In recent orders, the Federal Energy Regulatory Commission (FERC) has shown its willingness to entertain a more flexible approach to electric transmission financing than it has in the past to facilitate the construction of needed transmission facilities. Earlier this year, in Chinook Power Transmission, LLC, 126 FERC ¶ 61,134 (2009), FERC reduced the factors that an entity proposing a merchant transmission project, which assumes all the risks of financing and development of the facilities, must satisfy to obtain authorization to earn market rates for the service. Also, in Northeast Utilities Service Co. and NSTAR Electric Co., 127 FERC ¶ 61,179 (2009), FERC approved cost-capped, customer-funded transmission lines in which the transmission capacity may be exclusively reserved by the funding entity under a negotiated bilateral agreement that does not need to conform with FERC’s open access requirements. However, in an order issued on June 18, 2009, FERC has shown that there are limits on how flexible it will be.

Mountain States Transmission Intertie, LLC and NorthWestern Corporation, 127 FERC ¶ 61,270 (2009) involved NorthWestern Corporation (NorthWestern), which is a Montana public utility under FERC’s traditional cost-of-service regulation with transmission assets and captive customers. NorthWestern established a wholly owned stand-alone subsidiary, Mountain States Transmission Intertie (MSTI), to build and own a 433-mile transmission line (the MSTI project) adjacent to NorthWestern’s system. The primary purpose of the MSTI project would be to export wind energy. NorthWestern requested authority from FERC to hold an open season for the MSTI project’s capacity and to charge negotiated rates that would not be subject to cost-of-service regulation. NorthWestern asserted that the stand-alone subsidiary would insulate NorthWestern’s existing transmission customers from the expense of the new line, and cited FERC’s merchant transmission cases as precedent for this arrangement.

The principal protestor to the proposal, PPL Montana, LLC, and an affiliate (PPL), argued that it had requested transmission service from NorthWestern in 2004, which NorthWestern never completed acting upon, and PPL should not now be forced to take service from MSTI instead. PPL contended that there was no indication that existing transmission customers and customers in NorthWestern’s queue would be held harmless. PPL also alleged that the proposal would result in unnecessary pancaked rates for those seeking to move power out of NorthWestern’s system.

FERC rejected MSTI’s request for negotiated rate authority. It determined that allowing MSTI to charge rates at other than a cost basis would not be just and reasonable, primarily because of the affiliate relationship between NorthWestern and MSTI, and that the project would essentially be constructed within NorthWestern’s “footprint.” FERC noted that NorthWestern had played a “substantial role” in the initial development stages of the project, which gave MSTI an “undue preference” over other merchant developers. FERC held that the MSTI project was functionally more akin to an expansion of NorthWestern’s system than a “stand-alone merchant transmission project.”

FERC’s ruling expressed a concern about the impact on competition resulting from the affiliate relationship. Further, FERC thought that NorthWestern would have a disincentive to honor its open access tariff obligation to expand its transmission system under cost-of-service regulation, and instead rely upon the affiliate’s market-based capacity to fulfill that obligation. Finally, the absence of a regional independent system operator over transmission operation of the two entities was a factor that led FERC to deny MSTI the authority to charge negotiated rates. FERC concluded that “we believe NorthWestern has ample opportunity to accomplish many of its objectives and construct a project comparable to the MSTI proposal on a cost-of-service basis.”

Despite rejecting the request for negotiated rates in this case, FERC emphasized its commitment to the development of new transmission infrastructure, and that it remains “flexible” in evaluating new proposals for transmission development and pricing. FERC acknowledged the need for “innovative proposals” to develop new transmission projects, especially in regions with potential to deliver renewable energy to load centers. FERC added that this flexibility, however, cannot “compromise consumer protections.”