UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION REQUEST FOR REHEARING THE DAYTON POWER AND LIGHT COMPANY

Transcription

1 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION PJM Interconnection, L.L.C. Docket No. EL REQUEST FOR REHEARING OF THE DAYTON POWER AND LIGHT COMPANY Randall V. Griffin Chief Regulatory Counsel The Dayton Power and Light Company 1065 Woodman Drive Dayton, OH (937) (office) (937) (Facsimile) Hertzel Shamash Vice President, Resource Planning The Dayton Power and Light Company 1065 Woodman Drive Dayton, OH (937) (office) (937) (Facsimile) DATE: April 30, 2012

2 Page TABLE OF CONTENTS I. INTRODUCTION II. BACKGROUND III. SPECIFICATION OF ERRORS AND STATEMENT OF ISSUES IV. DISCUSSION A. Introduction and Summary of Basic Principles B. The Order on Remand Has End-Results that are Unjust, Unreasonable, Unduly Discriminatory and Preferential C. The Order on Remand Does Not Comply with the Mandate of the Seventh Circuit The Costs and Benefits of the New Transmission Facilities Are to Be Weighed, Not Some Set of Generalized Benefits of PJM Membership The Costs and Benefits Must Be Reviewed on a Sub-Regional or Utility-by-Utility Basis ) The Cost-Benefit Analysis in the Order on Remand for ComEd Fails the Seventh Circuit Mandate Because It is Not Based on Substantial and Credible Evidence D. The Order on Remand Fails to Provide Due Process under the 5 th and 14 th Amendments to the Constitution and Violates the Administrative Procedures Act Legal Standards of Due Process and the Administrative Procedures Act The Legal Standard Is Not Met By a Post-Decisional Procedure on Rehearing E. Documents Relied on in the Order on Remand Do Not Meet the Standards for Official Notice Legal Standards i

3 Page 2. The Documents for which Official Notice Has Been Taken Contain Information that Is Highly Disputable Either Inherently or as to Its Implication and Use a) Official Notice Should Be Withdrawn from the Group of Documents Misused to Find Benefits from Reduced Outages and Power Quality Disturbances b) Official Notice Should Be Withdrawn for CETO/CETL Data Misused to Find that Benefits Exist Because Power Also Flows East to West c) Official Notice Should Be Withdrawn for Emergency Events Postings that Have No Probative Value and, on their Face, Are Contrary to the Conclusions Drawn in the Order on Remand d) Official Notice Should Be Withdrawn for Reports that Are Misused to Imply Large Production Cost Benefits to ComEd, AEP and Dayton Power e) The 2011 ISO/RTO Metrics Report Is Useless for the Purpose of Determining Value Provided to Midwestern Utilities f. Dayton Power Objects to the Process of Issuing an Order Relying on Officially Noticed Documents without Prior Opportunities for Parties to Rebut the Statements Therein; But for the Limited Purposes Used, Does Not Seek Withdrawal of Certain Documents from the Record F. The Order on Remand Is Arbitrary and Capricious in Failing to Allocate Any Costs Based on the Specific Benefits Received by Entities with Recognized Reliability Problems Legal Standards The Costs of the Proposed 500 kv Facilities Are Caused to Resolve Specifically Identified Reliability Problems The Order on Remand Fails to Give Any Weight for Allocation Purposes to those Receiving the Specific Benefit of Resolving a Reliability Problem ii

4 Page 3. The Order on Remand Fails to Give Any Weight for Allocation Purposes to the Beneficiaries of Reduced Energy Costs G. The Record Evidence Compellingly Demonstrates that a DFAX Method Reasonably Allocates Costs to the Beneficiaries of the Projects The DFAX Method Allocates Costs Consistent With Transmission Planning and Modeling Under Each of the Scenarios in the Record, the DFAX Method Provides a Reasonable Matching of the Costs of a New Transmission Facility with the Beneficiaries of that Transmission Facility a) The Record Evidence Establishes that DFAX Analyses Run Under an Array of Different Scenarios Allocate Costs Similarly and Reasonably b) Criticisms of DFAX in the Order on Remand Are Misplaced and Overstated or Can Be Easily Resolved i) Speculation about Future Shifts in Load Patterns, Relative Prices, or Other Future Changes Do Not Justify Rejection of the DFAX Methodology in Favor of Socialization ii) Multiple Runs or Periodic Reruns of DFAX Analyses Can Obviate Concerns About a Snapshot Analysis iii) An In-Service DFAX Analysis and Federal Power Act Section 206 Adequately Solves Issues Relating to Significant Changes in Flow Direction or in the Use of the New Facilities (iv) An Alternative and Administratively Simple Solution Exists For Periodic Redetermination of Beneficiaries (v) The DFAX Methodology Adequately Matches Costs and Benefits Even where Multiple Reliability Violations Exist (vi) Unquantified Assertions of Uncaptured System-wide Benefits Provide Inadequate Support to Reject the DFAX Method iii

5 Page (vii) The Existence of a Stability Related Project Does Not Support Rejection of DFAX for All Reliability Projects (viii) Changes in the Timing of Construction Do Not Support Rejection of the DFAX Method H. A Load-Ratio Share Allocation Remains Unjust, Unreasonable, Unduly Discriminatory and Preferential No Matter How Often It Is Updated I. The Order on Remand Results in a Massive and Unjustified Cost Shift There Has Been a Move from the DFAX Method to Socialization that Has Caused a Massive Cost Shift Alternatively, the Last Fully Approved Method of Cost-Allocation Was Zone of Construction and Socialization Creates a Massive Cost Shift from that Approach J. In the Alternative, on Rehearing the Commission Should Consider a Sub-Regional Approach for Postage Stamp Cost Allocation V. CONCLUSION PJM Regional Transmission Expansion Plan Report Collected Statements of Need Affidavit of Scott M. Gass originally filed June 28, 2010 (selected pages) with Reply Comments of The Dayton Power and Light Company Affidavit of Michael M. Schnitzer filed May 28, 2010 (selected pages) with Initial Comments of The Dayton Power and Light Company PJM Emergency Messages (Mid-Atlantic Region Jan. 1, 2011-Apr. 5, 2012) APPENDIX A APPENDIX B APPENDIX C APPENDIX D iv

6 Page Constitutional and Statutory Authority TABLE OF AUTHORITIES U.S. Constitution Amendments V and XIV 3, 9, 30 Administrative Procedures Act, 5 U.S.C. 556(e) 3, 9, 30 Federal Power Act, 206, 16 U.S.C. 824e 3, 10, 18 Federal Power Act, 313, 16 U.S.C. 825l 1 Case Authority Court Cases Armstrong v. Manzo, 380 U.S. 545 (1965) 30 Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., et al., 419 U.S. 281 (1974) 9, 30 Cafeteria Workers v. McElroy, 367 U.S. 886 (1961) 31 Entergy Servs., Inc. v. FERC, 319 F.3d 536 (D.C. Cir. 2003) 10, 54 Illinois Commerce Comm n v. FERC, 576 F.3d 470 (7 th Cir. 2009), reh g denied (Oct. 20, 2009) passim KN Energy, Inc. v. FERC, 968 F.2d 1295 (D.C. Cir. 1992) 9-10, Mathews v. Eldridge, 424 U.S. 319 (1976) 31 McLeod v. INS, 802 F.2d 89 (3 rd Cir. 1986) 33 Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004) passim Mississippi Industries v. FERC, 808 F.2d 1525 (D.C. Cir. 1987) 33 Morrissey v. Brewer, 408 U.S. 471 (1972) 30 Motor Vehicle Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983) 10, 54 Ohio Bell Tel. Co. v. Public Utilities Comm. of Ohio, 301 U.S. 292 (1937) 9, 30, 33 Opp Cotton Mills, Inc. v. Adm'r of Wage & Hour Div., 312 U.S. 126 (1941) 9, 31 v

7 Page Public Service Comm n v. FERC, 813 F.2d 448 (D.C. Cir. 1987) 55 Union Electric Co. v. FERC, 890 F.2d 1193 (D.C. Cir. 1989) 9, 30, 33 Western Massachusetts Electric Co. v. FERC, 165 F.3d 922 (D.C. Cir. 1999) 9, Federal Energy Regulatory Commission Cases Baltimore Gas & Electric Co., 130 FERC 61,210 (2010) 9, 47 Louisiana Public Service Commission v. Entergy Services, Inc., et al., 206 FERC 63,012 (2004) 9, Northeast Utilities Service Company, 62 FERC 63,013 (1993) 33 PJM Interconnection, LLC, 104 FERC 61,124 (2003) 11, 87 PJM Interconnection, LLC, 115 FERC 61,261 (2006) 11, PJM Interconnection, LLC, Opinion No. 494, 119 FERC 61,063 (2007), order on reh g, Opinion No. 494-A, 122 FERC 61,082 (2008) passim PJM Interconnection, LLC, 122 FERC 61,217 (2008) 15 PJM Interconnection, LLC, 124 FERC 61,112 (2008) 15 PJM Interconnection, L.L.C., 138 FERC 61,230 (2012) ( Order on Remand ) passim PJM Interconnection, LLC and Public Service Electric and Gas Co., 135 FERC 61,229 (2011) 17 Potomac-Appalachian Transmission Highline, LLC, 122 FERC 61,188 (2008) 17 Public Service Electric and Gas Co., 126 FERC 61,219 (2009) 9, 47 Public Service Electric and Gas Co., 129 FERC 61,300 (2009) passim RITELine Illinois, LLC, 137 FERC 61,039 (2011) 80 Trans-Allegheny Interstate Line Co., 119 FERC 61,219 (2007) 17 Transcontinental Gas Pipeline Corp, 112 FERC 61,170 (2005) 9-10, 23 vi

8 Page Regulations and Rules Rule 508(d), 18 C.F.R (d) 31, 33 Rule 713, 18 C.F.R Rule 716(c), 18 C.F.R (c) 9, 32 Other Authority Federal Rules of Evidence, Rule 201(b) 33 Potomac Electric Power Co., 71 Md PSC 68 (1980) vii

9 UNITED STATES OF AMERICA FEDERAL ENERGY REGULATORY COMMISSION PJM Interconnection, L.L.C. Docket No. EL REQUEST FOR REHEARING OF THE DAYTON POWER AND LIGHT COMPANY The Dayton Power and Light Company ( Dayton Power or the Company ), pursuant to Section 313(a) of the Federal Power Act, as amended ( FPA ), 16 U.S.C. 825l(a) and Rule 713 of the Federal Energy Regulatory Commission s ( FERC or Commission ) Rules of Practice and Procedure, 18 C.F.R , hereby requests rehearing of the Order on Remand issued in the above-captioned proceeding on March 30, The Order on Remand responds to and purports to comply with an opinion of the United States Court of Appeals for the Seventh Circuit, 2 which rejected as unsupported the determinations in Opinion Nos. 494 and 494-A that socialized the costs of new transmission facilities operating at voltage levels at or above 500 kv within the PJM Interconnection, LLC ( PJM ). 3 I. INTRODUCTION A billion here and a billion there and pretty soon you are talking about real money. This quote, never verified but generally attributed to the late Everett Dirksen, Senator from Illinois, is particularly applicable to this case where the Commission, for the second time, has 1 PJM Interconnection, L.L.C., Docket No. EL , 138 FERC 61,230 (2012) ( Order on Remand ). 2 Illinois Commerce Comm n v. FERC, 576 F.3d 470 (7 th Cir. 2009) ( Seventh Circuit Remand ), reh g denied (Oct. 20, 2009). 3 PJM Interconnection, LLC, Opinion No. 494, 119 FERC 61,063 (2007), order on reh g, Opinion No. 494-A, 122 FERC 61,082 (2008).

10 ruled in favor of an allocation mechanism that would assign $1 billion to Commonwealth Edison Company ( ComEd ) in Illinois and more than $1 billion to the utilities operating in Ohio as their contribution to $6.6 billion in new 500 kv transmission facilities, all of which have been constructed or are planned for construction to solve reliability problems of other utilities operating hundreds of miles to the east. 4 The costs currently at issue are expected to continue rising as more eastern projects and costs get added year by year. There are no comparable reliability problems in Illinois or Ohio, where the transmission system is already strong and reliable and economic and population growth has been slower. There are no planned large new reliability projects in Illinois or Ohio where costs would be allocated to the eastern states. When evidentiary submissions were made in this proceeding in May and June 2010, the amount at issue for Dayton Power was approximately $162.6 million. With an updated allocator as used in the Order on Remand, the amount is approximately $147 million, or about $28.1 million if converted to an annual charge. 5 Dayton Power s current transmission revenue requirement is $40.1 million annually. 6 So, this order would increase Dayton Power s annual transmission revenue requirement by 70%. To Dayton Power and its customers, that s real money. The record evidence does not support a finding that Dayton Power receives any benefit from the new transmission facilities that create these costs, much less annual benefits as required 4 The $6.6 billion figure is as of the evidentiary submissions in this case of May 28, 2010 and June 28, In general, this rehearing request will reference costs and other data as set for in those submissions. It is understood, however, that there may be updated cost estimates for some projects, there have been additional projects proposed since then, and two of the projects have incurred pre-construction costs but are now delayed. 5 See Order on Remand at n. 138 ($6.6 billion x 19.1% PJM carrying charge x 2.23% Dayton Power load ratio). DP&L s load ratio at the time the record closed was slightly higher and the total amounts at issue based on that data was approximately $162.6 million ($ million socialization vs. $0.92 million DFAX). See PJM April 13, 2010 Response at PJM Open Access Transmission Tariff ( OATT ), Attachment H-15 Annual Transmission Rates -- The Dayton Power and Light Company For Network Integration Transmission Service. 2

11 by the Seventh Circuit that are roughly commensurate to $28 million in annual costs. Dayton Power respectfully offers the following simplistic yet accurate description of the $6.6 billion in constructed and planned transmission facilities: They are too far away from us to help us. Under almost any planning scenario, most of them don t even have a measurable effect on the flows on our system. For the reasons explained in detail herein, the Order on Remand: 1) violates the mandate of the Seventh Circuit; 2) violates due process under the 5 th and 14 th Amendments to the Constitution and the Administrative Procedures Act; 3) is arbitrary and capricious and not supported by substantial evidence in the record; and 4) is unjust, unreasonable, and unduly discriminatory and preferential in violation of the Federal Power Act in subsidizing those who are direct beneficiaries of new high voltage transmission facilities by allocating literally billions of dollars in costs of those facilities to entities who receive little or no benefits from those facilities and actually face increased costs of energy as the result of those facilities. The costs currently at issue here are $6.6 billion in new high-voltage transmission lines operating at 500 kilo-volts ( kv ) or above, that have been identified in PJM s Regional Transmission Expansion Plans ( RTEP ) as necessary to resolve reliability problems in the eastern portion of PJM. 7 Even the two lines planned to traverse parts of West Virginia (one in 7 For purposes of this rehearing request, eastern portions of PJM will mean that portion of PJM that includes what used to be referred to as the Mid-Atlantic Area Control Zone plus Virginia. Thus, eastern portions of PJM as used herein includes all of New Jersey, Delaware, eastern Pennsylvania, Maryland and the District of Columbia plus Virginia. The eastern utilities within those areas are Atlantic City Electric Company, Baltimore Gas and Electric Company, Delmarva Power and Light Company, Jersey Central Power and Light Company, Metropolitan Edison Company, PECO Energy Company, Pennsylvania Electric Company, PPL Electric Utilities Corporation, Potomac Electric Power Company, Public Service Electric and Gas Company and Rockland Electric Company, plus Dominion Resources, Inc. in Virginia. Midwestern or Midwestern utilities means utilities and their transmission systems within PJM that are operating in Ohio (Dayton Power, First Energy s Ohio subsidiaries, Duke Energy Ohio, and American Electric Power Company s Ohio subsidiaries) and the utilities who are PJM members operating in portions of Illinois, Indiana, Michigan, and Kentucky. There are also PJM members located in western Pennsylvania and West Virginia. While not included herein as Midwestern utilities, the economic consequences for those utilities are similar, i.e., they would be paying for a portion of the new high voltage transmission lines based on the size of their load but do not have a reliability need for the lines and make little or no contributions to 3

12 service now, the other delayed) were designed to resolve eastern reliability problems by increasing west-to-east power flows across a constrained interface. 8 The Order on Remand allocates 100% of the costs at issue based on load ratio share, which is computed using the customer load within a utility zone during the five hours in the preceding year when usage across PJM were at their peaks. The Order on Remand errs in failing to give any weight at all to the actual cause of the costs to be incurred to resolve these specific reliability problems that have been identified to exist in zones of utilities located in the eastern portion of PJM. A system-wide allocation based on load ratio share is purportedly justified by generalized assertions of system-wide benefits that are assumed to exist or based on speculation about future possibilities and extra-record evidence that is often unreliable and misused. The Order on Remand allocates 100% of the costs based only on this load ratio share allocator and does not answer a fundamental question: Why is it appropriate to allocate zero costs based on the specific reliability benefits that are provided to those entities with identified reliability needs? The Order on Remand also errs in failing to give any weight at all to the benefits that eastern utilities will receive in the form of lower energy prices and, conversely, the detriment of higher energy prices that Midwestern utilities will face. This is the natural result of building transmission lines that are explicitly planned to increase solve eastern reliability problems by increasing the transfer capability of the existing system to move Midwestern power, which is lower priced, to eastern markets that have been growing faster and have higher priced the constraints that caused the new facilities to be constructed. 8 The Order on Remand P 87 errs in stating otherwise. These lines are west only in the sense of being west of that constrained interface. See also Appendix A hereto, Collected Statements of Need from PJM RTEP Reports confirming that these two lines, PATH and TrAIL were planned to fix reliability problems and reduce energy costs in the fast growing D.C.-Baltimore corridor and Northern Virginia by permitting more west-to-east power flow. 4

13 alternatives. As more and more of this lower cost power flows from the west to eastern markets, it decreases prices there, and the loss from Midwestern markets increases prices in the Midwest. These are not merely allegations of parties on one side of an issue. There is hard data quantifying these benefits and detriments that was originally computed by PJM and compiled and submitted into evidence by Dayton Power. 9 But equally significant is that the parties on the other side of the cost allocation issue, and PJM, and this Commission have consistently acknowledged lower Locational Marginal Prices ( LMPs ) in these eastern utilities zones as a benefit for the project in the context of reviewing PJM RTEP filings or incentive rates applications filed by the utilities constructing the projects. It would be arbitrary and capricious to acknowledge the existence of these LMP benefits in all cases except in the one case where the Commission has been specifically directed to ensure that the allocation of costs is roughly commensurate with benefits received. Dayton Power also respectfully submits that it is unconscionable to allocate $6.6 billion in costs based on load ratio share, an allocator that is both overly-simplistic and completely disconnected from cost causation principles as applied to the costs of these new transmission facilities. The load ratio share is computed using only five hours of PJM peak loads in a 12- month period preceding the year of allocation and the amount of load served within a Zone during those five hours. 10 It does not take into consideration why the project is built, who is contributing to the reliability violation being rectified, or even who will be using the new transmission facility. It does not look at any differences in seasonal flows, hourly changes in flow direction, or any other types of changes (other than peak load) that can occur within a year 9 See PJM data compiled and explained in the Affidavit of Michael M. Schnitzer submitted with Dayton Power s Initial Comments of May 28, 2010 and reprinted here in pertinent part at Appendix C. 10 PJM OATT, Schedule 12(b)(i)(A). 5

