US Energy Regulator Adopts New Interconnection Regime

Following contentious rulemaking proceedings triggered by its proposed rule issued over 12 months ago,¹ on July 28, 2023, the Federal Energy Regulatory Commission (FERC) issued its final rule² (Final Rule) to revise current pro forma generator interconnection procedures and agreements to impose “commercial readiness” requirements on new generator interconnection applicants, requiring more concrete interconnection plans and forfeitable deposits for new interconnection applicants and some pending interconnection applicants.

The Final Rule requires increased financial commitments for interconnection customers to enter and remain in the interconnection queue. The Final Rule will also eliminate one-by-one interconnection study procedures, instead requiring transmission providers to use a group or “cluster” study process. In connection with its proposed rule, the FERC’s acting chair indicated that FERC was addressing the fact that at the end of 2022, more than 2,000 gigawatts of generation and storage were waiting in interconnection queues, and that projects now face interconnection processing times often reaching or exceeding five years to connect to the grid. The Final Rule notes that, as of the end of 2022, more than 2,500 interconnection studies in the organized markets are delayed or delinquent.

The Final Rule will take effect 60 days after publication in the Federal Register. That effective date will trigger a national round of compliance filings by transmission providers (including Regional Transmission Organizations and Independent System Operators (RTO/ISOs), as well as stand-alone utility systems), 90 days after the Final Rule’s publication. We expect FERC to receive six RTO/ISO and several dozen standalone utility compliance filings. It may take FERC weeks or months to process them, and the Final Rule will not take effect in a particular RTO/ISO or utility footprint until FERC accepts that particular compliance filing—meaning that the Final Rule is a minimum of a half-year away from its first day of actual effectiveness in any market. Compliance filings can be expected to be challenged by unhappy stakeholders, and those challenges will proceed before FERC and potentially consume further time. As a result, we do not expect the Final Rule’s subject matter to be fully settled for a year, or possibly even longer.

FERC Final Rule

Under longstanding FERC regulations and rulemaking orders, generator interconnection typically requires a generator to apply for interconnection, demonstrate site control, undergo a series of studies, commit to pay upgrade costs to the interconnected transmitting utility, and execute a tariff-based interconnection agreement, the terms of which are effectively non-negotiable. In some FERC-regulated organized markets, generators are already grouped or “clustered” together for study purposes, based on common timing and characteristics; while in other geographic areas, each serially-filed individual interconnection applicant is studied alone.

The FERC Final Rule provides that:

• Transmission providers (including RTO/ISOs and other FERC-regulated transmitting utilities outside of organized markets) will institute a first-ready-first-served annual cluster study process, which shifts all interconnection studies to a cluster system in which interconnection applications within a particular year will be aggregated and studied together;
  • The annual application window will be 45 days;
  • The interconnection applicant must respond to any claimed deficiencies by the earlier of ten business days or by the end of the 45-day window—meaning that an applicant that files near the end of the window might have insufficient time to respond to an alleged deficiency; and
  • The interconnection applicant’s failure to respond to, and apparently resolve, a claimed deficiency results in the termination of the application, the capture of the initial $5,000 application fee, and the return or release of study and commercial readiness deposits (if by then paid-in).
• Interconnection customers will be required to pay increased study deposits, meet more demanding site control requirements, and pay commercial readiness deposits;
  • The Final Rule confesses its site control requirements to be “stringent,” compared to the status quo. An interconnection applicant will be required to demonstrate what the Final Rule terms “90% site control” to seek interconnection, and “100% site control” at the time of the facilities study agreement. That means nothing less than:
    • ownership of, a leasehold interest in, or a right to develop a site of sufficient size to construct and operate the Generating Facility;
    • an option to purchase or acquire a leasehold site of sufficient size to construct and operate the Generating Facility; or
    • any other documentation that clearly demonstrates the right of the Interconnection Customer to exclusively occupy a site of sufficient size to construct and operate the Generating Facility.
• Adjacent, affiliated interconnection applicants will not generally be permitted to share siting rights, and each individual interconnection applicant will instead be required to itself satisfy site control requirements as a condition of proceeding with interconnection.
• Significantly, the Final Rule provides no alternative method for satisfying site control requirements: paying a forfeitable deposit, as FERC initially proposed, will be an option only for those (likely few) interconnection applicants facing unusual regulatory limitations on real property-related rights.
• The Final Rule also imposes withdrawal penalties on the interconnection customers that withdraw their request from the interconnection queue, subject to a number of timing and mitigation considerations;
• A transition process will allow transmission providers to move from the existing study process for the most ready projects in the current queue to the new Final Rule requirements. The transition group of interconnection applicants nationally may number in the thousands of projects, and transition issues may be significant. The Final Rule requires transition applicants—those stuck straddling the current and the new requirements—to establish that they comply with the Final Rule’s site control requirements at three specific times in the interconnection process:
  • at the time the interconnection applicant submits its initial interconnection request;
  • at the time of the interconnection facilities study; and
  • when executing (or requesting the unexecuted filing) of the interconnection agreement.
• A transition-period interconnection applicant opting for:
  • the new cluster process must pay a forfeitable deposit of up to $5 million; and
  • the transition serial process (essentially a continuation of project-by-project transition processing) must provide a deposit equal to 100% of the interconnection facility and network upgrade costs allocated to the interconnection customer in the system impact study.
• Other key transition requirements were established in the Final Rule:
  • Those interconnection applicants that have been tendered facilities study agreements (whether or not facilities studies have begun) may proceed to a transitional serial study (a facilities study), or may opt to move to the transitional cluster study.
  • Those interconnection applicants in the interconnection queue that have not been tendered a facilities study agreement (including those that have not completed the system impact study phase) will be eligible for the transitional cluster study.
  • A transition applicant that does not wish to comply with the deposit and site control requirements may also opt to withdraw from the interconnection process without penalty.
  • All other interconnection customers will be subject to the new interconnection procedures.
• The Final Rule also proposes to create firm deadlines and penalties if transmission providers fail to complete their interconnection studies on time. The effectiveness of these penalties is uncertain as to RTO/ISOs. These entities—each of which is a not-for-profit owning little (if nearly any) of its own rate base assets—collect no distributable net income. They may simply pass any penalties along to other market participants in their regional transmission and other charges. And the impact of these penalties is made even less certain by the exculpatory clauses.
• The Final Rule establishes a detailed affected systems study process, including uniform modeling standards and pro forma affected system agreements. There has never before been any form of pro forma affected system study. Affected system issues—involving a generator interconnection applicant relying on its interconnecting RTO/ISO or utility to manage adjacent-system upgrade studies, cost estimates, milestones, and certain related contracting—has been a persistent cause of uncertainty and disputes in interconnection.
• The Final Rule also requires transmission providers to post certain interconnection capacity availability information, such as a grid “heatmap.” FERC acknowledges that this posted information may not be consistent with actual study conditions, and is not likely to be sufficient to permit detailed or firm interconnection cost planning.

