Regulatory and Transmission Issues

1. Regulatory and Transmission Issues Jason Johns Stoel Rives LLP Portland, Oregon jajohns@stoel.com

2. Agenda • Regulatory Overview • Interconnection • Transmission Service • Reliability Standards

3. Basics of Jurisdiction • Where is the line between FERC and state regulation? • Generally, FERC has jurisdiction over • Wholesale sales and transmission of electricity in interstate commerce • Sales of jurisdictional facilities • Most interconnections to the transmission system • See Section 201 of the Federal Power Act • Generally, state utility commissions have jurisdiction over utilities’ retail services (i.e., sales directly to the consumer) and most QF sales and interconnections

4. Public Utility Holding Company Acts PUHCA 1935 • Enacted in wake of market crash of 1929 • Public utilities • Heavily leveraged • Complex corporate structures • Dabbled (and more) in non-utility businesses • 73% of IOU industry controlled by 8 utilities • Requirements • SEC approval before engaging in non-utility industries • SEC given authority to simplify corporate structures • Prohibited sales at a profit between affiliates

5. Public Utility Holding Company Acts PUHCA 2005 • Created by Energy Policy Act of 2005 • Severely weakened Holding Company oversight • Requirements – FERC may . . . • Holding Company access books and records • review allocation of certain non-power goods and services among affiliates within a “holding company” structure • Exemptions to PUHCA 2005 • Most common is holding companies solely with respect to exempt wholesale generators (EWGs) and qualifying facilities (QFs) and foreign utility companies (FUCOs)

6. QF Status under Public Utilities Regulatory Policy Act (PURPA) • QF status eligibility • Small power production facilities • Size limitations (80 MW) • Fuel use restrictions (75% input from renewables, biomass, waste) • Cogeneration (produces energy and useful thermal output) • The benefits of QF status • The QF is exempt from some provisions of the FPA, including for sales of energy and capacity from QFs 20 MW and smaller • The holding company of the QF may be exempt from PUHCA 2005 • Must-buy obligation under PURPA • How does a project become a QF? • Self-certification is most common (unreviewed) • FERC certification

7. EWG Status • Requirements to be an EWG • There are no fuel use and size limitations • BUT there is an “exclusivity” requirement • Exclusively in the business of owning/operating electric generation for purpose of making wholesale sales • There is a hook • Benefits of being an EWG • The holding company of an EWG may be exempt from PUHCA 2005 • BUT there are NO exemptions from FPA • Filing Requirement • Self-certification • Temporarily effective upon filing; effective 60 days later

8. What Regulations Govern the Developer’s Sale of Output? • Wholesale sales: FPA section 205 rate regulation by FERC • Developer must have prior approval under Section 205 to make wholesale sales • Market-based rate authority • How to get it? • You either have no market power, or • You’ve mitigated market power • How to keep it? • Change in Status filings • Retail sales and PURPA sales: state regulated; statutes vary by state • Net metering is considered a retail sale

9. What Regulations Govern the Developer’s Sale of its Assets? • Generally, sales of FERC jurisdictional assets require prior approval under Section 203 of FPA • Examples: • Sales of existing generating facility • Sale of Project LLC with jurisdictional assets • Sale of ownership interests in Project LLC

10. Section 203(a)(1) “No public utility shall, without first having secured an order of the Commission authorizing it to do so: • Sell, lease, or otherwise dispose of the whole of its facilities subject to the jurisdiction of the Commission, or any part thereof of a value in excess of $10,000,000; • Merge or consolidate, directly or indirectly, such facilities or any part thereof with those of any other person, by any means whatsoever; • Purchase, acquire, or take any security with a value in excess of $10,000,000 of any other public utility; or • Purchase, lease or otherwise acquire an existing generation facility—(i) that has a value in excess of $10,000,000; and (ii) that is used for interstate wholesale sales and over which the Commission has jurisdiction for ratemaking purposes.”

