Deal Friction

Deck: 

Why the green grid might do better without open access.

Fortnightly Magazine - April 2011

Last month, on the Ides of March, the staff of the Federal Energy Regulatory Commission held a technical conference under the somewhat fuzzy rubric, “Priority Access to New Participant-Funded Transmission.” But by the time each panel participant was heard from, and the meeting wound up, it was clear the topic should have read, “So FERC’s Policy of Transmission Open Access Is Maybe Bad for Green Power—Now What?”

In theory at least, wind, solar, and even geothermal project developers ought to be friends with open access. FERC Order 2003, for example, confers on gen plants of all stripes the right to request interconnection service from incumbent transmission providers to hook up to the integrated grid network. And this right is nothing to scoff at, given the remote locations of many renewable energy projects.

Yet, as was noted at the conference, a developer may have good reason to decline interconnection service from an incumbent utility transmission provider and elect instead to finance and build its own lead line to connect to the grid, especially for projects built in stages. The American Wind Energy Association and the Solar Energy Industries Association brought that point home back in 2009, in defending the Milford Wind Corridor project for wanting to do just that:

And so in a number of cases recently decided or yet pending, wind and other green project owners have asked FERC to rule that a gen developer who builds its own tie line to the grid can reserve available surplus line capacity for the gen units the developer plans to add to the project in future years. But in this effort, the developers haven’t quite succeeded. Rather, FERC generally has ruled that before those future project additions come on line, third-party gen plant developers who didn’t participate on the original project can come on the scene later and request and receive transmission service from the owner of the lead line at the embedded average project cost. That’s because, at least in the eyes of the Federal Power Act and FERC precedent, once the lead line is built, the owner in effect has become an incumbent transmission provider in his own right. Absent an explicit waiver granted by the commission, the original developer must take on the open-access obligations imposed generally on transmission providers by Orders 888 and 890, such as filing an open-access transmission tariff (OATT), complying with transmission provider standards of conduct, maintaining of an OASIS notice board to offer grid services, and expanding the line to honor good faith requests for service from third-party latecomers when available transmission capacity (ATC) isn’t sufficient to support the requested service.

NERC might even require the gen tie owner to register as a transmission provider in the reliability compliance registry, putting a wind project developer at risk for compliance with reliability standards, even though the gen tie line would function only as a very long extension cord, with no real functional integration into the networked bulk power system. At least two appeals of just such NERC directives were pending before FERC in late March, each filed last October by wind project developers, and each appeal has garnered virtually unanimous support from industry players, insisting that NERC is out of line on this issue. (See, FERC Docket RC11-1, and RC11-2.)

Speaking out at the recent FERC conference, Invenergy’s Kris Zadlo, v.p for regulatory affairs and transmission, summed up the feelings of the developer community:

“We construct gen tie lines out of necessity. It is not a business we want to be in.”

Penguins On Ice

In fact, the issue also affects bona fide transmission line developers, including sponsors of high-voltage DC lines. In the merchant grid arena, the question is whether transmission developers must conduct an open season to solicit interest in planned grid capacity, or whether transmission line sponsors can reserve capacity rights for preferred anchor shippers who participate as equity investors in funding line construction.

In early March, Hudson Transmission Partners asked FERC to bend even further than it already has on rights to new grid capacity, offering fresh evidence that FERC’s policy of open-access transmission is at war with green grid expansion and renewable energy development.

If approved as requested, Hudson’s proposed 660-MW high-voltage DC transmission project could go forward, linking New York City to PJM, with 90 percent of line capacity transmission capacity reserved for use by the New York Power Authority and other preferred anchor tenants—without first being offered through an “open season” bidding process, as ordinarily would be required under FERC policy governing merchant transmission lines that ask for authority to charge negotiated, market-based rates. (See, FERC Docket ER11-3017, filed March 3, 2011.)

In this way, Hudson’s proposed eight-mile line would vault past the 50 percent allowable threshold for anchor tenant interest set in 2009 for the 1,000-mile Chinook and Zephyr HVDC merchant lines (Dockets ER09-432 et al., 126 FERC ¶61,134), and even beyond the 75 percent benchmark that FERC allowed last summer for the 400-mile, 2,000-MW bi-pole Champlain Hudson Power Express (not affiliated with the Hudson NYC project), which would connect Montreal with Bridgeport, Ct. (See, Docket ER10-1175, July 1, 2010, 132 FERC ¶61,006.)

