UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) ) ) ) ) ) ) COMPLAINT OF AMERICAN ELECTRIC POWER SERVICE CORPORATION

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION American Electric Power Service Corporation, Complainant v. PJM Interconnection L.L.C., Respondent. ) ) ) ) ) ) ) Docket No. EL COMPLAINT OF AMERICAN ELECTRIC POWER SERVICE CORPORATION Amanda Riggs Conner Senior Counsel Regulatory Services American Electric Power Service Corporation 801 Pennsylvania Avenue, N.W., Ste. 735 Washington, D.C arconner@aep.com Jennifer L. Key Viet H. Ngo Steptoe & Johnson LLP 1330 Connecticut Avenue, NW Washington, DC jkey@steptoe.com vngo@steptoe.com John W. Seidensticker Senior Counsel American Electric Power Service Corporation 1 Riverside Plaza Columbus, OH jwseidensticker@aep.com November 19, 2018

2 TABLE OF CONTENTS Contents I. Introduction and Summary of Position... 3 II. Correspondence, Communications, and Service... 4 III. Description of the Parties... 5 A. AEPSC... 5 B. PJM... 6 IV. Background... 6 A. The Commission s Policy on IC-Constructed Facilities and Indemnification of TOs The Risk Associated with the IC s Option to Build Was Mitigated in Order No Through Pro Forma LGIA Section 5.2(7) In Order No. 845, the Commission Clarified the Breadth of Existing LGIA Section 5.2(7) and that It Trumps Section The Commission Held that No Changes to the LGIA Were Needed to Provide the Protections Already Granted by Order No B. PJM s Standard ICSA and ISA Do Not Reflect the Important Policy Discussed Above PJM Pre-Order No Interconnection Provisions PJM Compliance with Order No Current PJM ISA and ICSA C. Other Differences Between the Standard ISA/ICSA and Pro Forma LGIA V. Argument A. PJM s Standard ISA and ICSA Are Unjust and Unreasonable Because They Do Not Reflect Commission Policy Established in Order No. 2003, as Clarified in Order No B. There Is No Basis for Disparate Treatment of PJM TOs Relative to Other TOs Across the Country C. The Commission Had No Specific Notice of the Deviations at Issue... 30

3 D. ICSA Section 5.5 Should Be Clarified as to a PJM TO s Obligation to Take Title, But In No Case Should Ratepayers Bear Liability Relating to the Interconnection Customer s Option to Build E. AEPSC Is Seeking Reformation of the ISA/ICSA VI. Compliance with Rule 206 Requirements VII. Conclusion ii

4 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION American Electric Power Service Corporation, Complainant v. PJM Interconnection L.L.C., Respondent. ) ) ) ) ) ) ) Docket No. EL COMPLAINT OF AMERICAN ELECTRIC POWER SERVICE CORPORATION Pursuant to Sections 206 and 306 of the Federal Power Act ( FPA ), 16 U.S.C. 824e, 825e (2012), and Rule 206 of the Rules of Practice and Procedure of the Federal Energy Regulatory Commission ( FERC or the Commission ), 18 C.F.R (2018), American Electric Power Service Corporation ( AEPSC ), on behalf of its PJM transmission owners ( AEP PJM TOs ), 1 hereby submits this Complaint requesting that the Commission find PJM Interconnection, L.L.C. s ( PJM ) Interconnection Construction Service Agreement ( ICSA ) and Interconnection Service Agreement ( ISA ) are unjust and unreasonable because they do not comport with Commission 1 Appalachian Power Company, Indiana Michigan Power Company, Kentucky Power Company, Kingsport Power Company, Ohio Power Company, Wheeling Power Company, AEP Appalachian Transmission Company, Inc., AEP Indiana Michigan Transmission Company, Inc., AEP Kentucky Transmission Company, Inc., AEP Ohio Transmission Company, Inc. and AEP West Virginia Transmission Company, Inc.

5 policy established in Order No. 2003, 2 as recently clarified in Order No Specifically, PJM s ICSA and ICA do not reflect the indemnification from liability policy found in the Commission pro forma Large Generator Interconnection Agreement ( LGIA ), which expansively protects TOs 4 from liability arising from an Interconnection Customer ( IC ) exercising the Option to Build for the life of the facilities constructed by the IC ( IC-Constructed Facilities ). PJM s departure, whether or not intended, from FERC policy is so profound that it cannot meet the independent entity variation standard, as PJM s operating characteristics and market structure provide no basis for such a significant departure from Commission policy. AEPSC respectfully requests that relief be granted as of the date of the filing of this Complaint, as is permitted by Section 206(b) of the FPA, 5 such that all ISAs and ICSAs filed with the Commission after such date must be conformed (through 2 Standardization of Generator Interconnection Agreements and Procedures, Order No. 2003, FERC Stats. & Regs. 31,146 (2003) (Order No. 2003), order on reh g, Order No A, FERC Stats. & Regs. 31,160, order on reh g, Order No B, FERC Stats. & Regs. 31,171 (2004), order on reh g, Order No C, FERC Stats. & Regs. 31,190 (2005) (Order No C), aff d sub nom. Nat l Ass n of Regulatory Util. Comm rs v. FERC, 475 F.3d 1277 (D.C. Cir. 2007), cert. denied, 552 U.S (2008). 3 Reform of Generator Interconnection Procedures and Agreements, Order No. 845, 163 FERC 61,043 (2018). 4 Because this case involves interconnection provisions relevant to TOs in a Regional Transmission Organization ( RTO ), the term TO will be used in lieu of transmission provider throughout the pleading. The Commission has noted that the pro forma LGIA states that the term transmission provider; should be read to include the Transmission Owner when the Transmission Owner is separate from the Transmission Provider. Pro forma LGIA Art.1 (Definitions). Order No. 845 at P 94 n U.S.C. 824e(b) ( In the case of a proceeding instituted on complaint, the refund effective date shall not be earlier than the date of the filing of such complaint.... ). 2

