A c o s t a n a l y s i s p r e p a r e d

f o r t h e M i c h i g a n P u b l i c

P o w e r A g e n c y a n d t h e

M i c h i g a n M u n i c i p a l

E l e c t r i c A s s o c i a t i o n

S t e v e n A . T r a n s e t h

T r a n s e t h & A s s o c i a t e s

1 0 5 H i l l s d a l e S t

L a n s i n g , M I 4 8 9 3 3

( 5 1 7 ) 8 9 9 - 6 2 3 5

6 / 3 0 / 2 0 1 0

The Midwest ISO is going to file with FERC on July 15, 2010

a proposed tariff which establishes a socialized method for

transmission cost allocation for all members of the RTO.

Under this tariff Michigan will be assessed a

disproportionate share of the costs without the

commensurate benefits.

The MISO Transmission Cost Allocation Proposal – The Implications for Michigan

1

Introduction

Electricity transmission cost allocation methodology. The problem of deciding which

customers pay how much of the cost of building and operating new transmission lines that

cross several states has become a very contentious issue. But for a topic that has received so

much attention in certain circles, it is amazing how few people really understand the potential

impact on this State of the current proposed decisions being considered regarding how we are

going to pay for new transmission in the years to come. Because for the most part our state

has very little control over the lines that carry the power from the generation facilities to the

end user, transmission is often an overlooked component to our energy delivery system.

Transmission rates are set at the federal level and are passed along to the end user through

their utility bills. Over the next couple decades billions of dollars are going to be spent in

upgrading and expanding the transmission network and renewable energy is playing a key role

in the need for this new transmission. On a state, regional and national level we have

embarked on an important mission to generate more “green” energy. To meet this need, wind

has received the most attention, with solar, biomass and battery power not far behind. This

will require us moving away from large generation facilities located near the customer to a

more distributive model of smaller facilities located near the energy source. Because

renewable resources are often quite remote, the cost to transmit the power can be high and

how these costs going to be paid can be challenging.

This challenge has resulted in a debate as to what should be the appropriate size of this

new transmission system and how the costs associated with construction should be allocated.

Should the costs be broadly socialized or assessed to those directly benefiting from the new

resources? The current proposed development of wind in the Michigan Thumb area is but one

example of the problems we face on this issue. The wind is there and the developers are ready

to build, but it means little unless we can get the electricity onto the grid. To do so is going to

require the building of new transmission lines and the question is how much transmission is

needed and how are we going to pay for it? Should these costs be a state obligation or part of

an overall regional or federal plan? Should only those who directly benefit from the new

transmission pay or should the costs be spread over the Midwest ISO (MISO) footprint? Should

a portion of the profits made by the developers be returned to the ratepayers given that the

ratepayers paid the costs for the new transmission? The answers to those questions will have

significant implications for Michigan on both a short and long term basis.

The issue of regional cost sharing will come to a head on July 15, 2010 when MISO files

with the Federal Energy Regulatory Commission (FERC) its proposed cost allocation method.

2

Michigan needs to fully understand how this proposed allocation will eventually impact

this State and ensure it is part of the debate in determining the final decision. This paper was

prepared to provide context on the MISO proposal and to ensure that our State regulators and

policy makers have the necessary information to make informed decisions.

This is most certainly a complicated issue and there is no simple answer.

Historical Summary

Much of the cost allocation issue became a problem only in recent years as the need for

more renewable energy required new transmission. The primary Regional Transmission

Organization (RTO) for Michigan is MISO. Beginning in 2008, several smaller utilities,

particularly Otter Tail Power, challenged the then current MISO cost sharing formula for the

interconnection of wind into their system. They expressed concern that the transmission rates

resulting from wind generation being connected to their system were not commensurate with

the benefits associated with supporting their own internal load or Renewable Portfolio

Standard (RPS) needs. These entities said that unless MISO changed the allocation cost rules

they would leave the RTO.

