Energy Law

To Spur Investment in Transmission Lines, New FERC Policy Allows Merchant Transmission Developers to Pre-Subscribe "Anchor" Customers

By Tracy Davis

In a policy shift intended to encourage the development of transmission lines for renewable power, on February 19, FERC issued an order allowing merchant transmission developers to set aside a portion of new lines' capacity for so-called "anchor" customers for an initial term of 25 years.  In that order, FERC approved proposals by Chinook Power Transmission, LLC and Zephyr Power Transmission, LLC to charge negotiated rates for two new 500-kV direct current transmission lines from Montana and Wyoming, respectively, to the Las Vegas, Nevada area.  The proposed lines, which are expected to be completed in 2014, could bring up to 3,000 MW of wind generation to the Desert Southwest region, an area of the country in desperate need of additional generation.  Chinook and Zephyr have entered into agreements with a wind generation developer that will share a portion of the initial transmission development costs, in exchange for reserving up to 1500 MW of capacity, subject to the successful negotiation of a precedent agreement.

The anchor customer concept -- pioneered in the financing of natural gas pipelines -- will allow a transmission developer to pre-subscribe customers to the capacity it proposes to build, thereby securing financing early in the project's development.  Until now, FERC's policy had been to condition a merchant transmission developer's market pricing authority on its allocation of all capacity exclusively through a pre-construction open-season auction following initial development activities.  Critics of that policy had argued that it prevented front-end customer investments, forcing merchant transmission developers into "the 'chicken-and-egg' scenario that arises when generators, purchasers and transmission owners all wait for the other to commit money to a project before committing themselves."  The resulting capital inertia can inhibit the development of renewable energy projects, such as wind farms, that typically are remote from load centers and require transmission to access to markets.  By allowing anchor customers to invest at the outset in new merchant transmission, the Commission hopes to encourage more developers to build new transmission lines, particularly in the West, where state renewable portfolio standards have increased the need for renewable power and where generation tends to be located remotely from load centers.

Acting FERC Chairman Jon Wellinghoff trumpeted the February 19 order as "one of the most significant steps" the Commission has taken to "unlock the potential of our country's location-constrained renewable energy resources."  Commissioner Suedeen Kelly remarked that the policy changes illustrate the Commission's "capacity for flexibility" in the face of increasing demand for renewable energy.

To ensure that the new anchor customer policy does not result in undue discrimination among transmission customers, only half of the capacity on each of Chinook and Zephyr will be sold to the anchor customer and the other half will be later sold in an independently conducted open-season auction.  Notably, Chinook and Zephyr committed to sell capacity in the open-season at the same price and pursuant to the same terms and conditions to all bidders willing to make the same 25 year purchase commitment as the anchor customer.  In addition, both projects committed to offer point-to-point transmission service pursuant to an open-access tariff, provide for tradable secondary market transmission rights, and join a regional transmission organization when and if one forms in their area of operation.

Full post as published by Energy Legal Blog on February 24, 2009 (boomark / email).