MISO is requesting responses to the following questions on Cost Allocation Granularity
Comments are due Thursday, December 22, 2022
When designing a new cost allocation for benefits, MISO should provide benefit calculations down to the TPZ level. This is in keeping with CAPCom Principle 2, which reads “[c]ost allocation should be as granular and accurate as possible. Benefit-cost analysis should use metrics that are quantifiable, capable of replication, non-duplicative, and forward looking.” In other words, MISO must provide state regulators with calculated benefits that are granular.
Hypothesis One* – Transmission benefits can be subcategorized into three broad categories. Those are: Financial, Risk Avoidance and Policy.
AGREE, but a fourth category is missing: Interconnection. Developers are benefitting in ways such as significant increases in transmission capacity which reduces queue time and significant reductions or the complete elimination of interconnection costs. Benefits from each category should result in costs being allocated to beneficiaries and cost causers.
2 Hypothesis Two* – Risk Avoidance benefits are most appropriately shared at the subregional level. Those benefits include: Extreme Events, Load Shed, Resilience & Transfer Capability. Over time, these benefits can extend to footprint wide reach.
These benefits may all overlap with each other and perhaps even with some of the financial benefits. The benefits need to be better defined and quantified especially as the size of the portfolios (i.e. $30B for Tranche 2) grows. Ill-defined, unquantifiable benefits make it impossible to effectively evaluate projects. It is important for MISO to clearly establish how these benefits are being quantified. They need to be distinctly quantified not smeared into a general justification that could be used to cover policy drivers. MISO must clearly communicate the drivers of each project and how the benefits are quantified. Broad terms, such as resilience and extreme events, can be used to mask a lot of different intentions. Ultimately, state regulators must be able to clearly explain to ratepayers how the projects were evaluated and justified.
3 Hypothesis Three* – Policy associated benefits are most appropriately shared at the subregional level. Those benefits include: Decarbonization, Member Plans, State and Federal Policy & other policy drivers.
Policy benefits need to be identified as a primary driver and cost causer and not trumped by other more broadly applicable benefits such as resilience, transfer capability, financial, and risk avoidance. The policy costs need to be applied on a state-by-state basis and states without policy drivers need to be carved out from costs associated with this category. The question that needs an answer is not “does this line provide benefits to load?”. Rather, the question that needs an answer is “if it weren’t for new generation connecting to this line, would MISO need to build this line?”.
A simple way to assign costs for policy benefits is through a generator pay formula on the LRTP cost allocation. This would provide a tool to directly assign a portion of the LRTP costs to generators and then accordingly to the customers who are buying that power.
4 Hypothesis Four* – Financial benefits are most appropriately shared at the CA Zone level. Those benefits include: Congestion and Fuel Savings, Operating Reserves, Energy Losses, Resource Adequacy Savings, Avoided transmission and resource investment.
Financial benefits should be roughly aligned with a state’s policy goals so one state’s benefit of avoided transmission and/or generation costs does not become another state’s transmission cost even though both are allocated the benefits. Granularity should be used as a tool to address these concerns and properly apply the benefits observing the locational tradeoff between transmission and generation. Not all loads are equal financial beneficiaries, and MISO should recognize this and provide benefit calculations at the TPZ level.
Duke would like to thank MISO for a chance to provide feedback to MISO’s 4 questions on Cost Allocation Granularity. Duke’s responses are as follows:
Question 1: MISO has identified 4 layers of granularity: footprint, subregion, cost allocation zone & pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate? Please provide justification along with your response.
Response: It may be reasonable to create different allocation methods for the types of benefits and the level of granularity available for each, but a cost allocation method should mirror the benefit determination method. (i.e., today MISO determines benefits using an APC method plus a couple of other minor benefit methods, then reallocates the costs associated with those benefits using load ration share causing a disconnect.) MISO should allocate costs using the benefit determination at the lowest level of granularity available and not keep with the old stand-by Load Ratio Share (because it is easy) as implied in its November 28th presentation on Slide 3, bullet one under Long Term column (MISO is looking at the next iteration of cost allocation rather than fully transforming previous methodologies.)
Duke disagrees with MISO’s hypothesis 4. Yes, it is known that that the more granular a calculation gets the more complex the method becomes, but there does not necessarily have to be a loss of accuracy. MISO should strive for the most granular allocation (Transmission Pricing Zone) of Financial benefits and then apply that very same allocation to Costs, so there is a match of benefits and costs to meet FERC’s “Commensurate” requirement. Reallocation of costs using a separate method than benefits should not be permitted.
Duke can understand MISO’s hypothesis 2 and 3 knowing the limits as indicated by the asterisk, but feels with the eventual creation of LRTP Tranche 4 a method of allocation should be created to contemplate a time when that limit will no longer exist.
Question 2: Is the proposed mapping of benefits to a layer of granularity suitable? In your response, please detail the suggested changes & their justification.
Response: MISO’s current proposed mapping (developed over slides 5 through 9) appears acceptable, but should be sent to the Planning Advisory Committee for Subject Matter Experts review and acceptance prior to moving forward by MISO.
Question 3: What other considerations need to be made in the tension of granularity and accuracy?
Response: See Duke’s response to the first question.
Question 4: To the extent that the most appropriate layer of granularity is subregional allocation does the current MVP application make sense?
Response: Duke disagrees with using Load Ratio Share when allocating costs associated with benefits and believes allocating costs on the same methodology of benefit determination is more appropriate.
