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In the Transmission Corner...
By Thomas L. Blackburn and Peter K. Matt
Tom Blackburn and Peter Matt are partners at Bruder, Gentile & Marcoux, a law firm in Washington, DC.
Contrary to the perception of some merchant generators, transmission providers are not opposed to providing interconnection service. After all, transmission providers are in the business of providing interconnection and transmission service, and that's where they obtain their revenues. Transmission providers are guided by three principal considerations in providing their services:
- maintaining the reliability of the system,
- providing service on a nondiscriminatory and non-preferential basis,
- and obtaining recovery of the costs of the service that they provide.
These three considerations do not at first blush appear to be controversial. However, they are at the heart of most disputes between transmission providers and generators over the appropriate terms and conditions for generator interconnections.
In compliance with the requirements of Federal Energy Regulatory Commission (FERC) Order 889, traditional utilities have functionally separated their transmission and generation businesses and, by their lights, do their best to treat all requests for interconnection in a nondiscriminatory manner.
Most, if not all, transmission providers provide legitimate estimates of the cost of providing interconnection service and are not trying to require merchant generators to pay to upgrade long-standing deficiencies in the transmission system or to goldplate the system. Transmission providers consider that the real reason behind many of the transmission upgrades identified as necessary to accommodate generator interconnections is that generators are seeking to use the transmission system in ways different from those for which it was designed. The transmission system was designed to provide service within a defined service territory from generators that were carefully sited to provide energy at the least combined cost for generation and transmission. Independent generators are demanding that this system be converted to one that accommodates merchant plants that may not be sited from a least-cost transmission perspective and that accommodates the delivery of substantial amounts of energy outside the service territory. The resulting changes often result in significant upgrade costs.
Transmission providers strive to make good-faith estimates of the cost of providing interconnections. Any changes in these estimates are most often the result of changes in the status of proposed generators that are higher in the interconnection queue and that have priority rights to the system's interconnection capacity.
Most transmission providers can tell stories about generators that make multiple requests for interconnection, each of which must be studied separately as if all alternative requests will proceed to completion, but that have no intention of completing all the proposed generation projects. Since transmission providers cannot tell in advance which higher-queued requests will actually be constructed, they cannot provide accurate estimates of the costs to interconnect lower-queued generators.
The large majority of interconnection agreements are being executed by the parties without resort to FERC to resolve disputes. Where there is disagreement, the issues typically are those for which FERC has not established clear guidelines. In other words, the disputes are legitimate (on both sides) and not manufactured. Manufacturing disputes would not be a particularly useful delaying tactic in any event since FERC typically resolves such disputes within 60 days after they are filed. What then are the critical factors that shape transmission providers' responses to interconnection requests? As might be expected from an industry that is governed by open access requirements and expected to remain a regulated business for the foreseeable future, the factors relate to maintaining control over the interconnection process, preserving system reliability, and recovering the transmission providers' revenue requirements.
Compliance with Procedural Requirements
Transmission providers often find themselves embroiled in disputes over the enforcement of procedural requirements related to the interconnection process and the milestones for the generator's completion of its facilities. Those disputes generally result from the need to process large numbers of interconnection requests. One transmission provider is currently processing more than 100 such requests. It is expected that regional transmission organizations will have as many as 300 interconnection requests at any one time. If the transmission provider does not enforce the procedural dates for interconnections, the resultant slippage will affect every generator that is lower in the interconnection queue. As far as transmission providers are concerned, compliance with the procedural dates and requirements therefore benefits generators, rather than providers.
The principal means of enforcing the procedural requirements is to delete from the interconnection queue any customer that misses a procedural deadline or that modifies its interconnection request in a way that adversely affects a lower-queued generator. While this may be controversial, it is the only means of ensuring that interconnection customers that cannot complete the interconnection process in a timely fashion will not interfere with the interconnections of other customers.
Study Times
Transmission providers are often simply overwhelmed by the number of interconnection requests and cannot process interconnection requests as quickly as generators would like. The solution is not simply to throw more personnel at the problem; the industry is facing a substantial shortage of people who are qualified to perform the studies, and hastily performed studies could have a substantial adverse impact on system reliability. The study process is made more difficult by generators that request evaluations of multiple sites, only one of which will actually proceed to completion. Consequently, despite their best intentions, transmission providers may incur the ire of generators that see their projects' study dates slip past crucial deadlines. For providers, the solution is not to impose liquidated damages on them, as some generators have suggested, but to find a way to prioritize and group interconnection requests to allow the process to proceed more efficiently.
Interconnection Costs
Some generators have asserted that they should not have to pay any of the costs of interconnecting their units to the grid, including the costs of radial lines connecting their units to the grid. Transmission providers, on the other hand, are unwilling to bear these costs themselves, and they often are faced with transmission rates that are fixed for several years to come. The solution seems obvious to providers: Interconnection costs should be borne by the generators, whose sales prices are generally established by market conditions and for whom the cost of interconnection service is a relatively small portion of the delivered cost of power.
Rather than assign interconnection costs to the entities that benefit from them, FERC has recently expanded the portion of the interconnection costs that must be borne by the transmission provider. There are hints that FERC will shortly require transmission providers to bear all interconnection costs, providing generators with essentially free interconnection service. This result is almost certain to create even more controversy: As far as transmission providers are concerned, it eliminates any incentive for generators to site their plants at locations that will produce the lowest delivered cost of energy. It also will increase the financial pressure on transmission providers who do not have any way to pass the interconnection costs on to their customers. FERC should either defer requiring transmission providers to bear these costs or should implement a means of ensuring that all of the interconnection costs are passed on to transmission customers.
Curtailment of Service for Nonemergency Reasons
Transmission providers may need to curtail service to generators in non-emergency situations, such as the need to perform maintenance or construction. Some generators have argued that the transmission provider should pay compensation for any financial losses the generators incur as a result. Yet providers feel that generators should not be entitled to recover consequential damages resulting from transmission outages since other transmission customers do not receive such compensation. The transmission provider is not the guarantor of uninterrupted service; it only commits to provide transmission service in accord with good utility practice, which incorporates a statistical probability of curtailment. In addition, if transmission providers were required to compensate generators for curtailments, they would include those costs in their revenue requirements, and all transmission customers would pay for the cost of curtailments. Generators should obtain their own "insurance" against curtailments, rather than attempting to obtain, in effect, that insurance from transmission providers.
Reactive Power Requirements
Transmission providers normally require generators to maintain specified voltage levels at the points of interconnection between the generating facilities and the transmission system. The issue of reactive support is contentious because generators want to be compensated for any services they provide to the grid and because transmission providers cannot operate the grid reliably and efficiently without the reactive support of generators.
One way to address this issue is to permit the generator to charge the transmission provider for the portion of the generator investment that is dedicated to the production of reactive power. This is reasonable because the transmission provider obtains revenues from all transmission customers for reactive supply via FERC's pro forma transmission tariff. The transmission provider should pass through the revenues it receives for that service to the generators whose reactive supply capability maintains the reliability of the system. However, generators should not receive compensation for the actual supply of reactive power within the design capability of their units since the supply does not interfere with the generator's production of real power, and the transmission provider does not receive revenues from transmission customers related to dynamic reactive power production.
Resolving the Controversy
Generator interconnections will continue to create controversy because of the substantial amounts of transmission investment and generation revenues that are involved. Those controversies should be resolved in light of transmission providers' objectives of maintaining system reliability, providing service on a nondiscriminatory basis, and recovering the costs of providing interconnection service.
Finding a Way to Share the Title
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