FERC Order No. 1000: for Energy Providers

Presenting a live 90‐minute webinar with interactive Q&A

FERC Order No. 1000: New Demands for Energy ProvidersNavigating Significant Changes in Regional and InterregionalTransmission Planning Requirements and Cost Allocation

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

TUESDAY, NOVEMBER 1, 2011

Today’s faculty features:

Lyle D. Larson, Partner, Balch & Bingham, Birmingham, Ala.

Bob Edwards, Partner, Troutman Sanders, Atlanta

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FERC O d N 1000FERC Order No. 1000General Overview

Lyle D LarsonLyle D. LarsonBalch & Bingham LLP

November 2, 2011

1. This webinar does not constitute legal adviceadvice.

2. Opinions are only those of the presenters.

Order No. 1000 Key Findings

Existing Order 890 Processes are “Inadequate”

Key Findings

Existing Order 890 Processes are Inadequate No affirmative obligation to develop a regional plan reflecting evaluation

of “alternative regional solutions” Inadequate procedures to identify and evaluate benefits ofInadequate procedures to identify and evaluate benefits of

alternative regional solutions No requirement to expressly consider transmission needs at local or

regional level driven by Public Policy Requirements Federal recognition of incumbent ROFR might be discouraging

investment of time, energy and dollars toward alternative regionalsolutions

No inter-regional coordination is conducted to evaluate alternative inter-gregional facilities

Some cost allocation methods may let some “beneficiaries” ride free onsome occasions

7Copyright © 2011. Balch & Bingham LLP. All rights reserved

Primary Objectives

More just and reasonable rates through improving planning practices

Ensure non-discriminatory consideration of all possible regional transmission solutions

Ensure costs of regional transmission solutions are allocated fairly to all who receive benefits No Free Rides


Reforms

Four Primary Reforms:1. Mandatory regional plans built with processes to

l t h th “ ll d ” l l l ti ievaluate whether “rolled up” local plans optimize solutions

2 Removal of federal ROFR2. Removal of federal ROFR

3. Interregional planning

4 Cost allocation4. Cost allocation


Overview of “Reforms”Set 1

P bli Utilit T i i P id t ti i t i

Set 1

Public Utility Transmission Providers must participate in a regional process expressly considers alternatives to the transmission solutions that “roll up” from local plans p p(which implement IRP results).

A regional plan must be developed.

Both regional and local transmission planning processes must provide “an opportunity to consider” transmission needs driven by Public Policy Requirementsneeds driven by Public Policy Requirements.



Interjection of some form of competition in

Set 2

Interjection of some form of competition in transmission construction and ownership

Removal of ROFR from FERC tariffs and filed Removal of ROFR from FERC tariffs and filed agreements

R i d f k f lifi ti Required framework for qualification, submission and evaluation criteria and protocols

B t i t i f i i t diti l St t But promises not infringing on traditional State authority over utility facility need and siting


Overview of “Reforms”Set 3Set 3

Mandates to “improve coordination” across regional boundaries Procedures for joint evaluation and info sharing

regarding regional needs and solutions

Respective regions must consider whether inter Respective regions must consider whether inter-regional transmission solutions are more cost effective or efficient than regional solutions



R i t h th d l i f ll ti f

Set 4

Regions must have methodologies for allocation of costs of facilities selected in a regional plan for cost allocation Must be to all beneficiaries

Regardless of contract/customer status

No free rides

Participant Funding Per Se Insufficient as a regional cost allocation methodallocation method


FERC’s Ultimate ObjectivesObjectives

Remove impediments and increase opportunity for more transmission projects to be considered in the planning process on an equitable basisin the planning process on an equitable basis

Increase proportion of planned projects that move forward to constructionmove forward to construction


Implementation

Each indi id al reform in the package addresses a percei ed Each individual reform in the package addresses a perceived deficiency in existing FERC-approved transmission planning and cost allocation processes

