FTC Comment Before the Federal Energy Regulatory Commission Concerning the Planning of Electric Power Transmission and the Allocation of Costs for Transmission Expansions and Improvements

UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Transmission Planning Processes 	) 	Docket No. AD09-8-000
Under Order No. 890 	)
REPLY COMMENT OF THE FEDERAL TRADE COMMISSION
December 3, 2009
The Federal Trade Commission (FTC) appreciates this opportunity to submit a reply
comment regarding the transmission planning and transmission cost allocation issues raised in
the Notice of Request for Comments (Notice) that the Federal Energy Regulatory Commission
(FERC) issued on October 8, 2009.
FERC is considering means to strengthen regional transmission planning processes by
broadening the geographic scope of transmission planning. FERC asks: “Are transmission
planning processes adequate to identify and evaluate potential solutions to needs affecting the
system of multiple transmission providers?” Transmission planning is most likely to be effective
when the geographic scope of the planning process matches the geographic scope of the power
flows that affect transmission operations. For the United States, the relevant transmission areas
are the Eastern, Western, and Texas Interconnections.1 When transmission planning occurs on
this geographic scale, it can more efficiently incorporate all of the relevant congestion,
reliability, and environmental considerations. Our comment contrasts with the viewpoint
expressed in the comment of Dayton Power and Light (Section II.D.) to the effect that
consistency in transmission planning with Interconnections is of little importance because ad hoc
solutions historically have been the norm.2
A planned, efficient expansion is necessary to make the nation’s transmission system
robust. FERC finds, however, that inadequacies and inconsistencies in cost allocation techniques
appear to be undermining or slowing efficient transmission investments, particularly when a
transmission project spans several transmission operating areas. Such wide-area projects can
reduce the costs of complying with new renewable resource requirements and potential climate
legislation or regulation. FERC asks: “Should processes be established to help stakeholders
address cost allocation matters over larger geographic regions?” FERC should develop or
facilitate consistent Interconnection-wide approaches to the allocation of transmission costs as a
way to support efficient transmission investment activity. Setting a single, standard cost
1 The Electric Reliability Council of Texas (ERCOT) is the Texas Interconnection.
2 See Comments of The Dayton Power and Light Company, available at
http://elibrary.ferc.gov:0/idmws/File_list.asp?document_id=13768002.

2
allocation approach within each Interconnection is likely to benefit consumers by reducing
transaction costs, regulatory risks, and project delays associated with the existing processes.
FERC also asks: “How can customers that benefit from a particular facility be
determined?” FERC’s strategy for assessing benefits should be mindful that the transmission
system’s functions are evolving. In particular, when customers are on dynamic pricing and
generators are intermittent, the benefits of transmission projects differ from those benefits in the
traditional world (in which customers are passive and generators’ output is more predictable).
Computerized grid simulation techniques may be useful in assessing the specific benefits of
individual transmission projects – or of portfolios of such projects – under a variety of plausible
scenarios about future grid conditions. Accurate methods to combine the evaluations of
transmission’s economic and reliability benefits would lead to more accurate estimates of those
benefits. Our comment contrasts with the comment of Dayton Power and Light,3 which
advocates a form of “beneficiary-pays” approach that does not appear to include some important
benefits of a robust transmission system for power consumers, environmental benefits, or the
benefits of network economies that are likely to emerge as smart grid technology is deployed.
Interest of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers, both through enforcement
of the antitrust and consumer protection laws and through competition policy research and
advocacy. The FTC often analyzes regulatory or legislative proposals that may affect
competition or allocative efficiency in the electric power industry. The FTC also reviews
proposed mergers that involve electric and natural gas utility companies, as well as other parts of
the energy industry. In the course of this work, as well as in antitrust and consumer protection
research, investigation, and litigation, the FTC applies established legal and economic principles
and recent developments in economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
antitrust enforcement and competition advocacy.4 The FTC’s competition advocacy program has
