Benefits (and Pitfalls) of Sharing Qualifying Facility Interconnections

Benefits (and Pitfalls) of Sharing Qualifying Facility Interconnections Benefits (and Pitfalls) of Sharing Qualifying Facility Interconnections

by Ken Kaufmann, Partner, and Charles von Reis, Senior Associate, Lovinger Kaufmann LLP[1]
September 2012
 

I.  Introduction

Much of the wind and solar generation under development in the western United States is built and operated by private energy companies who contract to sell their output as qualifying facilities (QFs) to an electric utility pursuant to the Public Utilities Regulatory Policies Act of 1978 (PURPA).[2]  These new generators naturally cluster in areas with favorable sun and wind conditions, often in remote areas with little existing electrical infrastructure.  Solar and wind resources often are developed simultaneously or sequentially as separate QFs—resulting in multiple QFs in close proximity.[3]  Such closely sited QFs can substantially improve their profitability by sharing interconnection facilities needed to deliver their output to the utility.

Non-PURPA generators owning shared interconnection facilities typically become subject to the full range of Federal Energy Regulatory Commission (FERC) regulations applicable to transmitting utilities.  But qualifying facilities may, in some cases, share interconnection facilities without substantially increasing FERC regulation of those facilities.[4]  Sharing an interconnection creates new issues, however, including allocation of operations and maintenance obligations, ownership rights, and allocation of line losses.  This article describes three contractual approaches to implementing shared interconnections for qualifying facilities and identifies the most important considerations to address in the contracts.

II.  Why Share?

For an interconnection that will cost millions of dollars to construct, the money saved by sharing interconnection facilities will dwarf the resulting transactional complications.  In addition to saving construction costs, sharing facilities can shorten construction timelines and reduce risk.  Fewer power lines means fewer easements, fewer permits, and less environmental review.  Upon completion, shared facilities provide the benefit of lower operating costs.

Sharing an interconnection does add layers of complication.  The parties must agree on the terms of sharing.  Property may need to be transferred from one developer to another.  And the developers must be mindful of their obligations as transmission owners under the Federal Power Act.  However, as this article explains, the additional transactional demands of sharing an interconnection are surmountable.

III.  Models for Sharing Among Owners

There are two basic models for sharing ownership of jointly used interconnection facilities: direct and indirect.  Both models offer the benefits of QF status—so long as the facilities are used only to transmit to and from QFs, the facilities are deemed to be part of the QFs.  QF status exempts the transmission facilities from most FERC transmission regulations. If a third-party seeks to use the transmission facilities, however, these exemptions can be lost.  A later section of this article discusses the potential FERC regulatory consequences associated with third-party use of facilities.

A.  Joint Ownership of Interconnection Facilities: the Sagebrush model

FERC approved a joint ownership model wherein six QFs, (the “Sagebrush QFs”) jointly owned over 50 miles of interconnection and transmission facilities, including the 46-mile Sagebrush transmission line, used for delivery of the QFs’ output to the utility Southern California Edison.[5]  All owners were QFs and only QFs used the facilities.  The QFs entered into a non-profit partnership agreement for the administrative convenience of sharing ownership and operation and maintenance costs.  FERC concluded that the shared interconnection and transmission facilities were part of the QFs and therefore not subject to FERC Open Access Transmission Tariff (OATT) regulation.  FERC suggested that the same rule applies even where the QFs share the transmission line with exempt wholesale generators (EWGs), so long as the EWGs share ownership in the same manner as the qualifying facilities.[6]

B.  Joint Ownership of LLC that owns Interconnection Facilities: the JMC Wind model

In JMC Wind, FERC approved an arrangement wherein multiple qualifying facilities owned a single LLC that in turn owned interconnection facilities used only by qualifying facilities.[7]  The LLC was a special purpose entity created for the purposes of constructing, owning and operating a substation and related equipment, interconnection facilities, and a high voltage collector system serving the QFs.  Even though the QFs contracted with the special purpose LLC to use the shared facilities, for purposes of FERC regulation, the JMC Wind model is indistinguishable from the Sagebrush model.  FERC determined that because the interconnection facilities were ultimately owned by the qualifying facilities that use them the QFs were free from FERC OATT regulation.  As discussed later in this article, the JMC Wind model has an advantage over the Sagebrush model in that a single entity (the special purpose LLC) contracts for interconnection with the interconnecting utility.