Implementation therefore will focus on the separate processes that Implementation, therefore, will focus on the separate processes that have been found deficient

Order does not mandate a uniform national approach G t i fl ibilit t t il t i i l i d t Grants regions flexibility to tailor transmission planning and cost allocation processes to accommodate regional differences

But if no consensus FERC can mandate in compliance filing phase M if it i b k d th t More uniformity comes in back door that way


Implementation

Major Upcoming Events: Major Upcoming Events: Now: Transmission Providers Evaluating and Developing Outreach Plans

Regions Need to Crystallize Soon

Winter Spring: Regional and Inter Regional Consultations Among Transmission Winter-Spring: Regional and Inter-Regional Consultations Among Transmission Providers and Stakeholders on Implementation of Required Reforms

Summer 2012: Transmission Providers in Regions Finalize Plans and Develop FERC Compliance Filings

October 2012: Compliance Filings for Regional Planning

April 2013: Compliance Filings for Interregional Planning


Overview of Impact

Order 1000 is noteworthy on several levels: Order 1000 is noteworthy on several levels: Very rapid (premature?) abandonment of Order 890 processes. Not characteristic.

Seems in a hurry and politically driven. Shoots first, fills in the blanks later. Punting details to compliance filings avoids hard

questions but creates risks of delay and FERC mandates laterquestions but creates risks of delay and FERC mandates later. Theoretical need for reform. Theoretical basis for finding reforms just and reasonable. All new level of Federal intervention in industry. Is any practice that could be improved

inherently unjust and unreasonable? Has it asserted de facto jurisdiction over bundled retail and undermined IRP? States and j

integrated utilities seem to think so. Can “Beneficiary Pays” principle be extended to the outer reaches specified in the Order?

Aggressive interpretation of Section 206 authority.

Unless modified substantially on rehearing, major aspects likely to be vacated on appeal – but several years down the road. Is the intervening uncertainty worth it? FERC obviously made its decision. Time will tell.


FERC Order No. 1000:R f i T i iReforming Transmission

Planning & Cost Allocation RequirementsRequirements

PRESENTED BY

T t S d LLPTroutman Sanders LLPBob EdwardsPartner

Disclaimer • This webinar does not constitute legal advice. Opinions are

those of the presenters.

• These materials are intended to provide a review of the requirements of FERC Order 1000. In order to make discussion manageable these materials do not addressdiscussion manageable, these materials do not address questions of the authority of FERC to adopt Order 1000 or to impose its OATT tariff amendment requirements.

19

Topical Outline• Who is covered by the Rule?• What facilities are covered?What facilities are covered?• Compliance requirements

Transmission Planning• Transmission Planning• Inter-regional coordination• Public Policy related requirements• Cost Allocation• ROFR Controversy• Antitrust Considerationsus Co s de a o s

20

Who is Subject to the Final Rule? • Public Utility Transmission Providers

• Must submit OATT revisions to Attachment K and otherMust submit OATT revisions to Attachment K and other applicable agreements

• Combined regional compliance filings are permitted, but each public utility transmission providers OATT must include thepublic utility transmission providers OATT must include the relevant reforms

• ISOs/RTOs and Members• Like other public utility transmission providers, RTO/ISO and its

members may make a compliance filing to show their existing processes satisfy the requirements of the Final Rule p y q

• Members of RTOs/ISOs need not make a separate filing

21

Who is Subject to the Final Rule?

• Non-public utility transmission providers• To maintain a safe harbor tariff, non-public utility

transmission provider must ensure that their tariff is consistent with or superior to the pro forma OATT as p prevised by the Final Rule

• If the Commission finds that non-public utility t i i id t ti i ti i thtransmission providers are not participating in the transmission planning and cost allocation requirements of the Final Rule, the Commission may yexercise authority under FPA section 211A on a case-by-case basis

22

Which Facilities are Subject to the Final Rule?the Final Rule?