3 Supra note 2.
4 See, e.g. Opening Remarks at the FTC Conference on Energy Markets in the 21st Century:
Competition Policy in Perspective (Apr. 10, 2007), available at
http://www.ftc.gov/speeches/majoras/070410energyconferenceremarks.pdf. FTC merger cases
involving electric power markets have included the DTE Energy/MCN Energy (2001) (consent
order), available at http://wwwftc.gov/os/2001/05/dtemcndo.pdf; and PacifiCorp/Peabody
Holding (1998) (consent agreement), available at
http://www.ftc.gov/os/1998/02/9710091.agr.htm. (The FTC subsequently withdrew the
PacifiCorp settlement when the seller accepted an alternative acquisition offer that did not pose a
threat to competition.)

3
produced two staff reports on electric power industry restructuring issues at the wholesale and
retail levels.5 FTC and FERC staff (along with others) were members of the Electric Energy
Market Competition Task Force, which issued a Report to Congress in 2007.6 In addition, the
FTC has held public conferences on energy topics, including Energy Markets in the 21st Century
(April 10-12, 2007)7 and Carbon Offsets & Renewable Energy Certificates (January 8, 2008). 8
The FTC and its staff have filed numerous competition advocacy comments with FERC
and participated in FERC technical conferences on market power issues. For example, in March
2007, the Deputy Director for Antitrust in the FTC’s Bureau of Economics served as a panelist
for a technical conference on FERC’s merger and acquisition review standards under Federal
Power Act (FPA) Section 203 (Docket No. AD07-2-000). The FTC submitted comments in July
2004 and January 2006 in FERC’s proceeding on its FPA Section 205 standards for market-
based rates (Docket No. RM04-7-000). The FTC also has commented on FERC’s initiatives to
promote wholesale electricity competition and on various state issues associated with
restructuring the electric power industry.9
Background
5 FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/elec/electricityreport.pdf; FTC Staff Report, Competition and
Consumer Protection Perspective on Electric Power Regulatory Reform (July 2000), available at
http://www.ftc.gov/be/v000009.htm (compiling previous comments from the FTC staff provided
to various state and federal agencies).
6 See http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-fina-rpt.pdf.
7 Conference materials available at
http://www.ftc.gov/bcp/workshops/energymarkets/index.shtml.
8 Conference materials available at
http://www.ftc.gov/bcp/workshops/carbonoffsets/index.shtml. Other programs have included the
FTC’s public workshop on Market Power and Consumer Protection Issues Involved with
Encouraging Competition in the U.S. Electric Industry, held on Sept. 13-14, 1999 (workshop
materials available at http://www/ftc.gov/bcp/elecworks/index.shtm); and the Department of
Justice and FTC workshop on Electricity Policy, held on April 23, 1996.
9 See, e.g., Federal Trade Commission, Comment before the Federal Energy Regulatory
Commission on Wholesale Competition in Regions with Organized Electric Markets (Apr. 17,
2008), available at http://www.ftc.gov/be/v070014b.pdf. A listing of FTC and FTC staff
competition advocacy comments to federal and state electricity regulatory agencies (in reverse
chronological order) is available at http://www.ftc.gov/opp/advocacy_date.shtm.

4
The Notice reflects FERC’s concern that the transmission grid was not configured or
developed to perform functions that it currently performs or is likely to perform soon. 10 Most of
the existing transmission system was built to move power from central generating stations to
major cities within self-sufficient, vertically-integrated monopoly utilities. Transmission ties
between utilities generally were designed for relatively small, short-term flows of power to
supplement a utility’s own generation or to assist neighboring utilities facing minor generation
shortfalls.
Over the past 15 years, however, FERC policies and legislation promoting wholesale
competition among generators have changed the power sector dramatically. 11 Lower-cost
generators, as well as generators that use renewable sources of energy, have increased output and
served more distant customers, and thus have increased transmission substantially. 12
Consequently, the demand for transmission has increased, as has the volume of power
transmitted.
