FERC amends ITC Midwest’s generator interconnection reimbursement policy

FERC on July 18 found that ITC Midwest’s policy of reimbursing generators that connect to its system 100% of their network upgrade costs was unjust and unreasonable, and directed the Midcontinent ISO (MISO) to change its tariff so that the ITC Midwest pricing zone conforms to the “up to 10%” reimbursement provisions for the rest of the MISO zones (FERC Docket No. EL12-104).

The complaint was filed by Alliant Energy (NYSE:LNT) subsidiary Interstate Power and Light Company (IPL), which formerly owned and operated the transmission system now owned by ITC Midwest. IPL sold those transmission assets in 2007.

The complaint stems from a provision in FERC Order 2003, which formalized the commission’s policy to provide 100% reimbursement for a generator interconnection customer’s network upgrade costs. However, the order, issued in 2003, also permitted independent transmission providers to propose to reduce such reimbursement, requiring that the generator interconnection customer be required to fund all or part of its network upgrades.

In its Order 2003 compliance filing, MISO instituted the commission’s 100% reimbursement policy across all of its pricing zones.

In 2006, FERC accepted MISO’s regional expansion criteria and benefits (RECB) proposal to provide for 50% reimbursement to a generator interconnection customer for its network upgrade costs where such a customer qualified for any reimbursement. In order to receive 50% reimbursement, the generator interconnection customer would have to, among other things, demonstrate that it had a contractual commitment to serve load in the MISO footprint for a period of at least one year or that it was designated as a network resource.

If a generator interconnection customer failed to qualify for reimbursement, it would be responsible for 100% of its network upgrade costs.

However, in 2008, FERC accepted proposals by American Transmission Company (ATC), Michigan Electric Transmission Company (METC), and ITC Midwest to reinstate 100% reimbursement for generator interconnection customers in their pricing zones, with 50% of the reimbursement recovered from the transmission service customers in the zone where the generator interconnected.

In 2009, MISO proposed and FERC accepted an adjustment that reduced the reimbursement within the MISO footprint, but outside of the ATC, METC and ITC Midwest pricing zones. Those zones were exempted from the reduction because of location-specific outcomes from applying the existing reimbursement policy in the service territories of Otter Tail Power (NYSE:OTP) and Montana-Dakota Utilities (MDU), FERC said in its order. Within those three zones, the reimbursement remained at 100%.

Outside of those three pricing zones, reimbursement to generator interconnection customers was reduced from 50% to 10% for network upgrades rated at or above 345-kV, with no reimbursement for network upgrades rated less than 345-kV.

In its complaint, IPL stated that it was the largest customer in the ITC Midwest pricing zone, constituting approximately 88% of network load. Further, because ITC Midwest reimburses its generator interconnection customers 100% for all generator interconnection-related network upgrades, IPL said it paid approximately $44.7m in generator interconnection-related network upgrade costs to ITC Midwest from 2008 to 2011. In contrast, IPL estimated that it would have been responsible for only $12.3m in generator interconnection-related network upgrade costs during the same period if ITC Midwest used the same percentage as most other MISO pricing zones.

As a result, IPL argued that the $32.4m in incremental costs attributable to the difference in generator interconnection customer reimbursement policies represented an unfair burden on IPL and its retail customers, especially in relation to the “insignificant benefits” provided by those interconnection-related network upgrades.

In addition to the costs already incurred, IPL stated that it also faced significant cost exposure for future interconnection-related network upgrades if the reimbursement percentage was not reduced.

Specifically, IPL stated that ITC Midwest listed $153m in new generator interconnection costs in its capital plan for the 2012 to 2016 time period. IPL estimated that it and its customers would be responsible for approximately $138.1m in costs arising from those network upgrades, compared to $18.1m in expenses for which they would be responsible if MISO’s generally applicable 10% interconnection reimbursement policy were applied instead.

IPL also took issue with the presumption that it and its customers obtained benefits commensurate with the costs incurred, stating that it had no evidence that overall transmission system reliability had materially improved as a result of the generator interconnection-related network upgrades for which ITC Midwest reimbursed the costs. It also said it had no evidence that it or any other generator in the ITC Midwest pricing zone had experienced an improved ability to export power due to counterflows, that locational marginal prices had been materially reduced as a result of generation interconnected through reimbursable generator interconnection-related network upgrades, or that “any other significant benefit has accrued to IPL or its customers.”

In its response, ITC Midwest said IPL failed to provide substantial evidence supporting its contention that its reimbursement policy is unduly discriminatory. ITC Midwest also said IPL failed to provide evidence to support its claim that it has not benefited from any reliability improvements or lower energy prices as a result of the generator interconnection-related network upgrades. Further, ITC Midwest said IPL had exaggerated some of the cost figures it related in its filing.

In its decision, FERC found that ITC Midwest’s interconnection reimbursement policy, in the context of MISO’s zonal rate structure, did, in fact, result in an improper subsidy and was therefore unjust, unreasonable and unduly discriminatory or preferential. As a result, FERC granted IPL’s complaint and ordered MISO to amend Attachment FF of its tariff to reflect that generation interconnection customers in the ITC Midwest zone can receive “up to 10% reimbursement for the cost of their interconnection-related network upgrades.”

FERC also specified that the reimbursement policy that will apply to generator interconnection customers will be the policy in effect on the date that a generation interconnection agreement is executed or filed with the commission, if it is unexecuted. Therefore, the order does not modify any existing agreement executed or filed unexecuted with the commission prior to the date of the order.

Commissioner John Norris concurred in the decision but, in a separate statement, expressed some reservations.

“I am concerned that this policy might not adequately recognize the benefits that interconnection-related network upgrades provide to all users of the MISO transmission system,” Norris said. “Such benefits include enhanced reliability and lower energy prices resulting from a less constrained transmission system and increase in energy supply options in the ITC Midwest zone.”

Norris wrote that, while he generally agreed with the order, he was open to considering alternatives to the existing policy that fully account for the benefits provided by interconnection-related network upgrades in a manner that ensures just and reasonable rates.

ITC Midwest LLC and METC are wholly-owned subsidiaries of ITC Holdings (NYSE:ITC)