On March 4, 2016, over the objections of the developer and a dissent from Commissioner Cheryl LaFleur, FERC issued an order authorizing the Midcontinent Independent System Operator, Inc. to terminate a generator interconnection agreement relating to a planned 150 MW wind farm under development in North Dakota by which the project would interconnect to the transmission system of Montana-Dakota Utilities Company, which is operated by MISO. FERC agreed with MISO's position that termination was "just and reasonable" because the project was initially scheduled to achieve commercial operation in December 2012, and MISO's generator interconnection procedures do not permit an extension of the commercial operation date greater than three years absent extenuating circumstances. In her dissent, Commissioner LaFleur criticized the majority's "refusal to exercise its discretion in individual cases addressing infrastructure development." The developer, Merricourt Power Partners, LLC, has until April 4, 2016, to seek rehearing of FERC's order.
FERC's standard procedures and requirements for a developer to enter into an interconnection agreement, which FERC-regulated utilities, regional transmission organizations (RTO) and independent system operators (ISO) must adopt, are lengthy and impose significant expenses to generation developers. Accordingly, termination of an executed interconnection agreement is a major setback for a developer. The loss is even greater where, as here, the developer has paid millions of dollars for "network upgrades" to the interconnected utility's transmission system and faces the prospect of not recovering that investment.
Utilities, RTOs, and ISOs that administer interconnection queues are anxious to cull non-active projects from the queue and to avoid "re-studies" of interconnection requirements that can be required if a generator drops out of the interconnection queue. Under the Federal Power Act, termination of interconnection is subject to FERC review. In particular, FERC must find that termination is "just, reasonable and not unduly discriminatory" in order for a utility, RTO or ISO to terminate an interconnection agreement based on an assertion that the project developer has breached the agreement and that the breach justifies termination.
Under its interconnection agreement, the Merricourt wind farm was required to achieve commercial operation by December 1, 2012. However, the project's development was delayed after its original power purchaser terminated its purchase and sale agreement. Nevertheless, the project moved forward and Merricourt spent over $20 million in development costs, including $17.8 million in transmission network upgrades that are now operational. (If Merricourt's interconnection agreement is terminated, Merricourt will be reimbursed for the network upgrade costs only if other customers subsequently use them.) In addition, Merricourt had entered into a letter of intent with a new power purchaser that was contingent upon MISO agreeing to amend the interconnection agreement to extend the commercial operation date to December 31, 2016. However, MISO refused to do so and instead filed a notice of termination of the agreement with FERC. Notably, Montana-Dakota Utilities Company did not oppose Merricourt's request for extension.
In support of its notice of termination, MISO stated that "any extension … would harm lower-queued projects or create uncertainty because a speculative project would remain in the MISO queue." MISO further noted that in the four years since the facility was scheduled to achieve commercial operation, Merricourt had failed to construct any on-site portion of the wind farm. In response, Merricourt stated that its project was not speculative based on the sums spent on development costs and the letter of intent for a new power purchase agreement. In addition, Merricourt countered that MISO provided no evidence to demonstrate harm to lower-queued projects.
Generally, the withdrawal of an interconnection customer from an interconnection queue can harm lower-queued projects that were relying on the withdrawing interconnection customer to fund network upgrades. However, in this case, Merricourt had already funded all network upgrades associated with the interconnection of its wind farm, and the upgrades were operational. In addition, Merricourt stated that it was not aware of any lower-queued projects that would rely upon the network upgrades that it funded and that all transmission planning was completed, modeling Merricourt as operating in 2017 and thereafter.
FERC did not address whether Merricourt's withdrawal from the MISO interconnection queue would harm any other interconnection customers. Instead, FERC's decision rested on a provision of MISO's generator interconnection procedures, which have been approved by FERC. Under those procedures, requested extensions of more than three years from the original commercial operation date represent grounds for terminating an interconnection agreement, provided that the requests are not the result of either (a) a change in milestones by another party to the agreement or (b) a change in a higher-queued interconnection request. FERC applied the provision literally, stating that it "expressly precludes an extension of Merricourt's [commercial operation date] beyond three years of the original [commercial operation date]." FERC's decision signals that it will strictly enforce interconnection procedures and the satisfaction of milestones under an interconnection agreement.
In her dissent, Commissioner LaFleur acknowledged the many challenges facing independent power developers and criticized the majority for not exercising its discretion to deny the requested termination and uphold the Merricourt interconnection agreement. Commissioner LaFleur observed that "[b]uilding generation resources and transmission lines is a difficult, complex enterprise, and the Commission should be careful not to erect unnecessary barriers to their development in individual cases where there is no credible showing of harm to other parties."
The decision comes at a time when FERC is considering proposed revisions to MISO's generator interconnection procedures, which MISO argues are necessary to cull what MISO considers to be speculative projects from the interconnection queue. Independent power developers are protesting such reforms on the ground that they impose financial burdens that will create unreasonable barriers to entry for independent power projects. Based on FERC's decision in the Merricourt case, developers should be on notice that notwithstanding what may appear to be appropriate circumstances for waiving or extending milestone requirements, FERC will support RTOs and utilities that strictly enforce interconnection procedures and attempt to terminate interconnection agreements based on project delays.
A copy of FERC's order can be found here.