6 compliance filings as necessary) to the pro forma ISA and ICSA that results from this Complaint. I. INTRODUCTION AND SUMMARY OF POSITION In Order No. 2003, the Commission gave ICs the option to build a TO s Interconnection Facilities and Stand Alone Network Upgrades ( Option to Build ) if the TO was not able to construct the facilities by the IC s proposed in-service date. However, in so doing, the Commission recognized the concern expressed by a number of TOs that giving the IC the Option to Build could result in increased risk to the safety and reliability of the TO s system. Thus, to alleviate these concerns, the Commission adopted a number of safeguards, set forth in Section 5.2 of the pro forma LGIA ( General Conditions Applicable to Options to Build ). Notably, the Commission included Section 5.2(7), which provides that the IC shall indemnify [TO] for claims arising from [IC] s construction of [TO] s Interconnection Facilities and Stand Alone Network Upgrades. In the NOPR leading to Order No. 845, 6 the Commission revised its pro forma LGIP and LGIA to implement a number of reforms, including expanding the right of ICs to elect the Option to Build. Several TOs urged the Commission in rulemaking comments to either clarify or modify Section 5.2(7) of the pro forma LGIA, seeking assurance that the provision meant that ICs had to indemnify TOs for the life of any IC- Constructed Facilities. The Commission recognized and acknowledged the liabilityconcerns concerns raised by the commenters as valid and clarified that no changes to 6 Reform of Generator Interconnection Procedures and Agreements, FERC Stats. & Regs. 32,719 (2017) ( 845 NOPR ). 3

7 Section 5.2(7) were needed as it already covered all of their requested clarifications as to the indemnification that an IC had to provide. The Commission declared Section 5.2(7) sufficiently broad to address all of the TO-commenters liability-related concerns. In what may be an accident of history, PJM s standard ICSA and ISA reflect a policy that is diametrically contrary to that adopted by the Commission in Order No. 2003, as confirmed in Order No Such documents are unjust and unreasonable because they deviate from Commission policy as to the party that bears liability associated with IC-Constructed Facilities after title passes to the TO. There is no regional variation that would support or justify PJM TOs not having the very same protections afforded other TOs nationwide. Yet, the ICSA, the document that governs IC-Constructed Facilities, does not include necessary, protective wording. In addition, the ICSA does include language that could be interpreted to be directly contrary to Commission policy. No matter the reason for these deviations, AEP submits that proposed revisions to PJM s ICSA and ISA are necessary in order to render these two agreements just and reasonable. II. CORRESPONDENCE, COMMUNICATIONS, AND SERVICE AEP respectfully requests that all correspondence and communications regarding this filing should be addressed to the following persons, who should be placed on the Commission s official service list in this proceeding: 4

8 Amanda Riggs Conner John W. Seidensticker Jennifer L. Key Viet Ngo AEPSC has served this Complaint on the persons at PJM identified for service on the Commission s website. III. DESCRIPTION OF THE PARTIES A. AEPSC AEPSC is the service company 7 for American Electric Power Company, Inc. ( AEP ), the holding company for one of the largest families of electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states. AEP ranks among the nation s largest generators of electricity, owning nearly 32,000 megawatts of generating capacity in the U.S. AEP also owns the nation s largest electricity transmission system, approximately 40,000-mile network that includes 765 kilovolt extra-high voltage transmission lines, more than all other U.S. transmission systems combined. AEP s transmission system directly or indirectly serves about 10 percent of the electricity demand in the Eastern Interconnection. AEP s headquarters are at 1 Riverside Plaza Columbus, Ohio, AEPSC provides management and professional services to AEP and its utility operating subsidiaries, including accounting, administrative, information systems, engineering, financial, legal, maintenance and other services at cost. AEPSC also performs various marketing, generation dispatch, outage and maintenance coordination, fuel procurement and power-related risk management and trading activities on behalf of the AEP utility operating subsidiaries. 5

9 B. PJM PJM is a non-profit public benefit corporation organized under the laws of the State of Delaware with its principal place of business in Valley Forge, Pennsylvania. Pursuant to its Open Access Transmission Tariff ( PJM Tariff ), PJM provides open access transmission service and administers organized wholesale markets in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, New Jersey, North Carolina, Ohio, Pennsylvania, Virginia, West Virginia, and the District of Columbia. As an RTO, PJM operates the region s transmissions system and administers organized wholesale electricity markets pursuant to the PJM Tariff. IV. BACKGROUND A. The Commission s Policy on IC-Constructed Facilities and Indemnification of TOs 1. The Risk Associated with the IC s Option to Build Was Mitigated in Order No Through Pro Forma LGIA Section 5.2(7) In Order No. 2003, the Commission granted ICs the option to build a TO s Interconnection Facilities and Stand Alone Network Upgrades only if the TO notified the IC that it could not meet the in-service dates, as established by the IC. 8 The Commission, however, recognized a number of concerns expressed by TOs with respect to giving ICs the Option to Build. As relevant here, the Commission noted that in their rulemaking comments, several parties had argued that if the Commission does not eliminate the 8 See Order No A at P 236 ( The [TO] has the right to build, own, and control the facilities itself if it chooses to... and the [IC] has the option to build only if the [TO] declines to meet the construction milestones established by the [IC]. ). 6

