will also fail, because technology marches relentlessly on

How we produce and use electricity is also changing.  Not only is producing our own electricity locally better for our economy, it's also much more reliable.  Hurricane Sandy was one of the biggest wake-up calls we've had recently, and the inevitable Monday morning quarterbacking of that disaster reveals that increasing long distance, aerial transmission from remote generation is simply dangerous.
  Making our grid more reliable isn't about building more transmission.  It's about change:
This includes traditional tactics, such as upgrading power poles and trimming trees near power lines. But it also encompasses newer approaches, such as microgrids and energy storage, which allow operators to quickly reconfigure the system when portions of the grid go down. Implicit to such plans is the need to ensure uninterrupted power to critical sites such as oil and gas refineries, water-treatment plants, and telecommunication networks, as well as gasoline stations, hospitals, and pharmacies.

Some of the nation’s leaders seem receptive to such approaches.
Elected officials, progressive regulators, energy producers, energy consumers, and innovative companies embracing new technology are also increasingly joining forces to move our energy economy forward and away from the dated centralized generation and transmission business plan of the past.  Companies who continue to deny the inevitable will ultimately be the ones left behind in irrelevance.
The Columbus Dispatch and a couple of investment analysts gushed all over AEP CEO Nick Akins for "leading on ideas" yesterday.

What's Nick's idea?  Getting out of the generation business and betting AEP's future on long-distance transmission.

Bad idea.
...a transformation of the company’s structure and a shifting notion of what AEP needs to do to remain relevant in a changing energy landscape.

In doing so, the company is de-emphasizing what was once a crown jewel, the fleet of Ohio power plants, and putting a greater focus on developing an interstate network of power lines.

“The less we have to spend on centralized generation, the better off we are,” he said in a recent interview.

When he says “centralized generation,” he means big power plants. AEP will be closing more plants than it is building.

The company is shifting resources so it can expand its transmission system, made up of the high-voltage power lines that carry electricity across state lines and between metro areas.
Maybe ol' Nick missed the EEI report earlier this year, Disruptive Challenges: Financial Implications and Strategic Responses to a Changing Retail Electric Business.  The report cautioned electric utilities to avoid "that Kodak moment" for investors by embracing new technology and addressing competitive threats.

While getting out of the competitive centralized generation business "addresses" the threat that AEP may lose some of it's golden eggs in an unpredictable market, AEP is not embracing new technology or making itself relevant in a changing energy landscape.  It's simply putting even more of its golden eggs into a business plan that it will help to make obsolete. 

As competitive centralized generation closes, it is being replaced by independently owned distributed generation.  Distributed generation doesn't need new transmission.  Nick won't be collecting any eggs if he kills all the chickens.

A better idea to embrace new technology and establish future relevance was adopted by competitive generation company NRG earlier this year.
...NRG is installing solar panels on rooftops of homes and businesses and in the future will offer natural gas-fired generators to customers to kick in when the sun goes down, Chief Executive Officer David Crane said in an interview.
AEP loves regulated businesses.  It's a guaranteed revenue stream for a bulky, staid, not-particularly-innovative company.
AEP, which was reluctant to split its Ohio operations, has responded by focusing on the delivery business.
Meanwhile, the Ohio power plants are a shrinking asset. Because of environmental rules and the age of some of the plants, the company has announced a series of shutdowns that will occur over the next few years.

Also, AEP is in the process of transferring two plants away from Ohio regulation. The plants, both of which are in West Virginia near the Ohio line, will be regulated in nearby states that allow a utility to sell electricity directly to consumers.

Once the moves are complete, AEP will have 8,668 megawatts of power-plant capacity in the new Ohio power-plant subsidiary, which will be down from 11,652 megawatts today.

Akins says the company is responding to an economic climate in which there is little reason to build power plants in Ohio. The state’s electricity demand has been flat, and the regulatory structure provides no clear way to pay for plant construction.
So, dumping competitive, centralized generation is a smart idea, but increasing investment in long distance transmission to support a shrinking pool of centralized generators is not sustainable.

While AEP is banking on federally regulated interstate transmission to nearly double earnings from transmission activities from 2013 to 2014, AEP seems to have forgotten what happened with its PATH project.  Big, interstate transmission projects with long lead times lead to big failure.  That's because "need" for these projects is constantly shifting, and if opposition can delay them long enough, they become obsolete.  Opposition is growing by leaps and bounds.  AEP ain't seen nothing yet!

It's a risky proposition and I don't think it's a particularly good idea.
Akins says he’s having fun and is eager to see the work of the past two years come to fruition.

“We are now at a point where we can start defining our success,” he said. “Before, we had a huge anvil we were dragging around, whether it be environmental expense or whether it be other things we were dealing with that were reactionary. We’re finally at a point where we can map out the strategy of this company going forward. It is exhilarating.”
We'll be "having fun" too, supporting companies embracing the new technology of distributed generation, and dragging the progress of AEP's transmission projects down like a huge anvil.  Although AEP can ignore growing public discontent, it ultimately cannot be denied.
Every year, the Federal Energy Regulatory Commission issues a report of its enforcement actions.  The 2013 report was issued last month.

There was an interesting section of the report about formula rates.  A formula rate is a type of rate setting that involves a forward-looking collection of rates based on a projected budget.  Interstate electric transmission rates are set under FERC's federal jurisdiction and simply passed through unscathed in your state ratemaking process to your electric bill.  A formula rate is a blank template that calculates the rate
according to set formula in compliance with FERC's accounting and ratemaking guidelines.  Each year, the transmission owner populates the formula with numbers from its projected budget to arrive at the amount it is permitted to charge for service, and then collects that amount from its customers during the year.  At the end of the year, the transmission owner must file another formula rate calculation that trues up the projected rate by comparing it to actual spending.  The company then adjusts the following rate year to make up any difference between the two, whether an over-collection or under-collection.

Now, here's the rub.  This is all being done on the honor system.  And, as the old saying goes, there's no honor among thieves
.  FERC audits a small percentage of formula rates every year, either on its own initiative or through referral when a problem is reported.  FERC does not audit every formula rate every year.  Instead, FERC relies on the people who pay these rates to raise the red flag if something is amiss.  There are special protocols (instructions) attached to each formula rate that detail the procedures to be followed to review the formula rate and file a legal challenge if any discrepancies between transmission owner and customer cannot be resolved.  So, who is doing this job for you, little ratepayer?  Is it your local electric company?  Is it your state public service commission?  Is it your state consumer protection office?  Chances are it's none of the above, and NOBODY is reviewing the transmission rates you are paying.  It's not that these entities don't care that you may be being ripped off, it's that they don't have the resources or knowledge to do the job, so they simply skip it and hope for the best.  This situation does not serve your interests.

Transmission owners know that nobody is minding the store, therefore they have been taking advantage of the situation to "accidentally" include all sorts of expenses and incorrect calculations that jack up rates and cost you extra money.  I say "accidentally" because there's always the chance that they will get fingered for a FERC audit, or get challenged by a couple of housewives from West Virginia.  In case they are caught by FERC, they pretend any misdeeds were an "accident" and promise to issue refunds.  It's a gamble the transmission owner is willing to take because chances are they won't get caught.  If they do get caught, they may not have to refund the whole amount they stole from customers, either because the entire amount of the thievery isn't discovered, isn't proven, or is negotiated through a settlement.  It's a risk that's profitable to take.  Therefore, transmission owners are routinely ripping us off.  

FERC notes that certain trends are developing in the way transmission owners rip us off.
Compliance Trends
During the past several years, DAA observed noncompliance in certain areas that warrant highlighting for jurisdictional entities and their corporate officials. Although there are other areas of noncompliance associated with the topics presented below, the areas discussed relate to areas where DAA has found consistent patterns of noncompliance. Greater attention is needed in these areas to prevent noncompliance and to avoid enforcement action.

Formula Rate Matters. DAA rigorously examines the accounting that populates formula rate recovery mechanisms that are used in determining billings to wholesale customers. In recent formula rate audits, DAA observed certain patterns of noncompliance in the following areas:
Merger Goodwill – including goodwill in the equity component of the capital
structure absent Commission approval;
Depreciation Rates – using state-approved, rather than Commission-approved,
depreciation rates;
Merger Costs – including merger consummation costs (e.g., internal labor and other general and administrative costs) without Commission approval;
Tax Prepayments – incorrectly recording tax overpayments which are not applied
to a future tax year’s obligation as a prepayment leading to excess recoveries
through working capital;
Asset Retirement Obligation (ARO) – including ARO amounts in formula rates,
without explicit Commission approval;
Below-the-Line Costs – attempting to move below-the-line costs into formula rates (e.g., lobbying, charitable contributions, fines and penalties, and compromise settlements arising from discriminatory employment practices); and
Improper Capitalization – seeking to include in rate base (and earn a return on) costs that should be expensed.
This is completely unsurprising to me, since I've seen (and challenged) many of these incorrect practices.  But what does continue to surprise me is that nobody has the inclination to stop it.  If formula rates are to be used to set transmission rates, and FERC knows that they are subject to manipulation and purposeful over recovery, then there simply must be some entity designated to monitor them in the interest of consumer protection.  While states have agencies designated to protect their consumers from greedy utilities, there is no federal counterpart at FERC.

FERC's mission is to "assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means."  FERC is failing us on formula rates.