In this two-part interview, Joe Kelliher, NextEra Energy‘s (NYSE:NEE) executive vice president for federal regulatory affairs, addressed several big ticket Order 1000 issues after FERC decided not to grant rehearing on the ruling: the contentiousness of cost allocation, the goal of creating grid adequacy, the commission’s treatment of radial lines, and the establishment of new entrant qualification criteria.
Kelliher is responsible for managing federal regulatory matters for NextEra Energy and its principal subsidiaries, NextEra Energy Resources and Florida Power & Light.
From 2005 to 2009, he served as FERC chairman. Among the highlights of his chairmanship was the implementation of the Energy Policy Act of 2005, arguably the largest expansion in FERC regulatory authority since the 1930s.
An edited transcript of the first part of the interview follows.
THub: Many people in the industry said they weren’t surprised by FERC’s decision not to grant rehearing on Order 1000. Do you agree?
Kelliher: I think their number one goal was to put the agency in the best position to defend against future lawsuits. But the fact that they really didn’t decline to provide guidance to me is no surprise at all because there was a lot of guidance requested based on the proposed rule and FERC pretty uniformly declined to provide guidance in the final rule. So asking the same question the second time wasn’t a lot more likely to be successful than the first time.
THub: Cost allocation is one of the more controversial aspects of Order 1000. What makes it so contentious?
Kelliher: They recognize this is a controversial area and they said, for probably the hundredth time, that they’re not proposing a one-size-fits-all cost allocation [methodology]. FERC never proposed an interconnection-wide cost allocation. That was a congressional proposal – Congress in 2009 proposed taking the ERCOT model, the CREZ model and laying it over the other two interconnections. That never came from FERC but it was so controversial that that has created the politics around cost allocation.
One reason FERC did the rule-making is because the U.S. grid is different from other grids in terms of ownership. Most countries have one grid owner, so an issue like cost allocation doesn’t exist in the U.K.: an investment in Scotland is recovered across the whole system.
We have 500 owners and there’s the perception that we have 500 grids. We have eight to 10 large regional machines that have 500 owners yanking levers on those machines. The fractured ownership of the transmission grid in the [U.S] is what requires FERC to address things like cost allocation. FERC is trying to bridge the discrepancy or disparity between the nature of grid ownership and the nature of grid operations.
THub: But NextEra, unlike many of the interveners in the rehearing docket, actually supports Order 1000. Is this because of your renewable energy efforts?
Kelliher: We do agree with the goals of the rule-making because the basic reality is that the U.S. electric supply is changing and the grid has to change along with it. We have a grid right now that was built and designed for more than 50% coal electricity supply. That’s not the current electricity supply [and] it’s not the future electricity supply. Our electricity supply is getting cleaner and we need a different grid to deliver that cleaner electricity supply.
THub: One of the things FERC did say with respect to nonpublic utility transmission providers was that they’re not required to join a transmission planning region.
Kelliher: That was important to clarify because one-third of the grid is owned by companies that are not “public utilities.” A third is owned by munis, state utilities, rural electric coops and authorities like Bonneville Power Administration and Tennessee Valley Authority. And in some parts of the country, like the West, half of the grid is owned by those entities, at least in the parlance of the Federal Power Act.
So part of it is FERC is looking at how does Order 1000 work in regions that have a high ownership of those unregulated transmitting utilities, particularly the West? FERC wants those to participate in planning and probably has some authority to require them to participate in planning, but to me, I don’t see that FERC has authority to require that they accept cost allocation that comes out of that planning.
Let’s say you are a small transmitting utility and own a very small system, but it’s not a network, you rely on your neighboring systems, you could choose to participate in planning as a stakeholder, almost like with the perspective of a generator, or an entity that doesn’t own any transmission; or if you think your system needs strengthening, it might be in your interest to become a member and accept the cost allocation rules. They’ll have to choose between the two. It’ll come down to decision-making but I bet you’ll see some unregulated transmission utilities probably do participate in planning and accept cost allocation, but many will not.
Because the FERC process is so deferential, it’s the exact opposite of one-size-fits-all. I can see how a large unregulated utility in the western U.S. would have great bargaining power to negotiate cost allocation with neighboring transmission owners, some public utilities, some unregulated like themselves. And if they can work out some approach that people in the region are comfortable with they have a high degree of confidence FERC would accept it, so it’s almost like it could end up being like a contract model where they’ve negotiated a contract on cost allocation and FERC would then enforce that contract. It depends on their vision for the individual unregulated utility in the future.
The second part of the interview was published on June 1.