Legal Aspects of Grid Interconnection

4.1. Introduction

The flow of electrical power, and of funds to pay for electricity received, across borders must occur within a long-term legal framework that ensures trust between partners, as well as structuring straightforward and transparent dealings between the trading countries and the public and/or private institutions that support grid interconnections. A legal framework is necessary in order to identify the parties responsible for paying for power interconnection infrastructure, for the power itself, and for the costs of operating the infrastructure. In addition, and as indicated in Chapter 3 of this report, legal agreements must specify the prices to be paid for electricity (and how those prices are to be calculated), what form of payment is acceptable, and other parameters of international funds transfer. Also, for example, legal agreements are needed to indicate which parties are responsible to any third parties harmed by interconnection-related activities, and describing how disputes between parties are to be addressed. The legal agreements needed to establish and operate a grid interconnection are both affected by and affect the status of the legal systems within the interconnected countries—these effects can be both positive and negative. The Chapter that follows reviews the legal issues associated with international electricity grid interconnections, including providing a summary of the types of institutions likely to be involved in power trading (and thus required to be involved in legal arrangements related to power trading), describing the types of country-to-country legal agreements needed to establish and operate power lines (including legal agreements related to contractor selection), identifying some of the internal requirements needed to implement international legal agreements related to power trading—including characteristics of National legal systems that can make international legal agreements more complex, and noting some of the potential benefits to a national legal system from being involved in international agreements related to grid interconnections. In general, this Chapter focuses on legal agreements between and involving national governments, though agreements with others are described to some extent as well.

4.2. Potential Institutions and Groups Involved in Power Trading

The complexity of international power grid interconnection systems—including the physical systems themselves, the institutional arrangements necessary to make them work, and the economic arrangements needed to pay for them—mean that a number of very different “actors” may be involved in establishing and operating power trading arrangements. Legal agreements are needed to codify the rights and responsibilities of each of these actors relative to each other. Some of the potential “actors” (or “parties”) in legal agreements related to grid interconnections, and some of the agreements that each type of party is likely to be involved in, include the following: • National governments/ministries: National governments, usually operating through specific ministries (such as Ministries of Energy, Electricity, Infrastructure, and/or the Environment), are highly likely to be involved as parties to all but the simplest electricity interconnection projections. At a minimum, governmental agencies must certify that other parties have existing rights to do business in the countries involved in the interconnections, and own or have existing rights to use the land on which interconnection facilities are built. More likely, government agencies will be responsible to some degree for energy sector planning activities that implicate grid interconnections, will be needed to provide licenses to operate for companies involved in the interconnection, will need to provide rights of access to publicly-owned land for power lines and related facilities, and will need to pledge state financial resources toward the repayment of loans—from the private sector and/or multilateral financial institutions, for example. In some cases, government ministries may be the ultimate buyers and/or sellers of electricity, obliging them to sign legal agreements to guarantee electricity supplies or consumption at a certain level. • Sub-national governments and agencies: In many countries, the States, Provinces, Municipalities, or other jurisdictions that might host grid interconnection infrastructure (export-oriented power plants or power lines) may also be significant governmental actors in grid interconnection projects. The cooperation, or lack of same, of State and Local authorities can have a significant impact on decisions regarding grid interconnection projects, as the land-use, environmental, labor, and other rules at the State and Local levels must be considered in formulating legal agreements that define and guide interconnection projects. • National utilities: In many countries, national utilities, whether wholly government-controlled or semi-autonomous, are likely to own generation and transmission/distribution assets, and thus be involved in legal agreements to sell, buy, and move electricity flowing through international interconnections. Utilities, whether public or private, may also be involved in building, operating, and/or maintaining power line infrastructure, and as such will require legal arrangements that designate their rights and responsibilities as participants in the project. • Private utilities, buyers, or sellers: Where the generation and/or transmission/distribution assets to be used in power transfers are privately-owned, private utilities will be implicated as power buyers and sellers, and may also be providers of construction, operation, and maintenance services to the power line itself. Private utilities may require different legal structures from national utilities, as they are not (directly) backed by the government. As market mechanisms in the power sector mature, privately- owned generators or electricity or bulk electricity buyers (such as large industrial enterprises or firms purchasing bulk power for distribution to an aggregated group of consumers) may also arrange, via legal contracts, to buy or sell power that will flow between countries. In some countries, the activities of private utilities (and some other electricity market actors) will be regulated, and the regulatory body will likely also need to be consulted with regard to, if not have direct responsibility for, grid interconnection contracts. • Private construction and/or maintenance contractors and subcontractors: The construction of a large-volume transmission interconnection may by itself cost a billion US dollars or more, and when the major power plants needed to feed electricity into a major interconnection are included, the overall cost may be many billions of dollars. Legal contracts for construction services will need to be entered into between project sponsors (nations, private investors, and/or multilateral banks) and a firm, or likely many firms, engaged in construction of the grid interconnection. Often, prime contractors for all or a portion of construction services will work with subcontractors, under relationships also governed by legal agreements. Similarly, the maintenance contracts for the power lines may be arranged between private companies and private or national utilities, governments, or transmission consortia. • National or multi-national transmission consortia: In some cases, the operation of a grid interconnection may be the responsibility of a transmission consortium created for the purpose, or a consortium already operating in one of the interconnected countries. These types of consortia, which may be public, semi-public, or privately-owned, will be governed by legal agreements with the governments involved that specify their areas of operations, and will also enter legal agreements with electricity buyers and sellers to provide transmission services. • Multi-national banks and other financial institutions: Finally, the financing for grid interconnections, and often the new power plants designed to feed them, will often come in part from multinational development banks and/or private financial institutions (including national and international finance firms). These institutions will require contracts guaranteeing repayment from the countries and/or companies that will buy and/or sell the power flowing through the line, contracts secured by power line or generation assets, and often by general revenues from the countries involved as well.