As a result of the “Otter Tail” issue MISO resurrected their Regional Expansion and

Criteria Benefits Task Force (RECB TF) for the purpose of reexamining and making

recommendations regarding transmission cost allocation concerns for reliability driven projects

and economically driven projects. The RECB TF was also given the charge of developing a new

transmission cost sharing mechanism for handling future projects intended to support

renewable energy development. This last type of development is the center of the cost

allocation debate and is what MISO now labels Multi Value Projects (MVP)

The Organization of MISO States (OMS), which is made up of a representative from each

of the regulatory commissions of the various MISO states, also decided to weigh in on this issue

and created the Cost Allocation and Regional Planning group (CARP). This group’s purpose was

to also review and make recommendations regarding potential cost allocation methods, with

particular attention to projects directed at enabling states to meet their RPS.

The initial efforts of RECB TF and CARP resulted in a filing by MISO with FERC in July of

2009. FERC supported the recommendations made in this filing and issued an order in October

2009. The tariff changed the cost allocation to address the Otter Tail problem and prevent

further erosion of MISO membership. MISO portrayed this tariff only as an “interim” solution

3

and agreed to establish a process to determine a more permanent solution which would be

submitted to FERC no later than July 15, 2010.

In early 2010 a number of MISO Transmission Owners (TO) came together to develop

their own transmission cost allocation proposal. This group took a quite different approach by

distinguishing between the different types of transmission projects. Their recommendation

was to maintain the current cost allocation methodologies used for reliability and economic

projects and introduced a socialized approach for new projects developed to meet any state or

federal regulatory mandates such as a RPS. The Michigan Public Power Agency, ITC and

Wolverine Power withdrew from the TO group on the basis that they were unable to support

the final recommendations.

At the April, 2010 CARP meeting the western MISO states which support a regional

socialized approach dominated the discussion and the voting on the proposed allocation plan.

The final version of the CARP proposal provided 100% of the costs for all MVP projects to be

allocated regionally on a “postage stamp” basis. The CARP proposal continued the current

approach for allocating costs associated with reliability projects but proposed a socialized

allocation for projects which can be justified for economic reasons.

The vote on the CARP proposal was 11 states in favor and 2 abstentions. Illinois did not

register a vote but is most likely opposed given it appealed the FERC order approving socialized

cost allocation in the PJM Interconnection (PJM) that led to the ruling by the Seventh Circuit

Court which rejected FERC’s decision (see discussion below). Even though Michigan will bear a

disproportionate amount of the costs for the MVP overlay transmission build-out, it was one of

the 11 states that voted to support the 100% postage stamp proposal.

After weighting proposals by the RECB TF, CARP, and the transmission owners, on June

22, 2010, MISO presented its final cost allocation proposal calling for the broad socialization of

costs associated with new transmission network to be developed to accommodate state RPS

requirements. The stated goals were to create a fair cost allocation system that would enable

transmission development to support renewable energy integration, public policy, reliability

and economic goals while maintaining the “Midwest ISO Value Proposition”.

Causation and Beneficiary vs. Socialization

The debate regarding transmission cost allocation typically has involved the choice

between “cost-causers”, “beneficiary pays” and “socialization”. These terms have different

meanings depending on which side of the debate you are on. Proponents of “cost-causers” and

“beneficiary pays” argue that those parties benefitting from the new transmission should pay

the costs of building the transmission. This model has been the traditional means of how we

have allocated transmission costs. However, it is often difficult to identify exactly who are all

the beneficiaries or even what benefits should be considered. The proponents of “socialization”

argue that important benefits, such as grid reliability, reduced power loss and less congestion,

cannot be easily allocated because all parties enjoy these benefits, and therefore costs should

be spread over all users connected to the transmission system. Because of these differing

positions and the changing nature of the transmission system, it is becoming exceedingly

difficult to apportion transmission costs in a way that satisfies all parties.

The choice of an allocation method may depend on the priorities placed on the type of

benefits and practical considerations. If the emphasis is more on the direct cost-causers then

allocation will be based on flow-based or monetary metric methods because it’s important to

identify and ensure that beneficiaries are specifically allocated costs. Conversely, if there is a

strong emphasis on grid reliability or the fact that users may see some benefit from reduced

losses with new transmission facilities, then allocating costs based on a socialized model will be

preferred. A socialized allocation method, which spreads the costs equally across all affected

parties, assumes that benefits are equally distributed. However, when dealing with multiple

jurisdictions with varied interests there is going to be a strong likelihood of variance between

the costs assessed and the benefits received. The question becomes at what point does this

differential become too great and the benefits are no longer commensurate with the costs? An

allocation method that in general serves the Midwest ISO Value Proposition may, when

implemented, not be a value to a specific group within the region. MISO has created

precedents, even here in Michigan, for exceptions when it was necessary to have different

treatment of parties to avoid unfair treatment under a tariff. MISO recognized the necessity for

differential treatment when it addressed the Otter Tail issue and that practice should continue

in establishing any cost allocation method as it relates to Michigan.

