Electric Transmission: The Feds Are Here to Help Contributed by Glenn J. Berger, Cheryl Foley and J. Alexander Cooke, Skadden, Arps, Slate, Meagher & Flom LLP Despite all of the political and economic focus today on the need to develop clean new sources of electricity, a major hurdle remains: transmitting the electricity generated by such sources from their far‐
flung locations to load centers. New transmission lines, however, have been thwarted by parochial siting, environmental and NIMBY concerns and by the complicated logistics of obtaining committed transmission customers, whose ability to commit is in turn subject to the transmission’s existence. In the midst of such difficulties, a surprising cheerleader of new transmission development has emerged. Bucking the stereotype of bureaucrats as roadblocks, the Federal Energy Regulatory Commission ("FERC") has recently adopted reforms that significantly encourage the development of new electric transmission. For example, FERC has offered various financial carrots, including cost recovery during construction, at incentive rates, and for failed projects. FERC also has relaxed its rigid open‐season process, which required transmission developers to make future capacity available on a generic basis to the public, by permitting transmission customers to negotiate bilaterally with developers for some or even all of the capacity on proposed new transmission lines. Although FERC has room to liberalize its transmission policies further, if other state and local policymakers followed FERC’s lead, then their rhetoric about renewable energy might actually become a reality. Transmission – The Key to Unlocking a Clean Energy Future In the wake of the BP oil spill, Japan's nuclear crisis, and lingering concerns about the effects on climate of the burning of fossil fuels, no traditional energy source today engenders widespread public confidence. In fact, all have serious detractors, causing development of many major new sources of electric power to grind to a halt. One bright spot, though, is an increasing interest in developing energy from renewable sources – particularly wind and solar. Over the last several years, U.S. public policy has encouraged the development of new sources of clean energy and, not surprisingly, the jobs and advances in technology that they spawn. Today, thirty‐six states and the District of Columbia have adopted some form of a renewable energy portfolio standard ("RPS") that either mandates or encourages retail electricity providers to source a minimum percentage of their electric power requirements from renewables.1 Most notably, California recently enacted legislation mandating that 33% of its electric power come from renewable energy by the year 2020.2 Many other states, though less aggressive, are not far behind. In the rush to multiply renewable energy sources, state and local policymakers frequently overlook the long distances that usually separate large renewable power sources such as wind and solar ________________
© 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney‐client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. Bloomberg Finance L.P. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. from population centers. Electricity generated from wind or solar in the plains, on high mountain ridges, offshore or, in the case of solar, in the desert, may serve load in states hundreds of miles away and across multiple state borders. In many cases, the electric transmission lines needed to move this power into the grid and then into its markets currently do not exist and are costly to construct. For policymakers to fulfill their promises regarding renewable energy, they will have to find a way to promote the construction of a significant amount of new electric transmission. Regulatory, Commercial and Financial Barriers to Successful Transmission Projects. Transmission may be key to achieving national energy goals, but building new transmission has not proven easy. The three most significant barriers to transmission development are (i) siting transmission lines, which invokes parochial NIMBY and environmental concerns, (ii) obtaining committed transmission customers, and (iii) ensuring that the developer has the opportunity to recover the costs of a new line. Transmission developers must resolve all three before any spade can break ground. Siting To site a new transmission line, the developer must acquire rights‐of‐way from landowners along the proposed route. If landowners do not cooperate, eminent domain authority may be available, but exercising such authority risks alienating communities along the proposed route and can involve lengthy and costly legal proceedings. As electric system planning has expanded well beyond state borders, particularly in areas with regional transmission organizations, state authorities have less incentive to authorize the use of eminent domain or to persuade their constituents to accept new transmission lines if the lines primarily benefit other states. State siting proceedings often do not or cannot take into account benefits outside the state that materially improve an overall region’s electric system while minimally benefiting the electric system within the state. In a growing number of cases, actions at the local level have sought to eliminate eminent domain rights for transmission developers. In Montana, for example, a state court judge ruled that a proposed transmission line between Montana and Alberta, Canada