An Open Checkbook


Why grid owners don't like FERC's new rules on gen interconnection.

Fortnightly Magazine - August 2002

A year ago, when a group of electric utilities in the Southwest signed off on deals to hook up new generators in Arizona with an innovative "common bus" treatment for two adjoining switchyards at the Palo Verde hub, the Federal Energy Regulatory Commission (FERC) was quick to heap on the praise.

"Attaboy," said FERC's Pat Wood, at the commission's meeting of July 25, 2001.

"These companies … are taking actions that stimulate swift interconnection of generation … and have reached it in what I consider to be a pretty expeditious time frame. 'A' for Arizona."

Nevertheless, over the past twelve months, FERC twice has proposed new rules to govern the way in which new power plants gain the right to interconnect with the interstate transmission grid. These new rules on gen interconnection form an essential part of the puzzle more aptly known as the standard market design (SMD).

And the puzzle is proving difficult to solve.

In general, you can ignore most of the whining. It's the same old turf wars.

For example, the plan includes model agreements and protocols covering the gamut of rights and obligations, and each topic carries with it its own constituencies and opponents:

  • Liquidated Damages. Transmission owners-TOs-say they shouldn't have to pay if they dawdle in building needed grid upgrades, since they can't control all subcontractors.
  • Income Tax Indemnification. The government could treat up-front funding from power producers as contributions in aid of construction. Gens complain that TOs can demand credit security that has the same effect as a forced indemnification.
  • Credit Security. TOs want more, since a generator could cancel a project after the grid owner has begun work on upgrades.
  • Liability Insurance. A conspicuous omission in FERC's rules, but some grid owners want a concrete requirement.
  • Metering. Western reliability rules require "gross" metering to account for load behind the fence. But qualifying cogeneration facilities want net metering, to preserve the benefits of on-site generation.


And you can say the same about the problem of managing the queue.

As things stand now, some players want the rules to do more to explain what happens when a TO or a regional grid operator conducts a study to test how a later-queued gen project will affect grid capacity or congestion, but then discovers that an earlier-queued project has been cancelled. That often means that certain network upgrades that were to have been built along with that earlier-queued project will be cancelled as well. Meanwhile, all later-queued projects likely would have relied upon those improvements in their planning, development, and study phases. Who should pick up the tab for the new sets of feasibility and impact studies that now will be required?

Most of this debate is just noise. Grid owners and power producers will haggle over price. Eventually, they will learn the best ways to design contracts to handle these sorts of administrative contract details.

Yet the new rules do pose problems that appear intractable.

The problems arise as FERC is trying to mollify opponents by retaining aspects of the outdated native load concept even as it seeks approval for its SMD.

One example concerns the idea of a "network resource." Under this concept, generators get a cost-free option to future grid capacity, in perpetuity, whether they need it or even plan to use it. Once a generator completes interconnection and acquires status as a network resource, all future grid impact studies must begin from the point of preserving that generator's rights to future grid use.

The second example concerns grid expansion. Under its rule for gen interconnection, FERC forces grid owners (and thus retail ratepayers) to reimburse generators for money that generators supply up front to fund upgrades to the interstate portion of the grid. But opponents fear that FERC is allowing power producers to dictate the planning and expansion of the grid, without paying.

Listen to utility regulators in Florida:

"This requirement … appears to create an open checkbook allowing all generators to ask for the highest level of interconnection service."

In Arizona, the utility sponsors of WestConnect worry about overbuilding the grid to serve out-of-state interests:

"One or more Arizona transmission owners could be required to upgrade their systems for a generator serving remote California customers."

Opponents say the FERC rules will let generators ignore the SMD's preference for locational pricing and to build plants wherever they want, regardless of congestion and grid capacity, and leave ratepayers at risk for trapped costs and an overbuilt grid.

In essence, FERC wants it both ways. It wants the SMD, with locational prices to govern resource planning. But it doesn't know how to convince old-school utilities to give up the native load construct.

So now FERC has given merchant generators their own virtual equivalent of the native load preference, in the guise of (A) network grid rights plus (B) reimbursements for net-ups.

Yet these two rights put FERC at war with itself. They lie in direct conflict with locational pricing and the standard market design.