ITC evaluating response to FERC-ordered changes to Midwest cost recovery mechanism

ITC Holdings (NYSE:ITC) is evaluating whether to seek rehearing on, or to develop a new cost allocation proposal in response to, a recent FERC order that requires the company to alter the way it recovers generator interconnection network upgrade costs, ITC CFO Cameron Bready said July 25.

In September 2012, Interstate Power and Light (IPL) initiated a complaint against ITC Midwest, asking FERC to require ITC Midwest to align its cost recovery policy with the policy in many other pricing zones in the Midcontinent ISO (MISO).

Under Attachment FF of MISO’s open access transmission tariff, ITC Midwest was able to recover 100% of the costs it expended in generator interconnection network upgrades in the MISO pricing zone in which IPL operates.

IPL argued that the tariff allowed ITC Midwest to recover costs disproportionate to the benefits that IPL’s customers saw from the transmission upgrades.

FERC on July 18 granted IPL’s complaint and directed MISO to revise Attachment FF to reflect the same generator interconnection cost recovery provisions applicable to most other MISO pricing zones, thus lowering the 100% cost recovery provision to 10%.

“It will likely come as no surprise that we strongly disagree with the order and the rationale effectively overturning the use of Attachment FF by ITC Midwest going forward and believe the FERC has erred in its decision,” CEO Joseph Welch said during the company’s 2Q13 earnings call on July 25.

When ITC acquired the transmission system from IPL in 2007, the system in some rural areas of Iowa were “deplorable,” and investment needed to be encouraged, CEO Joseph Welch said.

“It was a very weak system and you virtually could not get anybody to interconnect … any kind of generation,” Welch said.

Since then and under ITC Midwest’s cost recovery provision, the cost recovery has encouraged generators, who have brought online electricity and reliability that have brought significant benefits to the region, he added.

However, IPL said these generators were disproportionately encouraged to interconnect to ITC Midwest’s system because the interconnection costs would largely be borne by IPL, regardless of any direct benefits its customers might see.

“Say you have a wind developer that would come online,” a spokesperson for IPL parent company Alliant Energy (NYSE:LNT) said. “We were subsidizing the cost of the transmission service for that wind developer, and so the developer is coming in and saying, ‘This is a great deal – someone else will cover the cost for the transmission interconnection and service.’”

IPL is about 90% of ITC’s revenue in the Midwest, the spokesperson said. 

Attachment FF change won’t have material impact, ITC says

Of the company’s five-year $4.2bn capital expenditure plan, about $890m is categorized as new generator interconnection network upgrades, and $510m of that is allocated to the Michigan Thumb Loop project, which is a MISO multi-value project and therefore is not affected by any future potential elimination of Attachment FF, Bready said.

He added that of the remaining $380m, potentially about $200m would be exposed to the 10% provision.

“Given all of the offsetting factors that I described … we don’t believe that any potential elimination of [Attachment] FF would have a material impact on our future capital investment plans through 2016,” Bready said.

The CFO noted that the FERC order is prospective and has application for non-executed or non-filed generator interconnection agreements.

“This essentially means that in-process generator interconnections would still fall under our historical Attachment FF treatment,” he said.

Though the order relates primarily to ITC Midwest, ITC’s Michigan operating companies also use Attachment FF for recovery of certain network upgrades to support new generator interconnections. The company is therefore evaluating the continued use of the provision in Michigan, Bready said.

“At a minimum, we think that modifications should be made that allow for the creation of more competitive marketplace, even if we’re not successful in advocating for a 100% reimbursement policy,” Bready said.

Before MISO changed Attachment FF to accommodate multi-value projects, the cost recovery rate was 50%. ITC plans to make a “good demonstration” of what the benefits to IPL’s region were, Welch said.

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.