ENERGY AND ENVIRONMENT
FERC’s Expected Decisions Make 2013 an
Important Year for Electric Transmission Development
In an effort to facilitate electric transmission development through increased
competition, in 2011 the U.S. Federal Energy Regulatory Commission (FERC)
issued Order No. 1000, which required transmission owners to develop
regional transmission planning processes and to allow non-traditional independent and merchant developers to propose and build transmission projects in
their regions.
COST ALLOCATION
Regional planning groups composed
of regional transmission organizations,
transmission owners, and other stakeholders have spent the last 12 to 18 months
developing their regional transmission
planning processes. Several significant
issues have arisen from these stakeholder
processes that FERC will need to address
in 2013. FERC’s decisions on these issues
“
Under Order No. 1000, regional planning
groups must adopt cost allocation methodologies to be used for transmission projects
selected in their regional transmission plan.
Many of the cost allocation methodologies
proposed by regional transmission organizations would socialize all or part of the costs
of transmission projects (particularly larger
projects) among
wide groups of customers, reducing
the costs that such
projects impose on
any one customer
group. These cost
allocation methodologies have been
approved by FERC
in different contexts
and have a proven
track record of
promoting transmission development
in various regions.
Accordingly, they
stand a good chance of being approved in
the compliance process and, more importantly, of facilitating the development of
new large regional transmission projects.
However, FERC’s approval of socialization
as a cost allocation methodology in prior
proceedings has already been called into
question by the U.S. Court of Appeals for
the Seventh Circuit, which will likely rule
on the issue in the Midwest Independent
Transmission System Operator, Inc.’s region
in 2013.
FERC’s implementation
of its new policy could
significantly affect the
success of transmission
development.
and its implementation of its new policy
”
on transmission rate incentives in 2013
could significantly affect the success of
transmission development and determine
whether Order No. 1000’s goal of encouraging competition in transmission markets
and promoting independent and merchant
developers will be achieved.
Other regions have proposed different cost
allocation methodologies that seek to use
various benefit metrics to allocate costs in
the region. In many cases, the selection of
these benefit metrics has been the subject
of great controversy, and the prospect of
FERC’s approval of such methodologies is
much less clear. Even if they are approved,
the lack of specificity regarding the metrics
that will be used in the cost allocation
process and the discretion inherent in those
proposals foreshadow future litigation over
the identification of beneficiaries and the
resulting allocation of costs, which may
frustrate transmission development by
injecting additional risk and uncertainty.
CRITERIA FOR TRANSMISSION
DEVELOPERS AND PROJECT
SELECTION
Order No. 1000 also requires regional planning groups to develop processes to allow
non-incumbent transmission developers
to participate in the transmission planning
process, including eliminating any right of
first refusal (ROFR) to construct transmission that may currently exist for incumbent
transmission owners and the establishment
of minimum criteria that developers must
meet to build transmission in the region.
FERC will be required to decide whether
to approve the proposed processes and,
more particularly, whether the qualifications
identified by the regional planning entities
discriminate against independent developers. FERC’s decision on such proposals will
significantly affect the ability of independent
transmission developers to participate
meaningfully in the planning process and
develop transmission projects in
these regions.
Many incumbent transmission owners
have also challenged FERC’s decision to
require the removal of any ROFRs, arguing
that ROFRs are contractual agreements
protected by long-standing FERC precedent
that restricts unilateral amendment by
FERC unless FERC can demonstrate that
the amendment is required by the public
ENERGY AND ENVIRONMENT
interest. Rather than generically finding in
Order No. 1000 that removal of the ROFR is
in the public interest, FERC chose to make
the decision region by region when approving compliance filings. FERC’s decision
(and the resulting appellate review that is
likely to follow) will determine the degree
to which independent transmission developers are able to construct transmission
projects resulting from the regional
planning processes.
TRANSMISSION RATE INCENTIVES
Separate from Order No. 1000, FERC also
issued a policy statement on transmission
rate incentives in 2012 that attempts to
balance the need for transmission development with protection for
customers from rising
costs. FERC’s decisions in 2013 applying
the policy statement
will likely have significant implications for
transmission development. For example,
the policy statement
reduces reliance on
return on equity (ROE)
adders and emphasizes other incentives
available to developers. However, incentive,
ROE adders remain important to developers
seeking to obtain financing for their projects
and, in some cases, may be critical to
attracting financing for such projects.
The policy statement also indicates that the
types of projects FERC will consider eligible
for such incentives may shift. For example,
the policy statement emphasizes that
enhanced technology will be an important
factor for awarding incentives and suggests
that projects intended solely to address
reliability needs may not be eligible for
incentive ROE adders unless they will use
such enhanced technology. FERC’s decisions in 2013 implementing its new policy
could shape the types of projects that are
attractive to non-traditional transmission
developers and will send an important
signal to the industry regarding what types
of financial returns to expect from transmission projects.
The upcoming year may prove to be pivotal
for determining whether FERC’s goals of
encouraging competition in transmission
development and promoting involvement
of non-incumbent transmission developers’
can and will be achieved.
AUTHORS
This article is taken from the K&L Gates
Donald A. Kaplan
Washington, D.C.
don.kaplan@klgates.com
Global Government Solutions 2013
Annual Outlook. For businesses to remain
competitive in this time of global uncertainty,
William M. Keyser
Washington, D.C.
william.keyser@klgates.com
they must appreciate and stay ahead of the
constantly changing relationship between
business and government. This report is a
Get the full report at
collection of more than 50 insightful articles
klgates.com/global-government-
to help you do just that.
solutions-practices/
Molly Suda
Washington, D.C.
molly.suda@klgates.com