Nevertheless, transmission investment has lagged, resulting in significant congestion in
some areas. This congestion limits competition and increases power costs and prices, to the
detriment of consumers. Incentives to reduce transmission congestion may be muted for some
transmission owners. For example, a firm that owns both transmission and generation in the
same region may profit when congestion prevents outsiders from competing with the firm’s
generation. This diminished competition also can harm consumers. Notwithstanding FERC
transmission policies that have sought to blunt these anti-consumer incentives – and despite
recent increases in transmission investment – consumers likely would benefit from further
transmission investment.
Looking toward the future, several states have required that an increasing proportion of
electricity be generated from renewable sources. Many of the best sites for wind and solar
generation, however, are in remote areas that are not well connected to the existing transmission
10 Notice. The issues associated with lagging investment and the legacy aspects of the
transmission grid are discussed in more detail in the Electric Energy Market Competition Task
Force’s Report to Congress on Competition in Wholesale and Retail Markets for Electric
Energy, supra note 6, at 36-37 (and, in general, in Chs. I-III).
11 See, e.g., Harry Singh, “Transmission Markets, Congestion Management, and Investment,” in
Fereidoon Sioshansi (ed.), Competitive Electricity Markets: Design, Implementation,
Performance, Ch. 4 (2008).
Some states have also allowed competition among retail firms seeking to serve end-users,
especially large commercial and industrial customers.
12 See, e.g., Erin T. Mansur and Matthew W. White, “Market Organization and Efficiency in
Electricity Markets” (June 30, 2009), available at
http://www.som.yale.edu/faculty/etm7/papers/mansur_white_pjmaep.pdf.

5
grid. Improvements in regional transmission planning, together with the resolution of disputes
over how to allocate the costs of enhanced transmission investments, are likely to make it less
expensive to comply both with existing renewable energy requirements and with potential future
federal environmental policies. Absent these improvements in transmission planning and cost
allocations, consumers may face higher electricity prices, lower-quality electricity services, and
unnecessary, adverse environmental impacts.
Issues Addressed in FERC’s Request for Comments
Below we discuss – and make recommendations concerning – the two major elements of
FERC’s Notice. Implementation of our recommendations likely would benefit consumers.
Enhancement of Regional Transmission Planning Processes
FERC’s Notice observed that localized transmission planning institutions may be
inadequate to handle larger-scale transmission projects, particularly those designed to connect
renewable energy resources to high-demand regions. There is often insufficient coordination
among local transmission planning organizations and between such organizations and regulatory
authorities. In addition, both local and regional transmission planning bodies have sometimes
given inadequate, inconsistent, or slow consideration to connection requests from renewable or
independent generation entrants. The Notice asks for views about the appropriate geographic
scope of transmission planning and seeks potential solutions to FERC’s transmission planning
concerns.
Transmission planning is most likely to be effective when the geographic scope of the
planning process matches the geographic scope of power flows. When transmission planning
occurs on this geographic scale, it can better incorporate the relevant congestion, reliability, and
environmental considerations. For the United States, the Eastern, Western, and Texas
Interconnections are the areas that best correspond to the relevant power flows.13 Electricity
13 An Interconnection is an integrated, alternating current transmission systems within which all
generators are synchronized. Power can be imported into or exported from one Interconnection
to another only by first converting it to direct current and then converting it back to alternative
current synchronized to the generators in the receiving Interconnection. Although the three
separate Interconnections in the United States are well recognized, they are not immutable.
As recently as the early 1970s, direct alternating current ties between the Eastern and
Western Interconnections were in operation. “Los Alamos Resource Pool Power Supply Study,"
DOE Contract No. DE-AC04-93AL82990 (July 1, 1994). The possibility of synchronizing
ERCOT with the Eastern Interconnection was reexamined at the direction of the Texas
Legislature as a possible way to help reduce concerns about retail market power and reliability
problems. "Feasibility Investigation for AC Interconnection between ERCOT and SPP/SERC,"
Report to the 76th Texas Legislature (1998). The 1997 merger of Public Service Company of
Colorado and Southwestern Public Service Company involved a reexamination of bringing the
Eastern and Western Interconnections into synchrony. Submission of Lundberg, Marshall &

6
flows along the path (or paths) of least resistance within each Interconnection. This means that
demand and supply conditions in one location can change power flows and the capacity to trade
power elsewhere in that Interconnection.14 Unusual local power flows can create transmission
difficulties in other areas of an Interconnection and, in severe cases, can even give rise to
cascading blackouts.15 Investment decisions about transmission in one area can affect the need
(and have other implications) for transmission investment elsewhere in the Interconnection. The
efficient development and operation of transmission require a careful evaluation of these
Interconnection-wide operational interactions and investment implications. Consequently, FERC
should consider requiring ongoing transmission planning at the Interconnection level in order to
facilitate the most effective and efficient transmission planning regime for the nation.16
The Interconnection-wide transmission planning process should be integrated with other
planning efforts, so that the overall effort can give consistent treatment to demand-side and
supply-side approaches to balancing the quantity of power supplied and consumed minute-by-
Associates on behalf of the Department of Energy, Albuquerque Operations Office (July 30,
1997).
The low transmission volumes and high costs of additional ties envisioned at the time of
these reviews combined to discourage synchronization between the three Interconnections. As
climate legislation (or regulation) and retail competition unfold – with corresponding increases in
potential power trades – and as improved transmission technologies emerge, FERC may wish to
assess the costs and benefits of reconnecting the existing Interconnections. Direct current links
between the Interconnections are another possibility, as proposed in the Tres Amigas project.
See Heather Clark, Associated Press, “NM Project Would Link Nation’s 3 Electric Grids” (Oct.
13, 2009), available at
http://www.google.com/hostednews/ap/article/ALeqM5giMkwo6cFPWD1X-
zXg4cgE7v_lIAD9BAGI080.
14 FERC’s Regional Transmission Notice of Public Rulemaking, Docket No. RM99-2-000, 64
Fed. Reg. 31398 (June 10, 1999), stated this explicitly and succinctly: “[T]he physical reality is
that, within the three interconnection grids, any action taken by one transmission provider can
have major and instantaneous effects on the transmission facilities of all other transmission
providers.”
15 For example, on August 14, 2003, poor management of transmission failures in Ohio led to a
cascading failure that spread through the Eastern Interconnection to black out places as distant as
New York and Toronto. See, e.g., U.S. Dep’t of Energy, Pacific Northwest National Laboratory,
“Looking Back at the August 2003 Blackout,” available at
http://eioc.pnl.gov/research/2003blackout.stm.
16 Existing regional and local transmission planning organizations could be retained and
integrated into Interconnection-wide transmission planning, using principles and standards that
are consistent and complementary.

7
minute to achieve the greatest efficiency.17 As FERC has observed, cooperation and
coordination with state regulators can facilitate and expedite efficient decision-making that
considers options, including local and regional approaches on both the demand and supply
sides.18 FERC – and the FTC, in prior comments 19 – have observed that a lack of demand
response to changes in wholesale prices harms consumers by raising the electric system’s costs,
reducing its reliability, and impeding innovation. The increased use of dynamic retail pricing
will sometimes be more cost-effective than transmission or generation investments as a way to
ensure that a region can meet its peak demand and manage equipment failures. In other cases,
transmission investments that connect intermittent wind and solar generators to more customers
on dynamic pricing will let customers save by shifting their consumption to inexpensive windy
or sunny periods, while increasing the intermittent generators’ profits. Such a scenario might
justify a connection that would not make sense under the traditional assumption that only
generators – but not retail customers – will respond to demand and supply fluctuations.
