Allocation of Capacity on New Merchant Transmission Projects and New Cost-Based, Participant-Funded Transmission Projects & Priority Rights To New Participant-Funded Transmission (Proposed Policy Statement)

140 FERC ¶ 61,061

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

18 CFR Parts 2 and 35

[Docket Nos. AD12-9-000 and AD11-11-000]

ALLOCATION OF CAPACITY ON NEW MERCHANT TRANSMISSION PROJECTS

AND NEW COST-BASED, PARTICIPANT-FUNDED TRANSMISSION PROJECTS

PRIORITY RIGHTS TO NEW PARTICIPANT-FUNDED TRANSMISSION

(Issued July 19, 2012)

AGENCY: Federal Energy Regulatory Commission.

ACTION: Proposed Policy Statement.

SUMMARY: The Commission seeks comment on this proposed policy statement, which

clarifies and refines current policies governing the allocation of capacity for new

merchant transmission projects and new nonincumbent, cost-based, participant-funded

transmission projects. The Commission proposes to allow developers of such projects to

select a subset of customers, based on not unduly discriminatory or preferential criteria,

and negotiate directly with those customers to reach agreement on the key terms and

conditions for procuring capacity, when the developers (1) broadly solicit interest in the

project from potential customers, and (2) file a report with the Commission describing the

solicitation, selection and negotiation process. The Commission proposes these policy

reforms to ensure transparency in the capacity allocation process while providing

Docket Nos. AD12-9-000 and AD11-11-000

- 2 -

developers the ability to bilaterally negotiate rates, terms, and conditions for the full

amount of transmission capacity with potential customers.

DATES: Comments on the proposed policy statement are due on or before [Insert_Date

60 days after publication in the FEDERAL REGISTER]

FOR FURTHER INFORMATION CONTACT:

Becky Robinson

Office of Energy Policy and Innovation

888 First Street, NE

Washington, DC 20426

(202) 502-8868

becky.robinson@ferc.gov

Andrew Weinstein

Office of General Counsel

888 First Street, NE

Washington, DC 20426

Comments on the proposed policy statement are due on or before [Insert_Date

60 days after publication in the FEDERAL REGISTER]

FOR FURTHER INFORMATION CONTACT:

Becky Robinson

Office of Energy Policy and Innovation

888 First Street, NE

Washington, DC 20426

(202) 502-8868

becky.robinson@ferc.gov

Andrew Weinstein

Office of General Counsel

888 First Street, NE

Washington, DC 20426

(202) 502-6230

andrew.weinstein@ferc.gov

Brian Bak

Office of Energy Policy and Innovation

888 First Street, NE

Washington, DC 20426

(202) 502-6574

brian.bak@ferc.gov

SUPPLEMENTARY INFORMATION:

140 FERC ¶ 61,061

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION

Before Commissioners: Jon Wellinghoff, Chairman;

Philip D. Moeller, John R. Norris,

Cheryl A. LaFleur, and Tony T. Clark.

Allocation of Capacity on New Merchant Transmission

Projects and New Cost-Based, Participant-Funded

Transmission Projects

Priority Rights to New Participant-Funded

Transmission

Docket Nos. AD12-9-000

AD11-11-000

PROPOSED POLICY STATEMENT

(Issued July 19, 2012)

I.

Introduction

1.

The Commission seeks comment on this proposed policy statement, which

clarifies and refines current policies governing the allocation of capacity for new

merchant transmission projects and new nonincumbent, cost-based, participant-funded

transmission projects. In recent years, a number of merchant and nontraditional

transmission developers have sought guidance from the Commission regarding

application of open access principles to new transmission facilities through petitions for

declaratory orders. As the Commission addressed these requests, its policies have

evolved over time to provide potential customers adequate opportunities to obtain service

while also providing transmission developers adequate certainty to assist with financing

transmission projects

Commission regarding

application of open access principles to new transmission facilities through petitions for

declaratory orders. As the Commission addressed these requests, its policies have

evolved over time to provide potential customers adequate opportunities to obtain service

while also providing transmission developers adequate certainty to assist with financing

transmission projects. As a result of these evolving policies, different rules have been

Docket Nos. AD12-9-000 and AD11-11-000

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adopted regarding capacity allocation for merchant transmission projects and

nonincumbent, cost-based, participant-funded transmission projects.

2.

With the benefit of experience regarding the unique characteristics of merchant

and other nontraditional transmission project proposals, and in consideration of industry

input on Commission policies regarding the allocation of capacity on such projects, the

Commission proposes to streamline its capacity allocation policies by establishing

consistent policies regarding capacity allocation for both merchant transmission projects

and nonincumbent, cost-based, participant-funded transmission projects. Specifically, the

Commission proposes to allow developers of such projects to select a subset of

customers, based on not unduly discriminatory or preferential criteria, and negotiate

directly with those customers to reach agreement on the key terms and conditions for

procuring capacity, when they (1) broadly solicit interest in the project from potential

customers, and (2) submit a report to the Commission describing the solicitation,

selection and negotiation process. The Commission proposes these policy reforms to

ensure transparency in the capacity allocation process while providing developers the

ability to negotiate bilaterally with potential customers the rates, terms, and conditions for

the full amount of transmission capacity

tential

customers, and (2) submit a report to the Commission describing the solicitation,

selection and negotiation process. The Commission proposes these policy reforms to

ensure transparency in the capacity allocation process while providing developers the

ability to negotiate bilaterally with potential customers the rates, terms, and conditions for

the full amount of transmission capacity. These policy reforms would be implemented

within the existing four factor analysis used to evaluate requests for negotiated rate

Docket Nos. AD12-9-000 and AD11-11-000

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authority.1 The Commission seeks comment regarding this proposed change in policy, as

discussed below.

II.

Background

3.