• Requirements of the Final Rule are intended to apply to new transmission facilities selected in a regional transmission plan for purposes of cost allocation • New transmission facilities are those which are subject toNew transmission facilities are those which are subject to

evaluation, or reevaluation, within a local or regional transmission planning process after the effective date of the Order No. 1000 compliance filing of the public utility transmission provider

• Each region should determine at what point a previously approved project is no longer subject to reevaluation, and thus isapproved project is no longer subject to reevaluation, and thus is subject to requirements of the Final Rule

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Compliance Items for Public Utility Transmission Providers Within 12 months of the Effective date

• Amend OATT to: • (1) detail procedures which provide for consideration of

transmission needs driven by public policy requirements in the localtransmission needs driven by public policy requirements in the local and regional transmission planning process;

• (2) identify the information that must be submitted by a prospective transmission developer in support of a transmission project it proposes in the regional transmission planning process; and theproposes in the regional transmission planning process; and the date by which such information must be submitted to be considered in a given transmission planning cycle;

• (3) eliminate federal ROFR provisions and demonstrate that the i l l i h i t lifi ti it i fregional planning process has appropriate qualification criteria for

determining an entity’s eligibility to propose a transmission project for selection in the regional transmission plan for purposes of cost allocation and whether it is an incumbent or non-incumbent; and (4) d ib d d l di i i• (4) describe a transparent and not unduly discriminatory process for evaluating whether to select a proposed transmission facility in the regional transmission plan for purposes of cost allocation

5

12 Month Compliance Requirements Continued

• Method or methods for allocating costs of new transmission facilities selected in the regional t i i l f f t ll ti ttransmission plan for purposes of cost allocation must be reflected in region-consistent OATT language.

• Must demonstrate that the method or methods satisfyMust demonstrate that the method or methods satisfy specified requirements: (1) costs allocated ex ante roughly commensurate with benefits,(2) no involuntary allocation of costs to non beneficiaries (3) benefit to costallocation of costs to non-beneficiaries,(3) benefit to cost ratio exceeding 1.25 requires justification, (4) allocation solely within planning regions unless others volunteer, (5) transparent method for identifying benefits and beneficiaries, and (6) different methods may be used for different types of facilities.yp

25

Compliance Items for Public Utility Transmission Providers Within 18 months of the Effective Date

• Develop procedures for sharing of information regarding the needs of neighboring transmission planning regions, g g p g g ,and for identification and evaluation by the neighboring transmission planning regions of potential interregional transmission facilities that address those needs

• Describe the methods by which they will identify and evaluate interregional transmission facilities

• Develop procedures by which differences in the data, models, assumptions, planning horizons, and criteria used to study a proposed transmission project can be y p p p jidentified and resolved for purposes of jointly evaluating the proposed interregional transmission facility

7

Compliance Items for Transmission Providers Within 18 months of the Effective date of the Final Rule continued

• Providers in each pair of neighboring transmission planning regions must develop the same language to be included in their OATT that describes the interregional transmission coordination procedures

H th d th d f ll ti th t f• Have a common method or methods for allocating the costs of a new interregional transmission facility among the beneficiaries of that transmission facility in the two neighboring transmission planning regions in which theneighboring transmission planning regions in which the transmission facility is located

• Demonstrate its cost allocation method for interregional costDemonstrate its cost allocation method for interregional cost allocation is just and reasonable and not unduly discriminatory or preferential by demonstrating that each method satisfies the six cost allocation principles

8

Transmission Planning• Transmission Providers must participate in a regional transmission

planning process which produces a single regional transmission plan that satisfies Order No. 890 principles

• Planning Regions must define themselves

• Public utility transmission providers must evaluate alternative transmission solutions that may be more efficient or cost-effective than those identified in local transmission processes

• Public utility transmission providers must also consider non-transmission alternatives proposed on a comparable basis (i.e. : demand response, and energy efficiency)