Both transmission investment that increases competition among generators and improved
retail pricing that increases demand elasticity can curb generator market power. Moreover,
increased competition in the electric power industry has reduced pollution in most areas by
increasing production efficiency and shifting production to newer generation sources, which
generally have lower emissions.20
Allocating the Cost of Transmission and Assessing Transmission Benefits
As FERC describes in the Notice, allocating the cost of transmission has been one of the
most contentious and time-consuming issues associated with the expansion of transmission
17 The FTC’s September 13, 2007, comment to FERC on Wholesale Competition in Regions
with Organized Electric Markets (FERC Docket Nos. RM07-19-000 and AD07-7-000) described
the benefits of improving retail pricing and of taking other steps to empower consumers to
participate in reducing the social costs of the electricity system.
18 An example of such cooperation and coordination is FERC’s collaboration with the National
Association of Regulatory Utility Commissioners in the areas of competitive procurement,
demand-side management, and smart grid technology.
19 See, e.g., Reply Comment of the Federal Trade Commission before the Public Utility
Commission, Commonwealth of Pennsylvania, Energy Efficiency and Conservation Program
and EDC Plans (Dec. 17, 2008), available at http://www.ftc.gov/os/2008/12/V090001papuc.pdf;
Comment of the Federal Trade Commission before the Federal Energy Regulatory Commission,
Wholesale Competition in Regions with Organized Electric Markets (Apr. 17, 2008), available
at http://www.ftc.gov/be/v070014b.pdf.
20 Karen Palmer and Dallas Burtraw, “The Environmental Impacts of Electricity Restructuring:
Looking Back and Looking Forward,” 1:1 Environ. & Energy Law & Pol’y J. 171 (2006). An
earlier version of this paper is available at http://www.rff.org/Documents/RFF-DP-05-07.pdf.

8
facilities.21 Major threshold questions for transmission investors are how, and from whom, the
costs of a project will be recovered. Established economic analysis demonstrates that it is
fundamentally difficult to devise economically efficient market-like mechanisms to solve
resource allocation problems that, like electricity transmission projects, have shared costs and
benefits for many actors.22
Nonetheless, some approaches to these problems are less flawed than others. Investors,
of course, want to see a return on their transmission investment in order to proceed. Existing
cost recovery regulations rely on complex determinations of beneficiaries and often restrict cost
recovery to limited geographic areas. Projects that cross more than one discrete local
transmission planning or operating area can face severe challenges in gaining consistent and
efficient agreements from multiple transmission planning, siting, and cost recovery regulators.
FERC reports in the Notice that cost allocation disagreements appear to be undermining several
major transmission expansion projects designed to improve transmission links to areas with
renewable energy resources. The Notice asks for views on how to coordinate cost allocation
21 As discussed in FERC Order No. 890, various approaches have been used to allocate
transmission costs. Some cost allocation regimes prescribe different treatments for individual
transmission projects that are designated as reliability projects (as distinguished from projects
that address transmission congestion). In October 2008, FERC approved a cost allocation
method in the Southwest Power Pool (a regional transmission organization) that uses a portfolio
approach to evaluate transmission projects and allocate transmission costs over broad geographic
areas. Statement of then-Chairman Joseph T. Kelliher, FERC (Oct. 16, 2008), available at
http://www.ferc.gov/news/statements-speeches/kelliher/2008/10-16-08-kelliher-E-8.pdf.
Literature on transmission cost allocation methods includes a variety of suggestions. See, e.g.,
Jeff Makholm, “Electricity Transmission Cost Allocation: A Throwback to an Earlier Era in Gas
Transmission,” 20:10 Electricity J. 13 (Dec. 2007); William Hogan, Juan Rosellon, and Ingo
Vogelsang, “Toward a Combined Merchant-Regulatory Mechanism for Electricity Transmission
Expansion” (Apr. 14, 2007), available at
http://ksghome.harvard.edu/~whogan/Hogan_Rosellon_Vogelsang_IAEEFlorence_041407.pdf;
Antonio Conejo, Javier Contreses, Delberis Lima, and Antonio Padilha-Feltrin, “Zbus
Transmission Network Cost Allocation,” 22:1 IEEE Transaction on Power Systems 342 (Feb.
