The Federal Energy Regulatory Commission (FERC) has ordered regional transmission organizations to respond to its finding that transmission utilities profiting from generator-backed interconnection upgrades “appears to be unjust.”

FERC specifically called out the Midcontinent Independent System Operator (MISO), PJM, Southwest Power Pool (SPP), and ISO New England in the order issued June 13. The order only targets multi-state RTOs/ISOs.

FERC said existing open access transmission tariffs in those regions are allowing transmission owners to profit from network upgrades that are triggered by, and eventually paid for, by interconnecting generators. Transmission owners may “unilaterally elect” to cover upfront costs for interconnection upgrade only to recoup those expenses, plus a rate of return, from the generator.

That cost recovery framework “may increase the costs of interconnection service without corresponding improvements to that service…,” FERC said, “and may result in undue discrimination among interconnection customers.” FERC added that the “initial funding” process allows transmission owners to assume no risk in owning, operating, and maintaining network upgrades.

Under the Federal Power Act, FERC directed the named RTOs/ISOs to respond to the order within 90 days to demonstrate why its open access transmission tariff is “reasonable and not unduly discriminatory” or explain what changes they will make to the tariff to remedy the issue.

“This has been a 15 to 20 year issue,” Ari Peskoe, director of the Electricity Law Initiative at Harvard Law School, told POWERGRID International. “FERC is now saying that we need a new approach to (interconnection upgrade costs) and that is that generators are going to decide how to fund these upgrades,” should the order proceed.

Peskoe noted that transmission utilities are likely to fight the order “tooth and nail” and it will likely be argued in federal courts if it survives the rebuttal period. But he also acknowledges the significance of FERC’s effort: if a utility is unable to stack its 9-10% guaranteed rate of return on top of interconnection upgrade costs, that could mean significant savings for developers.

Background: FERC Order 2003

FERC Order 2003 reaffirmed a drawn distinction between network upgrades and interconnection facilities, both of which are critical to connecting new generation to the grid. Network upgrades are defined as “additions, modifications, and upgrades” to the transmission system that are required at or beyond the point that an interconnection facility connects to the system to accommodate a large power plant. As part of the interconnection study process, a transmission owner will identify what, if any, upgrades would be triggered solely by the interconnection request. FERC said the commission has long maintained that network upgrades benefit the broader system, not just the interconnecting customer.

The FERC order also stipulated that interconnecting customers would be required to pay the higher of the costs of network upgrades that would otherwise not be needed or the “rolled-in transmission rate” reflecting the cost of the entire transmission network for up to 20 years from the facility’s commercial operation date, not both. Under this pricing policy, when rolled-in pricing is applied the interconnection customer initially funds the costs of network upgrades as construction costs are incurred, unless the transmission provider elects to initially fund the construction upfront itself. If the interconnection customer initially funds the network upgrades, the interconnection customer is then entitled to reimbursement for the cost of the network upgrades, including interest.

FERC’s rule is meant to prioritize the most efficient capital. Transmission owners could opt to fund initial network upgrade expenses if they were able to obtain more favorable financing for the network upgrades and immediately include the associated costs in rolled-in transmission rates.

RTOs and ISOs were granted flexibility to propose alternative interconnection pricing mechanisms in lieu of adopting the order with FERC approval. The commission allowed regional grid operators to propose to directly assign both network upgrade costs and the rolled-in transmission rate to interconnecting customers.

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