And open access has proven superfluous even in the public utility arena, where incumbent transmission providers offer service at cost-based rates. In 2009, in a notable case involving NStar and NE Utilities (the Northern Pass project), FERC granted a 100 percent reservation of grid capacity for an anchor tenant (Hydro-Quebec) that agreed to take on the risk of line construction—the theory being that any other shipper seeking access could take on the same risk—pay to expand the line and claim the new capacity for private use. (Docket EL09-20, 127 FERC ¶61,179.)

In FERC’s defense, the open-access policy does afford certain rights to initial gen project developers who build tie lines.

Under the so-called Milford rule, announced in 2009, the original developer can claim priority to unused line capacity only if the developer can prove what are known as “plans, milestones, and progress.” To retain priority to capacity rights, the developer must show that it has specific plans for phased development of future generating capacity as part of the project, that it has identified milestones to track construction work, and that it can demonstrate “material” progress in achieving those milestones. (Milford Wind Corridor, Docket EL09-70, 129 FERC ¶61,149.)

Absent such evidence, any third-party developer can jump in and ask for transmission service rights on the same lead line, leaving no capacity available for the original developer when later-phase project expansions are completed—a fact seen by virtually all conference panelists as proof that FERC’s open-access policy fails green energy developers.

FERC has since ratified the Milford rule in a number of cases. Just this past winter, FERC ruled that a renewable energy developer that builds its own interconnection tie line and seeks to confirm priority rights to line capacity for future project stages not only must prove plans, milestones and progress to preserve priority rights, but also must take on a duty to expand tie-line capacity to the extent that not enough capacity remains (after allowing for the original developer’s future priority rights) to accommodate a request for service from a third-party developer. (See, Alta Wind, Docket EL10-62, Feb. 17, 2011, 134 FERC ¶61,109.)

Conference panelist Robert van Beers, chief development officer for Tonbridge Power, argued that latecomer shippers instead “should get lesser-favored deals” than anchor customers or equity investors who help fund the line from the very start. He likened the situation to penguins perched on an ice floe, waiting for a comrade to dive in and test the waters.

“Why would you jump in,” he asked, “if you can stand by the side and get the same deal?”

No Straightjackets

A number of concrete policy alternatives emerged at the conference, including 1) creating a separate open-access tariff applicable only to radial tie lines built by gen project developers, dubbed an “OATT-lite”; 2) setting out concrete rules governing open season solicitations by sponsors of merchant transmission lines; or 3) treating all gen tie lines as interconnection facilities governed not by the pro-forma OATT, but by FERC Order 2003, and its pro-forma standard interconnection agreements for large and small generators (the LGIA and SGIA).

Each alternative, however, would likely add a significant dollop of transparency to green power development, a prospect that some panelists found troubling.

Joel Newton, senior attorney at NextEra Energy Resources, noted how his company must compete against other developers for permission to put up wind turbines on the property of landowners located in resource-rich areas. “If we have to hold up our hands and say, ‘Here we are,’ it won’t work,” he said.

Echoing that view was Kurt Adams, exeutive v.p. and chief development officer for First Wind:

“For a 38-mile line we had to go door to door with 130 landowners, and we had nothing to offer but love.”

Should open season rules force merchant developers to right-size their projects, so that sufficient capacity exists to satisfy future requests for service from latecomers who don’t participate in the initial funding of the line?

Robert van Beers of Tonbridge Power warned that an over-sized grid line that flooded a geographic area with huge amounts of transmission capacity might cause a collapse of locational marginal energy prices, but that sparked an objection from FERC staffer Arnie Quinn, who defended open-access rules and suggested that preventing monopoly transmission owners from influencing or manipulating competitive power markets was a non-negotiable, essential tenet of FERC policy.

Nevertheless, the panelists still seemed skeptical of any FERC rule that would force developers to build larger-capacity lines than financiers would care to support.

Kenneth Houston, director of transmission services for PacifiCorp, recounted his company’s experience with its planned Energy Gateway transmission project, where so many project developers for renewable generation had submitted transmission service requests that PacifiCorp decided to spend more and construct a double circuit for its planned 500-kV line, only to see those requests fall away when it came time to chip in equity support for the project.

“Basically we wanted to right-size the line so that there would be enough capacity for load-based service to native load at points in the future, but could not find a way to do it without equity funding from queue customers”—who eventually proved less than forthcoming.

