FERC Filings

REQUEST FOR REHEARING OF EPSA, RM99-2-001

I. Introduction

While EPSA³ generally supports the Final Rule, including the new eighth function on interregional coordination, it nonetheless requests clarification and, if necessary, rehearing of Order 2000 in the following respects:

1. the Commission should require that any RTO proposal clearly address the nature and scope of the RTO's sole responsibility for the interconnection of new generators to the transmission grid, and clarify that new generators will not be required to negotiate separately with both the RTO and individual transmission owners/providers in order to obtain interconnection service; and

2. with respect to Order 2000's discussion of RTO transmission ratemaking reforms, where an RTO proposes transmission rates based on the levelized cost of facilities used to provide the applicable transmission service, the Commission should require that any proposed switch to levelized rates must be based on the net (depreciated original) plant costs, as opposed to the gross (undepreciated original) costs.

A. The Commission Should Clarify And, If Necessary, Bolster The RTO's Authority Over The Interconnection Of New Generation To The Transmission System. ____________________________

1. Background
In Order No. 888, the Commission established the ground rules and minimum requirements for transmission service. Order No. 888 and the pro forma tariff did not, however, address the requirements for interconnecting new generators to the transmission system. While transmission providers may in fact be required to interconnect new generators to the grid in connection with a request for transmission service submitted pursuant to a pro forma-style open access transmission tariff, the tariff established by the Commission did not specify the terms and conditions of such interconnection service. Indeed, interconnection is distinct and separate from transmission and has been recognized as such by the Commission. In many cases, the generator is not the anticipated transmission customer, particularly where a power marketer purchases the facility's output. Thus, generators have been required to negotiate separately for new interconnection on a case-by-case basis. There is, therefore, a gap in the Commission's policy between the provision of interconnection and transmission services. EPSA's RTO comments were intended to bridge that gap.

In its initial RTO comments, EPSA stressed that the mandatory RTO functions should include the requirement that RTOs offer "streamlined" consideration of generators' new or enhanced interconnection requests. It should go without saying that new and expanded interconnection projects enhance competition, promote diversity in products and services offered to the market, mitigate vertical market power of incumbent utilities, and contribute to overall market liquidity. Indeed, the significant growth in potential merchant generation has resulted in a high volume of requests for interconnection agreements to tie these proposed new generating sources to the grid. Fair and timely response to interconnection requests and timely completion of relevant studies associated with these interconnections is critical to the development of new generating resources.

In particular, new generation developers require a knowledgeable, independent entity to oversee the preparation of system impact and other studies, to set appropriate security and other requirements, and generally to oversee an interconnection process that is fair and expeditious. To date, however, utilities in most regions have no FERC-approved interconnection tariff or other procedures governing new transmission interconnection. Generators are thus forced to engage in prolonged and costly negotiations with each transmission provider and potentially other utilities affected by a proposed new interconnection. To many generators, this process is reminiscent of what customers were required to endure in order to obtain transmission service from utilities prior to the passage of the Energy Policy Act and the Commission's open access transmission policies, culminating in Order No. 888 and its progeny.

Nor is the process much improved in regions with approved ISOs - where, for the most part, transmission is provided pursuant to a single tariff. Existing ISOs largely did not formulate rules governing new transmission interconnection upon the establishment of the ISOs, but were required to develop such rules after confronted with widespread confusion and delays. Indeed, in its Initial RTO Comments, EPSA specifically identified the existing problem of new generators being "whipsawed" between ISOs and individual transmission owners, with each waiting for the other to take certain actions or complete certain studies.⁴ In short, there are no clear lines of authority in the pro forma tariff with respect to controlling the entire interconnection process.

For these reasons, EPSA requested in its comments that, in addition to the seven RTO functions identified in its Notice of Proposed Rulemaking, the Commission establish an additional function to require (or, alternatively, clarify with respect to the tariff administration function) that RTOs to be solely responsible for implementing the interconnection of new generators to the transmission grid administered by the RTO⁵ This would entail RTOs promulgating and filing with FERC interconnection rules and procedures as well as rates, terms and conditions for interconnection service. Such rate proposals should clearly allocate interconnection-related costs consistent with Commission policies. A mandatory interconnection policy would establish definitive timelines for actions, confidentiality guidelines, and standardized interconnection agreements to facilitate the RTO's fair and timely evaluation of new interconnection requests.

2. Further Commission guidance on RTO function is needed

Order 2000 did not specifically address this interconnection issue, or otherwise clarify the role of RTOs with respect to new interconnection. The portion of Order 2000 dealing with Function 1 (Tariff Administration and Design) provides only that the RTO shall be the sole provider of transmission service and sole administrator of its own open access tariff, and that "[i]ncluded in this is the requirement that the RTO have the sole authority for the evaluation and approval of all requests for transmission service including requests for new interconnections."⁶ The Commission, however, did not expound upon the role of RTOs vis-à-vis other transmission owners/providers in facilitating new interconnection. Nor did Order 2000 specifically indicate that RTOs must include interconnection service provisions in open access transmission tariffs⁷ (or develop separate interconnection service tariffs) and propose and file new interconnection rules and procedures at the same time it files its open access transmission tariff.

