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’s decision to deny rehearing of 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 second part of the interview follows. The first part was published May 31 and can be found here.
THub: What issues did you seek rehearing on after your initial request for clarity on the cost/benefit issue?
Kelliher: We sought rehearing on two issues. One [involved] new entrant qualification criteria. If a new entrant is seeking to build projects that are in a regional plan, you want some kind of qualifications for new entrants – technical, experience building transmission in the past, and financial capabilities, so they don’t end up getting assigned a project and not being able to build it.
But FERC’s approach in the final order was to allow each region to assign its own qualification criteria, and we thought that is fraught with peril, that that invites abuse. It’s not hard to use qualification criteria as a barrier to entry and set the bar too high. To me, it’s not obvious why that should vary region to region. That would seem to be something that lends itself to a uniform approach. And if you don’t do that, there will be some mischief with some incumbents seeking to block entry.
THub: Because the incumbents are unhappy enough with the right of first refusal (ROFR) change?
Kelliher: It ties into that. If FERC has lowered the bar on ROFR and one of the last defenses left to incumbents is artificially high, that will tend to retard some benefits from eliminating ROFR in the first place. At least it introduces what could be totally unnecessary litigation over those criteria region by region.
The other issue was how FERC treats radial lines. Let’s say a wind project seeks a radial line to the network. FERC requires that they be regulated as if they own networks. There’s a whole host of requirements that come along with that and we asked FERC to clarify its policy with respect to radial lines. Someone who owns a 10-mile radial line shouldn’t be treated as though they own a 600-mile network.
THub: This applies specifically to NextEra’s renewable energy efforts?
Kelliher: We do own some radials and we own them because it’s typically a faster way to get your power to market than if you asked a local utility to build a radial to you. It’s part of the wind farm or generation facility and we like it to be treated that way as much as possible.
THub: What are the implications of this?
Kelliher: FERC has a notice of inquiry where they’re looking at their policy with respect to radial lines. That is encouraging because it at least shows that there’s some discomfort within FERC with taking the open access policies and OATT designed for networks, for companies like American Electric Power (NYSE:AEP) and dropping them onto a 10-mile radial line owner, that they recognize that that might not work so well.
THub: This seems like an area where the generation and technology mix is outpacing the policy to regulate it.
Kelliher: It’s sort of reflexive. Initially, FERC’s first attempt toward open access was wheeling orders, almost a transactional wheeling order. That didn’t work, so they developed the open access tariff. Wheeling didn’t work for networks. Now we’re looking at radials. The radial line isn’t a network. It’s reasonable to have some open access to a radial but it really should be the surplus capacity.
Say you’re anticipating a Phase 2 development, but someone else builds before your Phase 2. Who should use the capacity of your line? It’s reasonable for them to have some access to that radial, but should they be able to take all the capacity that we intended for a Phase 2 project? Say in eight years we don’t develop our Phase 2; then it might be reasonable for a third party to use it. These are complicated questions, so I’m glad FERC is asking questions about radial policy.
THub: Changing topics, Order 1000 also makes strides toward grid adequacy.
Kelliher: FERC transmission policy before Order 1000 was open access. But adequacy of the grid itself was actually very unimportant in FERC policy. What Order 1000 intended to accomplish is that adequacy of the grid is as important as open access. We need both open access and grid adequacy to meet the country’s needs. And I think it takes a big step in the direction of grid adequacy.
I think by the same token, some critics of Order 1000 have a different goal; they actually want to maintain the current grid. They’re not so interested in grid adequacy, for competitive reasons. If suddenly the grid is more robust in a certain region and power can enter from outside the region, then wholesale power prices will go down. So, in some cases people want to block entry – not just entry by other transmission owners, but by new generation, by greater wholesale power supplies. It isn’t all just policy and jurisdiction, some of it is just straight competitive factors.
THub: You said at the beginning of the interview that FERC has tried to prepare itself for legal challenges. How well do you think FERC has prepared itself?
Kelliher: They’re in a good position. A lot of decisions will come down to individual regional applications of the rule. It is an extremely flexible rule, so certain lines of attack are better against regional filings than against the rule itself. It’s also possible we’ll have a rehearing request on this rehearing order. They granted certain clarifications. And people might want to request rehearing in those areas where FERC granted clarification.
I think as people work through their filings some of the controversy associated with the rule-making will tend to dissipate. But there probably will be challenges to both the rule and regional decisions under the rule. FERC has had authority over transmission rates since 1935 and its authority rate is very robust. They also have authority to prevent undue discrimination or preference. Those historically have been their biggest powers when it comes to transmission policy. Those are the areas in which the court gives FERC a wide berth.