–FERC Protects Incumbent Transmission Owners, Offers Opportunities to New Entrants
by Michael R. Engleman, Dickstein Shapiro LLP
On July 21, the Federal Energy Regulatory Commission (FERC) issued Order No. 1000 to reform transmission planning and cost allocation. The commission said the final rule corrects deficiencies with respect to transmission planning processes and cost allocation methods.
The final rule is not as prescriptive as some pre-rule commentators wanted or feared, deferring much to stakeholder deliberations and compliance filings required in October 2012.
Nevertheless, the rule provides guidance on many planning and cost-allocation issues. The specific reforms adopted by the commission focus on:
- Requiring public utility transmission providers to participate in Order No. 890-style planning on a regional basis;
- Removing from all open-access transmission tariffs (OATTs) or other commission jurisdictional tariffs and agreements “any provisions that grant a federal right of first refusal to transmission facilities that are selected in a regional transmission plan for purposes of cost allocation”;
- Requiring the adoption of procedures for planning and allocating the costs of interregional projects upon their approval; and
- Requiring all such regional cost allocations to be based on a “beneficiary pays” principle.
The commission’s proposal to eliminate rights of first refusal, which sparked the most heated comments, was intended to provide opportunities for new entities to develop and own regional and interregional transmission projects. In the final rule the commission concluded that “leaving federal rights of first refusal in place for these facilities would allow practices that have the potential to undermine the identification and evaluation of a more efficient or cost effective solution to regional transmission needs, which in turn can result in rates for Commission-approved jurisdictional services that are unjust and unreasonable or otherwise result in undue discrimination by public utility transmission providers.”
The commission also wanted to protect incumbent transmission owners’ traditional opportunities to enhance their transmission rate base. The final rule differs significantly from the proposed rule, requiring that rights of first refusal be eliminated from OATTs and other commission jurisdictional agreements, only in more limited circumstances. In the final rule, the commission abandoned its proposal for ongoing sponsorship rights, concluding that “granting transmission developers an ongoing right to build sponsored transmission projects could adversely impact the transmission planning process, potentially leading to transmission developers submitting a multitude of possible transmission projects simply to acquire future development rights.”
Instead of allowing for ongoing sponsorship, the commission’s final rule focused on sponsorship only in the initial planning cycle to ensure only that “a nonincumbent transmission developer ” has the same eligibility as an incumbent transmission developer to use a regional cost allocation method or methods for any sponsored transmission facility selected in the regional transmission plan for purposes of cost allocation.”
The final rule requires each public utility transmission provider to “amend its OATT to describe a transparent and not unduly discriminatory process for evaluating whether to select a proposed transmission facility in the regional transmission plan for purposes of cost allocation.”
The final rule contains exceptions to the requirement that rights of first refusal be eliminated. Under the final rule, existing transmission owners retain the right to “build, own and recover costs for upgrades to its own transmission facilities, such as in the case of tower change outs, or reconductoring, regardless of whether or not an upgrade has been selected in the regional transmission plan for purposes of cost allocation.”
The final rule expands on the proposed rule’s exceptions by allowing incumbents to retain a right of first refusal for “local” projects, the costs of which would be allocated only to the incumbents’ retail customers. By allowing incumbents to retain rights of first refusal to projects solely within the incumbents’ retail distribution service territories and for which the incumbents would not seek regional cost allocation, the commission is allowing incumbents to retain only what they had before regional transmission organizations and independent system operators established regional planning or cost-allocation processes. By doing so, the commission strengthened the final rule against legal attacks by those who might appeal that the commission is usurping rights the entities had before joining regional organizations.
The final rule merely opens to competition regional projects for which the costs would be allocated across the region or regions and only in the case of such projects need the best and most cost-effective project be selected for development. Few should argue with this compromise.
Michael R. Engleman is administrative head of Dickstein Shapiro’s energy practice. He focuses on state, federal and international complex civil litigation matters and energy law issues. In 2011, he was named one of Legal 500’s recommended lawyers in energy litigation. Reach him at email@example.com.