Introduction

Virginia state public policy mandating Underground transmission line preference affects ratepayers. On October 19, 2017, FERC issued Opinion No. 555 pursuant to Parties’ exceptions to the Initial Decision in Old Dominion Electric Cooperative and North Carolina Electric Membership Corporation v. Virginia Electric and Power Company, 161 FERC ¶ 61,054, reversing the Administrative Law Judge’s determination as to the appropriate methodology for calculating Virginia Electric and Power Company’s (VEPCO) Incremental Underground Revenue Requirement (IURR). The origin of this dispute can be traced back to April 2, 2008, the day Virginia House Bill 1319 (HB 1319) was signed into law, mandating the Virginia State Corporation Commission (VSCC) establish a statewide pilot program for the development of underground transmission lines. VEPCO sited, constructed and placed in service three transmission projects, where all or portions of each were constructed underground pursuant to HB 1319.

On March 17, 2010, Old Dominion Electric Cooperative (ODEC) and North Carolina Electric Membership Corporation (NCEMC) (jointly, the Complainants) filed a complaint under section 206 of the Federal Power Act (FPA) against VEPCO, seeking to exclude the incremental costs associated with undergrounding portions of the Pleasant View-Hamilton Project, the DuPont Fabros Project, and the Garrisonville Project (collectively, the Projects) from VEPCO’s Annual Transmission Revenue Requirement. The Pleasant View-Hamilton Project consists of a 230 kV, 12-mile line to the new Hamilton substation, including approximately two miles of underground construction – placed in service on October 28, 2010, at a total cost of $90.4 million, with $32.9 million associated with the cost of the underground segment of the line. Order on Reserved Issue, 146 FERC ¶ 61,200 at P. 6 (Mar. 20, 2014). The DuPont Fabros Project is a 0.71 mile double-circuit 230 kV underground transmission line – placed in service in July 2010 at a total cost of $10.1 million, with $2.2 million associated with the cost of the underground segment of the line. Id., at P. 7. Lastly, the Garrisonville Project is a five-mile double circuit underground transmission line – placed in service in July 2012 at a total cost of $138.9 million, with $126.6 million associated with the cost of the underground segment of the line. Id., at 8. The Complainants chief argument for excluding the incremental undergrounding expenditures was that such costs accrued as a result of Virginia HB 1319 rather than a determination made by PJM or NERC that undergrounding the Projects was necessary for the reliability of the system.

Procedurally, the case was bifurcated on two main issues: (1) the appropriate methodology to calculate the Incremental Underground Revenue Requirement; and (2) the proper allocation of the undergrounding costs between VEPCO’s Incremental Underground Revenue Requirement and its overall Annual Transmission Revenue Requirement. Cost allocation was set aside as a Reserved Issue by the Parties and was determined separately by the Commission on March 20, 2014 in what is referred to as the Order on Reserved Issue. The Administrative Law Judge (ALJ) resolved all other issues in the proceeding in the Initial Decision issued on February 16, 2016. Parties moved for Rehearing of the Order on Reserved Issue, and also filed Briefs excepting to certain aspects of the ALJ’s Initial Decision. As such on October 19, 2017, the Commission issued companion orders: Opinion No. 555 resolving issue (1), and Order Denying Rehearing of the Order on Reserved Issue, 161 FERC ¶ 61,055, resolving issue (2).

Analysis

VEPCO’s Annual Transmission Revenue Requirement is assessed on its transmission customers in both Virginia and North Carolina. Originally, VEPCO had sought to allocate the undergrounding costs of the Projects equally among its transmission customers as a system-wide cost under its FERC-approved formula rate. Such was a major point of contention, especially among North Carolina transmission customers. For instance, NCEMC and the North Carolina Utilities Commission (NCUC), “assert[ed] that [VEPCO] placed the Projects underground solely to address local concerns, primarily related to local aesthetics, at the directive of the Virginia General Assembly and VSCC, and therefore [VEPCO’s] non-Virginia jurisdictional customers should not be required to pay for incremental costs of undergrounding.” Order on Reserved Issue, at P. 10. In the Order on the Reserved Issue, the Commission agreed and determined that it is not just and reasonable for non-Virginia jurisdictional customers to be allocated the incremental undergrounding costs of the Projects. Id.

As such, the Commission had to create an Incremental Underground Revenue Requirement to account for the associated undergrounding costs separately than what may be included in VEPCO’s overall ATRR. Only Virginia-jurisdictional customers would be required to pay the costs allocated to the IURR; whereas, all VEPCO transmission customers would continue to pay the remaining costs under the Company’s ATRR. In the Initial Decision, the Presiding Judge found VEPCO’s proposed methodology to calculate the IURR in the same manner as it calculates individual transmission project revenue requirements just and reasonable. Under Opinion No. 555, the Commission reversed the Presiding Judge’s Initial Decision on this issue. Essentially, the calculation came down to cost items that should be included in the IURR’s cost of service and what should properly be excluded. The Commission found that Operations and Maintenance (O&M), insurance, and general and administrative overhead, are ongoing costs incurred to provide continuous transmission service and are not incremental costs resulting from the VSCC’s determination that VEPCO construct the Projects underground. Instead, the Commission found it just and reasonable “for the IURR to include only the cost items directly associated with the incremental capital costs required to construct the Projects underground, specifically: depreciation, return on capital investment, income taxes and Accumulated Deferred Income Tax, and property taxes[,]” which are directly tied to the capital investment under Virginia state law. Opinion No. 555, at P. 30. The Commission determined that the projects provide system-wide benefits and that all VEPCO transmission customers should share costs like O&M associated with the ongoing operation of the Projects. Such costs should not be solely allocated under the IURR because direct assignment of such costs to Virginia-jurisdictional customers only, would be unjust and unreasonable.

The last prominent issue decided in Opinion No. 555, is how to allocate future capital expenditures that do not increase the capacity of the underground transmission lines. The Commission determined that future capital expenditures that do not increase the capacity of the lines should not be allocated to the IURR, but rather to the ATRR, because such future capital expenditures are like “O&M costs, and other costs like O&M associated with the ongoing operation of the Projects” because such expenditures are made to “provide system-wide benefits to all” VEPCO transmission customers, not just Virginia-jurisdictional customers.

Conclusion

Opinion No. 555 protects Virginia ratepayers from incurring full cost responsibility for the underground transmission Projects discussed herein. However, FERC’s Order Denying Rehearing of the Order on Reserved Issue preserved incremental underground cost responsibility, i.e., costs incurred during construction of the underground lines squarely on the backs of Virginia-jurisdictional ratepayers, thus excluding VEPCO’s North Carolina transmission customers. The Commission claims its determinations in these matters is narrowly tailored and rather fact specific; yet, these determinations make state siting decisions more critical. If a state orders a utility to underground portions of its transmission project, expenditures made to construct such underground lines could be localized to that state’s customers rather than pooled across state lines to a larger zone of customers. Opinion No. 555 should be referenced by state siting authorities when evaluating the aesthetic benefits of undergrounding transmission lines versus the economic costs that could follow.

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