April 2004

Grid Poker: Tipped Hand?

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2004/05/03)
 

If the game of grid poker is to swing toward T&D system enhancement and smart systems management, as suggested last month, an important driver will be FERC’s handling of the facility interconnection rules.

While the small generator rules have been mired in controversy, the large generator interconnection rules have moved forward, and give some indication of FERC’s thinking about how the post-SMD world of what might be termed “regional guided democracy” will work.

One can only extrapolate how the simultaneously re-regulating and RTO hardening world will treat the potential of near-term distributed energy as a substitute for new substantial wires expenditures. Did FERC tip its grid poker hand?

The interconnection rules as initially finalized by FERC in Order No. 2003 filled a gap in the implementation of Order 888 open access principles, by standardizing the scope of timing of the interconnection process, in a way meant to correct interconnection abuses of the past.

Customers clearly were assigned the costs of interconnection on their side of the interconnection and for distribution system upgrades. As to resulting required utility network upgrades, several issues remained to be resolved, notably: initial and ultimate costs of network upgrades on the transmission side of the interconnection and pricing of service in cases where networks were utility or RTO-controlled.

FERC’s original resolution of these issues was further clarified under Order No. 2003-A, which appeared at the beginning of March. The rules now work essentially as follows.

The basic principle is that while newly interconnected customers must pay up front for transmission side system improvement, they will be reimbursed (with interest) in the form of credits for transmission service received over a 5-year period.

However, where the transmission provider is an independent regional grid operator (i.e., transmission facilities have been turned over to it), “participant funding” may be proposed pursuant to criteria proposed by the RTOs. Under “participant funding,” the interconnecting party is not reimbursed by the transmission system provider, but those who benefit from a project are assigned to ultimately pay for it. The theory is independent regional providers do not have the incentive to discriminate against unaffiliated generators on the systems which a non-disaggregated utility system might have (of recent treatment of rollover contracts by the Southern Company rejected by FERC). The possibility of RTO transmission providers giving customers congestion rights in exchange for direct cost assignment was created.

Order 2003-A was designed to clarify important details of how this framework would operate, in terms of “how much is paid for what;” the crediting mechanism, and the pricing of the service.

It was made clear that transmission providers will no longer have to provide credits for all of the transmission services provided to an interconnecting party— just those specifically related to the provision of service for the interconnecting plant.

Second, after a newly interconnected plant has received five years of transmission credits, the transmission provider may choose between providing an upfront lump sum payment or continued runoff of its credits obligation to the interconnecting party until the balance is zero.

FERC’s existing “higher of” pricing policy applies to interconnection necessitated upgrades, i.e., the utility system provider may charge the higher of the incremental cost of improvement or the average embedded cost rate to customers of the entire system, inclusive of the upgrades (which presumably would be reduced by the upgrade).

FERC wanted to make clear that native load and current customers are not being called upon to subsidize merchant generation instigated network upgrades. This approach also precludes double payment for transmission upgrades by interconnected generators.

On the face of it, the implications for future rules affecting distributed energy development, including small generator interconnection, would appear to be the following:

• support for non-discriminatory regularized access regardless of power source
• full and fair allocation of costs for interconnection and related improvements among the parties
• no special benefits for multiple interconnections with a single system
• acceptance of some time lag caused by the process and by cost identification issues
• significant deference to cost allocation decisions made by RTOs in the course of system management.

It remains to be seen whether these FERC slants, taken together, add up to a program sufficient to stimulate creativity in the nascent distributed energy field. FERC’s approach would not fully value the external benefits of distributed energy strategies to native load, or reward third party innovations to improve grid operations.

It could result in the fragmentation of distributed energy regulation in different regions of the country.

Consequently, it remains to be seen whether FERC’s defined approach to large facility interconnection reshuffles the grid poker deck for distributed and renewable generation, or just provides signals so that individual players will know whether to hold or fold their hands — regardless of the impacts on the electric utility system for its ultimate consumers.

The wires game is a rough one.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.