Energy Law Alert: FERC Amends Merchant Transmission Participation Requirements, Allows Negotiations for "Anchor Tenants"
3/2/2009
In late February, the Federal Energy Regulatory Commission (the "Commission") significantly altered its analysis for considering merchant transmission projects. Perhaps more important, the Commission approved transmission developer proposals to allow an "anchor tenant" to presubscribe transmission capacity prior to such capacity being offered to other developers through the Commission's open season process. The Commission's decision (in the Chinook Power Transmission and Zephyr Power Transmission (collectively "Merchant Developers") dockets) should make both merchant transmission projects and remote generation resources easier to develop.
Merchant transmission projects bear full financial risk for a project, with no captive customers from which to recoup costs. Over the last 10 years, the Commission developed 10 flexible criteria for determining whether to grant negotiated rate authority to a merchant transmission developer. Although the criteria were intended to ensure generators nondiscriminatory access to the transmission grid, the criteria were unwieldy and too often led to a "chicken and egg" situation in which generators and merchant transmission developers would each wait for the other to commit to a project before committing themselves.
The Merchant Developers sought the Commission's approval of negotiated transmission rates over two proposed direct current transmission lines, each of which is expected to deliver approximately 3,000 MW of generation from Montana and Wyoming to the southwestern United States. The Merchant Developers requested a waiver of the Commission requirement that transmission capacity must initially be allocated through an open season process. Instead, the Merchant Developers proposed to presubscribe 50 percent of each line—a total of 3,000 MW—to a single "anchor" wind developer. The anchor tenant wind developer would pay its one-half share of development costs, including permitting, siting, path rating, and other development activities. The remaining 50 percent of cost and transmission capacity would be allocated through a traditional open season.
The Commission approved the anchor tenant proposal. In its decision, the Commission then jettisoned its cumbersome 10-criteria analysis in favor of a much more focused approach that supports new presidential policies toward transmission and renewable generation development. The Commission's refined analysis for determining whether to grant negotiated rate authority to merchant transmission projects will focus on four factors, as described more fully below: (1) the justness and reasonableness of rates; (2) the potential for undue discrimination; (3) the potential for undue preference, including affiliate preference; and (4) regional reliability and operational efficiency requirements.
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The Justness and Reasonableness of Rates. The Commission will continue to ask whether the merchant transmission developer bears full market risk for a transmission project and is not building within its own, or an affiliate's, traditionally regulated transmission footprint. In addition, the Commission will consider whether the developer, or an affiliate, owns transmission facilities in the relevant region, the alternatives available to customers, and whether the developer is capable of erecting barriers to entry or withholding capacity. Further, the Commission will require developers retaining control of their projects to create secondary transmission rights and Open Access Same-Time Information System sites to facilitate the purchase and sale of such rights. |
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Undue Discrimination. The Commission noted that although it previously required merchant transmission developers to allocate all initial capacity through an open season, practical realities must allow for financial commitments by anchor tenants in order to provide "crucial early support and certainty to merchant transmission developers, which enables them to gain the critical mass necessary to develop these projects." As a result, the Commission will now evaluate any proposal to allocate all or a portion of initial capacity outside of an open season. In doing so, the Commission will rely on post-open-season reporting requirements and the complaint process to ensure a merchant transmission developer did not unduly discriminate against any party in presubscribing capacity. |
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Undue Preference and Affiliate Concerns. The Commission's concerns about undue preference are heightened when the merchant transmission owner is affiliated with an entity vying for capacity. Thus, the Commission will apply a higher level of scrutiny when an affiliate of a merchant transmission developer commits to being an anchor tenant. However, merchant transmission developers may nevertheless presubscribe capacity with an affiliate if the developer can sufficiently show that no undue preference was afforded to the affiliate. Likewise, an affiliate may also participate in an open season upon a showing that no undue preference will be given. |
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Regional Reliability and Operational Efficiency. Because merchant transmission developers are subject to mandatory reliability standards, the Commission will no longer require such developers to adhere to separate reliability requirements. Further, to the extent a merchant transmission project is located near an RTO/ISO, the Commission will continue to require that merchant transmission developers consider turning over operational control to the RTO/ISO. |
If you have any questions about this important Commission policy change, please contact the attorneys indicated below:
Pamela L. Jacklin at (503) 294-9406 or
pljacklin@stoel.comMarcus Wood at (503) 294-9434 or
mwood@stoel.comJennifer H. Martin at (503) 294-9852 or
jhmartin@stoel.comJason A. Johns at (503) 294-9618 or
jajohns@stoel.com