14 or from year to year. If, contrary to all the record evidence, there were some future shift in flow patterns such that flows go east to west, it would not take that into consideration either. It is not a flow based allocator. It does not take into consideration any use of the new facility today or tomorrow or any point in time in the future. Its only consideration is how much peak load exists within a utility zone during five hours in the prior year. To correct these deficiencies, the Commission on rehearing must: 1) review the record evidence in conformance to the mandate of the Seventh Circuit and apply the beneficiary pays principle such that the costs imposed on each utility for these new transmission lines for each utility is roughly commensurate with the benefits it receives; 2) eliminate the reliance on extrarecord, post-hearing documents and statements therein; 3) find that socialization of the costs of high voltage transmission facilities based on load-ratio share is unjust and unreasonable and not supported by substantial evidence; and 4) find that allocating such costs based on a distribution factor analysis ( DFAX ) method is just and reasonable, is supported by substantial evidence in the record, and complies with the Seventh Circuit s mandate. II. BACKGROUND Dayton Power agrees that the Background section set forth in the Order on Remand at PP 4-13 is accurate in all material respects. To the extent that Dayton Power would place additional emphasis on other portions of the Seventh Circuit opinion, Dayton Power will raise those points in the body of this rehearing request. Dayton Power does herein supplement the background information in the Order on Remand with a few historic notes that are specific to it. Dayton Power joined PJM in 2004, the same year two other entities joined PJM: ComEd, and American Electric Power Company s ( AEP ) Midwestern subsidiaries. Duquesne Light & 6

15 Power Company from western Pennsylvania joined on January 1, As of that time, the costs of both existing and new transmission facilities were still being borne solely by the utility constructing the facilities the so-called License Plate approach. The debates that were then ongoing were focused primarily on how to allocate the costs of economic projects and merchantconstructed projects, not reliability based projects. Dayton Power brought to PJM a strong, reliable transmission system built around 345 kv facilities and interconnections with AEP, Duke Energy, Eastern Kentucky Power Cooperative, and the Ohio Valley Electric Company. The reliability of that system is evidenced by the fact that in PJM s RTEP Reports starting in 2005 and continuing through most of 2009, there was not a single transmission upgrade of any voltage proposed for the Dayton Zone. It was not until PJM s RTEP filing November 2009 that the first projects were identified for construction in Dayton Power s zone and even then they were minor projects at 138 kv included as a result of the new expanded definition of the Bulk Electric System. 11 It is further evidenced by the fact that the 2003 cascading black-out that originated in northern Ohio did not cascade in Dayton s zone the 345 kv system was resilient enough and the proper control equipment had been installed and maintained to isolate Dayton Power s lines from the cascade. 12 In all phases of this proceeding and PJM s various RTEP filings, Dayton Power has stood ready to pay for its fair share of transmission facilities that provide it some measurable benefits. It has not objected to paying a share of AEP s new transmission facilities that operate at voltages less than 500 kv, which share is allocated to Dayton Power by the Distribution Factor ( DFAX ) methodology. The DFAX methodology shows that Dayton Power contributes to some degree to 11 PJM Interconnection, LLC, Docket No. ER (November 13, 2009), Proposed Tariff Sheet No. 270F Dayton Power Reply Comments, Reply Affidavit of Hertzel Shamash, pp. 2-4 (June 28, 2010). 7

16 a few relatively small reliability issues identified on AEP s system and, thus, its contributions to those reliability issues are partially the cause for needing the upgrades. Similarly, even with 500 kv transmission lines that will be built hundreds of miles from Dayton Ohio, Dayton Power has remained willing to pay for its share of its contributions to the reliability violations that are driving the decisions to construct the new facilities. The DFAX methodology measures that contribution toward the reliability violations and would allocate Dayton Power about $1 million, total, for these facilities. 13 All of these facilities are designed to solve eastern reliability problems and some of them accomplish that by increasing the amount of power that can be transferred west to east across a constrained interface. Because Midwestern power tends to be lower cost than the alternative sources in the east, these new facilities built to solve reliability violations will have the further effects of reducing energy costs in the eastern portion of PJM and driving up the costs of energy in the Midwest, including Dayton Power s costs. The increased energy costs that will be borne by consumers in the Dayton Zone are tens of millions of dollars annually far more than the $1 million contribution that Dayton Power is making to the eastern reliability problems. 14 Stated simply, Dayton Power suffers a net detriment from these proposed facilities and arguably should be allocated no costs at all. But Dayton Power supports the DFAX methodology as a reasonable cost allocation mechanism that meets the Seventh Circuit s mandate of ensuring that the costs allocated are roughly commensurate with the benefits received. 13 PJM April 13, 2010 Response at p. 17 (Summary Table). 14 Dayton Power Initial Comments, Affidavit of Michael M. Schnitzer pp (May 28, 2010)(reprinted here for ease of reference in Appendix C). 8

17 III. SPECIFICATION OF ERRORS AND STATEMENT OF ISSUES 1. The Order on Remand errs in failing to comply with the mandate of the Seventh Circuit s opinion remanding this proceeding The Order on Remand errs in taking official notice of thousands of pages of extra-record documents and data, which do not meet the high degree of indisputability necessary for official notice and which are misused and misinterpreted The Order on Remand errs by failing to establish evidentiary procedures that meet the requirements of due process, thereby violating the 5 th and 14 th Amendments to the U.S. Constitution and the Administrative Procedure Act The Commission errs in failing to reopen the record pursuant to the Commission s Rule 716 to allow parties adequate notice and the chance to rebut thousands of pages of extra-record documents and data of which the Commission took official notice. 5. The Order on Remand errs in failing to allocate any costs of new transmission facilities operating at 500 kv and above based on the direct benefits from resolving identified reliability problems The Order on Remand errs in failing to allocate any costs of new transmission facilities 15 Authority includes: Seventh Circuit Remand, supra; KN Energy, Inc. v. FERC, 968 F.2d 1295 (D.C. Cir. 1992); Transcontinental Gas Pipeline Corp, 112 FERC 61,170 (2005); Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361 (D.C. Cir. 2004); Western Massachusetts Electric Co. v. FERC, 165 F.3d 922 (D.C. Cir. 1999). 16 Authority includes: Ohio Bell Tel. Co. v. Public Utilities Comm. of Ohio, 301 U.S. 292 (1937); Louisiana Public Service Commission v. Entergy Services, Inc., et al., Docket No. EL , 206 FERC 63,012 (2004). 17 Authority includes: U.S. Constitution Amendments V and XIV; Administrative Procedures Act, 5 U.S.C. 556(e); Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., et al., 419 U.S. 281 (1974); Union Electric Co. v. FERC, 890 F.2d 1193 (D.C. Cir. 1989); Ohio Bell Telephone Co. v. Public Utilities Commission of Ohio, supra; Opp Cotton Mills, Inc. v. Adm'r of Wage & Hour Div., 312 U.S. 126 (1941). 18 Authority includes: Seventh Circuit Remand, supra; KN Energy, Inc. v. FERC, supra; Transcontinental Gas Pipeline Corp, supra; Midwest ISO Transmission Owners v. FERC, supra; Baltimore Gas & Electric Co., 130 FERC 61,210 (2010); Public Service Electric and Gas Co., 126 FERC 61,219 (2009); Public Service Electric and Gas Co., 129 FERC 61,300 (2009). 9

18 operating at 500 kv and above based on the direct benefits received by certain entities in the form of lower energy costs The Order on Remand errs in rejecting the use of the Distribution Factor (DFAX) methodology to allocate the costs of new transmission facilities operating at 500 kv or above. 8. The Order on Remand errs in approving the socialization of the costs of new transmission facilities operating at 500 kv or above across PJM based on load ratio share. 9. The Order on Remand errs in approving a cost allocation that has end-results that are unjust, unreasonable, unduly discriminatory or preferential The Order on Remand errs in finding the socialization method of cost allocation is supported by substantial evidence and has end-results that are just and reasonable The Order on Remand errs in finding that there is substantial evidence on the record to establish that the DFAX method fails to allocate costs reasonably to the beneficiaries of the transmission facilities that generate the costs. 12. The Order on Remand errs in placing excessive reliance on extra-record, post-record documents, including a document heavily relied on that does not appear to have been given official notice status. 13. The Order on Remand errs in placing excessive reliance on speculative and unsupported hypothetical future changes in load flow patterns. 14. The Order on Remand errs in computing benefits ascribed to ComEd by a logical fallacy of assuming the conclusion, misusing data, and otherwise misconstruing data. 19 Authority includes: Seventh Circuit Remand, supra; KN Energy, Inc. v. FERC, supra; Transcontinental Gas Pipeline Corp, supra; Midwest ISO Transmission Owners v. FERC, supra. 20 Authority includes: Federal Power Act 206, 16 U.S.C. 826e; Motor Vehicle Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29 (1983); Entergy Servs., Inc. v. FERC, 319 F.3d 536 (D.C. Cir. 2003) 21 Authority includes: id. 10

19 15. The Order on Remand errs in finding that there was no prior approved cost allocation mechanism in effect and thus no cost shift resulting from a change to the socialization method of cost allocation The Order on Remand errs in failing to consider adequately potential modifications to the DFAX methodology that would have obviated concerns expressed in the Order on Remand regarding the DFAX methodology. IV. DISCUSSION A. Introduction and Summary of Basic Principles. The first time the Commission approved the socialization of costs associated with new high-voltage transmission lines in PJM, 23 Dayton Power and others filed appeals, which were consolidated and heard by the United States Court of Appeals for the Seventh Circuit. At issue was cost responsibility for existing and new transmission facilities. After examining the consequences of Opinion Nos. 494 and 494-A, the Commission s reasons for the Opinions, and the record evidence, the Seventh Circuit affirmed the portions of the FERC Opinions that continued to assign the costs of existing transmission facilities to the entities that had originally constructed them for use by their own customers. 24 The Seventh Circuit also discussed how the Commission was continuing the use of the existing method for allocating costs of new facilities operating below 500 kv, 25 but it was unnecessary to make an explicit ruling on the Distribution Factor ( DFAX ) method because there was not a single party in any of the appeals who took the 22 Authority includes: PJM Interconnection, LLC, 115 FERC 61,261 (2006); PJM Interconnection, LLC, 104 FERC 61,124 (2003). 23 Opinion Nos. 494 and 494-A, supra. 24 Seventh Circuit Remand, supra, at 474 and Id. at

20 position that the DFAX method was inappropriate for those facilities. The Seventh Circuit rejected that portion of Opinions 494 and 494-A that socialized costs of the new high voltage transmission facilities. The Court found deficient the arguments made within the Opinions or offered on brief by the FERC or supporting interveners, which largely relied on a wide variety of broad and general statements of benefits that were purportedly enjoyed system-wide across PJM. 26 Given indisputable facts that the costs at issue were to construct transmission facilities to rectify reliability problems of utilities located on or very near the east coast, there simply was nothing in the record evidence that met the standard enunciated by the Seventh Circuit that there must be an articulable and plausible reason to believe that the benefits to the Midwestern utilities from new 500 kv lines in the East... are at least roughly commensurate with those utilities share of total electricity sales in PJM s region. 27 The underlined phrase is a critical element of the Court s ruling because the Order on Remand purports to address that element, but does so through a reinterpretation that results in a meaning almost the exact opposite to what the Seventh Circuit ruled. Virtually every benefit that the Order on Remand identifies is unrelated to the new transmission lines whose costs are at issue here. To an excessive degree, the Order on Remand applies the wrong standard by looking at the wrong benefits i.e., it looks to the benefits arising from membership in a large Regional Transmission Organization ( RTO ) without a true examination of who benefits and who does not from the new transmission lines. In this regard, the Order on Remand is bereft of any recognition (let alone analysis) of the costs associated with Midwestern utilities membership in PJM. Midwestern utilities already pay their fair share for the general benefits of belonging to PJM--they pay their share of PJM s administrative costs; they are required to bid in their 26 Id. at Seventh Circuit Remand, supra, at

21 generation every day under PJM rules and PJM controls the dispatch of that generation; except in rare circumstances, the power that serves their load is priced based on PJM s locational marginal pricing; and they have turned over their existing transmission facilities for PJM s operation on a non-discriminatory, open-access basis. When they joined PJM, the Midwestern utilities traded a large amount of their autonomy in return for these benefits. Additionally, the Midwestern utilities lost the significant transmission revenues that they had been earning on power flowing out of or through their zones on its way to the then-existing PJM utilities to the east. These eastern utilities are still benefiting from the disappearance of these transmission charges for power flowing from the Midwest to the east. 28 On rehearing, the Commission should take a much more critical look at how socialization fails even to consider cost causation principles and fails any reasonable beneficiary pays analysis unless one assumes, contrary to fact, that there are no benefits at all to resolving a known reliability problem that is located in a specific part of PJM. Appendix A hereto collects statements made by PJM in its annual RTEP Reports on the need for the six most costly of the 18 projects at issue here. These six projects comprise about 97% of the $6.6 billion at issue in this proceeding. For each project, PJM identified specific reliability problems, all of which were in the eastern portion of PJM. When PJM identified additional benefits in such forms as delaying the dates when other reliability problems would arise or in reducing congestion costs of energy, those were also all problems delayed and benefits received within the eastern portion of PJM. Appendix B hereto is comprised of selected pages from the Reply Affidavit of Scott M. Gass ( Gass Reply Affidavit ), put into evidence in Dayton Power s Reply Comments of June 28 There was a transitional charge mechanism for approximately 18 months that replaced these lost transmission charges, but that charge no longer exists and the benefits to the eastern utilities continue. 13

22 28, These pages, appended here for ease of reference, are maps that show the location of the five major lines that comprise 93% of the costs at issue and tables showing, utility-by-utility, how costs would be allocated under socialization vs. under several different DFAX analyses originally developed by PJM or another analyst who had submitted those analyses through comments filed May 28, From a cost-causation perspective and as verified by the PJM RTEP Reports, these projects were not designed to make the transmission system throughout PJM more robust, or to reduce the impact of potential outages or power disturbances throughout PJM, or to diminish the odds of a cascading blackout throughout PJM, or any of the other system-wide benefits that are discussed within the Order on Remand to justify socialization. The cause of the costs can be specifically traced to solving reliability problems that exist only within transmission systems owned by certain utilities operating in one geographic region within PJM and nowhere else. The primary benefit of the new transmission facilities is the resolution of that region s reliability problems and the primary beneficiaries are the utilities operating in that region. But socialization ignores the direct and primary benefits and instead allocates costs across the entire footprint of PJM as if the utilities in Illinois and Ohio get exactly the same benefits proportional to customer load as the utilities in New Jersey, Delaware, Maryland, Northern Virginia, and Eastern Pennsylvania. In contrast, the DFAX method meets cost causation and beneficiary-pays principles because it looks specifically at the reliability problem that created the need for a new transmission facility and then identifies each entity s relative contribution to the problem that is resolved by the new transmission facility. The Commission recognized the DFAX method as the way PJM had previously determined beneficiaries and authorized the continued use of DFAX to 14

23 match beneficiaries with costs for the under-500 kv facilities, conditioned on PJM s providing more detail within the tariff on the computational methods, and then by approving a settlement as just and reasonable that included the requisite specificity for DFAX computations. 29 The record evidence in this case on remand with respect to the higher voltage facilities shows that the end-result of the DFAX method comports closely with what would be reasonably expected under any approach that tries to match quantifiable benefits with quantifiable costs. For example, in its 15-year regional transmission expansion plan completed in 2007, PJM analyses identified numerous overloads on critical 230 kv circuits across Eastern Pennsylvania and Northern New Jersey 30 and the proposed fix to the problem was the $1.161 billion Susquehanna-Roseland new 500 kv transmission line to be built from eastern Pennsylvania into New Jersey. Significantly, application of the DFAX methodology would result in virtually all the costs of the line being allocated to New Jersey utilities and eastern Pennsylvania utilities operating directly across the river from New Jersey. Eight variations of a DFAX analysis were presented in this proceeding for this project using different time periods or other different assumptions, including multiple scenarios submitted by a witness opposed to the DFAX method. Under each analysis, 92% to 99% of the load on the facility that was overloaded and created the reliability problem came from the same eastern utilities that then would be assigned between 29 See Opinion No. 494, 119 FERC 61,063 at P and n. 98 (discussing the pre-existing DFAX methodology used by PJM in determining beneficiaries, but requiring that additional details on the computational methodology be incorporated into the tariff for facilities operating below 500 kv and rejecting DFAX for facilities operating at 500 kv and above). See also PJM Interconnection, LLC, 122 FERC 61,217 at P 4 (2008), ( In Opinion No. 494, the Commission endorsed the continued use of a beneficiary pays approach for new facilities that operate below 500 kv ) and PJM Interconnection, LLC, 124 FERC 61,112 at P 7 (2008)(Approving settlement on under-500 kv cost allocation under which PJM will use a distribution factor (DFAX) analysis based methodology for determining the beneficiaries and therefore who should pay. ) 30 PJM 2007 RTEP Report at p

24 92% and 99% of the costs of the solution. 31 The socialization methodology would disregard these focused and localized benefits and instead allocate cost responsibility to all PJM members. This produces an unjust and unreasonable rate, one which unduly prefers ratepayers in eastern Pennsylvania and northern New Jersey, and unduly discriminates against Dayton Power s ratepayers. The unjust, unreasonable, unduly discriminatory and preferential end-results of socialization are further heightened if one takes into account that these transmission facilities will create additional benefits to the eastern portion of PJM through reduced energy prices. And unlike reliability, where at least the benefits to the east do not diminish reliability in the west, these lower energy prices in the eastern portion are the result of increased power flows from west to east that have the effect of driving up prices in the western part of PJM. Appendix C hereto is provided for ease of reference and it is comprised of the relevant pages from the Affidavit of Michael M. Schnitzer, Director of The NorthBridge Group and was originally filed with Dayton Power s Initial Comments on May 28, That Affidavit uses undisputed PJM data that shows billions of dollars of reduced energy costs to eastern utilities as a result of two of the major facilities and the corresponding increases in annual energy costs to Midwestern utilities. This type of PJM data, or similar data developed by the eastern utilities, has been consistently relied on by the eastern utilities and acknowledged by this Commission in demonstrating the existence of energy cost savings to meet one of the standards used by the Commission in evaluating whether to authorize incentive rates for the utilities that would construct the facilities. For example, in approving incentives for the $1.86 billion PATH project, the Commission found: 31 Gass Reply Affidavit at pp. 8-9 (reprinted Appendix B). 16

25 We find the Project satisfies the requirements for a rebuttable presumption for eligibility for transmission incentives under section 219. As PATH noted in its filing, the Project has been vetted and approved as part of PJM s 2007 RTEP, which constitutes a fair and open regional planning process. Moreover, there is substantial evidence that the Project ensures reliability by substantially reducing overloads on the current system and reduces the cost of delivered power by reducing congestion on 12 major 500 kv transmission routes in the region. 32 While the DFAX method could be criticized as less than perfect, those imperfections pale in comparison to the grossly imperfect outcomes by socialization. Consider again the $1.161 billion Susquehanna-Roseland new transmission line. Socialization would result in the eastern Pennsylvania and northern New Jersey zones paying only 23% of the costs, while the rest of PJM would assume 77% of the costs. 33 It is wrong to condemn the DFAX method for its lack of precision (e.g., differing DFAX scenarios showing that anywhere from 1% to 8% of that line s benefits accrue to remote transmission zones) and, instead, endorse a socialization method that would impose 77% of the costs to remote transmission zones. To underscore the unfairness of socialization, the ratepayers of Com Ed, AEP and Dominion together would pay twice as much as the ratepayers in eastern Pennsylvania and New Jersey combined. 34 No alleged imperfection in the DFAX methodology can support such an unfair allocation of cost responsibility. Similarly, where DFAX is criticized for focusing on the primary reliability problem and perhaps not adequately capturing the beneficiaries of secondary reliability problems that the new line also fixes, 35 the socialization method ignores all reliability issues and allocates costs to entities without any reliability problems. Where DFAX is criticized as a snapshot that might 32 Potomac-Appalachian Transmission Highline, LLC, 122 FERC 61,188 at P 31(2008). See also Trans- Allegheny Interstate Line Co., 119 FERC 61,219 at P 85 (2007); PJM Interconnection, LLC and Public Service Electric and Gas Co., 135 FERC 61,229 at P 62 (2011); Public Service Electric and Gas Co., 129 FERC 61,300 at P 20 (2009). 33 PJM April 13, 2010 Response at p. 17. Gass Reply Affidavit at pp. 8-9 (reprinted Appendix B). 34 Gass Reply Affidavit at pp. 8-9 (reprinted Appendix B). 35 Order on Remand P