On rehearing, therefore, EPSA requests the following with respect to RTOs and new transmission interconnection:

1. Clearly establish the RTO as the "lead agency" for new interconnections.

EPSA recognizes that during an interim period, the RTO may not be adequately staffed to exclusively perform all required interconnection-related studies and analyses. In order to ensure a nondiscriminatory interconnection process for all generators, the Commission should clearly establish the RTO as the "lead agency" for new interconnections, with individual transmission owners' roles limited to perhaps performing certain studies at the behest of the RTO. In other words, the RTO should assume a prominent role in coordinating such analyses and should actively supervise the entire study process, and not simply defer to actions taken or assumptions applied by the transmission owners. Studies conducted solely by transmission-owning utilities continue to raise the specter of discriminatory treatment and needless delay. While Order 2000 recognized that individual transmission owners are "not in as good a position . . . to judge requests for new interconnections" as the RTO,⁸ there still remains considerable ambiguity as to whether new generators could potentially be required to execute separate interconnection agreements with the RTO and individual transmission owners, as is oftentimes the case today.

Nor is it clear whether the final rule effectively mitigates the ability of individual utilities - which often are direct competitors of prospective new generators seeking interconnection service - to unduly influence the preparation of transmission impact studies which determine the ultimate cost of new transmission interconnection. Where a transmission owner also participates in competitive generation markets, there is opportunity and incentive to discriminate against the newly installed generation or to delay its ultimate interconnection through manipulation of system impact studies and other analyses. For this reason, the Commission should clarify that, within a reasonable time frame, the RTO itself must be capable of performing whatever transmission studies and analyses are required with respect to requests for new generator interconnections.

2. Interconnection service should be separate from transmission service

New generators should not be required to commit to a particular level or type of transmission service in order to obtain interconnection service. The Commission's pro forma open access transmission tariff does not specifically provide for new interconnection. Nor have many individual transmission providers filed separate tariffs or include in their open access transmission tariffs proposed rates, terms and conditions for interconnection service. And as a practical matter, developers of merchant power may be unable to identify specific points of delivery and, therefore, frequently are unable to satisfy certain of the technical requirements for processing requests for new transmission service. Utilities are often reluctant to waive or otherwise modify the requirements set forth in their open access tariffs. Transmission is an issue that, at the new interconnecting generator's option, can be dealt with subsequent to the execution of an agreement for interconnection service.

Moreover, generators that, at the outset, propose to market their capacity and energy on a non-firm basis, or when firm transmission capacity is otherwise available on an unconstrained basis, should be able to interconnect promptly with no requirement of lengthy studies of the possible impact of their project on transmission system reliability, precisely because there should be no adverse reliability impacts associated with such interconnection. The RTO, in the case of such interconnecting sellers, always has effective remedies: first, to offer all generators the opportunity to pay congestion charges on any transaction that causes congestion and, second, if the specific generators' interconnections will, during some operating conditions, create an unacceptable situation from a system reliability standpoint, obtain through negotiation contractual rights to direct that the generator back down its generation. Thus, in these circumstances, all that should be required is maintenance of a safe and reliable interconnection.

3. Require the RTO to establish reasonable time lines with respect to all required studies and completion of interconnection agreements.

In order to proceed with project investment, prospective generators need certainty on interconnection issues, and they need that certainty within a reasonable time frame. As it requested in its initial comments, EPSA recommends that all studies analyzing the system impacts associated with a proposed new interconnection and all agreements necessary to provide for construction of such a new interconnection should be completed within nine months, absent mutual agreement or extenuating circumstances. In addition, the interconnection studies and agreements must balance the interests of generators and transmission owners. For this reason, EPSA proposed the development of a standardized interconnection agreement that would be of significant value to the electric power industry and would hasten the development of new generation and streamline the entire interconnection process.

4. Require RTOs to address the issue of prioritization and queuing.

In many regions, multiple projects are vying for priority rights to interconnect at a certain site. Thus, the application process for evaluating interconnection requests and for processing those requests must be applied in a consistent, predictable and non-discriminatory manner. The process for prioritizing new generation projects must accord fair and non-discriminatory treatment to all proposed projects. While individual needs for confidentiality must be protected, the process must be sufficiently transparent to ensure that all proposed projects are treated comparably. Reasonable non-discriminatory means must be used to assure that only viable projects are included.

5. Encourage the establishment of standardized interconnection procedures and Rules. -
Finally, in order to assure non-discrimination and encourage timely completion of the interconnection process, most issues should be handled through a standard interconnection agreement. Unique project conditions can be addressed through special amendments, while the bulk of the issues can be handled in a streamlined and consistent manner. In addition, RTOs should be encouraged to standardize interconnection tariffs nationally on a consistent basis to the extent practicable. It makes little sense to impose one set of deadlines and requirements in one RTO and a completely different set in another RTO. Standardization of interconnection rules will ensure that new generation is installed at the most efficient locations. Otherwise, generation siting decisions will be skewed towards the RTOs with the rules that are most conducive to development, even if congestion is created elsewhere or optimal siting is in another jurisdiction.