The Commission first granted negotiated rate authority to a merchant

transmission project developer over a decade ago, finding that merchant transmission can

play a useful role in expanding competitive generation alternatives for customers.2

Unlike traditional utilities recovering their costs-of-service from captive and wholesale

customers, investors in merchant transmission projects assume the full market risk of

development.3 Over the course of a number of early proceedings, the Commission

developed ten criteria to guide its analysis in making a determination as to whether

negotiated rate authority would be just and reasonable for a given merchant transmission

project.4 Two of these criteria were that (1) an open season process should be employed

to initially allocate all transmission capacity and (2) the results of the open season should

1 See infra note 29.

2 TransEnergie U.S., Ltd. 91 FERC ¶ 61,230, at 61,838 (2000) (TransEnergie).

3 Id. at 61,836.

4 Id.; Neptune Regional Transmission System, LLC, 96 FERC ¶ 61,147, at 61,633

(2001) (Neptune); Northeast Utilities Service Co., 97 FERC ¶ 61,026, at 61,075 (2001)

(Northeast Utilities I); Northeast Utilities Service Co., 98 FERC ¶ 61,310, at 62,327

1 See infra note 29.

2 TransEnergie U.S., Ltd. 91 FERC ¶ 61,230, at 61,838 (2000) (TransEnergie).

3 Id. at 61,836.

4 Id.; Neptune Regional Transmission System, LLC, 96 FERC ¶ 61,147, at 61,633

(2001) (Neptune); Northeast Utilities Service Co., 97 FERC ¶ 61,026, at 61,075 (2001)

(Northeast Utilities I); Northeast Utilities Service Co., 98 FERC ¶ 61,310, at 62,327

(2002) (Northeast Utilities II).

Docket Nos. AD12-9-000 and AD11-11-000

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be posted on an Open Access Same-Time Information System (OASIS) and filed in a

report with the Commission.5

4.

In Chinook, the Commission refined its approach to evaluating merchant

transmission by adopting a four-factor analysis.6 Under this analysis, the Commission

continues to rely upon an open season and a post-open season report as a means to

provide transparency in the allocation of initial transmission capacity and ensure against

undue discrimination among potential customers in the award of transmission capacity.

Specifically, the Commission evaluates the terms and conditions of the open season as

5 The ten criteria are: (1) the merchant transmission facility must assume full

market risk; (2) the service should be provided under the open access transmission tariff

(OATT) of the Independent System Operator (ISO) or Regional Transmission

Organization (RTO) that operates the merchant transmission facility and that operational

control be given to that ISO or RTO; (3) the merchant transmission facility should create

tradable firm secondary transmission rights; (4) an open season process should be

employed to initially allocate transmission rights; (5) the results of the open season

should be posted on the OASIS and filed in a report to the Commission; (6) affiliate

concerns should be adequately addressed; (7) the merchant transmission facility not

preclude access to essential facilities by competitors; (8) the merchant transmission

facilities should be subject to

son process should be

employed to initially allocate transmission rights; (5) the results of the open season

should be posted on the OASIS and filed in a report to the Commission; (6) affiliate

concerns should be adequately addressed; (7) the merchant transmission facility not

preclude access to essential facilities by competitors; (8) the merchant transmission

facilities should be subject to market monitoring for market power abuse; (9) physical

energy flows on merchant transmission facilities should be coordinated with, and subject

to, reliability requirements of the relevant ISO or RTO; and (10) merchant transmission

facilities should not impair pre-existing property rights to use the transmission grids of

inter-connected RTOs or utilities. E.g., Northeast Utilities I, 97 FERC at 61,075.

6 The four factors are: (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.

E.g., Chinook Power Transmission, LLC, 126 FERC ¶ 61,134, at P 37 (2009) (Chinook).

Docket Nos. AD12-9-000 and AD11-11-000

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part of ensuring no undue discrimination (second factor),7 and uses the open season as an

added protection in overseeing any affiliate participation, to ensure no undue preference

or affiliate concerns (third factor).

5.

The Chinook order also marked a change in Commission policy on capacity

allocation, as in that order the Commission for the first time authorized developers to

allocate some portion of capacity through anchor customer presubscriptions, while

requiring that the remaining portion be allocated in a subsequent open season

, to ensure no undue preference

or affiliate concerns (third factor).

5.

The Chinook order also marked a change in Commission policy on capacity

allocation, as in that order the Commission for the first time authorized developers to

allocate some portion of capacity through anchor customer presubscriptions, while

requiring that the remaining portion be allocated in a subsequent open season. The

Commission implemented this policy to achieve the dual goals of requiring an open

season process that ensures capacity on a merchant transmission project is allocated

transparently in an open, fair, and not unduly discriminatory manner, while permitting an

anchor customer model that enables developers of merchant transmission projects to meet

the financial challenges unique to merchant transmission development.8 Since the

Chinook order, the Commission has issued orders on several new merchant and other

7 Also, the Commission looks to a developer’s own OATT commitments or its

commitment to turn operational control over to an RTO or ISO. See id. P 40. Guidance

given in this policy statement with regards to satisfying the second factor is directed at

the open season requirement; the Commission will continue to require merchant and

other transmission developers either to file an OATT or to turn over control to an RTO or

ISO.

8 See id. P 46.

Docket Nos. AD12-9-000 and AD11-11-000

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nontraditional transmission development proposals, including granting requests to

allocate up to 75 percent of a transmission project’s capacity to anchor customers.9

6.

The Commission also has received proposals from transmission developers

regarding the allocation of capacity on cost-based, participant-funded transmission

projects

. P 46.

Docket Nos. AD12-9-000 and AD11-11-000

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nontraditional transmission development proposals, including granting requests to

allocate up to 75 percent of a transmission project’s capacity to anchor customers.9

6.

The Commission also has received proposals from transmission developers

regarding the allocation of capacity on cost-based, participant-funded transmission

projects. These proceedings involved incumbent transmission developers,10 while one

involved a nonincumbent transmission developer.11 In NU/NSTAR, the Commission

approved the structure of a transaction whereby a customer was granted usage rights to

transmission capacity in exchange for funding the transmission expansion, under the

reasoning that any potential transmission customer has the right to request transmission

service expansion from a transmission owning utility, and that utility is obligated to make

any necessary system expansions and offer service at the higher of an incremental cost or

an embedded cost rate to the transmission customer. More recently, in National Grid, the

Commission found again that participant funding of transmission projects by incumbent

transmission providers is not inconsistent with the Commission's open access

9 See, e.g., Champlain Hudson Power Express, Inc., 132 FERC ¶ 61,006 (2010);

Rock Island Clean Line LLC, 139 FERC ¶ 61,142 (2012); Southern Cross Transmission

LLC, 137 FERC ¶ 61,207 (2011).