10 [IC s] option to build, the Final Rule must provide that an [IC] exercising this right shall indemnify or hold harmless the [TO] from any resulting liability. 9 In response to these comments, the Commission added an indemnification provision (Section 5.2(7)) to the LGIA in order to protect TOs from liability arising out of the [IC s] exercising its right to build. 10 Section 5.2(7) states as follows: [IC] shall indemnify [TO] for claims arising from [IC] s construction of [TO] s Interconnection Facilities and Stand Alone Network Upgrades under the terms and procedures applicable to Article 18.1 Indemnity. 11 That said, the scope of the indemnification protection afforded to TOs in Section 5.2(7) of the pro forma LGIA arguably is rendered ambiguous as a result of the language in Section Specifically, the language of Section 18.2 regarding limits on 9 Order No at P 341. For instance, Cinergy argued that allowing a generator to construct network facilities is unacceptable unless the [TO] is held harmless from any liability arising from generator construction. According to Cinergy, [i]t is only fair and a matter of common sense that if generators are allowed to perform construction, they should hold [TOs] harmless from liability arising the generator construction. Comments of Cinergy Services, Inc. at 18-19, Dkt. No. RM02-1 (June 17, 2002). The New York TOs indicated that it is critical that the indemnity provision embodied in Article 18 be clarified to ensure that Generators provide indemnification for any construction which they undertake. Comments of the New York Transmission Owners at 14, Dkt. No. RM02-1 (June 17, 2002). 10 See Order No at P Section 18.1 provides that the Parties shall at all times indemnify, defend, and hold the other Party harmless from, any and all damages, losses, claims, including claims and actions relating to injury to or death of any person or damage to property, demand, suits, recoveries, costs and expenses, court costs, attorney fees, and all other obligations by or to third parties, arising out of or resulting from the other Party s actions or in actions of its obligations under this LGIA on behalf of the Indemnifying Party, except in cases of gross negligence or intentional wrongdoing by the indemnified Party. 12 Section 18.2 provides: Consequential Damages. Other than the Liquidated Damages heretofore described, in no event shall either Party be liable under any provision of this LGIA for any losses, damages, costs or expenses for any special, indirect, incidental, consequential, or punitive damages, including but not limited to loss of profit or revenue, loss of the use of equipment, cost of capital, cost of temporary equipment or services, whether based in 7

11 consequential damages could be construed in such a manner so as to undermine or diminish the indemnification protection provided to TOs in Section 5.2(7). 2. In Order No. 845, the Commission Clarified the Breadth of Existing LGIA Section 5.2(7) and that It Trumps Section 18.2 In the rulemaking that led to Order No. 845, the Commission proposed an expansion of the Option to Build allowing ICs to exercise this option and build TO Interconnection Facilities and Stand Alone Network Upgrades even if the [TO] can meet the requested construction dates. 13 This proposal was opposed by the investor-owned TO industry as represented by the Edison Electric Institute ( EEI ), of which the AEP PJM TOs are members and others. 14 With the removal of the limitation that an IC can only build facilities if the TO is unable to meet the customer s proposed milestones, it is expected that more ICs will exercise the Option to Build. Given this expectation, three entities requested from the Commission greater clarity as to the liability of the IC with respect to IC-Constructed Facilities. As explained below, the three entities representing TOs sought very specific clarification and guidance as to the scope of the protection TOs would be afforded. whole or in part in contract, in tort, including negligence, strict liability, or any other theory of liability; provided, however, that damages for which a Party may be liable to the other Party under another agreement will not be considered to be special, indirect, incidental, or consequential damages hereunder. 13 See 845 NOPR at PP See Order No. 845 at P 84. AEPSC also submitted separate comments urging the Commission against expanding the Option to Build on the grounds that the interconnected TO is uniquely qualified to assess the requirements for expanding an existing station, and it would be improper for an IC to unilaterally override the interconnection transmission owner s assessments and standards. Comments of American Electric Power Service Corp. at 5-6, Dkt. No. RM17-8 (Apr. 13, 2017). 8

12 Xcel Energy Services, Inc. ( Xcel ) commented that if an IC decides to exercise the Option to Build, the standard indemnification clause as set forth in the LGIA was inadequate and that the IC should agree to an indemnification provision for the life of the facilities. 15 As Xcel stated: If the [IC] exercises its option to build, it also agrees to indemnify the [TO] for claims arising from the [IC] s construction. Simple indemnification associated with construction may not go far enough if this option is regularly exercised. The indemnification must extend for the life of the facilities. The transmission customer should be responsible for higher operation and maintenance costs for the self-constructed system, and penalties for noncompliance, if applicable. 16 EEI, which represents numerous investor-owned TOs, argued that in cases where ICs exercise the Option to Build, the Commission should provide TOs additional protection. As an example, EEI stated that if an IC builds a 30-year facility and failures begin to occur in year five due to inadequate workmanship or equipment, the [IC] should ultimately be responsible for all costs associated with subsequent outages (both planned and unplanned) and restoration, and that this liability protection should also extend to indirect damages to adjacent facilities. 17 EEI further argued that [s]uch indemnification must be memorialized in the interconnection service agreement and facilities construction agreements specifying that the [IC] is liable for any direct or 15 Comments of Xcel Energy Services Inc. at 10, Dkt. No. RM17-8 (Apr. 13, 2017) (emphasis added). 16 Id. 17 Comments of the Edison Electric Institute at 23, Docket No. RM17-8 (April 13, 2017). 9

