FERC Proposes Reforms to Transmission Planning and Cost Allocation; Will Interconnection Reform be Next?

At its April meeting, the Federal Energy Regulatory Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR) that would, if adopted, result in significant reforms to the planning of the nation’s transmission system as well as the allocation of costs for new transmission projects. The NOPR is FERC’s first concrete proposal arising from an Advance Notice of Proposed Rulemaking issued last July that sought input from interested parties on a variety of reforms aimed at expanding the nation’s transmission grid to accommodate the surge of renewable generation expected in the next two decades to achieve aggressive decarbonization goals of the Biden Administration and many states. The new NOPR addresses reforms to transmission planning and cost allocation. Comments in the NOPR itself and from FERC Commissioners at April’s meeting suggest that the agency is likely to propose one or more additional rules to address, for example, reducing the nation’s substantial backlog of new generation projects awaiting interconnection to the grid.

FERC’s new NOPR represents a potentially significant step that would encourage new investment in the nation’s transmission grid. Expansion of transmission is widely viewed as a necessary precondition to meet aggressive decarbonization goals laid down by the Biden Administration, as well as many states, localities, and private actors. While the payoff is at least several years down the road, parties interested in improving the operation of the nation’s electric transmission system should pay careful attention to the new NOPR.

Key Takeaways

• Comments on the proposed rule are due 75 days from the date of its publication in the Federal Register, with reply comments due 105 days thereafter.

• The NOPR proposes several specific reforms to the transmission planning process established by earlier FERC orders, including extending the planning horizon to at least twenty years and requiring transmission planners to consider a variety of factors that might drive the need for transmission expansion.
• The NOPR also proposes reforms to the cost allocation process developed in previous FERC orders. For example, the proposal, if adopted, would increase the participation of states in cost allocation processes.
• If adopted, the rule could improve the regulatory process and result in substantial expansion of high-voltage transmission facilities, although it would take several years for the rule to show concrete results.
• The NOPR does not address the generator interconnection process or interconnection queues, which have grown increasingly congested in recent years. However, additional proposals addressing these problems are anticipated in the relatively near future.

Background and Summary of the Proposed Rule

The NOPR addresses concerns that the current transmission planning process has resulted in insufficient investment and expansion of the nation’s electric transmission system, and that substantial additions to the transmission system will be necessary to accommodate transmission demand arising from the need to interconnect substantial volumes of new renewable energy. The demand for new renewable generation is, in turn, driven by a variety of state and federal policies, as well as private sector initiatives, aimed at decarbonizing the electric grid, electrifying the transportation system, electrifying buildings, and decarbonizing other aspects of the economy.

The NOPR’s centerpiece is a proposal that transmission planning is conducted on a long-term basis, over a time horizon of at least twenty years. Planning on this time horizon is intended to better match transmission planning with the time horizon generally needed to construct new transmission and to shift transmission planning to a proactive exercise that expands transmission based on anticipated needs rather than a primarily reactive exercise responding to needs created by projects seeking interconnection to the grid.

Long-term planning would include several specific features:

• Scenario Planning: Long-term transmission plans would be based on scenario planning, with multiple scenarios used to estimate the most likely range of outcomes and to gauge the level of uncertainty of the resulting projections. At least four different scenarios would be required and planners would be required to update the long-term plan at least once every three years to account for changes in the factors used to create the scenarios.
• Factors Considered: The NOPR proposes to significantly expand the range of factors to be considered in long-term planning to better predict the need for transmission expansion. Factors to be considered include, at a minimum: (1) federal, state, and local laws affecting the energy mix; (2) federal, state, and local laws concerning decarbonization that might affect electricity demand, such as transportation and building electrification initiatives; (3) utility Integrated Resource Plans; (4) trends in technology and fuel costs that are likely to affect electricity demand; (5) resource retirements; (6) generation interconnection requests and withdrawals; and, (7) private-sector sustainability commitments and state and local government sustainability goals.
• Renewable Energy Zones: The NOPR also proposes that transmission planners identify geographic zones that have a high potential for renewable energy development based on meteorological, geophysical, and other data regarding energy potential and developer interest in and plans for investments in those zones. This information would then be incorporated into the long-term planning process, with the aim of identifying new facilities that could permit generation located in those zones to be transmitted more efficiently than if transmission expansion is planned project-by-project as a new generation seeks interconnection to the grid.
• Portfolio Planning: The NOPR would permit transmission planners to consider transmission upgrades on a portfolio basis rather than on a project-by-project basis.
• Consideration of Advanced Transmission Technology: Transmission planning would be required to consider dynamic line ratings and advanced power flow control devices as means to achieve the benefits of transmission expansion at a lower cost. Planners could also consider other transmission technologies that may provide efficiency or reliability benefits at a lower cost than traditional transmission equipment.
• Upgrades Repeatedly Identified in Interconnection Process: FERC also proposes that network upgrades that are repeatedly identified in interconnection studies–but that have not been built because generators have withdrawn their interconnection requests—be evaluated for inclusion in regional cost-sharing plans. Specifically, where the upgrade has been identified at least twice in interconnection queue cycles over the previous five years, the upgrade is for facilities at or above 200 kV and/or costs $30 million or more, and the upgrade is not being developed based on a current interconnection request, FERC would require the upgrade to be considered for selection in regional transmission planning. If selected, the project would be subject to regional cost allocation.
• Criteria for Projects Subject to Regional Cost Allocation: As part of the long-term planning process, the NOPR proposes a non-mandatory set of criteria for the selection of projects in the regional transmission planning process that would then be subject to regional cost allocation. The criteria are intended to identify regional transmission projects that would be more efficient or cost-effective than local transmission facilities that would meet the same needs. The proposed criteria are: (1) avoided or deferred reliability transmission projects and aging infrastructure replacement; (2) either reduced loss of load probability of reduced planning reserve margin; (3) production cost savings; (4) reduced transmission energy losses; (5) reduced congestion due to transmission outages; (6) mitigation of extreme events and system contingencies; (7) mitigation of weather and load uncertainty; (8) capacity cost benefits from reduced peak energy losses; (9) deferred generation capacity investments; (10) access to lower-cost generation; (11) increased competition; and (12) increased market liquidity. Transmission providers may elect to use these criteria, along with criteria that have previously been approved by the Commission.

