We are providing below a summary of FERC’s latest merchant transmission project case in SunZia.  The SunZia case is noteworthy for the fact that FERC rejected the applicants’ proposal to allocate 100% of the merchant transmission capacity to anchor customers.  Yet, FERC declined to address whether the 50% anchor customer arrangement, approved in its Chinook decision in 2009, acts as a ceiling for the amount of transmission capacity that can be pre-subscribed by anchor customers.

FERC Denies SunZia Transmission, LLC’s Petition for a Declaratory Order

(Docket No. EL10-39-000)

On May 20, 2010, the Federal Energy Regulatory Commission (“FERC”) denied SunZia Transmission, LLC’s (“SunZia”) petition for a declaratory order regarding negotiated rate authority and the allocation of firm transmission rights to some owners of the proposed jointly-owned SunZia Southwest Transmission Project (“Project”).  FERC’s denial of the petition was without prejudice, enabling SunZia to modify its proposal to conform to FERC precedent and policy concerning open access transmission service and negotiated rates.

In its request for declaratory order, SunZia sought FERC’s expedited approval of its proposal that:  (1) “each SunZia owner may be allocated firm transmission rights representing 100 percent of its pro rata investment in the Project’s transmission capacity,” (2) SouthWestern Power Group (“SW Power”), ECP SunZia, LLC (“ECP SunZia”) and Shell WindEnergy Inc. (“Shell”) may use up to 100 percent of their pro rata share of capacity to service affiliated qualifying facilities or exempt wholesale generators, and (3) SW Power and ECP SunZia may allocate up to 100 percent of their pro rata share of transmission capacity through pre-subscribed negotiated rate contracts.

Background

SunZia is a special purpose entity owned by 4 independent companies and it owns 86 percent of the Project.  The remaining fourteen percent is owned by Salt River Project (thirteen percent) and Tri-State Generation & Transmission Association, Inc. (one percent).  SunZia’s 86 percent share in the Project is distributed to Tucson Electric Power Company (1%), SW Power (40%), ECP SunZia (40%), and Shell (5%).  The Project, as proposed, consists of two 500 kV transmission lines running 460-miles between a new substation in New Mexico and a new substation in Arizona.  SunZia anticipates that the project will have an expected capacity of either 3,000 MW or 4,500 MW, depending upon the final configuration.

Allocation of Firm Transmission Rights

FERC denied SunZia’s proposal to allocate to each SunZia owner firm transmission rights equal to “100 percent of [that owner’s] pro rata investment in the Project’s transmission capacity.”  FERC explained that while SunZia owners may have ownership shares based on their pro rata investment, the individual owners may only set aside capacity on their respective allocated portion of the Project for their own use (and the use of their affiliates) to the extent that they comply with FERC’s open access policies under Order Nos. 888 and 890.  FERC then distinguished the SunZia Project from the NU/NSTAR participant-funded project on the basis that the SunZia Project is a project by a transmission provider to provide transmission to third parties, whereas NU/NSTAR was a project funded by an unaffiliated transmission customer in exchange for firm rights to the line.  FERC indicated that all transmission providers are subject to FERC’s open access policies even if they are participant-funded.

Finally, FERC approved SunZia’s proposal that each owner of the Project and each owner of SunZia would file a separate open access transmission tariff (“OATT”) (or use an existing OATT in the case of some owners), and that the Project would have a  single open access same-time information system (“OASIS”) administrator.  FERC found that this plan was “reasonable” because it would “streamline and ensure efficient operation, maintenance and use of the Project.”  However, in the interest of transparent and non-discriminatory access to the Project, FERC directed the SunZia owners to file a “coordinated ownership and operating agreement(s), along with any OATTs” to clearly detail usage rights and responsibility for operations, transmission planning, interconnection and expansion requests.

Allocation of Capacity to Serve Affiliated Generators

FERC denied SunZia’s requests that SW Power, ECP SunZia and Shell be able to use up to 100 percent of their pro rata transmission capacity to serve affiliated generators and that FERC characterize the line, where it is used exclusively by affiliate generators, as a generation tieline.  First, FERC explained that the Project cannot be considered a generator tieline because it will have multiple points of interconnection and cannot be both a generator tieline for certain owners and a network transmission facility for others.  Next, FERC interpreted SunZia’s request as a request to grant priority to SunZia affiliates over third party companies seeking to use the same transmission capacity.  FERC stated that granting the owners’ affiliates priority rights to 100 percent of the owners’ share of available capacity appears to conflict with FERC’s open access policies requiring “open, transparent, and non-discriminatory access” to transmission systems.  FERC explained that transmission owners may have firm priority rights in instances where the owner has “pre-existing specific plans with milestones for construction of generation and made material progress towards meeting those milestones.”  However, FERC stated that transmission owners must provide service on the transmission lines until the owner is ready to use the firm capacity.