13 indirect costs incurred by the TO to address equipment failure due to material defect or workmanship for a set period after a facility is commissioned. 18 National Grid USA ( National Grid ) urged the Commission against giving the IC the unilateral Option to Build. However, National Grid stated that if the Commission decided to give the IC the unilateral option to build, the Commission should enhance the protection in Section 5.2 of the pro forma LGIA in a number of respects. With respect to indemnification, National Grid argued that Section 5.2 should provide for enhanced indemnification terms when the IC exercises the Option to Build. National Grid indicated that Section 18.1 of the pro forma LGIA does not have clear applicability to the situation where the IC is exercising the Option to Build. 19 As stated by National Grid, Construction of facilities by the [IC] and its contractors may give rise to many potential costs and damages to both the transmission owner and to third parties and that such costs and damages may, in many instances, be indirect in nature, making the exclusion of consequential, indirect, and similar damages (as set forth in section 18.2 of the pro forma LGIA... ) problematic. 20 National Grid urged the Commission to revise Section 5.2 as follows: [S]ection 5.2 of the pro forma LGIA should contain a requirement that the [IC] indemnify the transmission owner from and against any and all liabilities, damages, and losses to the extent they arise from the engineering, procurement, or construction of the transmission owner s interconnection facilities and/or stand alone network upgrades by the [IC] 18 Id. 19 Comments of National Grid at 10-11, Dkt. No. RM17-8 (Apr. 13, 2017). 20 Id. 10

14 and/or its contractors (including, without limitation, any direct or indirect costs incurred by the transmission owner to address equipment failure due to material defect or workmanship, claims for personal injury or property damage, third party claims, and claims for environmental damage or harm), except to the extent caused by the gross negligence or willful misconduct of the transmission owner. Section 5.2 should further provide that section 18.2, and the exclusion of recovery for special, indirect, incidental, consequential, or punitive damages contained therein, shall not apply to limit the above construction option indemnification obligation. 21 In Order No. 845, the Commission recognized the concerns expressed by EEI, Xcel, and National Grid. 22 The Commission clarified that Section 5.2(7) of the pro forma LGIA was sufficiently broad to cover the concerns raised by these three parties in their comments. Specifically, the Commission stated as follows: 94. In response to EEI s, Xcel s, and National Grid s comments, we note that article 5.2(7) of the pro forma LGIA requires the [IC] to indemnify the [TO] for claims arising from [IC] s construction of [TO] s Interconnection Facilities and Stand Alone Upgrades. We consider this provision sufficiently broad to address EEI s, Xcel s, and National Grid s concerns. 23 FERC made no exceptions to the specific indemnification requests the three named entities had asked for. Thus, the Commission indicated that the scope of Section 5.2(7) covered each and every concern raised by EEI, Xcel, and National Grid. 21 Id. at 11 (emphasis added). 22 Order No. 845 at P 93 (noting that EEI, Xcel, and National Grid ask the Commission to ensure that interconnection customers indemnify the [TO] from any damages that result from facilities built pursuant to the option to build, including damages to adjacent facilities ). 23 Id. at P 94 (emphasis added). 11

15 The Commission s clarification of the scope of the indemnification protection in Section 5.2(7) is sound policy and importantly protects ratepayers. This policy is particularly appropriate and justified in a situation where a TO effectively is being compelled to take title to IC-Constructed Facilities. In this situation, regardless of the procedural or oversight safeguards that are in place (as set forth in Section 5.2 of the pro forma LGIA), the fact remains that the Commission is compelling a TO to take title to transmission facilities that it did not build and which could result in damage or cause outages not only to its transmission system but the entire regional transmission system and beyond. If a facility fails and the TO has the obligation to repair and replace it, the ratepayers of the TO would suffer financial harm. It is worth pointing out that in Order No. 845, the Commission justified the removal of the limitation on the Option to Build based primarily on cost efficiency grounds. Specifically, the Commission indicated that the primary driver of permitting developers this Option to Build is that they may be able to build facilities in a less expensive manner. 24 Cheaper does not necessarily mean better. In a situation where a TO is compelled to take title to facilities that are constructed by another party, it is appropriate for the TO to be entitled to indemnification protection for the life of the facilities, as the Commission clarified at Paragraph 94 of Order No See Order No. 845 at P 85 ( The limitation restricts an [IC] s ability to efficiently build the [TO] s interconnection facilities and stand alone network upgrades in a cost-effective manner, which could result in higher costs for [IC]s. ). 12