MISO has identified 4 layers of granularity: footprint, subregion, cost allocation zone & pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate? Please provide justification along with your response
DTE supports the idea and concept that additional layers of granularity be evaluated for the purposes of developing a cost allocation for MVP project types that distributes costs in a manner that is roughly commensurate with beneficiaries. We acknowledge that a hybrid approach in which the level of granularity is predicated on the specific benefit is the appropriate methodology. Regarding the concept of accuracy, we would like for MISO to provide more definition and elaborate on how MISO views its relevancy to granularity. In slides 7 and 8 the charts depict benefits with a higher degree of accuracy being allocated at a higher level of granularity (footprint and subregion respectively) while in slide 9 benefits are allocated at a lower level of granularity (CAZ), even though the degree of accuracy is lower. If the intent is to identify the appropriate level of granularity, what is the significance of accuracy if there are scenarios in which a lower degree of accuracy can produce a more granular allocation?
Is the proposed mapping of benefits to a layer of granularity suitable? In your response, please detail the suggested changes & their justification
DTE supports a benefit specific approach in mapping benefits to the various layers of granularity. Grouping benefits into hi-level categories as a means to determine the level of granularity can lead to a postage stamp application for benefits that would otherwise be allocated more granularly if looked at individually. For example, on slide 8 there may be some policy related benefits that can be assigned at levels below the subregion. DTE recommends that MISO evaluate each benefit individually and categorize them based on qualities that characterize their granularity. For example, benefits could be categorized based on their measurability (i.e. having a reliable metric to measure) and quantifiability (i.e. having a reliable methodology to calculate). These categories would provide stakeholders with a more insightful view of the level of granularity that can be assigned to specific benefits.
What other considerations need to be made in the tension of granularity and accuracy?
DTE would like to see more focus and emphasis from MISO on establishing a criteria or framework that defines both measurability and quantifiability. The list of potential benefits can be quite exhaustive and discussions that center on the quantity of benefits rather than the feasibility of benefits will impede progress in developing a consensus on cost allocation. Just as FERC Order 1000 established a set of core principles that govern cost allocation for transmission planning, we should equally work towards establishing a framework that is specific to the granularity of benefits starting with our ability to measure and quantify them as being a minimum threshold. Once a criteria for granularity has been established each benefit can be evaluated against the criteria set to determine 1) if it is even feasible to assign costs given the profile of the benefit and 2) what level of granularity is appropriate. This process will allow the adoption of an enhanced cost allocation to move forward (including only benefits that meet the criteria), while stakeholders continue to have discussions on questionable benefits that warrant further evaluation.
To the extent that the most appropriate layer of granularity is subregional allocation – does the current MVP application make sense?
The current MVP application applies a postage stamp cost allocation which can woefully misallocate costs and should be revised to something more granular before Tranche 2 approval, otherwise changing the cost allocation for only Tranche 3 could unfairly burden MISO Central/North. The level of granularity should be benefit specific, therefore components of the MVP structure may be warranted depending on the benefit evaluated in a hybrid like model. However, as it becomes apparent (through the allocation methodologies we intend to develop) to assign costs to a level below the footprint, efforts should be made to do so in order to stay aligned with the Commission’s “roughly commensurate” standard.
Entergy Feedback to RECBWG on Granular Cost Allocation
December 22, 2022
The Entergy Operating Companies (EOCs)[1] appreciate MISO’s efforts to advance the conversation around the appropriate level of granularity of LRTP project cost allocation through the structure presented at the November 28, 2022 meeting of the Regional Expansion and Criteria Benefits Working Group (RECBWG).
As this discussion proceeds through the stakeholder process, it is important to move beyond the assumption that a postage stamp cost allocation approximates or is more accurate than applying granularly calculated benefits to a portfolio of LRTP projects, given the associated assumption that the beneficiaries of projects change over time. While this assumption may be proven correct when the analysis is complete, it cannot be assumed to be true for all LRTP project portfolios, and thus cannot be assumed to lead to a cost allocation method that is just and reasonable, and results in appropriate allocation of individual project costs that is roughly commensurate with the beneficiaries identified in the business case for the portfolio.
The EOCs urge MISO to approach the task of identifying an alternative cost allocation method that is more granular in nature with an open mind, given that a significant segment of MISO stakeholder population, including most MISO South TOs and state regulators, does not subscribe to or support the proposition that a postage stamp cost allocation method is just and reasonable, particularly on a MISO-wide basis considering the 15-state, nearly 1 million square mile-region that MISO encompasses. In addition, the Organization of MISO States own cost allocation principles, supported by all retail regulators in MISO, support the notion that granular cost allocation is a laudable goal.
The comments below are offered in response to the following questions, posed by MISO, regarding the evaluation of the appropriate level of granularity in the cost allocation of LRTP projects:
The responses below provide the EOCs’ initial reactions to MISO’s proposed approach, reflecting our general principle that allocation of costs for transmission investment should be aligned with the benefits anticipated to result from that investment, and are intended to advance this conversation. Ultimately, the EOCs’ support for any of the benefit metrics discussed at the RECBWG and addressed in the comments below will be tied to how MISO approaches evaluating these benefits when considering transmission projects for inclusion in a LRTP portfolio.
1. MISO has identified 4 layers of granularity: footprint, subregion, cost allocation zone, and pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate?
The proposed layers of granularity for cost allocation appear to be appropriate for discussion. They meet an important objective of capturing a reasonable and broad variety of groupings or levels of potential beneficiaries for a proposed project. They thus give MISO the necessary tools to “target” cost allocation for a broad variety of projects that serve a broad variety of needs and have a broad variety of characteristics.
However, the tension between accuracy and granularity may be overstated by MISO.