IV.  Dividing Rights and Responsibilities between Owners

A.  Construction

QFs that are attempting to develop a new interconnection or expand an existing interconnection must agree on how to divide construction responsibilities.  By this stage in development, one QF has likely identified a site and negotiated an option to lease from the underlying landowner(s).  In the construction phase, the QFs must agree with each other how to construct shared facilities and agree with the interconnecting utility how to fund the necessary upgrades to the utility’s system.

An important component of any agreement on funding construction is consideration of the risk that one or more of the QFs becomes insolvent. Shared interconnections owned by the QFs may cost millions of dollars.  Typically, the interconnecting utility will require a large security deposit to construct its portion of shared interconnection facilities. Will each QF contribute equally to construction costs and security deposits?  Will each one be jointly and severally liable for unpaid debts of a QF that becomes insolvent?  An agreement can account for these risks with contingencies that reallocate shared construction costs and unused capacity between the remaining QFs.

B.  Dividing Operational Responsibilities

After the construction phase is completed, the QFs will share operation and maintenance duties for the interconnection.  The QFs will likely need an agreement clarifying who is responsible for actually maintaining the interconnection and what share of maintenance costs each QF is responsible for.  Even if the QFs co-own the interconnection facilities under the Sagebrush model, they may find it convenient to “hire” an LLC for routine operation and maintenance work.  The QFs would each be responsible for a share of the total maintenance costs, but one entity would be responsible for performing the maintenance.

QFs sharing interconnection facilities should clarify ownership of electricity traveling both directions across the interconnection.  Due to line loss, the amount of energy that reaches the interconnected utility’s system will be less than the amount produced by the QFs. Consequently the QFs must agree on a method for determining what portion of the power that reaches the interconnected utility is owned by a given QF.  Power coming into the QFs for station service will likewise need to be accounted for.

With respect to line loss, a utility is only required to purchase QF net output actually delivered to the utility’s system.  No utility will agree to pay for the amount of output that a QF generates at the generator, ignoring the losses that occur between the generator and the system.  As illustration, in a given hour when Project A generates 5 MWh and Project B generates 5 MWh, but only 9.5 MWh reaches the utility-purchaser, the QFs need to divide the 9.5 MWh equitably.  In some cases this can be a simple pro rata division: Project A and Project B each generated 50% of the pre-loss output (50% of 10 MWh); therefore, each gets 50% of the delivered net output (4.75 MWh).

Adding another variable to the above illustration quickly complicates the allocation formula.  Some QFs may experience greater line losses than others sharing the same facilities because they are farther from the point of interconnection.  In such cases, well-placed metering may help the QFs to better distinguish output, and estimates of line loss differences can be factored into the formulae.

Further complicating the situation, QFs may desire to buy into pre-existing interconnection facilities.  Should the existing QF and the new QF share line losses pro rata, or should the new QF pay for all incremental losses?  Line loss increases exponentially with increases in current.  For example, if peak line loss for one QF is 3%, adding a second QF of equal capacity increases peak line loss to 9%. If the original and new QFs share line losses equally, the original QF would experience a tripling in line losses (from 3% to 9%) when both projects operate at full capacity.  Naturally, the original QF would want the new QF to pay for the original QF’s incremental line losses, but quantifying such losses (which vary with each QF’s output) may be difficult.  Engineering studies may be needed to quantify the increased losses.  The QFs can then agree on a formula that keeps the original QF whole.  The chosen method of line loss allocation (incremental or pro rata) may have implications if an additional generator later requests FERC to compel service over the shared interconnection facilities, so the QFs will want to consult an attorney familiar with such issues before finalizing their agreement.  The QFs should also consider previewing their agreement with the utility purchasing their output.  As discussed later in this article, the purchasing utility will likely want to approve any calculation apportioning line losses between QFs.

Another source of complication arises because the QFs obtain station service from multiple sources.  Station service electricity may be taken over the shared interconnection facilities or from a dedicated line, independent of the interconnection.  If taken from shared facilities, inevitably, station service will be provided inter-QF: when one QF is generating and another is not, some of the generating QF’s output will pass to the non-generating QF instead of going to the purchasing utility.  Even with wind or solar QFs clustered together and subject to nearly identical weather conditions, one QF can be generating while another is idle.  The QFs may be using different equipment with different ranges of operating conditions.  Or some QFs may obtain preferential curtailment treatment—meaning, when the receiving utility’s system is at maximum capacity, one QF may be allowed to generate at full capacity while another is ordered to cut all production.  In short, QFs taking station service over shared interconnection facilities will inevitably serve some amount of each other’s station service.  Their operations and maintenance agreement should contemplate how behind-the-meter station service will be counted.