26 not adequately allocate costs if load flow direction changes in the future, 36 socialization ignores all load flow considerations, current or future, and allocates costs to entities that are obviously not using the new line under any reasonably conceivable load flow conditions due to geographic location. Dayton Power respectfully submits that in the event that conditions change significantly such that the DFAX method as applied to a particular new transmission facility no longer fairly represents then-current use of the new transmission line, Federal Power Act 206 is designed to permit modifications of a once-appropriate, but later unjust allocation. The costs at issue here are $6.6 billion in new transmission lines approved, thus far, in PJM s RTEP process to resolve reliability problems in the eastern portion of PJM. To justify socialization of those costs, it would be necessary to ignore cost causation principles, the direct benefits of solving reliability problems, and the benefits from lower energy costs. The benefits from these new transmission lines to Midwestern utilities are not roughly commensurate with the costs being allocated to them and the Order on Remand fails to meet the standard enunciated by the Seventh Circuit. Dayton Power would also submit that the benefits from these new transmission lines to eastern utilities are not roughly commensurate with the costs being allocated to them either the eastern utilities are paying far less than the direct reliability benefits and the benefits of lower energy costs that they are receiving. B. The Order on Remand Has End-Results that are Unjust, Unreasonable, Unduly Discriminatory and Preferential. The Federal Power Act prohibits Commission action in this complaint proceeding that has results that are unjust, unreasonable, unduly discriminatory or preferential. 37 The Order on Remand finds that socializing the costs of new high voltage transmission facilities meets this 36 Order on Remand P Federal Power Act 206(a) and (b), 26 U.S.C. 824e(a) and (b). 18

27 standard. 38 This finding is made in the face of undisputed facts that this methodology has the end-result of charging utilities located in Illinois and Ohio billions of dollars for transmission facilities to be built to fix reliability problems arising exclusively in the eastern portion of PJM. The PJM Summary Table at p. 17 from its April 13, 2010 Response is reproduced here, with the three Midwestern utilities in bold. Transmission Zone Allocation DFAX Method ($M) Allocation Socialization Method ($M) AEC $ $ AEP $ $ 1, APS $ $ BGE $ $ ComEd $ $ 1, Dayton $ 0.92 $ DL $ 0.59 $ DPL $ $ Dominion $ $ JCPL $ $ ME $ $ Neptune $ $ PECO $ $ PENELEC $ $ PEPCO $ $ PPL $ $ PSEG $ $ RECO $ $ ECP $ $ Since 2010, FirstEnergy s Ohio subsidiaries and Duke Energy Ohio and Duke Energy Kentucky have joined PJM and their allocations would show a similar pattern little or no costs allocated under the DFAX method and large amounts allocated under socialization. Dayton Power respectfully submits that the Order on Remand has unjust and unreasonable results in creating a preferential and unduly discriminatory subsidy that Midwestern utilities will be paying every year for decades to eastern utilities within PJM in order to fix problems with the transmission systems of those eastern utilities. Dayton Power 38 Order on Remand P 1. 19

28 recognizes that other participants in this proceeding and the Order on Remand do not view the end-results as a subsidy. But the record evidence discussed in the sections below lead inexorably to that conclusion. Huge payments are being made by Midwestern utilities for facilities that provide specific and identifiable benefits solely to eastern utilities. Even if there had been any validly applied probative evidence to establish that there are some benefits that truly are spread PJM-wide, that does not justify ignoring the specific benefits that accrue solely to the eastern utilities. Said another way and put into context by using as an example two large utilities on opposite ends of PJM and one of the alleged socialized benefits (decreased line losses) offered in the Order on Remand: if these 500 kv lines do decrease line losses to the benefit of all equally, then PSEG in New Jersey and ComEd in Illinois equally share in that benefit. But then, on top of that benefit, PSEG benefits from eliminating the reliability problems on its system and PSEG further benefits from lower LMPs in its zone, while ComEd enjoys no comparable reliability benefit and is harmed by higher LMPs in its zone. 39 It is unjust, unreasonable, unduly discriminatory and preferential to allocate costs solely on the benefits identified as existing system-wide, while ignoring the benefits that are specific to a single entity or sub-region within PJM. Based on six years of PJM annual RTEP filings, the only conclusion that can be drawn about the state of transmission facilities in the Midwest is that there has been and there remains sufficient robustness in the transmission facilities in Illinois, Indiana, Michigan, and Ohio such that no transmission upgrades that operate at 500 kv or above are needed to resolve an identified 39 For all the reasons discussed in sections below, Dayton Power respectfully submits that the majority, if not all, of the system-wide benefits cited in the Order on Remand are based on false logic (assuming the conclusion), are unrelated to the new transmission lines (e.g., savings from reduced generation capacity reserve requirements), or are actually not system-wide but disproportionally enjoyed by the eastern utilities (e.g., savings from reduced redispatching to manage congestion that largely plagues the eastern utilities.) 20

29 reliability problem. The transmission facilities within the Midwestern zones are sufficient to meet the current and projected future needs of all of their customers served within those zones. And this result has been consistent through at least that six-year period. There is no reasonable basis for any speculation that this will change any time in the foreseeable future, particularly if load growth remains low within the Midwest. It is equally clear from every RTEP Report that there are real reliability problems in the eastern portions of PJM that are best resolved through construction of one or more 500 kv facilities. 40 The only conclusion that can be drawn is that the current mix of generation and transmission facilities within those eastern zones is inadequate to meet the projected peak requirements of the customers served within those zones and that has been true for every projection made since The Order on Remand P 87 errs in stating that two of these projects that traverse parts of West Virginia are to resolve western reliability violations. The projects are designed to solve reliability violations in the east by enhancing west-to-east power flows across what is now a constrained interface, thereby deliver additional (and less costly power) to Northern Virginia and the D.C.-Baltimore corridor. 41 They are built in the west to solve problems in the east. In short, the $6.6 billion in costs are caused by the need to resolve the reliability problems in the eastern portions of PJM with the additional benefit of reducing energy costs in the eastern portions of PJM. An appropriate allocation method must assign the costs largely or solely to the eastern utilities who have the reliability problems that cause the costs to be incurred. As the Seventh Circuit opined, quoting with approval from KN Energy, Inc. v. FERC, 968 F.2d 1295, 40 See Appendix A hereto, PJM RTEP Reports, Collected Statements of Need. 41 Id., for the TrAIL and PATH projects. 21

30 1300 (D.C. Cir. 1992), [A]ll approved rates [must] reflect to some degree the costs actually caused by the customer who must pay them. 42 Under socialization, however, there is no consideration of who causes the costs or who receives the specific benefits from resolving the reliability problems. Instead, the utilities and their customers in the Midwestern zones will be charged exactly the same amount per MW of load as the utilities and customers in the eastern portion of PJM. Even if there were some small portion of these costs that could be demonstrated as creating benefits enjoyed system-wide, there are clearly and indisputably benefits provided solely to the eastern portions of PJM in the form of resolving their reliability violations. The eastern PJM utilities are not being charged for these specific benefits and, thus, are being granted an unjust, unreasonable, unduly discriminatory and preferential subsidy from the Midwestern utilities. C. The Order on Remand Does Not Comply with the Mandate of the Seventh Circuit. Dayton Power respectfully submits that the Order on Remand fundamentally misreads and misapplies the legal standards enunciated by the Seventh Circuit and the evidentiary requirement that the Commission has been directed to meet in order to justify socialization of costs on a load ratio share basis. 1. The Costs and Benefits of the New Transmission Facilities Are to Be Weighed, Not Some Set of Generalized Benefits of PJM Membership. The Seventh Circuit could not have been more clear that the benefits and costs to be reviewed were the benefits and costs of the new transmission facilities operating above 500 kv not some set of generalized alleged benefits that arise because an entity is a PJM member. The inquiry needs to focus on the benefits of the new transmission lines and the allocation of costs of the new transmission lines to ensure that the benefits received are roughly commensurate 42 Seventh Circuit Remand, supra, at

31 with the costs imposed. The Seventh Circuit initially made this point by quoting from Transcontinental Gas Pipeline Corp, 112 FERC 61,170 at 61, (2005), holding that a claim of generalized system benefits is not enough to justify requiring the existing shippers to subsidize the uncontested increase in electric costs caused by the Cherokee project. The Seventh Circuit further held: FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members. Seventh Circuit Remand, supra, at 476. The Seventh Circuit further articulated the standard: If it cannot quantify the benefits to the Midwestern utilities from new 500 kv lines in the East... but it has an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities share of total electricity sales in PJM s region, then fine. Id. at 477. The Seventh Circuit recognized that there may be some generalized benefits, but clarified that was not the end of the analysis: No doubt there will be some benefit to the Midwestern utilities just because the network is a network.... But enough of a benefit to justify the costs that FERC wants shifted to those utilities? Id. at The Seventh Circuit noted that even if a presumption is made regarding system-wide benefits of reducing outages, the Commission cannot use the presumption to avoid the duty of comparing costs assessed against a party of the burdens imposed or benefits drawn by that party. Id. at 477, quoting Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1368 (D.C. Cir. 2004) ( Midwest ISO ). In each of these pronouncements, the Seventh Circuit was making clear that the benefits need to be benefits from the facilities generating the costs; not some generalized benefit of membership within PJM or a networked system. 23

32 But despite the clarity provided by the Seventh Circuit, the Order on Remand repeatedly offers generalized PJM membership benefits as a justification for allocating a billion dollars here (Ohio) and a billion dollars there (Illinois), without regard to whether any of those benefits have any nexus to the new transmission lines. The Order on Remand s multiple errors in this regard are listed below: o o o Every reference to the alleged $2.2 billion in savings set forth in two pages of the 2011 ISO/RTO Metrics Report is a reference to generalized system-wide benefits of PJM membership that are unconnected with the new transmission facilities. Order on Remand at PP 63, 78, 97, 100, 104, 109, and 120. In addition, section IV.D.2.(e) below explains why the highly summarized data in that Metrics Report is not appropriate for official notice, is disputable, involves alleged benefits unrelated to the new transmission lines and, in some instances, are not attributable in any way to Midwestern utilities. Every reference to the cascading outages or the Joint U.S. Canada Task Force Report on the 2003 Blackout is based on a generalized benefit claimed to exist from the ability of 500 kv and above facilities to absorb voltage swings. Order on Remand at PP 26, 46, 70, 92, 100, 120. Every reference to a reduced average level of outages and associated costs of outages between 500 kv facilities and 345 kv facilities is based on a generalized benefit that is irrelevant in the context of Midwestern utilities that have no 500 kv facilities operating in their zones currently and, which, after construction of the $6.6 billion in new facilities, will still have zero facilities operating at 500 kv within their zones. Order on Remand at PP 79, 98, 100 and n. 187, 109, 110, 117, 120. On rehearing, the Commission should eliminate any reliance on these claims of generalized benefits that are not shown to be related to the new 500 kv facilities whose costs are at issue here. 2. The Costs and Benefits Must Be Reviewed on a Sub-Regional or Utility-by-Utility Basis. The 7 th Circuit could not have been more clear that if a group smaller than PJM as a whole were being allocated costs that were grossly disparate with its benefits, the cost allocation 24

33 scheme could not stand. The Seventh Circuit first described how it would be unreasonable if even one company were allocated costs grossly disproportionate to benefits: At argument FERC s counsel reluctantly conceded that if Commonwealth Edison would derive only $1 million in expected benefits from Project Mountaineer, for which it is being asked to chip in (by its estimate) $480 million, the disparity between benefit and cost would be unreasonable. The concession was prudent. 43 The Seventh Circuit continued by finding: FERC is not authorized to approve a pricing scheme that requires a group of utilities to pay for facilities from which its members derive no benefits, or benefits that are trivial in relation to the costs sought to be shifted to its members. 44 The roughly commensurate test that the Seventh Circuit enunciated was explicitly stated in the context of requiring that if FERC cannot quantify the benefits to the Midwestern utilities from the new 500 kv lines in the East, FERC must show that there is an articulable and plausible reason to believe that the benefits are at least roughly commensurate with those utilities share of total electricity sales in PJM s region Where the Seventh Circuit finds an allocation that cannot stand if one or a group of Midwestern utilities is allocated a grossly disproportionate amount of costs relative to benefits, the Order on Remand explicitly rejects any reading of the Seventh Circuit opinion to require that a review of costs and benefits be made utility-by-utility or for the Midwestern utilities as a subregional group. Order on Remand at PP Indeed, the Order on Remand turns the Seventh Circuit s directive upside-down, wrongly finding that if there are benefits for only one utility located outside the zone of direct reliability benefits, that supports socialization of costs to all: we believe that we need only show that some customer zone in the PJM grid other than those zones currently flowing power over the existing facilities in 43 Seventh Circuit Remand, supra, at Id. (emphasis supplied). 45 Id. at

34 need of upgrades will make use of and benefit from the new high-voltage facilities. 46 The Order on Remand reaches this upside-down conclusion through two theories, neither of which is a reasonable reading of the Seventh Circuit s mandate. First, the Order on Remand cites to a number of cases where a system-wide allocation of costs or return of revenues was approved. 47 But each of those cases was decided on facts specific to the types of costs at issue and certainly did not establish a general principle or precedent that all costs of a utility or an RTO are to be allocated system-wide. There are certain types of costs for which a system-wide allocation may be perfectly appropriate. In this regard, for example, Dayton Power has no objection to the system-wide allocation of PJM s administrative costs. It is only objecting to the allocation to it of $150 million or more in new transmission costs for facilities built hundreds of miles to its east that will have no effect on its reliability or power flows. The second justification for the upside-down standard uses the cases cited by the Seventh Circuit, but does so by stretching the application of those cases to this case into unrecognizable dimensions. This stretch of authority is particularly apparent with respect to how the Order on Remand describes the Seventh Circuit s reliance on Midwest ISO. 48 The Seventh Circuit uses this case in three specific ways: first, that the D.C. Circuit concluded that we evaluate compliance [to cost causation principles] by comparing costs assessed against a party to the burdens imposed or benefits drawn by the party. 49 Second, the Seventh Circuit cites Midwest ISO for the proposition that there is no requirement that the benefits have to be calculated to the 46 Order on Remand P Order on Remand at P 51, n Order on Remand PP Seventh Circuit Remand, supra at

35 last penny or even hundred million dollars. 50 And third, the Seventh Circuit suggested that this case may be different from Midwest ISO in that the cost benefit disparities alleged therein were found to be a misrepresentation of the record, which is not the case here. 51 The Order on Remand however, stretches these citations and the Seventh Circuit s citation to Western Massachusetts Electric Co. v. FERC, 52 into an unwarranted conclusion that because the courts there did not order a utility-by-utility evaluation, the Seventh Circuit must also be agreeing that such an evaluation is unnecessary here. 53 The Court in Midwest ISO was reviewing the allocation of a totally different type of costs. It thus seems that the costs allocated by the Cost Adder are primarily MISO s startup expenses particularly those pertaining to the MISO Security Center and certain expenses pertaining to the creation and administration of MISO s open-access tariff. 54 Those kinds of administrative costs, when incurred by PJM, are also allocated system-wide and no one in this proceeding is disputing that these are appropriately allocated system-wide those kinds of costs cover PJM s operational expenses for administering a regional organization and none of these costs have been specifically incurred to resolve problems that arise within specific utility zones or subregions. While the D.C. Circuit in Midwest ISO did not order a utility-by-utility cost benefit analysis based on the types of costs at issue and the record evidence in the specific case before it, it did not establish a rule that such an inquiry was inappropriate in all cases. The D.C. Circuit decision certainly provides no support for the upside-down and unprecedented principle that the Order on Remand creates that the existence of one entity benefiting from a particular cost 50 Id. at Id. at F.3d 922 (D.C. Cir. 1999). 53 Order on Remand P Midwest ISO, supra, at

36 incurred to resolve another utility s problems is enough to justify a system-wide allocation of costs to all. Similarly flawed is the Order on Remand s discussion of Western Massachusetts Electric Co. v. FERC, supra. That case involved cost allocation within a very small geographic area, the area served by a single utility in western Massachusetts, and included evidence from models that showed how customers other than an interconnecting generator benefited from the upgrade. In this proceeding on remand, the issue involves the spread of costs across nearly 1,000 miles and the evidence from the DFAX models shows a zero or negligible contribution from Midwestern utilities load to the reliability violation that causes the upgrade to be necessary. The Seventh Circuit cites to that case as support for specific propositions but did not endorse every aspect of that case and certainly did not find that the facts in that case resembled the facts in this one. The Seventh Circuit found that Western Massachusetts v. FERC can be cited as permitting a presumption that new transmission lines benefit the entire network by reducing the likelihood or severity of outages, but then explained that such a presumption cannot be used to avoid the duty of comparing the costs assessed against a party to the burdens imposed or benefits drawn by that party. 55 A presumption is not the same as record evidence, nor is it conclusive and the end of all inquiry. The presumption of roughly commensurate system-wide benefits from the specific transmission lines at issue in this case has been challenged and the FERC now has the affirmative duty assigned to it by the Seventh Circuit to go beyond the presumption and examine the record to ensure a rough balance between costs imposed and benefits received. The record evidence establishes that the beneficiaries of transmission lines built to resolve reliability problems in the eastern portion of PJM are overwhelmingly the entities located where those lines are being constructed. In other words, the 55 Seventh Circuit Remand, supra, at 477 (discussing Western Massachusetts v. FERC and quoting Midwest ISO). 28

37 proper application of the Seventh Circuit mandate in its use of Western Massachusetts as well as Midwest ISO, is to permit a presumption that, once challenged, requires a further inquiry into the costs and benefits utility by utility the exact opposite of the conclusion that the Order on Remand draws from its reading of the Seventh Circuit s opinion. 3) The Cost-Benefit Analysis in the Order on Remand for ComEd Fails the Seventh Circuit Mandate Because It is Not Based on Substantial and Credible Evidence. Although the Order on Remand concludes that it is not required to examine costs and benefits for any one utility or group of utilities, it actually does attempt that task with respect to ComEd. Order on Remand at PP As discussed below in detail in section IV.E.2, virtually every paragraph of that analysis is unsupported by substantial evidence. Most of what passes for analysis is based on a logical fallacy of assuming the conclusion (i.e., an unwarranted assumption of socialized benefits that then is used as proof that benefits exceed socialized costs) and virtually all of the support comes from extra-record, highly disputable data that fails to meet the legal standard for the official notice that has been taken by the Commission. D. The Order on Remand Fails to Provide Due Process under the 5 th and 14 th Amendments to the Constitution and Violates the Administrative Procedures Act. The Order on Remand extensively, impermissibly and incorrectly uses official notice to bring into this docket more than two dozen documents that were not admitted into evidence in this proceeding and were therefore generally not subject to scrutiny or challenge in the reply comments and affidavits that were presented during the evidentiary hearing. 29

