FERC Issues Policy Statement Clarifying Requirements for Capacity Allocation for Merchant Transmission Projects

25 January 2013 Publication
Author(s): John T. Dunlap

Legal News Alert: Energy Industry

On January 17, 2013, the Federal Energy Regulatory Commission (FERC) issued its Final Policy Statement regarding the allocation of capacity on new merchant and non-incumbent, cost-based, participant-funded transmission projects. The Final Policy Statement clarifies and refines FERC’s existing policy, which has evolved significantly during the past 10 years, in order to provide “more flexibility in the capacity allocation process for customers and transmission customers,” including allowing merchant transmission developers the ability to allocate up to 100 percent of their project’s capacity through bilateral negotiations. The Commission finds that each merchant transmission project has unique project-specific characteristics that warrant providing developers flexibility in risk-sharing with its customers; however, consistent with its statutory duty to ensure that capacity allocation not be unduly discriminatory or preferential, the Commission imposes more stringent reporting and compliance requirements on developers.

Although the Final Policy Statement generally refers to merchant transmission developers, FERC states expressly that it is extending the policy’s application to developers of non-incumbent, cost-based, participant-funded transmission projects.

The Commission acknowledges that developers that have secured customers for a substantial portion of their capacity might have different incentives at that point and may seek to undersize the transmission facility. To the extent that the Commission finds that any facility was sized in a discriminatory manner, the Commission will reject the developer’s proposed allocation of capacity on its project. The Final Policy Statement also reaffirms that, upon energization (and sometimes earlier, depending on the circumstances) both merchant transmission projects and non-incumbent, cost-based, participant-funded transmission projects become public utilities subject to the Commission’s open access transmission tariff requirements, including the duty to expand transmission capacity to accommodate requests for service.

Solicitation, Selection, and Negotiation With Customers

The Final Policy Statement is based on FERC’s belief that “bilateral negotiations, if conducted in a transparent manner, may serve the same purpose as an open season process to ensure against undue discrimination or preference.” Under the Final Policy Statement, merchant transmission developers seeking negotiated rate authority may engage in an open solicitation of interest in their projects in lieu of a formal open season.

The initial solicitation of customers to participate in the capacity allocation process must be directed broadly to all potential customers, for which FERC suggests the use of notices in trade magazines, communications with regional planning groups, and email distribution lists pertinent to transmission planning matters. FERC notes that these suggestions are not exhaustive or prescriptive, instead stating a general requirement that developers should make reasonable efforts to ensure that all potential customers are made aware of the proposed project.

The solicitation also should include relevant details regarding the project, including a technical description (e.g, MW and kV rating, facility end points, in-service dates, and project type, such as AC, DC, or bi-directional), and a statement of the objective criteria that the developer will use in selecting the subset of customers that it will negotiate with directly (e.g, credit rating, “first-mover” status (those who act early and take on more risks)). Developers also may specify criteria that they will use in ranking the selected customers. The Commission did not adopt or reject any proposed criteria for ranking customers (such as willingness to pay, length of term of transmission service, status of generation project development); however, it indicated that on its face such criteria seemed reasonable, subject to receiving more information and reiterated that any criteria must not be unduly discriminatory or preferential. The policy does not preclude the selection of the developer’s affiliates in the selection process, even for 100 percent of a project’s capacity, though developers will bear a high burden to demonstrate that the selection of their affiliates is just, reasonable, and not unduly discriminatory or preferential.

Once a subset of customers is selected, developers may engage in direct, bilateral negotiations with each customer. The Final Policy Statement permits developers to negotiate different terms with the selected customers, so long as the differences reflect material differences between the customers and are not based on unduly discriminatory or preferential treatment, and in a break from past precedent, the Commission will allow more favorable rates, terms, and condition for “first mover” customers.

Reporting and Compliance Requirements

In order to ensure that developers’ selection and negotiation with potential transmission customers is transparent and not discriminatory, the Final Policy Statement implements more stringent reporting and approval requirements than were applied to projects using the previous open-season process.

Unlike the capacity allocation reports submitted by developers following the open-season process, which were not noticed by or acted on by FERC, developers will now be required to obtain FERC’s approval of their capacity allocation process. Although the Final Policy Statement does not specify the form of the required filing, it does set forth specific information to be included in the filing, including details of the selection process, the negotiated price terms, and any risk-sharing terms agreed to with customers. Any decision not to expand the capacity of oversubscribed projects or to offer more favorable terms to some customers than others should be explained in particular detail, as should the selection of and terms negotiated with affiliates of the developer.

FERC will permit developers to file the details of their capacity allocation process either before beginning the process, in which case a further compliance filing will be required following completion of capacity allocation, or following the allocation process. In either case, the filing will be noticed by FERC, subject to protests, and acted upon pursuant to Section 205 of the Federal Power Act. Challenges to the process may be submitted under the Section 206 complaint process.

The Final Policy Statement recognizes the possibility that FERC could disapprove of a developer’s capacity allocation process, though it does not specify the remedial steps that would be required to correct or unwind a flawed process. In light of this risk, which will be heightened for developers who seek approval only after the process is complete, developers should craft their capacity allocation processes carefully to ensure not only that they are not discriminatory or preferential, but also to ensure that they are transparent to both applicants for capacity and to FERC.

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

John T. Dunlap
Milwaukee, Wisconsin

Andrea J. Chambers
Washington, D.C.

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