On February 19, 2009, the Federal Energy Regulatory Commission (FERC) approved negotiated rates for two transmission projects that will deliver wind-generated electricity from Montana and Wyoming to customers in the southwestern United States. Chinook Power Transmission, LLC, and Zephyr Power Transmission, LLC, 126 FERC ¶ 61,134 (2009). In the words of Acting Chairman Jon Wellinghoff, FERC's order "is one of the most significant steps this Commission has taken" toward unlocking the potential of our country's location-constrained renewable energy resources and accelerating the integration of clean, reliable, domestic energy sources into our national energy portfolio.

FERC's order is significant for two reasons. First, FERC replaced its ten-criteria test for evaluating negotiated rate authority for merchant transmission projects with a less rigid four-factor analysis. Second, by approving the use of an "anchor customer," FERC adopted a more flexible approach that will assist merchant transmission developers in overcoming challenges to securing financing.

Background.

Chinook Power Transmission, LLC (Chinook), and Zephyr Power Transmission, LLC (Zephyr), filed in Docket Nos. ER09 432 000 and ER09 433 000, respectively, applications for authorization to charge negotiated rates for transmission rights on a proposed merchant transmission project. Chinook and Zephyr are each wholly owned subsidiaries of TransCanada Corporation.

Chinook plans to build a 1,000-mile, 500 kilovolt (kV) high-voltage direct current (DC) transmission line originating near Harlowton, Montana, and terminating south of Las Vegas. Similarly, Zephyr plans to build a 1,100-mile, 500 kV high-voltage DC transmission line beginning near Medicine Bow, Wyoming, and terminating south of Las Vegas. Converter stations (which will change alternating-current (AC) electricity to direct current and back) will be located at the origination and termination points of each line, as well as in Idaho and Nevada. Each line will cost about $3 billion to construct and will be able to deliver approximately 3,000 megawatts (MW). The lines are expected to be operational in 2014.

In requesting negotiated rate authorization, Chinook and Zephyr proposed to allocate half the capacity of each of their respective transmission lines (1,500 MW) to an "anchor customer," e.g., a wind-generation developer that would share a portion of the initial development costs of the transmission line. The remaining 1,500 MW of capacity on each line would be offered in an open season.

Requirements for negotiated rate authorization.

Unlike traditional public utilities, merchant transmission projects have no captive customers and, thereby, assume all of the market risk of a project. As a result, FERC typically authorizes merchant transmission projects to charge negotiated rates (as opposed to cost-based rates). In the past, when deciding whether to grant negotiated rate authorization, rather than apply a rigid and definitive test, FERC considered ten factors or guideposts, some of which would not be applicable to all situations.

Finding that the ten-criteria test was not flexible enough, FERC announced that its analysis for granting merchant transmission owners negotiated rate authority would now focus on the following four considerations: (1) the justness and reasonableness of rates, (2) the potential for undue discrimination, (3) the potential for undue preference, including affiliate preference, and (4) regional reliability and operational efficiency requirements. Subject to certain conditions, FERC found that the Chinook and Zephyr applications would result in just and reasonable rates, would not lead to undue discrimination or undue preference or affiliate concerns, and would comply with regional reliability requirements.

Presubscription of capacity to an anchor customer.

Previously, FERC required that merchant transmission owners allocate all initial capacity through a preconstruction open season. An open season is a period in which all requests for service received within the defined timeframe are accorded the same transmission priority.

In the February 19 order, FERC found that its "100 percent open season allocation requirement has become rigid and inflexible," acknowledging the "chicken-and-egg scenario that arises when generators, purchases, and transmission owners all wait for the other to commit money to a project before committing themselves." Accordingly, FERC determined that the anchor customer concept proposed by Chinook and Zephyr struck the right balance between ensuring that potential customers have access to new transmission capacity and enabling transmission developers to obtain financial commitments necessary for the critical mass needed to develop the projects. However, FERC will continue to evaluate any anchor customer proposals on a case-by-case basis to ensure that capacity is not allocated in an unduly discriminatory manner.