38 1. Legal Standards of Due Process and the Administrative Procedures Act. Due process under the 5 th and 14 th Amendments to the U.S. Constitution requires that affected parties have the opportunity to challenge evidence. A party is entitled, of course, to know the issues on which decision will turn and to be apprised of the factual material on which the agency relies for decision so that he may rebut it. Indeed, the Due Process Clause forbids an agency to use evidence in a way that forecloses an opportunity to offer a contrary presentation. Bowman Transp., Inc. v. Arkansas-Best Freight System, Inc., et al., 419 U.S. 281, n.4 (1974)(citations omitted). Accordingly, the Administrative Procedures Act, 5 U.S.C. 556(e), provides: When an agency decision rests on official notice of a material fact not appearing in the evidence in the record, a party is entitled, on timely request, to an opportunity to show the contrary. In the specific context of officially noticed information, the D.C. Circuit Court of Appeals has further elaborated on this requirement in light of Supreme Court precedent, finding that the APA requires that FERC must allow a participant to challenge evidence used against it: We read Ohio Bell as establishing two prerequisites for use of official evidence. First, the information noticed must be appropriate for official notice. Second, the agency must follow proper procedures in using the information, disclosing it to the parties and affording them a suitable opportunity to contradict it or "parry its effect." Union Electric Co. v. FERC, 890 F.2d 1193, 1202 (D.C. Cir. 1989), citing Ohio Bell Telephone Co. v. Public Utilities Commission of Ohio, 301 U.S. 292 (1937). The specific steps that must be taken to provide Due Process are not uniform and can vary depending on the circumstances. "[D]ue process is flexible and calls for such procedural protections as the particular situation demands," Morrissey v. Brewer, 408 U.S. 471, 481 (1972). The fundamental requirement of due process is the opportunity to be heard "at a meaningful time and in a meaningful manner." Armstrong v. Manzo, 380 U.S. 545, 552 (1965). 'Due process,' unlike some legal rules, is not a technical conception with a fixed content unrelated to time, place 30

39 and circumstances." Cafeteria Workers v. McElroy, 367 U.S. 886, 895 (1961)." There is no requirement for an evidentiary hearing prior to the time an initial decision is made so long as the requisite hearing is held prior to when the final decision becomes effective. Opp Cotton Mills, Inc. v. Adm'r of Wage & Hour Div., 312 U.S. 126, 152, (1941); see generally, Mathews v. Eldridge, 424 U.S. 319 (1976). 2. The Legal Standard Is Not Met By a Post-Decisional Procedure on Rehearing. Dayton Power respectfully submits that, in the circumstances presented here, the excessively heavy reliance within the Order on Remand on extra-record, officially-noticed documents and on a 2011 ISO/RTO Metrics Report that may not even have the official notice status, creates a violation under the 5 th and 14 th Amendments and the APA. The Commission did not previously reveal that it was going to base portions of its decision on those documents and, with rare exceptions, the parties did not address them during the hearing. Several of these documents did not even exist until after the evidentiary hearings closed, including one filed more than a year after the evidentiary hearings that is repeatedly cited and relied on in the Order on Remand the 2011 ISO/RTO Metrics Report filed August 31, 2011, by six ISO/RTOs including PJM. Through the mechanism of official notice, the Order on Remand relied on thousands of pages dumped into the record, including post-record documents, with no notice and no opportunity for parties to respond to the documents prior to the Commission s decision. This violation of due process and the APA is not adequately remedied by Order on Remand P 33 which provides that: The Commission is taking official notice of certain reports and other information pursuant to Rule 508(d) of the Commission s rules of Practice. This information is included in elibrary in this docket. Parties will have the right to address the use of the officially noticed material in their timely filed petitions for rehearing. 31

40 However, the opportunity to try to change an issued opinion of the Commission is by no means comparable to the opportunity to rebut and parry such evidence before the decision is made. As noted in the Legal Standards section above, there is no absolute and unvarying requirement for an evidentiary hearing to be held prior to the initial decision. But in this circumstance, where thousands of pages of documents not previously brought into evidence at the time of the hearing or briefing form the keystone for supporting an allocation of billions of dollars, due process requires more than is being provided. The parties are statutorily limited to 30 days to file rehearing. In that limited time, it is exceptionally difficult to identify and hire any outside experts that may be necessary to rebut the mass of contentions and statements pulled from those documents and treated uncritically by the Commission as conclusive facts upon which the Order on Remand relies to allocate $6.6 billion. The Commission had an extensive record before it developed by experienced litigants on both sides of the issue. The Commission appears to recognize that the litigants in support of socialization were unable to put on any credible evidence to show a quantifiable benefit to Midwestern utilities. Order on Remand P 56. But instead of relying on the record that was fully and fairly developed, the Order on Remand appears to be the result of scouring FERC files to find any document, anywhere, that could be used to justify a socialization result. Even if these documents met the legal standards for official notice, the proper procedural mechanism would have been to reopen the record pursuant to Rule 716(c) and schedule additional hearing procedures prior to issuing its order. The Order on Remand failed to take that action, and it is now too late to review rebuttal evidence in an atmosphere not already prejudiced by the findings in the Order on Remand. 32

41 E. Documents Relied on in the Order on Remand Do Not Meet the Standards for Official Notice. 1. Legal Standards. Official notice is an administrative offshoot of judicial notice and is a somewhat broader, but not infinitely flexible, concept. While judicial notice is generally limited to matters of common knowledge, Ohio Bell Tel. Co. v. Public Utilities Comm. of Ohio, 301 U.S. 292, 302 (1937), official notice is broader, allowing the agency to notice technical or scientific facts that are within the agency's area of expertise. McLeod v. INS, 802 F.2d 89, 93, n.4 (3 rd Cir. 1986). But, the standard for official notice still requires that the information is not typically subject to dispute. Mississippi Industries v. FERC, 808 F.2d 1525, 1568 (D.C. Cir. 1987)(validating the use of official notice of U.S. Treasury Bonds for ratemaking purposes). See also Union Electric Co. v. FERC, 890 F.2d 1193, (applying the same standard and noting that highly technical facts within an agency s expertise may become as obvious as the facts that are susceptible to judicial notice are to judges and that official notice is not troubling when such information is not typically subject to dispute. ) Judge Brenner succinctly summarized the standard typically applied in evidentiary proceedings before the FERC: Under Commission Rule 508(d), a presiding officer may take official notice of any matter that may be judicially noticed by the courts of the United States, or of any matter about which the Commission, by reason of its functions, is expert. 18 C.F.R (d) (2003). Rule 201(b) of the Federal Rules of Evidence provides for the judicial notice of facts in U.S. courts. It reads, in pertinent part, A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned. Fed. R. Evid. 201(b). Therefore, to be judicially noticed, a fact must be beyond reasonable controversy, where a high degree of indisputability is the essential prerequisite. Northeast Utilities Service Company, 62 FERC 63,013 at 65,057 (1993) (quoting Advisory Committee Note to Fed. R. Evid. 201). 33

42 Louisiana Public Service Commission v. Entergy Services, Inc., et al., Docket No. EL , 206 FERC 63,012 (2004). 2. The Documents for which Official Notice Has Been Taken Contain Information that Is Highly Disputable Either Inherently or as to Its Implication and Use. The misuse and misconstruction of information in many of the documents for which official notice was taken by the Order on Remand highlights the reasons why case precedent requires that the information have a high degree of indisputability and that, even then, parties have an opportunity to contradict it and parry its effect prior to the time the decision-maker rules. 56 Dayton Power s objections to the inclusion in the record by official notice of specific documents are addressed below. a) Official Notice Should Be Withdrawn from the Group of Documents Misused to Find Benefits from Reduced Outages and Power Quality Disturbances. In Paragraph 100 and related footnote 187, the Order on Remand relies on a group of documents for which official notice has been declared and which purportedly allow a computation to be made that PJM across its entire footprint, and Commonwealth Edison individually, receive $53 million and $7.8 million in benefits, respectively, from decreased service interruptions and power quality disturbances from the use of 500 kv facilities rather than 345 kv lines. None of those documents, individually, contain those savings numbers, but rather appear to have been created through undisclosed means by some unnamed person using a spreadsheet that is included in the April 3, 2012 data dump and apparently is officially noticed. One assumption underlying these computations that is disclosed is patently flawed: Assuming that all load in PJM benefits equally from decreased service interruptions and power 56 Union Electric Co. v. FERC, 890 F.2d 1193, 1202 (D.C. Cir. 1989). 34

43 quality disturbances, ComEd s share of this [computed $53 million PJM-wide] benefit would be $7,791,000 annually. 57 This is an incredible logical fallacy: one cannot prove a proposition by assuming the conclusion. But the Order on Remand does just that. It assumes the existence of socialized benefits from the new facilities and then uses that assumption to prove the conclusion that benefits exist that are roughly commensurate with the socialized costs of the new facilities. A cursory review of the spreadsheet that has been developed by persons unknown to compute $53 million in PJM-wide benefits from 500 kv lines relative to 345 kv lines reveals that the computed savings are based on the circuit miles of the new 500 kv transmission facilities. But every one of those 18 new facilities is located in New Jersey, Delaware, Maryland, Pennsylvania, or eastern Virginia, and, in two instances, from the middle of West Virginia to the east. 58 What is the basis for an assumption that ComEd will enjoy 14.7% (its load relative to total PJM load) of the power quality improvements that these new lines hundreds of miles away conceivably create? The spreadsheet and the Order on Remand are silent on that point and, Dayton Power respectfully submits that no such basis for that assumption exists. Within this spreadsheet relied on by the Order on Remand, $52.7 million of the $53.2 million is attributed to power quality disturbances, and most of that appears to be counting costs from momentary outages and other outages lasting less than a hour. It would be a near impossibility for a transmission line built hundreds of miles away to provide any meaningful role in reducing the number of momentaries or outages of less than an hour experienced on the Dayton Power system. Additionally, the $53.2 million in PJM-wide savings is highly disputable. The 57 Order on Remand P One of these two lines, the 502 Junction-Loudon line, includes a few miles in western Pennsylvania but drops immediately into central West Virginia on its way to its terminus in Loudon County Virginia. 35

44 computations are not based on PJM company data or experience, but appear to be pulled from a Lawrence Berkeley report that relied primarily on data pulled from other reports and utilities outside of PJM (a meta-data research methodology). And the purpose of the Berkeley report appears to be to compute the average costs of interruptions and power quality disturbances as experienced by customers, which is not the same thing as the costs or savings that would be incurred by an individual utility itself or an RTO like PJM. PJM does not guarantee uninterrupted power and is not liable for the costs that customers may incur as the result of outages absent gross negligence or intentional misconduct. 59 Dayton Power has a similar limitation on liability in its retail tariffs approved by the Public Utilities Commission of Ohio and that appears to be the norm among electric utilities in the PJM region. PJM does not save $53 million in costs even under all the assumptions made within the Berkeley report. Even the relatively reliable data within Order on Remand P 100 on the relative number of outages associated with 500 kv vs 345 kv facilities is misused in this context. ComEd owns no 500 kv facilities. Dayton Power owns no 500 kv facilities. AEP s Ohio subsidiaries own no 500 kv transmission lines. Yet these companies do not experience abnormally high outage rates on their transmission systems. None of the 500 kv v. 345 kv average outage numbers from national surveys or the Mid-Continent Power Pool can be properly applied to utilities that own no 500 kv facilities and who have designed robust transmission systems that meet all reliability standards without 500 kv facilities. It is flat out wrong for the Order on Remand to assume that the computed benefits of 500 kv facilities relative to 345 kv facilities are evenly spread across PJM and apply that assumption to entities that currently own no 500 kv facilities and will own none of the new 500 kv facilities that are at issue here. Because of the misuse of the data therein and the circular logic of assuming the 59 PJM OATT

45 conclusion, the Commission on rehearing should withdraw its official notice of and not rely on: sed Service Interrputions and Power Quality Disturbances Spreadsheet, 2009 Form EIA 861, the 2009 Lawrence Berkeley National Lab Report, 2009 NERC Transmission Availability Data System Report, 2009 NERC Disturbance Reports, the FERC Form 1s referenced in footnote 187; and Article Bulk Transmission Equipment Outage Performance Reporting at Mid-Continent Area Power Pool. b) Official Notice Should Be Withdrawn for CETO/CETL Data Misused to Find that Benefits Exist Because Power Also Flows East to West. The Order on Remand takes official notice of CETO/CETL data to establish the proposition that PJM s CETO/CETL data indicate that while the western region of PJM generally has sufficient generation as a whole, ComEd and other western zones require imports from the rest of PJM to avoid loss of load. Order on Remand P 74 and n The CETO/CETL data do establish the first part of that sentence: that the western region of PJM, including ComEd individually, generally has sufficient generation as a whole. The CETO/CETL data are grossly misused with respect to the second portion of the proposition. The CETO/CETL data for each utility zone show whether there is enough generation and transmission within the utility s zone and sufficient interconnections with nearby utilities to limit the loss of load expectation to one event in 25 years. So, the data could be reasonably used to show whether or not ComEd in Illinois is able to meet a once-in-25-years emergency solely through its own facilities and its existing interconnections with ComEd of Indiana or AEP s Indiana subsidiary. It does not establish that ComEd or Dayton Power will ever rely on any of the new transmission lines being built hundreds of miles to the east. The logic is elusive that ComEd should pay $198 million per year for new eastern transmission facilities as some form of 37

46 insurance against a potential loss of load event that may occur once every 25 years, particularly with no showing that the existence of the new transmission facilities would avoid the emergency. The incorrect conclusions regarding imports from the rest of PJM as drawn in the Order on Remand regarding the CETO/CETL are not bolstered by the data presented by AEP that establishes that there are power flows east-to-west into ComEd during some hours. The data shows only that power flows from one Midwestern utility, AEP, to another Midwestern utility, ComEd, during some hours. The Order on Remand cites that data and misapplies it repeatedly in what appears to be an attempt to create the impression that there might be now or someday in the future flows from the eastern portion of PJM across the new transmission facilities to ComEd. Order on Remand at PP 38 and n. 48, 74, 88, 94, 96, 107. There is not a shred of evidence in the record to support this implication. It is unsupported rank speculation that there will ever be a significant amount of power flows east to west across these new facilities for the benefit of Midwestern utilities. The CETO/CETL data as misused in the Order on Remand does not meet the legal standard of having a high degree of indisputability and official notice of that data should be withdrawn. c) Official Notice Should Be Withdrawn for Emergency Events Postings that Have No Probative Value and, on their Face, Are Contrary to the Conclusions Drawn in the Order on Remand. The first sentence in footnote 146 of Order on Remand starts with an exceptionally biased phrase and concludes with a statement that is simply wrong based on the officially noticed data: While opposing parties assert that the new 500 kv and above facilities are intended to address reliability problems in the east, western PJM has been experiencing more potential reliability problems in recent years. PJM provides a comprehensive list of 38

47 emergency events over the past several years at The FERC in its role as a neutral decision-maker should not be characterizing any party before it as opposing. But it is far more than a mere assertion that the new 500 kv and above facilities are intended to address reliability problems in the east. The entire RTEP process is intended to determine where future reliability problems exist and what new transmission facilities are needed to resolve those reliability problems. Order on Remand at PP For each and every one of the 18 major projects at issue here, PJM has identified the reliability problems and, in every case, the reliability problem or multiple reliability problems to be resolved lie in New Jersey, Delaware, Maryland, eastern Pennsylvania and northeastern Virginia. Even the two transmission lines that start in western Pennsylvania or central West Virginia to points east were not proposed by PJM to resolve any reliability problems within West Virginia or western Pennsylvania. They were designed to resolve reliability problems in northeastern Virginia and other eastern portions of PJM. 60 Last but not least, the data for which official notice has been made show the opposite of the Order on Remand s statement that western PJM has been experiencing more potential reliability problems in recent years. Those data show 60 notices in 2009, 26 in 2010, and only 5 in 2011 a decreasing trend. And none of those notices exceed TLR Level 3 which is a notice that curtailments of non-firm transmission are necessary. 61 In other words, entities that 60 See Appendix A attached hereto, compiled statements from PJM RTEP Reports. The Order on Remand at P 87 errs in stating that two lines are to rectify western reliability violations. 61 From the same PJM web-site that the Order on Remand cites: TLR Level 3a. Level 3a is Re-Allocation Nonfirm transactions. Curtailment of non-firm point-to-point transactions. These transactions have 5 percent or greater impact on the energy flow. The effect is to curtail interchange transactions and allow higher priority transactions that have a greater impact on the energy flow to start or increase. Re-dispatch options are also identified to reduce load on certain equipment. Occurs at top of upcoming hour. TLR Level 3b. Level 3b is Curtailment Non-firm. The flowgate is above its operating security limit. 39

48 contracted for interruptible service may be interrupted. That is not a potential reliability problem that these data are alleged to show as described in the Order on Remand. In contrast, a similar extraction of just 15 months of data from this PJM web-site on notices provided to Mid- Atlantic Region utilities yields more than 100 notices, including dozens of much more serious High System Voltage warnings, some Max Emergency Generation Alerts and, in 2011, a NERC Energy Emergency Alert. See Appendix D. The PJM emergency warnings data as used in the Order on Remand do not meet the legal standard of have a high degree of indisputability for the proposition that reliability issues are increasing in the western portion of PJM and official notice of that data should be withdrawn. d) Official Notice Should Be Withdrawn for Reports that Are Misused to Imply Large Production Cost Benefits to ComEd, AEP and Dayton Power. In listing the purported benefits received by ComEd and other Midwestern utilities, the Order on Remand states: Finally a study performed by Global Energy Decision, LLC estimated that the integration of ComEd, AEP, and Dayton into the PJM power market led to production cost savings of approximately $70 million in 2004 due to the reduction of seams between the new companies and PJM, with its energy market. 62 It is misleading in the extreme to imply that that the $70 million in savings were benefits received by ComEd, AEP and Dayton Power. These are instead benefits created by ComEd, AEP and Dayton Power for PJM as a whole. While ComEd, AEP, and Dayton Power may realize some portion of those benefits, the Report shows that the existing PJM membership and, Curtailment of non-firm point-to-point transactions (see LR Level 3a ); curtails lower priority and allows higher priority energy transactions to start or increase, by using re-allocation. Holds new interchange transactions using non-firm transmission service until the flowgate is at or below the operating security limit. Occurs ASAP, instead of at the top of the upcoming hour. 62 Order on Remand P 108 and note 210, citing to comments filed by Mid-Atlantic Entities May 28, 2010, which further cites to the Global Energy Decisions Report for which official notice has been taken. 40

49 indeed the entire Eastern Interconnection benefitted. 63 The Global Energy Decisions Report states that: Opening the PJM Interconnection to more electric supply competitors produced $85.4 million in annualized production cost savings during 2004 for wholesale power customers. The benefits of expanding the PJM wholesale power market with the addition of Commonwealth Edison (ComEd), American Electric Power (AEP), and Dayton Power & Light (DPL) in 2004, produced $85.4 million in annualized production cost savings for Eastern Interconnection customers. The expansion reduced transmission seams and provided for the entry of new competitors in the Midwest, resulting in a more efficient regional power market. The study showed that PJM wholesale customers weren t the only ones to benefit; rather, wholesale customers throughout the Eastern Interconnection realized a savings. These annual production cost savings should continue year after year. Global Energy Decisions Report, Executive Summary, at ES-1. The $70 million figure cited in the Order on Remand appears as $69.8 million on page RS-19 and, in context, is equally clear that the benefit was brought to PJM by the integration of ComEd, Dayton Power, and AEP, not taken from PJM as a benefit received by these utilities. Global Energy s analysis supports PJM s conclusion that, in 2004, changes in supply and demand fundamentals resulted in lower PJM prices in 2004 than Global Energy quantified the production cost savings associated with the reduction of seams between these ComEd, AEP, DPL, and PJM s energy markets at approximately $29.5 million for PJM in 2004 and $36.4 million for the Eastern Interconnection. Because these savings are based on the actual integration schedule for ComEd (May 2004) and AEP/DPL (October 2004), they represent savings for a partial year of integration in In order to quantify the benefits associated with a full year of integration, Global Energy performed the analysis as if ComEd, AEP, and DPL joined PJM on January 1, The estimated annualized production cost savings for PJM and the Eastern Interconnection were $69.8 million and $85.4 million, respectively. Global Energy Decisions Report at RS-19. The conclusion that ComEd, AEP, and Dayton Power brought benefits to PJM rather 63 The Order on Remand may have misread the Mid-Atlantic Entities filing that initially cited this Report. Mid- Atlantic Entities cited to this Report for the more prosaic conclusion that Operating efficiencies multiply over a larger region as a result of centralized management of resources and that PJM benefits of $70 million annually were created as a result of the elimination of seams. 41