Attorney David Raskin of Steptoe & Johnson suggested that right-sizing is a question better left to the regional planning process, working as a backstop behind private development efforts—not to merchant lines or gen tie lines that simply carry a dedicated supply of renewable energy to a grid entry point.

Stephen Conant, senior v.p. for strategic development at Anbaric Transmission, seemed to agree, as he questioned whether “right-sizing really isn’t simply wrong-sizing.”

Law school professors often counsel their students not to pose a question to a witness “if you don’t already know the answer,” and FERC staffers Steve Rogers and Jamie Simler proved the value of such advice in questions they addressed to the morning panel of merchant grid developers.

Simler asked point-blank whether there would be any “downside” to having FERC adopt formal rules governing open season solicitations for merchant grid lines, and heard a disquieting reply from former colleague Cindy Marlette, now working as special counsel with Patton Boggs:

“The commission is at a critical point here. It has to decide whether it wants new projects. If the commission wants to have merchant transmission projects, it can’t adopt a regulatory straightjacket on open seasons and transparency.”

And when Rogers asked whether FERC should allow a transmission project to reserve 100 percent of capacity for a favored anchor shipper, and saw the panelists nodding, he followed up a little too earnestly and received an answer that he should have known was coming.

“If that’s the case,” asked Rogers, “then wouldn’t that lead to a situation when all projects would be non-open-access?”

The panelists simply shrugged in unison, with Van Beers answering, “Maybe so.”

“We Let It Go”

There is perhaps no better example of the misfit between green power development and FERC’s open-access policy than the case of the ill-fated Wind Spirit Project, sponsored by Grasslands Renewable Energy LLC, which met a disappointingly early end when the commission denied its novel proposal in an order issued late last year. (See, Grasslands Renewable Energy, Docket EL10-51, December 16, 2010, 133 ¶FERC 61,225.)

Spearheaded by the Steptoe attorney and conference panelist Raskin, the Wind Spirit Project would have created a “collector system” of transmission lines across Montana, Wyoming, and perhaps North Dakota, integrated with battery storage and perhaps also some pumped storage hydro facilities, in order to aggregate and assemble a portfolio of various diverse wind power resources to create a high-capacity, firmed and shaped energy product for delivery to market.

In point of fact, the project would have operated very much like the webs of natural gas gathering lines that crisscross Texas and Louisiana and which feed into processing plants that weed out impurities and prepare the gas to serve as a reliable retail energy product. And as gas gathering lines operate largely outside FERC jurisdiction, perhaps the Wind Spirit Project should have enjoyed a similar regulatory reprieve, but it was not to be.

In its application, Grasslands provided evidence that if wind power could be collected and aggregated from a diverse set of wind farms exhibiting different locational and temporal profiles, and then firmed and shaped by storage and other locally produced generation, a firm renewable power product could be created with an average annual capacity factor of around 95 percent. Only then would project output be sent to market.

In addition, the project design would compensate equity participants through a netback scheme that would cover costs but place no limits on upside earnings. But this arrangement of turbines, storage, and portfolio management would prove a delicate balance. As was stated in the petition filed at FERC, “the project economics will not work if the petitioner is required to build a collector system that is oversized relative to the initial demand for transmission service”—which was the initial demand from equity partners signing on to help fund the project from day one.

Thus, Raskin and project sponsor Grasslands asked FERC to rule that if third-party developers should come along later to request transmission service across the Wind Spirit collector system, the sponsor would be authorized to deny the request, or else make the service available only at full incremental cost, rather than the embedded average cost of the original project. This argument lost out to FERC’s open access policy, as it was seen as granting preferential treatment to the initial project participants.

Nevertheless, FERC claimed to have “appreciation” for the novel project, and suggested various alternatives in its December order, such as holding an open season to assess interest from would-be participants, or use of a cluster procedure to determine the exact set of diverse facilities that would make the economics work.

Back at the conference, Raskin showed no bitterness over the decision, but stuck to his guns that FERC shouldn’t dictate green project design.

“It is not discrimination,” he said, if a transmission project developer builds a smaller line—and that small line has the effect of excluding a shipper—if the smaller capacity is chosen because it serves the project’s economic need.”

As the conference attendees were filing out of the FERC meeting room, a reporter asked Raskin if he had filed an appeal of FERC’s adverse ruling.

“No,” he said. “We let it go.”