4.3. Country-to-country Legal Agreements Required

The hosting of an international grid interconnection requires that the countries involved enter into a number of different types of legal agreements, often also involving some of the sub-national or multilateral/ consortium parties described above.

4.3.1. Power purchase and pricing agreements

Perhaps the most obvious type of agreement that needs to be entered into between countries involved in an interconnection are agreements for selling and purchasing power, including agreements on power pricing. In power sales agreements, the seller is usually obligated to make available a certain amount of power (for example, in MW and/or GWh per year), and the buyer is usually obligated to purchase a certain amount of power. Both minimum and maximum purchases may be stipulated, or only minimums may be included in the agreement (as maximums are likely limited by the physical capacities of the line). In some cases, contracts are set up so that buyers must “take or pay”, that is, must take delivery of a certain amount of energy per year, or pay as a penalty all or part of the cost of the energy that would have been “taken” had the buyer fulfilled its obligations under the contract. Conversely, contracts often specify financial penalties to sellers that do not meet their obligations to sell power. There are generally clauses, however, in power sales contracts to address circumstances beyond the suppliers’ control that cause disruption in or curtailment of the delivery of power. Often referred to as “Force Majeure” or “uncontrol lable forces,” these circumstances can include natural disasters, such as floods or droughts, epidemics and war. In addition, as can be seen in the electricity system interconnection agreement between the United States-based utilities CLECO Power LLC and the Southwestern Power Company, it would not be considered a breach of contract if a disruption of power supply were to occur due to “installation, maintenance, repair, or replacement of equipment”70. In some cases, power exchanges across borders are set up not so much to facilitate net sales from one country to another, but to allow countries with complementary resource endowments and/or electricity demand (such as countries with hydroelectric outputs that vary differently seasonally or over years, or countries with different seasons or times of day of peak demand) to exchange power so as to reduce capacity and reserve requirements in both countries. In these cases, power sales and purchase contracts may be structured differently. Power pricing agreements, as noted in the previous Chapter, are both legal and economic agreements. Power pricing agreements specify the price that a buyer must pay and a seller will receive for electricity. These agreements will typically have a long duration, since the power sales must pay the financing costs of the longlived assets (power lines and power plants) that make them possible. Power prices may be fixed over time, may have a fixed escalation rate over time, may be set to escalate with one or more national or international price indices, or may be linked, in part, to international prices for other energy commodities (such as crude oil). International purchase/sales agreements will also typically specify the currency in which payments are to be made. In many developing regions, contracts may specify that payments be made in “hard” currencies, such as US Dollars or Euros, so as to insulate buyers and sellers from the impacts of local-currency inflation, as well as to provide hard-currency income for the electricity sellers. A review of the pricing arrangements and currency requirements in the Power Purchase Agreement (PPA) for the Theun-Hinboun Hydropower Project in Lao People’s Democratic Republic (Lao PDR) illustrates this point. The main goal of the project, funded in part by the Asian Development Bank (ADB), was to promote economic growth in Lao PDR by increasing the foreign exchange earnings through exporting electricity to Thailand. The completed PPA requires that 50 percent of payments be made in Thai Baht and 50 percent in US dollars, all of which are paid to an offshore escrow account71. Power purchase agreements may involve parties other than the direct representatives of the trading nations, including national or private utilities, transmission consortia, or, in countries where electric sector restructuring is relatively advanced, private suppliers and/or buyers of power. The nature of the electricity buyer and seller in interconnection arrangements has a strong bearing on both the prices ultimately paid for power, and how pricing arrangements are reached. For example, as noted by Neuhoff, in the case where integrated monopolies are the actors on both the importing and exporting side, rather than a negotiated market price for electricity…72 “ The price for the electricity will be between the costs of the exporting country and the costs of the outside option for the importing country. If long-term contracts are to be signed the outside option of the importing country is to construct new power plants. If short term prices are negotiated the outside option for the importing country can be anything between running inefficient diesel generators and cutting power supply to part of the demand side. If power trade is based on commercial interests and the exporting country has no competitive market and the import country has no short-term substitute for electricity imports then long term contracts are vital for the importing country.” In most international power purchase agreements to date, nations are typically the ultimate legal guarantors of purchases or sales. The Lao PDR Theun-Hinboun Hydropower Project mentioned above, and the Bujagali Hydro Project in Uganda, are examples here. In both cases the respective governments borrowed funds, in part from the Asian Development Bank in the former case and from the African Development Bank, the World Bank and the International Finance Corporation (IFC) in the latter case, to finance the majority of the costs of the projects. In the PPA of the Bujagali project, signed in November of 1999, the government guarantees all payments that are to be made by the Uganda Electricity Board (UEB.) If UEB should default on any payments, the government will immediately cover the costs. Therefore, although there is private sector involvement in both of these interconnection cases, the governments are the legal guarantors of the loan repayments73.