10 See, e.g., Northeast Utilities Service Company, NSTAR Electric Company,

127 FERC ¶ 61,179 (2009) (NU/NStar), order denying reh’g. and clarification,

129 FERC ¶ 61,279 (2009); National Grid Transmission Services Corporation and

Bangor Hydro Electric Company, 139 FERC ¶ 61,129 (2012) (National Grid).

11 See Grasslands Renewable Energy, LLC, 133 FERC ¶ 61,225 (2010).

(2011).

10 See, e.g., Northeast Utilities Service Company, NSTAR Electric Company,

127 FERC ¶ 61,179 (2009) (NU/NStar), order denying reh’g. and clarification,

129 FERC ¶ 61,279 (2009); National Grid Transmission Services Corporation and

Bangor Hydro Electric Company, 139 FERC ¶ 61,129 (2012) (National Grid).

11 See Grasslands Renewable Energy, LLC, 133 FERC ¶ 61,225 (2010).

Docket Nos. AD12-9-000 and AD11-11-000

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requirements.12 Cost-based participant-funded projects are similar to merchant projects

in that both involve willing customers assuming part of the risk of a transmission project

in return for defined capacity rights; i.e., there is no direct assignment of costs to captive

customers. Cost-based participant-funded projects differ between incumbents and

nonincumbents, in that incumbent transmission providers have a clearly defined set of

existing obligations under their tariffs for the expansion of their existing transmission

facilities, whereas nonincumbents have no existing obligation to build any transmission

facilities.

7.

To gain feedback regarding the Commission’s capacity allocation policies, the

Commission held a technical conference in March 2011 to discuss the extent to which

nonincumbent developers of transmission should be provided flexibility in the allocation

of rights to use transmission facilities developed on a cost-of-service or negotiated rate

basis.13 Participants at that conference and subsequent commenters acknowledged the

value in widely soliciting new customers, but they also expressed the desire to be able to

allocate 100 percent of their projects’ capacity through bilateral negotiations with

identified customers.14 Based on these comments, the Commission held a follow up

(continued…)

12 National Grid, 139 FERC ¶ 61,129 at P 29.

13 “Priority Rights to New Participant-Funded Transmission,” AD11-11-000,

March 15, 2011

ressed the desire to be able to

allocate 100 percent of their projects’ capacity through bilateral negotiations with

identified customers.14 Based on these comments, the Commission held a follow up

(continued…)

12 National Grid, 139 FERC ¶ 61,129 at P 29.

13 “Priority Rights to New Participant-Funded Transmission,” AD11-11-000,

March 15, 2011. This technical conference also addressed generator lead lines, but those

facilities are not the subject of this proposed policy statement.

14 See, e.g., Clean Line Energy Partners May 5, 2011 Comments at 7 (Clean Line);

LS Power Transmission, LLC May 5, 2011 Comments at 3-4 (LSPT); Transmission

Docket Nos. AD12-9-000 and AD11-11-000

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workshop in February 2012 to obtain input on potential reforms to the Commission’s

capacity allocation policies.15 Many participants at the 2012 workshop suggested that the

need for flexibility required something less structured than the traditional open season

process. Specifically, some commenters, including transmission developers, emphasized

the inherent incentive transmission developers have to solicit interest widely and attract

potential customers to their project, so that they can identify customers that are most

likely to be successful in their own generation projects and therefore provide the greatest

certainty that they will be successful in becoming transmission customers.16 In this

respect, these commenters argued that their incentives harmonize with the Commission’s

goals of open access. Further, they argue that their class of transmission developers does

not raise the same concerns that motivated the Commission in Order No. 888,17 where

(continued…)

Developers, Inc., May 5, 2011 Comments at 4-5 (TDI); Western Independent

Transmission Group May 5, 2011 Comments at 6 (WITG); and Tonbridge Power Inc

s

not raise the same concerns that motivated the Commission in Order No. 888,17 where

(continued…)

Developers, Inc., May 5, 2011 Comments at 4-5 (TDI); Western Independent

Transmission Group May 5, 2011 Comments at 6 (WITG); and Tonbridge Power Inc.

April 19, 2011 Comments at 2 (Tonbridge).

15 “Allocation of Capacity on New Merchant Transmission Projects and New

Cost-Based, Participant-Funded Transmission Projects,” Docket No. AD12-9-000

(February 28, 2012).

16 See, e.g., MATL LLP and Montana Alberta Tie, Ltd. March 29, 2012

Comments at 3 (MATL).

17 Promoting Wholesale Competition Through Open Access Non-Discriminatory

Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities

and Transmitting Utilities, Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats.

& Regs. ¶ 31,036 (1996), order on reh’g, Order No. 888-A, 62 FR 12274 (Mar. 14,

1997), FERC Stats. & Regs. ¶ 31,048, order on reh’g, Order No. 888-B, 81 FERC ¶

61,248 (1997), order on reh’g, Order No. 888-C, 82 FERC ¶ 61,046 (1998), aff’d in

Docket Nos. AD12-9-000 and AD11-11-000

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vertically-integrated utilities had an economic incentive to favor their own generation and

discriminate against competitors when providing transmission service.18

8

74 (Mar. 14,

1997), FERC Stats. & Regs. ¶ 31,048, order on reh’g, Order No. 888-B, 81 FERC ¶

61,248 (1997), order on reh’g, Order No. 888-C, 82 FERC ¶ 61,046 (1998), aff’d in

Docket Nos. AD12-9-000 and AD11-11-000

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vertically-integrated utilities had an economic incentive to favor their own generation and

discriminate against competitors when providing transmission service.18

8.

