Global Energy Business September/October 2000 Cover Story
Paying to play: How utilities are blocking IPPs By Michael J. Zimmer and John A. Cohen
FERC needs to do much more—quickly—to make the process of connecting new power plants to utility grids fairer, cheaper, and easier. A national interconnection policy would go a long way toward making competitive electricity more reliable, timely, and less prone to price volatility. Many power projects encounter unforeseen problems when it comes time to connect them to the local transmission grid owned by an incumbent utility. This is the case for greenfield projects, plants bought from utilities, distributed generation, and qualifying facilities. Timely and effective processing of generation interconnection applications by base-load, peaking, and distributed generation facilities will go a long way toward reducing summer price volatilities and increasing the reliability of electricity supply. Background In Order No. 888 and its progeny, the Federal Energy Regulatory Commission (FERC) mandated open, non-discriminatory access to the nation's transmission systems. This objective was confirmed recently by FERC in Tennessee Power Company, 90 FERC (61, 238 at 61,761 (2000) (Tennessee Power), in which FERC found that "interconnection is an element of transmission service and is . . . required to be provided under [the] pro forma tariff." Unfortunately, many utilities continue to use their control of transmission systems to hinder the owners of non-utility generation from connecting to them--to the benefit of their own or their affiliates' generation businesses. Exacerbating the problem is the fact that one-third of the U.S. grid is outside FERC's jurisdiction, because major portions of it are owned and operated by federal power marketing agencies--such as Tennessee Valley Authority--and by municipal and rural cooperative utilities. These utilities are not subject to FERC's open access rules, nor to FERC's new regional transmission organization requirements recently published in its Order No. 2000. A DOE study confirmed that on 65 case studies of distributed generation projects, only 10% encountered no major problems with the local utility For independent power producers (IPPs), the consequence of utility control and lack of responsive FERC action is that interconnecting new generation is an expensive, confusing, and time-consuming process. It has, in some instances, rendered otherwise promising projects uneconomic, increased price volatility, and threatened reliability in many regions. Even the advent of new independent system operators (ISOs) has not protected IPPs, as utilities are in effect dominating ISO decision-making during today's early phase of the transition to competition. Some states, like New York and California, aren't waiting--they are weighing in on their own. The FTC and the Justice Department are still studying the issue, while the Department of Energy has only focused on interconnection in the context of distributed generation. What follows are discussions of some of the significant--and potentially deal-killing--interconnection problems that IPPs face today, and the solutions evolving in the marketplace. Foxes guarding chicken coops Today, even where ISOs exist, utilities remain in charge of estimating the cost, timing, and technological feasibility of putting a new power plant on the grid. Because these utilities or their affiliates may be developing their own power projects in the same region, in many cases they make estimates of the cost to connect a new plant to their grid unduly high, in a transparent effort to make an IPP's project seem too costly to pursue. In other cases, such estimates are wildly inaccurate, making it impossible for an IPP to come up with the accurate development budget required to win financing. Examples of such abuses abound. In one, the actual cost of interconnecting a plant to the grid exceeded the utility's original cost estimate by 50%, necessitating the addition of nearly $2 million of cost overruns to the project's pro formas. In another, the utility's cost estimates increased by 750% over less than two years--in a market replete with generation projects being developed by the utility's own affiliates and ostensibly favored by the regional ISO. In addition to controlling the budget and estimation process, utilities also remain in charge of building the physical facilities--transformers and the like--to effect the interconnection. Reason: Most utilities insist that, in the interest of reliability and safety, only they are competent to build such facilities. Having wrapped themselves in this blanket, many utilities then "goldplate" their transmission networks with state-of-the-art fiberoptic and telemetry systems and other improvements, use equipment from their own supply inventory, or use their own internal staff to design and construct--none of which solely benefit the IPPs who are charged for those costs. Even worse, many utilities routinely overcharge IPPs for legitimate interconnection equipment and services that they provide. For equipment and services that the utilities do not provide, some forgo competitive bidding, substantially raising the IPP's construction and installation bill. In a few cases, utilities have even charged IPPs unjustified, ongoing operating and maintenance fees for services that are either not actually provided or are unrelated to the interconnection of the new generating plant. If these tactics fail to persuade an IPP that its project is uneconomic, a utility can always seek to delay it, often on spurious grounds. And this is happening. A recent DOE study confirmed that on 65 case studies of distributed generation projects, only 10% encountered no major problems with the local utility. Picking operators' pockets Once an IPP has paid whatever is required to connect to the local grid, he may feel that his