Cost allocation is public policy mixed with engineering, economic and political

considerations. By its very nature, cost allocation must balance individual as well as collective

interests. However, regardless of how you define the terms beneficiary or socialization, any

authorized cost allocation of large transmission projects on a regional basis must demonstrate

that the “right load” pays for the cost of the new transmission built as a result of that load and

that the “benefits” received are commensurate with the costs that are being assessed. This

5

concept is consistent with one of the MISO’s guiding principles in establishing a fair cost

allocation method.

Illinois Commerce Commission v. FERC

The decision of the Seventh Circuit in Illinois Commerce Commission v. FERC1 rejected

the cost allocation plan approved by FERC that allowed the costs of certain new regional

transmission to be spread widely among ratepayers in PJM (the RTO directly east of MISO)

because it included those who did not substantially or clearly benefit from the new

transmission. This case involved several issues which went to justifying a cost socialized

approach (all of which were rejected) but the Court directed most of its decision to the FERC

rational that such cost sharing was supported because every member of the RTO would benefit

from improve reliability of the new transmission facilities. The Court found while there might

be certain “secondary” benefits to all PJM members, those benefits could be minor in

relationship to the costs imposed. Such benefits can not be merely presumed but there is a

duty of “comparing the costs assessed against a party to the burdens imposed or benefits

drawn by that party”.2

The most significant restriction placed on FERC by the Court was that before it can

approve a socialized cost allocation process for a RTO, it must show that any claimed benefit

received by a party must be roughly commensurate with the cost assessed.

Michigan’s unique position

Given the complexities of the issues it is easy to see the appeal of the MISO proposal

and the “value” to MISO in managing the grid. Unfortunately, what might be of value to the

RTO generally may have a negative impact on Michigan. A socialized cost allocation based on

load will mean Michigan will carry a disproportionate share of the costs without the

commensurate benefit. The reasons are three-fold: First, Michigan represents nearly 20% of

the MISO market and accordingly, under the proposed formula this State would be responsible

for 20% of the costs associated with specific new transmission project throughout the Midwest.

Michigan’s contribution will far exceed any benefit realized by these new transmission projects.

As stated earlier, whenever costs are proportionally spread out over all participates there will

always be some who will pay more than that which equals the benefits they receive. However,

the cost differential to benefits received for Michigan under the MISO scenario is so great that

it will result in this State being subjected to rates which do not meet the standard of being just

1 576 F.3d 470 (7

th Cir, 2009)

2 Id. at 477

6

and reasonable. Second, Michigan has a RPS of 10% by the year 2015 and the renewable

energy must have been generated within the State3. This requirement will mean Michigan will

receive little benefit from renewable energy generated from outside the state. Third, as a

result of legislative mandates, Michigan is currently aggressively developing its own renewable

energy market and hopes to be in the position of exporting green energy out of the state and is

willing to build transmission within the state to accomplish this goal. Given that almost all of

the new transmission in the MISO market will be for renewable energy outside of this State, the

situation for Michigan is only exacerbated and may actually create unfair markets for the power

we want to sell. The proposed allocation method creates an open checkbook for MISO and

leaves us with very little to say on how our money is spent. We will be in essence paying for

others to compete against us.

It also should be noted that with the exit of First Energy to PJM in the middle of next

year, Michigan will only have limited remaining electrical interconnections to MISO. This again

calls into question the benefit to Michigan in paying 20% of the large MVP transmission projects

being proposed in the western MISO states.

Finally and most importantly, if Michigan is required to pay 20% of even the low MISO

estimate of $16 billion in transmission costs, we will have hundreds of millions of dollars less

annually to spend in developing our renewable industry, revitalizing the economy and creating

new jobs.