Relative to the need for accuracy, the EOCs believe the most important step in building the business case for a project or a portfolio of projects, is a rigorous, upfront effort to demonstrate the beneficiaries in the near-term applicable study period, beginning with the initial investment. If the initial cost allocation is demonstrated to be consistent with beneficiaries-pays principles, any subsequent “drift” of benefits over the remaining decades of the project’s life is acceptable and not a cause for concern. Moreover, it is not reasonable or practical to attempt to maintain alignment of costs and benefits of a given project over its many decades-long lifespan. Rather, what matters is that when the investment decision is made, it has been demonstrated that the project is likely to deliver benefits to those who will be paying its costs. This should not be assumed, it should be demonstrated through a reasonable business case that supported by reasonable assumptions. If that hurdle is met, then the project should be approved. Once the project is built, the investment is sunk, and further scrutiny of its benefits and beneficiaries is neither useful nor appropriate. This approach has the added benefit of aligning with how businesses make investment decisions of their own: actual costs and actual benefits are analyzed and if an investment is believed through analysis to meet the business’ investment objective, then the project moves forward. Businesses making investment decisions do not analyze fictitious benefits or hand-wave over fictitious costs. The blind assumption that a non-granular method of cost allocation such as the postage stamp somehow better aligns the benefits and costs of a project over its lifespan is folly and cannot reasonably be used to justify a project investment in the tens or hundreds of millions (or billions) of dollars.
2. Is the proposed mapping of benefits to a layer of granularity suitable?
In your response, please detail the suggested changes & their justification.
To the extent that MISO uses multiple layers of benefits (Financial, Policy and/or Risk Avoidance) in the benefit calculation, they should be categorized and quantified clearly in presentations and reports for stakeholders to review and refer to going forward. If the benefits are not quantifiable, or are tangential to other benefits, this should also be clearly stated.
2a. Footprint/Sub-Region Granularity: Extreme Events, Avoided Load Shed, Resilience, NERC Reliability Issues, and Intra/Inter-regional Transfer Capability
Some Extreme Event, Resilience, and Inter-regional Transfer capability benefits may be appropriate for broad cost allocation if these benefits can be demonstrated to extend to the region. However, Transfer Capability within the MISO footprint, NERC Reliability Issues, and Avoided Load Shed should not be categorically placed in the Regional/Sub-regional benefit category; costs should be allocated according to the demonstrated benefit of the project. For example:
The purpose and use (resource siting, extreme event mitigation, etc.) of improved transfer capability should be identified to appropriately quantify and allocate the benefits.
2b. Sub-Region Granularity: Decarbonization; Member Plans; Local, State and Federal Policy; Other Policy Drivers
Allocation of costs associated with the benefits of meeting Federal and State Policies will depend on whether the policy is applicable to the Footprint or Sub-Region where the cost will be allocated. In determining how to account for these benefits, the inclusion of these policies in the resource mix needs to be accounted for and should not be double counted as decarbonization benefits. Rather, an avoided cost approach may be appropriate for measuring the associated benefits and allocating costs accordingly.
2c. Cost Allocation Zone (CAZ) Granularity: Avoided transmission investment, avoided capital costs of resource investment, congestion and fuel savings, operating reserves, resource adequacy savings, transmission energy losses
Allocation to the CAZ is appropriate for the proposed financial benefits. However, projects that help lower PRM may be appropriate for broader cost allocation than CAZ.
3. What other considerations need to be made in the tension of granularity and accuracy?
None. The EOCs believe that transmission investment should be allocated based on the best-known information at the time of approval. It is not useful or appropriate to try to account for future changes in the benefits or beneficiaries of a given project, and it is categorically unjust and unreasonable to assume that allocation without regard to specific benefits or beneficiaries – such as under a postage stamp method – somehow aligns with future changes that cannot be predicted. The EOCs vehemently disagree with a view that, over the life of a project, it can be assumed that “it all comes out in the wash.”
4. To the extent that the most appropriate layer of granularity is subregional allocation - does the current MVP application make sense?
The EOCs do not believe that the most appropriate level of granularity is subregional postage stamp allocation. The EOCs also do not believe that the subregional postage stamp currently in use is the best long-term allocation method; rather, it should be replaced with a more granular cost allocation method.
[1] The Entergy Operating Companies are Entergy Arkansas, LLC, Entergy Louisiana, LLC, Entergy Mississippi, LLC, Entergy New Orleans, LLC, and Entergy Texas, Inc.
ENVIRONMENTAL SECTOR’S ANSWERS TO GRANULAR COST ALLOCATION QUESTIONS FROM THE 11-28-22 RECBWG MEETING
The Environmental Sector appreciates MISO’s ongoing efforts to define more granular cost allocation approaches for future tranches of the LRTP. We provide responses to the questions posed by MISO at the November 28th RECB meeting below.
Initially, however, the Environmental Sector wants to clarify the following text on Slide 3: “MISO is looking at the next iteration of cost allocation rather than fully transforming previous methodologies.” Discussions at the meeting indicated to us that MISO does not intend to change existing cost allocation methodologies. Therefore, if the investigation into a more granular cost allocation for LRTP Tranche 3 results in a new cost allocation methodology, we assume it willapply to a new standalone project type. If our understanding of MISO’s intent is incorrect, please clarify at the next RECBWG meeting.
QUESTION 1: MISO has identified 4 layers of granularity: footprint, subregion, cost allocation zone & pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate? Please provide justification along with your response.
