Officials with PJM Interconnection, the California ISO (Cal-ISO), and such companies as Transource Energy and Public Service Enterprise Group’s (NYSE:PEG) (PSEG) Public Service Electric and Gas (PSE&G), discussed cost containment provisions in competitive transmission development processes during FERC’s recently held Competitive Transmission Development Technical Conference.
During his remarks, Craig Glazer, vice president, federal government policy with PJM, noted the need “to keep our eye on the prize.”
He added: “[A]t the end of the day, the ‘p’ in planning still has to stand for planning. We can’t lose sight of the need to continually get the day-to-day job done of upgrading the transmission system efficiently and timely. I know we’re all committed to that, but as a corollary to that, with the ‘p’ in planning, the letter ‘l’ in planning shouldn’t stand for litigation because, frankly, my biggest fear is if it does, the ‘l’ word will rapidly subsume the ‘p’ word in planning.”
Of PJM’s efforts on Order 1000, he noted that PJM has had six different proposal windows and received more than 400 proposals for evaluation, with the good news being that “we’ve gotten some really innovative proposals. We’ve awarded one of the largest projects to a non-incumbent, [are] taking a recommendation to the board on another one soon, and have seen a lot of good innovation.”
However, PJM has “also seen the ‘l’ word beginning to creep in and starting to overwhelm the best of the process – a lot of paper chasing on small projects that really aren’t paying benefits.”
Glazer also noted that cost caps are challenging, noting that they are “in essence, an alternative allocation of risk between the investor and the ratepayer.”
He added, “[W]e all have to be cognizant of each other’s mission as we move forward … [and of] who has what expertise and responsibility as we maneuver through these unchartered waters.”
New Jersey Board of Public Utilities President Richard Mroz said, “The prize here is to make sure that there’s a sense of cost consciousness throughout the process, not just cost containment in the procedures; though, that is a very important and, I think, required element.”
Procedures such as having requests for proposals (RFPs) need to be specific and have informed cost estimates. The scope of the work should be drafted in a manner that invites responses with engineering and permitting details and calculations, he added. Furthermore, the scope of the work should provide the latitude to determine the scope of the project and then selection criteria could be drafted, Mroz said.
Anthony Ivancovich, deputy general counsel, Regulatory at the Cal-ISO, noted that the California ISO has completed nine competitive solicitations and has dealt with a host of cost containment issues. The Cal-ISO’s tariff sets forth the standard and the criteria that the Cal-ISO applies to select and approve the project sponsor, he said, adding that for each competitive solicitation, the Cal-ISO identifies what it believes are the key selection criteria for that particular solicitation.
“Under our tariff, cost containment is required to be a key selection factor for every solicitation – and it is,” he said. “However, it is not the only relevant consideration.”
He noted that concerns have been raised nationwide about the ability of planning regions to objectively and transparently evaluate dissimilar proposals.
“We believe it’s critical to instill confidence in the selection process,” he said. “However, based on our experience, imposing predetermined weights, mathematical formulas and simplistic rules is not the answer. That can embed arbitrariness into the process and can dictate inappropriate project sponsor selection decisions. Nor should least project cost be the sole driver of decision-making. That would inappropriately devalue or ignore other factors.”
The proposal with the lowest construction cap may not be the best proposal from a cost perspective, he said, adding that least cost does not mean cost-effective or least risk. Upon closer examination, he said, it may not even mean least cost for the life of the project.
“Planning regions should be able to holistically look at all of the facts and evaluate and compare proposals based on their merits and the specific needs of each project,” he said. “In return, the commission should hold planning regions accountable for following their tariffs, for running fair and transparent processes, for fully explaining the reasons for their decisions and the role of each of the selection criteria, and basing their decisions on meaningful differences between project sponsors.”
In her remarks, Kim Hanemann, senior vice president, Delivery Projects & Construction, PSE&G, said: “PSE&G does not view Order 1000 right now as improving the transmission planning process or bringing value to our customers. We encourage the commission to take a hard look to evaluate whether the rule has delivered its intended benefits.”
Sound transmission planning requires consideration of many factors besides just initial construction costs, she said, adding: “Projects with the greatest overall value may be more expensive in the short-term, but they might provide other ancillary benefits as reducing congestion and replacement of aging infrastructure. Simply put, the project with the lowest bid cost is not necessarily the best project or value for our customers.”
She also noted that while RTOs are strong engineers and planners, they currently do not possess all of the required skill sets – involving knowledge of commercial practices, environmental permitting requirements, local regulations, equipment procurement practices and construction cost estimating – to adequately administer the Order 1000 open window process.
Furthermore, PSE&G believes cost containment provisions are of limited value, she said, noting that reputable developers already have cost containment measures in place through their internal project execution processes and have a track record to demonstrate whether they can deliver projects on budget.
