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Taking Green Private

How merchant funding is remaking the rules for renewables.

Fortnightly Magazine - March 2010

or even phantom projects.

Without the potential penalty of an onerous security requirement, project applicants might well turn the process into a high-stakes poker game. Developers could choose initially to propose a project with firm deliverables, but then back off to nonfirm status once third parties have committed to the most expensive grid upgrades.

As CAISO’s Stephen Rutty, manager of grid assets, testified in the case, any other rule would leave developers free “to work directly against each other’s interest and gaming opportunities would abound.” ( See Demonstration of CAISO Regarding Justness and Reasonableness of Existing Tariff Relating to Financial Security, FERC Docket No. EL10-15, filed Dec. 17, 2010 .)

The bottom line? Clipper’s now energy-only Baja wind project still would need a $7.5 million letter of credit, as determined under a CAISO tariff requiring financial security equal to the lesser of:

• 15 percent of the required grid upgrade (that being $80.7 million, or .15 x $538 million), or

• $20,000 per megawatt ($8 million for a 400-MW project), or

• $7.5 million.

Moreover, if Clipper were forced to abandon midstream, due to unforeseen events (such as failing to obtain permits or a viable purchased power contract), CAISO rules would force Clipper to forfeit 50 percent of the $7.5 million letter of credit.

Of course, if the project were carried to completion, CAISO eventually would conduct a second system impact study, based on Clipper’s Phase II switch to energy-only status. This new study, conducted after the opportunity for gaming behavior was passed, would reset Clipper’s required grid upgrade to that needed for an energy-only project (presumably only $4.578 million). It also would reset Clipper’s required letter of credit to only $686,000 (15 percent of $4.578 million).

Clipper’s only loss in that case would be the time value of money—specifically the carrying cost of the $7.5 million security over the intervening term. But Clipper didn’t see things quite that way, as it explained to both FERC and CAISO why, exactly, it had chosen eventually to abandon the project entirely, rather than to post the onerous $7.5 million letter of credit:

“The carrying cost [of the credit] was nonetheless not the principal burden … rather [it was] the extraordinary risk associated with its nonrefundable half.” ( See, Comments of Clipper Windpower, FERC Docket No. EL10-15, filed Jan. 19, 2010 .)

Clipper continued: “For small and mid-sized companies, a letter of credit of $7.5 million effectively requires that the principal be held by a bank in escrow and, hence, is not unlike being required to make a deposit of the same amount. Seven and a half-million dollars is a great deal of operating capital to have tied up throughout the entire Phase II study for a project which will ultimately have only cost responsibility … totaling only $686,700.”

Now imagine how this story might have turned out, had the developer been a regulated utility, able to draw on monopoly money to do its investing.

A Veto for States?

The widespread divesting of utility-owned generation has shifted regulatory authority from the states to FERC. Yet,