50 than taking this benefit from PJM is apparent given the source of the benefit examined the reduction of seams between these entities and PJM. Prior to integration, power that was flowing into PJM from or through ComEd, AEP and Dayton Power zones were charged for transmission by these utilities and then PJM transmission charges would be added for power sinking in the PJM zone of delivery. Integration eliminated pancaked transmission rates and those seams. Since then, the pre-existing PJM utilities have enjoyed lower delivered prices for the power moving west to east across what used to be a seam. The Global Energy Decisions Report does not meet the legal standard of having a high degree of indisputability and official notice of that Report should be withdrawn. The same paragraph of the Order on Remand also cites to a PJM document that purports to show $50 million of production cost savings in the ComEd control area for That document appears to be a Powerpoint presentation with limited probative value. It does not provide enough detail on its computational methods to allow any assessment as to whether it meets the high degree of indisputability that would be required to make it part of the record of this case through official notice. An additional and independent reason for rejecting these documents as having probative value for the issues in this proceeding is that they offer no evidence that the $6.6 billion in new transmission lines will generate additional production cost savings for Midwestern utilities. And, in fact, the record evidence is strongly to the contrary. These new transmission lines will enhance the ability of eastern PJM entities to import cheaper power from the Midwestern areas reducing by millions of dollars prices in the east and increasing prices by millions in the Midwest See Appendix C, hereto (summarizing results of PJM Load Payment Impacts from PJM Transmission Expansions Advisory Committee, Market Efficiency Analyses, Base Case Analysis ). 42

51 e) The 2011 ISO/RTO Metrics Report Is Useless for the Purpose of Determining Value Provided to Midwestern Utilities. There is at least one document heavily relied on by the Order on Remand that is not part of the evidentiary record in this proceeding, and the Order on Remand apparently is not even asserting official notice to bring it into the record. The 2011 ISO/RTO Metrics Report filed in Docket No. AD by six ISOs and RTOs, including PJM, has been imported into this proceeding, treated as if it provides conclusive and quantified benefits to transmission owners in the western portion of PJM and forms the centerpiece of the Order on Remand s cost-benefit analysis used to justify charging Commonwealth Edison over $1 billion in the costs of 500 kv facilities and, proportionately, $147 million to Dayton Power. Order on Remand PP 63, 78, 97, 100, 104, and 109 and n The legal basis for importing the 2011 ISO/RTO Metrics Report is obscure; in the data dump of April 3, 2012, the Commission posted thousands of pages of documents and spreadsheets for which it was taking official notice. But not included was the Metrics Report. Irrespective of whether or not the Commission has taken official notice of this Metrics Report, it is clear that the Commission has used it as if it provided conclusive and depositive evidence that ComEd receives benefits roughly commensurate with the costs being allocated to it. Order on Remand at P 63, P 78, P 97, P 100, P 104, and P 109. But the portions of the Metrics Report that are used in the Order on Remand do not constitute substantial evidence, are far from highly indisputable, and are so sketchy and summarized that no assessment could be made as to accuracy or implication. While the Metrics Report itself is sizable, the vast bulk of it relates to descriptions of the activities and responsibilities of six ISOs or RTOs, including PJM, and various potential ways that one could evaluate the degree to which these activities were performed efficiently and 43

52 effectively; 58 pages are devoted to PJM and 56 of those pages describe how PJM has met NERC standards, the reliability of its computerized systems, its success in forecasting, the number of and speed at which it has approved major transmission lines and performed timely interconnection studies with generators, market prices for energy, capacity and demand response programs, administrative costs, customer satisfaction and other initiatives. At the very end, in the final two pages, PJM provides information less detailed than a typical Powerpoint presentation. Within those two pages are all the support ascribed to this document by the Order on Remand for the $2.2 billion in annual PJM-wide benefits that are purportedly shared proportionately by ComEd, and by implication, Dayton Power, to justify socializing $6.6 billion in new transmission facilities costs based on load ratio shares. Order on Remand at PP 78, 97, 104 and 109. The Order on Remand and the Metrics Report itself are devoid of any detailed analysis or any other basis upon which one could conclude that these numbers have any validity or probative value. The following example is true for each of the six components of savings that appear on these two pages, but one example should suffice. The complete and unabridged analysis presented in the 2011 RTO/ISO Metrics Report regarding the cost savings created by PJM s regional planning is: By planning for future reliability needs on a region-wide rather than a utility-by-utility or state-by state basis, PJM s Regional Transmission Expansion Planning (RTEP) process helps focus on transmission upgrades that meet reliability criteria and increase economic efficiency. Annual Savings $390 million ISO/RTO Metrics Report p How was this number developed? What assumptions were made? What transmission upgrades were examined and what were the alternatives that would have occurred if utility-by- 44

53 utility or state-by-state planning were used? It is also strangely curious that the exact same amount of savings for this function and indeed for every other category of savings within the 2011 Metrics Report is also set forth in the 2010 ISO/RTO Metrics Report. 65 Are these fixed numbers that do not move from year-to-year even as new transmission and interconnection facilities are added each year? Additionally, these conclusory statements in 2010 and 2011 were made in the context of proceedings in which each ISO and RTO is attempting to show the FERC how it adds value to the market and, as such, have to be recognized as at least partially selfserving. The only conclusion that can be drawn from this kind of analysis is that the author, PJM, has made conclusory statements sometime in the past and typed a number into a report and continues to type in that number. There may be some backup data somewhere that would help explain the assertions, but there is simply not enough information provided to even analyze the statements, much less rebut and parry them as required to meet due process and APA requirements. The disputability of these statements is highlighted by the Order on Remand s own recognition that these are only estimates (P 78) and that it is difficult to precisely value a reliable transmission system (P 63). At no time in either this docket or within the docket where this Metrics Report was filed has the Commission informed the parties that untested and unsupported statements made by PJM in that other proceeding would be applied as compelling and conclusive evidence in this proceeding. But that is what the Order on Remand does. The Order on Remand s erroneous use of these highly disputable facts is compounded by a failure of an elementary rule of logic: it assumes the conclusion. The Order on Remand admits that it is assuming that ComEd s share of savings is equal to its 14.7% load-ratio share of ISO/RTO Metrics Report at pp

54 the $2.2 billion in savings reported by PJM. Order on Remand at P 104 and n In other words, the Order on Remand tries to justify socialization of costs by assuming that these alleged benefits are spread evenly based on load and then uses that to conclude that the assumed socialization of savings exceeds the socialized costs of the new transmission lines. The savings ascribed to ComEd, and by implication Dayton Power, fails due to this elementary rule that one cannot assume the conclusion. And when the assumption is challenged, the conclusion falls apart. The first category of savings explained by PJM in three sentences with the conclusion that there are annual savings of $78 million to $98 million, relates to PJM s ability to direct changes in the output of generating resources (redispatch) rather than curtail power-sales transactions to deal with transmission congestion enables it to deal with transmission constraints more effectively. The emphasis is supplied to highlight a fact of which this Commission is well-aware the vast majority of congestion that occurs within PJM occurs in the eastern portions of PJM, particularly in Northern New Jersey, the Delmarva peninsula and in the D.C. to Baltimore corridor. 66 It is wrong and unsupportable to assume that ComEd will receive a 14.7% load ratio share of the benefits from PJM s ability to redispatch to deal with the congestion that largely plagues the eastern portions of PJM. Of note, when the eastern utilities constructing these transmission facilities file for incentive ratemaking treatment, the congestion benefits 66 In general, the location of generation on which eastern markets rely is increasingly shifting to the west, due both to retirements of eastern units and the location of new generation capacity in western areas, i.e., western Pennsylvania, West Virginia, eastern Ohio and beyond. Eastern PJM relies on transmission across Pennsylvania and up from southwestern PJM to import power from sources west and southwest. PJM expects eastern PJM to continue to rely on transmission capability to replace retired generation and to meet growth in demand. This trend will also inevitably worsen congestion on bulk transmission facilities. Congestion on the eastern interface also constrains power flows from Washington D.C., Baltimore, and Northern Virginia to New Jersey, Delmarva Peninsula, and Philadelphia load centers PJM Regional Transmission Expansion Plan Report at

55 described are benefits to the Mid-Atlantic region. 67 The second category of savings explained by PJM in one sentence with the conclusion that there are annual savings of $390 million, relates to the benefits of planning for future reliability needs on a region-wide rather than a utility-by-utility or state by-state basis, [which] helps focus on transmission upgrades that meet reliability criteria and increase economic efficiency. By ascribing a load ratio share to ComEd of these alleged savings, the Order on Remand is implicitly assuming that if PJM did its reliability analyses state-by-state or utility-byutility, it would have found the need to build higher cost (presumably more, shorter, and/or lower voltage) transmission lines such that 14.7% of those costs would be properly allocated to Commonwealth Edison. That result defies common-sense and every RTEP analysis that PJM has ever done. Given the locations of the reliability problems that the 18 high voltage facilities in this proceeding are designed to fix, it is virtually certain that all of the facilities that need to be constructed would be constructed in the eastern portion of PJM irrespective of whether the study is PJM-wide, subregional, state-by-state, or utility-by-utility. For example, when PJM considered alternatives to the Susquehanna-Roseland line between eastern Pennsylvania and New Jersey, the alternatives considered were also located within eastern Pennsylvania and New 67 E.g., Baltimore Gas & Electric Co., 130 FERC 61,210 (2010) at P 3 ( Further, the Commission found that the MAPP Project would increase import capability, reduce congestion, and improve reliability in the Mid-Atlantic region.) ; Public Service Electric and Gas Co., 126 FERC 61,219 (2009) at 7 ( PSE&G states that the MAPP Project will traverse a number of zones in the eastern PJM region where congestion costs have been among the highest in all of PJM. PSE&G states these congestions costs are due, principally, to constraints on the eastern and central interfaces. PSE&G states that the MAPP Project will help resolve these constraints by adding a significant amount of transfer capability across the eastern PJM region.) Public Service Electric and Gas Co., 129 FERC 61,300 (2009) at P 20 ( PSE&G states that the Branchburg Project was approved as a PJM baseline project under the PJM RTEP process in 2008 to address more than 20 thermal and reactive reliability criteria violations and therefore qualifies for the rebuttable presumption under Order No PSE&G emphasizes that the Branchburg Project will help ensure reliability, reduce congestion, and provide reliability benefits to the entire mid-atlantic region, as well as significant improvements for import capability and congestion relief, particularly to the northern New Jersey region. PSE&G contends that the project will help resolve reliability and congestion issues triggered by those portions of the PJM transmission system that support west-to-east flows of power and the load centers of New Jersey. PSE&G states that the Branchburg Project will also result in economic benefits to the region by reducing transmission congestion by approximately $ 31 million per year in the PSE&G zone. ) 47

56 Jersey. 68 To the extent these savings exist at all, they are properly attributable to the eastern utilities that need such facilities to rectify their reliability problems. Just as is the case with the facilities that have been proposed, neither Commonwealth Edison nor Dayton Power would see any significant change on their systems from those alternatively planned and constructed facilities and no part of the purported $390 million in savings should be assumed to be enjoyed by either. The third category of savings, explained by PJM in one sentence with the conclusion that there are annual savings of $366 to $900 million, relates to the benefit of reduced capacity margins due to the large size of the PJM market area and its diversity of demand and resources. The huge range between $366 and $900 million highlights the disputability of this conclusory statement. And this alleged savings is unrelated to the costs of the new transmission lines built in the eastern portion of PJM. These are, at most, savings that arise for PJM members or members of any other generation power pool as the result of their being members. One does not need to turn over operational control of transmission or authorize regional planning of transmission in order to obtain this generation-related benefit. These are the kind of traditional benefits that power pools have provided their members for decades. And the Midwestern utilities have already paid for this benefit of membership by bringing their own generation facilities into PJM, which, in turn, helps reduce the capacity margin needed for the other members of PJM. The fourth category of savings, explained by PJM in three sentences with a conclusion of 68 PJM considered various transmission alternatives to the Susquehanna Roseland line. One main alternative considered was a circuit from Bossards through Jefferson to Roseland. This would have included upgrades to existing 230 kv circuits to 500 kv operation along a path from Bossards, on the eastern side of the Susquehanna 500 kv loop, through Martins Creek and Portland to Jefferson. However, the Bossards alternative would have required the outage of several 230 kv lines along the proposed route which would have significantly impacted area reliability. In addition, the Bossards alternative provided much less benefit with respect to integrating new generation in north-central and northeastern Pennsylvania. PJM 2007 RTEP Report at

57 annual savings of $275 million, relates to the alleged value that demand-response has in forestalling the need to construct new generation. There has been no showing that ComEd or Dayton Power has any need for new generation or that demand-side response programs have saved these two entities any money by forestalling the construction of new generation. Indisputable data from the U.S. Bureau of Labor Statistics and submitted into the record through Dayton Power s initial comments establish that economic growth and population growth have been much more rapid in the eastern portion of PJM than in Ohio and Illinois. 69 To the extent the demand response programs have forestalled the need for new generation, that benefit is not enjoyed proportionally by ComEd and Dayton Power. Any forestalled generation that may be occurring is more likely the generation that otherwise would have been needed in the eastern portion of PJM to meet more rapidly growing demand. The fifth category of savings, explained by PJM in two sentences with a conclusion of annual savings of $340-$445 million, are production cost savings relating to centralized dispatch of generation. Again, there is no nexus between these alleged savings and the new transmission lines. This is, at most, a general savings that comes to a member of PJM due to its membership and the Midwestern utilities pay for whatever benefit they may receive from other market participants by bringing their own generation and transmission facilities to PJM for centralized dispatch to benefit those other participants. The sixth and last category of savings, explained in two sentences with a conclusion of $80 to 105 million in savings is from ancillary services. Again, there is no nexus between these savings and the new transmission lines. This is, at most, a general alleged savings that comes to a member of PJM due to its membership and the Midwestern utilities already pay for ancillary 69 Initial Comments of Dayton Power and Light Company, May 28, 2010, Affidavit of Hertzel Shamash, HS-5 and HS-6. 49

58 services that they use and they also brought into PJM their own facilities that provide such services. As a matter of law, the Order on Remand errs in relying on these very sketchy and very conclusory statements as if they were indisputable and well-recognized facts. One cannot assume the conclusion or assume a relationship that does not exist between these benefits alleged to exist and the new transmission lines. The Commission on rehearing should rule without regard to this 2011 ISO/RTO Matrix Report. f. Dayton Power Objects to the Process of Issuing an Order Relying on Officially Noticed Documents without Prior Opportunities for Parties to Rebut the Statements Therein; But for the Limited Purposes Used, Does Not Seek Withdrawal of Certain Documents from the Record. PJM Manuals 13 and 14B are publically available documents that provide specific details on certain aspects of PJM operations. For the limited purposes used in the Order on Remand, they have a high degree of indisputability. The PJM RTEP filings made annually from 2006 through 2011 are publically filed documents with the FERC under docket numbers that permit interventions and comments to be filed. The RTEP filings themselves are primarily technical documents that identify the location of reliability problems and the proposed solutions to those problems. While those filings contain within them the allocated costs of new transmission, they are not advocacy or opinion documents; the costs are allocated according to then-current requirements subject to the outcome of this proceeding and, in the future, Order No For the limited purposes of identifying facts regarding location of lines and for identifying those factors that PJM believed were important bases for its recommendations made within these RTEP filings, they have a high degree of indisputability. 50

59 The Brattle Group Report cited at P 83, n. 148 appears to be used for the limited purpose of showing that the cost per GW-mile of a 500 kv or 765 kv transmission line is lower on a perunit basis than the cost of a 345 kv line. While that would be disputable in the circumstance where the 345 kv line is the proper size to meet the needs identified and a larger more expensive line would be wasteful, it is not objectionable as a general statement in most circumstances. Exelon Remarks in Docket No. AD09-8 contain policy recommendations made by an Exelon executive. While providing no evidentiary value for the substantive issue in this case as to whether the benefits of these 18 new transmission projects are roughly commensurate with the costs being allocated, these statements do identify an Exelon position that was taken in another proceeding. For the limited purpose of indicating what that position was, its use is not objectionable. Dayton Power would note, however, that the context of the remarks was for expanding the 345 kv and above transmission system as part of a national strategy to promote renewable forms of electric generation. These remarks do not suggest an Exelon position in favor of socializing the costs of only 500 kv and above facilities in the context of resolving reliability problems experienced exclusively in the eastern portions of PJM. Official Notice is also being taken of a Joint U.S. and Canadian Task Force Report on a major 2003 black-out ( Joint Task Force Report ). 70 While much within the Joint Task Force Report is disputable, this document was discussed by several commenters in their initial comments and was therefore available during the evidentiary hearing for rebuttal. Dayton Power, therefore, does not oppose its inclusion in the record. Dayton Power would note, however, that the Order on Remand mistakenly interprets the Joint Task Force Report by relying on a selective and limited discussion of the Joint Task Force Report by certain parties who will 70 U.S.-Canada Power System Outage Task Force, Final Report on the August 14, 2003 Blackout in the United States and Canada: Cause and Recommendations (Apr. 2004). 51

60 save millions of dollars if costs are socialized rather than allocated based on the DFAX method. See Order on Remand at PP 26, 70, 92. The Joint Task Force did in fact include a single sentence that higher voltage lines and more densely networked lines are better able to absorb voltage and current swings. But other aspects of the Joint Task Force Report are far more relevant to the issue in this proceeding. First, the Joint Task Force Report includes 46 separate recommendations, with a special focus on the development of mandatory reliability standards that include an increased emphasis on establishing proper relay and breaker settings, periodic testing of such settings and equipment, and enhanced computerized communications and controls. 71 Not one of those 46 recommendations was to build new high-voltage transmission lines. The Joint Task Force Report did not conclude, for example, that more high voltage lines should be constructed in Ohio, Michigan, Ontario or New York or eastern PJM (or within any PJM zone) to prevent future cascades. Second, the Joint Task Force Report identifies a different reason as the primary reason why the cascading blackout stopped where it did. In the same page for the sentence cited by the Order on Remand, the Joint Task Force Report states that the cascade ended at or near the New York-New Jersey seam because the current and voltage swings were attenuated by distance much like the ripple from a stone thrown in a pond. 72 The Report also found that the Northeast was largely unaffected by the cascade because control equipment there operated to isolate the Northeast from the New York and Canadian systems. 73 Additional record evidence is also compelling on this point that it was well-designed and 71 Joint Task Force Report at Joint Task Force Report at Joint Task Force Report at

61 maintained control equipment, not the size of facilities, that was the critical element in stopping the cascade. Dayton Power owns no 500 kv facilities, 74 and is located in the same State where the black-out began. Yet there was no cascading blackout into Dayton Power s zone. In fact, the cascading blackout circled through Michigan and Ontario and into New York on high voltage lines. In his Reply Affidavit at pp. 3-4, Hertzel Shamash, Vice President, Resource Planning for Dayton Power, 75 testified in this proceeding that: The primary reasons that the 2003 blackout began and cascaded were inadequate tree-trimming, inadequate maintenance, improper relay settings and lack of operator adherence to NERC operating guidelines. The building of new high voltage transmission lines is not going to reduce exposure to cascading blackouts if those practices continue. It was not a lack of high voltage lines that triggered the start of the blackouts; and it was not the existence of high voltage lines that stopped the cascade. * * * The key element to controlling cascading is not the voltage level of the system, but the design. Prior to joining PJM, the so-called CCD Companies (AEP s Columbus Southern, Duke s Cincinnati Gas and Electric, and Dayton Power) jointly designed a reliable 345 kv system, which could withstand all the NERC reliability contingency criteria, including Category C and D more severe multiple contingencies. The CCD 345 kv system is also capable of absorbing the voltage and current swings, and providing a barrier to cascading. The 2003 blackout didn t cascade into DP&L s zone, or further south into Duke-Cinergy s zone, and we do not have any 500 kv or 765 kv transmission facilities. In other words, the cascading black-out was not halted by either the existence of the 500 kv system as of 2003 or as it may be enhanced by $6.6 billion in new transmission facilities built in the eastern states of PJM. The cascade ended in major part because the voltage fluctuations attenuated over distance and/or control equipment and relay settings operated correctly to separate some utilities or groups of utilities from the lines that were cascading out of service. 74 Reply Affidavit of Hertzel Shamash, p As of the date of the Affidavit, Mr. Shamash was Director of Resource Planning. 53