16 3. The Commission Held that No Changes to the LGIA Were Needed to Provide the Protections Already Granted by Order No The Commission dismissed the specific concerns raised by Excel, EEI, and National Grid as to the perceived inadequacy of the existing indemnification provision in the pro forma LGIA by referencing specific pages of their comments 25 and finding that no changes to the existing provisions of the pro forma LGIA were necessary to address their concerns. 26 AEPSC appreciates the Commission s clarification as to the scope of the indemnification protection of Section 5.2(7). Rehearing requests submitted by several parties with respect to the Option to Build suggest that the Commission s ruling in Paragraph 94 of Order No. 845 was perhaps not obvious. 27 Several TOs remain concerned on rehearing that the Option to Build places liability on TO shoulders, even though some of the risks mentioned are the very risks the Commission indicated had already been resolved through wording adopted in Order No AEPSC only mentions such rehearing requests because they indicate that Section 5.2(7), particularly when coupled with Section 18.2, remains somewhat difficult to interpret without the reader having to resort to the Preamble of Order Nos and 25 See id. at P 93 n.166 (citing EEI 2017 Comments at 23; Excel 2017 Comments at 10; National Grid 2017 Comments at 8-11 ). 26 Order No. 845 at P 94 and Appendix C (not changing Section 5.2(7)). 27 See, e.g., Arizona Public Service Company s Request for Rehearing and Clarification of Commission Order No. 845 at 11-12, Dkt. No. RM17-8 (May 22, 2018) (stating that LGIA Section 18.2 excludes certain types of consequential damages but noting that these damages are the exact type of damages from which [TOs] would need to adequately protect themselves to ensure that the appropriate party was held responsible for penalties, required mitigation efforts, and other costs ). 13

17 AEPSC has reviewed the rehearing requests submitted in Order No. 845, and it appears no party has challenged the clarifications granted with regard to the scope of Section 5.2(7). The opportunity to seek rehearing of Order No. 845 has passed and any indemnification policy clarifications are now final. B. PJM s Standard ICSA and ISA Do Not Reflect the Important Policy Discussed Above Due to a confluence of factors, the PJM Tariff s interconnection provisions deviate in many regards from the pro forma LGIA and LGIP. 29 Several of these differences are relatively important with regard to this Complaint. First and foremost, the PJM s equivalent of the pro forma LGIA is actually a combination of two separate agreements, the ISA and ICSA. Second, the PJM terminology used is quite different with regard to the facilities associated with a generator interconnection (in part because the ICSA addresses construction associated with many types of service requests, not only (generator) Interconnection Requests). The pro forma LGIA (as applied to an RTO) would divide interconnection-related facilities into four categories, one of which has a subcategory: Interconnection Customer Interconnection Facilities; Transmission Owner Interconnection Facilities; Distribution Upgrades; and Network Upgrades (with the subcategory of Stand Alone Network Upgrades). 28 In any case, the independent entity standard should permit PJM to adopt wording that would eliminate any confusion. 29 The LGIP are not particularly relevant here. 14

18 In contrast, the ISA and ICSA divide facilities into two categories: Customer Interconnection Facilities; and Transmission Owner Interconnection Facilities. That is, in PJM, the concept of Interconnected Transmission Owner Interconnection Facilities ( TOIF ) includes network upgrades. Indeed, the term is defined by PJM as: all Interconnection Facilities that are not Customer Interconnection Facilities and that, after the transfer under Tariff, Attachment P, Appendix 2, section 5.5 to the Interconnected Transmission Owner of title to any Transmission Owner Interconnection Facilities that the Interconnection Customer constructed, are owned, controlled, operated and maintained by the Interconnected Transmission Owner on the Interconnected Transmission Owner s side of the Point of Interconnection identified in appendices to the Interconnection Service Agreement and to the Interconnection Construction Service Agreement, including any modifications, additions or upgrades made to such facilities and equipment, that are necessary to physically and electrically interconnect the Customer Facility with the Transmission System or interconnected distribution facilities. Any facility that is not ultimately owned by the Interconnection Customer is a TOIF in PJM. In contrast, outside PJM, the acronym TOIF typically refers only to the TO s facilities between the Point of Change of Ownership and the Point of Interconnection The pro forma LGIA states [TO s] Interconnection Facilities shall mean all facilities and equipment owned, controlled or operated by the [TO] from the Point of Change of Ownership to the Point of Interconnection as identified in Appendix A to the Standard Large Generator Interconnection Agreement, including any modifications, additions or upgrades to such facilities and equipment. [TO s] Interconnection Facilities are sole use facilities and shall not include Distribution Upgrades, Stand Alone Network Upgrades or Network Upgrades. 15

19 The discussion below explains how AEPSC believes the PJM ICSA and ISA came to deviate so markedly from the FERC pro forma LGIA, as to the provisions regarding indemnity for the TO as to IC-Constructed Facilities. 1. PJM Pre-Order No Interconnection Provisions On March 31, 1999, PJM submitted an application in Docket No. ER proposing to add a new Part IV to the PJM Tariff and a new Schedule 6A to the Operating Agreement to address interconnections of various types. Such filing was submitted years before the ANOPR 31 preceding Order No was issued in Almost three years later, on March 18, 2002, PJM further amended Part IV, largely in reliance on the ANOPR and the changes it portended. The filing added to PJM Tariff Part IV a new Subpart B, Standard Terms and Conditions for Interconnection, and a new Subpart C, Standard Construction Terms and Conditions. It also added two new attachments: Attachment O, a form of the Interconnection Service Agreement, and Attachment P, a form of the Construction Service Agreement. Attachments O and P were quite abbreviated, with the bulk of terms and conditions relating to interconnections remaining in Part IV. The Option to Build concept was adopted in this 2002 PJM filing. Of most relevance here was the inclusion of the final sentence of Section 85.5: Transfer of Title to Certain Facilities Constructed By [IC]: Within thirty (30) days after the [IC] s receipt of notice of acceptance under Section following Stage Two energization of the Interconnection Facilities, the [IC] shall deliver to the Interconnected [TO], for the Interconnected [TO] s review and approval, all of the documents and filings 31 Standardizing Generator Interconnection Agreements and Procedures, Advance Notice of Proposed Rulemaking, FERC Stats. & Regs. 35,540 (2001). 16