MISO is correct to emphasize the tension between granularity and accuracy, but we stress that the tension spans across both geographic and temporal accuracy as it is acknowledged among stakeholders that benefits[1] and beneficiaries will shift over place and time. For the portfolio of LRTP projects, which are primarily intended to address regional reliability challenges, both the beneficiaries and the benefits will change over time and current tools are not able to accurately measure those changes over the long term.[2] Therefore, there can be an inverse relationship between accuracy and granularity for the LRTP projects because of the limitations of current tools.
It is noteworthy that MISO’s “layers” only address geographic scope but do not address temporal scope. Ultimately, MISO must also address how it can reach the “reasonably commensurate” standard as benefits change over time. Our comments address both geographic and temporal accuracy.
As to the “layers” of geographic granularity, MISO’s four layers of granularity seem an appropriate starting point for the discussion, but we question the ability to allocate different benefits to different layers without further discussion and analysis. The appropriate layer of granularity should be driven by three factors:
(1) Can benefits be calculated more granularly than footprint-wide, and if so, over what geographic scope can those benefits be defined?
(2) Can specific beneficiaries be identified in that geographic area?
(3) Can benefits be reasonably quantified and evaluated based on cost savings?[3]
We agree that for LRTP lines, given the broad range of benefits associated with addressing regional reliability, both footprint wide and subregional layers may be appropriate and can meet (and already have met) FERC’s “roughly commensurate” standard. 133 FERC ¶ 61,221 (2010 MVP Order); 179 FERC ¶ 61,124 (5/18/22 MVP Order).
However, it is unclear if FERC’s “roughly commensurate” standard can be met if costs are distributed at a more granular layer than subregional because as granularity increases, so does the potential number of customers who either are (1) paying costs that are greater than the commensurate benefits they are receiving, or (2) receiving benefits for which they are not paying (a/k/a freeriders).
The Environmental Sector can agree to investigate cost distributions at the cost-allocation zone (CAZ) or transmission pricing zone (TPZ) layers, and that certain benefits such as Adjusted Production Cost, and avoided transmission or resource investments may initially appear to lend themselves to a CAZ or TPZ approach. However, we are not yet convinced such a distribution could result in just and reasonable rates given the added layer of temporal granularity that will be needed. Indeed, this investigation is limited to whether benefits (and their commensurate costs) can be accurately isolated into a geographic area that is more granular than subregional and, if so, can the benefits be accurately evaluated based on cost savings over the long term? Again, these questions are especially important related to LRTP portfolios that are focused on addressing reliability issues across a broad region.
QUESTION 2: Is the proposed mapping of benefits to a layer of granularity suitable? In your response, please detail the suggested changes & their justification.
The Environmental Sector does not believe that MISO’s initial mapping of benefits to layers of geographic granularity is suitable. MISO has divided benefits into three buckets purportedly based on the nature of the benefits received: financial savings, compliance with policy requirements, and avoiding risk. MISO’s purpose of placing benefits into these three buckets is apparently to then distribute costs over a different geographic layer for each of the buckets. First, the Environmental Sector disagrees with parsing benefits based on financial savings, compliance with policy requirements, and avoiding risk, i.e. we disagree with MISO’s articulation of Hypothesis One on Slide 5. We do not believe such categorization provides any additional insight into which geographic “layer” costs should be distributed. In addition, we do not agree that all of the benefits identified on this slide are indeed “benefits” as some are more appropriately considered inputs into the modeling assumptions and are not benefits at all. Other benefits do not fit neatly into only one of these three categories, but could be considered to fall into two or three categories.
MISO’s proposed methodology further breaks down in its attempt to then allocate those buckets to different levels of geographic granularity; for example, not all Risk Avoidance benefits lend themselves to just one level of granularity. The fact is that many of these identified benefits can spread across geographic zones. If MISO continues to identify portfolios within LRTP, then MISO’s proposed methodology likely ends up with multiple projects providing multiple benefits across multiple zones, ultimately leading us back to a situation where the portfolio as a whole provides benefits across a much larger geographic zone that aligns more closely with a subregional/regional approach rather than a zone-by-zone approach.
Instead, the Environmental Sector recommends that each benefit be evaluated on its own based on whether, over the long term, (a) the metric can identify the geographic impact of that specific benefit and (b) that metric can isolate and accurately quantify benefits received within that specific geographic area to a reasonably accurate level.