does not possess the power of eminent domain.3 The New Hampshire House of Representatives recently passed a bill on March 30, 2011 to eliminate eminent domain for transmission lines unless they are needed for system reliability.4 In Arkansas, the state public utilities commission refused to grant the Plains and Eastern Clean Line transmission project public utility status, a prerequisite to obtaining the right of eminent domain in that state.5 With or without eminent domain, rights‐of‐way negotiations with landowners can significantly delay or kill an otherwise viable transmission project. Where siting is not a matter of local concern, for example in the case of underwater cables, new transmission lines have proliferated without encountering the same siting difficulties. The Cross Sound Cable was constructed under Long Island Sound and the Neptune project was constructed from New Jersey to Long Island under the Raritan River and Atlantic Ocean with minimal siting problems. Trans Bay Cable, which started operations earlier this year, lies within the San Francisco Bay. New proposals, such as the Champlain Hudson project, are being designed to lie within riverbeds to avoid rights of way issues. Although underwater routing of new transmission may eliminate major siting problems, it is obviously of no value where the option does not physically exist. Unfortunately for transmission proponents, there is no federal right of eminent domain for electric transmission lines. Although Congress gave the FERC additional authority regarding routing decisions under the Energy Policy Act of 2005,6, at the states' urging, the courts have narrowly © 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. interpreted this authority and vitiated much of the power FERC thought it had been given.7 In response, FERC has testified before Congress of its need for additional siting authority, but faces continual opposition by those who want to keep this authority a matter of local concern.8 Trying another approach that could potentially ease local siting skepticism, FERC has initiated a rulemaking proceeding in which it would for the first time require individual transmission providers to engage in a region wide transmission planning process in order to link state and local interests into a regional whole.9 One of the key principles in this proposal is to make the process open and transparent to the public, so that state and local policymakers can incorporate their unique goals into the planning model and be able, at the end of the process, to better understand how the results they are promoting are achieved more efficiently through the regional plan. Although this proposal, if ultimately adopted by FERC, cannot be expected to cure all siting barriers, it may improve state/federal coordination and result in fewer local denials based on lack of information or purely parochial concerns. Customers Even if transmission developers acquire sufficient land rights for a transmission line, they still need transmission customers to use the line. Since many new lines are transmitting electricity from new renewable energy projects, their potential transmission customers will exist only if the new transmission exists. In this so‐called "chicken‐and‐
egg" problem, the transmission line must be planned, financed, constructed and operated in near perfect tandem with the new sources of power that will use the line. If the transmission line is not built, then the renewable energy projects will not be able to transmit electricity, and if the renewable energy projects are not constructed, the transmission line will have no users. In such a circumstance of mutual dependence (or mutually assured destruction, depending on your perspective), the developer of a transmission line will not secure financing for construction unless it is entitled to full recovery of its costs even if the potential users of the line never materialize. The ability of a transmission developer to contract with customers for the capacity of a new line is subject to a FERC requirement that such capacity be offered to all potential transmission customers on a nondiscriminatory basis. Until recently, FERC had adhered to a strict requirement that access to service over a new transmission line had to be offered to the public in general via an "open season" bid process. There is no specific definition of an open season, and the bidding process itself is usually unique to the particular project, but it is often designed and supervised by an independent expert who ensures its fairness and then describes the process and results to FERC in a required, after‐
the‐fact report. Although in theory the open season appeared to be a reasonable means of subscribing the capacity of a new transmission line, actual practice has exposed several flaws that have proven the opposite. In a nutshell, the process is complex, burdensome time‐
consuming, and expensive, and doesn’t reflect practical considerations. Many, if not all, of the open season procedures necessarily involve iterative rounds of bidding to reconcile the ultimate sizing and cost of the line with the bids that are submitted. Thus, the open season does not easily accommodate the continual jockeying of sizing, costs, project timing and customer base inherent with the "in tandem" planning needs of transmission and new generation. Nor does its one‐
