Energy Law Alert: FERC Conditionally Approves MISO Queue Reform
On Friday, March 30, 2012, the Federal Energy Regulatory Commission (the "Commission") conditionally approved a proposal from the Midwest Independent System Operator ("MISO") to change its generator interconnection queue procedures to address backlogs and late-state terminations of generation interconnection queue agreements (FERC Docket No. ER12-309-000). The new procedures are effective January 1, 2012. The reforms approved on Friday are MISO's third set of significant queue reforms since 2008 as MISO has continued to shift its procedures for processing interconnection applications from a "first-come, first-served" approach to a "first-ready, first-served" approach.
For developers, the most critical changes are the new cash-at-risk milestones required for projects to enter the Definitive Planning Phase and after execution of a Generator Interconnection Agreement ("GIA"). The purpose of these new milestones is to require interconnection customers to put more money at risk earlier in the process so that projects that advance through MISO's queue to the Definitive Planning Phase will be more likely to reach commercial operation. Other important changes include revised timelines, new study procedures, and Net Zero Interconnection Service.
MISO filed its proposed revisions to its Generator Interconnection Procedures ("GIP") in Attachment X of its Open Access Transmission, Energy and Operating Reserve Markets Tariff ("Tariff") on November 1, 2011. While many stakeholders generally agreed that the queue backlog and delays identified by MISO are real problems, numerous project developers filed protests objecting to MISO's diagnosis of the cause of these problems and the particulars of MISO's proposed solutions. However, the Commission found that, with certain modifications, MISO's revisions to its GIP are just and reasonable and further the goals of FERC's seminal order on interconnection procedures, Order No. 2003. Although the Commission generally found MISO's proposal persuasive, the Commission also found that certain aspects of it were not adequately supported, are contrary to Commission precedent, or are unfair to interconnection customers. As a result, the Commission approved MISO's queue reform proposal on the condition that MISO make several modifications within 30 days.
Summary of Changes to MISO's Queue Procedures:
- Revised Queue Structure. MISO's revised GIP significantly changes the structure of its interconnection queue. MISO will retain the System Planning and Analysis and Definitive Planning Phases, but the mandatory timelines for moving through these phases have been removed. The System Planning and Analysis Phase will become an information-gathering phase in which the interconnection customer will be able to control the parameters of its studies. Interconnection customers will be allowed to stay in the System Planning and Analysis phase indefinitely, so long as their studies are refreshed once every 18 months. The interconnection customer may choose at any time to move to the Definitive Planning Phase by providing another study deposit, additional technical information, and the new cash-at-risk M2 milestone payment discussed below. The revised structure will essentially establish two queues. An interconnection customer will be assigned an "Initial Queue Position" upon making an interconnection request and a "Definitive Planning Phase Queue Position" upon entering the Definitive Planning Phase. The Definitive Planning Phase Queue Position will be the basis for a project's definitive studies.
- New Cash-at-Risk Milestones Required. Under the new procedures, MISO significantly increases the level of financial commitment interconnection customers must make to demonstrate their readiness to proceed.
- M2 Milestone Payment. The new M2 milestone payment is now the only means by which an interconnection customer can demonstrate readiness and gain entrance to the Definitive Planning Phase. Previously, interconnection customers could choose from several non-monetary options to demonstrate readiness, including having turbines on order and submission of applications for required permits. The amount of this cash-at-risk payment is based on a formula and must be at least $2,000 per gross MW addition and no more than $10,000 per gross MW addition. The M2 milestone payment will be fully refunded only in the following circumstances: (1) upon satisfaction of the Initial Payment milestone (discussed further below) in Article 11.5 of a non-provisional GIA, (2) upon commencement of commercial operation under a provisional GIA, and (3) if (a) the total network upgrade cost estimates contained in the Interconnection Facilities Study and performed in the Definitive Planning Phase increase by more than 25% over the System Impact Study performed in the Definitive Planning Phase and (b) the interconnection customer withdraws its interconnection request. Although the Commission accepted MISO's proposal to limit the circumstances in which full refunds are available, the Commission will require MISO to revise its Tariff to provide for partial refunds of the M2 milestone payment to withdrawing customers. Specifically, any portion of an M2 milestone payment above the costs resulting from an interconnection customer's withdrawal must be refunded to the withdrawing customer.
