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Chicken-Egg Solution

Solar and wind developers learn to shift project risk to the grid.

Fortnightly Magazine - February 2011

simply by combining several grid expansion projects together into a single request to boost the total cost of construction and thereby qualify the combined project qualifies as “not routine.”

In theory, under its Order 679 policy, FERC will consider three categories of factors in determining whether a project is routine:

• Scope: Dollar investment, size, increase in transfer capability, involvement of multiple entities or jurisdictions, effect on the region.

• Effect: improvements in reliability, reductions in congestion costs.

• Challenges and Risks: siting difficulties, long lead times, financing challenges, regulatory and political risk.

And on some past occasions, FERC has applied these tests to an aggregated group of projects when presented for consideration in the aggregate. However, in the recent companion cases, (one involving PJM and Public Service Electric & Gas, the other Oklahoma Gas & Electric) the commission ruled that applicants for incentives must now supply evidence and proof of the non-routine nature of the grid expansions not in the aggregate, but on a project-by-project basis. (See, PJM Interconnection, Docket ER11-1985, Dec. 30, 2010, 133 FERC ¶61,273; and Okla.G&E, Docket ER11-112, Dec. 30, 2010, 133 FERC ¶61,274.)

Nevertheless, does this new policy of treating projects separately actually make sense, given the real-world ways of construction financing?

In his affidavit (cited previously) in support of Edison’s pending request for transmission rate incentives for grid expansion projects to interconnect the Millennium Solar and related projects, Dr. Hunt notes that lenders will view Edison’s previous and current financing requests as a single combined corporate risk, despite any insistence from FERC that the need for incentives must be determined separately, project by project. Hunt describes the problem that Edison will face in attempting simultaneously to finance many large grid expansions, such as the Tehachapi Renewable Transmission Project, the Devers-Colorado River Transmission Project, Eldorado-Ivanpah, Lugo-Pisgah, Red Bluff, and the new set of network upgrades designed to serve the Blythe and nearby solar developments:

“When the financing requirements of the [new] transmission projects are added to the financing requirements of these aforementioned projects [Tehachapi, etc.], they pose considerable adverse effects on SCE’s cash flow and financial metrics. This is because the total investment is approximately $3.1 billion over the period from 2010-2014, a figure that represents approximately 14 percent of SCE’s total system investment during this period.”

Hunt reminds FERC that when seeking financing, Edison will be treated just like any homeowner seeking a mortgage who is also carrying old school loans or credit card debt:

“Investors will view the transmission projects in light of SCE’s total transmission and capital spending. While investment in the [current] transmission projects is significant, it is not this investment alone that concerns investors, but the size of SCE’s total transmission investment and total capital investment.”