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In the Generation Corner...
By Michael J. Zimmer and Jonathan W. Gottlieb
Michael Zimmer and Jonathan Gottlieb are partners in the Washington, DC, office of the law firm Baker & McKenzie.
Many new generation projects currently face a major stumbling block in their effort to connect to the grid—the actual process for interconnecting to the incumbent utility-owned transmission grid. In fact, the process for many new generation projects has now become more time-consuming, difficult, and expensive than the overall environmental and site permitting process.
In almost every case, where new generators request interconnection to the existing system, transmission providers perform the required interconnection studies, which offer estimates of the cost and technological feasibility of interconnecting the project to the transmission system. In many cases, the estimated cost for the interconnection has been so high as to make the developer's project too costly to pursue. In other cases, generators have felt that the estimates have been wildly inaccurate, making it extremely difficult to plan a budget properly for project development and financing.
In one case, the actual interconnection cost claimed by the transmission provider exceeded the original cost estimate by 750 percent over fewer than two years. And this was in a market heavily shaped by affiliate generation projects ostensibly favored by the Federal Energy Regulatory Commission's (FERC's)-approved independent system operator (ISO).
Not only do incumbent transmission providers control the interconnection study process, but they also are largely responsible for managing the construction of the physical facilities, such as generator leads and transformers. In fact, most utilities, invoking reliability grounds, insist that they must construct and own all such facilities. Generators feel that many transmission owners, once wrapped in the safety and reliability blanket, have effectively sought to goldplate their systems with improvements that benefit their entire system but not interconnecting generators, who are nevertheless billed for the improvements.
Moreover, many generators feel that they are overcharged for interconnection facilities that they themselves provide. For nonincumbent-utility-provided equipment and services, incumbent utilities often forgo competitive bidding, which can result in dramatically higher costs for construction and installation. Some providers have even tried to charge ongoing operating and maintenance fees for services that are either not actually provided or do not result from the interconnection of the new generator.
Lastly, because the transmission providers effectively control the interconnection study and construction process, the interconnection process itself has become extremely time-consuming, as utilities (to generators' eyes) often delay projects on spurious grounds.
What Needs To Change?
To meet the needs of growing demand for more power and the current boom in new powerplant construction, the difficulties and problems associated with interconnection need to be addressed. While FERC believes it has managed the problem effectively, there is still an unusually large number of unexecuted interconnection agreements on file with the commission, and this number has escalated over the past year. Being unable to reach agreement, transmission owners and generators are opting to file their unexecuted agreements with FERC and seek independent review by the commission to resolve disagreements. All this has occurred despite the fact FERC has determined that interconnection is an essential element of transmission service. The time has come for FERC to recognize that despite its good intentions, its recent orders have failed to develop a system that encourages the development and interconnection of new generation.
It has been estimated that in the typical interconnection agreement, 80-90 percent of the binding obligations are imposed solely on the generator. Conversely, most of the nonbinding obligations in such agreements favor the transmission owner. Generators are frustrated: They contend that these agreements are developed exclusively by the transmission owners and show a clear intent to impose the maximum burden on the generator while ensuring the maximum benefit for the transmission owner. Rather than seeking a reciprocal, equitable, and nondiscriminatory solution that will benefit both parties, transmission owners appear unwilling or unable to find the creative solutions and approaches.
Lastly, because there is not a national model interconnection agreement, each agreement is different, raising concerns over disparate treatment of generators by the transmission provider. This is of particular concern where the incumbent utility has sold its generating assets to another entity in a divestiture auction, where preferential interconnection may have been negotiated along with the purchase of the assets. Further, will transmission owners use interconnection policies to close down their service territory to competition from new generation, while they freely market power from their own generation and avail themselves of more responsive policies governing interconnection of their affiliates' generation in other regional markets? While several large utilities and power pools have developed interconnection procedures as amendments to their pro forma tariff, these efforts are not uniform and are evaluated and approved on a case-by-case basis at FERC. Even within ISOs, interconnection policy uncertainty has caused severe problems for generators seeking to interconnect with the ISO-controlled grid. In one such case, a generating project being developed by an independent developer was assigned an advantageous interconnection position only to see it later taken away by the ISO because an incumbent utility subsequently sought interconnection for one of its own projects at the same area on the grid.
A clear national interconnection policy and a national industry standard agreement form for interconnection are needed to address the disparities that have developed.
