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Commission Watch

Feds seek plug-and-play for distributed generation, but utilities want the power to stay local.

Pity the poor Federal Energy Regulatory Commission (FERC). With its market crusade out of favor, and transmission reform suddenly suspect after the Aug. 14 blackout, it could use a new agenda. And what better than to promote the development of smaller, distributed generation (DG) plants closer to load, to minimize reliance on a widely diffused power grid that some now see as one of the nation's most vulnerable economic assets?

Indeed, FERC this past July had proposed a new set of standards for the connection of small- and micro-sized power plants units to regional transmission networks, or even to radial or local distribution lines operating at low voltages. (See Notice of Proposed Rulemaking [NOPR] Dkt. No. RM02-12, July 24, 2003, 104 FERC 61,104.) And just about the time the proposal emerged, the Institute of Electrical and Electronics Engineers (IEEE) was releasing its Standard 1547 (Standard for Interconnecting Distributed Resources with Electric Power Systems), raising hopes for plug-and-play for fuel cells, wind turbines, and reciprocating engines.

Yet the commission still waits in vain for the applause. The reaction to its small-gen proposal has been tepid, if not angry.

Opponents fear a threat to reliability if small gen units come on line without sufficient study by transmission owners. They urge no retreat from "good utility practice." But to the small-scale generators, the joke in the negotiations room was that the only "good utility" is one that is willing to interconnect. A coalition of such firms (Plug Power, BP Solar, the American Wind Energy Association, etc.) sees reliability as a red herring.

"The underlying issue," they say, "is not whether interconnection of small resources harms reliability." (After all, as the coalition points out, small-scale units are generally built downstream from the points where the biggest failures occur.) "The true threats to reliability," the coalition insists, "come from grid constraints, large power plant outages, and high-voltage facilities."

The Rule: Bright Line and Dual Use

State authorities in California, Texas, New York and Ohio (making up nearly a third of the nation's population) already have adopted rules governing the interconnection of small-scale generator units with electric distribution lines, and as of October, draft rules were under development in New Jersey.

The California Public Utilities Commission (CPUC) offers statistics showing the wide acceptance of DG interconnections under state-sponsored programs:

Further, the U.S. Department of Energy says it expects 20 percent of new generation to come from DG by 2010. But who will run the show?

Clearly, FERC anticipates that many of these new small-scale generators will interconnect with state-controlled distribution lines but also will participate in wholesale markets, throwing some "wholesale electrons" on to those lines, thereby creating a hook for federal jurisdiction.

If that happens, according to one industry group, and distribution lines connected to DG fall under FERC purview, then the jurisdictional divide between the states and the federal government will have collapsed.

The CPUC takes a contrary view. It claims, "small generators have no actual or legitimate need for FERC assistance to cover interconnections to state-jurisdictional facilities in states where DG interconnections rules are already in place."

Representing the state PUCs, the National Association of Regulatory Utility Commissioners (NARUC) urges FERC to withdraw its proposal, saying it has no practical purpose or effect, since the matter is better handled at the state or local level. That's because FERC would limit its proposed rule to units with a capacity of 20 MW or less-units that could interconnect with interstate transmission lines (subject to FERC authority), but just as often would link up with "local distribution" lines that fall under state control, excluded from FERC oversight by the Federal Power Act and by the "bright line" doctrine of various Supreme Court decisions.

But in a creative move, FERC solves this concern by creating a new jurisdictional category, which it calls "dual-use." According to FERC, if a distribution line or grid asset is already being used for a wholesale power transaction in interstate commerce, then FERC can classify the facility as dual-use, and can regulate the interconnection itself (rates, costs, procedure and agreement), as if it were a separate interstate transaction, even though the FPA would reserve exclusive state PUC jurisdiction for the facility, as part of the local distribution system.

A host of utilities and state PUCs attack this dual-use theory, saying it is concocted simply to allow FERC lawfully to propose the rule, and unsupported in the statute and inconsistent with the FERC's own precedent. (FERC had declared in Order 888 that it would treat grid facilities as either transmission or distribution-but not both simultaneously-and provided a seven-factor functional test in that decision to govern the interpretation.)

The utilities and regulators add that FERC's dual-use theory runs afoul of a ruling from the federal appeals court in Washington, D.C., issued this past summer on whether the Midwest Independent System Operator could attach its wholesale tariffs to services using local distribution lines.

PacifiCorp, in particular, points out that FERC's dual-use concept could produce "absurd" results: "Two small generators may request interconnection to the same 34.5-kV line, and one may be subject to federal rules and the other to state rules, because one intends to sell to the wholesale market and the other to enter a PURPA contract."

NARUC asks why the industry should want three separate regulatory regimes for gen plant interconnections: (1) A FERC-imposed scheme for small-scale units connected to transmission lines and to dual-use distribution lines; (2) various state-imposed regimes for small-scale units linked to distribution lines other than dual-use; plus (3) a FERC-imposed interconnection regime for plants larger than 20 MW.

(That rule was finalized on the same day that FERC proposed its small-unit rule. )

Safe Harbors and False Positives

FERC's proposed DG regime would divide the field into high- and low-voltage interconnections (above and below 69 kV), and subdivide the low-voltage group by plant size (under 2 MW, 2 to 10 MW, and 10 to 20 MW). It would establish two different safe-harbor screening tests: an Appendix 1 ("super-expedited") screen, plus an Appendix 2 ("expedited") screen, applicable to the two smallest plant categories of low-voltage connections. Those units of 2 MW or less and connected at low voltage that pass the Appendix 1 screen would be home free without any further sign-off on safety or reliability-attracting protests from state PUCs and transmission owners.