However, commenters also focused on the need for negotiation flexibility during

the capacity allocation process,19 pointing out that the transmission developer and

customer need to address a variety of issues, including points of delivery and receipt,

project timing and what happens if schedules change, termination rights of parties at

various development stages, development cost-sharing, length and payments of the initial

term of service, extensions of the term and associated payments.20 These commenters

argued that a rigid open season process that requires developers to offer all customers the

same terms and conditions does not allow for the bilateral exchange of information to

address the unique needs of developers and their potential customers. Moreover, these

commenters pointed out that there have been no claims of undue discrimination resulting

from any of the anchor customer proposals the Commission has approved, to date,21 and

relevant part sub nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667

(D.C. Cir. 2000), aff’d sub nom. New York v. FERC, 535 U.S. 1 (2002).

18 SunZia Transmission, LLC March 29, 2012 Comments at 7 (SunZia).

19 See, e.g., WITG March 28, 2012 Comments at 5; Clean Line March 28, 2012

Comments at 5-7; SunZia March 29, 2012 Comments at 3-6, 9; LSPT March 29, 2012

Comments at 2-4; and Pattern Transmission March 28, 2012 Comments at 6-7 (Pattern).

20 LSPT March 29, 2012 Comments at 2-3

aff’d sub nom. New York v. FERC, 535 U.S. 1 (2002).

18 SunZia Transmission, LLC March 29, 2012 Comments at 7 (SunZia).

19 See, e.g., WITG March 28, 2012 Comments at 5; Clean Line March 28, 2012

Comments at 5-7; SunZia March 29, 2012 Comments at 3-6, 9; LSPT March 29, 2012

Comments at 2-4; and Pattern Transmission March 28, 2012 Comments at 6-7 (Pattern).

20 LSPT March 29, 2012 Comments at 2-3.

21 TransWest Express LLC March 28, 2012 Comments at 7.

Docket Nos. AD12-9-000 and AD11-11-000

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that parties who feel they were unduly discriminated against have had, as an added

protection, the right to file a section 206 complaint.22

9.

However, other commenters at the 2012 workshop voiced concerns with the

merchant transmission model in general, and the opportunity for potentially unduly

discriminatory deals.23 They argued that allowing more flexibility for merchant

transmission developers is tantamount to reverting to the pre-open access Order No. 888

days of transmission regulation, and discouraged the Commission from pursuing policies

that enable anchor customers to exclude or burden generation competitors or engage in

other abusive practices the Commission sought to eradicate in Order No. 888. Such

commenters favor requiring merchant transmission developer participation in the regional

planning process.24 The staff of the Federal Trade Commission similarly questions how

the Commission will restrain merchant transmission developers from exercising market

power.25

22 Duke Energy Corporation March 29, 2012 Comments at 7-8; 16 U.S.C. § 824e

h

commenters favor requiring merchant transmission developer participation in the regional

planning process.24 The staff of the Federal Trade Commission similarly questions how

the Commission will restrain merchant transmission developers from exercising market

power.25

22 Duke Energy Corporation March 29, 2012 Comments at 7-8; 16 U.S.C. § 824e

(2006).

23 See, e.g., Transmission Access Policy Study Group March 29, 2012 Comments

at 6-9 (TAPS); Transmission Dependent Utility Systems March 29, 2012 Comments at 2-

4; New Jersey Division of Rate Counsel March 29, 2012 Comments at 2-4; and the

Federal Trade Commission staff June 14, 2012 Comments at 6-9 (FTC staff).

24 This latter argument is outside the scope of this proceeding and was addressed

in Order No. 1000-A. Transmission Planning and Cost Allocation by Transmission

Owning and Operating Public Utilities, Order No. 1000, FERC Stats. & Regs. ¶ 31,323

(2011), order on reh’g, Order No. 1000-A, 139 FERC ¶ 61,132, at P 297 (2012).

25 FTC staff June 14, 2012 Comments at 9.

Docket Nos. AD12-9-000 and AD11-11-000

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10.

The Commission believes that there is a role within its transmission development

policies for both bilateral negotiations for transmission service and uniform rules and

processes through the pro forma OATT for all customers at all times. The policy of open

access and comparable treatment is the underpinning of the Commission’s approach to

ensuring against undue discrimination and permeates many, if not all, of the

Commission’s programs. However, this does not mean that the Commission cannot be

flexible in how it accomplishes open access and comparable treatment. As Order

No. 100026 is implemented around the country, the Commission expects that more

transmission needs will be identified and addressed through the open and transparent

regional transmission planning process

any, if not all, of the

Commission’s programs. However, this does not mean that the Commission cannot be

flexible in how it accomplishes open access and comparable treatment. As Order

No. 100026 is implemented around the country, the Commission expects that more

transmission needs will be identified and addressed through the open and transparent

regional transmission planning process. Nonetheless, bilateral negotiation between

transmission developers and potential customers may be another appropriate vehicle for

new merchant transmission projects and new nonincumbent, cost-based, participant-

funded transmission projects to move forward. In fact, Order No. 1000 allowed for such

a vehicle, noting that some projects may not seek to pursue regional or interregional cost

allocation.27 In addition, there may be projects that are considered in the regional

(continued…)

26 Transmission Planning and Cost Allocation by Transmission Owning and

Operating Public Utilities, Order No. 1000, FERC Stats. & Regs. ¶ 31,323 (2011), order

on reh’g, Order No. 1000-A, 139 FERC ¶ 61,132 (2012).

27 See Order No. 1000, FERC Stats. & Regs. ¶ 31,323 at P 725; Order No. 1000-

A, 139 FERC ¶ 61,132 at PP 728-729 (“[N]othing in Order No. 1000 forecloses the

opportunity for a transmission developer, a group of transmission developers, or one or

more individual transmission customers to voluntarily assume the costs of a new

transmission facility…. Transmission developers who see particular advantages in

participant funding remain free to use it on their own or jointly with others. This simply

28-729 (“[N]othing in Order No. 1000 forecloses the

opportunity for a transmission developer, a group of transmission developers, or one or

more individual transmission customers to voluntarily assume the costs of a new

transmission facility…. Transmission developers who see particular advantages in

participant funding remain free to use it on their own or jointly with others. This simply

Docket Nos. AD12-9-000 and AD11-11-000

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planning process that, although not ultimately selected in a regional plan for purposes of

cost allocation, have sufficient value for individual potential customers such that they

wish to pursue them through bilateral negotiations with a potential developer. This

proposed policy statement is intended to provide a “roadmap” for entities to pursue those

projects, while also serving to ensure transparency in the allocations of capacity resulting

from such bilateral negotiation and, in turn, to ensure that transmission service is

provided at rates, terms and conditions that are just and reasonable and not unduly

discriminatory.