The following table presents each of MISO’s benefits[4] and proposes answers to those critical questions:
MISO's Benefit Metric | Can Benefits be Quantified (Financial or Otherwise) | Can Specific Beneficiaries be Identified? | Smallest Area that can be Identified by Existing Tools (Note some benefits could cover multiple areas, e.g., multiple CAZs) | Who are the Beneficiaries? | Can Financially Quantifiable Benefits be Calculated Reasonably Accurately over the Long Term? | Comments |
Congestion and Fuel Savings | YES | YES | TPZ | LSE Customers in a TPZ | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. | While APC is an accepted industry standard that can result in reasonably accurate benefits analysis over the planning horizon and can be used for project qualification (the business case), with existing tools APC will not provide a reasonably accurate calculation over the life of the project. |
Avoided capital costs of resource investment | YES | YES | CAZ | LSE customers in the CAZ | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. | Calculations for avoided capital costs of resource investments can be used for project qualification, but cannot be calculated to a reasonably accurate level over the life of the project. |
Avoided transmission investment | YES | NO | CAZ* | LSE customers in the CAZ | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. Specific beneficiaries may be clearer in the short term. | Calculations for avoided transmission investments can be used for project qualification, but cannot be calculated to a reasonably accurate level over the life of the project. |
Resource Adequacy Savings | YES | YES | CAZ | LSE customers in the CAZ | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. | Calculations for resource adequacy savings can be used for project qualification, but cannot be calculated to a reasonably accurate level over the life of the project. |
Transmission Energy Losses | YES | YES | TPZ | Transmission customers in a TPZ | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. | Calculations for transmission energy losses can be used for project qualification, but cannot be calculated to a reasonably accurate level over the life of the project. |
Operating Reserves | YES | YES | Subregional or Footprint | LSE customers in the Subregion | Financial savings can be quantified for specific beneficiaries but not reasonably accurately over the life of the project. | We presume these are ancillary services including spinning reserve, non-spinning reserve, and frequency regulation provided by generators and procured by MISO on behalf of LSEs. These services are not locationally dependent and thus are subregional or footprint-wide in nature. Because maintenance of operating reserves appears to be a system requirement, we question whether this is a "benefit". |
Local/State Policy Compliance | N/A | N/A | N/A | N/A | N/A | Compliance with requirements is an input into modeling, not a "benefit". |
Enabling Member Plans | N/A | N/A | N/A | N/A | N/A | Compliance with plans is an input into modeling, not a "benefit". |
Avoided Load Shed | YES | YES | Interregional, Footprint or Subregional | LSE customers throughout the footprint | YES | Depending on how this is calculated it could overlap with the extreme events, transfer capability, and resilience metrics. |
Decarboniza- tion | YES | YES | Footprint | LSE customers throughout the footprint | YES, but requires complex analysis |
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Addressing NERC Reliability Issues | N/A | N/A | Footprint | N/A | N/A | Compliance with reliability criteria is not a benefit but a system requirement. |
Intra/Inter-Regional Transfer Capability | YES | YES | Footprint | LSE customers throughout the footprint | N/A | While transfer capability can be quantified, the financial benefits accruing from this increase in capability will likely be captured through other metrics such as APC, resource adequacy savings and operating reserves. |
Federal Policy Compliance | N/A | N/A | N/A | N/A | N/A | Compliance with requirements is an input into modeling, not a "benefit". |
Extreme Events | NO | NO | Footprint | LSE customers throughout the footprint | N/A | Unclear how extreme events differ from avoided load shed or resilience. |
Resilience | NO | NO | Footprint | LSE customers throughout the footprint | N/A | While there are proposals on how to quantify the benefits of increased resilience, there is no clear methodology that does not overlap with such things as extreme events, avoided load shed etc. |
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* | Could be as granular as TPZ in cases where it is possible to identify specific avoided projects |
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QUESTION 3: What other considerations need to be made in the tension of granularity and accuracy?
The following is a decision tree that the Environmental Sector finds helpful as we think through these issues:
If the answers to all these questions in the decision tree are “yes,” then a more granular cost allocation for LRTP projects using that specific benefit can meet the “roughly commensurate” standard. If any of the questions for a specific benefit are answered “no”, then how to meet the roughly commensurate standard using that metric becomes more difficult. Applying this decision tree to the table above, each of the benefits falls into one of the following four categories:
Category | Benefit | How the Costs for the Benefit Category should be Distributed for LRTP Projects |
The benefit can only be evaluated on a footprint or subregional level and the cost savings can be quantified over the long term to a reasonable level of accuracy | Loss of Load; Decarbonization | Footprint wide or subregional. The cost savings from Avoided Load Shed and Decarbonization can both be measured and the beneficiaries receiving these benefits can also be identified. However, the benefits will be widely spread so a granular cost distribution is unnecessary, and the usage-based MVP cost distribution is appropriate. |
The benefit can only be evaluated on a footprint or subregional level and the cost savings cannot be quantified. | Extreme Events, Resilience; Intra/Inter- Regional Transfer Capability | Footprint wide or subregional. The benefits are real and widespread but cost savings cannot be calculated for specific beneficiaries, so a postage stamp allocation is appropriate for the receipt of these benefits. |
The benefit can be analyzed on either at a CAZ or TPZ level; but, while cost savings can be quantified, they cannot be quantified for specific beneficiaries over the long term to a reasonable level of accuracy | Congestion and fuel savings; avoided capital costs of resource investment; avoided transmission investment; resource adequacy savings; transmission energy losses; and possibly operating reserves. | Unclear. Under existing tools as applied to LRTP projects, these metrics cannot calculate cost savings for specific beneficiaries over the long term to a reasonable degree of accuracy. These metrics would capture neither the changing beneficiaries nor the changing benefits they receive over time. Two options for using these benefits in the cost distribution for LRTP projects:
FERC has found: “a postage stamp cost allocation method may be appropriate where all customers within a specified transmission planning region are found to benefit from the use or availability of a transmission facility or class or group of transmission facilities, especially if the distribution of benefits associated with a class or group of transmission facilities is likely to vary considerably over the long depreciation life of the transmission facilities amid changing power flows, fuel prices, population patterns, and local economic considerations.” FERC Order 1000 (136 FERC 61,051) ¶ 605. |
Not benefits but are instead inputs into modeling assumptions. | Local and State Policy Compliance; Enabling Member Plans; Addressing NERC Reliability Issues; Federal Policy Compliance; and possibly operating reserves. | No cost distribution for these “benefits.” The cost savings for compliance cannot be calculated as meeting these requirements is hard-wired into the modeling assumptions. So, these metrics should not be used to distribute costs to specific beneficiaries. The Environmental Sector does not believe these are in fact “benefits” but rather the intended outcome of robust planning. |
QUESTION 4: To the extent that the most appropriate layer of granularity is subregional allocation, does the current MVP application make sense?
