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<title>April 2004: Grid Poker: Tipped Hand?</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p><b><u><br>
</u></b><u><b>April 2004</b></u></p>
<p align="center"><font size="6"><b>Grid Poker: Tipped Hand?</b></font></p>
<p><strong>by Roger Feldman -- Bingham, Dana L.L.P.<br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2</em>004/05/03)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
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<p>If the game of grid poker is to swing toward T&D system enhancement and
smart systems management, as suggested last month, an important driver will
be FERC’s handling of the facility interconnection rules.<br>
<br>
While the small generator rules have been mired in controversy, the large
generator interconnection rules have moved forward, and give some indication
of FERC’s thinking about how the post-SMD world of what might be termed
“regional guided democracy” will work.<br>
<br>
One can only extrapolate how the simultaneously re-regulating and RTO
hardening world will treat the potential of near-term distributed energy as
a substitute for new substantial wires expenditures. Did FERC tip its grid
poker hand?<br>
<br>
The interconnection rules as initially finalized by FERC in Order No.
2003 filled a gap in the implementation of Order 888 open access principles,
by standardizing the scope of timing of the interconnection process, in a
way meant to correct interconnection abuses of the past.<br>
<br>
Customers clearly were assigned the costs of interconnection on their
side of the interconnection and for distribution system upgrades. As to
resulting required utility network upgrades, several issues remained to be
resolved, notably: initial and ultimate costs of network upgrades on the
transmission side of the interconnection and pricing of service in cases
where networks were utility or RTO-controlled.<br>
<br>
FERC’s original resolution of these issues was further clarified under
Order No. 2003-A, which appeared at the beginning of March. The rules now
work essentially as follows.<br>
<br>
The basic principle is that while newly interconnected customers must pay
up front for transmission side system improvement, they will be reimbursed
(with interest) in the form of credits for transmission service received
over a 5-year period.<br>
<br>
However, where the transmission provider is an independent regional grid
operator (i.e., transmission facilities have been turned over to it),
“participant funding” may be proposed pursuant to criteria proposed by the
RTOs. Under “participant funding,” the interconnecting party is not
reimbursed by the transmission system provider, but those who benefit from a
project are assigned to ultimately pay for it. The theory is independent
regional providers do not have the incentive to discriminate against
unaffiliated generators on the systems which a non-disaggregated utility
system might have (of recent treatment of rollover contracts by the Southern
Company rejected by FERC). The possibility of RTO transmission providers
giving customers congestion rights in exchange for direct cost assignment
was created.</p>
<p>Order 2003-A was designed to clarify important details of how this
framework would operate, in terms of “how much is paid for what;” the
crediting mechanism, and the pricing of the service.</p>
<p>It was made clear that transmission providers will no longer have to
provide credits for all of the transmission services provided to an
interconnecting party— just those specifically related to the provision of
service for the interconnecting plant.</p>
<p>Second, after a newly interconnected plant has received five years of
transmission credits, the transmission provider may choose between providing
an upfront lump sum payment or continued runoff of its credits obligation to
the interconnecting party until the balance is zero.</p>
<p>FERC’s existing “higher of” pricing policy applies to interconnection
necessitated upgrades, i.e., the utility system provider may charge the
higher of the incremental cost of improvement or the average embedded cost
rate to customers of the entire system, inclusive of the upgrades (which
presumably would be reduced by the upgrade).</p>
<p>FERC wanted to make clear that native load and current customers are not
being called upon to subsidize merchant generation instigated network
upgrades. This approach also precludes double payment for transmission
upgrades by interconnected generators.</p>
<p>On the face of it, the implications for future rules affecting
distributed energy development, including small generator interconnection,
would appear to be the following:</p>
<p>• support for non-discriminatory regularized access regardless of power
source<br>
• full and fair allocation of costs for interconnection and related
improvements among the parties<br>
• no special benefits for multiple interconnections with a single system<br>
• acceptance of some time lag caused by the process and by cost
identification issues<br>
• significant deference to cost allocation decisions made by RTOs in the
course of system management.</p>
<p>It remains to be seen whether these FERC slants, taken together, add up to a
program sufficient to stimulate creativity in the nascent distributed energy
field. FERC’s approach would not fully value the external benefits of
distributed energy strategies to native load, or reward third party
innovations to improve grid operations.<br>
<br>
It could result in the fragmentation of distributed energy regulation in
different regions of the country.<br>
<br>
Consequently, it remains to be seen whether FERC’s defined approach to
large facility interconnection reshuffles the grid poker deck for
distributed and renewable generation, or just provides signals so that
individual players will know whether to hold or fold their hands —
regardless of the impacts on the electric utility system for its ultimate
consumers.<br>
<br>
The wires game is a rough one.</p>
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<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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