4.3.2. Agreements on siting of power line and related infrastructure

In addition to agreements on the quantities of power to be transferred, and the prices to be paid for power, in virtually all circumstances where power lines cross national borders the nations involved must agree on the siting of power lines and related infrastructure, such as substations and control centers. Governments must agree to provide a right-of-way for the power line through publicly-owned land, and must work with private landowners to secure additional land or easement rights to traverse private land. Frequently, siting power lines will involve a process of negotiation between governments to determine which routing is “best” from the perspectives of each country and of the interconnection as a whole, and will also involve negotiations with sub-national groups representing the populations in areas where power lines will pass.

4.3.3. Agreements on operation of power line

In power purchase agreements, or subsidiary agreements, the interconnected countries must agree on what entity will operate the power line, and how the governments will work with that entity (whether it is a public or private utility, a consortia of utilities and/or other public or private agencies, or a new entity created to run the line) to make sure that the power line operates smoothly and with adequate input from the parties to the power purchase agreements. Agreements will also be needed to specify the rights of generators and power consumers to, and costs to be paid for, transmission access (“wheeling”) services. Legal agreements must also specify what “remedies”—opportunities to address problems—the parties to the agreement (the electricity buyer, the seller, and others) will have if there is a disagreement over how the power line is operated. For example, the legal agreement may specify that the power line operator, while responsible for day-to-day decisions related to the operation of the line also is subject to the oversight of a “board of directors”, “transmission commission”, or some such authority made up of members appointed from each of the countries involved in the interconnection. Such an authority would ideally be composed of members from different interest groups within their nation, including utilities, government, business, and civil society74. An agreement specifying the responsibilities of the power line operator, the authority of the operator over other parties in the interconnection, and the authority of the parties, through an overseeing body, over the operator, would typically be part of any electrical grid interconnection where the operation of the interconnection has a significant impact on the operation of the national grids that it connects. As a part of power line operation, agreements will be needed as to which entity (for example, utilities, governmental ministries, and/or the transmission operator) will be responsible for maintaining the power line right-of-way in each country through which it passes. This will mean, for example, designating which organization will be responsible for making sure that vegetation in the right-of-way does not impede power line performance or present a fire hazard, as well as making sure that safety and environmental regulations (see below) with regard to power line operation are agreed upon.

4.3.4. Agreements on power line security

An electricity transmission interconnection that is relied upon to provide a significant amount of income to a national grid and/or to provide significant hard-currency income must be secured from attack or other damage. Here “attack” in most instances will probably mean malicious damage to the power line caused by sub-national groups unhappy with national government decisions (including, but certainly not limited to, decisions related to the power line itself). Power lines can also be damaged by thieves trying to illegally tap power lines to obtain “free” electricity, or looters looking to sell power line components (such as metals in towers and conductors). Agreements between countries participating in the interconnection will be needed to set out responsibilities for maintaining the security of the power line in the territory of each nation through which it passes, and to specify damages to be paid (and responsibility for repair of the line) if there are breaches in security.