Yes. FERC has found the MVP tariff using a postage stamp at the subregional level is just and reasonable provided that MISO demonstrates that “such portfolio primarily benefits only a single Subregion.” 179 FERC 61,124 at ¶ 61. If MISO establishes that the benefits from LRTP Tranche 3 spread primarily throughout MISO South, then it would be appropriate to apply the MVP tariff to MISO South for Tranche 3.
Any more granular cost allocation methodology for LRTP Tranche 3 must establish that the new methodology results in just and reasonable rates and meets FERC’s roughly commensurate standard. Developing such an alternative has at least two hurdles. First, as noted above, given the nature of the LRTP lines and the tools currently available, it will be difficult to develop a more granular cost allocation that could meet FERC’s roughly commensurate standard. Second, FERC has mandated that there cannot be two cost allocations for the same project type. FERC Order 1000 (136 FERC 61,051) ¶ 686. If a new, more granular tariff is developed for LRTP Tranche 3, then one of the following must happen:
The Environmental Sector urges that the MVP tariff, with both footprint wide and subregional application not be changed. Any more granular approach should be applied like a “State Agreement” approach in MISO South, or MISO should identify a Tranche 3 portfolio that does not have widely spread benefits and create a new project type.[5]
[1] Benefit metrics are used for two distinct purposes: (a) project justification and (b) how to distribute the costs of projects relative to the benefits received for those projects or in the case of LRTP, those portfolios that meet the criteria for the project type. The majority of this discussion focuses on the latter.
[2] When considering how to pay for the backbone regional grid, we should recognize that the costs for the existing backbone grid are postage-stamped either footprint wide or to regions via transmission rates. These rates are not based on a specific benefits analysis as is being discussed in these comments. Because LRTP is intended to bolster the backbone grid, one must question whether the payment for these incremental improvements should be paid for through a different mechanism than we pay for the existing regional grid, i.e., why the costs for the backbone regional grid should not be postage-stamped?
[3] Note that there are metrics that can quantify benefits but not on the basis of financial savings. For example, improved competitiveness through measuring the Herfindahl-Hirschman Index (HHI).
[4] We are listing MISO’s benefits even though we believe some of the benefits are inappropriate, overlapping and/or duplicative.
[5] During the RECBWG discussions in 2021, some MISO South stakeholders proposed a revised Market Efficiency Projects (MEP) tariff for LRTP. MEPs have a fundamentally different purpose than LRTP projects and, therefore, the MEP tariff should not be applied to LRTP. (MEPs are intended to resolve narrow congestion issues and very few projects have ever qualified for an MEP cost allocation.) The current Order 1000 cost allocation tariffs in MISO are wanting: the only choices are MEPs or MVPs, which as noted apply to very different types of projects. MEPs can apply to a single or small group of projects while MVPs are applied to portfolios. MISO should consider whether a new universal project type, which recognizes multiple types of benefits, could be created that would not be limited to the narrow congestion relief of MEPs or to identifying a portfolio of MVPs benefitting the subregion/region.
Joint Comments
of
Association of Businesses Advocating Tariff Equity (ABATE)
Illinois Industrial Energy Consumers (IIEC)
Louisiana Energy Users Group (LEUG)
Texas Industrial Energy Consumers (TIEC)
Coalition of MISO Transmission Customers (CMTC)
Midwest Industrial Customers (MIC)
NIPSCO Large Customer Group (NLCG)[1]
Regarding
RECBWG
Cost Allocation Granularity
(RECBWG: 20221128)
December 22, 2022
I. Background
On February 4, 2022, MISO submitted a filing at the Federal Energy Regulatory Commission (“FERC”) in Docket No. ER22-995-000 to establish a cost allocation method for Tranche 1 and Tranche 2 Long Range Transmission Plan (“LRTP”) projects. In that filing, MISO proposed to allocate the costs of such projects on a sub-regional basis using a postage stamp, energy-based allocation. The FERC subsequently approved MISO’s filing. However, for future LRTP tranches, MISO committed to continue to explore in 2022 and 2023 further cost allocation changes that may replace this bifurcated, sub-regional postage-stamp methodology on a going forward basis. MISO has indicated that any replacement cost allocation methodology that is ultimately produced is currently targeted to be filed with the FERC by December 2023.
As part of the stakeholder discussion of cost allocation granularity at the November 28, 2022 RECBWG meeting, MISO presented a proposed mapping of various transmission project benefits to four potential layers of cost allocation granularity (footprint-wide, sub-regional, cost allocation zone and pricing zone). During that meeting, MISO also issued a series of questions regarding this proposed mapping of project benefits for stakeholder feedback. The following are the responses of the End-Use Customer Sector to the questions posed by MISO.
II. Responses to MISO’s Questions
1. MISO has identified 4 layers of granularity: footprint, sub-region, cost allocation zone & pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate? Please provide justification along with your response.
We do not agree or believe that it is reasonable to spread most transmission project costs across the MISO footprint or sub-regionally on a postage stamp energy basis. Such a cost allocation approach fails to track project beneficiaries with reasonable accuracy. Moreover, an energy-based allocation of project costs is inconsistent with the cost drivers for transmission investment and unduly burdens large, high load factor customers with a disproportionate share of project costs.
To ensure that the allocation of LRTP project costs tracks the distribution of project benefits as accurately as practicable, MISO should calculate the distribution of project benefits and the allocation of project costs more granularly than a sub-regional postage stamp allocation. This means that benefits should be calculated and costs should be first be allocated at the Transmission Pricing Zone (“TPZ”) level in all cases where this is feasible and reasonably practical. Moreover, to track cost causation, project costs that are allocated to each TPZ should then be allocated to customers on a coincident peak demand basis[i] rather than an energy basis.