MISO final cost allocation proposal

MISO’s basic approach centered on the premise that there is a need for major new

transmission build in the RTO to meet state RPS requirements (mainly through the

development of wind generation) and that current cost allocation method impose a barrier to

large scale transmission development. Unfortunately, the debate has focused on “who pays”

and not what we should be paying for. The economics seem to have been lost in the

discussions. For example, wind development located closer to load will require less

transmission infrastructure and be less costly than massive high voltage transmission

superhighways moving power from remote locations with greater wind capacity. Little analysis

has been done to distinguish between or relate capacity and cost factors. In other words, it

may be more cost effective to utilize a lower capacity wind zone closer to the load.

At the June 22, 2010 RECB TF meeting MISO presented its FINAL Cost Allocation

Proposal. The basic proposal is as follows:

1. 100% postage stamp of revenue requirements to load and exports (MWh) for Multi

3MCLA 460.1029

7

Value Projects (Overlay transmission build-out for renewable energy).

2. Generation Interconnection Projects cost sharing methodology remains the same.

3. 10% of 345kV and above facilities will be shared postage stamp to load. - All other costs borne by the interconnecting developer.

4. Use inclusion criteria for qualifying projects.

- Multi Value Projects.

- RECB I baseline reliability stays the same.

- RECB II criteria stay the same (for now).

At the June 22 presentation of it final cost allocation proposal, MISO included a slide

titled “Annual Estimate of MVP Usage Rate for Various Load Allocation Percentages” (see Chart

A) indicating an average annual MVP charge of $2.10/MWh with the charge ramping up from

$0 in 2011 to a high of $3.83 in 2024 and declining after that.

Chart A – MISO’s Estimate of MVP Usage Rate – See Appendix 1

This forecast was based on: 1) 100% of costs being recovered from load on a $/MWh basis;

2) an overlay cost of $16B with capital being expended over a thirteen year period beginning in

2011 and rate recovery beginning in 2013; and 3) MWh withdrawals from the MISO grid would

escalate at approximately 2.2% per year (MISO did not adjust the base for the withdrawal of

First Energy or Duke). There is another assumption that the annual charge rate is based on a

8

revenue requirement calculation utilizing an average fixed charge rate based on each individual

transmission owner’s cost structure.

The problem for Michigan is MISO chose to use calculations which presented the least

possible impact and made assumptions based on best case scenarios. For example, MISO has

previously indicated that the transmission overlay should cost between $16 and $20 billion but

elected to use the lowest cost number for its analysis. Another problem is the use of a 2.2%

energy growth rate which understates what the annual MVP charge rate will be and thus, when

applied to Detroit Edison and Consumer Energy’s own load circumstance, understates what

their total annual costs will be.

It is also important to note that the $16 billion cost estimate provided by MISO does not

include the cost of any underlying feeder systems required to connect renewable generation to

the transmission overlay. Also, MISO’s definition of what it considers to be a MVP remains

unclear and depending on the final determination could add substantially more cost than

estimated.

Cost Analysis

To arrive at a more accurate picture of the cost implications for Michigan, data from

MISO’s most recent Annual Electric Control and Planning Area Report contained in its FERC

Form 714 submittal was utilized to adjust the MWh withdrawals used in MISO’s presentation

shown above. The energy growth rate reflected in MISO’s FERC Form 714 is 0.84% which

compares favorably with the North American Electric Reliability Council’s 2009 Reliability

Assessment’s projected growth rate of 0.67% for the MISO region.

Replacing the MWh transaction data in the MISO’s cost allocation presentation with

that contained in its FERC Form 714 results in an increase of the annual average MVP charge

rate from $2.10/MWh to $3.40/MWh and an increase in 2024 peak rate of $3.83/MWH to

$5.59/MWH. The adjusted figures are included in Chart B, which also include the estimated

usage rates for transmission development in the Michigan Thumb area.

9

Chart B – Adjusted Annual Estimate of MVP Usage Rate – See Appendix 2

$5.59

$0.86

$3.40

$0.65

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

MV

P U

sage

Rat

e ($

per

MW

h)

100% Load Allocation

100 % Michigan Thumb Allocation

100% Load Allocation - Levelized

100% Michigan Thumb Allocation - Levelized

The before and after impacts for Detroit Edison and Consumers Energy are summarized in the

table below:

MISO’s Initial Presentation

MISO’s Presentation Adjusted

DE Average Annual Cost

$123 million $199 million

CE Average Annual Cost

$105 million $170 million

Total Average Cost $228 million $369 million

DE 2024 Cost $210 million $307 million

CE 2024 Cost $179 million $262 million

Total 2024 Cost $389 million $569 million

These numbers are substantial, representing costs which are 60% more than those

presented by MISO. Even then, there have been arguments made that once they are spread

over the entire MISO membership the increases are tolerable. For example, using the more

10

accurate figures in Chart B the total increase per kWh would be slightly more than a half of one

penny.

