[BETA] Fortnightly

 

How rules muted price signals and did not ensure efficient siting.

Of the new rules proposed by the Federal Energy Regulatory Commission (FERC) for interconnecting new power plants to the transmission grid, the most controversial (for transmission providers and generators alike) is FERC's choice of who should pay to construct the various categories of required new facilities.

Some transmission providers argue that interconnecting generators should pay the full costs of all transmission upgrades that are required to interconnect a new generator to the power grid, and which would not be required for grid expansion (to meet load growth, for instance) absent the new generation project.

Generators claim, however, that their presence on the grid benefits all power customers-through increased competition, lower energy costs, etc.-so that all transmission customers should share in paying grid upgrade costs.

The FERC, meanwhile, takes a middle course, but one that seems more offensive to grid owners than gen project developers.

Under the FERC's proposed standard interconnection agreement (IA), the costs associated with the design, construction, and ownership of all of the interconnection facilities, including the network upgrades, would be assigned to the generator. ¹ So long as the transmission provider receives payments for transmission service under such upgrades, the generator would be entitled to recover these costs through refunds from the transmission provider, with interest, within five years from the date of the network upgrades. ²

In choosing such a policy, FERC has concluded that current rules and practices pose sufficient barriers to entry, and thus inhibit the development of competitive generation. Yet at the same time, while attempting to stimulate construction of new generation, FERC's new rule provides no new price signals to guide developers on where to build their new plants. Indeed, experience demonstrates that a cost allocation mechanism like that proposed in the interconnection NOPR, by itself, mutes siting signals that would otherwise be provided if the full costs of completing necessary transmission upgrades were born by the new generator.

Consider New England, and the lessons learned about the importance of including location-specific price signals for power plant developers.

Several years ago, New England adopted a new set of gen interconnection rules and procedures-well thought-out, like those that FERC now has proposed. Beginning in 1997, many crucial elements came together in New England and spawned an explosion in merchant plant development. At that time, New England had relatively high-priced electricity. The New England Power Pool (NEPOOL) had restructured to include open membership for all market participants. It had filed to implement bid-based markets for generation and regional open access transmission service. Access to fuel supplies was being expanded with the construction of the Maritimes and Northeast Pipeline (M&N Pipeline). The NEPOOL transmission system was perceived to be robust, with little to no congestion. Although NEPOOL's restructured electricity market was envisioned ultimately to provide an acceptable congestion management system, the market initially implemented for NEPOOL reflected region-wide clearing prices. Congestion management was intended to be implemented promptly following prove out of the markets. ³

In these circumstances, generation developers flocked to New England, proposing