Construction of new long-distance transmission lines has become a hotly debated energy policy issue. Advocates see enhancements to the transmission grid as necessary for exploiting remote sources of renewable power and improving the reliability of the transmission system. Others argue that there are less costly and intrusive means of meeting energy needs than a large transmission build-out. Estimates of the cost of expanding the transmission grid to increase renewable power delivery and other goals run into the tens of billions of dollars. For example (all figures in nominal dollars): The estimated transmission cost of the Joint Coordinated System Plan to bring Great Plains wind power to the East Coast ranges from $49 billion to $80 billion. A Department of Energy (DOE) study of expanding the use of wind power estimated transmission expansion costs of $60 billion by 2030. A study of transmission funding requirements for all purposes for the period 2010 to 2030 estimated total costs of about $300 billion. The North American Electric Reliability Corporation (NERC) identified 39,000 circuit-miles of projected high-voltage transmission over the next 10 years, with roughly one-third of these transmission facilities used to integrate variable and renewable resources. Perhaps the most contentious transmission financing issue is cost allocation for new interstate transmission lines—that is, determining which customers must bear the costs of building and operating new transmission lines that cross several states. This report provides background and analysis of current transmission cost allocation policy and issues. The balance of the report is organized as follows: Background and history, including a discussion of federal authority under the Federal Power Act. Cost allocation policy at the federal and state levels in the years prior to the adoption by the Federal Energy Regulatory Commission (FERC) of Order No. 1000. A review of the transmission planning and cost allocation reforms in Order No. 1000. The authority of the Federal Energy Regulatory Commission (FERC) to regulate interstate electricity transmission is derived primarily from Sections 205 and 206 of the Federal Power Act (FPA). Section 205 of the FPA provides that all rates and charges for the transmission of electric energy subject to FERC's jurisdiction, as well as rules and regulations affecting those rates, must be "just and reasonable," and that no public utility's rates may "unduly discriminate" against any customers. FERC's section 205 authority has been characterized as "an essentially passive and reactive" role. However, Section 206 of the FPA gives FERC a broader and more proactive rate authority: Whenever the Commission, after a hearing had upon its own motion or upon complaint, shall find that any rate, charge, or classification, demanded, observed, charged or collected by any public utility for any transmission ... subject to the jurisdiction of the Commission, or that any rule, regulation, practice, or contract affecting such rate, charge or classification is unjust, unreasonable, unduly discriminatory or preferential, the Commission shall determine the just and reasonable rate, charge, classification, rule, regulation, practice or contract to be thereafter observed and in force, and shall fix the same by order. Section 206 thus permits FERC to make changes to existing utility rates, including transmission charges, either on its own initiative or at the request of an interested party. In order to make such changes, FERC must (1) find that the existing rates or practices are unjust, unreasonable, unduly discriminatory, or preferential; and (2) show that its proposed changes are just and reasonable. Section 206 also allows FERC to establish a just and reasonable rule, regulation, or practice "to be thereafter observed and in force," and to "fix the same by order." The statutory authority found in Section 206 of the FPA gives FERC broad authority to establish a set of general principles to be applied in setting just and reasonable rates upon a finding of unjust, unreasonable, unduly discriminatory, or preferential rates or practices in the industry. FERC has cited its Section 206 authority in promulgating other significant rulemakings related to interstate electricity transmission facilities, including Order No. 2000 (providing for the creation of Regional Transmission Organizations to manage electricity transmission grids) and Orders 888 and 890 (requiring utilities to provide open access to transmission facilities and creating a pro forma tariff for utilities to adopt for their transmission services). Most recently, FERC cited its Section 206 authority when it issued Order No. 1000, the order that altered Commission policy on transmission planning and cost allocation. FERC's transmission cost allocation activities have often addressed complex projects with one or more of the following types of characteristics: May traverse multiple utility service territories and cross the boundaries between power system planning areas. May have multiple owners. May provide benefits to many and diverse beneficiaries. These beneficiaries may be difficult to accurately identify, and it may be even more difficult to quantify the benefits. However, cost allocation for these and other transmission lines was less contentious—or at least less visible and pressing at the national level—in the past because of the nature of the industry itself and federal/state regulation of the industry prior to the mid-1990s. Transmission lines were historically constructed