Generators Under Utility Transmission Tariffs
In an attempt to maintain control over the operations of new generators, transmission providers have sought to place generators under their open access transmission tariffs, even though the generators do not require transmission service to export power to the grid. In so doing, claim some generators, transmission providers have tried to charge them for transmission or ancillary services that are not actually provided. To generators, there has been no cost justification for these charges. Moreover, because a generator's negotiated interconnection agreement with the incumbent utility is designed to provide all the rates, terms, and conditions associated with the interconnection, the transmission service agreements into which generators are required to enter may actually contradict the terms of the interconnection agreement. Not only does this create ambiguity and extraordinary cost inefficiencies, but it also requires the generator to constantly monitor the incumbent utility's FERC filings affecting its tariff, resulting in administrative and legal costs.
Federal Interconnection Policies: An Update
FERC has taken major strides to clarify its interconnection policies since early this year. What is required now are
- a national pro forma tariff setting out uniform procedures under which generators obtain new interconnection services;
- a national model interconnection agreement (IA) containing terms and conditions the commission has found to be reasonable and that can be a basis for individual negotiations of IAs;
- removal of ancillary services and reactive power requirements from IAs with treatment and pricing addressed in an agreement with the generator;
- uniform and more cost-efficient treatment of contributions in aid of construction for the costs of new interconnection;
- clarification of the deliverability rights associated with interconnection service, separate from transmission service;
- clarification that transmission system upgrade costs that provide system benefits should not be directly assigned or otherwise allocated to new interconnecting generators;
- reciprocity and comparability extended to decisions regarding affiliate generation weighed with independent power production-consistency within and outside service territories should become the goal; and
- a transparent procedural system that ensures implementation rules are fairly and publicly developed, with nondiscriminatory and timely dispute resolution on a real-time basis.
National, uniform interconnection procedures would ensure that national development companies know the procedural rules will be consistent from one region to another. However, this would solely serve as a model, not a pro forma IA, thereby allowing for individual project requirements. Pro forma IAs might lock developers into one form of agreement with no room for further amendment to meet a project's site-specific attributes.
Generation developers themselves have expressed differences on deliverability that have generated confusion and lack of consensus. There are at least three alternatives to consider regarding interconnection service:
- Interconnection service does not convey transmission service to the generator absent a separate request for transmission service, nor does it provide the transmission provider free or below market access to ancillary services; but it does convey a right to introduce power at the point of receipt.
- Interconnection service conveys a right to transmission service, except that, where a generator chooses to pay for system upgrades that are not for the sole use and benefit of the generator, interconnection service conveys an entitlement to transmission credits on a dollar-for-dollar basis for any transmission service requested by the generator or its customer.
- Interconnection service conveys the right to generate and deliver power consistent with the deliverability parameters in the interconnection study. It also conveys a limited right of first refusal over subsequent requests for transmission service. New generators should have the right to request that certain deliverability parameters be modeled as part of a request for interconnection service, without in fact requesting that transmission service. Once that deliverability is modeled, the generator should have the right to rely on the availability of that transmission capacity (again, without separately requesting transmission service) until a subsequent generator submits an interconnection service request or transmission service request (which could have an impact on the deliver-ability associated with the first project). After all, the transmission provider is in a service business and needs to be customer-oriented.
At that time, the transmission owner would notify the first developer, who would have a limited time either to request and pay for the desired transmission service or lose the right to the transmission capacity originally modeled. To avoid the second generator or subsequent transmission customer being "blindsided" by the first generator's rights, the deliverability parameters modeled and subject to the right of first refusal could be posted on an open-access information system. This approach advanced by generators provides them some additional protections that could be valuable when transmission service requirements are not definitely known at the time interconnection is needed and that first request is made. However, it does introduce new complications associated with transmission service queuing.
Clarification!
Some generators have argued that there never should be any system upgrade costs associated with new generation interconnections; others have been willing to pay some portion of these costs in the interest of moving a project forward in a timely manner. In this regard, FERC has clarified its policy for transmission credits, which require full, fair, and timely implementation. Better procedures now also need to be developed to convey new implementation policies and mechanisms by utilities to resolve disputes and varying interpretations of interconnection policies in a timely manner. Otherwise, current interconnection policies without reformation place at risk the underlying reliability of the transmission grid.
Finding a Way to Share the Title
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