Because sales of net output from one qualifying facility to another qualifying facility are not subject to FERC regulation in most cases, the QFs have considerable flexibility in accounting for them.  If the QFs are all roughly the same capacity, they may agree that they do not need to account for inter-QF station service because it will average out over time.  But if some QFs are large and some are small, the smaller QFs should be concerned that a significant portion of their output would be absorbed by the larger QFs.  In that case, the QFs would need metering to account for the inter-QF station service and would need to agree on rates for inter-QF service.

In summary, sharing interconnection facilities can easily create a host of operational issues between the QFs.  The complications are not insurmountable and are generally minor compared to the savings of sharing an interconnection.  By anticipating the problems during initial negotiations between the QFs, the QFs should not have much difficulty reaching equitable solutions and enjoying relatively dispute-free operations.

V.  Relationship with the Interconnecting Utility

The contractual relationship between the QFs and the interconnecting utility depends in large part on the ownership structure the QFs choose for the interconnection facilities.  The utility will likely require an interconnection agreement with each entity with which it directly interconnects. The utility will also require a commitment from the interconnected entity(ies) to pay for system upgrades to the utility’s facilities needed to accommodate the desired level of output from the QFs.

Under the Sagebrush model, even though there is only one point of interconnection with the utility, each QF will need to enter into a generation interconnection agreement with the utility because each QF will own a share of the interconnection.  If the interconnection requires system upgrades to the utility’s transmission system to accommodate output, the utility may allow the QFs to agree amongst themselves how to divide the total cost of system upgrades so long as the utility can ensure costs will not go unpaid if any one QF defaults.  The JMC Wind model facilitates easier interaction with the interconnecting utility than the Sagebrush model because only one entity contracts with the utility directly.

As noted in the previous section, any calculation apportioning line losses between the QFs must be agreeable to the purchasing utility.  This is because the utility needs a reasonably accurate way to determine how much output it is purchasing from a given QF.  The utility will likely be most concerned about two things.  First, the allocation formulae cannot result in payment for more net output than the utility actually receives at the point of interconnection.  Second, the formulae cannot cause the utility to pay one QF for net output attributable to another QF.  The latter concern is particularly important where one QF in a cluster is receiving higher rates for its power than another QF, in which case paying the wrong QF may mean paying more total money than is required.  The utility must therefore ensure that the formulae reasonably approximate the actual net output delivered by a given QF.

Moreover, the utility should shield itself from the possibility that the QFs will dispute the allocation formulae amongst one another.  A dispute between QFs could result in two QFs laying claim to the same delivered output.  If the QFs dispute the allocation method, the utility could be caught in the middle, with two or more QFs demanding overlapping payment.  One solution to this problem is to allow the utility to be released from the dispute by making payments into escrow while the QFs sort out who receives the payment.  This can be addressed in advance through a condition in the agreement between the utility and the QFs.

As the QFs decide how to operate and maintain their interconnection facilities, the interconnecting utility and the QFs must agree on cost responsibilities and ownership rights for the segments of the interconnection.  Federal and state laws largely determine responsibility for costs of construction, operation, and maintenance between generators and utilities.[8]  Despite the legal framework purporting to allocate responsibility, large interconnections often entail significant negotiations between the utility and the generators in order to reach consensus on the scope of the interconnection and the parties’ responsibilities.

VI.  Potential for FERC jurisdictional and OATT requirement

Sharing interconnection facilities is not a panacea.  It may lead to other generators seeking access and FERC ordering the interconnection facilities’ owner(s) to file an open access transmission tariff (OATT).  It is worth noting, however, that the risk that FERC will compel a generator to share its interconnection facilities is inherent in any qualifying facility interconnection, regardless of whether the interconnection was previously shared.  As of the date of this article, FERC is reviewing public comments on whether it should revise its policy on third-party requests for access to interconnection facilities.[9]  QFs will want to consult an attorney regarding the impact of the rulemaking on FERC regulation of interconnection facilities.

