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On June 13, 2024, the Federal Energy Regulatory Commission (FERC) issued an “Order to Show Cause”[1] (Order) under Section 206 of the Federal Power Act to four regional transmission organizations (RTOs) and independent system operators (ISOs). FERC is concerned that the RTOs/ISOs’ open access transmission tariffs (OATT) are unjust, unreasonable, and discriminatory because they allow transmission owners (TOs) to unilaterally elect “TO Initial Funding” (a funding mechanism that allows TOs to fund network upgrade capital costs upfront and then recover those costs from interconnection customers) which FERC believes may create barriers to interconnection and result in discrimination.

FERC is directing the Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) to either show cause as to why their OATTs are just and reasonable or explain what changes they would make to remedy the concerns. The Order acknowledges and discusses the background of the issue, including FERC’s Order No. 2003, which established an interconnection pricing policy that allows RTOs/ISOs to propose alternative pricing mechanisms.

However, FERC is concerned about the potential for discrimination when the transmission provider is not independent. The Order further discusses the different ways that network upgrade costs can be funded in the Midcontinent Independent System Operator (MISO) region, recent case history related to TO Initial Funding, and a number of proceedings related to the issue. The Order also raises concerns about potential discrimination by transmission owners in PJM, Southwest Power Pool (SPP), and ISO New England, as well as questions about whether transmission owners face any uncompensated risks associated with owning, operating, and maintaining network upgrades.

FERC requests the RTOs/ISOs to address these concerns and answer a number of questions related to increased costs and potential discrimination.  Under its Section 206 authority, FERC directs each of the four RTOs/ISOs, within 90 days of the date of the Order (i.e., Wednesday, September 11, 2024), either: (1) to show cause as to why its OATT remains just and reasonable and not unduly discriminatory or preferential and provide responses to the questions set forth in the Order; or (2) to explain what changes to its OATT it believes would remedy the identified concerns if the commission does determine the self funding to be unjust and unreasonable.

The impact of “TO self funding” on generation developers can be substantial. Here is a breakdown of the potential impacts on generation developers:

  • Increased Costs: When transmission owners can pass on the upfront capital costs of network upgrades to generation developers, it significantly increases the cost of connecting to the grid, impacting the financial viability of new generation projects.
  • Barrier to Entry: These additional costs serve as a barrier to entry, particularly for smaller developers or those with more innovative or less capital-intensive technology, impacting resource diversity and competitiveness of the market.
  • Project Delays: Disputes over cost allocations and the process of funding network upgrades lead to project delays, harming generation developers who rely on predictable timelines to plan and execute their projects and secure financing.
  • Financing Challenges: The uncertainty and potential for increased costs associated with network upgrades make it more difficult for generation developers to secure financing, as lenders and investors may see the projects as riskier investments.
  • Operational Risks: Questions raised by FERC about whether transmission owners face any uncompensated risks associated with owning, operating, and maintaining network upgrades might affect terms and conditions of interconnections, potentially passing more risks onto generation developers.
  • Discrimination Concerns: The potential for discriminatory practices by transmission owners could undermine the fair and competitive access to the grid for new generation developers, potentially favoring incumbent players or certain types of generation.

The FERC directive for RTO/ISOs to either justify the fairness of these practices or propose changes is therefore very significant for generation developers, who stand to benefit if the costs and risks associated with network upgrades are distributed more equitably and transparently.

For more information about the Order’s potential impact on your specific situation or to explore the next steps in light of the Order, please contact Michael Blackwell or a member of Husch Blackwell’s Energy Regulation team.

[1] Midcontinent Indep. Sys. Operator, Inc., et al., 187 FERC ¶ 61,170 (2024) (FERC Docket Nos. EL24-80-000, EL24-81-000, EL24-82-000, EL24-83-000).