Although the use of a shared facilities agreement (SFA) for co-located energy projects is not a new concept, their use has increased significantly in recent years due to the rise in co-located generation, storage, and load infrastructure, particularly in the case of data centers. In general, an SFA grants each party a co-tenancy ownership interest in certain shared facilities, subject to detailed management, operations, and cost-sharing provisions, among other considerations.

Given the increasing frequency of their use, owners, operators, financing parties, and developers should understand when, why, and how SFAs can (or should) be used to avoid potential regulatory, operational, or cost-allocation issues with co-located projects.

The “When”

An SFA is generally required whenever two projects owned by different entities (including affiliates) are co-located and share certain facilities. Most commonly, SFAs apply to shared interconnection facilities, such as substations and tie lines, but they can also include other types of property, including access roads, communication lines, stormwater facilities, utility facilities of all types (including electric, gas, water, wastewater, and other utilities), pump stations, ponds, offices, operations and maintenance buildings, and virtually any other type of property.

→ Does your project include facilities that will be shared between two or more projects owned by different entities? If so, consider whether an SFA is needed.

In identifying when an SFA is needed and which facilities must be included, the most important consideration is whether one or more projects will use the facilities in the development, construction, operation, maintenance, or decommissioning of the project. Even occasional, temporary, or backup use may be sufficient to require shared ownership of the facilities.

The “Why”

Although there are numerous benefits associated with the use of an SFA, the primary benefit is that it provides each project with a designated ownership interest in the shared facilities (rather than a lesser interest such as a lease, license, or use agreement). This gives each party greater rights regarding financing their interest, governing issues related to the operation and maintenance of the shared facilities, and sharing costs.

For all types of shared property, an SFA may therefore be advisable in any situation where co-located projects are or may be owned by different parties in the future. For electric interconnection facilities, however, an SFA may not just be advisable, but required to comply with regulatory requirements.

In the absence of an SFA, facilities that are shared by co-located projects could raise certain regulatory issues—namely, whether the facilities are being used for the delivery of electricity through private transmission and distribution facilities in a way that would cause a party to be regulated as an electric utility. In general, only certificated electric utilities are permitted to own and operate transmission or distribution facilities for compensation.

To allow co-located projects to jointly use private transmission and distribution facilities, each project must co-own as tenants-in-common the substation and any interconnection facilities up to the point of interconnection with the transmission system. An SFA provides each party with an undivided ownership interest in the shared facilities based on the ‎percentage of the capacity of those facilities that each party is anticipated to use.

→ Does your project include any shared private transmission or distribution facilities, such as a substation or tie line? If so, an SFA may be required to avoid potential regulatory issues.

This ‎co-tenancy structure for the ownership of shared facilities is consistent with federal and state regulatory decisions, which have found that co-ownership of private transmission and distribution facilities does not cause either party to become an electric utility, provided there is no compensation paid to either party for use of those facilities.[1]

In the Flint Hills case, the Public Utility Commission of Texas ‎concluded that two refineries could jointly own a private ‎transmission line as tenants-in-common, and neither party would be considered an electric utility because no compensation would be paid for use of the facilities. Similarly, in the King Mountain case, the Federal Energy Regulatory Commission determined that a generator and data center could co-own private transmission facilities as tenants-in-common without causing the generator to lose its exempt wholesale generator status.

In structuring SFAs consistently with these decisions, each party must separately own the private facilities between its project and the shared substation because those facilities will only be used by one project. Typically, only the substation and any private facilities between the substation and point of interconnection used by more than one project would be included as shared facilities in the SFA.

The “How”

An SFA can be structured to accommodate the specific types of energy projects and facilities that will be included in the agreement, but generally each SFA contains the following key provisions:

• Designation of certain “Shared Facilities” that will be used by more than one project and included in the agreement, and “Separate Facilities” that will be owned by each party separately but will interconnect with the Shared Facilities.

• Allocation of responsibility for the construction, operation, maintenance, and decommissioning of the Shared Facilities, and the allocation of costs therefor.

• Conveyance of an undivided ownership interest in the Shared Facilities to each party as a tenant in common, in accordance with the “Proportionate Share” for each party (determined by each party’s anticipated percentage use of the Shared Facilities). The Proportionate Share is often based on the expected generating capacity, storage capacity, or load demand for each project, but can vary depending on the types of projects that are co-located.

• Designation of one party (or a third party) as the “Shared Facilities Manager,” with responsibility for the operation and maintenance of the Shared Facilities, and for setting and administering an annual budget, including invoicing each party for its portion of “Shared Expenses.”

• Establishment of certain rights and obligations for the protection of each party, including insurance requirements, indemnification for losses due to outages or disconnection, and step-in rights in the event of default.

• Providing financing party rights and protections to allow each party to include its Proportionate Share of the Shared Facilities in the collateral package for financing.

→ There is not a “one size fits all” approach to structuring SFAs, so it is important to work with counsel and counterparties early to identify the scope of shared facilities and potential requirements for each party and any financing parties.

[1] See Application of AEP Texas Central Power Company for Declaratory Order, PUCT Docket No. 25395, Final ‎Order (Jun. 21, 2004) (“Flint Hills”); King Mountain Upton Wind, LLC, Docket No. EL22-51-000, Order on Petition for Declaratory Order to Confirm Status as Exempt Wholesale Generator, 180 FERC ¶ 61,029 at pp. 4-8 (2022) (“King Mountain”).