November 01, 2013

Water on, wind off? Generator curtailment in the Pacific Northwest

Zori Ferkin

An ongoing dispute between the Bonneville Power Administration (BPA) and wind generators pits two laudable environmental goals against one another: maximizing renewable wind energy generation, on the one hand, and managing seasonal high water conditions to adhere to water spill limitations under the Clean Water Act and to protect endangered fish species, on the other. The dispute highlights the challenges of integrating wind power into a regional power generation and transmission system that must address a complex portfolio of legislative mandates, including requirements to market hydropower generated by federally owned dams on the Columbia River. It raises issues regarding the extent to which the Federal Energy Regulatory Commission (FERC) has authority to direct a power marketing administration not under its jurisdiction to abide by the fundamental principles of “comparable service” for all transmission customers and “open access.” Finally, the dispute conveys the importance for renewable power project developers, or acquirers of such projects, to understand curtailment risks and the extent to which the risks can be mitigated.

Wind generators have sought relief from FERC for two BPA curtailment protocols within the space of two years. The first, in 2011, was the “Environmental Redispatch Protocol,” which FERC rejected. BPA then submitted the second curtailment mechanism, termed the “Oversupply Management Protocol” (OMP), to be in effect for a short initial period. FERC conditionally accepted the OMP, subject to further modification. Currently pending before FERC is a request by BPA to extend a somewhat revised OMP through September 2015.

Why Environmental Redispatch

During certain spring and summer high water conditions the reservoirs behind federally owned dams on the Columbia River reach capacity, forcing BPA to spill excess water over the dams. BPA had concerns, however, that excessive water spill might create gas bubbles in the water that could endanger salmon and other aquatic species, some that are listed as threatened or endangered under the Endangered Species Act. To protect aquatic species, the states of Oregon and Washington established spill limitations under the Clean Water Act. In response, BPA implemented the Environmental Redispatch Protocol. The protocol limited spills during specific high water conditions by permitting BPA to run federally owned hydroelectric generators along the Columbia River and to curtail wind and other forms of electricity generation. BPA did not offer curtailed generators compensation for lost revenues, lost production tax credits, or penalties under power purchase contracts for nondelivery of wind generation.

Wind generators filed a petition with FERC alleging that BPA had acted in an unduly discriminatory manner by directing the curtailment of wind generation and then using the wind generators’ firm transmission rights to deliver federal hydropower to the wind generators’ customers. The wind generators asked FERC to invoke its authority under section 211A of the Federal Power Act to direct BPA to change its curtailment practices and to file a revised open access transmission tariff (OATT) with FERC. In addition, the generators requested that FERC order BPA to act in accordance with the terms of its interconnection agreements with the generators and cease its curtailment practices immediately. Iberdrola Renewables, Inc., et al. v. Bonneville Power Admin., Docket No. EL11-44-000, Complaint and Petition for Order Under Federal Power Act Section 211A (June 13, 2011). FERC ruled in favor of the wind generators, finding that the Environmental Redispatch Protocol was unduly discriminatory and preferential and did not result in transmission service to the nonfederal generating resources interconnected to BPA’s transmission system that was comparable to the service BPA provided to the federal hydroelectric generating resources. Iberdrola Renewables, Inc., et al. v. Bonneville Power Admin., 137 FERC ¶ 61,185 (2011), reh’g, 141 FERC ¶ 61,233 (2012). FERC determined that section 211A of the Federal Power Act gives FERC authority to grant relief to ensure that an unregulated transmission provider provides open access to transmission service at comparable and not unduly discriminatory or preferential rates, terms, and conditions. Federal Power Act § 211A. FERC directed BPA to submit a compliance OATT that would provide comparable transmission service.

After Environmental Redispatch, “Oversupply Management”

In 2012, BPA submitted its compliance filing to FERC, in which it proposed to place the OMP into effect for one year. Under the OMP, BPA would continue to issue dispatch orders that direct other generators to reduce output and instead deliver federal hydroelectric energy using the transmission schedules for delivery to the wind generators’ customers. BPA would displace wind and other nonfederal hydroelectric generation according to a “least cost displacement curve,” i.e., from lowest-cost to highest cost, implemented by an independent evaluator. In contrast to the Environmental Redispatch Protocol, BPA proposed to compensate wind and other generators for displacement costs including lost Production Tax Credits (PTC), lost sales of Renewable Energy Credits (REC), and penalties and lost revenues under power sales contracts because of the generators’ failure to supply wind energy during displacement hours. Iberdrola Renewables, Inc., et al. v. Bonneville Power Admin., 141 FERC ¶ 61,234 (2012) , reh’g, 143 FERC ¶ 61,274 (2013). In December 2012, FERC conditionally accepted the OMP as a balanced interim measure to address BPA’s oversupply problems, subject to further compliance filings. On rehearing, FERC affirmed that it “cannot evaluate whether the OMP as a whole results in comparable transmission service for all resources connected to Bonneville’s transmission system without looking at the interrelationship of all three aspects of the proposal”: displacing nonfederal resources on a unilateral basis, compensation for displaced resources, and allocating displacement costs across BPA’s transmission system. Id. at 13. In March 2013, BPA filed with FERC a revised OMP, to take effect upon expiration of the initial OMP and remain in effect through September 30, 2015.

