On January 31, 2012, FERC issued a notice of workshop that will take place on February 28, 2012.  Among other topics, the workshop will include a discussion of whether it would be appropriate to utilize open seasons as a way to allocate capacity on a merchant transmission line.The Commission seeks comment on a method for distinguishing among bidding customers to allow for one customer to obtain 100 percent of the capacity in an open season context.

Merchant transmission projects are distinct from traditional public utility transmission projects because merchant developers do not have captive customers; therefore, the merchant developers assume the entire risk of a project and must recover the costs of constructing the proposed transmission facilities through market based rates (instead of cost-based rates).  Prior to 2009, the Commission followed a policy of requiring merchant developers to allocate all of the capacity on a proposed line through an “open season” auction.  However, in February 2009, the Commission allowed Chinook Power Transmission, LLC and Zephyr Power Transmission, LLC to award portions of presubscribed capacity on their proposed lines to “anchor customers.”  The remaining capacity was then auctioned through an open season.  The Commission has since rejected an application by SunZia Transmission, LLC which requested that an anchor customer receive 100 percent of the capacity on a merchant transmission line.  However, FERC has never foreclosed the possibility that an anchor tenant may hold 100 percent of the capacity on a merchant transmission line. 

Thus, the Commission is conducting the upcoming workshop to receive comments on whether a customer should be permitted to hold exclusive capacity on a merchant line.  Again, FERC is interested in ensuring that this model does not foreclose open access to merchant transmission lines that would otherwise be available during an open season. 

FERC posed the following questions in preparation for the February 28 workshop:

  1. Would the above-noted approach provide similar benefits as presubscription of anchor customers? If not, in what ways does presubscription of anchor customers enable a project to succeed that are not also satisfied by allocating up to 100 percent of capacity through an open season, including to a single customer?
  2. In the event of an oversubscription in an open season, would it be appropriate for the Commission to clarify that there is no obligation to prorate capacity allocations where bids are distinguishable by transparent and not unduly discriminatory criteria, such as creditworthiness, term of service sought, price bid, and net present value?
  3. What criteria should the Commission use in evaluating whether a developer has appropriately sized a line?
  4. Given the protections afforded by the open season process, should the Commission permit affiliates of the merchant transmission developer to be awarded up to 100 percent of capacity in the open season?
  5. What are the characteristics of a well-designed open season process? Are there lessons learned from the use of open seasons for natural gas pipeline development that are relevant to merchant development of electric transmission?
  6. Are the existing open season reporting requirements adequate to provide transparency as to how capacity rights are allocated?
  7. Should the Commission retain its practice of considering responses to requests for proposals (“RFP”) by a merchant transmission developer to satisfy open season requirements, provided that any capacity in excess of the RFP amount be allocated through an open season?

Transmission development and cost allocation have been central issues for the Commission over the past decade.  In an effort to encourage more transmission development, the Commission issued Order No. 1000 which required regional planning and forms of cost socialization across regional ratepayers, among other things.  The Commission, however, specifically excluded merchant developers from most Order No. 1000 reforms and regional planning requirements which focused mostly on how costs of new transmission upgrades are to be allocated among regional ratepayers through cost-based rates. 

With respect to planning, the Commission encouraged the participation of merchant developers, but only required them to “provide adequate information and data to allow public utility transmission providers in the transmission planning region to assess the potential reliability and operational impacts of the merchant transmission developer’s proposed transmission facilities on other systems in the region.”  Thus, under Order No. 1000, merchant projects are essentially “inputs” into the regional planning process and are not necessarily identified as reliability and/or economic projects through the regional planning process contemplated by the order.

When the Commission first green-lighted the use of anchor customers by developers in Chinook and Zephyr, FERC cited the “chicken-and-the-egg scenario” (i.e., wherein transmission needs are identified by the market, but the market is unwilling to make the initial financial commitment due to perceived risks).  There have been instances in which open season auctions did not provide sufficient commercial support to attract investors, and hence, the anchor tenant model was developed. 

A link to the FERC notice is available here.