2007); Paul L. Joskow, MIT, “Patterns of Transmission Investment” (Mar. 15, 2005), available
at http://econ-www.mit.edu/files/1174.
22 The analyses that consider it difficult to engage in efficient, market-like decision-making about
whether to build projects typically assume that each individual firm has secret information about
how the project would affect its bottom line and about what investment and operating decisions
it would make in the absence of the project. In Game Theory, Ch. 7 (1991), Drew Fudenberg
and Jean Tirole provide an overview of relevant economic theory.
The availability of rich data about electricity flows and prices may make more
information available than the literature assumes concerning the value of transmission to firms.
Nevertheless, transmission planners are unlikely to know how firms would have invested, bid,
and operated in the absence of the transmission project.

9
approaches. The Notice also seeks to identify the current and future beneficiaries of
transmission investments – a critical consideration in allocating transmission costs.
Because building transmission that spans several transmission operating areas may
significantly reduce the costs of complying with renewable portfolio standards or potential
climate policies,23 FERC should foster consistent, Interconnection-wide cost allocation
approaches. The use of the same, reasonable cost allocation approach throughout each
Interconnection-wide transmission planning area is likely to benefit consumers by reducing the
transaction costs, regulatory risk, and project delays that the existing processes often create.
FERC’s approach to transmission benefit assessment should recognize that the
transmission system’s functions are evolving. The historic function – to bring power from large,
centralized generating stations to local retail distribution systems – remains important. The
transmission system will increasingly connect customers with inflexible demand and generators
with intermittent or inflexible output to flexible elements of the system. The flexible customers
and power sources may be centralized, or they may be dispersed at the local distribution level.
For example, air conditioners might be temporarily turned off, and plug-in hybrid electric vehicle
batteries in Chicago might be dispatched to keep the lights on in Des Moines when the wind
stops blowing in South Dakota. If these current trends continue, the operations of the
transmission and local distribution systems are likely to become more closely related.24
23 “The organizational and regulatory framework that presently governs much of the U.S. electric
power sector is not conducive to supporting these transmission investments. If remote sources of
renewable energy are not available to meet state or potential future federal renewable energy
portfolio standards or to respond to the incentives provided by CO 2 emissions prices, CO2
mitigation goals will be even more costly to achieve.” Paul L. Joskow, “Challenges for Creating
a Comprehensive National Electricity Policy,” at 5, European University Institute, Robert
Schuman Centre for Advanced Studies, EUI Working Paper RSCAS 2009/01 (2009), available
at http://cadmus.eui.eu/dspace/bitstream/1814/10618/1/EUI_RSCAS_2009_01.pdf.
24 Two major developments – the rise of small-scale, flexible load and the increasing role of
inflexible supply – are involved in increasing the role of demand-side resources in keeping
supply and demand balanced on an Interconnection-wide scale. First, technological advances in
metering have made it technically feasible and economical to measure consumption and provide
price information to consumers over smaller intervals of time. Historically, a single retail
electricity price often applied over months or years, despite the substantial changes that can
occur in wholesale prices every few minutes due to changes in consumption and shifts in the mix
of supply sources required to match it. Increasing the flexibility and price sensitivity of demand
should allow increased reliance on lower-marginal-cost, high-capital-cost “base load” generation
technologies that typically produce a consistent amount of power around the clock.
Second, requirements for renewable generation have increased because of environmental
concerns. Many renewable generators are intermittent because they produce only when there is
enough wind or sun. The conventional, expensive response to this problem has been to have
thermal plants standing by to increase their output should wind or solar generation drop off.

10
Advances in smart grid technology (in addition to smart meters) likely will support and expand
these trends.25 (These trends also strengthen the above-described case for the integration of local
and regional transmission and resource planning.)
Similarly, in a system with extensive distributed resources, such resources in one area
may be used to supply other areas if strong transmission ties link the areas. In such a system,
substantial network economies may be present and should be accounted for in an assessment of
the beneficiaries of transmission investment. In general, network economies arise when the
connection of additional customers to the network increases the social value of the network to its
members. In this example, network economies arise because each additional customer with
demand resources is a potential supplier for other customers whose supply activities may reduce
power costs and prices, improve reliability, and reduce environmental harm.
