1. WINDPOWER 2003 Austin, TX May 18-21, 2003 Session 4A: Regulatory Issues Monday May 19, 2003 3:40-5:00 pm Wind Generation Interconnection to Transmission System Current and Future Interconnection Procedures and Standards Sedina Erić Whitfield Russell Associates www.wrassoc.com Participated in Preparation: Whitfield Russell & Geneva Looker, Whitfield Russell Associates Scott Hempling, Attorney at Law (www.hemplinglaw.com) Jeffrey S. Marks, Padoma Wind Power (www.padoma.com) Special Thanks to Mr. Gary Hardke of the Cannon Power Corporation for his Comments

2. 1 CURRENT GENERATION INTERCONNECTION PROCEDURES AND STANDARDS Interconnection standards and procedures are not uniform; they vary from region to region, from utility to utility and from RTO to RTO. In general, interconnection procedures require a generator:  to apply for a queue position;  to pay for system feasibility, system impact, and facilities studies;  to sign interconnection and construction agreements;  to pay for the construction of interconnection facilities, and network upgrades if required. The Federal Energy Regulatory Commission (FERC) governs the generation interconnection process through its rules and case-by- case orders.

3. 2 CURRENT GENERATION INTERCONNECTION PROCEDURES AND STANDARDS-CONTINUED FERC’s authority to issue rules and orders affecting generation interconnection is derived from various provisions of the Federal Power Act:  Section 201- grants FERC jurisdiction over the transmission of electric energy in interstate commerce  Sections 205 and 206- require all rates and charges for transmission (and also wholesale power) to be “just and reasonable” and not “unduly discriminatory or preferential.” FERC has established two distinct services essential to generators seeking interconnection:  Interconnection  Delivery

4. 3 RIGHT TO INTERCONNECT FERC ruled that a transmission owner must allow any New Generator to interconnect to the transmission system, whether or not transmission capacity for delivery is available. This principle is known as the “minimum interconnection standard.” FERC ruled that the interconnection right does not grant a right to deliver the power from the generator to the load, unless there is sufficient available transmission capacity to deliver the power to load. Rather, delivery of the power is based on “as available capacity.” In engineering language, these rules mean that New Generators must be allowed to interconnect, even at a substation where existing generation has already been interconnected, and where outgoing transmission lines do not have enough capacity to deliver the full output of both existing generators.

5. 4 RIGHT TO DELIVER The “right to deliver” is the right to have the power output of an interconnected generator transmitted to a customer’s load. Except for general standards in pro forma Open Access Transmission Tariff, there are no uniformed, detailed standards on granting delivery rights (rights to transmission service), to the interconnected generator. In ISO New England, all generation is interconnected based on minimum interconnection standards. Delivery rights are then granted to the generator with the lowest bid. The generator is not responsible for transmission system upgrades necessitated by the generator’s request for delivery service. The generator is responsible only for transmission system upgrades necessitated by the generator’s interconnection.

6. 5 RIGHT TO DELIVER-CONTINUED In PJM’s bid-based system, wind generators can be interconnected based on minimum interconnection standards called “Energy Resources.” If two “energy resources” are connected to the same transmission line that has insufficient capacity, the “energy resource” with the lower bid will be granted delivery. Recently, PJM announced the decision to grant wind generators a capacity status as well. As capacity resources, wind generators will have a right to sell Installed Capacity (ICAP) into the PJM auction market and sell capacity to Load Serving Entities. In contrast to ISO-NE and PJM, most transmission providers (whether RTOs or individual transmission-owning utilities) will grant full delivery rights to a wind generator only if the generator commits to pay for any increases in transmission capacity necessary to carry the full generation output to load.

