On Thursday, January 17, 2013, FERC issued its Final Policy Statement, Allocation of Capacity on New Merchant Transmission Projects and New Cost-Based, Participant-Funded Transmission Projects; Priority Rights to New Participant-Funded Transmission (“Final Policy Statement”). FERC stated that the Final Policy Statement clarifies and refines its existing four-factor analysis used to evaluate requests for negotiated rate authority for transmission service. The four factors of FERC’s analysis include: (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. Going forward, merchant transmission developers who comply with the policies laid out in the Final Policy Statement will be considered to have satisfied the second and third factors of the analysis. The first and fourth factors will remain elements of FERC’s analysis of merchant applications for negotiated rate authority.

FERC has been developing the Final Policy Statement for some time, first holding a technical conference in March 2011 (see February 24, 2011 edition of the WER), and later, in February 2012, holding a follow-up workshop in order to obtain feedback on specific potential reforms to FERC’s policies on capacity allocation. (See February 13, 2012 edition of the WER.) FERC issued its proposed policy statement on the allocation of capacity on new merchant transmission projects and new cost-based, participant-funded transmission projects in July 2012.

In crafting the Final Policy Statement, FERC aimed to provide more flexibility in the capacity allocation process for customers and transmission developers, while continuing to satisfy its statutory responsibility to ensure that the resulting allocation of new transmission capacity is not unduly discriminatory or preferential. As such, FERC refined its capacity allocation policies “to allow the developer of a new merchant transmission project 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 rates, terms, and conditions for procuring up to the full amount of transmission capacity, when the developer (1) broadly solicits interest in the project from potential customers and (2) demonstrates to FERC that the developer has satisfied the solicitation, selection and negotiation process criteria set forth” in the Final Policy Statement.

In addition to new merchant transmission projects, FERC applied the Final Policy Statement to nonincumbent, cost-based, participant-funded transmission projects; however, use of this common process does not eliminate the distinction between these two types of projects. Unlike rates negotiated for new merchant transmission projects, for a nonincumbent, cost-based, participant-funded transmission project, FERC will review the transmission rates, terms and conditions, including any agreed-upon return on equity, more closely to ensure that they satisfy Commission precedent regarding cost-based transmission service.

Additionally, FERC reaffirms that all merchant transmission developers and nonincumbent cost-based, participant-funded transmission projects will become public utilities at the time their projects are energized, if they have not become public utilities earlier, and as such will be subject to FERC Open Access Transmission Tariff (“OATT”) requirements, which expressly includes the obligation to expand their transmission system as necessary to provide transmission service.

With regard to cost-based participant-funded transmission projects by incumbent transmission providers, FERC is not changing its current use of case-by-case evaluation of requests. FERC also clarified that those developers that have already been granted negotiated rate authority must seek Commission approval to deviate from their current authorized capacity allocation process if they want to utilize the capacity allocation process described in the Final Policy Statement.

Open Solicitation Process

In lieu of the prior requirement to host a formal open season process, merchant transmission developers seeking negotiated rate authority may now instead engage in an open solicitation of interest in their projects from potential transmission customers. Such open solicitation must include a notice issued in a way such that all potential customers are informed of the proposed project. The notice needs to include information to help notify potential customers of the nature of the project and to specifically indicate customer selection criteria, including a specific set of objective criteria that will be used to rank prospective customers. The merchant developer must update its posting if there are any material changes that occur with regard to the project itself or the capacity allocation parameters.

A developer may only engage in bilateral negotiations with specific potential customers once a subset of the customers responding to the open solicitation has been identified by the developer as prospective partners through transparent and not unduly discriminatory or preferential criteria. The prospective customer base may include affiliates, but such inclusion will require the developer to demonstrate that the assignment of capacity to its affiliate is not unduly preferential or discriminatory. These negotiations may be individualized as needed to address project-specific needs and may result in the allocation of the entire capacity of the project. Specifically, FERC will allow for distinctions among these discussions with prospective customers as long as these negotiations are recognizing material differences. FERC states that “developers might offer ‘first mover’ customers more favorable rates, terms, and conditions than later customers.” Importantly, while these negotiations for the allocation of initial transmission rights may address terms and conditions of transmission service, any deviations from FERC’s pro forma OATT that are negotiated by the parties must still be justified as consistent with or superior to the pro forma OATT when the transmission developer files its OATT with FERC.

Post-Selection Demonstration

FERC required merchant transmission developers to disclose the results of their capacity allocation process in a post-selection demonstration. To address the issues of transmission siting fatigue and right-of-way limitations, the Final Policy Statement required that the sizing of facilities be based on objective criteria, and will consider this factor in the evaluation of the proposed allocation of capacity on a project. This disclosure will operate as part of FERC’s approval of the capacity allocation process, and will be noticed and acted upon under section 205 of the FPA.

Additionally, interested parties also remain entitled to exercise their statutory right to challenge the process under section 206 of the FPA. The developer will have the burden to demonstrate that its process was in fact not unduly discriminatory or preferential, and that it resulted in rates, terms, and conditions that are just and reasonable. Developers may request and argue for confidential treatment if they are concerned with making certain information publicly available at the time that they file their post-selection demonstrations. FERC did not set a specific time frame for a developer to make its request for approval of its capacity allocation process. Rather, the request for approval may occur after completion of the customer selection process, or a developer can seek initial approval of its capacity allocation approach, and after utilizing the process, submit its post-selection demonstration in a compliance filing. In the demonstration, the merchant transmission developer should describe the criteria used to select prospective partners from the pool of potential customers.

A copy of the Final Policy Statement can be found here.