Negotiated Rate Authority

In determining whether to grant merchant transmission developers negotiated rates, FERC uses a 4 factor test established in Tres Amigas.  The 4 factors are:  (1) the justness and reasonableness of rates; (2) the potential for undue discrimination; (3) the potential for undue preference, including affiliate preference; and (4) regional reliability and operational efficiency requirements.  FERC uses these 4 factors to ensure that protections are in place to preserve open access principles and that resulting rates are just and reasonable.  Based on its evaluation of the SunZia proposal, FERC determined that while SunZia is a merchant transmission owner and pre-subscribed contractual arrangements may be permissible to offset the merchants investment risks, SunZia did not fully address the four factors or the concerns outlined in relevant FERC precedent.

Just and Reasonable Rates

FERC found that SunZia had not fully addressed “just and reasonable rates” concerns based on an evaluation of the safeguards derived from FERC precedent.  FERC noted that certain SunZia owners have affiliates in western markets that could be served by the project, and that SunZia must address the extent to which the affiliates may serve the same market(s) as the SunZia project and “any barriers to entry and competitive impact associated with the affiliation.”  Further, based on SunZia’s request to allocate 100 percent of individual owner capacity to anchor customers through negotiated rate agreements, FERC found that SunZia failed to demonstrate that it will hold a “fair, open and transparent open season for the initial allocation of their shares of capacity.”  As a result, there would be no initial capacity available to interested customers in an open season.  FERC explained that the “open season” is required to satisfy the four-factor analysis associated with negotiated rates.

Undue Discrimination

FERC identified the potential for undue discrimination because, under the SunZia petition, certain owners seek to allocate 100 percent of their shares of the Project’s capacity to anchor customers without participating in an initial open season.  FERC generally evaluates two factors to prevent undue discrimination when granting negotiated rate authority to a merchant transmission developer:  (1) the terms and conditions of the merchant transmission developer’s open season; and (2) its OATT commitments.  In the order, FERC explained that SunZia fails to address how it will conduct an open season as required by FERC policy, and that SunZia does not commit to making the same anchor customer deal available to any party willing to commit to the same rates, terms and conditions as the anchor customers.

FERC declined to address whether the fifty percent anchor customer arrangement, approved in Chinook, acts as a ceiling for the amount of capacity that can be pre-subscribed.  FERC stated that the pre-subscribed capacity determination will be made on a case-by-case basis.  FERC also explained that if SunZia seeks to enter into negotiated rate contracts it must make a FERC filing “describing the process used to identify anchor customers as well as details of the associated agreement.”

Finally, FERC required that SunZia provide ancillary services under its OATTS.  FERC recognized that it might not be practical for merchant transmission developers that do not own generation to provide generation-based ancillary services, but indicated that such merchant transmission developers should incorporate into transmission service agreements with customers the means by which ancillary services will be provided.

Undue Preference and Affiliate Concerns

FERC found that it lacked sufficient information to determine whether SunZia’s proposal would result in undue preference to any entity or create any affiliate concerns.  It is FERC’s practice to  carefully examine “situations where the merchant transmission developer is affiliated with the anchor customer” to ensure that service on merchant transmission projects will not result in any undue preference to any entity.  FERC noted that Shell, an independent owner of the Project, may be an anchor customer of SW Power or ECP SunZia, and that Shell, ECP SunZia and SW Power have expressed interest in making all of their capacity available to affiliated generators.  FERC concluded that, lacking sufficient information, it is possible that the proposal is unduly preferential.

Regional Reliability and Operational Efficiency

FERC stated that the Project, as detailed in the petition, would meet the regional reliability and operational efficiency requirements.  FERC found that SunZia’s commitment to comply with all NERC and WECC reliability requirements and procedures, and to participate in Order No. 890 planning processes with potential utility interconnections was sufficient to fulfill the fourth factor.

Click here to access the order.