Energy Industry Updates for February 2010

26 February 2010 Publication

Legal News: Energy Industry

Transmission Incentives Approved for Battery Storage Devices

Transmission rate incentives for battery storage devices were approved by FERC to help improve the operation and reliability of the California Independent System Operator (CAISO) grid. Western Grid Development LLC filed a petition for declaratory order that its proposed battery storage devices constituted “wholesale transmission facilities” and were eligible for FERC rate incentives under Section 219 of the Federal Power Act (FPA) and Order No. 679. Western Grid proposes to install and operate the battery storage devices in strategic locations along the CAISO grid. The 10 to 50 MW batteries would then be used to provide voltage support and to address thermal overload situations.

Though clarifying that Western Grid had not yet made the necessary FPA Section 219 demonstration that the proposed batteries would ensure reliability and/or reduce the price of delivered power by reducing congestion, FERC agreed to classify the batteries as transmission facilities. In part, this was because Western Grid agreed only to operate the batteries to enhance transmission reliability, not to provide electricity for commercial sale.

Some have argued that battery storage should be considered generation facilities. But FERC noted that “storage devices do not fit neatly into a traditional category of assets, be it transmission, generation, or distribution, given their ability to perform multiple functions. However, the Projects as Western Grid proposes to operate them do share some important characteristics with capacitors.” FERC’s ruling is analogous to its longstanding treatment of natural gas storage as part of the “transportation” subject to its jurisdiction under the Natural Gas Act.

FERC found that Western Grid’s proposal met the Order No. 679-A “nexus test” because Western Grid demonstrated that the total package of incentives requested was “tailored to address the demonstrable risks or challenges faced by the applicant.” Accordingly, FERC granted Western Grid the following incentives:

  • 100 percent of construction work in progress for the projects in rate base
  • A combined return-on-equity adder of 195 basis points for the projects, which includes 50 basis points for participation in an organized market, 100 basis points for independent transmission company status, and 45 basis points for use of advanced transmission technology
  • Deferred cost recovery through creation of a regulatory asset for pre-commercial costs, amortized over five years
  • A hypothetical capital structure of 50-percent equity and 50-percent debt until the projects are placed into service

While paving the way for additional battery storage “transmission” proposals, the order does not definitively classify such devices as transmission assets for all purposes.


The CAISO Will Review Interconnection Standards to Facilitate the Integration of Renewable Technologies

The CAISO has begun a review of its interconnection standards in an effort to facilitate the integration of renewable technologies in the CAISO Control Area and also to improve reliability and resolve operational problems relating to the interconnection. In particular, the CAISO will implement the requirement for the installation of active and reactive controls to resolve ramp rate issues, MW output control, and voltage control and frequency response associated with variations in energy inputs and outputs of intermittent resources such as the wind and the sun. The CAISO has not provided information on the costs associated with the incorporation of such controls in the construction and operation of renewable power sources, or on the effect that active control of such resources will have on productivity levels.

The CAISO expects to file the revised interconnection standards with FERC in June 2010. It will present the standards enhancement proposal at an open stakeholder meeting to be held at the end of March 2010 or the beginning of April 2010. A subsequent stakeholder meeting will be held in late April 2010. The meeting times and call-in information can be found at http://www.caiso.com/meetings/index.cgi.


FERC Extends Waiver for Qualifying Facility Operating Without a Host

A qualifying cogeneration facility (QF) in Idaho, which has not had a steam host since November 2007, has been granted an additional waiver from the otherwise applicable operating and efficiency standards required by FERC’s rules. Over the protest of the QF’s off-take customer, Idaho Power, FERC agreed that Glenns Ferry Cogeneration Partners, Ltd. could continue operating outside the requirements for QF status for calendar years 2009 and 2010. A previous one-year limited waiver for calendar year 2008.

Idaho Power argued that there was no evidence that a replacement thermal host was on the horizon and that, in the meantime, the requirement for it to buy QF energy surplus to its needs was leading to higher prices for its consumers. Glenns Ferry disagreed with the cost analysis provided by Idaho Power and noted that it was in negotiations with a potential thermal host.

FERC has previously granted waivers of the operating and efficiency requirements for QF status from time to time, but has in other cases not agreed to extend such waivers for a third year.


Municipal Utility Sells Transmission Assets to Independent Transmission Company

In February 2010, FERC approved the acquisition by American Transmission Company, LLC of 34.4 circuit miles of transmission lines and certain substation-related equipment owned by a municipal utility, the City of Marshfield. The 34.4 circuit miles of transmission lines and equipment were valued at approximately $6 million. The transmission facilities will come under the operational control of the Midwest ISO.

There may be opportunities for other municipal utility owners to seek to maximize the value of their assets by selling their transmission facilities to standalone transmission entities.


Legal News is part of our ongoing commitment to providing legal insight to our energy clients and our colleagues.

Please contact your Foley Energy attorney if you have any questions about these topics or want additional information regarding energy matters.

Authors and Editors:

Ronald N. Carroll
Washington, D.C.
202.295.4091
rcarroll@foley.com

Thomas McCann Mullooly
Milwaukee, Wisconsin
414.297.5566
tmullooly@foley.com

Michelle M. Gourley
Los Angeles, California
213.972.4556
mgourley@foley.com

Trevor D. Stiles
Milwaukee, Wisconsin
414.319.7346
tstiles@foley.com

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