primarily by investor-owned utilities subject to traditional cost of service regulation by state utility commissions. These utilities sold a "bundle" of electric power transmission, generation, and distribution services to ratepayers as a single price. Customers in the utility's service area generally paid a share of the costs of transmission investments, whether or not a particular transmission investment was of value to the customer; this universal sharing of expenses is referred to as the "socialization" of costs. Under this regulatory regime, cost allocation was therefore generally not a complex issue, since the beneficiaries of the transmission service and the customers paying for the services were, in effect, assumed to be the same—the utility's entire set of captive ratepayers. As one analysis points out, the bundling of costs made it possible and acceptable for cost allocation issues to be "swept under the rug." Cost allocations, and related transmission planning issues, were also less contentious and visible because of the historical development of the electric power grid. Transmission lines were first built in the early 20 th century by single utilities to move electricity to population centers from relatively nearby power plants. As generation and transmission technology advanced, the distances increased, but the model of a single entity building lines within its own service territory to supply its own load still predominated. Over time, these local grids began to interconnect, due to utilities building jointly owned power plants and because power companies began to grasp the economic and reliability benefits of being able to exchange power. Nonetheless, this pattern of development did not emphasize the construction of very long-distance inter-regional lines involving multiple owners and jurisdictions, the kinds of projects likely to have difficult cost allocation issues. Cost allocation issues have become pressing in part because of the restructuring of the electric power generation and transmission industries that began in the late 1970s. The Public Utility Regulatory Policies Act of 1978 and the Energy Policy Act of 1992 had as one of their aims the introduction of competition into generation service. In order to facilitate the ability of non-utility generators to access the transmission grid, in 1996 FERC issued Orders 888 and 889, to establish an open access regulatory regime for the transmission grid. These orders directed transmission owners and operators to open their system to any connected generator or load on a "non-discriminatory" basis (that is, without giving preference to their own generation or load). Rates are to be cost or market based, and rates and conditions of service are to be embodied in an open access transmission tariff (OATT) approved by FERC. By allowing non-utility generators and loads to use the transmission system, open access broke the formerly rigid link between the entities that built transmission and their captive ratepayers. Now a new transmission line could be used by multiple entities to transmit or receive power. The operational links between utilities and transmission were further weakened by FERC's policy of promoting regional transmission organizations (RTOs) in the 1990s and 2000s. In RTOs, utilities retain ownership of the transmission grid but operational control is exercised by the RTO. The object is to further ensure that the transmission grid is operated in a non-discriminatory fashion to the benefit of all market participants. The restructuring of the transmission market had several consequences for transmission cost allocation and planning: Cost allocation became more complex and contentious because the clear links that existed under traditional regulation between the parties that built, operated, and benefited from new transmission lines were broken. Under the traditional regulatory regime, distinctions between transmission additions aimed at improving system reliability and those aimed at reducing the costs of operating the power system (i.e., "economic" projects) had little meaning. In the open access regime the distinction between reliability projects and economic projects became an important one, since each type of project could benefit different groups of customers to different degrees. In the open access regime, much of the responsibility for transmission planning shifted from utilities to either RTOs or, in the markets without RTOs, a plethora of other planning organizations built around utilities, generators, and other stakeholders. Prior to the adoption of Order No. 1000 in the summer of 2011, FERC's most significant articulation of the principles applicable to transmission cost allocation was Order No. 890, issued by FERC in February 2007. The purpose of the order was to improve the operation of the open access transmission market created by Order Nos. 888 and 889, including establishment of cost allocation procedures as an element of transmission planning. Order No. 890 established nine transmission planning principles, of which one is "Cost Allocation—a process must be included for allocating costs of new facilities that do not fit under existing rate structures, such as regional projects." This principle was included because FERC found that "[t]he manner in which the costs of new transmission are allocated is critical to the development of new infrastructure. Transmission providers and customers cannot be expected to support the construction of new transmission unless they understand who will pay the associated costs."