Midwest Wind Slowed to a Breeze? Feds to Make New Projects Shoulder 90% to 100% of Transmission Upgrade Costs

Wind power and other renewable energy developers in the Midwest are now facing the very real possibility of significant interconnection cost increases that will likely make it more difficult to obtain financing for their projects. The cost increases are the result of an order issued on October 23, 2009, by the Federal Energy Regulatory Commission that will likely eliminate or greatly reduce new generators' entitlements to repayments for network upgrade costs incurred for projects that enter into interconnection agreements with the Midwest Independent System Operator between July 10, 2009, and July 15, 2010. A stakeholder process will determine the cost allocation methodology to be applied after that. Both the interim and long-term methodologies could influence transmission cost allocation policies in other regions of the country.

Under MISO's previous tariff, newly interconnecting generators that were designated as network resources or were committed by contracts to supply capacity or energy to network customers for at least one year or more were entitled to be repaid 50% of the transmission upgrade costs necessitated by their projects. For facilities rated 345 kV or above, 20% of the repayments were allocated to MISO on a system-wide basis and 80% were allocated among pricing zones based on Line Outage Distribution Factor. For facilities rated less than 345 kV, the repayments were entirely allocated among pricing zones based on LODF.

The changes approved by FERC on October 23 are the result of a request by MISO and numerous MISO transmission owners to amend the MISO transmission tariff with respect to such cost allocation methodology. MISO and the transmission owners claim that the existing cost allocation methodology imposes disproportionate costs on consumers in pricing zones that have high levels of new generation relative to load. In particular, two of the filing parties, Otter Tail Power Company and Montana-Dakota Utilities Company, were threatening to leave MISO rather than impose large cost increases on their customers to repay new generators in their territories for transmission upgrade costs caused by projects built predominately to serve customers outside their service territories.

In its October 23 order, FERC accepted the filers' two-phase proposal in which a Phase I cost allocation methodology would go into effect as of the filing date and in which stakeholders would engage in a process to determine a long-term Phase II methodology to be filed by July 15, 2010. Under the Phase I methodology, interconnecting customers who create the need for network upgrades bear 100% of the costs for upgrades rated below 345 kV and 90% for those rated 345 kV or higher. To obtain such limited repayments, interconnection customers no longer need to be designated as or have contracts with network resources, and customers who do not receive repayments are entitled to financial transmission rights (although protesting parties in the proceeding noted that FTRs are of little value in obtaining project financing). These provisions will apply permanently to all interconnection customers who execute, or file unexecuted, interconnection agreements during the Phase I period.

Regarding the Phase II stakeholder process, FERC (which, on a related note, is currently seeking comments due November 9 on regional transmission planning processes and cost allocation under FERC Order No. 890) stated that, although it would not prejudge the outcome, it expects the process to honor the principle in FERC Order No. 2003 that network upgrades should be paid for by both the parties that cause transmission upgrades and those that enjoy their broad benefits. Further, FERC expects "all methodologies" to be considered, including those recently approved in the CAISO and SPP systems, to address the challenges associated with location-constrained resources. While incorporation of some of these principles may lessen the financial burden on wind and other renewable projects in the Midwest once the Phase II methodology goes into effect, in the mean time, some of the air has been taken out of the sails of wind and other renewable project developers.