20 necessary to transfer to the Interconnected [TO] title to any TO Interconnection Facilities constructed by the [IC], and to convey to the Interconnected [TO] any easements and other land rights to be granted by Interconnected Customer in accordance with Section 85.1 that have not then already been conveyed. The Interconnected [TO] shall review and approve such documentation, such approval not to be unreasonably withheld delayed, or conditioned. Within 30 days after its receipt of the Interconnected [TO] s written notice of approval of the documentation, the [IC], in coordination and consultation with the Interconnected [TO], shall make any necessary filings at the FERC or other governmental agencies for regulatory approval of the transfer of title. Within twenty (20) days after the issuance of the last order granting a necessary regulatory approval becomes final (i.e., is no longer subject to rehearing), the [IC] shall execute all necessary documentation and shall make all necessary filings to record and perfect the Interconnected [TO] s title in such facilities and in the easements and other land rights to be conveyed to the Interconnected [TO]. Prior to such transfer to the Interconnected [TO] of title to the TO Interconnection Facilities built by the [IC], the risk of loss or damages to or in connection with, such facilities shall remain with the [IC]. Emphasis added. The Transmittal Letter accompanying the filing mentions Section 85.5 in passing, 32 but does not describe the bolded sentence, which implies that the IC bears the risk of loss or damages relating to the TOIF only prior to the time it passes title. The Commission s order accepting the filing likewise does not reference the provision. 33 provided: Additionally, Section was added to the PJM Tariff in this filing and it (2002). 32 Transmittal Letter at 37, Dkt. No. ER (Mar. 18, 2002). 33 See Old Dominion Elec. Coop. v. PJM Interconnection, L.L.C., 99 FERC 61,189 17

21 General Conditions Applicable to Option: In addition to the other terms and conditions applicable to the construction of facilities under this Subpart, the Option to Build is subject to the following conditions: (a) The [IC] must obtain or arrange to obtain all necessary permits and authorizations for the construction and installation of the TO Interconnection Facilities that it is building, provided, however, that when the Interconnected [TO] s assistance is required, the Interconnected [TO] shall assist the [IC] in obtaining such necessary permits or authorizations with efforts similar in nature and extent to those that the Interconnected [TO] typically undertakes in acquiring permits and authorizations for construction of facilities on its own behalf; (b) The [IC] must obtain all necessary land rights for the construction and installation of the TO Interconnection Facilities that it is building, provided. however, that upon [IC] s reasonable request. the Interconnected [TO] shall assist the [IC] in acquiring such land rights with efforts similar in nature and extent to those that the Interconnected [TO] typically undertakes in acquiring land rights for Construction Facilities on its own behalf; (c) Notwithstanding anything stated herein, each Interconnected [TO] shall have the exclusive right and obligation to perform the line attachments (tie-in work), and to calibrate remote terminal units and relay settings, required for the interconnection to such Interconnected [TO] s existing facilities of any TO Interconnection Facilities that the [IC] builds; and (d) The TO Interconnection Facilities built by the [IC] shall be successfully inspected. tested and energized pursuant to Sections 83.8 and 83.9 of this Subpart C. 18

22 Additional provisions relating to Network Facilities were included in Section , but none addressed the indemnification of the TO, which is the issue relevant here. 34 The 2002 PJM filing also included a Limitation on Damages provision for each of the ISA and ICSA that read as follows: [ISA] 64.5 Limitation on Damages. Except as otherwise provided in this Article 64, the liability of an Interconnection Party under this Subpart B shall be limited to direct actual damages and all other damages at law are waived. Under no circumstances shall any Interconnection Party or its affiliates, directors, officers: employees and agents, or any of them, be liable to another Interconnection Party, whether in tort. contract or other basis in law or equity for any special. indirect, punitive, exemplary or consequential damages, including lost profits. The limitations on damages specified in this Section 64.5 are without regard to the cause or causes related thereto, including the negligence of any Interconnection Party, whether such negligence be sole, joint or concurrent, or active or passive. This limitation on damages shall not affect any Interconnection Party s rights to obtain equitable relief as otherwise provided in this Subpart. The provisions of this Section 64.5 shall survive the termination or expiration of the Interconnection Service Agreement. [ICSA] 92.5 Limitation on Damages. Except as otherwise provided in this Article 92, the liability of a Construction Party under this Subpart C shall be limited to direct actual damages, and all other damages at law are waived. Under no circumstances shall any Construction Party or its Affiliates, directors, officers, employees and agents, or any of them, be liable to another Construction Party, whether in tort, contract or other basis in law or equity for any special, indirect, punitive, exemplary or consequential damages, including lost profits. The limitations on damages specified in this Section 92.5 are without regard to the cause or causes related thereto, 34 This fact is not surprising, as Section 5.2(7) was a late addition to the Order No pro forma LGIA, with its wording being issued with the Final Rule in July 2003, more than a year after this PJM proposal was filed. 19