28

Transmission Planning• Transmission Providers in neighboring

transmission planning regions must coordinate p g gconcerning more efficient or cost-effective solutions• Does not have to meet Order No. 890 principles, but

each transmission provider in neighboring regions must develop same language in their OATT regarding interregional coordination

• Must adopt coordination procedures that allow for transparent exchange of data that can account for p gany differences in data

29

Interregional Coordination Requirements

• Transmission Providers in neighboring transmission regions must develop a formal procedure to identify and jointly evaluate i t i l t i i f iliti th t d t b l t dinterregional transmission facilities that are proposed to be located in neighboring regions as well as facilities that could address transmission needs more cost-effectively and efficiently

Th i t i l t i i di ti d t id f• The interregional transmission coordination procedures must provide for the exchange of planning data and information at least annually

• A website or email list must be maintained to communicate information related to coordination proceduresrelated to coordination procedures

• Transmission Providers must update their OATTs to describe the interregional transmission coordination procedures for a particular g p ppair of regions• Transmission Providers have the option of filing an interregional

transmission coordination agreement

30

Public Policy Consideration in Transmission PlanningTransmission Planning

• Each transmission planning processes (local and regional) m st consider transmission needs dri enregional) must consider transmission needs driven by established federal or state laws or regulations (public policy requirements)• “Public policy requirements” – enacted statutes and regulations

promulgated by a relevant jurisdiction (state or federal)• No mandate to include any specific requirementy p q

• Transmission Providers and stakeholders will determine procedures to identify transmission needs and potential solutions (including potential consideration of requirements under EPA

l ti ) d d t b j t d bl d tregulations) procedure needs to be just and reasonable and not unduly discriminatory

• Not precluded from choosing to plan for goals

31

Public Policy Requirements continued• By “consider” FERC means: (1) the identification of transmission

needs driven by public policy requirements and (2) evaluation of potential solutions to meet those needs. Need procedures for bothp p

• At a minimum, procedures must allow for input from stakeholders, including but not limited to, those responsible for complying with the public policy requirements and developers of potential transmissionpublic policy requirements and developers of potential transmission facilities that are needed to comply with one or more requirements

• Must identify out of the larger set of needs, those needs for which transmission solutions will be evaluated (Committee of LSEs;transmission solutions will be evaluated (Committee of LSEs; Committee of state regulators; stakeholder group)

• Post on website an explanation of which transmission needs - driven b bli li i t ill b l t d f t ti lby public policy requirements - will be evaluated for potential transmission solutions in the local or regional transmission planning process, as well as an evaluation of why other suggested transmission needs will not be evaluated

32

Cost Allocation Principles• Regional and interregional cost allocation

methods must meet six principles:methods must meet six principles:

1. Cost must be allocated roughly commensurate with benefits; g y2. No benefits = No cost allocation; 3. No cost allocation beyond region unless agreed; 4. No benefit/cost ratios higher than 1.25; g ;5. Transparency; and6. Different methods for different types permissible.

33

ROFR CONTROVERSY• Vertical integration remains suspect at

FERC perceived as a barrier to entryFERC—perceived as a barrier to entry• Order 1000 includes some acknowledgment

of the transaction cost issues raised byof the transaction cost issues raised by FERC’s approachThe ROFR was a compromise in some• The ROFR was a compromise in some RTO/ISO marketsN i t i diffi lt li• New requirements raise difficult compliance issues

34

Removal of ROFR

• What is a ROFR: the right of an incumbent to construct, own, and propose cost recovery for any p p y ynew project that (1) is located within its service territory; and (2) approved for inclusion in a new transmission plan developed through the Order No. 890 l i890 planning process

• What does the rule do: remove from OATT, C i i d t iff d tCommission-approved tariffs, and agreements any provision that grants a federal ROFR for facilities selected in a regional plan for purposes of cost allocationallocation

35

Removal of ROFR continued

• Scope: FERC rejects request that reforms related to non-incumbent transmission developers do not apply in

RTO i “Th f l ll t blinon-RTO regions. “The reforms apply equally to public utility transmission providers in all regions.”

