FERC Continues Trend: Flexibility for Electric Transmission Financing
The Federal Energy Regulatory Commission (FERC) issued a ruling on May 22, 2009, that increases regulatory flexibility for the financing of new electric transmission facilities. FERC acted on a proposal by two investor-owned utilities, Northeast Utilities Service Company and NSTAR Electric Company (the “IOUs”) to construct and own a new transmission line running from the Canadian border to southern New Hampshire, and to sell all of the transmission rights in the line to a subsidiary of Hydro-Quebec (“HQUS”).
FERC accepted essentially all of the IOUs’ proposal, which contained a unique combination of elements that should be noted by entities needing, or wanting to build, additional transmission capacity. This outcome could open up new options for transmission construction that could be advantageous for electric generation developers, among others.
The IOUs’ proposal included the following:
- HQUS would purchase all of the 1,200 MW capacity of the line as Firm Transmission Rights under a bilateral Transmission Service Agreement;
- The Transmission Service Agreement would not be subject to the IOUs’ FERC Open Access Transmission Tariff;
- The purchase price for the capacity would be a negotiated rate that would be no higher than a cost-of-service rate to be established by FERC;
- HQUS would bundle the transmission with hydroelectric energy imported from Canada and sell it at the New Hampshire interconnection at a delivered market price to the IOUs and third-party purchasers under 20-year agreements; and
- The new transmission line would be considered to be “participant-funded” by HQUS and thus the cost of the line would not be included in transmission rates charged by ISO-New England.
In the course of accepting all of these elements, FERC rejected protesters’ complaints that asserted that by committing the capacity under a bilateral agreement with a single customer, the proposal violated FERC’s open access and open season policies. In a significant statement of policy that it claimed was consistent with its precedent, FERC declared that it is not a violation of open access for a customer to fund a transmission facility and receive priority rights to use the line, and this arrangement also does not constitute undue discrimination or preference. Further, FERC declared that an open season process was not required with regard to a cost-based, participant-funded transmission system expansion.
Protesters also argued that the Commission’s policy with respect to “merchant” transmission lines, which includes an open season requirement and other commitments, should be applicable to the IOU’s proposal. They argued that the proposal in essence enables the IOUs and HQUS to assume the risks of the project in exchange for profits achieved through negotiated rates.
FERC, however, went out of its way to insist that the IOUs’ proposal was not a merchant transmission facility, but rather a cost-based participant-funded project to which it could apply different rules. FERC acknowledged that it would be allowing the parties to a bilateral transmission agreement to negotiate terms and conditions that are different from the Commission’s open access tariff requirements, but justified its decision on the basis that the transmission agreement would have to be filed with FERC and the proponents would have the burden of demonstrating that the terms are not unduly discriminatory or preferential.
FERC further explained that the proposed bundling by HQUS of the transmission and renewable energy product for sale at the New Hampshire interconnection did not violate FERC’s unbundling requirements on the basis that FERC would continue to require that the transmission rate be separately stated.
FERC gave rather short shrift to protestors’ arguments that this proposal bypassed ISO-New England’s regional planning process, seemingly accepting the IOUs’ arguments that as long as reliability was coordinated with ISO-New England and no costs of the project were imposed on ISO-New England transmission customers, the project was not required to be evaluated through the regional planning process.
Although one concurring Commissioner emphasized the uniqueness of the facts, this case (Northeast Utilities Service Co. and NSTAR Electric Co., 127 FERC ¶ 61,179) appears to establish the ground rules for a new class of transmission investment: cost-capped, participant (i.e., customer) funded transmission lines in which the transmission capacity may be exclusively reserved by the funding entity under a negotiated bilateral agreement that does not need to conform with FERC’s open access requirements.
FERC’s action in this case thus continues its trend of enabling investments in transmission facilities to be more flexible, which it advanced earlier this year by reducing the requirements necessary for a merchant transmission developer to charge market rates for transmission.