By contrast, it is believed that the state PUCs that have adopted rules in this area limit their effect to plants no larger than 10 MW, or set even small thresholds for maximum plant capacity. Noting that, the Edison Electric Institute and the National Rural Electric Cooperative Association (NRECA) complain that FERC's 20-MW cutoff point is too high and that its screening requirements are too lax.

"It is arbitrary and capricious," says NRECA, "for the [FERC] to presume that a 2-MW facility is likely to have 'no impact' on a transmission provider's low-voltage system."

Many distribution circuits have a total capacity of less than 1 MW, as NRECA points out. "It should be obvious," the group adds, that you cannot interconnect a 1-MW unit with such a circuit without "expensive and extensive upgrades."

The engineering firm R.W. Beck takes the opposite tack, however, calling the Appendix 1 screen "too restrictive." But even more confusion abounds, as explained by the small generator coalition.

The coalition says the two screens were designed by the industry initially to work in tandem. The Appendix 1 screen was made especially tight, they say (likely leading to many "false positives"), since units of 2 MW or less that pass the screen would face no further test for safety or reliability. Thus, they would then put the units under 2 MW through the second screen to weed out those false positive results and create a more accurate process. Units failing the first screen but then passing the second one would still face review by the transmission owner for safety and reliability, with the transmission owner having the burden of proof.

All of this leaves the coalition dismayed and alarmed that the FERC did not understand the proper functioning of the two screens, as the group explains:

"Instead of implementing the screens in this manner [sequentially], or simply splitting the difference between the two sets of screens, the NOPR applies the primary [Appendix 1] screens to generators less than 2 MW and, inexplicably, applies the secondary screens to generators between 2 and 10 MW.

"This approach actually destroys the intended functionality of the screens."

Procedures and Property Rights

Overall, the energy industry voices many concerns to FERC, some of which have already been considered in discussions about FERC's rule for large-scale plant interconnections:

The Transmission Access Policy Study Group (TAPS), represented by lawyers Robert McDiarmid and Cynthia Bogorad of Spiegel & McDiarmid, and well-known as a defender of the rights of municipal utilities, urges reconsideration of FERC's final, large-unit interconnection rule in Order 2003. Presumably it would do the same for FERC's small-scale rule if that proposal should gain approval as drafted.

It attacks FERC's policy of allowing interconnecting generators to seek certification as a "network resource," a concept taken from the standard market design (SMD).

According to TAPS, FERC errs by using its interconnection policy to impose an SMD concept on an industry not committed to deregulation, but instead made up of utilities treated as load-serving entities (LSEs).

"The resulting framework [under FERC's interconnection rules] is tailored to an imaginary marketer/merchant-generator promised land in which LSEs purchase all their power from entities with sophisticated energy and FTR trading strategies, selling the output of power plants built 'on spec' to LMP markets."

In other words, the interconnection rules define a "network resource" without assuring deliverability, because the SMD assumes that market participants will use financial transmission rights (FTRs) or otherwise buy-through any intervening congestion, and will suffer the financial consequences of that. Meanwhile, by contrast, as TAPS explains, a traditional utility serving bundled retail load faces a duty to serve with resources dedicated to specific customer loads (not simply measured in aggregate terms), and that presumes a capacity to deliver without incurring congestion costs. Thus, if new merchants that interconnect gain network resource status, thereby affecting existing allocations of FTRs to resource owners, then utilities still facing a state-imposed duty to serve might lose access to FTRs and see their resource base degraded by uncompensated-for congestion costs.

"There will be no connection," says TAPS, "between an LSE's power supply planning and the transmission expansion planning process.

"The bottom line is the needless punishment of consumers."

The Alabama Public Service Commission attacks this problem in a different way, focusing on the small scale of DG units and the unique aspects of interconnection to lower-voltage lines. But it ends up at the same conclusion that TAPS reaches.

"Small generators," the PSC says, "simply do not meet the basic prerequisites to receive a 'network' type of service. Small generators almost universally interconnect to either distribution or subtransmission facilities that are not 'networked' but are radial in nature."

That leaves it to National Grid, an international company known for managing transmission assets, and presumably a company that is reasonably comfortable with SMD concepts, to suggest an honorable exit for FERC. In an ironic twist, National Grid urges FERC to "decentralize" the process by taking the RTOs out of the process and leaving the details of DG to the local utilities.

"One potential solution," the company offers, "is to dispense with the concept of 'transmission provider' and allow the individual owners of transmission and distribution to administer the interconnection of small generators...

"Today, small generator interconnection requests are administered by individual distribution companies, who are best attuned to the needs of their delivery systems...

"Those ISOs and RTOs that exist today are really set up to operate only the bulk power grid and have little or no expertise in dealing with lower voltage facilities that may be involved in small generator interconnection."

With SMD all but dead, and Congress openly skeptical of any more reliance on RTOs, the counterproposal from National Grid to take DG out of FERC's control and send it back to the local utility would leave the commission with yet another feather plucked from its cap.

 

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