By JIM LARSON
The Billings Outpost

A federal commission ruled in June that Montana’s main electric utility may not operate its new export transmission project using a free market or “merchant” model, a Montana Public Service Commission attorney said.

In a memo to the commissioners, PSC staff attorney James Paine wrote that the Federal Energy Regulatory Commission denied NorthWestern’s petition for negotiated rate authority for its proposed Mountain States Transmission Intertie.

NorthWestern Energy had hoped to build and operate the transmission project as a separate company that charged rates set through negotiations with the customers that used the line. MSTI would hook up to five proposed “collector” lines located in wind power-rich north central Montana and connect them to large markets in California and Arizona, areas that are anxious to meet renewable energy quotas.

At the heart of the federal commission’s denial was doubt about whether MSTI could actually be considered separate from NWE.

FERC expressed four areas of concern regarding NWE’s request to operate MSTI using a merchant model. The commission considered whether the negotiated rates would be just and reasonable. It also took into account whether undue potential for discrimination against certain power producers existed.

FERC also attempted to discern if MSTI would receive undue preference over competing transmission projects and if the company’s regional reliability and efficiency requirements would be compromised, the memo said.

When determining whether MSTI would charge its transmission customers “just and reasonable rates,” FERC looked to see if the project had assumed “full market risk” for the construction of the line.

The federal commission argued that MSTI had already fallen short of that mark. It noted that MSTI’s parent company, NorthWestern, had already “conducted and funded the preliminary siting, planning and environmental work,” the memo said.

As a regulated utility, NorthWestern operates under an open access transmission tariff. Its rates are based on cost of service. Under its tariff the utility is obligated to expand its system when power generators seek transmission that exceeds NWE’s capacity.

PPL Montana has longstanding requests for transmission service on NorthWestern’s system that have not resulted in the construction of new capacity.

FERC noted that with the construction of MSTI as a merchant line, NWE would lose the incentive to build the regulated transmission capacity that it was obligated to provide, since its MSTI affiliate would probably realize a greater profit charging PPL negotiated rates, the memo said.

The FERC ruling noted, however, that NorthWestern could achieve its goals by building a project similar to MSTI on a cost-of-service basis and by asking for appropriate waivers to its tariff.

Mr. Payne wrote that if NorthWestern went in that direction, the Montana commission would be “concerned about possible adverse impacts on native load customers.”

NorthWestern’s spokesman Claudia Rapkoch told the Montana Standard that the company would move forward with MSTI. Though disappointed with the ruling, the decision didn’t change the need for the line or NorthWestern’s plans to construct it, the paper reported.

Describing the project weeks before the ruling, a Montana Public Service commissioner expressed concern about building MSTI using a merchant model.

“I’m skeptical of it,” Commissioner Ken Toole said.

He noted that NWE was a regulated company that was attempting to start an unregulated company. Traditionally utilities knew who their customers were going to be before they built. Using the merchant model, NWE would build the line and then market space on it, he said.

“Who the hell are your customers?” he asked.