Transmission Expansion Cost Recovery:

FERC’s Generator Interconnection Rule and Other Proposed Policies Kevin Kelly Federal Energy Regulatory Commission Rocky Mountain Subregional Transmission Planning Salt Lake City, September 26, 2003

OUTLINE

1. Current FERC policy for transmission cost recover 2. Transmission cost recovery policies proposed in White Paper of April 2003 3. Large generator interconnection final rule 4. Small generator interconnection proposed rule 2

1. Traditional FERC Cost Recovery Policies

   Before 1991, all expansion costs were rolled-in to the transmission average transmission rate After 1991, “Or” pricing offered:  Transmission customer pays the higher of the average rolled-in cost and the incremental cost expansion cost, but not both Average is usually higher: de facto “roll in” 3

2. Transmission Cost Recovery Policies Proposed in White Paper of April 2003

  Proposes that each region form a regional state committee (RSC) to develop many regional policies Proposes that each region have its own transmission planning process with criteria developed with or by the RSC 4

Regional Flexibility in Cost Recovery

     The RTO or ISO tariff would state a transmission cost recovery policy The RTO/ISO and the RSC would develop the appropriate approach to file with FERC The two principal choices are rolled-in pricing and “participant funding.” Either of these or an innovative combination may be proposed.

For a 1-year transition period, participant funding may be used for transmission upgrades for generator interconnection as soon as an independent entity has been approved by the Commission and affected states.

Transmission cost recovery outside an RTO or ISO is not addressed in the White Paper proposal.

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Reliability and Economic Upgrades

      The RTO or ISO would include transmission upgrades in the regional plan that are necessary:  to maintain or improve reliability, or  to reduce congestion and improve access to lower cost supplies (economic enhancements). Recovery for these two types of upgrades may differ The RTO/ISO tariff would have criteria for distinguishing reliability and economic enhancements.

Each RSC may determine the criteria for economic enhancements.

If the RSC decides the criteria, the RTO or ISO would file them with FERC.

If the RSC is unable to reach a decision, the RTO or ISO would file its own proposal. 6

Interregional Transmission

   Regions should try to eliminate export and import fees from region to region If there is a notable imbalance between imports to and exports from a region, the RTO or ISO may seek to recover some of its transmission costs through an export fee. Other measures could be used to prevent cost shifts among the regions. E.g., adjusting the transmission revenue requirement for the importing region to include a portion of the revenue requirement of the exporting region 7

3. Interconnection Rulemaking Process

      FERC’s 2001 stakeholder negotiations led to a January 2002 consensus document NOPR issued April 2002  > 173 filings Small generators asked for own rule Small generator ANOPR August 2002 July 24, 2003: large generator final rule and small generator proposed rule issued State views reflected in much of both large and small generator rulemakings 8

Large Generator Interconnection Final Rule

   Requires public utilities to amend their Open Access Transmission Tariff to include standard interconnection procedures and a standard interconnection agreement for generators larger than 20 MW.

Standardizes the scope of each study, deposit amount, time of completion of each study, and access to study data.

Goes into effect on October 20.

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Purposes of Large Gen Rule

      Reduce the cost of electricity to customers, including the cost of renewables Reduce interconnection time and costs Prevent discrimination in interconnections Increase energy infrastructure Preserve grid reliability Clarify transmission expansion cost recovery for generator interconnections 10

Advantages to Transmission Providers

   Standard procedures streamline the interconnection process and reduce litigation time and costs RTOs and ISOs may design their own interconnection processes Data access allows generators to do their own “what if” studies, reducing the transmission provider’s study load 11

Advantages to Generators

    They can interconnect without requesting transmission service They have access to study data so they can conduct their own interconnection studies They have a standard interconnection procedure and a standard interconnection agreement The agreement clearly lays out the legal rights and obligations of the parties 12

Another Advantage to Generators

 The rule offers generators two interconnection options   A low-cost interconnection with grid expansion only for reliability (Energy Resource Interconnection Service) A higher quality interconnection that provides expansions to allow a generator to qualify as a network resource (Network Resource Interconnection Service) 13

Interconnection Cost Recovery

   Generator pays for all interconnection costs, other than network upgrades, such as:  Application fees and costs of studies  Costs of facilities and upgrades on the generator’s side of the point of interconnection to the transmission system Transmission system enhancements, called network upgrades, are treated separately Generator pays for distribution upgrade costs  For interconnection to a wholesale distribution facility 14

Transmission Expansion Costs

  Who pays for the costs of transmission network upgrades on the transmission provider’s side of the point of interconnection?

FERC’s new rule: this depends on whether the transmission provider is a market participant or independent of market participants  Not independent: use traditional FERC policy. The transmission provider pays and recovers its costs through its rolled-in transmission rates  Independent: An RTO or ISO may propose an alternative policy that states in the region agree on 15

Expansion Cost Recovery with a Non-Independent Transmission Provider

   The transmission provider eventually pays for upgrading the grid for its interconnecting generating customer But the generator initially funds the cost of these upgrades and gets fully reimbursed over time Credits against the generator’s transmission bills over 5 years, with interest, reimburse the generator  but Generating Facility must achieve commercial operation to qualify for credits 16

Expansion Cost Recovery with an Independent Transmission Provider

   Follows April White Paper proposed policy The rule allows pricing flexibility for an RTO or ISO, including use of “participant funding” In forming an RTO or ISO, an independent administrator may use participant funding for Network Upgrades for one year, subject to approval by the Commission and affected States 17

Variations From Any Part of the Large Generator Rule

  Regional variations  Utilities may propose variations that are generally used throughout a region if consistent with or superior to the Final Rule  Utilities may propose variations to comply with a regional reliability rule, subject to Commission approval RTO or ISO  The rule allows greater flexibility for an RTO or ISO, subject to Commission approval 18

Applicability

    The rule does not expand FERC’s jurisdiction.

It does not apply to interconnections to facilities of a company that is not a jurisdictional “public utility” or to a public utility’s facilities that are not regulated by the FERC.

It applies only to interconnections to facilities already subject to a transmission provider’s Open Access Transmission Tariff at the time an interconnection request is made The new rule goes into effect on October 20.

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4. Small Generator Interconnection Proposed Rule

  Has the same purposes as the large generator rule, but also:   Facilitates the interconnection of small generators with a rule designed for their special features and needs Encourages the development of alternative small energy sources such as wind, solar and distributed generation.

Has standard procedures and agreement 20

Small Generator Rulemaking Process

       FERC stakeholder negotiation started August 2002 Coalition documents filed November 2002, calling for two Agreements and two Procedures – one set for ≤ 2 MW and another set for 2-20 MW NARUC proposed a single set of procedures and agreement FERC’s NOPR draws significantly from NARUC ideas It has a single set of procedures and an agreement applicable to all generators no larger than 20 MW Proposed rule issued July 24 Comments due October 3 21

Small Generator Interconnection Agreement

    Sets forth the legal rights and obligations of each party Addresses cost responsibility for interconnection facilities and upgrades Lays out milestones for completing the interconnection, and Sets forth the process for dispute resolution.

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Small Generator Interconnection Procedures

   Accelerated procedures for:   Generators connecting at high voltage and Generators >10 MW connecting at low voltage Expedited procedures for generators 2 10 MW connecting at low voltage Super-Expedited procedures for generators ≤ 2 MW connecting at low voltage 23

Cost Recovery and Applicability

 Cost recovery policies proposed are the same as for the large generator rule  Applicability – proposal is the same as Large Generator Final Rule 24