size fits‐all approach permit bilateral resolution of other physical and financial considerations that may be individual to each participant in the process. Recognizing that many open seasons were not producing viable projects, FERC recently began permitting transmission developers to subscribe up to 75% of the proposed new capacity through bilateral negotiations with so‐called "anchor tenants". The anchor tenant process allows the transmission owner to work directly with a large © 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. customer so that the development needs of each can be closely coordinated and a transmission service agreement can be reached that reflects rates and conditions satisfactory to both sides. This transmission service agreement then becomes the backbone upon which the line can be financed, constructed, and placed into operation. After the anchor tenant contract is signed, other potential customers have the opportunity to bid for the remaining capacity in an open season, based on the same or similar pricing and terms that are in the anchor tenant contract. Since the anchor tenant concept is relatively recent, it remains to be seen whether it will successfully meld commercial necessities with regulatory goals to create viable new transmission projects. Cost Recovery Transmission lines are costly, and even more so when developers must overcome the uncertainty and resulting delays inherent to a process that faces the barriers discussed above. Because much of today’s new transmission serves renewables that are also relatively expensive, electric customers frequently dispute who should pay the cost of such transmission. Customers along the path of a line often balk at paying for the portion of the transmission line that delivers renewable energy beyond their service area. Americans may be excited and proud of new clean energy sources, but they are not enthusiastic about paying for the associated costs, especially the costs related to new transmission that benefits users of such energy located in other states.10 In the same rulemaking proposal requiring regional transmission planning, FERC is also proposing new rules designed to eliminate much of the cost allocation debate. In its proposal, FERC would require each region to develop and file as part of an open access tariff specific cost allocation formulae applicable to each new transmission project identified under each regional plan. Although each region could use stakeholder negotiations to devise methodologies to fit its unique needs, the ultimate process adopted would have to identify and quantify the benefits of each new line included in the regional plan, and the costs of that line would have to be allocated in a manner roughly commensurate with those benefits as part of the overall regional plan. The process could adopt different methodologies to reflect the costs and benefits of different types of transmission projects. For example, the cost allocation formula for new transmission needed to maintain system reliability could differ from that applicable to transmission built to achieve economic efficiencies or that designed for transmission needed to achieve policy goals, such as meeting a state’s RPS requirements. Similarly, FERC is proposing to require neighboring regions to enter into agreements containing interregional allocation methodologies. These agreements, which would have to be filed with FERC, would reflect the same types of principles regarding cost/benefit identification and analyses that apply to the intraregional planning process. Regulatory Efforts to Break Down Barriers and Encourage New Transmission In addition to the steps it has taken to address the siting, customer access and cost recovery barriers to transmission development, FERC has also authorized a series of financial incentives, including higher rates of return, recovery of the costs of funds expended during construction, use of hypothetical capital structures, recovery of abandonment costs, establishment of regulatory accounting mechanisms to ensure future investment recovery, formula rates to track operating costs from year to year, and other case‐specific requests by transmission developers. For new entrants who can show that they have no market power, FERC has granted even more flexibility by permitting the transmission owner to establish rates, terms and conditions for the development, construction, and operation of the line based upon freely negotiated competitive market conditions. Under these "market‐based" © 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. rates, a transmission developer may structure its investment around individualized project and investor needs. With respect to customer access concerns, FERC continues to reevaluate its anchor tenant and open season bidding policies. It is currently considering proposals by transmission developers to negotiate anchor tenant contracts with affiliates and equity investors. These proposals typically involve joint development by affiliated entities of new generation and the new transmission capacity needed to transmit this power to market. FERC has thus far been reluctant to approve these proposals, fearful of providing undue preferences to affiliated entities and discriminating against unaffiliated third parties who may need the same transmission to support the development of their own generation projects which may be in competition for the same market as the transmission owner’s affiliates. developers that embrace different treatment of different customers based on objective facts and designed to achieve