FERC has used its authority under the Federal Power Act (FPA) to compel qualifying facilities to provide transmission service to third parties over their interconnection facilities.[10]  FERC exercised this authority in Aero over the Sagebrush projects’ 46-mile transmission line.[11]  Aero Energy LLC (Aero) sought, and was granted transmission service on the line over the objection of the Sagebrush projects, who had plans to use the full capacity of the line in the future.  (FERC did credit some of the Sagebrush projects’ expansion plans as sufficiently mature to justify those projects having a higher priority over available capacity than Aero.)  So long as Aero remained a qualifying facility, the 46-mile transmission line could continue to be considered part of a qualifying facility.[12]  Aero, however, was not entitled to an ownership share in the shared transmission facilities.  FERC required that the transmission agreement be filed.

FERC also has authority to require a qualifying facility owner-operator of a transmission line to file an Open Access Transmission Tariff (OATT), thereby offering transmission to third parties.  Subsequent to Aero, but with the same 46-mile Sagebrush line, FERC did just that, requiring the Sagebrush projects to file an OATT and offer service at rates approved by FERC.[13]  FERC imposed the elevated regulation of an OATT on the transmission line in part because FERC granted market-based rate authorization to several Sagebrush affiliates for wholesale energy transactions.[14]  FERC allowed that transmission service initiated prior to the requirement to file an OATT would be grandfathered.  Even with OATT service, the transmission line could remain a part of the qualifying facilities up until such time as a non-qualifying facility used the line.[15]

VII.  Conclusion

With the growth in clustered renewable energy generators, the number of interconnections shared between qualifying facilities can be expected to increase.  The benefit for QFs is clear: sharing interconnections can substantially reduce the costs of interconnecting a QF to the grid.  The interconnecting and purchasing utility(ies) can protect themselves while fulfilling regulatory mandates by seeking the appropriate commitments from the QFs, as discussed in this article.  The issues unique to shared interconnections can be addressed through agreements negotiated between QFs at the outset of project development, as outlined in this article.  With this modest investment upfront in the transaction, the pie for all participating QFs increases.

 


[1] Lovinger Kaufmann LLP is law firm specializing energy law with practices in California, Oregon, Washington, and Idaho.  This article relates experiences of the firm in handling QF interconnections under PURPA.

[2] Qualifying facilities are a class of renewable (e.g., wind or solar) and cogeneration generators that are provided certain benefits and exemptions by PURPA.

[3] The modularity of photovoltaics and wind turbines makes incremental development physically practicable.  State-determined avoided cost rates available only to projects below a certain size provide an economic incentive to develop small projects that qualify for higher power purchase rates and government subsidies targeted at smaller projects.

[4] See 18 C.F.R. § 292.101(b)(1) (2011).

[5] Zond Sky River Dev. Corp. 57 FERC ¶ 62,019 (1991).  The Sagebrush QFs are subject of many FERC orders.  See, e.g., Zond Victory Garden Phase IV Dev. Corp., 57 FERC ¶ 62,018 (1991), Gamma Mariah, Inc., 44 FERC ¶ 61,442 (1988).

[6] Sagebrush, 103 FERC ¶ 61,300 (2003).

[7] JMC Wind, LLC, 114 FERC ¶ 62,060 (2006).

[8] Qualifying facility generator interconnections are regulated by states pursuant to PURPA or by FERC under Order No. 2003 and Order No. 2006 depending on the nature of the power sale and the size of the interconnection.

[9] Open Access and Priority Rights on Interconnection Facilities, FERC Docket Nos. AD11-11-000, AD12-14-000.

[10] FPA §§ 210, 211, 18 U.S.C. §§ 824i, 824j (2011) (providing FERC with authority to order owners of a facility to interconnect and provide transmission to a third-party).

[11] Aero Energy, LLC, 118 FERC 61,204 (2007).

[12] 18 C.F.R. § 292.101(b)(1) (2011) (providing that a qualifying facility may include lines used to transmit power from other qualifying facilities).

[13] Sagebrush, a Cal. P’ship, 132 FERC ¶ 61,234, P 31 n.49 (2010); EDFD-Handsome Lake, 127 FERC ¶ 61,243 (2009).

[14] Sagebrush, a Cal. P’ship, 132 FERC ¶ 61,234, P 4.

[15] Id. at P 31 n.49.

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