11.

Accordingly, the Commission proposes to clarify and refine its policies

governing the allocation capacity for new merchant transmission projects and new

nonincumbent, cost-based, participant-funded transmission projects to ensure that it is

done in an open and transparent manner, giving all interested parties a chance to

participate. The Commission believes that the proposed capacity allocation process

outlined here satisfies our statutory responsibilities, provides sufficient transparency and

protections to market participants, and is responsive to the industry concerns.

III.

Discussion

A. Merchant transmission projects

12

ne in an open and transparent manner, giving all interested parties a chance to

participate. The Commission believes that the proposed capacity allocation process

outlined here satisfies our statutory responsibilities, provides sufficient transparency and

protections to market participants, and is responsive to the industry concerns.

III.

Discussion

A. Merchant transmission projects

12.

The Commission proposes to revise its merchant transmission policy to

streamline the process by which capacity may be allocated on new merchant transmission

means they would not be pursuing regional or interregional cost allocation.”).

Docket Nos. AD12-9-000 and AD11-11-000

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projects and to expect more detail and transparency in the report describing the

developer’s capacity allocation approach. While the Commission’s fundamental

concerns continue to be that new transmission capacity be allocated in a not unduly

discriminatory or preferential manner, the Commission’s experience with new merchant

transmission projects and comments received during the technical conference and

workshop suggest that we can provide more flexibility while addressing these concerns.

The Commission proposes to allow merchant transmission developers to allocate up to

100 percent of their projects’ capacity through bilateral negotiations.28 With the

transparency protections discussed below, the Commission also proposes to allow

capacity allocation to affiliates, when done in a transparent manner, so that other

interested parties can voice concern if they believe the affiliate was treated preferentially

at the expense of another party.29

13

llocate up to

100 percent of their projects’ capacity through bilateral negotiations.28 With the

transparency protections discussed below, the Commission also proposes to allow

capacity allocation to affiliates, when done in a transparent manner, so that other

interested parties can voice concern if they believe the affiliate was treated preferentially

at the expense of another party.29

13.

The flexibility we propose to afford under the policy outlined below is

complemented by the emphasis on additional detail in reports describing the developer’s

28 Commenters in the technical conference and in the workshop specifically

requested that the Commission clarify circumstances under which merchant transmission

developers would be allowed to allocate up to 100 percent of their project’s capacity

through bilateral negotiations.

29 By proposing to adopt the policies herein, the Commission seeks to encourage

merchant transmission developers intending to seek negotiated rate authority to utilize the

guidelines discussed below. To the extent that a merchant transmission developer

substantially complies with any such policies ultimately adopted by the Commission, the

developer would be deemed to have satisfied the second (undue discrimination) and third

(undue preference) factors of the four-factor analysis.

Docket Nos. AD12-9-000 and AD11-11-000

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capacity allocation approach. The Commission agrees with commenters that each

merchant transmission project has unique characteristics that require the ability to

negotiate risk-sharing and other details. The Commission also acknowledges that

merchant transmission developers have inherent incentives to solicit interest widely in a

potential project. However, other commenters point out that counter-incentives may exist

that motivate a developer to unduly prefer one or more customers

mission project has unique characteristics that require the ability to

negotiate risk-sharing and other details. The Commission also acknowledges that

merchant transmission developers have inherent incentives to solicit interest widely in a

potential project. However, other commenters point out that counter-incentives may exist

that motivate a developer to unduly prefer one or more customers. To protect against

undue discrimination, the Commission proposes to allow merchant transmission

developers to engage in an open solicitation to identify potential transmission customers,

but with the expectation that they will submit to the Commission reports regarding the

processes that led to the identification of customers and execution of relevant capacity

arrangements. The Commission believes that this approach, when coupled with the

existing opportunity to file complaints under FPA section 206, serves the interest of

customers and developers alike.30

1.

Open solicitation process

14.

In the past, the Commission has required an open season for the allocation of

capacity on new merchant transmission projects. The open season requirement was to

ensure open access to transmission capacity and prevent the withholding of transmission

capacity from interested transmission customers, and also to enable the developer to

assess the size of the market. However, beginning with the Chinook order, the

30 See Chinook, 126 FERC ¶ 61,134 at P 41.

ssion projects. The open season requirement was to

ensure open access to transmission capacity and prevent the withholding of transmission

capacity from interested transmission customers, and also to enable the developer to

assess the size of the market. However, beginning with the Chinook order, the

30 See Chinook, 126 FERC ¶ 61,134 at P 41.

Docket Nos. AD12-9-000 and AD11-11-000

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Commission also began to allow the allocation of a portion of transmission capacity

through bilateral negotiations prior to an open season. Thus, current Commission policy

allows a merchant transmission developer to solicit interest through bilateral negotiations

for a portion of its capacity so long as it makes the remainder available through an open

season.

15.