Benefits that reduce transmission investments that would otherwise be needed for reliability or resource adequacy have no nexus to annual energy consumption. As such, it is completely inappropriate for the costs associated with these demand-related benefits, after first being allocated to the benefiting TPZs, to then be allocated to transmission customers within the benefiting TPZs on an energy consumption basis. Instead, these transmission costs should be allocated to customers on a demand basis.
Moreover, we do not agree that there is a tension between granularity and accuracy for all types of transmission benefits, nor do we agree with a generalized assumption that granular cost allocation methods sacrifice accuracy, irrespective of benefit type. It is not reasonable to default to a broad postage-stamp energy allocation of reliability benefits simply due to generalized and untested assertions that such benefits are too difficult to allocate in a precise manner. Instead, MISO should apply a cost allocation that tracks costs to beneficiaries more accurately and more granularly than a sub-regional postage stamp approach. The accuracy and robustness of a more granular cost allocation can be tested by MISO through appropriate sensitivity analyses, if there are concerns that a more granular allocation method may not accurately identify project beneficiaries.
We also disagree with the suggestion that established, granular cost allocation methods such as the Adjusted Production Cost (APC) benefit metric sacrifice accuracy because they may not capture changing project beneficiaries over time. MISO has applied the APC benefit metric for many years, and the Federal Energy Regulatory Commission (FERC) has accepted this metric as appropriate for the allocation of project benefits for Market Efficiency Projects (MEPs). There is no reason to believe that this same APC benefit metric is somehow inappropriate or inaccurate in the context of LRTPs.
To the extent that there are concerns regarding changes in project beneficiaries over time, MISO can perform a periodic review of the distribution of LRTP project benefits. This would provide a means of testing the assertion that beneficiaries will change significantly over time, which could in turn inform an evaluation of the robustness of specific benefit metrics for transmission projects.
It should be noted that the issue of changing beneficiaries over time will not be remedied through a sub-regional or a footprint-wide postage stamp energy allocation, as this approach assumes that the benefits of LRTP projects are directly proportionate to customer energy consumption, and further assumes that the project benefits will be evenly spread across the sub-region or the entire MISO footprint over the life of the projects. This assumption is not likely to be valid and should be tested over time through a periodic review of the distribution of LRTP project benefits.
Finally, MISO should recognize that load is not the only beneficiary of LRTP projects. Generators also benefit from the increased transfer capability provided by LRTP projects. This is particularly true of projects that are driven by the need to facilitate the transfer of power from generation resources that locate far from load centers. Therefore, MISO should consider cost allocation methods that include cost assignments to generators as well. Imposing the costs of network upgrades that are driven by network generators’ location choices on those interconnecting generators sends appropriate price signals for generation location and transmission build-out.
2. Is the proposed mapping of benefits to a layer of granularity suitable? In your response, please detail the suggested changes & their justification.
We do not believe that MISO’s proposed mapping of benefits to layers of cost allocation granularity is suitable. For example, MISO proposes to allocate financial benefits at the cost allocation zone (CAZ) level. However, MISO has developed well-established modeling methods to allocate financial benefits, such as APC benefits, at the TPZ level. Accordingly, it is appropriate to allocate financial benefits at the TPZ level where the models to allocate project costs at that level are readily available and well-tested. If there are concerns with respect to changing beneficiaries over time or with the accuracy of the assumptions underlying these models, such concerns can be addressed through sensitivity analyses and a periodic review of the distribution of LRTP project benefits, if appropriate.
We also disagree with the proposal to default to a sub-regional postage stamp allocation method for metrics that MISO has characterized as risk avoidance benefits and policy benefits. For example, changes in transfer capability resulting from transmission additions can be determined at the CAZ or TPZ level, and can therefore be used to allocate project costs under such a metric at a more granular level than suggested by MISO. In addition, the cost of transmission projects that are driven by state policy initiatives should be allocated to the TPZs that are included in the states adopting such policies, rather than spreading the project costs to customers on a sub-regional or footprint-wide basis. MISO should explore more granular cost allocation approaches for risk avoidance benefits and policy benefits, rather than making a generalized assumption that all such benefits should be allocated sub-regionally.
We do not support applying benefit metrics in the risk avoidance and policy benefits categories to allocate transmission costs unless the selected metrics are objective, readily quantifiable and not duplicative of other benefit metrics that are already in place. For example, a reliability metric can meet these criteria if it defines reliability in terms of a concrete and objective measure such as increases in transfer capability, and then allocates project costs in proportion to changes in transfer capability at the CAZ or TPZ level. Other risk avoidance and policy benefits that cannot be objectively and readily quantified should not be used to allocate project costs.
If, despite our ongoing objections since the initiation of MISO’s LRTP initiative, MISO ultimately proposes to spread certain risk avoidance or policy benefits to customers on a sub-regional basis, it should prioritize the allocation of project benefits that can be distributed more granularly in the cost allocation process. For example, LRTP project benefits that can be allocated using established financial benefit metrics currently used by MISO for MEPs, such as the APC metric, should be applied to allocate LRTP project costs in the first instance. Any residual project costs that remain after the more granular benefit metrics have been applied could then be spread sub-regionally on a coincident peak demand basis rather than an energy basis. This approach would make the cost allocation more accurate relative to an approach that simply spreads all project costs across the sub-region on a postage stamp energy basis.