important new additions to our transmission infrastructure. As expected, the generous financial incentives FERC offers and its other regulatory initiatives are attracting a large number of potential investors, but new transmission lines designed to connect new sources of electric generation to the grid, particularly renewables, continue to be bogged down. The problem is that not all of the roadblocks to new transmission are within FERC’s power to remedy. Although FERC can act as a cheerleader for new, inter‐regional transmission projects, it cannot totally resolve all financial and structural issues or eliminate the parochial disputes that threaten the infrastructure needed to achieve both local and national energy goals. Conclusion FERC’s challenge here is to balance the fear of causing undue discrimination against unaffiliated third parties with the need to ensure that needed new transmission projects actually get built, or, at a minimum, that its policies are not the roadblocks that kill a project. Parties have suggested that it is not "undue" discrimination, nor is it illegal under the Federal Power Act, for FERC to permit benefits to flow to those entities who financially commit to and support the development of needed new transmission. These benefits may include allowing affiliates to become anchor customers, allowing equity investors in a new transmission line to reserve future capacity on that line for the benefit of their affiliates, eliminating the obligation on the part of the transmission developer to build new capacity to serve future needs of third parties, permitting pricing mechanisms that reward those transmission customers whose initial contracts support the construction of a new line, and shifting other risks to future customers. These suggestions would require FERC to discard the notion that the one‐size‐fits‐all approach is necessary to avoid discrimination under the Federal Power Act and to adopt a set of rules and regulations for transmission In order for a new transmission project to succeed, a large number of variables must align. Unfortunately, success is neither assured nor in many cases even probable, particularly given the lack of alignment of interests and responsibilities of the various parties involved in the commercial, regulatory, and transmission siting processes. State and federal policymakers and their constituents have a huge stake in the success of clean, economic new sources of electric power, but in order to achieve their goals they will have to join FERC in a cooperative give‐and‐take in which, from time‐to‐
time, policymakers will have to cede their local authority or make difficult and locally unpopular decisions. If, instead, of taking this approach, legislators and other policymakers choose to engage in parochial and self‐interested decision‐
making, they will only ensure overall failure, for their region as well as for the nation as a whole. FERC’s ongoing initiatives to promote new transmission development provide a good example of how a regulator can be part of the solution, not part of the problem. State and local policymakers are encouraged to follow suit. © 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P. Glenn J. Berger is a Partner and J. Alexander Cooke is an Associate in the Energy and Infrastructure Group in the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. Cheryl Foley is a Counsel in the Energy Regulatory Group in the Washington, D.C. office of Skadden, Arps, Slate, Meagher & Flom LLP. © 2011 Skadden, Arps, Slate, Meagher & Flom LLP 1 Database on State Incentives for Renewables & Efficiency, RPS Policies, available at http://www.dsireusa.org/documents/summarymaps/RPS
_map.pptx (last visited May 9, 2011). 2 Cal Pub. Res. Code § 25740 as amended by SBX1‐2 (2011). 3 Order Dismissing Complaint for Condemnation, MATL, LLC v. Salois, Montana Ninth Judicial District Court, No. DV‐10‐66 (Dec. 12, 2010). 4 State of New Hampshire H.B. 648 (2011), currently under consideration by the state Senate. 5 See Order of Arkansas Public Service Commission, No. 10‐041‐U, Order No. 9, (Jan. 11, 2011). 6 Pub. L. No. 109‐85, 119 Stat. 594 (2005) ("EPAct") (which added a new Section 216 to the FPA, codified at 16 U.S.C. § 824) 7 See Piedmont Environmental. Council v. FERC, 558 F.3d 304 (4th Cir. 2009), cert. denied, 130 S. Ct. 1138 (2010) 8 FERC Chairman Wellinghoff testimony before the House Energy and Commerce Committee, Subcommittee on Energy and Environment on June 12, 2009, available at http://www.ferc.gov/EventCalendar/EventDetails.aspx?I
D=4702&CalType=%20&CalendarID=122&Date=6/3/2009
&View=Listview (last visited May 9, 2011). 9 FERC Notice of Proposed Rulemaking, 75 Fed. Reg. 37884 (June 17, 2010). 10 Not only are disputes arising in multiple regulatory proceedings, but federal legislators are now entering into the fray. U.S. Senators Bob Corker (R‐
Tenn.), Ron Wyden (D‐Ore.), Lisa Murkowski (R‐Alaska), Richard Burr (R‐N.C.), and Lindsey Graham (R‐S.C.) recently proposed legislation which would require FERC to use a "measurable reliability or economic benefit" standard when distributing transmission costs across state lines. Electric Transmission Consumer Protection Act (S.400) 112th Congress (2011). © 2011 Skadden, Arps, Slate, Meagher & Flom LLP. Originally published by Bloomberg Finance L.P. in the Vol. 3, No. 12 edition of the Bloomberg Law Reports—Technology Law. Bloomberg Law Reports® is a registered trademark and service mark of Bloomberg Finance L.P.