The Federal Energy Regulatory Commission’s (FERC’s) latest reform to the electric transmission market, Order 1000, has stunned most market participants.The mandatory elimination of incumbent right of first refusal (ROFR) under Order 1000 is of particular focus for the industry. On May 28, more than 30 utilities, trade associations and state commissions filed legal briefs with the U.S. Court of Appeals in Washington, D.C., asserting that FERC is overstepping its jurisdiction.
The Final Order requires that with limited exceptions only jurisdictional transmission owners must remove from their OpenAccess Transmission Tariff (OATT) any tariff language that permits incumbent utilities a priority right to develop a regional transmission project. FERC has steadfastly maintained its position to eliminate the ROFR and has largely rejected filers’ proposals to retain it with the exception of limited cases involving specific upgrades and projects on existing rights-of-way.
The elimination of ROFR has the potential to pit incumbents and merchant developers in a head-to-head battle for projects that may have otherwise naturally fallen into one of the following categories:
- Broad regional programs/native load requirements. These projects are typically selected via a FERC-approved regional planning process and costs are recovered through a cost-based tariff (with the potential, in certain cases, for FERC incentives) charged to captive ratepayers. Incumbent utilities have traditionally accepted the role as principal developers of the nation’s transmission backbone system for many reasons, including their well-defined primary obligations under their existing tariffs to maintain reliable utility service and to expand capacity to lines when requested from potential new transmission customers.
- Niche market segment programs. Merchant and other non-incumbent transmission developers typically develop transmission either through bearing significant, if not all, development risk up-front, or through executing participant funding approaches. This group also has demonstrated an ability to design and build complex transmission projects that have been typically focused on the delivery of new renewable supply to specific market participants. Although the scale of some of these projects is comparable to some regional ones, few small to mid-sized merchant developers have significant experience with developing large-scale regional projects serving reliability or economic needs exclusively. To date, success for merchant developers following this model has hinged on being able to nimbly develop and design projects that serve a specific market need and to match that capacity with the right market participant.
All successful transmission developers must demonstrate requisite operational, financial, construction and managerial capabilities to develop any transmission project. Incumbent utilities could expand their reach of project development activities outside of the defined steps and reach of the regional planning process and into the traditionally merchant-dominated space. Because most incumbents can develop projects pursuant to an existing OATT with capacity expansion obligations, they may potentially mitigate extensive FERC review of capacity subscription in some instances. The successful incumbents in this space may be those that cultivate or transfer the skill sets required to design and deliver projects quickly and to market efficiently to match capacity with the needs of specific market participants. Early adapters such as Northeast Utilities have already embarked on this course with their Northern Pass project, a cost-based, participant-funded $1.4 billion project linking Canadian renewable resources with the New England market, slated for service in 2017.
Likewise, merchants/non-incumbents will now have an opportunity to expand into regional transmission projects. Developers that successfully engage in the regional transmission planning process, tolerate the potentially longer approval lead time and accommodate projects serving primarily reliability and economic needs (in addition to public policy potentially) will have an advantage. Evidence exists that early merchant adapters are moving into this space. In late July, seven companies responded to PJM’s first solicitation process that requested regional proposals to resolve a transmission constraint in southern New Jersey known as the “Artificial Island.” According to SNL Energy (July 29, 2013), project proposals ranged “from a 5-mile, 230-kV project to 500-kV lines estimated at more than $1 billion” and that among the seven proposals, three were from merchant (member) developers.
It is too early to tell who will be the winners and losers under FERC Order 1000. However, smart money may be wagered on those who are accepting change and adapting early to the changing sands of federal energy regulation.
David DesLauriers (email@example.com) is a director within the Finance & Markets practice at Black & Veatch. In this role he directs advisory engagements related to federal energy regulatory affairs.