3. What other considerations need to be made in the tension of granularity and accuracy?
MISO should not assume, without specific analysis, that more granular allocation methods are less accurate than sub-regional postage stamp approaches. As discussed elsewhere in these comments, concerns regarding the accuracy of the modeling assumptions associated with more granular cost allocation methods can be evaluated and addressed through appropriate sensitivity analyses that apply a range of modeling assumptions.
Moreover, concerns regarding changes in beneficiaries over time in the context of more granular cost allocation methods can be addressed by periodically reviewing the distribution of benefits under specific metrics to determine whether a significant change in project beneficiaries has occurred. As discussed in our response to question number 1, the issue of changing beneficiaries over time will not be remedied through a sub-regional postage stamp allocation, as this approach assumes that the benefits of LRTP projects will be evenly spread across the sub-region over the life of the projects.
4. To the extent that the most appropriate layer of granularity is sub-regional allocation, does the current MVP application make sense?
No. As noted earlier, we believe that MISO can and should allocate many financial and other benefit metrics down to the TPZ level. If MISO nevertheless concludes that the appropriate level of granularity for some benefit metrics is sub-regional, we do not support applying the current sub-regional MVP allocation to such metrics, which is based on a postage stamp energy allocation.
A sub-regional postage stamp allocation of project costs assumes that project costs are evenly distributed across the sub-region. We do not believe it is valid to make this assumption solely on the basis that it is difficult to objectively quantify a more granular distribution of benefits associated with a particular benefit metric. Rather, any sub-regional allocation of project costs should be supported by objective analysis demonstrating an even distribution of project benefits across the sub-region. If the distribution of project benefits under a particular benefit metric can be objectively measured and quantified more granularly than a sub-regional postage stamp allocation, MISO should apply the more granular cost allocation approach in order to track project costs to beneficiaries more accurately. For example, as discussed earlier in these comments, it should not be burdensome or difficult to measure the distribution of certain reliability benefits such as increases in transfer capability at the CAZ or TPZ level.
Even if a sub-regional cost allocation is applied for specific benefit metrics, MISO should allocate these costs on a demand rather than an energy basis, particularly for project benefits that are reliability-related. Project benefits that stem from enhanced system reliability are correlated with increases in peak system capacity and have no relationship to customer energy consumption. Moreover, energy-based allocation approaches ignore the fixed, sunk nature of transmission capital investments. Finally, allocating transmission costs on an energy basis disproportionately allocates transmission costs to large, high load factor transmission customers, who are among the most efficient users of the transmission grid.
Thank you for giving us the opportunity to provide this feedback. If MISO has any questions or concerns with respect to these comments, please do not hesitate to contact the following:
Jim Dauphinais
Brubaker & Associates, Inc.
(Consultants to ABATE, IIEC, LEUG, NLCG and TIEC)
(636) 898-6725
Ali Al-Jabir
Brubaker & Associates, Inc.
(Consultants to ABATE, IIEC, LEUG, NLCG and TIEC)
(361) 994-1767
Kevin Murray
Ken Stark
McNees Wallace & Nurick LLC (for CMTC)
(614) 719-2844
kstark@mcneeslaw.com
Kavita Maini
KM Energy Consulting, LLC (Consultants to MIC)
(262) 646-3981
[1] ABATE, IIEC, LEUG, TIEC, CMTC and MIC are all MISO Members in the End-Use Customer Sector. NLCG is a non-MISO Member stakeholder whose members include large end-use customers within Indiana that are interruptible and/or have cogeneration facilities and that take service under NIPSCO Rate Schedule 831, which allows limited market purchases through NIPSCO.
[i] Coincident peak demand allocation allocates costs to customers within a pricing zone on the basis of each customer’s demand at the time of the system peak, or, alternatively, at the time of the peak demand of that pricing zone. In other words, it allocates costs based on each customer’s contribution to the system peak or to the peak demand of the pricing zone.
RECBWG November 2022 Feedback Request
Minnesota Power Response
WPPI offers responses to MISO’s specific questions below. More broadly, we note that MISO’s presentation proposes consideration of a number of new benefits that have not previously been included in MISO’s transmission-planning arrangements. These benefits raise a number of questions, and the specific resolution of those questions matters and may affect the proper allocation of costs.
MISO is requesting responses to the following questions on Cost Allocation Granularity
- MISO has identified 4 layers of granularity: footprint, subregion, cost allocation zone & pricing zone. Are the layers of granularity and the accompanying tension with accuracy appropriate? Please provide justification along with your response.
In general, as discussed at RECBWG in recent years, it makes sense to consider different levels of granularity for different benefits and different types of benefits. MISO’s proposed 4 layers appear to be a reasonable approach.
- Is the proposed mapping of benefits to a layer of granularity suitable? In your response, please detail the suggested changes & their justification.
WPPI agrees that benefits can be organized into the three categories that MISO describes. While we view MISO’s assignment of benefit types to granularity levels as sensible at a very broad level, we think it would be inappropriate to opine on the appropriate treatment of all of the 15 benefit types that MISO lists at this time. We take the position that these benefits should be clearly defined prior to determining the appropriate corresponding level of cost-allocation granularity.
- What other considerations need to be made in the tension of granularity and accuracy?
WPPI sees the key considerations as including ability to accurately calculate benefits, and to predict future conditions that affect these benefit calculations.
- To the extent that the most appropriate layer of granularity is subregional allocation does the current MVP application make sense?
Application of the current MVP cost allocation is one reasonable approach for benefits for which subregional granularity is appropriate. Variations on elements such as the MVP energy charge and the treatment of imports and exports are possible within a subregional allocation.