Based on the Commission’s experience with prior cases and information

received from the technical conference and workshop, the Commission believes that

bilateral negotiations, if conducted in a transparent manner, may serve the same purpose

as an open season process by ensuring against undue discrimination or preference in the

provision of transmission service. Hence, the Commission proposes that, in seeking

negotiated rate authority, merchant transmission developers should also engage in an

open solicitation of interest in their projects from potential transmission customers

(without the previous requirement of an open season). Such open solicitation should

include a broad notice issued in a manner that ensures that all potential and interested

customers are informed of the proposed project. For example, such notice may be placed

in trade magazines, regional energy publications, communications with regional

transmission planning groups, and email distribution lists addressing transmission-related

matters

season). Such open solicitation should

include a broad notice issued in a manner that ensures that all potential and interested

customers are informed of the proposed project. For example, such notice may be placed

in trade magazines, regional energy publications, communications with regional

transmission planning groups, and email distribution lists addressing transmission-related

matters. Such notice should include transmission developer points of contact and

pertinent project dates, as well as sufficient technical specifications and contract

information to inform interested customers of the nature of the project, including:

Docket Nos. AD12-9-000 and AD11-11-000

- 16 -

Technical specifications

 Project size/Capacity: MW and/or kV rating (specific value or range of

values)

 End points of line (as specific as possible such as points of

interconnection to existing lines and substations, although it may be

potentially broad, such as Montana to Nevada, if the project is very

early in development)

 Projected construction and/or in-service dates

 Type of line — for example, AC, DC, bi-directional

Contract information

 Precedent agreement (if developed)

 Other capacity allocation arrangements (including how it will address

potential oversubscription of capacity)

16.

The developer should also specify in the notice the criteria it plans to use to

select transmission customers, such as credit rating; “first mover” status, i.e., customers

who respond early and take on greater project risk; and customers’ willingness to

incorporate project risk-sharing into their contracts. This will contribute to the

transparency of the process, and help interested entities know at the outset the features of

the project and how the bids to the merchant transmission developer will be considered.

17.

Finally, the merchant transmission developer would be expected to update its

posting if there are any material changes to the nature of the project or the status of

capacity allocation.

18

l contribute to the

transparency of the process, and help interested entities know at the outset the features of

the project and how the bids to the merchant transmission developer will be considered.

17.

Finally, the merchant transmission developer would be expected to update its

posting if there are any material changes to the nature of the project or the status of

capacity allocation.

18.

Under this proposed process, once a subset of customers has been identified by

the developer through the open solicitation process, the Commission would allow

developers to engage in bilateral negotiations with each potential customer on the specific

terms and conditions for procuring transmission capacity, as the Commission recognizes

that developers and potential customers may need to negotiate individualized terms that

Docket Nos. AD12-9-000 and AD11-11-000

- 17 -

meet their unique needs.31 In these negotiations, the Commission proposes to allow for

distinctions among prospective customers based on transparent and not unduly

discriminatory or preferential criteria -- so long as the differences in negotiated terms

recognize material differences and do not result in undue discrimination or preference --

with the potential result that a single customer may be awarded up to 100 percent of

capacity. For instance, developers might offer “first mover” customers more favorable

terms and conditions than later customers.

2.

Reporting

19

ential criteria -- so long as the differences in negotiated terms

recognize material differences and do not result in undue discrimination or preference --

with the potential result that a single customer may be awarded up to 100 percent of

capacity. For instance, developers might offer “first mover” customers more favorable

terms and conditions than later customers.

2.

Reporting

19.

In the past, the Commission required that developers file a report, shortly after

the close of the open season, on the results of the open season and any anchor customer

presubscription, including information on the notice of the open season, the method used

for evaluating bids, the identity of the parties that purchased capacity, and the amount,

term, and price of that capacity.32 The Commission required this report to provide

transparency to the allocation of initial transmission rights, and to enable unsuccessful

31 While negotiations for the allocation of initial transmission rights may address

terms and conditions of the transmission service to be ultimately taken once the facilities

are in service, the Commission will adhere to its policy, regardless of any negotiated

agreement, that any deviations from the Commission’s pro forma OATT must be

justified as consistent with or superior to the pro forma OATT when the transmission

developer files its OATT with the Commission and any deviations will be evaluated on

that basis by the Commission when they are submitted. See Chinook, 126 FERC

¶ 61,134 at PP 47, 63.

32 Chinook, 126 FERC ¶ 61,134 at PP 41, 43.

that any deviations from the Commission’s pro forma OATT must be

justified as consistent with or superior to the pro forma OATT when the transmission

developer files its OATT with the Commission and any deviations will be evaluated on

that basis by the Commission when they are submitted. See Chinook, 126 FERC

¶ 61,134 at PP 47, 63.

32 Chinook, 126 FERC ¶ 61,134 at PP 41, 43.

Docket Nos. AD12-9-000 and AD11-11-000

- 18 -

bidders to determine if they were treated in an unduly discriminatory manner so that they

may file a complaint if they believe they were.33

20.

The Commission now proposes to place more emphasis on reporting, as the

success of the capacity allocation approach proposed here and its ability to prevent undue

discrimination relies, to a noticeable degree, on the transparency this report provides.

Open access requires not only that everyone is given an opportunity to seek access, but

also that entities know how their bids were evaluated and, if they were not selected in the

initial allocation of transmission rights, on what basis that decision was made. If a party

feels it was treated in an unduly discriminatory way, it may file a complaint under section

206 of the FPA; however, parties must have access to the relevant information on the

outcomes of the capacity allocation process to evaluate whether or not they were treated

fairly.

21.

To prevent against undue discrimination by merchant transmission developers, a

report should be submitted shortly after the completion of the open solicitation process

and the resulting negotiations describing the processes that led to the identification of

transmission customers and the execution of the relevant contractual arrangements. The

merchant transmission developer should describe the criteria used to select customers,

any price terms, and any risk-sharing terms and conditions that served as the basis for

identifying transmission customers selected versus those that were not

ons describing the processes that led to the identification of

transmission customers and the execution of the relevant contractual arrangements. The

merchant transmission developer should describe the criteria used to select customers,

any price terms, and any risk-sharing terms and conditions that served as the basis for

identifying transmission customers selected versus those that were not. The Commission

33 See Chinook, 126 FERC ¶ 61,134 at P 41; Montana Alberta Tie, Ltd., 116 FERC

¶ 61,071, at P 37 (2006).

