MISO Interconnection Deposit Loophole Closed

Mayer Brown - Tax Equity Times
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Mayer Brown - Tax Equity Times

North American development-stage projects interconnecting with Midcontinent Independent System Operator (“MISO”) member utilities may no longer rely on funds deposited for network upgrades being returned if the project ultimately does not move forward.

Citing knock-on effects to other projects caused by withdrawals from executed Generator Interconnection Agreements (“GIAs”), MISO filed proposed tariff changes with the Federal Energy Regulatory Commission (“FERC”) to prospectively allow MISO to capture network upgrade deposits of withdrawing projects and use those deposits to mitigate effects on other non-withdrawing projects rather than refund them to the withdrawing project. FERC approved the change with an effective date of February 1, 2021.

The New Rule

In MISO’s proposed tariff change to close what it termed the “Post GIA Termination Loophole,” it noted that its then-effective tariff required MISO’s transmission-owning utilities (who receive the upgrade deposits from GIA project customers) to return deposits made under a terminated GIA, other than funds used for actual costs incurred, to the project. The tariff amendment now requires the transmission owner to forward these unused amounts to MISO, which will determine the financial impact of the withdrawal on other projects, then first apply the unused payments toward mitigating these impacts and, only after doing that, refund remaining amounts to the withdrawing project.

MISO’s rationale for the change in the tariff focuses on the effects of imposing the full amount of costs for shared required upgrades necessary after a project cancels on fewer remaining projects. While certain shared costs will, naturally, decrease if a project withdraws, other network upgrade costs will not scale down proportionately, so remaining projects are forced to absorb increased costs. MISO raised concerns in its application to FERC of projects being burdened with an increased portion of costs becoming financially untenable and withdrawing, causing “cascading terminations and restudies” (though MISO did not give an example of the occurrence of such an event).

Where projects have provided letters of credit, surety bonds or parent guarantees in lieu of cash for interconnection payments, this security is treated the same way as cash under the revised tariff: this security may be drawn to provide funds to support network upgrade obligations after projects withdraw from GIAs. However, to avoid possible draws, MISO’s tariff update specifies that projects may fund the financial impact through other means.

The “Loophole”

MISO describes projects terminating GIAs and receiving a full refund as a loophole because, prior to the execution of a GIA, a withdrawing project is subject to the loss of its milestone payments to compensate other projects for increased costs (though there are some predetermined points in the pre-GIA process where projects may withdraw without this penalty). Thus, prior to February 2021, non-viable projects could nonetheless execute GIAs and then terminate in order to get a full refund of network upgrade deposits, avoiding any risk of loss. (Withdrawing GIA customers would separately lose any filing-fee and study-cost payments, which are typically quite small.)

Who Is Affected?

The change is relevant to all projects under development or construction subject to MISO’s tariff, including those that are already in the queue or that may join in the future but will not apply to an existing, paid-up interconnection customer that is not affected by other GIA applicants.

For projects that do not cancel their GIAs and that instead move forward with construction, no change is expected other than the marginal positive effect that withdrawal of other GIA projects will be less likely to result in increased costs for interconnection upgrades.

Financial Analysis

The analysis conducted by MISO will determine how much of the withdrawing project’s deposits will be used to mitigate effects on other projects. Analyzing 10 project withdrawals in the 2016 and 2017 cycles, MISO found eight with no effect on other projects, one with financial impacts of nearly $5.5 million and one with impacts of almost $10.5 million.

The amount of mitigating payments that MISO can withhold is capped at the amount of a project’s milestone payments (typically 20 percent of a project’s expected network upgrade costs). Amounts over this cap cannot be used by MISO to mitigate potential harm to other GIA projects, but MISO’s tariff does not explain why any amounts over this cap cannot immediately be refunded to the project.

In development-stage financings, interconnection deposits may be a material component of costs. Financiers could previously be assured, however, that projects that execute GIAs but ultimately withdraw could recoup those funds. MISO’s tariff changes shift this risk metric by both inducing a delay for undertaking studies and imposing the risk that funds, in an amount to be determined after the withdrawal and out of control of the withdrawing project, will not be returned and instead be applied to other projects’ upgrade costs.

Calculations of the effect of withdrawal are only undertaken for projects in the same queue cycle. Financial effects of withdrawals from projects in future cycles are not considered.

[View source.]

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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