7. 6 WHO PAYS FOR TRANSMISSION UPGRADES? FERC has a policy that, for transmission systems that have developed comprehensive congestion management schemes (such as PJM with its nodal Locational Marginal Prices-LMP), transmission system upgrades, required for new generation, should be paid by the new generator, even if the upgrades are network facilities. Recently, PJM started offering Incremental Available Transfer Capacity Revenue Rights and Incremental Auction Revenue Rights as a compensation for payment for the network upgrade. For transmission systems that have not developed comprehensive congestion management schemes, FERC has ruled that transmission system upgrades having a proven network function should be initially financed by the generation developer. When the generator enters service, these costs should be rolled into transmission rates applicable to all transmission users. The developer will then receive back the initial payment through transmission bill credits spread over several years.

8. 7 WHAT DOES A NEW GENERATOR RECEIVE FOR PAYMENT OF TRANSMISSION SYSTEM UPGRADES? In systems with comprehensive congestion management schemes, FERC does not require transmission providers to grant credit to the generator for network upgrades. The transmission customer (generator) instead, receives comparable compensation in the form of price protection from the cost effects of transmission congestion. This price protection takes the form of Financial Transmission Rights (FTRs), which are financial instruments used as a hedge against congestion costs. A generator can use its FTRs during periods of congestion, or sell its FTRs in an auction. Recently, PJM started offering Incremental Available Transfer Capacity Revenue Rights and Incremental Auction Revenue Rights as a compensation for payment for the network upgrade. In systems that do not have comprehensive congestion management schemes, as mentioned before, FERC requires that a generator receive credits for initial investments in transmission system upgrades when delivery service begins. With a payment for network upgrades, required for delivery of the full generation output, a generator is granted the right to deliver its power as a Capacity Resource.

9. 8 WHAT DOES A NEW GENERATOR RECEIVE FOR PAYMENT OF TRANSMISSION SYSTEM UPGRADES? -CONTINUED An important recent FERC ruling enables some generators that were previously precluded from receiving credits to receive this treatment for network upgrades, if their signed Interconnection Agreements contained provisions authorizing them to file complaints to seek revisions. These generators signed Interconnection Agreements that did not provide for such credits and paid for transmission system upgrades (102 F.E.R.C. P61, 070; FERC LEXIS 152; Order Partially and Fully Granting Rehearings and Partially Granting Complaints, January 29, 2003).

10. 9 FUTURE INTERCONNECTION STANDARDS AND PROCEDURES FERC issued a Notice of Proposed Rulemaking (NOPR) on Generation Interconnections that should, when finalized, establish the same procedures and standards for the entire country. FERC issued a NOPR on Standard Market Design (SMD) that may, when finalized, have a significant impact on generation interconnection procedures, especially those related to the question: “Who pays for network upgrades”? The proposed SMD uses the PJM market design as a model, which indicates that at the time FERC proposed the SMD, it anticipated unified generation interconnection procedures similar to those PJM currently applies.

11. 10 PJM INTERCONNECTION PROCEDURE PJM’s procedure requires all generators to apply in order to be placed in the PJM queue, whether or not the proposed interconnection is at distribution or transmission system level. The PJM queue is publicly available through its website, as are the non-confidential portions of the interconnection studies, and the load flow base cases. PJM grants an “energy resource” status to wind generators, which in most instances, does not require major network upgrades. Recently, PJM decided to grant capacity status as well. However, those who chose that status, would be tested using a deliverability test, which means more network upgrades. Required transmission system upgrades are paid by generators, and are not credited back. However:  Payment for upgrades may be reduced to zero if upgrades produce benefits, such as deferring or eliminating the construction of planned local or network facilities.  Generators may receive FTRs if upgrades increase system transfer capability, and may use them to hedge against congestion costs or sell them in the FTR auction. PJM recently established new products, such as the Incremental Available Transfer Capacity Rights and the Incremental Auction Revenue Rights. All of these are services which compensate generator developers for investment in network upgrades. Generators have the option of selecting a company, other than the owner of the transmission system to which the generator is connecting, to design and construct the interconnection generation-tie line and transmission upgrades.