Incorporation of Technological Advancements

The Final Rule requires transmission providers to allow more than one generating facility to co-locate on a shared site behind a single point of interconnection and share a single interconnection request. Additionally, the Final Rule requires transmission providers to use operating assumptions in interconnection studies that reflect the proposed charging behavior of electric storage resources. Finally, the Final Rule establishes modeling and performance standards for inverter-based resources.

Other Key Changes and Issues

Initial Feasibility Study: A key component of the existing interconnection regime is the “Interconnection Feasibility Study.” These studies have been viewed as being of low value, providing early, highly generalized determinations of whether an interconnection applicant’s request is totally impossible. Feasibility studies have historically provided no signal as to whether the scope of overall costs, affected system studies and work, system impact studies, facilities studies, identified upgrade costs, and milestones might render a project possible but commercially non-viable. The Final Rule dispenses with the Interconnection Feasibility Study.

Wholesale Distribution Interconnection: Nearly every FERC-regulated RTO/ISO and utility provides some form of interconnection service through wholesale distribution tariffs. PJM alone has several hundred wholesale market participation agreements in effect, typically providing smaller generators interconnected to local distribution facilities with access to the PJM wholesale market. In the New York ISO, ISO New England, and the California ISO, many smaller renewable generators are interconnected to local distribution facilities and are not subject to those RTO/ISOs’ FERC pro forma generator interconnection agreements. Southern California Edison asked FERC to clarify whether the Final Rule applies to wholesale distribution service. FERC indicated that the Final Rule’s pro forma procedures and agreements will apply, but qualified its response with respect to wholesale distribution service that is not, in fact, controlled by FERC’s existing interconnection procedures, and went on to refer the treatment of wholesale distribution interconnection to each RTO/ISO’s and utility’s compliance filing. In effect, the Final Rule punts to each transmission provider’s own compliance filing process.

Suspension: Under existing interconnection procedures, an interconnection customer may be entitled to suspend upgrade work and expenditures for some period of time specified in the applicable RTO/ISO’s or utility’s interconnection procures. During the period of suspension, no expenditures are typically allocated to the customer, except for costs already incurred in the interconnection process as of the time of suspension and the costs of keeping the transmission grid safely operable while a project is suspended. Suspension under the Final Rule will require the interconnection customer to fully satisfy site control, deposit, and other requirements prior to requesting suspension.

Unexecuted Interconnection Agreement Filings: Under current interconnection procedures, an interconnection customer that disagrees with an RTO/ISO or utility interconnection cost allocation, or other decision, may in some cases be able to protect its rights and direct that the proposed final interconnection agreement be filed with FERC unexecuted, thereby triggering dispute resolution proceedings. Under the Final Rule, this suspension right may effectively exist in name only, since the customer will be required to prove, within 10 days of the filing of the unexecuted agreement, that it has satisfied all interconnection requirements—including satisfaction of “stringent” site control requirements and submissions in full of required deposits.

PJM: Just days before the FERC issued the Notice of Proposed Rulemaking that led to the Final Rule, PJM Interconnection, L.L.C. filed its own proposed interconnection “reform” proposal, incorporating cluster process, site control, and related changes to PJM requirements that are similar to those adopted in the Final Rule. FERC accepted PJM’s proposal (subject to conditions) in late November 2022, and in July 2023—just three weeks before issuing the Final Rule—FERC explained its rejection of various rehearing and modification requests made by parties in PJM’s proceeding. In the Final Rule proceeding, PJM has asked FERC to leave PJM’s new mechanism intact. FERC declined to do so, although FERC invited PJM (and other transmission providers) to address deviations from the Final Rule in their Compliance Filings. This means that PJM’s interconnection reform proposal may well have an effectiveness lifespan of a handful of months. In concurring opinions, two of FERC’s four Commissioners have raised questions as to whether the Final Rule appropriately considers PJM’s changes, and will accommodate proposals now being developed by the California Independent System Operator.

¹ Described in our earlier June 22, 2022 Legal Update “US FERC and PJM Both Release Parallel Proposals to Holistically Reform Interconnection Process”.

² Improvements to Generator Interconnection Procedures and Agreements, Order No. 2023, Docket No. RM22-14-000, 184 FERC ¶ 61,054 (2023).