62 F. The Order on Remand Is Arbitrary and Capricious in Failing to Allocate Any Costs Based on the Specific Benefits Received by Entities with Recognized Reliability Problems. 1. Legal Standards. The Commission s orders must not be arbitrary and capricious. 76 An agency s decisions must be supported by substantial evidence and a rational and articulated connection must be made between the facts found and the choices made. 77 Dayton Power respectfully submits that the Order on Remand fails to meet these requirements. 2. The Costs of the Proposed 500 kv Facilities Are Caused to Resolve Specifically Identified Reliability Problems. $6.6 billion in new 500 kv transmission facility costs have been proposed, thus far, to resolve identified reliability problems. These costs are not being incurred to reduce the potential for cascading outages across PJM, or to meet a speculative need that might exist if today s normal power flows of west to east reverse and more power starts traveling from east to west, or to reduce the customer costs of average number of outages and power quality problems that may occur in western portions of PJM, or any of the other factors that the Order on Remand has identified as potential system-wide benefits. The costs are caused in order to resolve identified reliability problems period. And all the reliability problems identified are in the eastern portion of PJM. See Appendix A hereto, identifying the bases provided by PJM in its RTEP Reports for the six largest projects, which comprise 97% of the total $6.6 billion in costs. Starting in 2006, PJM has made six annual RTEP filings and, in some years, supplemented those filings. In each and every one of those filings, PJM has identified specific reliability problems that it proposed be resolved through the construction of one or more 500 kv 76 Entergy Servs., Inc. v. FERC, 319 F.3d 536, 541 (D.C. Cir. 2003). 77 Motor Vehicle Mfrs. Ass n v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983); Public Service Comm n v. FERC, 813 F.2d 448, 451 (D.C. Cir. 1987). 54

63 facilities. Of note: every time a 500 kv line has been proposed it is to resolve a specific reliability problem arising within the eastern portion of PJM New Jersey, Delaware, eastern Pennsylvania, northern Virginia and Maryland. When multiple violations are discussed, those violations are occurring in the same States. Just as significantly, none of these RTEP Reports have identified a single reliability problem within Ohio, Indiana, Michigan, or Illinois that should be resolved through the construction of a facility operating at 500 kv or above. The Order on Remand, perhaps inadvertently, makes these basic facts less clear by references to some of the lines at issue in this proceeding as being designed to resolve reliability problems in the western PJM. Order on Remand at PP 56, n. 90 and None of the six western lines that are referred to there are really in the west; the Pruntytown Mt. Storm Doubs line is located in West Virginia and northern Virginia; and the five lines in the west associated with the PATH project are all located in West Virginia and central or eastern Pennsylvania, still hundreds of miles east of Dayton Power and ComEd. They are only west in the sense of being west of an interface across eastern Pennsylvania, Maryland and Virginia that currently is often congested and precludes lower cost power from the Midwest, West Virginia or western Pennsylvania from reaching Northern Virginia, the D.C.-Baltimore corridor, the Delmarva peninsula or New Jersey. 79 It is precisely because these lines in the west increase 78 Order on Remand P 29 also touches on this subject and could be misconstrued as a statement that some of these facilities were identified as needed to resolve western reliability problems. That is not the case. All of the facilities are to resolve reliability problems in eastern portions of PJM. The DFAX analyses show, however, that for some of these projects changes in load by some Midwestern utilities may have a small, but measurable effect on the constrained facility. Thus, under DFAX, ComEd might be charged 2% of the costs of PATH because its power flows are such that its contribution to the constraint was 2% of the total of all contributions to the constraint. 79 As proposed, the Amos Bedington Kemptown circuit [a.k.a PATH] also shown on MAP 3.14 will bring a strong source into Kemptown and will reduce the flow on existing PJM 500 kv west to east transmission paths and provide significant benefits to the constrained Baltimore / Washington area, resolving a number of reliability criteria violations revealed by deliverability analyses. Amos is a relatively strong source with 2100 MW of generating 55

64 the transfer capability across this constrained interface that power flow from west to east will increase, congestion in the east will be relieved, the benefits of lower cost power will be received by the eastern utilities and the power costs for Midwestern utilities will increase due to their loss of the cheaper power now moving east. In other words, the record evidence establishes exactly the opposite of the implication that the Order on Remand appears to be making enhancing these slightly western lines fixes eastern reliability violations and, additionally, will increase the energy cost savings benefits provided to eastern utilities to the detriment of Midwestern utilities. These new transmission lines do not benefit Midwestern utilities. 3. The Order on Remand Fails to Give Any Weight for Allocation Purposes to those Receiving the Specific Benefit of Resolving a Reliability Problem. The Order on Remand provides no rationale for giving zero weight to the benefits of resolving specific reliability problems that PJM has identified and which are the driving force, i.e., the cost causative agent, for the $6.6 billion in new transmission lines. The Order on Remand focuses almost exclusively on alleged system-wide benefits, many of which rely on speculation about the potential for a future reversal of load flows, the potential for future cascading outages, or future transmission projects that may be needed to resolve future reliability problems that may arise someday in the west. But the Order on Remand never actually takes into consideration that the reason these particular transmission lines are being planned now for construction in the near future, is to resolve specific reliability problems that have already been identified as real problems that, left unresolved, would lead in overloads and outages within a few years. There is no speculation necessary. The reliability problems have been identified and the specific benefits of resolving those problems accrue in the zones where the reliability problems exist. Those specific benefits are ignored. It is no exaggeration to say that the Order capacity that ties into the AEP 765 kv system RTEP Report at 93. See also Appendix A hereto. 56

65 on Remand gives greater weight for cost allocation purposes to the potential for a future once-in- 25-year loss of load event to occur in ComEd s zone than it does for the current reliability problems that have been identified and are the cost causative agents for the planned construction of the transmission facilities. The former is discussed as a rationale for a system-wide load ratio allocator. 80 The latter is trivialized as subject to postponement if load growth projections change or demand side management programs increase. 81 The evidentiary record certified to the Seventh Circuit was largely comprised of documents from the evidentiary hearings held in April 2006, which was prior to the time that PJM identified the need to construct many of the most costly projects that are on the $6.6 billion list. Even with the limited record before it, the Seventh Circuit was obviously deeply troubled by the potential for a Midwestern utility to be charged millions of dollars for projects caused by the threat of degraded reliability in Eastern PJM. 82 The Commission, on remand, correctly reopened the record in 2010 for additional evidence to be presented and correctly started the evidentiary hearing process with a directive to PJM to prepare and file studies that compared how costs would be allocated, utility-by-utility zone, under a socialization method or a DFAX method. The record evidence that was developed can only deepen the level of concern that a reviewing court will have. Applying the 2010 data presented in the PJM April 13, 2010 Response: where the DFAX methodology allocates less than $1 million to Dayton Power, socialization allocates $163.5 million. For ComEd, the DFAX allocation is $15.17 million, but socialization allocates $1.037 billion. For AEP, the DFAX 80 Order on Remand PP 74, Id. at Seventh Circuit Remand, supra, at 477 (quoting from Opinion No. 494-A). 57

66 allocation is $87.79 million and socialization allocates $1.194 billion. 83 Whether looked at as a total amount or converted to an annualized amount, socialization allocates to these utilities more than 100 times as much as would be allocated under the DFAX method. And conversely, utilities in the eastern portion of PJM are allocated hundreds of millions of dollars less than under the DFAX methodology. 84 A court reviewing the Order on Remand and this evidence would correctly ask the same question that the Seventh Circuit asked in its opinion: No doubt there is some benefit to the Midwestern utilities just because the network is a network... But enough of a benefit to justify the costs that FERC wants shifted to those utilities? 85 The Order on Remand tries to avoid this question through the legalism of explaining that there is no cost shift because the Commission never specifically approved a particular method of DFAX cost allocation, 86 the argument that it does not need to examine costs and benefits utilityby-utility, 87 and by extra-record officially noticed documents that purport to show general system-wide savings and assume the conclusion by assuming that these system-wide benefits are shared proportionally. For reasons discussed elsewhere in this rehearing request, none of those rationales hold up under scrutiny. But, even if there were some merit in those arguments, the question would remain, but reframed as: Why is it appropriate to allocate 100% of the costs based on load ratio share and allocate zero costs based on the specific reliability benefits that are provided to those entities with identified reliability needs? 83 PJM March 13, 2010 Response (Summary Table) at p. 17, reprinted here at p Id. 85 Id. at Order on Remand PP 35 and Id. at

67 The Order on Remand never comes to grips with that fundamental question. The Branchberg-Roseland-Hudson 500 kv line is an example of the absurd results that follow from failing to consider the specific benefits for resolving the specific reliability problems that have been identified through the PJM RTEP process. That line is planned to be built solely within New Jersey and is designed to resolve reliability problems identified in New Jersey alone. 88 Under the Order on Remand, however, ComEd would pay more for this transmission line than all of the utilities in New Jersey combined. AEP would pay more for this transmission line than all of the utilities in New Jersey combined. Dominion Resources would pay more for this transmission line than all of the utilities in New Jersey combined. The New Jersey utilities will pay for only a fraction, about 1/8 th, of the costs. 89 No amount of speculation about system-wide reductions in outage possibilities or power quality or reversed power flows or any of the other benefits alleged to exist system-wide, can justify totally ignoring the actual cause for constructing the Branchberg-Roseland-Hudson line and the actual benefits received by New Jersey utilities from resolving reliability problems that are currently identified as actually existing within the New Jersey utilities zones. 4. The Order on Remand Fails to Give Any Weight for Allocation Purposes to the Beneficiaries of Reduced Energy Costs. In discussing transmission lines built for economic rather than reliability purposes, the Order on Remand recognizes that In addition to planning for reliability, PJM seeks to identify transmission enhancements that lower cost to consumers by relieving congested lines and allowing lower-cost power to flow to customers. Order on Remand P 76. The Order on Remand, however, appears not to recognize the same results apply for reliability projects that RTEP Report at p. 95, reprinted in pertinent part Appendix A hereto. 89 When evidentiary hearing were held, AEP s load ratio share was about 18%; ComEd s was 16%, Dominion s was 13%, and the combined New Jersey utilities load ratio shares totaled about 12%. Gass Reply Affidavit at p

68 relieve congestion and utterly ignores a simple fact: If there is lower-cost power flowing to some customers, it must be coming from somewhere else. There is hard data in the record prepared by PJM and submitted through affidavit by Dayton Power that shows that once these high voltage transmission lines are constructed, the Locational Marginal Prices ( LMPs ) in the eastern portions of PJM will drop, while LMPs in the western portions of PJM will rise. 90 The Initial Affidavit submitted on behalf of Dayton Power by Mr. Michael M. Schnitzer, Director of The NorthBridge Group, presents this PJM data both descriptively and in a dramatically effective bar chart showing that the TrAIL line alone (already built and in-service) provides Pepco (D.C. and Maryland) and BG&E (Maryland) annual benefits in the form of lower energy costs in excess of $100 million. PSEG in New Jersey receives an estimated $99 million annually, and the big winner is Dominion Resources in Virginia with annual LMP savings of $835 million. The PATH line (currently delayed) provides the same pattern of benefits, again with Dominion Resources, Pepco and BG&E receiving more than $100 million annually in a reduced LMP benefit. 91 At the same time, these facilities would cause Midwestern entities -- AEP, Com Ed, and Dayton Power -- to pay higher energy prices. Com Ed, for example, would pay $638 million annually in higher energy prices as a result of these two proposed lines and Dayton Power, a much smaller company, would pay over $100 million more annually See Affidavit of Hertzel Shamash at 8-9 and Exs. HS-3 and HS-4 (compiling data prepared by PJM s Transmission Expansion Advisory Committee) and Schnitzer Initial Affidavit at 22-24, both filed with Dayton Power s Initial Comments of May 28, Schnitzer Initial Affidavit at 22-24, citing PJM Load Payment Impacts from PJM Transmission Expansions Advisory Committee, Market Efficiency Analyses, Base Case Analysis. Reprinted here for ease of reference in Appendix C. 92 Id. 60

69 The Order on Remand at P 96 dismisses this presentation in a single paragraph as only an allegation of entities supporting DFAX and possibly subject to change under future conditions if relative prices change between the east and the west. The Order on Remand s approach here is perplexing given that the same or similar data from PJM is relied on extensively by the eastern utilities and acknowledged by the Commission in reviewing incentive rates applications filed by the eastern utilities who are or will be constructing these high voltage facilities. For example, when the Commission reviewed PSE&G s $946 million Branchburg-Roseland-Hudson Project, a PJM baseline project under the PJM RTEP process in 2008, it noted PSE&G s contention that: the project will help resolve reliability and congestion issues triggered by those portions of the PJM transmission system that support west-to-east flows of power and the load centers of New Jersey. PSE&G states that the Branchburg Project will also result in economic benefits to the region by reducing transmission congestion by approximately $31 million per year in the PSE&G zone. 93 The implications of ignoring these energy savings in the assessment of whether costs imposed are roughly commensurate with benefits enjoyed are staggering when put into context with the socialization of costs. Under socialization, PSEG will pay approximately 7% of the costs of this $946 million Branchberg project, or about $66 million. Using the Order on Remand s 19.1% carrying charge rate for computing an annualized cost, 94 that is a $12.6 million annual cost to PSEG. PSEG s $31 million estimate of its annual energy savings is more than 250% of those annualized costs. And this windfall does not even include the direct benefit PSEG is getting from rectifying the New Jersey reliability violations that this project was designed to correct. 93 Public Service Electric and Gas Co., 129 FERC 61,300 at P 20 (2009). 94 Order on Remand P 79, n,

70 And there is yet one more element: because PSEG is the entity constructing and owning the facility, all the incentive return from the project goes to PSEG! Under socialization, PSEG s shareholders and/or customers pay only $12.6 million of the annual costs, but enjoy $31 million per year in energy savings and earn an incentive return on investment. In contrast, ComEd pays twice as much of the costs, will have higher LMPs in its zone and, of course, earns nothing on the investment. Under a DFAX method of allocation, the allocation of costs is much better aligned with benefits under five different DFAX scenarios developed by PJM and a witness testifying against the DFAX method, PSEG would be allocated between 72% and 77% of the costs of the Branchburg-Roseland-Hudson project; and ComEd would be allocated between 1% and 3%. 95 Dayton Power strongly urges the Commission on rehearing to look far more deeply into the energy price benefits and detriments that these new transmission facilities create. These are not merely allegations of parties on one side of an issue. The parties on the other side of the cost allocation issue, and PJM, and this Commission have consistently identified lower LMPs in these eastern utilities zones as a benefit for the project. It would be arbitrary and capricious to recognize that benefit in every case except in the one case where the Commission has been directed to ensure that the allocation of costs is commensurate with benefits received. G. The Record Evidence Compellingly Demonstrates that a DFAX Method Reasonably Allocates Costs to the Beneficiaries of the Projects. 1. The DFAX Method Allocates Costs Consistent With Transmission Planning and Modeling. Paragraphs of the Order on Remand provide a useful and succinct summary of the transmission planning process. As explained therein, PJM s modeling efforts are performed using known data and looking forward up to 15 years to determine whether there are any 95 Gass Reply Affidavit at p

71 transmission overloads, voltage limitations or other reliability standards violations. When a reliability standards violation is identified, various transmission alternatives are studied and ultimately a solution is recommended. When the recommendation involves facilities that would operate at voltages under 500 kv, the costs of the project are allocated according to a DFAX analysis that identifies which entities are using, and how much they are using, the constrained facility identified as the primary reliability violation. The same approach was used by PJM for new facilities operating above 500 kv prior to Opinion No The Order on Remand P 39, n. 52 incorrectly understates the role of DFAX modeling in the PJM planning process by asserting that the DFAX model is not used for planning purposes to identify reliability problems or to assess costs and benefits of solutions. It would be technically accurate to state that PJM does not solely apply the DFAX model. But the DFAX method is certainly an integral part of the process. PJM has compiled its regional planning procedures into Manual 14B PJM Region Transmission Planning Process. PJM s modeling for regional planning purposes starts with the development of a consistent set of inputs. PJM Manual 14B at 10. It develops a reference power flow case developed from the most recent set of Eastern Reliability Assessment Group system models. PJM transmission planning revises this model as needed to incorporate all of the current system parameters and assumptions. These assumptions include current loads, installed generating capacity, transmission and generation maintenance, system topology, and firm transactions. PJM Manual 14B at 22. PJM s Open Access Transmission Tariff requires it to use this consistent set of planning parameters in applying the DFAX methodology: (e) All 63

72 values and inputs used in the calculation of the distribution factor shall be the same values and inputs as used in the basecase for the Regional Transmission Expansion Plan. 96 A key aspect of PJM s regional planning process, spelled out in Attachment C of Manual 14B, is to verify that the transmission system is sufficient to ensure deliverability of all the Capacity Resources (generators) within PJM to meet total system load with a loss of load probability of once in 10 years. In determining whether a separate Load Delivery Area needs to be established and modeled for compliance with this standard, PJM uses a DFAX analysis. Future constrained facilities or clusters of facilities are identified utilizing the long term planning analysis. Potential facilities are screened using thresholds that are utilized in the RTEP long-term planning studies. This analysis is updated annually based on approved RTEP upgrades. 500 kv and above facilities that advance more than three years between RTEP cycles are identified for further consideration. If the driver for a 500 kv facility advancing more than three years is linked to a specific event (e.g. significant generation retirement), it may require further analysis. Once a facility has been identified utilizing the above methods, distribution factor analysis is utilized to determine the specific busses included in the analyzed LDA. The model used to determine the load bus distribution factors would include all approved RTEP upgrades. A distribution factor cutoff is established based on one of the existing LDA s, and is dependent upon an analysis of the specific system topology and the identified constrained facility(s). PJM Manual 14B at 54 (emphasis supplied). The DFAX method also is used in the reliability planning process as an integral part of PJM s assessment as to whether generation is deliverable during emergency conditions. PJM Manual 14B at For allocating costs under the DFAX model for the RTEP reliability projects operating at voltages below 500, PJM uses the consistent set of planning assumptions that were used to identify the reliability problem. The planning (modeling) assumptions associated with each reliability criterion in PJM are highly prescriptive, such that discretion cannot be applied to manipulate the 96 PJM OATT, Schedule 12 section (b)(iii)(c)(1)(e). 64

73 determination that a violation does or does not exist. The reliability criteria and the associated modeling rules were established in this way specifically to ensure consistency of application and ability to replicate results. In this way, once it is determined that an applicable criterion has been violated, it is a simple matter to determine the extent to which load within each transmission zone contributes to that violation. That relative contribution then establishes the appropriate, proportional allocation to each zone of the costs required to remove the violation..... The basic steps for calculating the cost allocations for baseline upgrades can be summarized as follows:... Load Deliverability Violations Calculate the Distribution Factor (DFAX), where DFAX represents a measure of the effect of each zone s load on the transmission constraint that requires the mitigating upgrade, as determined by power flow analysis. The source used for the DFAX calculation is the aggregate of all generation external to the study area and the sink is the peak zonal load for each Transmission Owner within the study area. Multiply each DFAX by each zonal load to determine the zone s MW impact on the facility that requires upgrading. Divide MW impact for each zone by sum of all MW impacts to yield baseline cost allocation factors. PJM Manual 14B at Under Each of the Scenarios in the Record, the DFAX Method Provides a Reasonable Matching of the Costs of a New Transmission Facility with the Beneficiaries of that Transmission Facility. Dayton Power respectfully offers the following simplistic yet accurate description of the $6.6 billion in 500 kv transmission facilities that have been planned thus far: They are too far away from us to help us. Under almost any planning scenario, most of them don t even have a measurable effect on the flows on our system. 65

