Found Money in Interconnection Agreements?

Found Money in Interconnection Agreements?

October 01, 2003

Generators and utilities are anxiously watching a complaint that Mirant filed with the Federal Energy Regulatory Commission asking the commission to revise a 2002 interconnection agreement with Nevada Power Company.

Mirant has asked FERC to revise the contract and reclassify facilities installed at the substation where the line from a power plant Mirant built in Nevada ties into the Nevada Power system as “network upgrades” instead of “interconnection facilities.” If Mirant is successful, Nevada Power will have to refund the $3.4 million costs of these facilities, plus interest, to Mirant through credits against the transmission charges that a power marketing affiliate of Mirant pays Nevada Power.

In other similar cases, FERC has responded favorably to requests to revise interconnection agreements in this fashion.

The Mirant request is the first such complaint to be filed since FERC adopted lengthy and detailed rules governing generator and utility interconnections. The rules adopted the pricing policy reflected in earlier FERC orders going back to 2000, namely that the generator is only responsible for the cost of facilities, plus operating and maintenance costs, from his power plant to the point of interconnection with the grid, and that the utility must ultimately pay the cost of facilities and O&M on the grid side of the point of interconnection.

Background

Historically, independent generators seeking to connect their power plants with the grid have had almost no bargaining leverage with utilities. The local utility that owns the grid could adopt a “take-it-or-leave-it” posture. In most circumstances, no other transmission lines are located near enough to provide a viable alternative: as a result, absent regulatory interference, utilities have been able to maintain the upper hand in negotiating interconnection arrangements.

In July 2003, FERC adopted Order No. 2003, which requires utilities to adopt standard generator interconnection procedures and to file a standard interconnection agreement for use with generators whose projects have a capacity of more than 20 megawatts. The July 2003 order affirms and codifies recent FERC decisions specifying how the costs of interconnection are to be allocated between the utility and the independent generator. Under these decisions and Order No. 2003, the generator is responsible for all costs (including the capital cost of the facilities as well as the cost of operating and maintaining facilities) on the generator’s side of the “point of interconnection,” which FERC defines as the point where the facilities from the generator connect to the utility’s transmission system. These facilities are called “interconnection facilities.” The “transmission system” is defined as all of the facilities used to provide transmission service that is subject to FERC regulation.

Cost responsibility for all “additions, modifications, and upgrades” to the transmission system “at or beyond” the point of interconnection — called “network upgrades” — falls on the utility. Under this policy, there is no need to show who benefits from facilities required to effect the interconnection; instead, the “point of interconnection” is a “bright line” that FERC uses as the sole determinant of how interconnection costs will be allocated.

Recognizing that there can be regulatory delay in a utility’s ability to recover the cost of network upgrades through its rates, FERC requires generators initially to advance the money required to build the network upgrades. The generator is repaid its advance with interest, through a “cash equivalent refund,” which may be set up in form as a credit against amounts the utility charges for transmitting electricity from the generator’s power plant. However the amounts are credited, the generator must be repaid in full within five years of the generator’s commercial operation date. Credits must be usable against charges for any transmission services provided by the interconnected utility to the generator, even, for example, service provided to other plants owned by the generator.

In general, rules adopted by FERC are applied prospectively, and existing arrangements are not affected.

However, in this case, FERC has authority under section 206 of the Federal Power Act to review existing agreements and, if it determines that they are “unjust, unreasonable, unduly discriminatory or preferential,” to revise their terms. Under section 206, unless a generator has contractually waived its right to file a complaint at FERC or otherwise to seek FERC review of its interconnection agreement, even if it has executed an interconnection agreement in which the generator is responsible for costs of network upgrades, the generator may seek FERC review and revision of its interconnection agreement to conform to FERC’s current policies that are more favorable to generators.

Mirant Complaint

In a complaint recently filed by a generator owned by an affiliate of Mirant Corporation (Mirant Las Vegas, LLC), Mirant did just this — asked FERC to revise an interconnection agreement that Mirant entered into in August 2002 with Nevada Power Company, in which improvements to the Harry Allen 500 kV substation were classified as “interconnection facilities” the costs of which were allocated to Mirant.

Mirant said it acquiesced in the interconnection agreement because it had no other way to transmit its output to the market and the commission had not yet clearly established the test for distinguishing interconnection facilities from network upgrades. Mirant contends that under the test codified in Order No. 2003, the improvements to the Harry Allen substation are network upgrades and not interconnection facilities and the interconnection agreement should be revised accordingly.