Who pays for protection

While BPA claimed the OMP is necessary for the protection of species and water quality standards, wind generators argued that the OMP is simply another mechanism that BPA will use to “unilaterally curtail wind generation and then take the firm transmission service associated with the output of such wind generation and use it to serve such generators’ customers with [BPA’s] hydro power instead.” Iberdrola Renewables, Inc., et al. v. Bonneville Power Admin., Protest of Complainants, Docket No. EL11-44-006, at 10. Wind generators also alleged BPA has provided insufficient information as to the “amount of oversupply costs [BPA] will ultimately propose to allocate to them.” Id. at 10. This is an important issue. BPA would recover 50 percent of the costs of compensating curtailed generators from these very wind generators rather than have the costs spread pro rata among all BPA transmission customers. Wind generators have argued that this allocates a disproportionate amount of those costs to the wind generator class of transmission customers.

BPA as both generation marketer and transmitter

Under FERC’s policies in accordance with the Federal Power Act, a transmission provider must provide transmission service to unaffiliated generators that is comparable to that provided to generating resources affiliated with or controlled by the transmission provider. Today, most transmission providers in the United States operate independently, whether functionally or by corporate organization, from ownership or control of generating resources. That is not the case with BPA. BPA is mandated by statute to market the federally owned system of hydroelectric generating resources along the Columbia River. BPA also operates a large transmission system on which service is provided to deliver the federal hydropower and unaffiliated generating resources, including a significant amount of wind-powered generation. Whether BPA’s practices, such as curtailment determinations, reflect the principle that “comparable” transmission service must be offered to all users of the system whether BPA has an interest in such users (i.e., federal hydropower on the Columbia River) or not is a highly relevant issue. Further complicating matters, BPA is not directly subject to FERC jurisdiction, so FERC’s determination that it was authorized under section 211A of the Federal Power Act to direct BPA to alter the Environmental Redispatch Protocol to provide “comparable” transmission service will likely be a focal issue in the appeals pending in the Ninth Circuit.

Unilateral revisions to interconnection agreements

In connection with these curtailment protocols, BPA has asserted its authority to revise, unilaterally, the terms of its interconnection agreements with wind generators to “clarify” that a generator’s obligation to comply with BPA’s dispatch orders includes complying with the Environmental Redispatch Protocol. 141 FERC ¶ 61,234, at 8. In its March 2012 compliance filing, BPA declared that to “leave no doubt” that a generator is bound by its OMP protocol, it would unilaterally amend all existing wind generator interconnection agreements to make clear that the wind generators must operate their projects as directed by BPA and comply with all BPA orders, including orders to reduce generation. 137 FERC ¶ 61,185, at 4–5. BPA asserted this authority based upon language embedded in fairly technical appendices to its interconnection agreements, which detail a generator’s obligations to its interconnected control area once its project commences operations. Project developers and prospective acquirors would be well served to study these often densely worded portions of the interconnection documents to evaluate risks for such unilateral actions that would occur after the agreements are executed.

What’s next

FERC has yet to issue a decision on BPA’s revised OMP, which would be in effect through September 30, 2015. BPA is in the process of establishing a cost allocation methodology for the costs of displacement under the OMP in a formal rate case under section 7(i) of the Pacific Northwest Electric Power Planning and Conservation Act, which requires BPA to submit the methodology and accompanying rates to FERC for its review. Iberdrola Renewables, Inc., et al. v. Bonneville Power Admin., Docket No. EL11-44-000, Compliance Filing (Mar. 6, 2012); see also, 143 FERC ¶ 61,274. FERC will evaluate the cost allocation methodology, together with the compensation and the nonrate terms and conditions of the OMP, and reach a determination as to whether the OMP, considering all three of these elements, results in transmission service to generators that is comparable to the service BPA provides itself. 143 FERC ¶ 61,274, at 13. BPA may seek to extend its curtailment authority beyond September 30, 2015. Finally, FERC’s authority to direct BPA as an entity not directly subject to its jurisdiction will be debated by the Ninth Circuit.

As this dispute highlights, in evaluating the risks associated with electric generating projects, it is important to examine the curtailment practices and protocols that are in effect or that have been proposed, the extent to which generating resources are compensated for curtailments, and how curtailment costs are allocated.

Zori Ferkin

Zori Ferkin is of counsel at Morrison & Foerster LLP, where she practices in their Environment and Energy Group and specializes in federal energy regulatory issues.