Another, non-traditional role for transmission links is to curb the cost of integrating wind
farms with intermittent output. For example:
● Transmission can reduce the cost of integrating wind generation by
linking wind farms to a larger set of customers on dynamic pricing (or other
demand response) programs that can partially synchronize their demand with
wind speeds.
● Transmission investments can reduce the cost of managing intermittent
wind generation by linking wind farms to a broader set of flexible generators and
to other wind farms that may be experiencing uncorrelated changes in output.
FERC should develop a sound, coherent, and comprehensive methodology to estimate
benefits, including reduced costs and improved reliability.26 This methodology should account
Demand response gives consumption the flexibility to offset some of the increased volatility
from intermittent generators. Power from local distribution networks may play an increasing
role in the Interconnection’s operation as demand response, renewable distributed generation,
and energy storage technology (such as batteries on plug-in hybrid cars) become more important
in providing both energy and ancillary services. Some of the effects of this compensation
strategy will occur at the local distribution level (traditionally regulated by states) as well as at
the transmission level (traditionally regulated by FERC).
25 Smart grid technologies include, among others, advanced meters with two-way
communication capabilities, appliances that automatically respond to price signals, monitors that
report the condition of transmission lines more quickly and completely, and equipment designed
to prevent short circuits on transmission lines. The American Recovery and Reinvestment Act of
2009 funded Department of Energy grants for the smart grid and renewable generation.
26 The inclusion of environmental effects in this analysis would require valuation of the net
environmental impacts of transmission projects (unless emissions taxes or cap-and-trade systems
already price them).

11
for the way in which smart grid technology and intermittent generation will alter investments’
costs and benefits. Experience to date suggests that the benefits of a particular transmission
investment can be sensitive to many variables and can fluctuate widely over time (as evidenced
by, e.g., the volatility of natural gas prices, policies to encourage wind generation, and locational
marginal prices).27 The process of ascertaining who will benefit from a specific transmission
investment is complex, and the accuracy of any such determination may well be ephemeral and
sensitive to modeling assumptions. Accordingly, we encourage FERC to refine its use of data
and analysis so as to yield reasonable choices, while also acknowledging that the future holds
unavoidable uncertainties. The inappropriate use of computer simulations can lead decision-
makers to follow apparently precise answers that are true only under opaque, strong modeling
assumptions, even though those findings are misleading in many other scenarios.28
Computer simulation modeling of the transmission system can help in an assessment of
transmission projects’ implications for prices, reliability, and pollution. Such models, which can
use a variety of scenarios to determine the range and robustness of the estimates, 29 are employed
widely to examine the likely power flow and market power effects of generation investments.
FERC may wish to ascertain whether an allocation approach that assigns transmission
costs locally is still warranted, given that a localized allocation approach may not enhance
system-wide efficiency, reliability, and environmental goals.30
27 As discussed above, with respect to the sensitivity analysis of transmission benefits and
beneficiaries, one should bear in mind that transmission and generation projects (including
demand resources) sometimes can substitute for each other.
28 See, e.g., John H. Miller, “Active Nonlinear Tests (ANTs) of Complex Simulation Models,”
44 Mgmt. Science 820 (June 1998).
29 For a discussion of power system computer modeling regarding the market power effects of
mergers, see the FTC Bureau of Economics’ comment to FERC on “18 CFR Part 33, Revised
Filing Requirements,” FERC Docket No. RM98-4-000 (Sept. 11, 1998), available at
http://www.ftc.gov/be/v980022.shtm.
30 A recent federal appellate decision suggests that FERC may be required to make detailed
assessments of beneficiaries to justify decisions to allocate transmission costs broadly. Illinois
Commerce Comm’n v. Fed. Energy Reg. Comm’n, 576 F.3d 470 (7th Cir. 2009).