23 including the negligence of any Construction Party, whether such negligence be sole, joint or concurrent, or active or passive. This limitation on damages shall not affect any Construction Party s rights to obtain equitable relief as otherwise provided in this Subpart. The provisions of this Section 92.5 shall survive the termination or expiration of the Construction Service Agreement. All of the above provisions were accepted, but the ordering paragraph indicated that the filing was accepted subject to the Commission s final rule in Docket No. RM PJM Compliance with Order No As described above, Order No addressed the liability of the IC with regard to facilities that it constructed and transferred to the TO by adopting LGIA Section 5.2(7). On January 20, 2004, PJM submitted its compliance filing with Order No It explained in its Transmittal Letter that its intent was (1) to modify its current tariff only as needed to add provisions of the LGIP and LGIA for which there presently is no comparable provision in Part IV, and (2) to revise certain terms to make them compatible with the Final Rule to the extent feasible without upsetting the careful balances of competing regional interests on which Part IV is founded. 36 Importantly, as indicated in Paragraph 357 of Order No. 2003, Section 5.2.(7) was a brand new section, added by the Final Rule. Given that the PJM Tariff had no comparable provision in Part IV, it is unclear why the wording of Section 5.2(7) was not adopted FERC 61,189 at 61,774 (Ordering Paragraph). 36 Transmittal Letter at 3, Dkt. No. ER (filed Jan. 20, 2004) ( Order 2003 Transmittal Letter ) (emphasis added). 20

24 In its Transmittal Letter, PJM included as an Appendix a table matching each provision of the pro forma LGIP and LGIA to the provisions in its Tariff (Part IV) including Attachments O and P. PJM stated that the Appendix demonstrates that PJM s tariff already meets the Commission s principal goals regarding standardization of generation interconnections and, upon acceptance of the enclosed compliance tariff sheets, will comply fully with Order No The table (Order 2003 Transmittal Letter, Appendix at 16) indicates that the General Conditions Applicable to Option to Build found in Section 5.2 of the FERC pro forma LGIA could be found in Section of the PJM Tariff. That said, was not amended at all. The crucial indemnification provision of Section 5.2(7) was not added to the PJM Tariff. The AEP TOs were not PJM Transmission Owners at the time of such filing and they are uncertain why the equivalent wording of Section 5.2(7) was not added. In discussing omissions from its Tariff, PJM stated: PJM has not included in its compliance tariff sheets a few provisions of the LGIA for which there presently is no parallel in the PJM Tariff. PJM believes the principal, substantive provisions that it has not adopted are LGIA Sections 5.3 and Section 5.3 provides for liquidated damages for interconnection customers in certain circumstances. Section 5.16 relates to suspension of construction of facilities at the request of the customer. 38 It thus does not appear that the omission of the protection on Section 5.2(7) was an issue at the time and is not even clear if the omission was intentional. The Commission s order 37 Id. at 3 (emphasis added). 38 Order 2003 Transmittal Letter at

25 largely accepting the compliance filing does not address the fact that Section 5.2(7) was never included in Section or elsewhere in the Tariff. 39 This substantial deviation continues to this day. In the PJM Order No compliance filing, Section 85.5 was not amended to eliminate the implication that the liability of the IC with regard to TOIF ceased when title transferred. The final sentence of Section 85.5 was not mentioned as being in conflict with Section 5.2(7) 40 of the pro forma LGIA in PJM s Order 2003 Transmittal Letter, although it is possible that PJM believed that Section s 5.2(7) s protections ended with title transfer. It is Order No. 845 that clarifies that there is a direct conflict between the PJM ICSA and the intent of Section 5.2(7) to provide life of facility indemnification. As to the limit on consequential damages, which also is relevant here, the policy reflected in Section 18.2 of the pro forma LGIA was identified as being reflected in Tariff Sections 64.5, 64.6, 92.5, and Those provisions were quite similar to Section 18.2 and did not substantially deviate from the intent of Section Thus, it appears that PJM had a general intent to follow the liability provisions the Commission had adopted. 39 In protests, an unrelated issue was raised concerning the Option to Build, which PJM answered, resulting in FERC noting in its order accepting the compliance filing that: PJM contends that its stakeholders adopted the Option to Build provisions of pro forma LGIA Articles and 5.2 within section of the PJM Tariff.... PJM Interconnection, L.L.C.., 108 FERC 61,025 at P 14 (2004) (emphasis added). 40 Section 5.2(7) does not state that its protections terminated with the transfer of title. Indeed, Order No. 845 confirmed that Section 5.2(7) s protections do not terminate with the transfer of title, but rather remained in effect for the life of the facility. 41 Order 2003 Transmittal Letter, Appendix at

26 3. Current PJM ISA and ICSA Although many years have passed since Order No was adopted, the substance of the PJM provisions filed in March 2002 remain intact. The primary event that has occurred is that the deficiencies at issue the omission of Section 5.2(7) and the inclusion of a sentence indicating ICs liability is limited to the period of their ownership of TOIF are now reflected in Attachment P (the ICSA), rather than in Part IV of the PJM Tariff. 42 Today, the General Conditions Applicable to Option section is found in Section of the ICSA and provides: General Conditions Applicable to Option. In addition to the other terms and conditions applicable to the construction of facilities under this Appendix 2, the Option to Build is subject to the following conditions: (a) The [IC] must obtain or arrange to obtain all necessary permits and authorizations for the construction and installation of the [TO] Interconnection Facilities that it is building, provided, however, that when the Interconnected [TO] s assistance is required, the Interconnected [TO] shall assist the [IC] in obtaining such necessary permits or authorizations with efforts similar in nature and extent to those that the Interconnected [TO] typically undertakes in acquiring permits and authorizations for construction of facilities on its own behalf; (b) The [IC] must obtain all necessary land rights for the construction and installation of the [TO] Interconnection Facilities that it is building, provided, however, that upon [IC] s reasonable request, the Interconnected [TO] shall assist the [IC] in acquiring such land rights with efforts similar in nature and extent to those that the Interconnected [TO] typically undertakes in acquiring land rights for construction of facilities on its own behalf; 42 Much of Part IV was moved into the ISA (Attachment O) and ICSA (Attachment P) in a filing submitted on December 18, 2006 in Docket No. ER

