The Interconnection Landscape Changes Yet Again: FERC Conditionally Accepts the California ISO's Interconnection Queue Reform Phase 2

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On January 31, 2012, the Federal Energy Regulatory Commission (FERC) conditionally accepted additional reforms to the California ISO's Generator Interconnection Procedures (GIP) that significantly change the rules that apply to developers seeking to interconnect power generation facilities in the California ISO's balancing authority area. The decision continues the California ISO's efforts to reform the GIP that began in 2008, and focuses on 18 specific issues that arose from stakeholder efforts, interconnection agreement negotiations, the California ISO's transmission planning process, or that were carried over from the previous round of reforms.

Deliverability Status.

The reformed GIP now provides that the California ISO may study deliverability from generation projects that are located within the California ISO balancing authority area but that are interconnecting with a non-participating transmission owner, such as the Los Angeles Department of Water and Power or the Sacramento Municipal Utility District. New GIP section 8.4 allows the California ISO to study the deliverability of such generation projects in a manner similar to the way it studies deliverability for projects interconnecting with a participating transmission owner, i.e., by considering how the non-participating transmission owner's interconnection study process treats (1) the California ISO; (2) interactions among the interconnection customer, the California ISO, and participating transmission owners; (3) deposit requirements; and (4) reimbursements to the interconnection customer of funds posted for the construction of delivery network upgrades.

The reformed GIP also allows interconnection customers to request partial deliverability status, thereby allowing customers to potentially reduce deliverability network upgrade costs associated with full capacity deliverability status while also allowing the customer to maintain greater deliverability than energy-only status. FERC ordered the California ISO to make a compliance filing to include provisions that, upon an interconnection customer's request for partial deliverability, cause the California ISO and the participating transmission owner to evaluate whether one or more delivery and/or reliability network upgrades can be eliminated from the cost estimates that establish an interconnection customer's financial security requirements.

Financial Security Deadlines.

In its application supporting the reformed GIP, the California ISO proposed two separate mechanisms for dealing with changes to an interconnection study report. For changes that address a substantial error, the California ISO proposed to revise the final Phase I interconnection study and also change the amount of interconnection financial security that must be posted and the deadline for posting such security. The California ISO proposed to define a "substantial error" as one that (i) understates a customer's cost responsibility by more than 5 percent or $1 million, whichever is greater; (ii) overstates a customer's cost responsibility by more than 20 percent; or (iii) results in a delay to the customer's commercial operation date by more than a year. For non-substantial errors in a study report, the California ISO proposed issuing an addendum to the report, but not revising posting requirements or deadlines.

FERC conditionally approved the provisions for changes to an interconnection study report, but required the California ISO to revise the asymmetrical definition of "substantial error" so that errors that understate or overstate a customer's cost responsibility by more than 5 percent or $1 million, whichever is greater, will be considered substantial.

Posting of Security and Reimbursement of Costs for Network Upgrades.

The reformed GIP also further clarifies that, at the third interconnection financial security posting, interconnection customers are not required to post security for 100 percent of the costs of all applicable reliability and delivery network upgrades. Instead, provided that certain conditions are met, a customer may divide the third posting across separate and discrete intervals that more closely align with when costs are actually incurred. Consequently, if (1) a customer's network upgrades are separated into two or more specific components and/or can be separated into two or separate and discrete phases of construction and (2) the participating transmission owner is able to identify and separate the costs of the identified discrete components and/or phases of construction, then a customer may negotiate to divide the third interconnection financial security posting into smaller deposit amounts and schedule such postings to more closely align with the respective discrete component and/or phase of construction.

FERC also accepted reformed provisions that will allow customers with phased generating facilities to be reimbursed for the cost of the network upgrades associated with that phase,1 provided that all of the following conditions are met:

  • The generating facility is capable of being constructed in phases;
  • The interconnection agreement specifies that the generating facility is being constructed in phases;
  • The completed phase corresponds to one of the phases identified in the interconnection agreement;
  • The interconnection customer has tendered the required notice that the phase has achieved commercial operation;
  • All parties to the interconnection agreement have agreed that the completed phase meets the requirements set forth in the interconnection agreement;
  • The network upgrades necessary for the completed phase to meet the desired level of deliverability are in service; and
  • The interconnection customer has posted 100 percent of the interconnection financial security required for the network upgrades for all phases of the generating facility.

Consequently, an interconnection customer who takes advantage of phasing its third financial security posting will not receive any reimbursement for network upgrades until the customer's final security posting milestone is completed. Once the interconnection customer satisfies the conditions above, the customer will be repaid a portion of its cost responsibility determined by the percentage of the generating facility declared to be in commercial operation multiplied by the cost of the network upgrades associated with the completed phase.

Reductions in Project Size.

In addition to the provisions in the GIP that allow an interconnection customer to reduce project size during the study process, the California ISO added a provision to its pro forma Generator Interconnection Agreement (GIA) that will allow customers to reduce project size during the time period between the effective date of the GIA and the commercial operation date. This new provision to the GIA, Article 5.19.4, creates a safe harbor that allows a customer to reduce its project by up to 5 percent for any reason during this period. Additionally, the provision allows interconnection customers to request size reductions of greater than 5 percent upon a demonstration of circumstances motivating the capacity reduction that are beyond the interconnection customer's control. No reduction in size under this provision, however, serves to reduce the interconnection customer's cost responsibility for network upgrades or alter the customer's right to reimbursement.

FERC conditionally approved this new provision to the GIA, and in doing so rejected requests by intervenors who wanted interconnection customers to have a unilateral right to reduce generating capacity by up to 20 percent. However, FERC directed the California ISO to establish objective standards that will be applied in determining whether a capacity reduction is due to reasons beyond the customer's control, and to file those standards for acceptance within 30 days.

The GIP reforms accepted yesterday materially alter the process for developers who plan to interconnect a generation project anywhere within the California ISO balancing authority area, and it is important that all developers currently developing, or considering developing, a power generation project in California understand how these reforms change the playing field. Furthermore, we note that this client alert covers only a portion of the GIP reforms that were approved yesterday; the order also approved revisions to suspension rights, the financial responsibility cap and maximum cost responsibility, off-peak and partial deliverability assessments, and more.

To learn more about the reforms approved yesterday and how they may affect your generation development plans, please contact a key contributor.

1 We note that the California ISO's current efforts to integrate the GIP and the Transmission Planning Process may result in the cost of only reliability network upgrades being reimbursable, leaving the cost of deliverability network upgrades allocated solely to certain interconnection customers.

Key Contributors

Seth D. Hilton
Jason Johns
Chad T. Marriott
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