coffers are beyond the local utility's reach. But that's not always the case. Some utilities are even trying to broaden their hegemony to include IPP operations, by attempting to make independent plants subject to their open-access transmission tariffs--even in situations where a plant does not require transmission service to export its power to the grid. In New England, at least one utility has attempted to impose its tariff on generators that interconnect directly with ISO-controlled, pool-level transmission facilities--not with the utility's lower-voltage local system. In the most brazen instances of these attempts, some utilities have charged generators for transmission or ancillary services that were not actually provided. They have done so without justifying the charges, instead claiming that it is administratively infeasible to separate out their costs for providing the alleged services to generators. Compounding the problem for IPPs is the fact that the provisions delineated in a transmission service agreement may contradict those spelled out in a previously signed interconnection agreement (IA). This not only creates ambiguity and great cost inefficiencies, but also requires an IPP to constantly monitor the incumbent utility's FERC filings that affect its tariff, increasing the project's day-to-day costs. Welcome to the jungle The confusion caused by the lack of a clearly defined interconnection policy at FERC is exacerbated by federal/state jurisdictional concerns Although FERC Order No. 888 mandates non-discriminatory interconnection, in practice there is no uniform, nationwide interconnection policy. Interconnection policy varies from utility to utility in those areas without operating ISOs, and from ISO to ISO in areas where they exist. The confusion caused by the lack of a clearly defined interconnection policy at FERC is exacerbated by federal/state jurisdictional concerns. For example, although Western Massachusetts Electric Company v. FERC, 165 F.3d 922 (D.C. Cir. 1999) makes clear that FERC has jurisdiction over interconnection, the introduction of retail competition by many states has necessitated revisions to utility open-access tariffs that may have the effect of imposing inappropriate charges on interconnecting generators. This, in turn, has resulted in the misapplication of wholesale regulatory concepts--such as denying credits for behind-the-meter (or self-provided) generation--and situations in which IPPs must take station service as retail customers to restart their plants after an outage. In addition, IPPs are often presented with generator imbalance charge proposals by various utilities--each of which attempts to wring more revenues from them. One major policy debate raging in this arena concerns the power delivery rights that an IA affords a generator. In Entergy Services, Inc., 91 FERC ( 61,149 (2000), FERC clarified that an IA conveys no transmission delivery rights beyond the point of receipt. This is consistent with the Tennessee Power case, in which FERC found that an interconnecting customer must make a separate application under the pro forma tariff for the delivery component of transmission service. In a recent case related to this issue, FERC denied a complaint by a Florida IPP which claimed that its local utility--with which it has an IA--is discriminatorily denying it transmission service. The IPP claims that the utility has reserved all of its system's transmission capacity for its own plants for eight years, essentially precluding the IPP from transmitting to and servicing key markets for that period of time. Interconnection agreements are just as non-uniform as interconnection policy. Because IAs are unique, it is easy to skew them to favor one IPP over another The lack of a standard, national interconnection policy is adversely affecting the fortunes of IPPs. Utilities are taking advantage of this situation in two ways: by effectively closing down their service territory to entrants that would compete with their own affiliates, and by having their affiliates exploit more-open interconnection policies in other regional markets. While several large utilities and power pools--such as Entergy, the Southern Company, Commonwealth Edison, and the Southwest Power Pool--have developed interconnection procedures as amendments to their pro forma tariffs, these policies are not uniform and are evaluated and approved on a case-by-case basis by FERC. Even within ISOs, uncertainty about interconnection policy has caused severe problems for IPPs seeking to interconnect with the ISO-controlled grid. For example, in one such case, an IPP project was assigned an advantageous interconnection position but later saw it taken away by the ISO because an incumbent utility sought interconnection for one of its own projects at the same point on the grid. Interconnection agreements are just as non-uniform as interconnection policy. Because IAs are unique, it is easy to skew them to favor one IPP over another. The potential for abuse is highest in cases where a utility has sold its generating assets to another entity that may have also paid for preferential interconnection rights. Confidentiality is frequently not guarded, and competitive advantage or disadvantage is easily created. Miles behind, miles to go FERC has made major strides in clarifying its interconnection policies since early this year; an example is the Tennessee Power ruling. Yet the commission recently decided not to further review a complaint by SkyGen against the Southern Company that has two public policy points at its core: the relationship of interconnection to transmission services, and the role of affiliate generation vs. independent power production. In doing so, FERC continues to put off consideration of critical factual and legal issues such as the following: • A national pro forma tariff setting out uniform procedures under