By Ric Austria, Cherry Bautista

In a significant move for the U.S. energy sector, a proposed settlement filed with the Federal Energy Regulatory Commission (FERC) promises to resolve a long-standing dispute over how costs for critical transmission upgrades are shared within PJM Interconnection, one of the nation’s largest regional grid operators. This agreement, detailed in filings from the Indicated PJM Transmission Owners (ITOs), Long Island Power Authority (LIPA), Neptune Regional Transmission System, LLC, and supported by technical analysis from Pterra, addresses fairness in cost allocation while paving the way for a more reliable grid. Here’s a deep dive into what this settlement means and why it matters.

The Heart of the Dispute

The conflict, unfolding over four years, in FERC Docket Nos. EL21-39-000 and ER22-1606-000, centers on PJM’s Solution-Based Distribution Factor (DFAX) methodology, which determines how costs for Required Transmission Enhancements (RTEP projects) are allocated across its 21 zones. In 2020, LIPA and Neptune challenged two aspects of this system as unjust:

  • 1% De Minimis Threshold: Zones with a distribution factor below 1% are exempt from costs, often leaving smaller entities like Merchant Transmission Facilities (MTFs)—such as Neptune’s transmission line—shouldering disproportionate burdens compared to larger zones like PSEG (11,000 MW peak load vs. Neptune’s 685 MW).
  • Netting Procedure: By offsetting positive and negative energy flows, this method disadvantages MTFs, which, as single-node entities, can’t benefit from netting, unlike networked zones.

These issues sparked concerns about fairness, with LIPA and Neptune arguing that the methodology violated the “beneficiary pays” principle, unfairly burdening smaller players. A 2022 D.C. Circuit ruling in a related case (Consolidated Edison Co. of N.Y., Inc. v. FERC) echoed these concerns, finding that assigning hefty costs to small MTFs while sparing larger zones defied cost causation principles.

Adding to the debate, a 2021 affidavit by Pterra’s Ric Austria, analyzed an alternative nodal DFAX approach without netting or the 1% threshold. Using PJM data for upgrades in non-PSEG zones (e.g., projects b0487, b0489), Pterra showed that applying MW usage thresholds allocated costs more equitably, reducing assignments to zones with minimal usage. Pterra’s findings underscored the need for reform, setting the stage for settlement talks.

The Proposed Settlement: A Balanced Solution

Filed on February 14, 2025, the settlement offers a pragmatic fix to these issues through targeted revisions to PJM’s Tariff Schedule 12. Here’s what it entails:

Zonal Integration for MTFs

MTFs with Firm Transmission Withdrawal Rights (FTWRs), like Neptune, will no longer be treated as standalone zones. Instead, they’ll be integrated into their interconnected zone’s load—for instance, Neptune’s 685 MW FTWRs join JCPL’s 6,200 MW peak load, sharing ~10% of JCPL’s DFAX costs. This mirrors existing practices, like PSEG/RECO, where smaller loads are integrated for fairness. Integration applies only to DFAX-based upgrades, with provisions to end if FTWRs are relinquished or zone boundaries shift significantly.

No Host Zone Exclusion

Building on a 2022 proposal, host zones (where transmission upgrades are built) are exempt from the 1% de minimis threshold, ensuring they bear costs based on their DFAX value, even below 1%. This reflects both direct and indirect benefits, with refinements to use physical location data for projects after December 11, 2023, improving accuracy over earlier ownership-based identifiers.

Retroactive and Prospective Fixes

The changes apply back to December 31, 2020, with PJM recalculating costs and issuing refunds or surcharges within 180 days of FERC approval. Going forward, annual RTEP updates will reflect the new methodology.

Safeguards and Clarity

The settlement ensures Neptune remains exempt from the State Agreement Approach project costs and prevents parties from undermining the agreement in other forums, fostering stability.

Why It Works

The settlement is a win for fairness and efficiency, delivering several key benefits:

  • Ending a Four-Year Feud: By resolving contentious litigation, it saves time and resources, aligning with FERC’s preference for negotiated solutions.
  • Fairer Cost Sharing: Zonal integration lets MTFs benefit from netting and de minimis exemptions, addressing Pterra’s call for usage-based equity. The host zone exclusion ensures no zone escapes responsibility for projects it benefits from.
  • Minimal Disruption: Data shows only a 1% cost shift ($114.81 million), with zones like JCPL and PSEG absorbing modest increases while Neptune sees significant relief ($114.80 million less), keeping PJM’s system stable.
  • Robust Evidence: Pterra’s analysis, using PJM’s power flow models, validated that a usage-based approach reduces allocations to marginally impacted zones, informing the settlement’s design.

A Boost for the Energy Future

By clearing cost allocation hurdles, the settlement ensures timely RTEP projects.

The Big Picture

This settlement isn’t just about numbers; it’s about building a grid that’s ready for tomorrow. By fixing how costs are shared, it supports the infrastructure needed for a cleaner, more resilient energy system. As FERC reviews this proposal, the stakes are clear: a fairer PJM grid today means a stronger energy future for all.