Conclusion

Why argue over a half of a penny per kWh? First, the cost projections are based on

“best case” scenarios. The actual costs could be double the estimated figures. Any cost per

MWh can be made to look minimal if taken to a large enough denominator. Much of the

debate within MISO is limited to the stakeholders who for the most part are generators and

transmission operators. Ratepayers usually have little or no say in the final decisions, even

though it is they who will pay the bill. This is a rate payer risk we should not take.

Second, these pennies add up to real dollars. As stated above, under the MISO proposal

Michigan will be sending hundreds of millions dollars annually outside the state to fund

transmission projects which not only provide little value to the State but will actually harm our

ability to develop our own renewable energy market.

Finally, this State is in one of the worse recessions in its history. If Michigan is going to

invest hundreds of millions of dollars in infrastructure and the development of renewable

energy then it should do so within its own borders.

While as a general rule socializing of some of the costs may make sense, there are gong

to be exceptions to this rule to avoid unattended consequences. While MISO’s proposed cost

allocation formula may work for the majority of the members served by the RTO, it would have

a disproportionate negative impact on Michigan. Although Michigan would initially benefit

from socializing the $510 million it will cost to bring the wind out of the thumb, this State

becomes a huge loser in the years to come when we are required in turn to pay over 20% of the

$16 billion or more that will be spent for new transmission planned in the rest of the region.

Because of this State’s unique situation, any cost allocation approved by FERC needs to

provide a solution to the problems facing Michigan under the current MISO proposal. This will

allow for the advantage of spreading costs over most of the region to those who will directly

benefit by the new transmission but account for the unfair application a socialized allocation

would have on this State.

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COST ALLOCATION COMPARISON MISO Overlay vs. Northeast Region

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Implications of Regional Cost Allocation of MISO Overlay vs. Michigan-Specific Region 4 Cost Allocation Methodology

• Annual charges associated with Region 4 System Annual charge rate ~ 20% x ($510 M) = $102 Million (average over life of project)

• Annual charges associated with of MISO Regional Overlay

Expect $15B - $20B investment over 15 year period

Annual charge rate ~ 20% x ($15 - $20B) = $3B to $4B Michigan represents approximately 18% of MISO region and thus would be allocated between $540M -$720M for the MISO overlay

• For Michigan to be indifferent, MISO overlay, including the Region 4 System, needs to be limited to: $102M /18% market position / 20% Fixed Charge Rate = $2.8B

• MISO expects that $4.6B (including Michigan Region 4 build) will be authorized within the next 18 months.

13

MISO NORTHEAST REGION

Advocacy Document

14

Background

Michigan's regulated electric utilities, municipal electric providers and businesses remain

deeply concerned with the direction that the Midwest Independent Transmission System

Operator (Midwest ISO) has proposed related to the cost allocation of future electric

transmission system improvements and expansion, in particular the massive projects intended

to support renewable portfolio standards (RPS) throughout the region.

On July 15, 2010 the Midwest ISO filed a request with the Federal Energy Regulatory

Commission (FERC) seeking approval of a tariff that will allocate billions of dollars of costs

for transmission projects designed to meet state RPS requirements throughout the Midwest

ISO region to areas or states that may see little benefit from those projects. While we are not

in any way arguing against other areas of the Midwest ISO developing transmission to

support their needs, we are fundamentally and philosophically opposed to having Michigan's

customers pay for the projects when they provide little or no benefits to Michigan's residents.

We collectively and unanimously subscribe to the following statements:

a. The costs of system improvements or system expansion that are allocated to regions within

Midwest ISO must be directly related and traceable to the level of benefits received by those

regions.

b. Under the current Midwest ISO cost allocation proposal Michigan customers will be

assessed a significant portion of the costs for projects built in other regions but will receive

little, if any, benefits from these projects. Any benefits received will certainly not even be

“roughly commensurate” with the costs imposed on Michigan customers.

c. Michigan will ultimately be exposed to much larger costs than are currently being

proposed by Midwest ISO due to the broad project qualification criteria, including a lack of a

voltage based cost threshold contained in the Midwest ISO filing.

d. Midwest ISO's cost allocation proposal will significantly undercut the progress of

Michigan's in-state renewable energy development goals.

e. Given the limited interconnections with the other regions of the Midwest ISO, Michigan

needs to be placed into its own transmission planning and cost allocation region within the

Midwest ISO.