74 a) The Record Evidence Establishes that DFAX Analyses Run Under an Array of Different Scenarios Allocate Costs Similarly and Reasonably. The DFAX method, whether run once or multiple times using different scenarios, reasonably allocates costs to the entities that will benefit from the new transmission facility by its elimination of their contribution to a reliability violation that has been identified. The record evidence shows that no matter what scenario is used, the DFAX method tends to allocate costs around a relatively narrow band to the same group of utilities. PJM ran two different DFAX analyses (a minimum and maximum). A party opposed to the use of the DFAX method sponsored an expert witness, Esam Khadr, who ran several different DFAX analyses to support his contention that the DFAX method was imperfect. 97 Unquestionably the results from one analysis to the next differed. But far more significant was how similar they were. Dayton Power submitted a reply affidavit of Scott W. Gass, a Principal Consultant from PowerGEM and an expert in power modeling. He compiled the two different PJM scenarios and four of the five scenarios advanced by Mr. Khadr. 98 Mr. Gass then presented detailed tables, utility-by-utility, for the five most expensive transmission projects. Those tables are reprinted here for ease of reference in Appendix B. What is most significant about them is their consistent results even despite the hand-picked variations in assumptions applied by a witness who was trying to prove the inadequacy of the DFAX method. For example, for the Susquehanna- Roseland transmission line that starts in eastern Pennsylvania and extends into northern New Jersey, no matter which DFAX scenario was run, the DFAX model consistently allocated between 92% and 99% of costs to the eight utilities within the Eastern Mid-Atlantic Region. 97 Initial Comments of Fair Pricing Group, Initial Affidavit of Esam A.F. Khadr. 98 One scenario was rejected due to errors made by Mr. Khadr regarding transfer capability between ComEd and the rest of western PJM, the amount of generation in western PJM and other serious errors. Gass Reply Affidavit at

75 Under all six scenarios, the DFAX model consistently allocated 0% to Dayton Power and from 0% to 1% to ComEd. Additionally, PJM ran its DFAX model for three years in a row (2007, 2008 and 2009). In each instance, the DFAX model allocated 99% of the costs to the same eight utilities in the Mid-Atlantic Region and only 1% elsewhere. Socialization, on the other hand, allocates costs far outside the bands of any of these DFAX analyses. ComEd would be allocated 16% of costs, not 0%-1%. And the eight utilities within the Eastern Mid-Atlantic Region would see their allocation drop from the 92%-99% range to only about 23% (load ratio shares in 2010). Similar results were true for each of the other major projects examined in depth by Mr. Gass. These DFAX results are completely in line with common sense expectations. If there is a reliability problem identified in eastern Pennsylvania and Northern New Jersey that is resolved by a multi-million dollar transmission line built in that area, it is not surprising that the largest users of that new transmission line will be the same utilities who are located where the reliability problem exists. The costs are caused to resolve that reliability problem and the beneficiaries of its resolution are the same entities that will use the line most to eliminate their contribution to the reliability problem. In contrast, socialization defies any attempt to assess actual use of the new facility. It assumes with supporting basis in fact that every MW served in Illinois is receiving exactly the same benefit from this Pennsylvania-New Jersey facility as a MW served in New Jersey. In reality, based on actual analysis of load and its relationship to the reliability constraints, ComEd is not using a load-ratio share of that Pennsylvania-New Jersey line and neither is Dayton Power. 67

76 On rehearing, the Commission should rule that the record evidence supports a finding that the DFAX Method provides a reasonable matching of costs with the users of the transmission facility. That finding would meet the Seventh Circuit s mandate by establishing an allocation methodology where the costs allocated are roughly commensurate with the benefits received from the particular facilities at issue in this proceeding. b) Criticisms of DFAX in the Order on Remand Are Misplaced and Overstated or Can Be Easily Resolved. The Order on Remand identifies a number of concerns with how the DFAX analysis operates with respect to facilities operating at 500 kv or more. Those concerns can be summarized as follows: (i) the DFAX analysis as performed by PJM is a single snapshot in time that may fail to capture future load shifts, changes in usage, changes in relative prices in different regions or other future changes, including the fact that from one year to the next, PJM s annual RTEP filings may delay or even indefinitely defer construction of a previously identified necessary transmission upgrade; 99 (ii) it would be administratively burdensome or even impossible to update or rerun the DFAX model periodically to capture any of these future changes; 100 (iii) the DFAX analysis focuses on the most significant constraint or reliability problem and may fail to capture the benefits to others from the relief of other reliability problems; 101 (iv) the DFAX analysis fails to capture system-wide benefits including enhanced reliability, decreased line losses, and other potential positive externality benefits; 102 and (v) some types of facilities needed for stability of the system instead of reliability would not be appropriately allocated using the DFAX method Order on Remand PP 37, 38, 42, and Id. P Id. P Id. P Id. P

77 These concerns are addressed below. i) Speculation about Future Shifts in Load Patterns, Relative Prices, or Other Future Changes Do Not Justify Rejection of the DFAX Methodology in Favor of Socialization Much of the criticism leveled against the DFAX method is based on speculation that there could be some significant future changes that would make the original DFAX analyses no longer valid. At various points within the Order, it is stated that the DFAX method fails to account for changes in usage and flow direction over time, fails to account for the changes that might arise as changes occur with respect to generator, load and flow patterns, as well as other structural changes, it cannot reflect the benefits provided by these facilities over their extended life as flows change over time, or reflect changes such as new transmission installed or existing transmission retired. Order on Remand P 37, P 38, P 42, P 43. It is further noted that conditions under which the studies are done are likely to change from time to time, as evidenced by the fact that some of these projects have been delayed or placed into abeyance. Id. at P 43. The foundational facts necessary to support these criticisms are totally absent in the record evidence. There is nothing in the record that suggests that the flows across these lines that are projected to relieve eastern congestion and to resolve eastern reliability problems will suddenly reverse and start flowing power to the Midwest. There is nothing in the record that suggests that future new or retiring existing generation units or transmission lines will result in a change in use of the new transmission facilities at issue in this proceeding. And while the delays in the timing of construction for some of these projects are real, that does not mean the DFAX analysis fails to identify the beneficiaries. Whether the PATH line is built in 2012 or 2014 or several years from now, it will still be built for the same reasons and would still benefit the same group of utilities located in the eastern portion of PJM. As previously noted, the west to east 69

78 flows to ComEd cited in the Order on Remand are flows from another Midwestern utility, AEP not from some eastern utility. Assuming that there ever is any appreciable western flow of offshore wind, 104 those facilities will be built for reasons other than reliability with costs allocated pursuant to whatever cost allocation methodology is established under FERC Order No As a post-script, Dayton Power would note that socialization as a method always fails to take these factors into account. The only factor considered by socialization is the peak load that exists within the zone during a handful of peak hours measured by PJM. Power flows are irrelevant now and future changes in power flow are irrelevant. Changes in where generation is located or the types of generation that is installed are irrelevant now and in the future. Where and when new transmission is installed or existing transmission is retired are irrelevant. While peak load itself will change over time, there is still going to be no relationship between such changes and the use of the facilities if Dayton Power s load has a zero effect on an existing constrained transmission line in New Jersey and the new facility built to relieve that constraint, then the fact that Dayton Power s load ratio share is 2.1% one year and 2.3% in another does not mean that it is obtaining more benefits from the new line in the subsequent year. Dayton Power s use of that line was zero in both years and socialization fails to recognize that. ii) Multiple Runs or Periodic Reruns of DFAX Analyses Can Obviate Concerns About a Snapshot Analysis. It is true that applying the DFAX method generally means that models are run at a single point in time based on the data that is known at the time and the projections of load and other forecasted events over whatever period of time is used for modeling purposes. But there is nothing inherent within the DFAX method that prevents multiple scenario runs to be made and 104 Order on Remand P

79 averaged, or for a DFAX run to be made as of the time the facility is first planned and then run again as of the date it goes into service. It should be beyond debate that multiple scenario runs prior to construction can be done without an excessive burden; one of the parties to this case hired an expert witness who took the PJM information filed March 13, 2010, and by May 28, 2010, had prepared and submitted five different DFAX scenario runs. 105 There is also nothing inherent in the DFAX method that would preclude a periodic reanalysis. The Order on Remand PP notes that PJM has opined that there would be a virtually impossible administrative burden to run a DFAX analysis periodically. It is clearly not impossible PJM did just that for its March 13, 2010 filing in this proceeding. Dayton Power agrees that it may be difficult and even time-consuming. But Dayton Power would also submit that when $6.6 billion is being allocated, the administrative burden of doing additional studies periodically should not be a fatal impediment. Additionally, as described in subsections (iii) and (iv) below, there are DFAX mechanisms that are administratively simple to use that could be used if there were a need to update the analysis at the time the facility goes into service or periodically thereafter to address future changes in conditions. Dayton Power would also submit that if administrative burden were the primary criterion, then the least burdensome allocation method that would still match costs with benefits far better than socialization, would be to just assign costs to the zone of construction. At least the Commission could be assured that the costs were being allocated to the entity earning a return on the assets and that had significant amounts of power flowing through the facilities within its zone. 105 Initial Comments of Fair Pricing Group, Affidavit of Esam A.F. Khadr. 71

80 (iii) An In-Service DFAX Analysis and Federal Power Act Section 206 Adequately Solves Issues Relating to Significant Changes in Flow Direction or in the Use of the New Facilities. The effects of delays in construction as cited in the Order on Remand at P 43 can be taken into consideration by adopting a recommendation that Dayton Power made in its Reply Comments filed June 28, An initial DFAX analysis can be performed to allocate costs during the planning and construction phases with a second DFAX analysis run with updated data in the year placed in service. In the unlikely event that sometime over the 40 year useful life of a transmission asset, there truly is a sizable change in how power flows over these new transmission facilities and who uses them, Section 206 of the Federal Power Act already provides the traditional mechanism for adjusting how a once reasonable allocation method has become unreasonable over time. (iv) An Alternative and Administratively Simple Solution Exists For Periodic Redetermination of Beneficiaries. If the administrative burden of performing periodic DFAX redeterminations of beneficiaries after the new facility goes into service is a significant barrier to the Commission s approval on rehearing of the DFAX method, Dayton Power would respectfully request that the Commission: a) conditionally approve the DFAX method as described on the record for use in making the initial cost allocations that are used during construction and thereafter until the first redetermination period; and b) direct PJM to develop and present for further consideration an alternative form of DFAX that is administratively simpler to apply to periodic redetermination of beneficiaries. The current DFAX method, with its focus on who is contributing how much to the constrained facility, reasonably allocates costs on a cost causation basis. It can become difficult 72

81 to apply that same type of DFAX analysis several years later when the constrained facility may no longer be constrained and, in addition to the 500 kv facility that was constructed to relieve the constraint, there may be multiple other transmission or generation facilities that have been added nearby in the interim. But it is relatively easy, at any time, for PJM to apply the DFAX method to the now-in-service 500 kv facility itself. That is a simple with and without analysis similar to what PJM does routinely in its contingency planning. That kind of DFAX analysis looks to who is using the new facility (i.e., what changes would occur to whom if the facility did not exist). Dayton Power submits that the end-results of that kind of analysis would satisfy beneficiary pays principles and would meet the Commission s concerns about the appropriateness of the allocation over time to adjust for all the potential shifts in power flows, relative pricing in different areas of PJM, and other changes in markets. Dayton Power would like to emphasize that it is not suggesting that the Commission adopt this approach on rehearing without further proceedings. The genesis of the problem before the Commission on remand was that the particular form of socialization adopted in Opinion No. 494 had not been supported by any party during the evidentiary phase of the proceeding and thus there was no evidence directly addressing that method. It was first raised as a concept in a posthearing brief by PJM. Dayton Power would not want the Commission to make the same misstep here with respect to this concept. (v) The DFAX Methodology Adequately Matches Costs and Benefits Even where Multiple Reliability Violations Exist. The Order on Remand at PP correctly notes that the DFAX methodology currently employed by PJM focuses on who is using the single constrained facility that is the primary driver of the decision to build a new high voltage transmission line. And the Order on Remand correctly notes that the solution for resolving that reliability violation often mitigates or solves 73

82 other potential reliability problems. Id. at P 41. Where the Order on Remand errs is in its implicit assumption that those other potential reliability problems are in some far-off zone that is not being allocated the proper level of costs under the DFAX methodology. The record evidence, supplemented by PJM s RTEP filings, establish that the reliability problems that are resolved are in close geographic proximity and a broadened DFAX methodology to take into account all reliability violations would cause only minor changes in the allocation outcomes. For example, PJM s 2008 RTEP reported the following with respect to the $1.161 billion Susquehanna-Roseland project: The 2012 Retool analysis revealed 23 reliability criteria violations in Eastern Pennsylvania and New Jersey beginning in The Susquehanna Roseland 500 kv project resolves 21 violations such that they are then not expected to occur until 2022 or later. So, all 21 of the reliability violations resolved were violations in Eastern Pennsylvania and New Jersey. And the single violation DFAX methodology, under a variety of differing scenarios, assigns between 92% and 99% of the costs to those utilities in eastern Pennsylvania and New Jersey. 106 In other words, the single violation DFAX methodology has end-results that remain reasonable even when all 21 of the violations are considered it allocates costs that are roughly commensurate with the value received by these utilities from resolving all 21 of the violations. In the sensitivity analysis presented in its April 13, 2010 Response, PJM upped this number to 143 violations, but did not identify precisely where those violations were. 107 It then performed a multi-violation DFAX analysis that strongly suggests that all 143 violations continue to be in the eastern portion of PJM, centered primarily in New Jersey. According to 106 Gass Reply Affidavit, pp comparing 8 different DFAX scenarios prepared by PJM or by a witness for a party opposed to the DFAX method. 107 PJM April 13, 2010 at p

83 PJM s comparison table at p. 19, the New Jersey utilities that would be allocated about 87% under the single violation approach, would be allocated about 96% under the All Violations approach. 108 If Eastern Pennsylvania utilities are added to the New Jersey utilities, the single violation allocation is 98%, while the All Violations allocation is 99%. 109 Given this evidence, it is rather surprising that the Order on Remand at P 41 uses this specific example to conclude that DFAX does an inadequate job of allocating costs where there are multiple violations. It then becomes rather shocking that the solution adopted is a socialization method that drops the New Jersey utilities share of costs to 14% -- a fraction of the costs allocated to them under either DFAX method. Socialization obviously fails to capture the value of fixing reliability problems whether it is one violation or multiple violations. Additionally, it is almost tragically ironic that the Order on Remand voices concerns that this sensitivity analysis almost doubled the amounts allocated to some Midwestern utilities. 110 It is true that this sensitivity analysis nearly doubled ComEd s contribution from 0.28% to 0.40% and Dayton Power s contribution from 0.03% to 0.05%. The solution to that variation is certainly not socialization where the respective load ratio share allocations of 14.7% and 2.1% would be more than 30 times the highest of the DFAX values. (vi) Unquantified Assertions of Uncaptured System-wide Benefits Provide Inadequate Support to Reject the DFAX Method. Section VI.2 of the Order on Remand summarizes the bases for the determination that the DFAX method does not adequately recognize or allocate to all beneficiaries certain purported system-wide benefits that may be created from the new 500 kv facilities. That Section, 108 PJM April 13, 2010 Response at p.19, (adding values of Atlantic City Electric, Jersey Central Power, Neptune, ECP, Public Service Electric and Gas, and Rockland Electric). 109 Id., adding values for New Jersey utilities plus PECO and Pennelec. 110 Order on Remand P 121 n

84 however, is almost exclusively limited to a reiteration of statements made by PJM that were, themselves unsupported by any hard data. PJM did indeed state that a DFAX method may not allocate costs to all the beneficiaries of a new transmission line that provides enhanced reliability, reduced losses or other potential positive externality benefits. Order on Remand P 38. But PJM s statement did not try to quantify how much in the way of benefits any missing beneficiary is receiving. Other potential benefits discussed in the Order on Remand that are not captured by the DFAX method are the avoidance of cascading black-outs and the potential future use of transmission lines if power flows reverse. Order on Remand PP 42 and 46. There is, in fact, no record evidence that establishes that the Midwestern utilities receive any reliability benefits from these eastern transmission facilities. The DFAX methodology, if anything, over-allocates costs to the Midwestern utilities if one were to look at which entities truly need the facility for reliability purposes. The Midwestern utilities have zero need for these new transmission lines; every RTEP filed by PJM shows that their systems are reliable without the need for any new facilities operating at 500 kv or above. While it has zero need for the facilities, Dayton Power has been willing to pay a share of the costs of these facilities based on the DFAX methodology to reflect its contribution to the constraint that drives the decision to construct a new facility. The other alleged benefits that are supposedly uncaptured by the DFAX methodology are equally unsupported by any data or probative evidence. Sections IV.D.1 and IV.E.2. of this rehearing request deal with the Order on Remand s attempt to justify socialization on the basis of these same and additional alleged system-wide benefits. But as shown in these Sections above, the bulk of the assertions are based on a logical fallacy of assuming the conclusion, rely on extra- 76

85 record disputable data, or look to generalized benefits of belonging to an RTO that have no relationship to the new transmission facilities, or a combination of all three defects. For example, as discussed in more detail above in IV.E.2(a) of this rehearing request, the Order on Remand examines data from a meta-data study prepared by Berkeley Energy regarding the power quality benefits of 500 kv relative to 345 kv. There is no doubt that the DFAX methodology does not capture this benefit. But, in reality, this benefit does not exist on a system-wide basis. The Order on Remand committed a logical fallacy by assuming the conclusion: Assuming that all load in PJM benefits equally from decreased service interruptions and power quality disturbances, ComEd s share of this [computed $53 million PJM-wide] benefit would be $7,791,000 annually. 111 And this assumption of benefits spread equally across PJM is made despite the fact that now and after construction of the new transmission lines, there will be no 500 kv facilities in Ohio or Illinois. And more than $52 million of the alleged $53 million in PJM savings relates to power quality disturbances and it is unexplained how an eastern transmission line that will not affect power flows in the Midwest could possibly improve power quality in the Midwest. See Section IV.E.2.(a) of this rehearing request on this specific alleged benefit and Sections IV.D.1 and IV.E.2 addressing and rebutting other alleged benefits. (vii) The Existence of a Stability Related Project Does Not Support Rejection of DFAX for All Reliability Projects. The Order on Remand at P 46 notes a concern raised initially by Baltimore Gas & Electric ( BGE ) that the DFAX method might fail to allocate costs properly for projects 111 Order on Remand P

