In an order issued February 19, 2009, the Federal Energy Regulatory Commission ("Commission" or "FERC") opened the door to new financial arrangements for merchant transmission projects. In a departure from prior precedent, FERC (a) permitted two project developers to presubscribe a substantial portion of the project capacity to anchor customers before holding open season auctions to allocate the rest; and (b) replaced its ten-factor test for authorizing negotiated, rather than cost-based, rates with a simpler, flexible, four-factor test. These projects were touted as necessary to help deliver energy from wind power projects to the Southwest electric markets. In the order, the Commission applied the new test to merchant transmission projects that proposed delivery of renewable energy projects, however, the test is equally applicable to all merchant transmission projects. The order is particularly important given the need for substantial transmission system investment, including investment to tap additional new renewable resources in areas that can support their development, but that are not located near load centers. Project investors and lenders will find the executive summary and analysis in the full article of interest.

The Projects

Chinook Power Transmission, LLC ("Chinook"), a merchant transmission project developer, proposed the development of a 1,000-mile, 500 kV high-voltage direct current ("DC") transmission line from Montana to Nevada. Zephyr Power Transmission, LLC ("Zephyr"), also a merchant transmission project developer, proposed the development of an 1,100-mile, 500 kV high-voltage DC transmission line from Wyoming to Nevada. Each of the proposed lines is expected to be in service in 2014 and will deliver approximately 3,000 MW of generation to the southwest United States. Neither Chinook nor Zephyr will have captive ratepayers. These proposed lines might help southwestern states meet renewable portfolio standards by delivering energy from wind projects in Montana and Wyoming to load centers in the Southwest.

Presubscription with Anchor Customers

In last week's order, FERC authorized Chinook and Zephyr to charge negotiated rates for proposed merchant transmission projects that will presubscribe fifty percent of the projects' capacity to anchor customers. Prior to this decision, the Commission had required each project developer to hold an open season to auction all of its project's initial capacity. The order provides merchant transmission developers more flexibility in solving a financing dilemma that has plagued projects — fulfilling the need to obtain commercial support from potential customers as early as possible despite the hesitancy of generators and purchasers to support new transmission projects before they acquire demonstrable commercial support. Commissioner Spitzer succinctly summarized the virtues of the Commission's authorization:

The Gordian Knot of who goes first is resolved in this case by simultaneity. [Chinook] and [Zephyr] propose to resolve the "chicken and egg" problem by signing-up "anchor customers" for a portion of the new capacity and holding an open season for the remainder. The "anchor customers" will assure commercial viability of the project while the open season affords non-party developers a fair shot at obtaining capacity. And all of the investment is recovered under a merchant-based rate design so captive customers will not be stuck with any costs if the projects ultimately do not go forward. This win-win approach is an elegant solution and I support the Order.

Chinook and Zephyr each has entered into agreements with a wind generation developer that will share the initial development costs (including costs of permitting, siting, the Western Electricity Coordinating Council's path rating, and other development activities) and become an "anchor customer" conditioned on the negotiation of a precedent agreement at arms' length. Chinook and Zephyr told the Commission they would need to presubscribe fifty percent of the capacity to their anchor customers to achieve commercial viability. They proposed that the rest of the capacity be allocated in an open season auction. Each anchor customer's capacity would be guaranteed in that it would not be subject to pro-ration if open season bids for capacity exceed available capacity. In approving the proposals, the Commission noted that "the financial commitments made by anchor customers prior to an open season provide crucial early support and certainty to merchant transmission developers, which enables them to gain the critical mass necessary to develop these projects."

The Four-Factor Test

In the order, the Commission also introduced a four-factor analysis which will replace the ten-factor analysis the Commission has applied to requests for negotiated transmission rate authority for several years. The four factors are:

a) The justness and reasonableness of rates — the Commission will consider whether the merchant transmission owner has assumed the full market risk for the cost of constructing a particular transmission project and is not building within the footprint of its own (or an affiliate's) traditionally regulated transmission system; whether the merchant transmission owner or an affiliate already owns transmission facilities in the particular region of the project; what alternatives customers have; whether the merchant transmission owner is capable of erecting any barriers to entry among competitors; and whether the merchant transmission owner would have any incentive to withhold capacity.

b) The potential for undue discrimination — the Commission will consider the terms and conditions of a merchant transmission developer's open season and its Open Access Transmission Tariff commitments (or in the regional transmission operator ("RTO") or independent system operator ("ISO") context, its commitment to turn operational control over to the RTO or ISO).

c) The potential for undue preference, including affiliate preference and affiliate concerns — the Commission will review the proposed project to identify and evaluate situations where the merchant transmission owner is affiliated with either an anchor customer, participants in the open season, and/or customers that subsequently take service on the merchant line.

d) Regional reliability and operational efficiency requirements — the Commission will consider whether the merchant transmission developer turns over operational control to the RTO or ISO, if the project is located in or adjacent to an RTO/ISO. Further, merchant transmission developers will be required to comport with all applicable requirements of the North American Electric Reliability Corporation and any regional reliability council.

The Commission invites new proposals. The Commission indicated it will consider proposals to allocate all or a portion of initial capacity outside of an open season on a case-by-case basis. Further, the Commission did not rule out scenarios where the anchor customer is an affiliate — so long as the transmission developer can demonstrate that there was no undue preference afforded the affiliated anchor customer. Entities considering investing in merchant transmission projects now have a broader range of financing options that may be available pursuant to the order. Further, Commissioner Kelly's comments suggest interest in considering flexibility for future projects: "This finding represents a significant step in the evolution of our merchant transmission policy....This order marks the initial phase of that process of change but by no means the last." Stay tuned.

Follow this link for additional information: