FERC Finalizes Rule Adopting Interconnection Reforms

On July 28, 2023, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued a long-anticipated final rule adopting reforms to streamline the generator interconnection process and address the nationwide backlog of interconnection requests that have delayed efforts to interconnect new generation to the grid.^[1] Much of the backlog is comprised of new wind energy and solar projects, which have been incentivized by tax benefits provided in the Inflation Reduction Act. FERC’s Order No. 2023, which represents the first major reform to FERC’s interconnection procedures in twenty years, requires FERC-regulated transmission providers to adopt revised pro forma generator interconnection procedures and agreements that conform to the final rule. The reforms are designed to (1) implement a “first-ready, first-served” cluster study process, (2) increase the speed of interconnection queue processing, and (3) incorporate technological advancements into the interconnection process. The final rule adopts most of the reforms proposed in the notice of proposed rulemaking issued on June 16, 2022 (“NOPR”),^[2] with certain modifications. We have highlighted the deviations from the NOPR and key reforms adopted in Order No. 2023 below.

1. First-Ready, First-Served Cluster Study Process.

Consistent with the NOPR, Order No. 2023 replaces the “sequential” interconnection process, which determines priority based on the date of the interconnection request, with a “first-ready, first-served” approach, which prioritizes interconnection requests for customers that meet certain project development milestones. In addition, the final rule requires transmission providers to adopt a “clustering” interconnection study method to study groups of projects rather than individual projects. In the NOPR, the Commission had proposed to require transmission providers to allocate the shared costs of cluster studies 90% pro rata to interconnection customers based on requested MWs included in the applicable cluster, and 10% per capita to interconnection customers based on the number of interconnection requests included in the cluster. The Commission adopted a more flexible approach in Order No. 2023 and will allow a transmission provider to propose its own study cost allocation ratio for allocating the shared costs of cluster studies between a per capita basis and pro rata by MW, provided that between 10% and 50% of study costs are allocated on a per capita basis, with the remainder (between 90% and 50%) are allocated pro rata by MW.

2. Increased Financial Commitments and Readiness Requirements.

   1. Study deposits. The Commission adopted the below study deposit framework based on the proposed MW size of the generating facility, consistent with the NOPR:

      Size of Proposed Generating Facility Associated with Inter-connection Request	Amount of Deposit
      > 20 MW < 80 MW	$35,000 + $1,000/MW
      ≥ 80 MW < 200 MW	$150,000
      ≥ 200 MW	$250,000

      However, the Commission declined to adopt the NOPR proposal to collect a study deposit at each phase of the cluster study process. Instead, the final rule requires transmission providers to collect a single study deposit based upon the above framework when a new customer enters into the cluster (i.e., at the time the interconnection request is submitted).

   2. Site control. As part of its effort to prevent speculative interconnection requests from entering the queue, the Commission adopted many of the stringent site control requirements proposed in the NOPR. However, the final rule reduced the initial demonstration of site control and shifted the timeline for demonstration, affording interconnection customers greater flexibility in obtaining land rights and enhancing alignment with the project development cycle. Under the final rule, interconnection customers must provide evidence of 90% site control at the time of submission of the interconnection request (instead of 100%), and 100% site control at the time of execution of the facilities study agreement (instead of prior to the facilities study) and when executing, or requesting the unexecuted filing of, the LGIA.]
   3. Commercial Readiness Deposits. The Commission declined to adopt the non-financial commercial readiness demonstration requirements proposed in the NOPR, instead requiring interconnection customers to submit a “commercial readiness” deposit at the beginning of each study in the cluster study process. The Commission modified the commercial readiness deposit framework from one based on generating facility size to one based on percentages of the interconnection customer’s identified network upgrade costs. The initial commercial readiness deposit is two times the study deposit, consistent with the NOPR. The commercial readiness deposit to enter the cluster restudy is the amount required to bring the total amount of the interconnection customer’s commercial readiness deposit to 5% of the interconnection customer’s network upgrade cost assignment identified in the cluster study. To enter the facilities study, the interconnection customer must submit the commercial readiness deposit, which is the amount required to bring the total amount of the interconnection customer’s commercial readiness deposit to 10% of the interconnection customer’s network upgrade cost assignment identified in the cluster study or restudy. At LGIA execution or at the time the request is made to file the unexecuted LGIA, the interconnection customer must deposit the difference between its total commercial readiness deposits submitted at that point and 20% of its estimated network upgrade cost responsibility.
   4. Withdrawal Penalties. The Commission adopted withdrawal penalties as part of its strategy to address backlogged interconnection queues caused in part by speculative interconnection requests. The Commission modified the NOPR proposal to require the transmission provider to impose a withdrawal penalty only if the withdrawal has a material impact on the cost or timing of any interconnection requests with an equal or lower queue position. If the transmission provider determines that the impact of the withdrawal is immaterial, the transmission provider cannot assess a withdrawal penalty. With respect to the distribution of funds collected from withdrawal penalties, the transmission provider must use the funds: (1) to fund studies and restudies in the same cluster; (2) if withdrawal penalty funds remain, to offset net increases in costs borne by other remaining interconnection customers from the same cluster for network upgrades shared by both the withdrawing and non-withdrawing interconnection customers prior to the withdrawal; and (3) if any withdrawal penalty funds remain, to return them to the withdrawing interconnection customer.

3. Study Delay Penalties.

While the Commission adopted many aspects of the NOPR’s study delay penalty structure in the final rule, it eliminated the “reasonable efforts” standard. In its place, the Commission adopted the “penalties per business day of delay” and cap that correspond with each phase of the interconnection process, as follows:

Transmission providers must distribute study delay penalties on a pro rata basis per interconnection request to the interconnection customers and affected system interconnection customers included in the relevant study that did not withdraw, or were not deemed withdrawn, from the interconnection queue before the missed study deadline.

4. Material Modifications.

The Commission modified the NOPR proposal with respect to the timing of the transmission provider’s assessment of whether a request to add a generating facility to an existing interconnection request is material. Under the final rule, transmission providers will be required to evaluate whether such a request is material only if the request is submitted before the interconnection customer returns the executed facilities study agreement to the transmission provider. Interconnection customers may continue to request changes to proposed generating facilities at any time in the process, and transmission providers may continue to evaluate modification requests later in the interconnection process than required by the final rule. In addition, the final rule eliminated the 60-day requirement for transmission providers to complete their material modification evaluations.

5. Transition Process.

The final rule sets forth a three-option transition process: (1) interconnection customers that have executed or been tendered facilities study agreements by the transmission provider may proceed to a transitional serial study (a facilities study) or opt to move to the transitional cluster study; (2) interconnection customers in the interconnection queue that have not been tendered a facilities study agreement are eligible for the transitional cluster study; and (3) all other interconnection customers are subject to the new interconnection procedures or may withdraw without penalty. Interconnection customers will have 120 days after the publication of the final rule in the Federal Register to achieve eligibility for the transition process.

6. Compliance.

The final rule expedites the compliance timeline for transmission providers to implement reforms to their generator procedures and agreements. Instead of 180 days from the effective date of the final rule, transmission providers must submit their compliance filings within 90 days of the date the final rule is published in the Federal Register. The Commission recognized that many transmission providers have already undertaken efforts to address interconnection queue management issues. The Commission will evaluate compliance filings consistent with the independent entity variation standard and the consistent with or superior to standard, as applicable.

The reforms adopted in Order No. 2023 are a significant step toward clearing the backlogs and reducing the delays that have hindered development of new generation, including renewable generation resources. However, the final rule will not immediately resolve interconnection challenges. Whether the reforms are effective at expediting interconnection-related delays remains to be seen, as transmission providers submit compliance proposals and begin to process queues under the Order No. 2023 framework.