86 designed to enhance stability rather than reliability. According to BGE s 2010 comments to which the Order on Remand refers: Prime examples of this are the two 500 kv circuits that were built jointly by BGE and PEPCO the Calvert Cliffs to Chalk Point and the Waugh Chapel to Brighton 500 kv circuits. These circuits were not built to address any system overloads, but were solely needed to improve the stability of the system. These circuits rarely carry any appreciable amount of power, but of course this was not their intention. To allocate the costs of such projects based on a flow-based methodology such as DFAX makes absolutely no sense. 112 There appears to be nothing in the record to determine the costs of these facilities, when they were built or how their costs are currently allocated. A search of Maryland PSC cases indicates that these circuits may have been certificated and approved in the early 1980s. According to the Maryland PSC, The segment of the 500 kv line in Maryland between Waugh Chapel and High Ridge is certificated, but a provision in the authority delays the beginning of construction contingent upon the issuance of a certificate for the segment of the line involved in this proceeding. The segment between Chalk Point and Calvert Cliffs has received a certificate, but currently is on remand to the hearing examiner in Case No (69 Md PSC 217) for the sole purpose of further proceedings with respect to four of the conditions that were included in his proposed order. The beginning of construction of this segment is also delayed until a certificate is obtained for the Brighton-High Ridge segment Pepco summarizes its evidence, presented through Mr. Templeton, in justification of the need for the 500 kv loop and the Brighton to High Ridge segment into four major points. 1. The Brighton-High Ridge line is needed (i) to close the 500 kv loop and thereby provide a minimum transfer capability of 5,000 mw between adjacent interconnected regions; (ii) to avoid cascading outages for loss of the Burtonsville-Oak Grove right of way; and (iii) to provide flexibility to accommodate for future generation in the south of the Pepco and BG&E systems. 2. When the Burches Hill-Possum Point line is out of service (maintenance or forced outage) at the same time a 230 kv line between Dickerson and Quince Orchard is lost for any reason, the Brighton-High Ridge line is needed to avoid unacceptable loads on the 112 Initial Comments of BGE, Initial Affidavit of Charles P. Mantassa P Re Potomac Electric Power Co., 71 Md PSC 68 (1980) mimeo at 20 n

87 Pepco system. 3. To avoid instability from "loss of the right of way" between Bowie and Burtonsville. 4. If BG&E has problems on its Waugh Chapel 230 kv bus at the time when the Burches Hill-Possum Point line is out of service, unacceptable loads will be experienced on Pepco's feeders between its Oak Grove and Burtonsville substations.... With respect to the loop increasing transfer capability on an interregional basis, it was testified that such transfers would principally benefit, and occur among, the Mid-Atlantic Area Council ("MAAC"), of which Pepco and BG&E are members; the Virginia- Carolinas companies ("VACAR"), of which VEPCO is a member [the VACAR group is a part of the Southeastern Electric Reliability Council ("SERC")]; and the East Central Area Reliability Council ("ECAR"), to the west of Pepco's service area and includes the Allegheny Power System ("APS"), of which The Potomac Edison Company ("PE") is an operating subsidiary. Completion of the loop, it was said, would strengthen presently weak interfaces between these adjacent reliability councils, particularly the MAAC- VACAR interface between the Pepco and VEPCO systems. 114 Dayton Power respectfully submits that even if these were the considerations given for the construction of new facilities under PJM s RTEP process, there would be no basis for socializing the costs across all of PJM. The instability on the system being addressed is between two points in a defined geographical location (between Bowie and Burtonsville Maryland); and the cascading outage and other reliability concerns are expressed solely with respect to BGE and Pepco. While broader benefits were alleged for increased transfer capability, it is unlikely that such benefits would reach as far as Dayton Power or ComEd. These facilities, built then or now, would be built to enhance local stability and reliability concerns and would be properly allocated accordingly, not socialized across all of PJM. To the extent the Commission on rehearing remains concerned that the DFAX methodology does not adequately capture the benefits of a stability upgrade that may not be designed to carry much power, it should direct PJM to allocate the related costs based on where the instability problem exists. Socializing such costs to remote utilities is unjustified. 114 Id., mimeo at

88 (viii) Changes in the Timing of Construction Do Not Support Rejection of the DFAX Method. As support for the view that the DFAX method fails to capture changing circumstances, the Order on Remand P 43 and n. 59 states that changing conditions are indicated by the Commission having recently approved transmission rate incentives for a new 765 kv project that will strengthen the transmission system in Illinois, Indiana, and Ohio and by the fact that two of the large proposed eastern transmission facilities have been delayed indefinitely. These assertions do not in any way invalidate the DFAX method. As an initial observation, the 765 kv line was not being proposed to resolve any currently identified reliability problem and the Commission explicitly found that the applicants had not provided sufficient evidence to establish that the project ensured reliability. 115 With respect to the eastern projects that have been delayed, Dayton Power would submit that that is not a change in circumstance that would invalidate a DFAX method of allocation. First, the underlying reasons for construction, whether in 2012 or 2016 or later, will remain the same, i.e., there will be a reliability problem in the eastern portion of PJM that needs to be fixed by the new transmission facility. Absent a truly radical shift in power flows, the utilities that contributed the most to a constraint when the DFAX analysis was first run will still be contributing the most to the constraint at the time construction begins. But it is not even required to make that reasonable assumption as Dayton Power has previously proposed, another DFAX analysis could certainly be run as of the date the new transmission facility goes into service, which would update the percentage contributions to the constrained facility as of that date. The difficulties identified by PJM in periodically rerunning DFAX analyses do not arise in the context of an analysis performed as of an in-service date. Those difficulties arise well after that 115 RITELine Illinois, LLC, 137 FERC 61,039 at P 36 (2011). 80

89 as a result of other changes in flow caused by subsequent new facilities and generators that may interconnect. Dayton Power would further note that certain costs qualify for recovery even before a facility is complete. Thus, the proper allocation of costs can remain an important issue to resolve even with respect to projects that are delayed or deferred. H. A Load-Ratio Share Allocation Remains Unjust, Unreasonable, Unduly Discriminatory and Preferential No Matter How Often It Is Updated. The Order on Remand P 62 states that: Unlike the one-time allocation of costs of lower voltage projects, providing for an annual reallocation of the cost of high voltage facilities pro rata based on load-ratio share will help ensure that, over time, the costs of these projects are allocated to those who are likely to benefit. Under the theories advanced in the Order on Remand it does not matter that the $6.6 billion is all planned to be incurred to resolve reliability problems in eastern zones. It would not matter if it were $66 billion. It would not matter if it were $66 billion all spent in a single utility zone in a single State. The load ratio share is computed using only five hours of PJM peak loads in a 12-month period preceding the year of allocation and the amount of load served within a Zone during those five hours. 116 It does not take into consideration why the project is built, who is contributing to the reliability violation being rectified, or who will be using the new transmission facility. It does not look at any differences in seasonal flows, hourly changes in flow direction, or any other types of changes (other than peak load) that can occur within a year or from year to year. If, contrary to all the record evidence, there were some future shift in flow patterns such that flows go east to west, it would not take that into consideration either. It is not a flow based allocator. It does not take into consideration any use of the facility today or tomorrow or any point in time 116 PJM OATT, Schedule 12(b)(i)(A). 81

90 in the future. Its only consideration is how much peak load exists within a utility zone at some point during the prior year. The load ratio share is just a number that is essentially unconnected in any way to the use of the new transmission facilities. When $6.6 billion is being allocated, it is unconscionable to use such a simplistic allocator that is so disconnected from the actual usage of the new transmission lines or the actual benefit from no longer relying on existing facilities that are constrained to the point of causing a reliability violation. No matter what variation of DFAX analysis is presented, they all demonstrate that Midwestern utilities contribute zero or close to zero to the reliability problems that are being fixed by the new facilities. As noted above, these facilities are simply too far away from Dayton Power or utilities even farther west to provide any significant and quantifiable benefit. Dayton Power has already noted the absurd results from using a load ratio share allocator for the $946 million Branchburg-Roseland-Hudson line, located solely in New Jersey and designed solely to rectify known reliability violations in New Jersey. Under socialization, the aggregated share of costs for this project from all the utilities in New Jersey (about 12%) would be lower than the costs paid by ComEd (16%) individually, AEP (18%) individually, or Dominion Resources (13%) individually. 117 This allocation is unjustifiable currently based on cost causation principles and if any weight at all were to be given to the localized benefits in New Jersey to solving reliability problems that are focused in that State. And, contrary to the Order on Remand s statement quoted above, it does not become justified over time as load ratio shares change. If Dominion Resources load ratio changes from 13% to 14%, there is no reason to believe that this somehow means that Dominion Resources is receiving an additional 1% of the benefits of this New Jersey line. The basic facts remain unchanged: this facility was not 117 Gass Reply Affidavit pp

91 needed by and provides no quantifiable reliability benefits to Dominion Resources either in year 1 or in some subsequent year when its load ratio share changes. Other portions of this rehearing request have demonstrated that none of the benefits that are alleged to support the socialization method actually provide such support. System-wide benefits cannot be found by taking two pages of conclusory statements of benefits from a PJM report and then assuming the conclusion that such benefits are spread evenly across PJM. Identifying benefits of being a member of a power pool or RTO may support system-wide allocation of PJM s administrative costs, but benefits that are independent of the new transmission facilities at issue here do not support system-wide allocation of the costs of the new transmission facilities. The fact that PJM does regional planning supports the allocation of its internal planning costs system-wide, but does not support allocating new transmission facility costs system-wide that are specifically designed to fix reliability problems located in one part of PJM. There has been no showing that these new transmission lines will in any way reduce the potential of cascading outages or improve power quality to the Midwest utilities those utilities had sufficiently robust systems in place to avoid the last major cascading outage and where the DFAX analyses in the record demonstrate no or virtually no relationship between their load and the constrained facilities, it is impossible to conclude that these utilities will see improved power quality from the new facilities built to relieve the constraint. Also, as discussed in more detail in sections of this rehearing request above, many of the defects ascribed to the DFAX methodology are present to an even greater degree for socialization. Socialization ignores the use of the new facilities both now and under all future hypothetical power flow changes. Where there are multiple reliability violations, socialization 83

92 ignores the location of all them including the primary violation that the DFAX method uses to match cost responsibility to those who contribute to the cause for costs to be incurred. Socialization, conceptually, is founded in a belief that there are no identifiable benefits that can be attributed to any entity or group of entities despite the fact that the entire structure of the PJM planning process and the Commission s review is to identify specific facilities located in specific places that are posing a reliability problem that needs to be addressed. In short, the Order on Remand offers a large number of justifications for socialization, but each such justification is founded in unwarranted assumptions, unsubstantiated hypotheticals about future changes, improper attribution of benefits to the Midwest, and erroneous interpretations of data. A long string of zeros still adds up to zero: socialization is unsupported by substantial record evidence. I. The Order on Remand Results in a Massive and Unjustified Cost Shift. 1. There Has Been a Move from the DFAX Method to Socialization that Has Caused a Massive Cost Shift. There is no dispute that the end-results of socialization are hugely different from the endresults under the DFAX method. The PJM chart from its April 13, 2010 submission at 17 is reproduced here; the final two columns were calculated and added by Dayton Power and included in its Reply Comments filed on June 28, 2010 and the Midwest utilities are in bold font. 84

93 Transmission Zone Allocation DFAX Method ($M) Allocation Socialization Method ($M) $M Increase or Decrease DFAX to Socialization Percentage Increase or Decrease AEC $ $ ($113.86) (46.3%) AEP $87.79 $1, $1, ,360% APS $ $ ($17.95) (4.1%) BGE $ $ ($324.01) (50.1%) ComEd $15.17 $1, $1, ,841% Dayton $0.92 $ $ ,761% DL $0.59 $ $ ,649% DPL $ $ ($163.14) (46.4%) Dominion $ $ $ % JCPL $ $ (567.63) (66.9%) ME $90.24 $ $ % Neptune $ $33.24 ($98.76) (74.8%) PECO $ $ ($188.10) (32.5%) PENELEC $22.87 $ $ % PEPCO $ $ ($51.91) (14.4%) PPL $ $ $ % PSEG $1, $ ($1,211.61) (71.9%) RECO $64.16 $17.95 ($46.21) (72.2%) ECP $40.51 $15.96 ($24.55) (60.6%) The Order on Remand, however, rejects any implications that there is a cost shift involved because, in its view, the DFAX method has never been approved for allocating higher voltage facilities. Thus, the Order on Remand opines that there is no starting point for an analysis that would show a cost shift. 118 The Order on Remand recognized that PJM was using a model to allocate costs prior to initiation of this Federal Power Act section 206 proceeding. Order on Remand P 35. It has been well-understood that that model is the DFAX method. PJM s January 2006 Report on Allocations of Cost Responsibilities for Certain Transmission Upgrades specifically identifies the method by which costs are allocated as the DFAX method and illustrates how that method would allocate costs of baseline reliability projects. 119 The baseline projects allocated through the DFAX methodology included facilities operating at 500 kv as well those operating at lower 118 Order on Remand PP 35 and PJM Application, Docket No. ER , Jan. 6, 2006, Attached Report at p

94 voltages. 120 In reviewing that filing, the Commission did not accept it unconditionally, but set certain aspects of it for hearing. But, significantly, the Commission recognized the prior use of the DFAX method and that those seeking changes to it would need to file a complaint. Further, PJM explains that the methodology it used to allocate costs included in the filings is the same methodology it has used historically to allocate cost responsibility. PJM asserts that it has presented and explained the methodology to various stakeholder groups during the RTEP process. PJM states that its methodology remains applicable as the current RTEP, like all previous expansion plans, includes only zonal allocations of cost responsibility. PJM notes that no alternative allocation methodologies have been suggested through the committee structure.... A number of protests seek generic changes to the RTEP methodology that are unrelated to the allocation of costs for the specific projects at issue in this filing. For example, protests request generic changes to the Distribution Factor (DFAX) methodology used by PJM. Generic issues as to the way RTEP is applied are beyond the scope of the instant filings..... Parties seeking to alter or modify the RTEP process, or PJM s OATT or Operating Agreement, are free to file a complaint with the Commission. PJM Interconnection, LLC, 115 FERC 61,261, PP 7 and 52 (2006). These rates never did become truly final due to subsequent Commission orders consolidating it with other cases, and an eventual Commission finding in Opinion No. 494 that the specific mechanisms for cost allocation should be incorporated into the tariff rather than described generally in the tariff with detail in related Manuals. 121 So, the details of the DFAX method had not been approved in a final order no longer subject to review in any earlier case for allocating costs of new facilities planned under the RTEP protocol. But unquestionably, the DFAX method was being used by PJM prior to the complaint case that initiated this process to allocate costs and develop the cost recovery obligations set forth in Schedule 12 of its Tariff. DFAX has been the status quo method from which all other 120 E.g., id. at 21, Network Upgrade B Opinion No. 494, supra, at PP

95 proposals have deviated. Equally clear it was not until issuance of Opinion No. 494 that the Commission ordered socialization as an approach. The pre-existing use of the DFAX method makes it an untenable position that it and socialization stand on an equal footing such that there would be no cost shift in the event that socialization becomes the new method for allocating costs of new 500 kv and above facilities identified as necessary in RTEPs filed after Alternatively, the Last Fully Approved Method of Cost-Allocation Was Zone of Construction and Socialization Creates a Massive Cost Shift from that Approach. If one is to take the position that DFAX is not the appropriate starting point to determine whether a move to socialization creates a cost-shift, then the alternative must be an allocation method that is even older. Going back to 2003, the proposals that were under discussion were a flow-based approach that looked at megawatt-hour flow within the zone from a transmission enhancement. As the Commission noted in PJM Interconnection, LLC, 104 FERC 61,124 at P 41 (2003). PJM also proposes a new Section 12 of its tariff, which sets out a framework for transmission owners to establish a fixed monthly Transmission Enhancement Charge (TEC) for each required upgrade, which PJM will translate into a charge per megawatt-hour of monthly system usage by the appropriate market participants, and will incorporate into that tariff provision the designation of each customer from whom it proposes to collect the TEC for each upgrade. PJM currently anticipates applying such charges on a zonal basis only, although in the future it may be able to apply the charges on a sub-zonal basis. But even that method does not appear to have been approved in a final order. The last allocation method that may actually be approved is the License Plate methodology that still remains in effect for existing transmission facilities, 122 i.e., the zone of construction pays for the costs of the facilities. All 18 planned facilities at issue in this case are planned for construction by utilities 122 Order on Remand P 4. 87

96 located in Pennsylvania, Virginia, West Virginia, Maryland, Delaware and New Jersey. Socialization would create a multi-billion cost shift to Illinois and Ohio from that form of allocation. J. In the Alternative, on Rehearing, the Commission Should Consider a Sub-Regional Approach for Postage Stamp Cost Allocation. As is clear from this rehearing request, Dayton Power supports a DFAX methodology and believes that the postage stamp approach using load ratio share as an allocator to socialize costs massively shifts to western utilities costs that are incurred solely to resolve reliability violation in the eastern portion of PJM. In the event, however, that the Commission continues to believe that a load ratio share allocator better responds to changes in future loads, Dayton Power suggests that a possible alternative approach for the Commission to consider is a mechanism that would allocate costs by load ratio share on a sub-regional basis. That is, the DFAX method would be a screening tool to identify the sub-regions within PJM that comprise the vast majority of the contribution to the reliability violation that the new facility is designed to fix and the subregions within PJM that contribute little or nothing to the reliability violation. The costs would then be allocated using the load ratio share of the entities operating within the sub-region(s) found to contribute significantly to the reliability problem. This modified postage-stamp methodology would meet all the criteria and goals offered by the Commission in favor of a broader regional allocation, without imposing substantial costs on market participants who have contributed little or nothing to the reliability violation and do not receive any direct or quantifiable benefit from resolving the reliability violation. This approach meets a common-sense test as well in the context of the Commission s concerns that models have limitations. Shifts in real versus projected load growth, fuel rates and other factors are likely to cause some deviations from how a model would allocate costs for a 88

97 project. For example, a facility designed primarily to resolve a reliability concern in Maryland may also provide benefits to utilities in Delaware, Eastern Pennsylvania and New Jersey. Over time, however, the relative proportions of benefits may change. A sub-regional allocator on a postage stamp basis would recognize that all entities in those zones are benefiting from the project to some degree now and that the relative proportions of benefits may change over time, while simultaneously recognizing that remote zones who receive zero or nearly zero benefits based on a multi-year set of load projections are also unlikely to receive any significant benefits in the future absent truly radical changes in flow patterns. 89

98 V. CONCLUSION For the foregoing reasons, The Dayton Power and Light Company respectfully urges the Commission to accept this request for rehearing and, on rehearing take actions and make rulings as follows: 1) eliminate the reliance on extra-record, post-hearing documents and statements therein; 2) find that the record evidence does not support socialization of the costs of high voltage transmission facilities based on load-ratio share and that the end-results of such an allocation are unjust, unreasonable, unduly discriminatory and preferential and not in conformance to the Seventh Circuit s mandate to ensure that the costs allocated to each transmission owner subject to Schedule 12 of PJM s tariff are roughly commensurate with the benefits received by that transmission owner from the new transmission facilities at issue in this proceeding; 4) find that the record evidence supports the DFAX method of allocating the costs of high voltage transmission facilities and that the end-results of such an allocation are just, reasonable, and not unduly discriminatory or preferential and are in conformance to the Seventh Circuit s mandate to ensure that the costs allocated to each transmission owner subject to Schedule 12 of PJM s tariff are roughly commensurate with the benefits received by that transmission owner from the new transmission facilities at issue in this proceeding; 5) direct PJM to modify its tariff to specify the use of the DFAX method for 90

99 allocating the costs of new transmission lines operating above 500 kv; 6) if the Commission believes that it is necessary to periodically re-evaluate the beneficiaries of a new transmission line, direct PJM to develop and propose to the Commission a DFAX related method, such as a DFAX analysis with and without the new transmission line, that will implement that directive; and 7) in the alternative, consider using the DFAX method as a screening tool, using load ratio share to allocate costs on a sub-regional basis to those identified as significantly contributing to the reliability violation that caused the need for the new transmission facility. Respectfully submitted, THE DAYTON POWER AND LIGHT COMPANY ss:/ Randall V. Griffin Randall V. Griffin Chief Regulatory Counsel The Dayton Power and Light Company 1065 Woodman Drive Dayton, OH (937) (office) (937) (Facsimile) randall.griffin@dplinc.com Hertzel Shamash Vice President, Resource Planning The Dayton Power and Light Company 1065 Woodman Drive Dayton, OH (937) (office) (937) (Facsimile) hertzel.shamash@dplinc.com 91

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