Overview of Concern

Significant Transmission Expansion is Being Proposed in the Midwest ISO region

With the advancement of state renewable portfolio standards and in anticipation of federal

standards, the Midwest ISO4, along with its member transmission owners, have initiated

plans calling for the development of a broad regional transmission system intended to

connect remotely sited renewable generation, mainly wind turbines, with the urban electric

load centers.

4 The electric transmission system across much of the Midwest, while owned by individual transmission owning utilities, is

operated and planned for by the Midwest Independent Transmission System Operator (Midwest ISO) headquartered near

Indianapolis. Midwest ISO’s operations are regulated by the Federal Regulatory Energy Commission.

15

Who Should Pay for the Cost of Transmission is a Hotly Debated Issue

Over the last couple of years the Midwest ISO engaged stakeholders in a discussion of how

and from whom the cost of such a new transmission system would be recovered. Whether or

not the project costs should be socialized across the Midwest ISO footprint; or whether the

beneficiaries of each transmission project should or could be identified and charged

individually was hotly debated. The Midwest ISO proposal will result in the widespread

socialization of future transmission costs, without regard to who will actually benefit from

each transmission project.

Current Cost Allocation Proposal

Midwest ISO’s Proposal to Socialize Costs

Prompted to do so by FERC, on July 15th

Midwest ISO submitted for FERC’s approval a

proposed cost allocation methodology which would socialize across all of the utilities in its

footprint the costs for a new class of transmission projects described as “Multi Value

Projects” (MVPs). MVPs are projects essentially designed to support current or future state

or federal electric generation policy requirements or to provide regional economic or

reliability benefits. Costs for the multi value projects are proposed to be recovered based on

the percentage of the energy that each transmission customer, primarily electric utilities,

withdraws from the entire transmission system; not just from the MVPs.

Michigan’s Transmission Requirements in the Thumb Qualify as a MVP

An example of one MVP project is the 345kV transmission line proposed to be constructed

in Michigan’s Thumb intended to enable the state’s utilities to comply with the RPS

requirements set forth by the Michigan legislature in Public Act 295 (PA295) of 2008. This

project and the wind resources connected to it will provide more than adequate electric

transmission and generation capacity to enable the state’s utilities to achieve compliance with

the in-state development requirement set forth in PA295 intended to create an in-state

renewables industry with its incumbent benefits. The Act specifically intended to:

“promote the development of clean energy, renewable energy, and energy optimization

through the implementation of a clean, renewable, and energy efficient standard that will

cost-effectively . . . [p]rovide greater energy security through the use of indigenous energy

resources available within the state [and] [e]ncourage private investment in renewable

energy and energy efficiency.”

o Michigan’s Thumb Transmission Investment is Projected at $510 Million

The investment in this project is expected to be $510 million with annual associated

investment and operating charges expected to be $140 million.

o Michigan Utilities Support Building Transmission in the Thumb

The state’s utilities are supportive of the construction of, and will recognize benefit

from, the transmission system to be developed in the Thumb. However, once that

system is built, the capability to comply with PA295 will be met and no additional

out-of-state resources are necessary to enable the state’s utilities to reach compliance.

In fact, with the requirement that the renewable energy be sourced largely from in-

state resources, Michigan’s utilities can’t use out-of-state transmission resources to

16

meet their RPS compliance requirements.

Transmission Expansion Outside of Michigan Provides Few Benefits to Michigan

The transmission systems in the Lower Peninsula of Michigan are loosely connected with

the other transmission systems in the Midwest ISO. Once First Energy leaves the

Midwest ISO in 2011, the majority of Michigan’s transmission capacity will be only

interconnected with transmission systems in Canada and PJM Interconnections, resulting

in Michigan having little benefit from transmission expansion in other parts of the

Midwest ISO.

o In particular, Michigan Doesn’t Benefit from MVPs Outside of Michigan

Michigan has a RPS of 10% by the year 2015 and the renewable energy must be

generated, with limited exception, within the State. This requirement will mean

Michigan will receive little benefit from renewable energy generated from outside the

state and from Midwest ISO’s proposed transmission system to serve that generation.