• For RTOs it may mean removing affirmative provisions granting ROFR (e.g. SPP Attachment O Section VIII; CAISO Tariff Section 24.4 6.2; MISO Transmission Owners Agreement Appendix B Section VI)Appendix B Section VI)

• For Non-RTOs it will be adding provisions to Attachment K regarding ability of non-incumbents to be able to develop projects approved in the regional transmission plan for purposesprojects approved in the regional transmission plan for purposes of cost allocation

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Removal of ROFR continued• Focus is on the set of transmission facilities that are evaluated atFocus is on the set of transmission facilities that are evaluated at

the regional level for purposes of cost allocation – not projects included in the local plan that are rolled-up without going through a needs analysis at the regional level

• Does not require removal of a federal ROFR for local transmission facility – facility located solely within the utility’s retail distribution service territory or footprint that is not selected in the regional plan for purposes of cost allocationg p p p

• Does not affect the right of the incumbent to build, own and recover costs for upgrades to its own transmission facilities -such as tower change outs or reconductoring - regardless of whether or not the project has been selected in the regional planwhether or not the project has been selected in the regional plan for purposes of cost allocation

• Does not alter the incumbent’s use and control of an existing right of way

• Order disavows preemption of state or local laws or regulations with respect to construction of transmission facilities, including but not limited to, authority over siting or permitting of transmission facilities

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Removal of ROFR continuedR i i b t d l f f ilit l t d• Requires nonincumbent developers of a facility selected in the regional plan to have comparable opportunity to transmission developer to allocate the cost through a regional cost allocation method or methodsregional cost allocation method or methods

• Must establish framework in consultation with stakeholdersstakeholders

• May, but are not required to, use competitive solicitation to solicit projects or project developers to meet regional needsneeds

• Change from NOPR – elimination of proposed requirement to allow a developer to maintain for a defined period a right to build and owndefined period, a right to build and own

38

Need to DevelopQ lifi ti it i id d l th t it t• Qualification criteria – provide developer the opportunity to demonstrate that it has the necessary financial resources and expertise to develop, construct, own, operate and maintain transmission facilities • Must provide opportunity to remedy a deficiency• No qualification is necessary for parties that only propose transmission

projects but do not intend to develop them• May enter voluntary arrangements - nothing requires incumbent to y y g g q

operate and maintain facility developed by another party

• Protocols for submission and evaluation • Must have in OATT the same information requirements as other q

providers in the same planning region• Must allow a project to be evaluated on a comparable basis• May request engineering studies and cost analysis

• Criteria for evaluation - The evaluation process must culminate in a determination that is sufficiently detailed for stakeholders to understand why a particular project was selected or not selected in the regional transmission plan for purposes of cost allocation g p p p

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ReliabilityT i i O h t b ild f iliti th t• Transmission Owner can choose to build facilities that are located within its retail service territory or footprint and not submitted for regional cost allocation

• OATT must describe the circumstances and procedures under which providers in the regional planning process will reevaluate the regional plan to determine if delays in the development of a facility selected require evaluation ofdevelopment of a facility selected require evaluation of alternative solutions, including those that the incumbent transmission provider proposes to ensure the incumbent can meet its reliability needs or service obligationsy g

• FERC recognizes there may be circumstances when an incumbent may be called upon to complete a project that it did not sponsor this would be a basis for the incumbentdid not sponsor – this would be a basis for the incumbent transmission provider to be granted abandoned plant recovery upon filing with FERC

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Antitrust Considerations

• The expanded coordination between actual and potential competitors contemplated and required by the Rule raises additional compliance considerations

