United States: FERC Proposes Reforms To Its Large Generator Interconnection Procedures And Announces Review Of Its Market Power Analysis

In the last quarter of 2016, FERC announced two proceedings that have the potential to affect the future development and financing of, and investment in, electric power projects in the United States. The first proceeding is a proposed rulemaking concerning revisions to the interconnection procedures for large generating facilities, and the second is a notice of inquiry concerning FERC's intention to review the way it analyzes market power when it considers applications submitted under Sections 203 and 205 of the Federal Power Act (FPA).

FERC's Interconnection NOPR

In December, FERC issued a Notice of Proposed Rulemaking (NOPR) proposing to revise its interconnection regulations, the pro forma Large Generator Interconnection Procedures (LGIP) and the pro forma Large Generator Interconnection Agreement (LGIA) that establish the terms and conditions under which Large Generating Facilities, which are generating facilities having a capacity of more than 20 MW, are interconnected to the interstate transmission grid.53

Revisions to FERC's regulations resulting from the Interconnection NOPR could make it easier for Large Generating Facilities to apply for and obtain interconnection to the grid.

The Interconnection NOPR is the result of a 2015 petition for rulemaking submitted by the American Wind Energy Association (AWEA) requesting changes to FERC's interconnection rules and procedures. AWEA argued that FERC's current interconnection process often results in "complex, time consuming technical disputes about... interconnection feasibility, cost and cost responsibility" with delays that "undermine the ability of new generators to compete."

In the Interconnection NOPR, FERC found that the current process for interconnecting Large Generating Facilities can create uncertainty for interconnection customers with respect to both the costs and timing of interconnection. FERC also found that the process for a transmission provider, such as a regional transmission organization (RTO) or independent system operator (ISO), to conduct required interconnection studies may result in uncertainty and inaccurate information. Finally, FERC found that the potential for discriminatory interconnection processes exists as new technologies, such as electricity storage technologies, enter the power generation sphere.

FERC's Interconnection NOPR proposes four reforms to improve certainty in the interconnection process: specifically, FERC would revise the pro forma LGIP to require transmission providers that conduct cluster studies to conduct restudies on a scheduled, periodic basis, such as annually, semi-annually, quarterly or a set number of days after completion of a cluster study; remove from the pro forma LGIA the limitation that interconnection customers may only exercise the option to build transmission providers' interconnection facilities and stand-alone network upgrades if the transmission owner cannot meet the dates proposed by the interconnection customer; modify the pro forma LGIA to require mutual agreement between the transmission owner (generally a public utility that is a member of the RTO or ISO) and interconnection customer to opt to initially self-fund the costs of the construction of network upgrades; and require that RTOs and ISOs establish dispute resolution procedures for interconnection disputes.

FERC also proposes five reforms to improve transparency in the interconnection process: specifically, FERC would require transmission providers to outline and make public a method for determining contingent facilities in their LGIPs and LGIAs based upon specified guiding principles; require transmission providers to list in their LGIPs and on their Open Access Same-Time Information System (OASIS) sites the specific study processes and assumptions for forming the networking models used for interconnection studies; require congestion and curtailment information to be posted in one location on each transmission provider's OASIS site; revise the definition of "Generating Facility" in the pro forma LGIP and LGIA to explicitly include electric storage resources; and create a system of reporting requirements for aggregate interconnection study performance.

In the Interconnection NOPR, FERC also proposes five reforms to enhance interconnection processes by making use of underutilized existing interconnections: specifically, FERC would allow interconnection customers to limit their requested level of interconnection service below their generating facility capacity; require transmission providers to allow for provisional agreements so that interconnection customers can operate on a limited basis before completing the full interconnection process; require transmission providers to create a process for interconnection customers to utilize surplus interconnection service at existing interconnection points; require transmission providers to establish a separate procedure to allow transmission providers to assess and, if necessary, study an interconnection customer's technology changes, such as incorporation of a newer turbine model, without a change to the interconnection customer's queue position; and require transmission providers to evaluate their methods for modeling electric storage resources for interconnection studies and report to FERC why and how their existing practices are or are not sufficient.

FERC also is seeking comment on whether any of its proposed reforms also should be applied to small generating facilities (generating facilities having a generating capacity of less than 20 MW) and implemented in the pro forma Small Generator Interconnection Procedures (SGIP) and pro forma Small Generator Interconnection Agreement (SGIA).

Comments on the Interconnection NOPR must be filed with FERC no later than March 14, 2017.

FERC's Market Power NOI

At the end of September, FERC issued a Notice of Inquiry (NOI) announcing its intention to consider whether and, if so, how it should revise its current approach to identifying and assessing market power in its review of utility mergers and other transactions under Section 203 of the Federal Power Act (FPA) and applications for market-based rate authority under Section 205 of the FPA.54 Revisions to FERC's regulations resulting from the Market Power NOI may require applicants for market-based rate authority, and applicants for approval of public utility mergers and other transactions subject to FERC jurisdiction to provide additional information and analyses in their applications.

Section 203 of the FPA

Section 203 of the FPA requires public utilities to seek prior authorization for public utility mergers and for the disposition, consolidation, and acquisition of facilities subject to FERC jurisdiction. FERC authorizes such transactions upon a finding that the proposed transaction is "consistent with the public interest" and "will not result in cross-subsidization of a non- utility associate company or the pledge or encumbrance of utility assets for the benefit of an associate company." In determining whether a proposed transaction is "consistent with the public interest," FERC generally considers whether the proposed transaction will have an adverse effect on competition in the relevant market(s), an adverse effect on rates and an adverse effect on regulation.

