On January 31, 2020, FERC rejected Southwest Power Pool, Inc.’s (“SPP”) proposed Tariff revisions to eliminate SPP’s current policy of offering transmission revenue credits as reimbursement for certain transmission network upgrades, and to instead provide term- and value-limited transmission congestion rights for all such upgrades. Under SPP’s proposal, a party that funds certain network upgrades would receive incremental transmission congestion rights for a limited term of up to twenty years or until the party that sponsored the upgrade recovered their costs, with interest. FERC held that this cap on recovery would disincentivize construction of merchant transmission projects, and rejected SPP’s proposal without prejudice to SPP submitting a revised proposal that does not impose a cap on the term and value of the incremental transmission congestion rights.

Currently, SPP offers two reimbursement options to parties that fund sponsored upgrades (i.e., certain transmission network upgrades requested by the transmission customer that do not include generator interconnection-related upgrades): transmission revenue credits or transmission congestion rights. Pursuant to Attachment Z2 of SPP’s Tariff, parties that fund sponsored upgrades may receive credit for the cost of transmission service over SPP’s system as reimbursement for the cost of those upgrades. Incremental transmission congestion rights entitle the holder to a payment or charge equal to the difference in the congestion component of the locational marginal price between a source and sink point on the system. The term of the transmission congestion rights is between ten and twenty years.

SPP’s filing explained that the revenue crediting approach under Attachment Z2 has increased transmission service rates by roughly two percent on average, created additional upgrade costs, and created substantial complexity and uncertainty in the transmission service study process. Instead, SPP proposed to offer only incremental transmission rights to parties that fund Sponsored Upgrades, capped for a term of twenty years or until the funder recovers the cost of the upgrade, including interest.

SPP’s proposal faced opposition from various parties including a group of renewable energy developers, who primarily argued that that the proposal violated FERC precedent because an upgrade sponsor would be unable to profit from its investment in the upgrade as a result of the cap on the amount of transmission congestion rights received. The renewable developers also argued that transmission congestion rights are unpredictable, risky, and that SPP transmission customers have never selected them over transmission revenue credits; that using a congestion hedging product would not ensure all beneficiaries of a sponsored upgrade pay a rate commensurate with the benefits they received from the upgrade; and that the SPP Board did not vote on the Tariff sheets included in SPP’s filing, as required by its Membership Agreement and bylaws.

FERC rejected SPP’s proposal without prejudice on the basis that capping the term and value of the transmission congestion rights at the cost of the upgrade would unjustly and unreasonably eliminate the funding party’s ability to earn a profit on its investment. In rejecting SPP’s proposal on these grounds, FERC did not address other arguments by protesting renewable developers or other intervenors.

FERC’s January 31 order is available here.