11. Section 203(a)(2) “No holding company in a holding company system that includes a transmitting utility or an electric utility shall purchase, acquire, or take any security with a value in excess of $10,000,000 of, or, by any means whatsoever, directly or indirectly, merge or consolidate with, a transmitting utility, or an electric utility company, or a holding company in a holding company system that includes a transmitting utility, or an electric utility company, with a value in excess of $10,000,000 without first having secured an order of the Commission authorizing it do so.” 

12. Interconnection • Which interconnection procedures apply? • First, you need to determine if your interconnection is subject to state or federal jurisdiction • If Federal, the procedures that apply depend on the facility’s size • Small Generator = ≤ 20 MW • Large Generator = > 20 MW

13. Interconnection Services • What types of interconnection service are available? • Energy Resource service = Allows generator to connect to the transmission system and be eligible to deliver electric output using existing firm or non-firm transmission on an “as available” basis. • Network service = Allows generator to connect to the transmission system: • In a manner comparable to that which the TP integrates its own generating facilities to serve native load customers; or • In an RTO or ISO with market-based congestion management, in the same manner as all other Network Resources. • Is there a difference between the two?

14. Interconnection Services • How does the interconnection process proceed? • Generally, interconnection requests are processed and studied according to “first come, first served” • Request establishes the queue position • A deposit must accompany the interconnection request and all interconnection study agreements • Choose a type of interconnection service, then continue with the studies • As a project evolves may a developer modify its interconnection request?

15. Interconnection Studies • Which interconnection studies are performed and what will they tell me? • Feasibility Study – gives the developer a rough idea of the equipment required to interconnect • System Impact Study – analyzes a facility’s effect on the transmission system and gives a rough cost estimate • Facilities Study – provides the closest estimate of the cost required to interconnect a facility (+/- 20%)

16. Cost Allocation • The ELEPHANT in the room • The test – “but-for” • Pro Forma approach • Upgrades divided into two categories: • Direct Assignment Facilities • Network Upgrades • Customer reimburses Transmission Provider for all upgrades • Customer receives transmission credits equal to actual cost of Network Upgrades • Limited to specific generating facility • 5-year window

17. Other Approaches to Cost Allocation • Midwest ISO • Below 345 kV = no reimbursement • 345 kV and above = 10% reimbursement • MVP category • PJM Interconnection • No reimbursement • SPP • Reimbursement based on all uses of incremental capacity, not just the customer’s use • Priority Projects category

18. Interconnection Queue Reform • December 2007 • FERC holds technical conference regarding queue management. • Serial study practices being slowed by new entry into queues & speed at which projects could develop. • Interconnection delays causing trouble in meeting RPS obligations. • March 2008 • Order issued as a result of technical conference. • FERC requires RTOs/ISOs to file status reports detailing the condition of their respective queues. • Identifies three needed changes: • Increased requirements for entering the queue. • Eliminate the Feasibility Study. • First-ready, first-served vs. first-come, first-served.

19. Queue Backlogs • California ISO • 361 pending interconnection requests (105,000 MW). • 68,000 MW of renewable energy. • CAISO’s historic peak demand: 50,270 MW. • Southwest Power Pool • 255 pending interconnection requests (57,000 MW). • 50,000 MW related to wind generation (176/196 requests over two years). • Midwest ISO • 348 pending interconnection requests (80,000 MW). • 65,000 MW related to wind generation. • Under then-current processes, could not clear queue until 2050.

20. The Results • California ISO • Clustering with queue windows (two per year). • 2 studies (Phase I and Phase II). • Increased, non-refundable financial requirements. • Southwest Power Pool • 3 queues, your choice (IFS, PISIS, DISIS). • Suspension only allowed for 18 months after Effective Date. • Shared Network Upgrades will be built upon execution. • Midwest ISO • Milestones provide “first-ready, first-to-proceed.” • No suspension for economic reasons (force majeure only). • Once a GIA is signed, Network Upgrades will be built. • Deposits that vary based on generator size.

