FERC Rejects Notice of Termination Despite Breach of LGIA

The Federal Energy Regulatory Commission (FERC) recently rejected a notice of termination of a large generator interconnection agreement (LGIA), despite finding that the interconnection customer had breached the terms of the agreement. The interconnection customer failed to make scheduled interim payments toward the estimated cost of interconnection facilities and network upgrades, as required under the LGIA. Duke Energy Florida, LLC, 165 FERC ¶ 61,230 (2018). In this rejection, the FERC explained that the transmission provider had not shown that a significant increase in the estimated cost of installing and constructing the interconnection facilities and network upgrades after the LGIA had been executed was just and reasonable.

In March 2011, Duke Energy Florida (Duke Energy) agreed to purchase the output of a biomass electric generation facility being developed by U.S. EcoGen Polk, LLC (USEG Polk) for a term of approximately 30 years. Subsequently, in June 2015, Duke Energy and USEG Polk entered into an LGIA (Polk LGIA) pursuant to which USEG Polk is responsible for the costs of interconnection facilities and network upgrades needed for interconnection of that generation facility to the Duke Energy transmission system.

The Polk LGIA provided for Duke Energy to send invoices monthly to USEG Polk based on the estimated costs of the interconnection facilities and network upgrades. At the time the Polk LGIA was executed, the estimated cost of the interconnection facilities and network upgrades was $1,720,000. However, the estimated cost of these facilities was increased by Duke Energy thereafter, to approximately $3.9 million in March 2017, and again to $6.2 million in August 2017.

The FERC concluded in the order that USEG Polk was in breach of the Polk LGIA because it was undisputed that USEG Polk had failed to pay invoices dated May 14, 2018 and June, 12 2018 for the estimated costs to procure, install, and construct the interconnection facilities and network upgrades identified in the Polk LGIA and it had failed to cure the breach after being given written notice. As a result of this breach, Duke Energy argued that it had the right to declare a default and terminate the Polk LGIA.

In its order, the FERC concluded that, because Duke Energy had failed to demonstrate that the increase in estimated costs of the interconnection facilities and network upgrades from $1,720,000 to more than $6 million over the course of approximately two years was just and reasonable, it was unable to determine whether Duke Energy had met its burden under Section 205 of the Federal Power Act to show that the notice of termination was just and reasonable. Therefore, the FERC rejected the notice of termination of the Polk LGIA and ordered an investigation under Section 206 of the Federal Power Act concerning the justness and reasonableness of the increased estimate in the costs of interconnection facilities and network upgrades. Presumably, Duke Energy’s right to terminate the Polk LGIA will be determined at the conclusion of that investigation.

Also in its order, the FERC rejected the suggestion by USEG Polk that the costs of the interconnection facilities and network upgrades for which USEG Polk was responsible might somehow be limited on the basis of the initial cost estimate prepared by Duke Energy. In so doing, the FERC explained that “the costs in an LGIA are simply estimates and that interconnection customers are responsible for paying the actual costs of interconnection facilities and network upgrades” unless a transmission provider voluntarily adopts a fixed price or cost cap based on its estimate.