Dive Brief:
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Four major grid operators may have unjust rules concerning transmission owners’ right to pay for and earn a profit on network upgrades needed to connect generation and energy storage to the grid, according to the Federal Energy Regulatory Commission.
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The rules for “initial funding” may increase interconnection costs without corresponding improvements to that service, may unjustifiably block interconnection and may allow transmission owners to discriminate in favor of themselves and their affiliates, FERC said in a “show cause” order issued on Thursday.
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FERC gave the Midcontinent Independent System Operator, the PJM Interconnection, the Southwest Power Pool and ISO New England 90 days to show why their initial funding rules are just — or to describe what changes would be needed to make them allowable.
Dive Insight:
FERC’s proceeding on initial funding is in response to recent litigation and a desire to set a consistent policy across grid operators, the agency said in its order.
There is evidence that initial funding increases costs when transmission owners charge interconnection customers a rate of return that is higher than what they would incur to finance the network upgrade costs themselves, FERC said. Also, project developers have said that requiring interconnection customers to post security on the undepreciated balance of the network upgrade increases costs, according to the agency.
In agency proceedings, FERC has been told that network upgrade costs have more than doubled in some cases for companies such as RWE Renewables, NextEra Energy Resources and EDF Renewables when the transmission owners pay for them, according to the agency. FERC said it has been told that in some cases, the increased costs lead to canceled projects.
FERC said initial funding may lead to discrimination if transmission-owning utilities don’t self-fund projects for affiliated companies.
“We are concerned that if the [transmission owner] initial funding option can result in higher costs to the interconnection customer through, for example, higher financing costs, a transmission owner could strategically increase costs for interconnection customers by selecting [transmission owner] initial funding for network upgrades assigned to non-affiliate interconnection customers, potentially causing them to withdraw from the queue,” FERC said.
Also, the transmission owners’ risks related to owning network upgrade projects may already be paid for through their FERC-approved return on equity, making extra returns via initial funding mechanisms unjust, according to the agency.
FERC asked ISO-NE, MISO, PJM and SPP to respond to a series of questions, including whether their rules had protections to prevent transmission owners from boosting their rate base by unjustly increasing network upgrade costs paid for through initial funding.
FERC also asked the grid operators to answer questions about potential discrimination.
“Please explain whether transmission owners have an economic incentive to engage in undue discrimination or preferential treatment by unilaterally electing [transmission owner] initial funding for non-affiliated interconnection customers and by allowing generator upfront funding for affiliated interconnection customers,” FERC said. “Please explain the economic theory and logic behind your response.”
FERC asked the grid operators to propose new network upgrade funding rates that could be used if the agency rejects the initial funding paradigm but finds that transmission owners face uncompensated risks from the upgrade projects.