21. Negotiation of the Interconnection Agreement • Under FERC’s LGIA, many terms are standard and changes must be approved by FERC • Negotiations focus on: • Milestones (schedule and payments) • Cost allocation • Operational Characteristics • Facilitating use of one interconnection capacity by more than one project or owner • Phasing • Joint Ownership Agreements • Amendment or Modification of LGIAs

22. Interconnection Operations • FERC Order 661 excused wind developers from certain technical requirements • Low-voltage ride through = can the facility remain online during a system disturbance? • Phased in • Reactive Power • “Froth on the beer” Really?!? • Provides magnetic capability • Maintain power factor • SIS must show need

23. Transmission Service • The facility is already interconnected, so what’s the point of transmission service? • Interconnection service provides no delivery rights • Unless a purchaser is taking power at the busbar, you will need to purchase transmission service • Transmission service provided under OATT • Where to reserve and buy transmission service? OASIS • What types of service are available? • Point-to-point vs. Network • Short-term vs. Long-term • Firm vs. Non-firm • Conditional firm

24. Transmission Service • Transmission service is... • Non-discriminatory • Non-preferential • Available to any eligible customer • Types of transmission providers • RTOs/ISOs (independent; no pancaking) • Integrated utilities (merchant & transmission houses) • Quasi-jurisdictional by choice(e.g., BPA, TVA, WAPA) • Non-jurisdictional And...

25. Transmission Service • Interconnection owners/operators! • Interconnection lines are subject to open access • FPA Section 205 requires FERC acceptance of transmission rate prior to service commencing • $0 service is still a rate • Joint Ownership Agreements and Facilities Use Agreements considered transmission service • May be required to file an OATT

26. Transmission Service • Obtaining service • Process is similar to interconnection • Make a request on OASIS + deposit • Transmission Provider studies request • If no upgrades needed, TSA signed within 30 days • Transmission Provider may require security (discretionary) • If upgrades are needed, transmission developer determines incremental rate (based on requested service term) • Compares it to embedded rate • Charges higher of the two (the “higher of” rate) • Customer signs TSA and is bound for initial term • Cannot terminate • Only relief is to resell

27. Ancillary Services • Purpose = products designed to maintain reliability on the grid • Types of Ancillary Services • Example – Imbalance Service • When do imbalances occur? • When the hourly generation as scheduled is different than the actual hourly generation delivered from a facility • Someone has to make up the difference • How are imbalance penalties assessed? • The charges are tiered, i.e., the larger the deviation from your schedule, the larger the charge • Variable generators are exempt from the most expensive tier • Variable generators are allowed to net imbalances

28. Intra-Hour Wind Integration • What is intra-hour wind integration service? • Some transmission providers claim that intra-hour variations in output of intermittent resources impose added costs on the transmission system operator • Resource costs • O&M costs • Wildlife costs (spilling water kills fish) • Integration service follows variable resources with dispatchable facilities in order to make up moment-to-moment differences in generation output within the scheduling hour • Example: BPA

29. Reliability Standards • Previously voluntary; now mandatory (2006) • Most common category for developers • Generator Owner • Generator Operator • Increasing popularity – Transmission Owner/Operator • Who oversees compliance? • North American Electricity Reliability Corporation (NERC) • NERC delegates to regional entities

30. Reliability(cont.) • Standards of applicability • Standard = users, owners, and operators of the bulk electric system who have a material impact on the bulk power system • “Bulk electric system” = electric generation resources, transmission lines, interconnections with neighboring systems, and associated equipment, generally operated at 100 kV or higher • Who is subject to registration? • Single unit 20 MVA; multiple units 75 MVA • QFs are not exempt • There are also catch-alls! (material to reliability)

31. Put It All Together A developer is building a new wind power generation facility nearby an existing affiliated facility.  The developer plans to interconnect its new project at the project substation for the existing facility, and then transmit to the interstate transmission grid using the existing interconnection line.  The developer has not decided how to sell the output from its new facility, although the developer is considering either a busbar PURPA sale to the interconnection provider or a negotiated sale to a utility at a distant delivery point (assume more than one utility system away).  In addition, the developer has not identified a turbine supplier and likely will not do so until late in the interconnection process.  When the turbine supplier is finalized, the developer wishes to adjust its project size (either up or down) to match the economics afforded by the turbine supply arrangement.