• Under Otter Tail Power Co Federal Power Act encouragement of voluntary• Under Otter Tail Power Co. Federal Power Act encouragement of voluntary coordination conferred no antitrust immunity implied beyond “filed rate doctrine” protection from private suits based upon excessive rates

• Parties will want to be able to demonstrate that collaborative actions are pursuant to FERC di ti d th R l d d t d th t i d t i i iFERC directives under the Rule and do not exceed that scope in order to minimize the risk of private claims or federal enforcement actions

• Expanded scope of FERC’s regulatory reach may warrant broader view of immunity under Credit Suisse but there is at present no decision revisiting Otter Tail’s p grationale and holding in the present expanded regulatory context

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Thank you

Bob Edwards404.885.3134 [email protected]

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O d N 1000Order No. 1000 Cost Allocation Reforms

Lyle D LarsonLyle D. LarsonBalch & Bingham LLP

November 2, 2011

Regional RequirementRequirement

Transmission Providers to establish a commonmethod or set of methods for allocation thecosts of:costs of: New

T i i f iliti Transmission facilities

Selected

In the Regional Transmission Expansion Plan

For purposes of cost allocation


Interregional Cost AllocationAllocation

For Interregional: Each TP must establish method(s) to allocate cost of:

New

Transmission facilities

Selected

By both regions

For purposes of cost allocation in each Region

And only in regions where facility(ies) located.


Allocating What?

Th d tl i d t f th l t d f ilit i The prudently incurred cost of the selected facility isbeing allocated.

Many unanswered questions:Many unanswered questions: Cost allocation is not cost recovery. Who/How will the cost be determined as prudent? How will delays or cost over-runs be handled? What is preemptive effect of acceptance in plan? Will FERC conduct prudence reviews?Will FERC conduct prudence reviews? Who is the seller and who is the buyer? How will States protect retail ratepayers?


Allocating How?

“B fi i ” “Beneficiary” pays.

Participant funding not acceptable.

Must allocate in rough proportion to benefits.

Stamping out free ridership is one of the chief goals ofOrder No 1000Order No. 1000.

Regions based on rolling up local plans, beneficiariesare those whose facilities displaced by better optionare those whose facilities displaced by better option.

Regions using top down planning have more work to do.


Six Criteria

Actually four criteria and two observations:1. Cost must be allocated roughly commensurate with

benefits;benefits;

2. No benefits (now/likely future scenario) = No cost allocation;

3. No cost allocation beyond region unless agreed;

4. No benefit/cost ratios higher than 1.25;

5. Transparent application; and

6. Different methods for different types permissible.


The Ultimate Test of a Cost Allocation Method

D it f l f id ?

Cost Allocation Method

Does it foreclose free riders? (If not, see fate of participant funding).

What is a free rider anyway? What is a free rider, anyway? A beneficiary that defers investment in the hopes that other

beneficiaries will value a transmission project enough to fund itsd l tdevelopment.

Sort of a nebulous concept. Lots of room for interpretation. FERC’s reasons that free riders must pay a toll under costp y

causation principles because: “without the expectation of [their] contribution, the facilities

might not have been built, or might have been delayed.”


LIKELY APPROACHES

In regions with unbundled service model with RTOsplanning transmission, existing methodologies will bep g , g gtweaked and continued.

In regions with vertically integrated load serving entities,OATT service obligations and IRP processes willOATT service obligations and IRP processes willcontinue to drive identification of transmission needs. Project costs needed to meet reliability requirements in a region

will be allocated to the transmission networks’ revenuerequirement.

Project costs needed to meet the transmission needs of specificload serving entities will be allocated to those entities.

Regional projects that are more efficient or cost effective thanprojects rolled up through local process will be allocated to thebeneficiaries of the displaced projects.


Thank you.y

Lyle D LarsonLyle D. Larson(205) 226-3441llarson@balch [email protected]


FERC Order No. 1000: for Energy Providers

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