With respect to competition, applicants seeking Section 203 authorization can demonstrate that the transaction does not result in any increase in the amount of generation capacity owned or controlled by it and its affiliates in the relevant markets, or the transaction results in a "de minimis" change in its ownership or control of generation in the relevant markets. An applicant that cannot make either demonstration must submit a Competitive Analysis Screen with its application.

Section 205 of the FPA

Section 205 of the FPA requires that rates charged by public utilities must be "just and reasonable." Historically, "just and reasonable" rates meant rates that were cost-based. However, FERC will authorize sales of electric energy, capacity and ancillary services at negotiated, "market-based" rates under Section 205 of the FPA if the applicant shows that it and its affiliates do not have, or have adequately mitigated, horizontal and vertical market power in the relevant market(s). For purposes of making this showing, FERC has established two indicative screens. The first screen, the wholesale market share screen, measures whether an applicant has a dominant position in the relevant market by analyzing the amount of uncommitted capacity (MW) it owns or controls, relative to the uncommitted capacity in the entire market. If an applicant's share of the relevant market is less than 20 percent during all seasons, it passes the market share screen. The second screen, the pivotal supplier screen, evaluates an applicant's potential to exercise market power based on its uncommitted capacity at the time of annual peak demand in the relevant market. An applicant will pass this screen if its wholesale load is less than the uncommitted capacity of its competing suppliers in the relevant market.

In the NOI, FERC indicated that it is considering whether it should establish a simplified analysis for certain transactions, subject to Section 203 of the FPA transactions that are unlikely to raise market power concerns; add a supply curve analysis to its analysis of transactions under Section 203 of the FPA evaluations; improve its single pivotal supplier analysis in reviewing market-based rate applications and require that a similar pivotal supplier analysis be included in Section 203 applications; add a market share analysis to review of Section 203 transactions; modify how capacity associated with long- term power purchase agreements should be attributed to Section 203 transactions; and require submission of applicant merger-related documents.

FERC also indicated that it is considering whether there are existing blanket authorizations granted under Section 203 of the FPA that may be overly broad or otherwise no longer appropriate, and whether there are classes of transactions subject to Section 203 of the FPA for which further blanket authorizations or expedited review would be appropriate. Comments on the NOI were filed in late November. Among those providing comments were the US Department of Justice and the Federal Trade Commission (DOJ/FTC) and a group of Market Power Experts who have submitted market power studies and testimony in proceedings before FERC and DOJ's Antitrust Division.

DOJ/FTC recommended that FERC add a supply curve analysis to its examination of mergers under Section 203 of the FPA; account for transmission constraints when defining a geographic market to assess market power; make its Section 205 market power analysis under Section 205 of the FPA as consistent as possible with its Section 203 competitive effects analysis under Section 203 of the FPA, particularly with respect to defining geographic markets; account for incremental acquisitions in its merger analysis under Section 203 of the FPA; take a more flexible approach to assessing the competitive effects of power purchase agreements (PPAs); and require that applicants under Section 203 submit certain merger-related documents after ensuring that it can protect confidential information from public disclosure.

The experts' comments generally were opposed to the comments submitted by DOJ/FTC. The Experts observed that the Market Power NOI "contemplates analyses that, at times have been part of the antitrust review process at DOJ," and recommended that FERC not adopt such analyses, because they are the result of the different laws enforced by FERC and DOJ, which have different standards and burdens of proof. Specifically, the experts recommended that FERC not adopt an additional market share screen for applications under Section 203 of the FPA because the current market share screens utilized by FERC are economically superior; FERC not adopt a supply curve analysis requirement because it is too simplistic to provide probative value; FERC not adopt a pivotal supplier analysis for Section 203 applications because the existing screens are superior; FERC not change its existing policy under which existing long-term PPAs in effect prior to a transaction are assigned to the buyer pre-transaction, even if the buyer is then entering into a transaction to buy the underlying asset; and not require submission of merger-related documents because the Commission already has superior information, and the merger-related documents have not been instrumental to electric industry market power analyses at DOJ.

A group of Fund Management Parties also submitted comments in response to the NOI, arguing that the NOI "proposes to impose substantial burdens by needlessly modifying what are well-established, well-understood policies and processes." The Fund Management Parties also argued that FERC had not demonstrated any need to change its currently effective market power analysis and asked FERC not to formally propose or consider any of the proposals discussed in the NOI without a formal rulemaking proceeding.

After considering the comments submitted in response to the NOI, FERC may decide to propose specific revisions to its regulations through a NOPR, issue a statement of policy or take no further action.

Footnotes

53. Reform of Generator Interconnection Procedures and Agreements, Notice of Proposed Rulemaking, Docket No. RM17-8-000, 157 FERC ¶ 61,212 (Dec. 15, 2016) (the "Interconnection NOPR").

54. Modifications to Commission Requirements for Review of Transactions Under Section 203 of the Federal Power Act and Market-Based Rate Applications Under Section 205 of the Federal Power Act, Notice of Inquiry, Docket No. RM16-21-000, 156 FERC ¶ 61,214 (Sept. 22, 2016).

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