FERC Ruling Frustrates Wind Developers

FERC Ruling Frustrates Wind Developers

June 01, 2006

Wind farm owners and other independent power suppliers in the United States are troubled by a ruling by the Federal Energy Regulatory Commission in late February that let a utility charge a toll for allowing electricity from a wind farm to gain access to the regional grid. The electricity had to travel first over distribution lines belonging to the utility to reach the grid.

Surprisingly, FERC held that it does not have jurisdiction over the “distribution” portion of the interconnection arrangement. The result is surprising because neither the wind farm owners nor the utility asked for such a ruling.

The courts are expected to overrule FERC — if the case gets that far. The developer of the wind farm has asked FERC for a rehearing.

Line Drawing

The Federal Power Act divides jurisdiction over the different aspects of the electricity business between federal and state regulators. FERC has exclusive jurisdiction to regulate the sale of electricity at wholesale in interstate commerce and transmission in interstate commerce. State commissions regulate retail power sales and distribution services.

FERC has long recognized that when a generator interconnects with a utility for the purpose of selling power at wholesale, if the power enters the interstate grid, then the interconnection arrangement is part of the transmission service provided by the interconnecting utility. Based on this understanding, FERC adopted various orders starting with Order No. 2003 that establish standardized interconnection agreements and procedures for generators that sell power into the interstate grid. In a series of cases decided in the last five decades, the US Supreme Court has determined that power sales that enter or affect the interconnected utility transmission grid are “in interstate commerce” and, therefore, are regulated by FERC. It is well established that transmission and wholesale power sales in the continental US flow into the interconnected grid — except for sales in the ERCOT region of Texas — and, therefore, are “interstate commerce” that should be regulated by FERC rather than the state commissions.

It is also well established by Supreme Court decisions that the “transmission function” begins at the point the electricity leaves the generator’s power plant. In other words, irrespective of the voltage level or function of the system to which the generator is connected, the transmission function “extends from the generator, where generation is complete . . . to the point where the function of conveyance in bulk over a distance . . . is completed and the process of subdividing the energy to serve ultimate consumers, which is the characteristic of local distribution, is begun.”

These court decisions have recognized that, although from a scientific or engineering perspective, the transmission function continues all the way to the retail load, the exclusion of federal jurisdiction over local distribution facilities was a political decision, intended to preserve the authority of state regulators to regulate the retail function. As a result, the courts have established that where a generator is involved, FERC-jurisdictional transmission starts at the generator and extends to the point where the power reenters the local distribution grid, where it is delivered to end users.

Under this straightforward test, it would seem obvious that so long as the power from a generator reaches the interstate grid, the interconnection between the generator and the utility grid is a “transmission facility” subject to exclusive FERC jurisdiction. It would also seem clear that whether the interconnection is made to a high-voltage “transmission” line or to a low-voltage “distribution” line, so long as the power generated flows out and onto the interstate grid, the interconnection is “transmission in interstate commerce” and is FERC jurisdictional.

However, FERC seemed to forget these principles in a decision in late February involving the filing of an interconnection agreement between PJM — the regional grid operator for the mid-Atlantic and some midwestern states — and a wind farm that GSG plans to build in Lee County, Illinois. The GSG project will interconnect to the distribution facilities of Commonwealth Edison. Since ComEd is a member of the PJM grid, and the power generated by the wind project will be sold into the PJM wholesale market, PJM filed interconnection agreements for the GSG project with FERC. PJM’s open access transmission tariff expressly provides for interconnection where the generator uses distribution facilities to deliver energy into the PJM transmission grid, and the interconnection agreements were accordingly filed pursuant to the tariff.

A dispute arose between GSG and ComEd in that ComEd proposed to charge a “wholesale distribution charge” to compensate ComEd for the use of its distribution lines over which power from the wind project would flow before entering the PJM high-voltage transmission system.

GSG objected to the charge, noting that the interconnection studies showed that by injecting power into the distribution grid, the wind project would reduce the need for future transmission facilities and reduce generation losses incurred in serving ComEd’s load.

On February 22, FERC, to both parties’ surprise, ruled that it lacked jurisdiction over the interconnection agreements and dismissed the case. Ignoring decades of precedent, FERC ruled that it has jurisdiction over a distribution-level interconnection only if, prior to the request for interconnection being made, some other generator is already connected to the distribution facilities, and that generator (or some other seller) is engaged in making wholesale sales over the distribution facilities. If these conditions are not satisfied, then the state commission, and not FERC, will establish the rate, term and conditions of the interconnection. FERC held that in this case those conditions were not satisfied and dismissed the interconnection filing.

Moreover, according to FERC, even if there is an existing interconnection and wholesale sale on the affected distribution facilities, if the generator is a “qualifying facility” or “QF” that sells all of its output to the utility that owns the distribution facilities, FERC still does not have jurisdiction. According to FERC, in this situation, there is no preexisting FERC transmission service involved when a QF sells its output

to the interconnected utility and, therefore, the distribution facilities are not FERC jurisdictional.

Backlash

The American Wind Energy Association identified 72 projects in the interconnection queue that are connected at the 69k level or below in a filing protesting the FERC approach in the GSG case. Under FERC’s ruling, a state commission would be free to ignore FERC-approved queue policies, as well as long debated interconnection standards, for interconnections that do not satisfy the standards for FERC jurisdiction. Instead of “preventing balkanization of the interstate power market”— a goal that FERC cited in adopting its uniform open access transmission tariff in Order No. 888 — FERC’s policy, if not overturned, will require generators that find it necessary to interconnect at the distribution level potentially to deal with 47 different state policies for interconnection. (The ERCOT region of Texas has already established its own approach to interconnection.)

GSG has applied for a rehearing of the FERC’s decision. If FERC fails to change its position, and if the case is appealed, the courts are very likely to overturn FERC’s determination and rule that all interconnections involving power sales to the interstate grid — regardless of the voltage level of the facilities to which the generator interconnects — are subject to FERC jurisdiction. Order No. 2003 focused on “dual use” distribution facilities, facilities used for both wholesale sales and retail sales, and correctly held that FERC has jurisdiction over, for example, wholesale sales that take place on the distribution system, while the state commission retains jurisdiction over the use of the distribution system for retail sale and retail distribution or wheeling service.

The basic problem with FERC’s approach is that it— and Order No. 2003, which it cites as precedent— rely on the existing use of the distribution system to establish whether or not the new interconnection is FERC-jurisdictional.

There is no basis in the Federal Power Act or in prior court decisions interpreting the Federal Power Act for this “preexisting use” test. Rather, the test is whether the interconnection service that is or will be provided by the utility that owns the distribution system will constitute “transmission in interstate commerce.” As already noted, “transmission” begins when generation is complete, irrespective of the voltage level, and continues to the point after the step-down process, where the power is “distributed” to end users. If the service that the interconnecting utility will provide is “transmission in interstate commerce,” then, whether or not there is any preexisting use, when the requested interconnection service commences, that service will be FERC jurisdictional.

In the meantime, FERC’s decision has already created uncertainty for projects in the queue and for projects that have assumed that FERC’s well-established and uniform standards for interconnection would apply to their interconnection.