California Grid Operator Proposes Extending Rate Incentives To Developers

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On October 17, 2013, the California Independent System Operator (“CAISO”) released a draft final proposal for revisions to its transmission planning process. The proposal reflects comments received on a straw proposal issued on September 10, 2013 and is intended to improve the transmission planning process for transmission developers that are not currently Participating Transmission Owners (“PTOs”) and who do not currently own transmission facilities operated by CAISO (“non-PTOs”). The draft proposal has three parts. First, CAISO proposes to create a rate recovery mechanism that allows non-PTOs to recover their transmission revenue requirement for transmission projects under construction so long as the non-PTOs have received approval of their transmission rate incentives and revenue requirements from the Federal Energy Regulatory Commission (“FERC”). This change would allow project sponsors and investors to begin revenue recovery before the project goes into service. Second, CAISO proposes to clarify that project sponsors with existing transmission assets are only required to turn over to CAISO operational control of the project they are selected to build in the CAISO planning process. Third, to mitigate costs incurred by CAISO to perform and administer the competitive transmission solicitation process, CAISO proposes to impose a project sponsor application deposit of $75,000, plus a true up or refund based on CAISO’s actual administrative costs.

CAISO will hold a stakeholder web conference on October 29, 2013 to discuss the draft final proposal and solicit final stakeholder comments. CAISO is also requesting written stakeholder comments by November 12, 2013. CAISO’s proposal will be presented to the CAISO Board of Governors at its December 18-19 meeting, with a projected filing date for applicable tariff revisions in the early part of 2014.

Participation in the CAISO stakeholder process can be a powerful way for transmission developers to shape the policies and procedures that will ultimately govern their transmission project proposals to CAISO. Raising concerns and presenting alternatives during the stakeholder process can be an important means of affecting proposals that will ultimately be filed at FERC, where adjustments to the proposal may be more difficult to obtain. More detail on each of CAISO’s proposals is provided below. K&L Gates LLP has substantial experience with CAISO, FERC, and Regional Transmission Organization (“RTO”) stakeholder processes, and in advising clients regarding competitive solicitation processes for transmission projects.

Proposal 1: Permitting Revenue Recovery for Non-PTO Transmission Projects under Construction
To promote capital investment in reliable and economically efficient transmission infrastructure, FERC established transmission rate incentives that include: (1) return on equity adders, (2) recovery of prudently incurred costs associated with abandoned transmission projects due to factors beyond the control of the constructing entity, (3) use of hypothetical capital structures, (4) inclusion of construction work-in-progress (“CWIP”) in rate base, (5) accelerated depreciation, and (6) expensing pre-commercial operation costs. Although most of these rate incentives are not included in the transmission revenue requirement of the transmission owner until the new transmission facilities are operational and, in the context of CAISO, turned over to CAISO control, inclusion of CWIP in rate base and recovery of abandoned plant may be recovered prior to completion of the new transmission project or after abandonment of the project. Inclusion of CWIP in rate base allows investors to receive a return on their investment before the project is placed into service, which eases the financial burden on the developer and increases the attractiveness of investments in transmission projects. Recovery of abandoned plant reduces the ex ante risk of investment in transmission projects because prudently incurred costs may still be recovered even if the project is not completed.

The CAISO tariff contains provisions for PTOs to collect the transmission revenue requirements and rate incentives that FERC has approved through transmission and wheeling access charges. However, cost recovery is limited to entities that have become a PTO and turned over operational control of their facilities to CAISO. This prevents non-PTOs from taking advantage of FERC-approved preconstruction rate incentives, which are designed to ease the financial burden on development of large-scale transmission projects. To address this concern, CAISO is considering tariff revisions to permit non-PTOs to recover all FERC-approved costs, including CWIP and abandoned plant, so long as the non-PTOs obtain approval for their transmission rate incentives and revenue requirement from FERC. These revisions would provide transmission developers and investors with the valuable option of recovering costs during the construction phase prior to the transmission project being placed into service, thus easing the financial burden on non-PTO developers and increasing the project’s attractiveness for investors.

Proposal 2: Clarifying Treatment of Non-PTO Approved Project Sponsors with Existing Transmission Assets
Stakeholders have expressed concern that the CAISO tariff provisions requiring new PTOs to turn over operational control of transmission projects are unclear and may potentially be read to require transmission developers to turn over not just the particular transmission project selected through the competitive solicitation process, but also all other existing transmission assets. Noting that it was never the intent for new PTOs to turn over all other existing transmission assets, CAISO proposes to make the changes necessary to clarify that the transfer of control requirement is applicable only to the facilities that the new PTO was designated to build in the CAISO competitive solicitation process, not all of the PTO’s transmission facilities.

Proposal 3: Competitive Solicitation Process Application Deposit
CAISO states that administering the competitive solicitation process for transmission projects requires a significant expenditure of costs and commitment of resources, including enlisting outside consultants to support internal CAISO staff. CAISO expects the costs of administering this process to increase as more and more projects are proposed through the competitive solicitation process. Therefore, CAISO proposes to adopt a $75,000 application deposit to cover these costs. If the amount required to pay actual costs is determined to be greater than $75,000, then each project sponsor participating in the competitive solicitation would be obligated to pay more to cover the actual costs, up to a cap of $150,000. However, if the amount required to pay actual costs is determined to be less than $75,000, then each project sponsor would be refunded the unused balance of its deposit, with interest. The deposit amount is based on the costs experienced by CAISO in recent competitive solicitations. FERC has approved similar application deposits for the competitive solicitation processes administered by other RTOs. Through the stakeholder process, CAISO will develop tariff provisions to clarify the costs to which the deposit will apply and how it will calculate when a project’s sponsor will receive a refund. CAISO will also provide a public accounting of the actual costs incurred to which the deposit applies.

CAISO states the three proposals are intended to “further support competition in the ISO transmission planning process.” By providing non-PTO developers with a mechanism to recover pre-construction and abandonment costs, CAISO seeks to create more opportunity for non-PTO transmission development. Non-PTOs will no longer need to wait until their project is operational to begin cost recovery or to earn a return on their capital investment. They will also have more certainty that FERC-approved abandonment costs can be recovered. This should ease the financial burden on non-PTO developers and make such projects more attractive for financial investors. By adopting a $75,000 application deposit, CAISO is also signaling that it intends to invest significant resources in the review and evaluation of transmission bid proposals and that only those developers that are serious about participation should get involved in the process. CAISO believes that these changes will advance its goal of a creating a competitive transmission planning process in California.