Energy Legal Blog

Long-Term Transmission Rights Arrive in Midwest ISO

The Energy Policy Act of 2005 (EPAct 2005) required FERC to enable load servers to obtain long-term transmission rights (LTTR).  Earlier versions of financial transmission rights offered in organized power markets were of short duration — typically monthly or yearly — which many load servers deemed inadequate for long-term planning and price certainty.  In its rulemaking to implement LTTRs, FERC directed organized market operators to prepare compliance plans consistent with FERC's guidelines.  Just as each organized market is idiosyncratic so too were the plans, and FERC is now addressing them, one by one.

In its plan, the Midwest ISO proposed not to allocated LTTRs directly to load servers, but instead to give them auction revenue rights (ARR).  A load server in the Midwest ISO can then choose whether to convert the ARRs to transmission rights or use them to collect the revenues from the sale of transmission rights in an auction.  The ARRs would have initial terms of one year each, but could be renewed annually for up to ten years.  FERC largely approved this approach. 

FERC went on to fault the Midwest ISO, however, for failing to fund fully its LTTR —that is, to ensure that the financial coverage offered would not change during its term.  While the Midwest ISO proposal would fully fund the ARRs, the associated transmission rights would not be fully funded, which could expose transmission users to revenue shortfalls, for example, when a transmission line goes out of service.  FERC directed the Midwest ISO to propose means for ensuring the transmission rights holder is fully compensated in all such instances. 

PJM was the first organized market operator to submit an LTTR compliance filing to FERC.  FERC approved PJM's LTTR proposal last fall, but also found that PJM had not met the full funding requirement.  PJM revised its proposal to use an "uplift" mechanism that distributes the shortfall costs to all financial transmission right holders to provide the revenue protection, and FERC sanctioned that approach. 

FERC also denied the demand of the Long Island Power Authority that it be allowed to obtain LTTRs in the PJM service territory.  LIPA only serves load outside the PJM territory, and PJM denied its requests for LTTRs.  LIPA argued its request was consistent with the EPAct and justifiable because it pays for its share of necessary transmission upgrades as well as the transmission service charge that covers the embedded costs of PJM transmission.  FERC agreed with PJM but not on the ground that LIPA only served load external to PJM.  Instead, FERC found that LIPA failed to meet the PJM prerequisite of having taken transmission service during a given reference year in the past and paying the embedded costs of the PJM transmission system.