which generators obtain new interconnection services. • A national model IA containing terms and conditions that the Commission has found can reasonably serve as a basis for individual negotiations of IAs. • Clarification of deliverability rights associated with interconnection service, separate from transmission service. • Clarification that transmission system upgrade costs that provide system benefits should not be directly assigned or otherwise allocated to new interconnecting generators. • Reciprocity and comparability extended to decisions regarding affiliate generation weighed with independent power production. Consistency within and outside service territories should become the goal. • A transparent procedural system that ensures implementation rules are fairly and publicly developed, with non-discriminatory and timely dispute resolution on a real-time basis. • Proper calculation of generation imbalance charges, tax gross-ups for interconnection costs, and ownership requirements imposed by utilities. Nationwide, uniform, pro forma interconnection procedures would ensure that IPPs know the procedural rules will be consistent from one region to another. However, this would solely serve as a model, not a pro forma tariff, so individual project requirements can be satisfied. Utilities have seized on pro forma tariffs as vehicles for locking developers into one form of agreement, leaving them no room for amendments to meet the needs of individual projects, or distributed generation. A hidden body of law and interpretation has arisen that discriminates against new generation and distributed generation, exacerbating the concerns over reliability and price volatility that have arisen in key markets like California and New York. Perhaps one reason that the deliverability issue remains unresolved is that IPPs lack consensus on it. Industry sources report that they support at least three philosophies: • Interconnection service conveys no transmission service absent a separate request for transmission service, but does convey a right to introduce power at the point of receipt. This approach has been generally adopted on the AEP system. • In general, interconnection service conveys a right to transmission service. Exceptions exist where a generator chooses to pay for system upgrades that are not for its sole use and benefit; here, interconnection service conveys an entitlement to transmission credits on a dollar for dollar basis for any transmission service requested by the generator or its customer. This approach has been modeled on the Commonwealth Edison and Duke systems. If open access is to exist in practice, FERC must clarify quickly what utilities can charge IPPs for upgrades • Interconnection service conveys the right to generate and deliver power consistent with the deliverability parameters modeled in the utility's interconnection study, as well as a limited right of first refusal over subsequent requests for transmission service. New generators should have the right to request that certain deliverability parameters be modeled as part of a request for interconnection service, without requesting that transmission service. Once that deliverability is modeled, the generator should have the right to rely on that transmission capacity being available until such time as a subsequent generator submits an interconnection service request, or another party submits a transmission service request that will impact the deliverability associated with the first project. At that time, the transmission owner would notify the first developer, who would have a limited time to either (1) request and pay for the desired transmission service or (2) lose the right to the transmission capacity originally modeled. To avoid the second generator or subsequent transmission customer being blind-sided by the first generator's rights, the deliverability parameters modeled and subject to the right of first refusal could be posted on Oasis. This approach provides generators some additional protections that could be valuable when transmission service requirements are not definitely known at the time interconnection is needed and that first request is made. However, it does introduce new complications associated with transmission service queuing and ATC calculations. This approach would address problems arising on the Southern Company's network and on PJM. The ball's in FERC's court If open access is to exist in practice, FERC must clarify quickly what utilities can charge IPPs for upgrades to their transmission systems "associated" with the interconnection of new generating plants. Some IPPs have argued that they should not be charged any such costs; others say they are willing to pay some portion of these costs to keep a project moving forward; and, others contend that responsibilities for such costs should not be borne solely by IPPs. FERC also needs to develop better procedures to implement its new open-access policies, and better mechanisms with which utilities and IPPs can resolve their interconnection disputes in more timely fashion. Until the commission does so, interconnection issues will continue to constrain competition and exacerbate the supply, reliability, and price volatility problems of state electricity markets nationwide. Michael J. Zimmer is a partner and John A. Cohen is an associate in the Washington office of the law firm Baker & McKenzie. Their areas of expertise are regulation of competitive fuel and power markets, generation asset sales and acquisitions, and utility industry restructuring. Cohen has served on the staffs of the Federal Energy Regulatory Commission and the Maryland Public Service Commission. Return to top Unfortunately we had to discontinue our guestbook because unscrupulous individuals were inundating it with links. If you want a link request it via email. 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