FERC Proposes New Policy Restricting Third-Party Use of Interconnection Facilities

by Orrick, Herrington & Sutcliffe LLP

On May 15, 2014, the Federal Energy Regulatory Commission (FERC) proposed new rules and policies that would make it easier for the developers of non-utility transmission lines that connect their power projects to the grid to avoid having to offer unused capacity on those lines to third parties, and instead to reserve that capacity for their own future use.  When non-utility generators build new power plants, they ordinarily construct and own new interconnecting power lines - called "gen-tie lines" and related equipment, such as substations, collectively referred to as "Interconnection Customer's Interconnection Facilities" (ICIFs) in FERC parlance.  In many instances, these gen-tie lines are a few hundred feet, but for solar, wind and geothermal plants, which are often located in less populated areas, they can extend dozens or even hundreds of miles.

FERC's "open access" policies, which are designed to ensure that traditional utilities cannot use their monopoly over the transmission grid to stifle competition, require owners of transmission lines - including ICIFs - to function as common carriers, by making unused capacity available to third parties any time such service is requested.  For developers of power projects that include ICIFs, who have borne the risk of developing and financing these lines, these open access policies have been problematic, imposing costs and regulatory burdens, and limiting their incentive to undertake the risk of development only to have a competitor benefit equally from the line if it is successfully completed.

In order to restore a more appropriate balance between its open access policies, and to reduce the burdens on project developers, FERC proposes to amend its regulations to: (i) provide a blanket waiver to eligible ICIF owners, and (ii) establish a five year "safe harbor," from the date that ICIFs are energized, during which third parties are not permitted to obtain interconnection service over the ICIF.  After the five year period, third parties can seek to interconnect their facilities with the ICIF by filing with FERC a request for interconnection under Sections 210 and 211 of the Federal Power Act (FPA) - which is a much more burdensome process than simply making a request for interconnection.


Currently, absent a waiver, FERC-jurisdictional generator owners that own no transmission facilities other than ICIFs must comply with FERC's open access requirements, which provide that unless it obtains a FERC order granting a waiver, a generator owner must file an open access transmission tariff (OATT) and comply with FERC's standards of conduct and open-access same-time information system requirements. Even if a generator owner does obtain a waiver from the OATT filing requirement, the waiver is effective only until a third party requests service over the interconnection facilities, at which time the generator owner has 60 days to file an OATT. 

FERC's current policies also impose burdensome requirements on ICIF owners by awarding priority to use available capacity on interconnection facilities based on the timing of an interconnection request.  It is common for generation developers to have excess capacity on their interconnection facilities because they plan to develop their generation facilities in phases, or because economies of scale in transmission provide incentives to develop IFICs with more capacity than is immediately needed, which is available for future projects that the developer or its affiliates might pursue.  Because FERC's current policies encourage transmission access on a first-come, first-served basis, developers are exposed to the risk of a third-party request for service that could interfere with the developer's planned use of its interconnection facilities. 

FERC has developed a process whereby generation developers can request a FERC declaratory order that confirms the developers' priority rights to their excess gen-tie capacity.  FERC often grants such requests, but the process is burdensome and expensive.  The declaratory order process, which includes a $24,260 filing fee and can include significant legal fees, requires the developer demonstrate to FERC that it has "specific, pre-existing" generator expansion plans with milestones for construction of generation facilities and that it has made material progress toward meeting those milestones. 

In practice, FERC's open access policies, as applied to interconnection facilities, have yielded little benefit in the promotion of competitive transmission markets at a great cost to generation developers.  Third-party requests for service over interconnection facilities have been rare, and the requests for interconnection service can be abandoned after the IFIC owner has incurred the expense of preparing and filing an OATT.  As noted in the NOPR, only four requests for service from third parties have resulted in actual interconnections under the current process. 

As discussed in more detail below, FERC proposes three key revisions to its policies relating to third-party use of interconnection facilities that are intended to reduce regulatory burdens and costs to generation developers, while ensuring open access by permitting third-party interconnections only when they are in the public interest.      

Blanket Waiver

FERC proposes to amend its regulations to grant generator owners that (i) are a FERC-jurisdictional "public utility," (ii) sell electric energy, and (iii) own an ICIF, a blanket waiver from FERC's open access requirements.  (In order to qualify for the blanket waiver, the generator owner must be potentially subject to an interconnection order under Section 210 of the FPA.  Section 210 authorizes FERC to require an "electric utility" to interconnect. The FPA defines "electric utility" as "a person or Federal or State agency...that sells electric energy," which is why FERC proposes to impose the requirement that the entity sell electric energy.)  

FERC explains that it is appropriate to grant a blanket waiver to such entities because of the limited and discrete nature of their interconnection facilities. Unlike an integrated utility grid, access to which is essential for non-utility generators to compete, gen-tie lines and related interconnection facilities simply plug a generator into the grid, and in most cases do not  provide the owner an opportunity to thwart competition by denying access to competitors.

To qualify for the blanket waiver, the ICIF owner must be a FERC-jurisdictional "public utility" that sells electric energy.  In recent years, generation developers have increasingly chosen to establish a separate entity, referred to as the "gen-tie owner," to own their interconnection facilities.  Under FERC's proposed rules, these gen-tie owners are not eligible for the blanket waiver.  However, they would be permitted to seek an individual waiver from FERC's open access requirements.   

Safe Harbor

FERC also proposes to adopt a safe harbor period of five years, beginning on the date that the interconnection facilities are energized, during which, as a general rule, FERC will not require the ICIF owner to provide transmission access to a third party.  (There is no prohibition on establishing voluntary arrangements for sharing use of ICIF or providing transmission service over them.)  During the safe harbor period, FERC will rely on a rebuttable presumption that the ICIF owner has definitive plans to use the full capacity of its interconnection facilities.  A third party may attempt to rebut these presumptions, but it also would have the burden of proving that the public interest is better served by FERC granting access to the third party over the interconnection facilities that were designed to the serve the ICIF owner's planned use.   

Interconnection Pursuant to FPA Sections 210 and 211

Following the safe harbor period, third parties could use procedures set forth in Sections 210 and 211 of the FPA to request interconnection with interconnection facilities that are subject to the blanket waiver.  Under Section 210 of the FPA, FERC can require ICIF owners to interconnect a third-party generating facility if FERC determines that such interconnection is in the public interest and would encourage conservation of energy or capital, optimize efficient use of facilities and resources, or improve reliability.  Similarly, under Section 211 of the FPA, FERC can require ICIF owners to provide transmission service to third parties if FERC determines that ordering such transmission service is in the public interest.  The third party must compensate the ICIF owner for the costs of any expansions required to interconnect and provide transmission service to the third party.  FERC precedent is unclear, however, on whether a third party must compensate the interconnection facility owner for incremental line losses caused by the third-party interconnection.   

Companies that may be affected by these proposed policies have the opportunity to have their views considered by FERC by submitting comments to FERC prior to the deadline, which is July 29, 2014.

A copy of FERC's proposed rulemaking can be found here.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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