Docket Nos. AD12-9-000 and AD11-11-000

- 19 -

proposes that the developer should include, at a minimum, the following information in

the report to provide sufficient transparency to the Commission and interested parties:

(1) Steps the developer took to provide broad notice;

(2) Identity of the parties that purchased capacity, and the amount, term, and price

of that capacity;

(3) Basis for the developer’s decision to prorate, or not to prorate, capacity, if a

proposed project is oversubscribed;

(4) Basis for the developer’s decision not to increase capacity for a proposed

project if it is oversubscribed (including the details of any relevant technical or

financial bases for declining to increase capacity);

(5) Justification for offering more favorable terms to certain customers, such as

“first movers” or those willing to take on greater project risk-sharing;

(6) Criteria used for distinguishing customers and the method used for evaluating

bids. This should include specific details on how each potential transmission

customer (including both those who were and those who were not allocated

capacity) was evaluated and compared to other potential transmission

customers, both at the early stage when the developer chooses with whom to

enter into bilateral negotiations and subsequently when the developer chooses

in the negotiation phase to whom to award transmission capacity;

n how each potential transmission

customer (including both those who were and those who were not allocated

capacity) was evaluated and compared to other potential transmission

customers, both at the early stage when the developer chooses with whom to

enter into bilateral negotiations and subsequently when the developer chooses

in the negotiation phase to whom to award transmission capacity;

(7) Explanation of decisions used to select and reject specific customers. In

particular, the report should identify the facts, including any terms and

conditions of agreements unique to individual customers that led to their

selection, and relevant information about others that led to their rejection. If a

selected customer is an affiliate, the Commission will look more carefully at

the basis for reaching that determination.

22.

The Commission anticipates that, under this proposed policy, those developers

requesting negotiated rate authority will file this report either in conjunction with their

request for negotiated rate authority or as a compliance filing to a Commission order

Docket Nos. AD12-9-000 and AD11-11-000

- 20 -

approving a request for negotiated rate authority.34 This will allow interested entities to

submit comments on the report, or otherwise protest the contents or insufficiency of the

report, to ensure that there is sufficient transparency, as well as to provide Commission

oversight in the capacity allocation process.35

23.

Beyond the reporting process described above, the Commission does not propose

to change its existing requirement that developers seek Commission approval, either

when the developer requests negotiated rate authority or files its report describing its

capacity allocation approach, if an affiliate is expected to participate as a customer on the

proposed merchant transmission project

s.35

23.

Beyond the reporting process described above, the Commission does not propose

to change its existing requirement that developers seek Commission approval, either

when the developer requests negotiated rate authority or files its report describing its

capacity allocation approach, if an affiliate is expected to participate as a customer on the

proposed merchant transmission project. Further, consistent with Commission precedent,

34 This flexibility in timing acknowledges that parties have filed and may continue

to file requests for negotiated rate authority at various stages of their project development

process.

35 Commenters opposing the Commission’s merchant transmission policy

generally express concern regarding the use and allocation of scarce rights-of-way. The

Commission appreciates the significance of this issue, but has limited authority to address

it directly. Through Order Nos. 890 and 1000, the Commission has increased

transparency in local and regional transmission planning processes, and through this

proposed policy statement seeks to increase transparency in the negotiation of capacity

allocation with merchant transmission and nonincumbent, cost-based, participant-funded

developers. For example, as noted above, the pre-open solicitation notice requirement

and post-open solicitation reporting requirement proposed here require developers to

provide information on any oversubscription of a proposed project. The Commission

anticipates that this kind of information may be useful for relevant entities (such as siting

authorities) as they evaluate whether a proposed transmission facility satisfies applicable

requirements for use and allocation of rights-of-way.

solicitation reporting requirement proposed here require developers to

provide information on any oversubscription of a proposed project. The Commission

anticipates that this kind of information may be useful for relevant entities (such as siting

authorities) as they evaluate whether a proposed transmission facility satisfies applicable

requirements for use and allocation of rights-of-way.

Docket Nos. AD12-9-000 and AD11-11-000

- 21 -

in order to allow affiliate participation, the Commission will expect an affirmative

showing that the affiliate is not afforded an undue preference.36

B.

Nonincumbent, cost-based, participant-funded projects

24.

The Commission proposes to apply the policy reforms above to nonincumbent,

cost-based, participant-funded transmission developers. The Commission has similar

concerns regarding the capacity allocation process regardless of whether the project is a

nonincumbent, cost-based, participant-funded transmission project or a merchant

transmission project. That is, the Commission is concerned that access is not unduly

discriminatory or preferential. We believe that the process outlined herein will address

our concerns regardless of the manner by which transmission rates are determined.

Commenters and workshop participants support the Commission’s application of these

policy reforms to both merchant transmission developers and nonincumbent, cost-based,

participant-funded transmission developers.37

25.

However, use of this common process does not eliminate the distinction between

these types of projects. In particular, although the negotiations between developers and

potential customers could address a transmission rate, among other issues, the

Commission’s approach to reviewing such a rate would be different for a new merchant

transmission project than for a new nonincumbent, cost-based, participant-funded

36 See Chinook, 126 FERC ¶ 61,134 at PP 49-50

rticular, although the negotiations between developers and

potential customers could address a transmission rate, among other issues, the

Commission’s approach to reviewing such a rate would be different for a new merchant

transmission project than for a new nonincumbent, cost-based, participant-funded

36 See Chinook, 126 FERC ¶ 61,134 at PP 49-50.

37 TAPS March 29, 2012 Comments at 24; Pathfinder Renewable Wind Energy,

LLC March 28, 2012 Comments at 3-4.

Docket Nos. AD12-9-000 and AD11-11-000

- 22 -

transmission project. For a merchant transmission project, the Commission relies on the

processes it sets forth to ensure against undue discrimination in the award of capacity and

the willingness of the transmission developer and customers to negotiate a transmission

rate and terms and conditions, understanding that the customers are not captive

customers.38 For a nonincumbent, cost-based, participant-funded transmission project,

the Commission would review the transmission rate, including any agreed upon return on

equity, in greater detail to ensure that it satisfies Commission precedent regarding cost-

based transmission service.

26.

While we are proposing that this capacity allocation process apply equally to

nonincumbent, cost-based, participant-funded projects, we are not proposing to evaluate

such projects based on the other aspects of the four factor analysis set forth in Chinook.39

To the extent nonincumbent, cost-based, participant-funded transmission projects wish to

use an anchor customer-type model, the effect of the proposed policy would be that the

Commission will deem any capacity allocation process that follows the guidelines of this

proposed policy statement to satisfy its concerns regarding undue discrimination and

undue preference.