“[W]hen cost containment provisions are included in the evaluation process, right now, they seem to get overvalued, creating a situation where more important considerations receive insufficient weight, like the overall project costs,” she said.
Hanemann said: “If the commission believes that some form of construction cost caps should be included, then FERC should provide guidance on how these caps will be enforced and require the RTOs [to] have clear guidelines for evaluating them. Plans should include development of clearly understood and judicially recognized cost containment provisions for use by all bidders. These provisions should be predictable, commercially reasonable and enforceable.”
Sharon Segner, on behalf of LSP Transmission Holdings (LS Power), noted that LS Power actively participates in planning processes all over the United States and is involved in most, if not all, of the regions across the country.
“The one thing that is very clear is that the qualification process in each of the regions has been a success and what you have is, in each of the regions, highly qualified participants, formidable energy companies, stand ready to compete for projects,” she said.
She added: “There are many critics, as you know, who will say that the commission’s policies of the last two years have not worked. We would say there haven’t been enough projects that have gone out for bid in the various regions. Most of the regions across the country … have yet to complete their first Order 1000 process. In stark contrast, in PJM and California, there have been many windows … and have done very well in implementing Order 1000.”
Among other things, she noted that, at this juncture, LS Power does not support efforts to standardize cost containment and innovative rate structures.
“We think that cost containment proposals will vary from region to region, and from project to project, because different projects truly are different and there’s different types of project development risks,” she said.
Michael Sheehan, on behalf of NextEra Energy Transmission (NEET), said in his remarks that cost caps benefit customers through cost savings and certainty, shifting the risk of cost overruns from customers to the developers’ equity shareholders.
He noted that in the Cal-ISO and PJM, NEET and other non-incumbent developers have been selected in the competitive process, in large part due to the cost containment commitments in their bids.
“NEET recommends that RTOs use a transparent scoring system based on benefits provided in each proposal that reflect the adequate weighting for cost factors,” he said. “Such scoring systems and methodologies are needed so that RTOs will fairly evaluate the relative benefits of competing proposals and meet the objectives of Order 1000.”
NEET believes that RTOs should not define in advance which categories of costs are covered or not covered by binding cost contained bids, he said. Consistent with Order 1000’s goals of fostering innovation in the transmission development sector, bidders should be allowed to submit cost contained bids reflecting the risk tolerance in various elements of transmission development, he said.
Antonio Smyth, president, Transource Energy, said that based on his company’s broad and real world experience to date, customer benefits are maximized through the sponsorship model, such as that employed by PJM, as compared to a competitive solicitation model for financial bidding.
“By encouraging developers to tap into their design experience and ingenuity to craft innovative solutions to an identified problem, the sponsorship model fosters a more creative, competitive environment that will produce an efficient 21st century transmission grid,” he said.
He added: “The savings from picking the right project under the sponsorship model are much larger than the potential savings from picking the cheapest developer for a single project in a bid-based competitive model. While cost containment or fixed revenue requirements bids would seem to benefit consumers, each approach is fraught with challenging issues that may actually ultimately increase costs to customers. For example, the level of risk undertaken by developers with state processes and permitting challenges can create instances where customers may be worse off if projects are abandoned or otherwise financially injured.”
He also said that voluntary cost containment, as opposed to revenue requirement bidding, seems much more manageable within the current competitive frameworks approved by FERC under Order 1000.
Noman Williams, senior vice president, Engineering and Operations, and COO, GridLiance, said that by promoting competition through transparent solicitations, evaluations and award decisions, RTOs will build trust with stakeholders and develop healthy developer pools that perpetuate the cycle of robust competition that delivers the best value to ratepayers.
“Recent RTO RFPs have demonstrated that competitive transmission processes have the potential to provide tremendous value to ratepayers,” he said. “However, in our experience, current RTO rules allow the RTOs too much arbitrary discretion in regard to qualified low bids and select higher cost options with no corresponding benefits to ratepayers. These and other barriers to full participation in the RTO competitive processes need to be eliminated. Otherwise, competitive entrants like [Grid]Liance will likely limit their participation to RTO RFPs where they will be treated fairly.”
Cost and associated binding cost containment mechanisms should be a deciding factor in bid evaluation processes, he said. Also, RFPs should incorporate as much as possible in the prequalification processes and limit the bid itself to actual engineering, design and cost aspects of the projects such that the bid proposals are scored only on project-specific criteria that was not addressed in the prequalification process. Williams further noted that GridLiance believes that FERC should issue a policy statement adopting a set of uniform best practices for RTO competitive solicitation processes for determining whether there can be a rebuttable presumption that the rate outcomes from a given RTO solicitation are just and reasonable.