27 (c) Notwithstanding anything stated herein, each Interconnected [TO] shall have the exclusive right and obligation to perform the line attachments (tie-in work), and to calibrate remote terminal units and relay settings, required for the interconnection to such Interconnected [TO] s existing facilities of any [TO] Interconnection Facilities that the [IC] builds; and (d) The [TO] Interconnection Facilities built by the [IC] shall be successfully inspected, tested and energized pursuant to Sections 3.8 and 3.9 of this Appendix 2. Section 85.5 is now found in Section 5.5 of the ICSA. It now reads: 5.5 Transfer of Title to Certain Facilities Constructed By [IC]: Within thirty (30) days after the [IC] s receipt of notice of acceptance under Section 3.10 of this Appendix 2 following Stage Two energization of the Interconnection Facilities, the [IC] shall deliver to the Interconnected [TO], for the Interconnected [TO] s review and approval, all of the documents and filings necessary to transfer to the Interconnected [TO] title to any [TO] Interconnection Facilities constructed by the [IC], and to convey to the Interconnected [TO] any easements and other land rights to be granted by [IC] in accordance with Section 5.1 above that have not then already been conveyed. The Interconnected [TO] shall review and approve such documentation, such approval not to be unreasonably withheld, delayed, or conditioned. Within 30 days after its receipt of the Interconnected [TO] s written notice of approval of the documentation, the [IC], in coordination and consultation with the Interconnected [TO], shall make any necessary filings at the FERC or other governmental agencies for regulatory approval of the transfer of title. Within twenty (20) days after the issuance of the last order granting a necessary regulatory approval becomes final (i.e., is no longer subject to rehearing), the [IC] shall execute all necessary documentation and shall make all necessary filings to record and perfect the Interconnected [TO] s title in such facilities and in the easements and other land rights to be conveyed to the Interconnected [TO]. Prior to such transfer to the 24

28 Interconnected [TO] of title to the [TO] Interconnection Facilities built by the [IC], the risk of loss or damages to, or in connection with, such facilities shall remain with the [IC]. Transfer of title to facilities under this section shall not affect the [IC] s receipt or use of the interconnection rights related to Network Upgrades and/or Local Upgrades for which it otherwise may be eligible as provided in Subpart C of Part VI of the Tariff. Other than the addition of one new sentence to the end of Section 5.5, no substantive change to either provision has occurred since the 2002 filing. 43 C. Other Differences Between the Standard ISA/ICSA and Pro Forma LGIA As mentioned above, the pre-order No PJM Tariff interconnection provisions did not limit the Option to Build to Stand Alone Network Upgrades, as that concept did not even exist at the time the PJM Option to Build provisions were accepted. With the adoption of Order No. 2003, PJM chose not to scale back its Option to Build and adopt the Stand Alone Network Upgrade concept. In its Order 2003 Transmittal Letter matrix of changes (at 14), PJM notably leaves a blank next to the term Stand Alone Network Upgrades, showing that there is no equivalent of the Stand Alone Network Upgrade concept in its Tariff. PJM also mentioned that the Interconnection Customer could undertake construction of some or all of the required transmission upgrades. 44 This difference between the two approaches may exist because PJM was not asked to scale back its Option to Build to Stand Alone Network Upgrades by its stakeholders. 43 Section 14.5 of the ISA is now almost identical to Section 18.2 of the pro forma LGIA. 44 Order 2003 Transmittal Letter at 10 (emphasis added). 25

29 The pro forma LGIA states in Section that [i]f the dates designated by Interconnection Customer are not acceptable to Transmission Provider, Transmission Provider shall so notify Interconnection Customer within thirty (30) Calendar Days, and unless the Parties agree otherwise, Interconnection Customer shall have the option to assume responsibility for the design, procurement and construction of Transmission Provider s Interconnection Facilities and Stand Alone Network Upgrades on the dates specified in Article In contrast, the ICSA states in Section : In the event that the Interconnected Transmission Owner and the Interconnection Customer are unable to agree upon the terms of an Interconnection Construction Service Agreement (a) on or before the date that is 30 days after Interconnection Customer s execution of the Interconnection Service Agreement,, the Interconnection Customer shall have the right, but not the obligation ( Option to Build ), to design, procure, construct and install all or any portion of the Transmission Owner Interconnection Facilities. There is no mention in subsection (a) of the dates designated by the Interconnection Customer being not acceptable to Transmission Provider as it being the trigger that entitles the Interconnection Customer to build. In its Order 2003 Transmittal Letter, PJM stated that [t]he most significant aspects of Subpart F are its provisions that authorize a generator, if it is unable to agree with an interconnecting transmission owner on appropriate terms for completing construction on the schedule that the generator seeks, to undertake construction of some or all of the required transmission upgrades. 45 The Transmittal Letter s intent and the plain wording of subsection (a) do not appear to match each other. The PJM Tariff wording could be interpreted to give an 45 Order 2003 Transmittal Letter at