- Initial Payment Milestone. MISO is adding a new Article 11.5 to its pro forma GIA that requires an interconnection customer to make an Initial Payment toward its network upgrade costs 30 days after the execution of a GIA or the filing of an unexecuted GIA with the Commission (or 30 days following the Commission's acceptance of an unexecuted GIA if the Initial Payment is contested). The amount of this payment must be 10-20% of the total cost in cash or 100% of the total cost in the form of security. The Commission is requiring MISO to allow the customer to choose between providing cash or security. Previously, an interconnection customer would not have been required to provide security for the cost of network upgrades until 30 days prior to the commencement, design, procurement, installation, or construction of a discrete portion of certain network upgrades.
- Re-studies. Section 8.7 of the GIP is revised to clarify that a restudy is required if a project recommences following suspension and that a restudy will be performed subject to the GIP in effect at the time notice of such restudy is provided by MISO.
- Changes to Point of Interconnection. MISO proposed to revise the Tariff to grant itself authority to modify the point of interconnection following both System Impact Studies and Facilities Studies. The Commission accepted MISO's proposal with respect to studies performed in the System Planning and Analysis phase, but rejected it as too potentially harmful to other aspects of project development in the Definitive Planning Phase.
- Model Sign-Off. The Commission accepted MISO's proposal to require interconnection customers to review and "sign-off" on study models within 30 days in the Definitive Planning Phase, but rejected a 30-day sign-off deadline as too short for the System Planning and Analysis Phase.
- Material Modifications. The Commission conditionally accepted MISO's proposal to limit the types of modifications under Section 4.4 of the GIP that are permissible after a project enters the Definitive Planning Phase. Certain changes to technical parameters will be allowed (and reviewed on a case-by-case basis) as will certain changes to the point of interconnection. The Commission declined to require MISO to specifically identify a change in turbine technology as a permissible modification, but such a change may be permissible as a change to a technical parameter. However, the Commission will require MISO to further modify Section 4.4 to provide that MISO may not unreasonably withhold approval of changes to a project's commercial operation or in-service dates that arise (1) when a party to the GIA other than the interconnection customer changes its milestones or (2) due to changes in a higher-queued interconnection request.
- Interest on Refunded Study Deposits. The Commission rejected MISO's proposal to eliminate the requirement in Section 3.6 of the GIP to pay interest on refunded study deposit amounts.
- Net Zero Interconnection Service. The Commission was generally supportive of the concept behind MISO's proposal to establish a new sub-class of Energy Resource Interconnection Service called Net Zero Interconnection Service, but expressed serious concerns about the manner in which MISO proposed to implement it. In concept, the new service will allow an existing interconnection customer to increase the gross generating capability at the point of interconnection of an existing generating facility without increasing the net generation output above the existing generating facility's capacity. However, the Commission expressed concerns over the competitive implications of the party-driven structure of MISO's proposal and is requiring a MISO-administered process to be developed for Net Zero to ensure that it is available on a fair, transparent, and non-discriminatory basis. The Commission also is requiring MISO to make revisions to address scenarios where the existing generator has not been studied in off-peak conditions.
Among the most controversial aspects of MISO's queue reform proposal is MISO's intention to apply the revised procedures to nearly all projects in the queue—even those in very late stages. In its order, the Commission clarified which projects will be subject to the new cash-at-risk milestones:
- M2 Milestone Payment. A limited number of projects will be exempt from the new M2 milestone payment, including a project that (1) is in commercial operation and has an executed GIA, (2) had a GIA prior to January 1, 2012 and is not subject to restudy, (3) is subject to restudy and has been meeting milestones under its existing GIA, and (4) is subject to restudy but has reached the point under its existing GIA when the M2 milestone payment would have been refunded. Interconnection customers subject to the new M2 milestone payment must comply with this requirement within 90 days of the March 30, 2012 Order. Projects unable to make the required payment will revert to the System Planning and Analysis phase.
- Initial Payment Milestone. The Commission clarified that MISO may not use its authority under the revised GIP to require interconnection customers with existing GIAs to modify the body of these agreements to reflect the revisions to the revised pro forma GIA accepted by the Commission if the customer is subject to restudy. Instead, if MISO wants to revise the body of an existing GIA to reflect the revisions, it must file each agreement that it proposes to modify with the Commission and demonstrate that its proposed revisions are just and reasonable. As a result, the Initial Payment milestone discussed above will apply only to (1) new GIAs and (2) GIAs that MISO seeks to amend by a filing at the Commission.
If you have any questions about the issues raised in this alert, please contact: