Opinion ID: 187436
Heading Depth: 1
Heading Rank: 3

Heading: Interconnection Pricing

Text: In what we have referred to as the bad old days, Midwest ISO Transmission Owners v. FERC, 373 F.3d 1361, 1363 (D.C.Cir.2004), public utilities owned most of the nation's electricity grid and there was little competition within wholesale electric energy markets, id. In exercising their monopoly power, these utilities refused independent electricity generators access to their transmission lines on competitive terms and conditions. See Transmission Access Policy Study Group v. FERC, 225 F.3d 667, 681-82 (D.C.Cir. 2000). In its landmark Order No. 888, FERC did away with the old arrangement and sought to establish competitive wholesale power markets to increase consumer welfare. See id. at 680-81; see also Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities (Order No. 888), 61 Fed.Reg. 21,540 (May 10, 1996). To achieve this goal, Order No. 888 requires that public utilities provide open access to their transmission lines on nondiscriminatory terms to any independent entity that generates or purchases electricity. Transmission Access, 225 F.3d at 681. To take advantage of open access, generators must be able to link their plants to the utilities' transmission systems. The process of physically connecting a generating plant to a transmission grid is called interconnection. Although Order No. 888 did not address interconnection, FERC has since made clear that interconnection is an indispensable component of open access that must be offered on a nondiscriminatory basis. See Tenn. Power Co., 90 F.E.R.C. ¶ 61,238, at 61,761-62 (2000). The rates, terms, and conditions of interconnection are set forth in interconnection agreements between the utility that owns the transmission system and the interconnecting generator. These agreements identify the new facilities needed and what the generator must pay to achieve interconnection. The parties file their agreements with FERC for its certification that they are just and reasonable. See Entergy Servs., Inc. v. FERC, 391 F.3d 1240, 1243 (D.C.Cir.2004). The agreement's rate for interconnection becomes a filed rate that can only be modified under the section 206 process. FERC originally evaluated the cost allocations laid out in interconnection agreements on a case-by-case basis but over time found this approach inadequate. See Nat'l Ass'n of Regulatory Util. Comm'rs v. FERC, 475 F.3d 1277, 1279 (D.C.Cir.2007). In Order No. 2003 and three successive rehearing orders, FERC standardized the method by which utilities must set their rates for interconnection. See Standardization of Generator Interconnection Agreements and Procedures (Order No. 2003), 68 Fed.Reg. 49,846 (Aug. 19, 2003). The pricing model FERC adopted recognizes that interconnection requires an initial cost outlay for two types of facilities. Interconnection Facilities are located before the point of interconnection and allow generators to connect to the transmission grid. Network Upgrades are located on the gridthat is, at or beyond the point of interconnectionand improve the network for the benefit of all users. See id. at 49,849; see also Nat'l Ass'n, 475 F.3d at 1284-85. The interconnecting generator pays up front for both sets of facilities. See Order No.2003, 68 Fed.Reg. at 49,901; Entergy, 391 F.3d at 1243. Placing the full cost of these new facilities on the generator alone, however, is unreasonable. See Order No. 2003, 68 Fed.Reg. at 49,849. Because Interconnection Facilities benefit only the interconnecting generator, the generator properly bears their full cost. See id. at 49,901. Network Upgrades, by contrast, improve the entire network, thus their cost must be spread among all users. See id. ; see also Entergy, 391 F.3d at 1243. This distribution is achieved by assigning the cost of Network Upgrades to the utility whose network is improved. The utility rolls this cost into its transmission rates so that all users of the grid pay their fair share. Because an interconnecting generator pays up front for Network Upgrades, it would be unfair to make it pay again for those upgrades through increased transmission rates designed to spread the cost of the upgrades among all beneficiaries of the improved service. The utility must therefore grant the interconnecting generator transmission service credits equal to the total cost of the Network Upgrades. The interconnecting generator uses its transmission service credits to offset future transmission charges paid to move power over the improved grid. See Order No. 2003, 68 Fed.Reg. at 49,849-50; see also Entergy, 391 F.3d at 1243. In the typical case, assignment of transmission service credits is straightforward. If a newly created facility is classified as a Network Upgrade in an interconnection agreement, the generator receives a credit to apply against its transmission service charges. As one might expect, this case is not typical.