Significant MVP Transmission Expansion is Being Proposed in the Midwest ISO

In addition to Michigan’s project, Midwest ISO has forecasted an initial investment

outlay for other near term MVP projects in the region, referred to as the ”MVP Starter

Projects”, of $4.1 billion with an initial annual associated investment and operating

charges expected to be $ 820 million. The MVP Starter Projects are only a subset of the

overall transmission expansion projects being looked at by the Midwest ISO to cover

potential regional RPS needs in the future, with some of total portfolio investment costs

projected to be as high as $20 billion.

o The defined scope of MVP projects is too broad

We believe that MVP projects should be limited to those projects needed to meet state

and federal electric generation policy requirements, such as RPS standards. They

should not be projects needed to meet reliability or economic requirements – these

types of projects should continue to be handled using the current cost allocation

methodology, which limits socialization to 20% of the total project cost.

o The socialization of MVP projects costs should be limited to projects 345kV and

above

In the Midwest ISO cost allocation proposal there is no voltage threshold limit below

which projects are to be considered “local” versus “regional”. If cost socialization is

to occur, as a minimum it should only apply for costs associated with transmission

projects or transmission project components that are 345kV or larger. To assume

anything smaller than 345 kV has “regional” benefits across the entire Midwest ISO

footprint does not make sense due to the limited regional transfer capability of lower

voltage facilities.

Michigan Residents are Harmed by the Midwest ISO Proposal

17

Michigan Residents Will Pay Millions Annually for Unneeded Transmission

o Socialization Charges Michigan 20%

Michigan represents nearly 20% of the Midwest ISO market and accordingly, under

the proposed Midwest ISO transmission cost allocation formula, Michigan residents

would be responsible for 20% of the costs associated with specific new transmission

projects throughout the Midwest. Michigan’s contribution will far exceed any benefit

realized by these new regional transmission projects.

o Socialization Charges Michigan $164 Million for Unneeded Transmission

The allocation of the initial MVP Starter Projects outside of Michigan would have an

initial annual charge to Michigan residents of $164 Million. This charge is expected

to grow dramatically as additional MVP projects are authorized. Recent projections

have MVP project investments doubling or tripling over the next ten years.

Michigan’s Competitive Position is Harmed

The proposed allocation method creates an open checkbook for those western states in the

Midwest ISO who are aggressively pushing to export remotely located wind energy to other

states and leaves Michigan electric customers with very little to say on how their money is

spent. In essence, Michigan electric customers will be paying for other states to develop

their renewable energy generation along with the accompanying industry, jobs and

infrastructure (i.e. transmission). At a time when one of Michigan’s goals to revitalized our

economy is the development of its own renewable energy market we should not be spending

hundreds of millions of dollars so other states can accomplish this same goal knowing that

the out-of-state projects will provide no benefits to Michigan over the very limited

interconnections with MISO following the departure of FirstEnergy in 2011.

Michigan’s Solution

Create a Michigan Transmission Planning and Cost Allocation Zone

Michigan’s utilities recognize the need for and fully support the development of

transmission to serve renewable resources. However, Michigan’s electric customers

should only be charged for systems that provide benefit to Michigan. As such, Michigan

utilities will respond to Midwest ISO’s July 15th

filing requesting that FERC designate

Michigan as a separate planning and cost region within Midwest ISO and that Michigan

alone will pay for the MVP transmission system developed in state necessary to support

in-state renewable development. In turn, Michigan’s electric customers would not be

forced to pay for transmission MVP systems developed out of state for the purpose of

meeting other states’ RPS requirements or for speculative investments.

As a minimum, the scope of MVP projects should be limited

MVP projects should be limited to only those projects that are required to meet state and/or

federal mandates such as RPS. The costs associated with projects being justified due to

reliability and economic reasons should be allocated in the same manner as is done under the

current Midwest ISO tariff, with only limited socialization.

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Furthermore, any costs below a 345 kV threshold should be assessed to the local planning

region within the Midwest ISO, and not socialized across the entire Midwest ISO footprint.