• FERC's Decision Bolsters Merchant Transmission Development Prospects in PJM
  • May 4, 2010
  • Law Firm: Troutman Sanders LLP - Atlanta Office
  • On April 13, 2010, FERC found that PJM Interconnection L.L.C.’s (“PJM”) open access transmission tariff (“OATT”) does not preclude PJM from designating Primary Power to build projects as part of PJM’s regional transmission expansion plan (“RTEP”).  FERC’s decision will allow Primary Power, a merchant transmission company, to build their Grid Plus transmission project (“Grid Plus”) and recover the cost of the project through cost-based rates so long as the project is accepted into the RTEP.

    Grid Plus consists of four 500 MVar (500+/100-) Static Var Compensators (“SVC”).  Grid Plus is considered a discrete transmission project that uses advanced power electronics and unlike traditional linear projects on the bulk power system, the project will not build more aerial transmission lines.  Instead, discrete projects will make small additions to the footprint to expand the transmission system.  Grid Plus could potentially be the largest integrated SVC project implemented in PJM, and possibly the nation, at 2,000 MVars.

    In November 2009, Primary Power filed for incentive rate treatment to be included in a future rate formula for Grid Plus.  Additionally, Primary Power applied for cost-of-service rate recovery through PJM’s rate base despite being a merchant transmission company.  Several PJM transmission owners and PJM itself asked FERC to deny Primary Power cost-based rates, arguing that the project would violate PJM’s operating agreement.  PJM stated that Grid Plus is inconsistent with the RTEP and will require modifications to FERC’s already-approved interconnection and regional protocols.  PJM added that FERC is still considering issues surrounding rights of first refusal, and that PJM is seeking guidance how to handle existing RTEP projects.  Finally, PJM argued that the existing RTEP does not address how to prioritize competing RTEP projects.

    In its order, FERC determined that PJM’s OATT does not prevent Primary Power (or any third party developers) from seeking cost-based rate recovery.  However, in order to recover costs, Grid Plus must be included in the RTEP and satisfy reliability and/or economic requirements that transmission owners must satisfy for their cost-based projects.  Additionally, since Grid Plus is currently a merchant transmission facility, it is not eligible for cost-based rates until PJM determines that Grid Plus satisfies the reliability and/or economic requirements.  FERC also reminded PJM that it did not have to designate Primary Power as the entity to build Grid Plus.  In essence, PJM should treat Primary Power’s proposal just like any other proposed cost-based project in the RTEP process, including any procedures used for evaluating competing projects.

    In terms of rate incentives, FERC approved some, but not all of Primary Power’s requests.  Notably, FERC found Grid Plus to be a non-routine project that can recover developmental and other costs as a regulatory asset, as well as prudently incurred costs associated with abandonment.  However, FERC ruled that Grid Plus is not entitled to a 12.75 percent initial return on equity since Primary Power could not show that the requested ROE was important to its investment decision.  FERC also approved a 50 basis point adder for participating in a Regional Transmission Organization, a 100 basis point adder for Transco formation, and a 50 basis point adder for investment in non-routine transmission.

    Construction on the first SVC is scheduled for early 2010, and Grid Plus is expected to be operational in 2012.  Once the project is complete, Primary Power plans on turning over operational control over to PJM and becoming a transmission owner within PJM.