FERC clears repayment agreement for MISO network upgrades

Washington — The US Federal Energy Regulatory Commission approved Monday a new standardized service agreement to govern one of the methods generators in the Midcontinent Independent System Operator footprint can use to fund the costs of facilities needed to interconnect their power projects to the grid.

Generator interconnection agreements (GIAs) in MISO specify that interconnection customers will be on the hook for 100% of the costs of network upgrades that transmission owners must build to accommodate interconnection requests, with certain upgrades eligible for a 10% reimbursement.

Interconnection customers may provide up-front funding for the upgrades and be credited for any reimbursable portion of the payment through a reduction in transmission service charges; or the transmission owner can decide to initially fund the upgrades and charge the interconnection customer for the non-reimbursable costs as well as recover a return on its cost of capital.

The repayment details of the latter option are memorialized in a facilities service agreement (FSA).

Each FSA in MISO was individually negotiated between the parties involved and then filed with FERC. MISO in November proposed tariff revisions (ER20-359) to implement a new pro forma FSA that would serve as a standard agreement for use when a transmission owner or affected system operator elects to initially fund the cost of network upgrades.

EFFICIENCY, PREDICTABILITY

"The availability of a pro forma FSA for the implementation of that funding option will help promote administrative efficiency and predictability, as transmission owners and interconnection customers will no longer be required to negotiate the terms and conditions of each FSA," FERC said in an order Monday approving the tariff changes.

The pro forma FSA carries a 20-year default term, which parties can change if there is mutual agreement. FERC said 20 years was "just and reasonable because it links the term to the lower end of the average GIA term under which interconnection service is provided."

The commission added this would allow "the transmission owner to recover its return on and of capital invested in network upgrades over a time period based on the term over which interconnection service will be provided, while providing the interconnection customer with a shorter period to pay depreciation expenses than the period of recovery based on useful service life generally used in commission ratemaking."

Transmission owners, under the pro forma FSA, are compensated with a return on their investment through a monthly network upgrade charge established using a formula rate based on the term of the agreement and year-ago inputs from the transmission owner's formula rate.

Because those inputs are updated annually, FERC found that the formula rate would automatically reflect future changes to taxes, interest on long-term debt, return on equity or other factors.

The commission also pushed back on arguments to use a stated rate for more predictability. "The formula rate is a just and reasonable method to ensure that transmission owners recover the return on and of capital for constructing interconnection customers' network upgrades; we need not find that it is the most just and reasonable proposal among all possible alternatives," FERC said.

SECURITY, DEFAULT PROVISIONS

The pro forma FSA requires an interconnection customer to provide the transmission owner with financial security, such as a letter of credit, surety bond or parent guaranty, equal to the initial capital cost of the network upgrades its power project prompted.

"We find that the posting of financial security is reasonable to protect the transmission owner and transmission service customers from the risk that an interconnection customer will stop making payments under an FSA and that the portion of the undepreciated costs would be borne by either the transmission owner or transmission service customers, or assigned to another interconnection customer," FERC said.

The security may be reduced pro rata over the term of the FSA to account for amounts the interconnection customer has paid.

The pro forma FSA also includes breach, default and cross-default provisions as an incentive for interconnection customers to abide by their FSAs and protection against strategic non-payment.

Without such provisions, MISO argued "an interconnection customer could decide not to pay under the FSA and not to maintain the required security, and there would be little recourse for the transmission owner," while the interconnection customer would still receive interconnection service using the unpaid network upgrades, according to the order.

The tariff changes implementing the new pro forma FSA took effect Monday.