B. The Commission Should Clarify That RTO Proposals That Include Ratemaking Practices
Based On Levelized Rates Should Base Those Proposals on the Net, Depreciated, Plant Costs of the Facilities Used to Provide the Transmission Service.

In Order 2000, the Commission expressed its willingness to allow increased flexibility for RTO proposals that include ratemaking practices based on levelized rates, and indicated that "levelized rates are preferable in an RTO environment because all customers, regardless of when they take service, face the same price."⁹ As the Commission reiterated in Order 2000, it has not heretofore approved switches from or to levelized rates proposed by public utilities under traditional cost-of-service ratemaking because of the opportunities that switching may provide for utilities to over recover transmission costs.¹⁰ The Commission here, however, believes that "levelized rates may be appropriate in circumstances, as here, where an RTO reflects a fresh start with respect to the provision of transmission services, and potentially the customers for those services."¹¹

While EPSA does not oppose the use of levelized rates,¹² it is concerned that allowing a switch from a non-levelized pricing methodology to a levelized pricing methodology based on the undepreciated original plant costs will allow the transmission owners to potentially over-recover their costs. A levelized pricing methodology based upon net, depreciated plant costs, however, is designed to, and will, allow each transmission owner a fair opportunity to fully recover its capital costs through an RTO-administered tariff. For the same reasons that the Commission historically has disallowed rate proposals that would result in an over-recovery of costs, existing transmission owners/providers should not be afforded opportunity to recover (indirectly through RTO rates) more than their costs of service.

The Commission appears to suggest that RTOs would provide a new service for "potentially" new customers.¹³ But customers who presently pay pancaked transmission rates in order to traverse multiple transmission systems have been paying, and will continue to pay, rates based on the applicable transmission provider's revenue requirement. Most utilities historically have used the straight-line depreciation method to develop their wholesale transmission rates, which recovers costs based on the remaining plant balance of the transmission system. Thus, existing customers have been contributing for many years to their transmission provider's total cost of service. These same customers should not have to begin paying a transmission service rate through an RTO-administered tariff based on the undepreciated costs of the same facilities historically used to provide transmission service to these same customers.

In issuing Order 2000, the Commission did not repudiate its long-held policy with respect to transmission pricing (i.e., that "transmission prices must be based on the costs of the transmission service provided.")¹⁴ Switching to a levelized charge based on the original plant cost after the facilities already have been substantially depreciated overstates the transmission owners' revenue requirement, because it allows the owner to recover the same depreciation expense twice plus an additional return on capital. This approach - to the extent permitted by Order 2000 - is fundamentally inconsistent with the Commission Transmission Policy Statement and is unjust and unreasonable.

The potential conversion of transmission customers to RTO service is not materially different from a ratemaking perspective than the conversion of customers to individual utility open access tariffs following the issuance of Order No. 888. Order No. 888 reinforced the Transmission Policy Statement by requiring that new open access tariff filings conform to the traditional revenue requirement,¹⁵ which "has been measured by embedded (depreciated original) cost." ¹⁶ Transmission owners should not be permitted to avoid the "depreciated original cost" measurement merely by switching to a levelized rate and having future transmission services administered by an RTO.

Finally, Order 2000 recognizes that allowing levelized rates could raise RTO transmission rates in the short-term. The use of a net, depreciated plant levelized rate would mitigate, if not eliminate, any concern about economic harm resulting from a transition from one pricing approach to another.
1. EPSA is the national trade association representing competitive power suppliers active in U.S. and global power markets. EPSA's members, which include power generators, power marketers and suppliers of goods and services to the electric power supply industry, share a commitment to bring the benefits of competition to all electric customers. Using a broad spectrum of fossil-fuel and renewable technologies, EPSA's members generate reliable, competitively priced electricity, steam and other forms of useful energy from environmentally-responsible facilities. The comments contained in this filing represent the position of EPSA as an organization, but not necessarily the view of any particular member with respect to any issue.

2. Regional Transmission Organizations, Order 2000, 89 FERC 61,285 (1999) ("Order 2000").

3. As reflected in EPSA's July 27, 1999 Initial Comments and October 6, 1999 Reply Comments, however, EPSA would have preferred the Commission to focus its time and resources on promoting full comparability within the electric industry by requiring all transmission users, including transmission uses to serve native load customers, to procure transmission services at the same rates, terms and conditions and under the same open access transmission tariff. Only full comparability will assure that all customers in all states receive the same quality of service. Without full comparability, individual utilities in certain states will retain the opportunity and incentive to disadvantage other market participants through discriminatory reservation and use of transmission capacity.

4. Initial Comments at 44.

5. Initial Comments at 43-47.

6. Order 2000, mimeo at 330 (emphasis added).

7. As discussed below, however, interconnection service should be separate from transmission service.

8. Order 2000, mimeo at 331.

9. Order 2000, mimeo at 569-70

10. Id at 570.

11. Id.

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