The effect of such a change to the interconnection agreement would be to require Nevada Power to provide transmission credits to Mirant for the $3,415,739 cost of the substation improvements, plus interest, during the five-year refund period for repayment of generator-funded network upgrades.

Mirant’s filing refers to a FERC decision involving an interconnection at the same Harry Allen substation by the Silverhawk power plant owned by Gen West. In that case, Nevada Power filed an unexecuted interconnection agreement that similarly characterized modifications to the Harry Allen switchyard as part of the “interconnection facilities” to be paid for by the generator. FERC rejected this characterization, stating that “the switchyard is a network facility today .. . [and] the fact that it is being reconfigured or upgraded [to accommodate the generator] does not transform it into a non-network facility.” FERC required Nevada Power to amend its interconnection agreement to provide transmission credits to Gen West, reflecting FERC’s reclassification of the modifications to Nevada Power’s substation as network upgrades. These costs amounted to $3.4 million.

Many of the prior FERC rulings do not mention a dollar figure for the amount of interconnection costs to be reclassified as network upgrade costs. However, in a decision involving Consumers Energy Company, the generator, Kinder Morgan, estimated that $10.2 million of the $13.2 million it was required to pay in interconnection fees should be reclassified as network upgrade costs. In another case involving American Electric Power, FERC determined that AEP should credit to a generator that was interconnecting with it $2.3 million for network upgrades.

A key issue in FERC’s review of previously executed interconnection agreements is the standard of review that FERC will employ. Under the Federal Power Act, if a contract over which FERC has jurisdiction — here the interconnection agreement — preserves the right of one or both parties to submit unilateral applications to FERC for a change to the contract, or to file a complaint under section 206, then the FERC standard of review is the “just and reasonable” standard. Under this test, if the contract fails to conform to extant FERC policies, and no compelling countervailing circumstances are present, then FERC will normally revise the agreement upon the submittal of such a request. However, if the contract, either expressly or implicitly, waives the parties’ rights unilaterally to seek FERC changes to the contract, then FERC may revise the contract only if failure to so would result in harm to the public interest.

So far, the FERC decisions to reclassify interconnection facilities as network upgrades have all involved either contracts that preserved the parties’ ability to seek unilateral changes or unexecuted contracts. Mirant’s complaint similarly asserts that its interconnection agreement with Nevada Power preserves its right unilaterally to request FERC to revise the agreement, and to do so under the “just and reasonable” standard. Also, the FERC decisions and Order No. 2003 do not address the case where the generator is not a customer of the utility for transmission service and in which there are no transmission charges against which to credit the costs of network upgrades initially funded by the generator. Nevertheless, the reasoning behind the FERC cost allocation policies applies equally to generators that sell their output to the interconnected utility or to third parties, and there is no apparent policy basis why such generators should not be entitled to cash payments for network upgrades for which they have paid, to be paid over the same five-year period that applies to transmission customers.

Generators are carefully watching this case, as it is the first post-Order No. 2003 case that FERC will decide and because the amount at stake is significant.

More Refunds?

Generators who believe they may be entitled to similar refunds and credits should answer the following questions:

  • Does the interconnection agreement classify facilities on the utility’s side of the point of interconnection as “interconnection facilities” to be paid for by the generator? Note that under the “bright-line” test, if facilities that benefit the entire transmission grid are located on the generator’s side of the point of interconnection, they are nevertheless deemed to be interconnection facilities for which the generator must bear the costs.
  • Is the project interconnected with a utility that is a member of an ISO (independent system operator) or RTO (regional transmission organization)? Order No. 2003 permits RTO’s, subject to FERC approval, to adopt different policies for sharing the costs of network upgrades.
  • Does the interconnection agreement permit unilateral filings seeking FERC revisions to the agreement? Most agreements contain such a provision; however, if the contract does not permit such filings, there is a greater likelihood that FERC will require the parties to live with the contract, notwithstanding FERC’s policy positions on interconnection cost allocation.

If the answers to these questions are “yes,” “no” (or “yes” but no differing policy has been sought or approved), and “yes,” then the generator may be in a position to have FERC revise its interconnection agreement. FERC proceedings of this type generally take three to six months to resolve. They ordinarily involve the submittal of pleadings, called a “paper hearing,” but do not involve a trial-type hearing before an administrative law judge. For generators, there may indeed be gold in those dusty interconnection agreements.