Order 1000: driving transmission investment in the United States

May 2013 | EXPERT BRIEFING | SECTOR ANALYSIS

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Nearly two years ago, the United States Federal Energy Regulatory Commission (FERC) issued its final rule requiring the implementation of major reforms in transmission planning and cost allocation for transmission providers in the US (Order 1000). Order 1000 will profoundly impact the US electric transmission system, likely leading to hundreds of billions of dollars of investment in, and the expansion of, transmission infrastructure throughout the US. Two major features of Order 1000 are highlighted below.

Order 1000 required all FERC-jurisdictional transmission providers to submit compliance filings proposing how they would engage in regional and interregional transmission planning and cost allocation, consistent with the principles and requirements set forth in Order 1000. Transmission providers submitted compliance filings on the regional aspects of Order 1000 late last year. In March 2013 the FERC issued its first set of orders on those compliance filings, conditionally accepting some of those filings, and is now considering the remaining proposals. The recently-issued orders provide insight into how the FERC intends to implement the requirements of Order 1000, particularly with respect to the ability of nonincumbent transmission developers to participate in transmission expansion, as well as how the costs of new transmission will be allocated among the various users of the transmission grid.

Order 1000 restructures the US transmission business in two key ways that should spur investment in new transmission. First, Order 1000 requires transmission planning on a regional and interregional basis. Each transmission provider must participate in a regional transmission planning process that produces a regional transmission plan, rather than developing transmission on an individual company basis. The regional plan must identify transmission needs, and evaluate and select solutions that are more efficient or cost effective than individual solutions developed by each of the individual transmission providers in a region. As part of this regional transmission planning process reform, the FERC has ordered the elimination of the incumbent transmission providers’ so-called ‘rights of first refusal’ to build and own regional transmission. Instead, the FERC has mandated that the future construction and ownership of all regional transmission projects receiving regional cost allocation be open to both incumbent utilities and non-incumbent, independent transmission developers on a competitive basis, subject to qualification criteria. This opening of regional transmission development to competitive processes will provide substantial investment opportunities, for both new entrants into transmission development and existing transmission utilities that seek to develop transmission outside their normal transmission service area. The FERC affirmed its commitment to competitive transmission development in its initial orders on the Order 1000 compliance filings by finding against any special legal protection of asserted exclusive rights on the part of incumbent transmission owners to build transmission.

Under Order 1000, the regional transmission planning processes must also consider transmission needs driven by public policy requirements established by statutes and regulations of federal, state and local governmental entities. Such requirements include renewable energy and environmental requirements. Planning for public policy requirements will be a major change and could lead to significant expansion of transmission to meet state renewable energy and environmental requirements, because much of the renewable generation potential is remote from load centres in the US. While Order 1000 mandates only that public policy requirements be “considered” and potential solutions “evaluated”, some regions submitted compliance proposals that go well beyond that requirement. For example, New England has proposed a complete state-led process for getting public policy transmission built through a competitive solicitation and for allocating the costs of such transmission among participating states.

Second, Order 1000 will encourage new transmission investment by establishing much-needed requirements for transmission cost allocation. A clear, comprehensive cost allocation method is one of the most important factors in getting new transmission built, given the potential for multi-billion dollar investments in major transmission. For many regions of the US, agreement on such a method has been the hardest transmission expansion issue to resolve, impeding the integration of new renewable energy resources. Order 1000’s requirements should overcome this obstacle. The order requires that transmission providers have in place a method for allocating the costs of new regional transmission facilities selected in the regional transmission plan. While Order 1000 allows each region considerable flexibility to determine its cost allocation methods, the order requires that each method satisfy specified cost allocation principles, the most important of which is that costs must be allocated in a way that is “roughly commensurate” with identified benefits. These regional cost allocation methods must be applied not only to regional transmission plan projects that are developed by incumbent transmission utilities, but also to those projects developed by nonincumbent transmission developers, including existing transmission providers building transmission outside their service areas. In its recent orders on compliance the FERC also made clear that for any projects that are actually built as part of the regional transmission plan, the cost allocation must be binding upon the identified beneficiaries of such projects. The FERC rejected a proposal that provided only for voluntary participation in the cost allocation of regional projects. Thus, the FERC has paved the way for transmission cost allocation certainty.

The result of Order 1000’s requirements for transmission planning and cost allocation will be increasing opportunities across the US for investment in new transmission projects, with nonincumbent transmission providers playing an increasing role. These new entrants may charge for transmission service under traditional cost-of-service ratemaking principles or on a merchant basis (i.e., negotiated rates established through competitive processes). For transmission projects using cost-of-service rates, moreover, it may be possible to qualify for various rate incentives, such as an enhanced return on equity; recovery of abandonment costs; inclusion of 100 percent of construction work in progress in rate base; hypothetical capital structures; accelerated depreciation for rate recovery; and recovery of prudently incurred pre-commercial operation costs. For merchant transmission projects, the FERC recently adopted policies providing the developer increased flexibility, including allowing the developer to negotiate agreements that provide priority access rights to a single customer or set of customers that will use up to 100 percent of the newly-constructed transmission capacity.

Order 1000 provides significant transmission investment opportunities. A key to unlock those opportunities will be to know the particulars of each region’s planning process and cost allocation methods and the FERC’s rules regarding cost recovery and rates.

William T. Baker, Jr. is of counsel, Michael D. Hornstein is a partner and Eric K. Runge is senior counsel at Day Pitney LLP. Mr Baker can be contacted on +1 (212) 297 2482 or by email: wbaker@daypitney.com. Mr Hornstein can be contacted on +1 (202) 218 3902 or by email: mhornstein@daypitney.com. Mr Runge can be contacted on +1 (617) 345 4735 or by email: ekrunge@daypitney.com.

William T. Baker, Jr., Michael D. Hornstein and Eric K. Runge

Day Pitney LLP