38 TransEnergie, 91 FERC ¶ 61,230 at 61,836

ission projects wish to

use an anchor customer-type model, the effect of the proposed policy would be that the

Commission will deem any capacity allocation process that follows the guidelines of this

proposed policy statement to satisfy its concerns regarding undue discrimination and

undue preference.

38 TransEnergie, 91 FERC ¶ 61,230 at 61,836.

39 We note, however, that petitions regarding capacity allocation on nonincumbent,

cost-based, participant-funded transmission projects must continue to be evaluated by the

Commission in accordance with the Commissions’ responsibilities under the FPA.

Docket Nos. AD12-9-000 and AD11-11-000

- 23 -

C. Incumbent, cost-based, participant-funded projects

27.

The Commission does not propose to change its case-by-case evaluation of

requests for cost-based participant-funded transmission projects by incumbent

transmission providers.40 As noted above, incumbents differ from nonincumbents in that

the former have a clearly defined set of existing obligations under their OATTs with

regard to new transmission development, including participation in regional planning

processes and the processing of transmission service request queues. Nonincumbent

transmission developers do not yet own or operate transmission facilities in the region

that they propose to develop transmission and, therefore, are not yet subject to an OATT

in that region. The proposed policy laid out above identifies the Commission's policies

regarding the allocation of capacity for merchant transmission developers and

nonincumbent, cost-based, participant-funded projects during the development of a new

transmission facility. In most instances, we would expect that an incumbent transmission

provider will be able to use existing processes set forth in its OATT to allocate capacity

on a new transmission facility

mmission's policies

regarding the allocation of capacity for merchant transmission developers and

nonincumbent, cost-based, participant-funded projects during the development of a new

transmission facility. In most instances, we would expect that an incumbent transmission

provider will be able to use existing processes set forth in its OATT to allocate capacity

on a new transmission facility. These existing OATT processes do not prohibit

incumbent transmission owners from identifying projects that could be constructed on a

participant-funded basis in conjunction with processing of transmission service requests

or in addition to meeting transmission needs through participation in a regional

40 See, e.g., NU/NSTAR; National Grid.

Docket Nos. AD12-9-000 and AD11-11-000

- 24 -

transmission planning process.41 Furthermore, the Commission will continue to entertain

on a case-by-case basis requests for waiver of any OATT requirements that may be

needed for the incumbent transmission owner to pursue innovative transmission

development that is just, reasonable, and not unduly discriminatory. For example, an

incumbent may seek waiver of serial queue processing requirements so that they may

cluster transmission service requests,42 or they may seek to "ring fence" a transmission

project in order to ensure that new transmission facilities developed for a particular

customer or set of customers do not adversely impact existing customers, including

native load.43 Incumbent developers should address the capacity allocation issues in a

41 See, e.g., Subscription Process for Proposed PacifiCorp Transmission

Expansion Projects, available at

http://www.oasis.pacificorp.com/oasis/ppw/SUBSCRIPTION_PROCESS.PDF (noting

incumbent’s solicitation of interest from third parties in the development of a cost-based

transmission project in advance of receipt of transmission service requests from third

parties under the

41 See, e.g., Subscription Process for Proposed PacifiCorp Transmission

Expansion Projects, available at

http://www.oasis.pacificorp.com/oasis/ppw/SUBSCRIPTION_PROCESS.PDF (noting

incumbent’s solicitation of interest from third parties in the development of a cost-based

transmission project in advance of receipt of transmission service requests from third

parties under the incumbent’s OATT).

42 See, e.g., Portland General Electric Co., 139 FERC ¶ 61,133 (2012) (granting

waiver of serial queue processing requirements, allowing a general facilities study for a

cluster of transmission and interconnection service requests).

43 See, e.g., Mountain States Transmission Intertie, LLC and NorthWestern Corp.,

127 FERC ¶ 61,270, at PP 2, 5 (2009) (incumbent developing an export-only

transmission project through a separate stand-alone company so that their existing

transmission customers will not be required to subsidize the cost of a new transmission

facility to serve off-system markets; the Commission presented the option of this project

proceeding on a cost-of-service basis).

Docket Nos. AD12-9-000 and AD11-11-000

- 25 -

manner that does not constitute undue discrimination or preference and is consistent with

the applicable Commission-accepted tariffs.44

IV.

Comment Procedures

28.

The Commission invites comments on this proposed policy statement

[Insert_Date 60 days after publication in the FEDERAL REGISTER].

V.

Document Availability

29.

In addition to publishing the full text of this document in the Federal Register, the

Commission provides all interested persons an opportunity to view and/or print the

contents of this document via the Internet through FERC's Home Page

(http://www.ferc.gov) and in FERC's Public Reference Room during normal business

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A,

Washington DC 20426.

30.

From FERC's Home Page on the Internet, this information is available on

eLibrary

interested persons an opportunity to view and/or print the

contents of this document via the Internet through FERC's Home Page

(http://www.ferc.gov) and in FERC's Public Reference Room during normal business

hours (8:30 a.m. to 5:00 p.m. Eastern time) at 888 First Street, NE, Room 2A,

Washington DC 20426.

30.

From FERC's Home Page on the Internet, this information is available on

eLibrary. The full text of this document is available on eLibrary in PDF and Microsoft

Word format for viewing, printing, and/or downloading. To access this document in

eLibrary, type the docket number excluding the last three digits of this document in the

docket number field.

31.

User assistance is available for eLibrary and the FERC’s website during normal

business hours from FERC Online Support at 202-502-6652 (toll free at 1-866-208-3676)

44 See National Grid, 139 FERC ¶ 61,129 at P 33.

Docket Nos. AD12-9-000 and AD11-11-000

- 26 -

or email at ferconlinesupport@ferc.gov, or the Public Reference Room at (202) 502-

8371, TTY (202)502-8659. E-mail the Public Reference Room at

public.referenceroom@ferc.gov.

By the Commission.

( S E A L )

Nathaniel J. Davis, Sr.,

Deputy Secretary.