Introduction

Transmission Cost Allocation refers to the legal and regulatory process of distributing the costs of constructing, operating, maintaining and upgrading electricity transmission networks among the utilities, generators, consumers and regions that use or benefit from those networks. It is a central issue in energy law because transmission infrastructure requires substantial investment, while its benefits frequently extend beyond the territory of the utility that constructs it.

Transmission lines support electricity reliability, reduce congestion, facilitate cross-border electricity trading and connect renewable energy projects to consumers. However, disputes arise when one region pays for infrastructure that benefits another, or when the costs of a particular project are imposed on customers who receive limited benefits. The legal challenge is to allocate costs fairly while maintaining affordable electricity prices and encouraging efficient investment.

In the United States, the Federal Energy Regulatory Commission (FERC) plays a major role in interstate transmission cost allocation under the Federal Power Act. FERC Orders No. 1000 and No. 1920 establish important frameworks for regional transmission planning and cost allocation. <Cite refs={["turn195381search0","turn195381search6"]}/>

Legal Framework Governing Transmission Cost Allocation

1. Federal Power Act

The Federal Power Act provides the foundation for federal regulation of interstate electricity transmission. Section 205 requires jurisdictional rates and charges to be just and reasonable and prohibits undue discrimination. Section 206 authorises FERC to investigate and remedy rates or practices that are unjust, unreasonable or unduly discriminatory.

Transmission cost allocation must therefore comply with statutory requirements. A regulator cannot distribute infrastructure costs arbitrarily; its methodology must have a rational relationship to the costs incurred, the benefits received or other legally relevant considerations.

2. FERC Order No. 1000

Issued in 2011, Order No. 1000 reformed regional transmission planning and cost allocation. It requires relevant transmission providers to participate in regional planning processes and establish methods for allocating the costs of selected regional and interregional transmission facilities.

Its six regional cost allocation principles include the following requirements:

Costs must be allocated in a manner roughly commensurate with estimated benefits.

Costs cannot be assigned involuntarily to entities that receive no benefit from the facility.

Benefits and costs must be identified through an appropriate planning process.

A regional method must be clear, transparent and capable of being applied consistently.

The allocation method must not be unduly discriminatory or preferential.

Participant funding may be used for individual projects, but cannot replace the required regional or interregional cost allocation method.

These principles seek to prevent free-riding while ensuring that regional projects are not blocked merely because beneficiaries cannot agree on voluntary contributions. <Cite refs={["turn195381search0","turn195381search12"]}/>

3. FERC Order No. 1920

Order No. 1920, issued in 2024, strengthens long-term regional transmission planning by requiring transmission providers to consider a longer planning horizon and evaluate a broader range of future needs and benefits. Subsequent orders, including Order No. 1920-A and Order No. 1920-B, address rehearing and clarification.

The framework seeks to improve the coordination of transmission investment by considering factors such as reliability, congestion, resource changes and the distribution of costs and benefits over time. It does not establish one universal cost-sharing formula for every region; regional compliance processes remain important. <Cite refs={["turn195381search1","turn195381search6"]}/>

Principal Methods of Cost Allocation

1. Beneficiary-Pays Principle

Under this approach, entities that benefit from a transmission project bear an appropriate share of its costs. Benefits may include improved reliability, reduced congestion, access to lower-cost generation and increased transfer capability.

The principal difficulty is measuring benefits accurately, especially where a transmission line provides system-wide advantages that cannot be reduced to a single financial figure.

2. Postage-Stamp Method

This method allocates costs across a defined group of customers or utilities using a common rate or an agreed proportional measure, rather than tracing every cost to an individual transaction.

It can simplify administration and support regional infrastructure investment. However, it may become unfair if the allocation is not reasonably connected to the benefits received by the entities required to pay.

3. Participant Funding

Under participant funding, a particular project beneficiary agrees to pay some or all of the cost of a facility. This approach may be appropriate where a project's benefits are concentrated among a small number of participants.

Nevertheless, under Order No. 1000, participant funding cannot serve as the sole regional or interregional cost allocation method required by that rule.