PANEL: Proposed and unanticipated changes will come from FERC Order 1000

Now that the regional compliance filings for FERC Order 1000 have been submitted to FERC, numerous issues are expected to surface including some that were anticipated by regulators, as well as others that may not have been expected, such as the “dash to gas,” according to a panel of experts who spoke at TransmissionHub’s TransForum East conference in Arlington, Va., on Dec. 6.

FERC Order 1000 directed organizations to include public policy considerations in their planning processes. As a result, organizations proposed a number of approaches aimed at satisfying that requirement, according to Gloria Godson, vice president of federal regulatory policy with Pepco Holdings (PHI, NYSE:POM).

At the onset, PJM Interconnection (PJM) proposed three additional decisional frameworks to meet the public policy requirement: the “proactive build” approach, the “critical mass” approach, and the “state agreement” approach, Godson said. Her company is a member of PJM.

“The initial approach was to have these three, in addition to the two historical triggers that PJM has had in the past” for such projects, Godson said.

The proactive build approach, through which PJM would evaluate the system and propose solutions, is effectively dead, she said, noting that the proposal did not sit well with PJM members, many of whom objected to its “command and control” implications.

The critical mass approach is still being discussed under the label “multi-driver” approach. That approach would evaluate projects on the three drivers of reliability, market efficiency, and public policy.  

“The question is, how do you manage such projects, and how do you cost-allocate across such projects?” she asked, noting that the “multi-driver” approach proposal has not yet been filed with FERC.

The state agreement approach, by contrast, has been filed. Under that proposal, state agencies would be empowered to propose transmission projects, provide inputs and assumptions, and direct PJM to build such projects.

Another facet of FERC Order 1000 is the elimination of right of first refusal (ROFR). ROFR elimination is still pending at FERC, she said, and may ultimately be subject to litigation before a solution is reached.

Not covered or contemplated

The interdependence of the gas and electric markets is an area not covered or contemplated by FERC Order 1000, but an area that will have a large and growing impact on transmission planning in the future, Godson said.

The “dash to gas” being seen in PJM and elsewhere, coupled with the environmental rules from EPA, is causing a migration from coal-fired generation to gas. That will give rise to a number of questions including whether the gas delivery infrastructure is sufficient to accommodate the number of gas-fired generators that could come on line.

Other questions involve gas pipeline capacity, and whether there is sufficient diversity of generation sources to maintain reliability.

Finally, there is the disconnect between the time frame of approximately three years to build a gas plant and the 10-year lead time to build the necessary transmission. How that will be managed is an issue Order 1000 did not address, she said.

Other issues will include how to include nontraditional assets in transmission rates. Those assets include energy efficiency, distributed energy resources, demand response, and blackstart generation, Godson said.

Importantly, she asked, how would the inclusion of non-traditional assets in transmission rates affect transmission planning?

“If you get to the point where you have non-traditional assets included in transmission rates, does that change the role of the RTO?” she asked. “Can PJM now require the building of distributed energy resources and blackstart generating assets? If it does that, is PJM getting into integrated resources planning?”

Evolution or revolution

Flora Flygt, strategic planning and policy advisor for American Transmission Company, said FERC Order 1000 is both evolutionary and revolutionary.

“Order 1000 is the latest in a long series of orders and it will not be the last,” she said, pointing to FERC Orders 888, 889, 2,000, and 890 as examples of orders that have “evolved the planning, the ownership, and the approach to building transmission.”

FERC Order 1000 is more evolutionary than revolutionary when it comes to transmission planning, Flygt said. The order will, in many ways, extend to ISO/RTO model to the West, forming regions that will plan together and coordinate better than has been done in the past.

The concept of introducing public policy is also evolutionary, she said, noting that the order gives more authority to the ISOs and RTOs to meet that driver.

“It’s really now up to the RTOs and the ISOs to determine what is the right transmission to build,” she said, citing the multi-value project process within the Midwest ISO (MISO). “That’s great, but we still own the responsibility for the reliability, so we need to make sure we still have a voice in that process as a transmission owner.”

FERC Order 1000 is revolutionary in other ways, including the elimination of ROFR. However, she said, that raises question about who will have responsibility for system reliability in the future. 

As it is now, “we own the responsibility for the reliability of the system,” she said, noting that a pivotal question about reliability has not been addressed, namely, “How are you going to maintain that reliability if you have independent [entities] coming in and building?”

New developers, she said, cannot just build, own the assets, and earn on them; they must be qualified to maintain the systems, operate them reliably, and meet NERC standards.

Beyond FERC Order 1000, Flygt said companies will need to develop the right definition of the benefits of transmission – including economics, reliability, and public policy – as well as the right approach to monetizing those benefits.

Once those definitions are in place and values assigned, transmission projects can then be evaluated on the basis of a benefit/cost ratio.

“If you monetize your benefits correctly, then count up the dollars on the benefit side [and] the dollars on the cost side, you’ve got a simple metric to decide whether that’s a project that should go forward,” she said. 

Tools and processes to deal with uncertainty are also beyond the scope of FERC Order 1000.

“There are so many more uncertainties in the transmission planning world than we’ve every faced before,” she said. “Transmission planning models are not designed to deal with uncertainty easily.”

Some examples of that uncertainty are EPA regulations and the unanticipated retirement of the Kewaunee nuclear plant near Green Bay, Wis.

“Transmission planning is incredibly complex, even when you think you know what the future holds,” she continued. “We don’t have good tools and processes for dealing with that uncertainty,” but, as an industry, must work on using probabilistic models and scenarios to plan more effectively.

Ongoing politics

Beyond the operational challenges outlined by Godson and Flygt, there is a political component that will need to be addressed in terms of regulations yet to come.

“Order 1000 is a continuum of several other orders … and FERC is not going to let up,” Roy Palk, former President and CEO of East Kentucky Power Cooperative, said. “[FERC] is going to continue [and that is] going to change the culture of a lot of companies because of compliance. The way employees think, the way companies operate, the way business is modeled is going to be changed because of the force of the orders that are coming down the pike.”

“[FERC Order 1000] is an enabler that says we’re going to level the playing field, similar to what we did with independent power producers 10 years ago,” he said. “What’s happening on the transmission side now [is] very similar to what happened on the power supply side years ago.”

He continued, “FERC has tried to carefully bifurcate the state jurisdiction versus federal interference, because state jurisdictions will be challenged even more because of their rate-making and rate approval process.”

For example, a question that will arise is, “How do you divide the benefits [of renewable energy] between states that have RPSs and those that do not?”

He added: “I think all of these things, by design, were not intended to be answered by Order 1000.”

There are other issues as well, including gas prices that he said will not remain at today’s historically low levels for long.  Pointing to NYMEX contracts, Palk said prices in 2014 are trading at about 40% above today’s prices.

Finally, renewables integration continues to be an issue outside the purview of FERC Order 1000, he said, while acknowledging it is a situation the industry must address.

“FERC Order 1000 was not intended to be an all-resolve approach,” Palk said. “It was a way to get people together, to talk about issues, to plan together, to identify costs, to allocate costs, and to try to enable the implementation of public policy issues.”