The NOPR proposes several additional reforms related to cost allocation and related matters. These include:

• Long-Term Transmission Cost Allocation Method: To reduce controversy over the allocation of costs for regional transmission facilities, and the repeated litigation over this issue that has occurred in recent years, FERC proposes that regional transmission planning organizations establish set cost allocation methodologies rather than relying on project-by-project negotiations of cost allocation. To achieve this, FERC proposes that regional transmission providers develop and include in their tariffs either a “Long Term Transmission Cost Allocation Method,” an ex-ante method for allocating the costs of projects selected for regional development; a “State Agreement Process” that would allow the states in a transmission region to negotiate a cost allocation method for projects selected for regional development; or a combination of the two. If a Long Term Transmission Cost Allocation Method is selected, transmission providers would be required to seek the agreement of the states in the affected region on the Method, and would report to FERC if no agreement can be reached. The State Agreement Process would permit the states a limited period, such as 90 days, to agree on cost allocation. If they fail, then the project sponsor would be permitted to fall back on the ex-ante cost allocation methodology specified in its tariff.
• Cost Recovery Limited for Projects Under Construction. Since 2006, FERC has allowed transmission providers to recover costs of transmission construction as construction progresses, referred to as CWIP (“Construction Work In Progress”) accounting treatment. In the NOPR, FERC proposes to abandon this rule, so that transmission construction costs are recovered only after the transmission project is completed, referred to as AFUDC (“Allowance for Funds Used During Construction”) accounting treatment. FERC argues that this reform is necessary because the uncertainty inherent in the long-term regional planning horizon it proposes puts undue risk on ratepayers, who might be required to pay for investments in projects that turn out to be unneeded or otherwise imprudent.
• Revisions to Federal Right of First Refusal: In its last major order concerning transmission planning, 2011’s Order No. 1000, FERC eliminated the right of first refusal for incumbent transmission providers to construct regional transmission facilities, reasoning that this right created a disincentive to competition in transmission construction. However, incumbents generally retained the right of first refusal to construct transmission on their own “local” systems. Since Order No. 1000 was issued, new transmission has predominantly been built within those local systems, with little construction of regional or inter-regional projects. FERC attributes this failure, at least in part, to the perverse incentives created by the elimination of the right of first refusal for regional projects while retaining that right for local projects. FERC, therefore, proposes to permit a limited federal right of first refusal for facilities selected for regional development, conditioned on the incumbent utility permitting the new facility to be jointly owned and developed with non-incumbents. Non-incumbents could include public power agencies, independent power producers, states, and other entities not affiliated with the incumbent.
• Enhanced Transparency of Local Transmission Inputs Into Regional Planning: FERC is also concerned that regional transmission planning is based on information from individual transmission providers that is subject to little or no scrutiny. Hence, the NOPR proposes that before information from a local transmission provider is incorporated into a regional transmission planning process, it be subject to a process of review by interested parties. The process would include an “Assumptions Meeting” where the assumptions underlying the information are reviewed; a “Needs Meeting” to review the information the local transmission provider claims drives the need for transmission replacements or upgrades on its system; and, a “Solutions Meeting” where regional alternatives may be identified that can replace the local upgrades at a lower cost.
• Right-Sizing Local Replacements: FERC proposes a regional review of the local transmission provider’s proposals for all in-kind replacements of facilities 230-kV or above to identify “right-sized” regional alternatives that would provide the benefits of the in-kind replacements at a lower cost or with broader benefits.
• Inter-Regional Coordination. To enhance consideration of inter-regional transmission projects, the NOPR proposes that regional transmission planning agencies share the information developed through their respect long-term regional planning processes, and that they identify inter-regional projects that may provide cost or efficiency benefits when compared with regional projects.

Next Steps

• Although exact deadlines are not yet established, interested parties will have the opportunity to comment on the NOPR, with initial comments likely due in mid-July, with reply comments due in mid-August.

• Within the next several months, FERC may issue a Final Rule that generally follows the course laid out by the NOPR. The Final Rule may require compliance filings by transmission providers and regional planning entities, which FERC would then review and possibly reject and send back for further work. Once compliance filings are in place, they would apply to the next round of regional transmission planning. It would, in turn, likely take at least several years to construct new transmission projects identified in the new regional transmission plans. Hence, considerable time is likely to pass before a Final Rule produces tangible increases in transmission investment and construction.
• FERC previously also asked interested parties to comment on problems with the existing process for interconnecting new generations and on potential solutions. As a recent study from the Lawrence Berkeley National Laboratory demonstrates, clogged interconnection queues continue to be a serious problem. FERC is likely to issue at least one more proposed rule that would address interconnection processes, which would aim to reduce interconnection queues, speed up the processing of interconnection requests, and reduce the number of generation projects that are not constructed because of problems encountered in the interconnection process.

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