FERC’s proposed changes to capacity allocation policy generate strong support

Over a dozen respondents to FERC’s proposal to change its policy on capacity allocation for merchant transmission lines have overwhelmingly supported bilateral negotiations, which would eliminate the current open season requirement.

The commission has proposed allowing merchant developers to allocate the entirety of a line’s capacity to anchor tenants through bilateral negotiations (Docket Nos. AD11-11, AD12-9). Under FERC’s existing framework, projects may enter into bilateral negotiations for up to only 75% of a project’s capacity, and must hold an open season for the remaining 25%.

FERC’s proposal also would allow developers to allocate capacity to affiliates as anchor tenants, potentially allowing them to be the only subscribers on a line.

“Negotiations are of paramount importance, and if any policy changes are recommended, they must be structured to allow at least as much flexibility as is now present in the subscription progress,” independent transmission developer Clean Line Energy said in its comments. “The policy statement’s proposal to allow up to 100% of project capacity to be awarded through bilateral negotiations appropriately recognizes the commercial reality of merchant transmission lines and is justified because merchants like Clean Line are not developing projects on the backs of any captive customers and have no incentive to stifle competition or pick favorites.”

Commenters, most of whom filed their replies on Sept. 24, included investor-owned utilities (IOUs), merchant and nonincumbent project developers, and public power, regulatory and industry associations.

In its policy statement, FERC proposed allowing merchant and nonincumbent, cost-based, participant-funded transmission project developers to select a subset of and negotiate agreements with customers. This policy would allow nontraditional transmission developers bilaterally to negotiate rates, terms and conditions for up to 100% of a project’s capacity.

In doing so, developers would have to broadly solicit interest in the project from potential customers and file a report describing the solicitation, selection and negotiation processes.

Duke Energy (NYSE:DUK) said it supported the proposal, as allowing a merchant or nonincumbent developer to negotiate directly with subscribers, rather than holding an open season process, better ensures a project’s success.

“Duke Energy believes that the anchor customer model or bilateral negotiations between the developer and transmission customer(s) provides an incentive to develop the project as the developer is better able to gauge the success of the project up front and make adjustments as necessary, and also enter into risk sharing arrangements with the customer(s),” Duke Energy said.

However, Duke Energy, joined by the Edison Electric Institute (EEI), expressed concern regarding FERC’s reporting requirements, which the commission has proposed as a way of creating transparency and, in the case of affiliate anchor tenants, precluding preferential treatment.

Under FERC’s proposed policy, reporting requires developers to explain how they chose their customers, including an explanation of those customers who were rejected.

“While EEI recognizes the need to ensure a transparent and fair process, EEI is concerned that this condition may require commercially sensitive information to be shared,” the association of IOUs said.

Both EEI and Duke Energy said that FERC should not require more reporting than it requires for the current open season process, with regard to customer selection and rejection.

The Western Independent Transmission Group (WITG) and American Electric Power (NYSE:AEP) suggested that with respect to reporting the open solicitation process, sensitive and confidential information should be protected and not be made publicly available.

Both AEP and WITG supported FERC’s proposed changes, as the ability to enter into bilateral negotiations will facilitate a more fluid allocation process, they said.

“Having a commission-approved process would spur new and innovative transmission projects because it would allow project developers to engage in open dialogue with prospective customers on mutually agreeable terms and conditions for contractual arrangements, technical specifications, and project timing,” WITG said in its filing.

FERC should also allow affiliates of a developer to participate in a project as anchor tenants to the extent they satisfy the commission-approved guidelines for anchor tenant participation, WITG said.

“Allowing affiliates the ability to participate will give developers a critical option to overcome the difficult task of identifying a viable customer and, in turn, developing a needed transmission element,” the group said. “Any commission policy that places significant barriers to the participation of affiliates as anchor tenants will handicap transmission developers’ ability to finance and build needed new facilities.”

WITG requested clarification from FERC regarding the timing of reporting affiliate contracts, whether a developer should report after executing a transmission service agreement, or earlier in the process when parties have reached a memorandum of understanding.

The group also said that FERC should clarify that developers that previously received a FERC order approving negotiated rate authority and a process for allocating capacity to anchor tenants “should be allowed to immediately undertake the allocation of any of the unsubscribed capacity under the rules and guidelines set forth in the commission’s new policy statement.”

The American Wind Energy Association (AWEA) said FERC should move forward with the 100% anchor tenant policy.

“This allows the developer to tailor transmission services to the unique needs of individual transmission customers,” AWEA said. “In this respect, we urge the commission not to require transmission developers to include any additional information in the open solicitation notice that would limit the ability of transmission developers and potential customers to negotiate specific and individual terms of service.”

The wind energy organization supported affiliates as anchor tenants. Recognizing FERC’s concern about preferential treatment where affiliates are involved, AWEA said the reporting and open solicitation process would create a transparent framework both for the commission and for customers.

TransWest Express said it “generally” supported FERC’s policy changes. TransWest has proposed the 725-mile, 600-kV DC transmission line from south-central Wyoming to southern Nevada.

“TransWest’s only concern is that the commission not expand the open solicitation requirements to turn it into an open season under a different name,” the company said in its comments.

One of the benefits of the open solicitation is the ability for the developer to “tailor transmission services to the unique needs of individual transmission customers.” Requiring developers to include in the reporting process information could limit their ability to negotiate specific terms of service, the company said.

“In particular, TransWest urges the commission not to require transmission developers to include any additional information in the open solicitation notice that would limit the ability of transmission developers and potential customers to negotiate specific and individual terms of service.”

TransWest also noted that FERC’s requirements around open solicitation and reporting processes will provide adequate assurances that affiliates won’t be treated preferentially.

Clean Line also said it should be made clearer that incumbents, in addition to nonincumbents, can participate in merchant lines outside their service territory.

The company further said that the proposal does not address the interconnection process in certain jurisdictional RTOs, which continues to hinder merchant transmission development.

“The commission should act to ensure that all RTOs/ISOs and transmission providers create interconnection queue processes that do not inhibit merchant transmission lines,” Clean Line said. “Often an HVDC transmission line must resort to ‘playing generator’ to fit into the generation interconnection queue, and it must struggle to meet milestones that do not technically apply to a transmission line. A standard transmission interconnection process for HVDC facilities would remove this barrier.”

EEI went further, to say that FERC’s proposed policy should not preclude incumbents from developing a transmission project outside of its open access transmission tariff territory.

“[J]urisdictional utilities with existing OATT obligations in a territory are beginning to participate in projects outside of their footprint to create a more robust transmission system to benefit customers,” EEI said. “These project development, partnership and financing arrangements may take several forms, and the commission must ensure that these project developers are provided equitable treatment to other nontraditional project developers.”

Other full supporters of the proposed policy changes included the New York ISO transmission owners and Transmission Developers, Inc., which is developing the Champlain Hudson Power Express (CHPE) project.

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.