4.3.5. Agreements on interconnection environmental performance

The construction and operation of power lines are typically subject to a variety of national environmental and safety regulations. These regulations include, for example, the width of the transmission right-of-way for lines of a given voltage and capacity, the required height of conductors above the ground and transportation crossings, and their distance from surrounding vegetation, the distance that power lines must maintain from human dwellings, and the strengths of electric and magnetic fields at specific distances from the lines. Regulations may also specify how construction of power lines must be managed to minimize environmental degradation, including mitigating impacts on vegetation, wildlife, and land use by indigenous populations. It may be necessary for countries sharing a power line to include in their legal agreements aspects such as the harmonization, for the construction and operation of the interconnection project, of safety, environmental, and other regulations in the trading countries. In some cases this harmonization may be driven by the requirements of multi-lateral lenders or other financing organizations75. The need for the harmonization of relevant environmental standards between the countries participating in the interconnection was noted in the context of the Baltic Ring interconnection project in Northern Europe, and deemed “…a challenging task, due to the difference in power generation portfolios, economic and political situation, as well as other framework conditions”. The need for the interconnection consortium (in this case the BALTREL organization) to play an intermediary role in helping the harmonization process was noted76.

==4.3.6. Agreements on liability for power line failure or damage, and other issues of legal liability concerning grid operation==

Agreements between nations, and between other parties involved in building and operating an interconnection project, will also require legal designations of liability for problems of different types. For example, vendors and/or installers of transmission equipment may be held liable for technical failure of transmission infrastructure up to a certain date. Construction and other contractors would typically be required to carry insurance to compensate any party who could prove they were injured by the power line. Beyond these considerations, however, nations may be required to agree on who is responsible, and who is not, for damages caused by the power line operation, or by its failure. These damages could include failure of appliances or commercial or industrial equipment caused by voltage spikes or frequency fluctuations, or claimed damages by businesses unable to operate due to power outages (or poor power quality) traceable to the operation of the interconnection.

==4.4. Legal Agreements and Protocols for Selection of Interconnection Projects and of Contractors for Power Line Construction==

A specific group of legal agreements not covered in the listing above are agreements as to how grid interconnection projects are selected, where several options exist, and how contractors and subcontractors for power line construction (and sometimes operation) are to be selected. These agreements would typically be signed by the nations involved in the interconnection, and will likely often be strongly influenced by the requirements of the organizations providing project financing. In countries where graft is consistently a problem, the clear designation and implementation of an impartial protocol for selecting one potential project over another, and for selecting, overseeing, and paying construction and other contractors, can be a significant measure to boost confidence between the countries.

==4.4.1. Protocols to ensure transparency in the selection and evaluation of grid interconnection prospects==

For any given proposed interconnection between neighboring grids there may be several distinct possible “projects” among which the parties to the interconnection must choose. A grid interconnection, for example, may be used to transport power generated at one or more of several different proposed power plants, over one or more of several proposed routes to one or more points on the receiving grid. Each option may well have its own set of specific beneficiaries and groups who are negatively affected—its own set of “winners” and “losers”. As such, it is important that the countries participating in the proposed interconnection decide and codify early in the process a systematic, clear, and legally-based means of selecting among major project options. This process would include ensuring transparency between the countries partnering to trade power—for example, through an exchange of technical information on national power demand, power systems, power development plans, and environmental data—so that the interconnection option chosen could be assured, as much as possible, to be a “best fit” to the needs of all interconnected nations77. The process would also include transparency in terms of public information and participation in the project design process—meaning making all (or most) documents related to the discussion available for review by the public in general or by suitably accredited representatives of a wide variety of groups from the citizenry of all of the interconnected nations (and other, such as upstream and downstream countries potentially affected by hydroelectric development. Note that these two issues may also be pre-specified to a degree by the requirements of multilateral financial institutions, if the latter are involved in financing. Assuring that parties to the interconnection adhere strictly to legal protocols for information provision and for inclusion of all relevant groups is likely to prevent, or at least reduce, legal, political, social, and economic problems as the project is developed.

4.4.2. Protocols and requirements for selection of contractors

Many nations, both industrialized and developing, can be justifiably accused of having shown favoritism in the awarding of lucrative infrastructure design and/or construction contracts at various times in the past (if not the present). Such favoritism, at a minimum, leaves other potential contractors disaffected by the selection process, and has the potential to create lingering resentment between the partner nations. More extreme potential results of an unfair contracting process can include wasted financial resources, shoddy workmanship by unqualified contractors (putting the project technically and/or environmentally at risk), and even the risk that the project will not be finished at all (among many other potential negative outcomes). To guard against the possibility of graft in contractor selection, participating nations should agree beforehand to a systematic, impartial contractor selection process overseen by a broad group of representatives from participating and affected parties in all of the nations involved in the project. This would include broad, public dissemination of calls for proposals, clear listings of the criteria by which competing proposals will be judged, clear and unbiased definition of contracting requirements, the definition of a transparent system for judging of proposals, and the public announcement of winning bids. For large projects, legal agreements between countries may also include requirements for the process with which contractors select local (or international) subcontracting firms, again to ensure that such selections are carried out in a manner that gives competing firms a fair chance and assures project participants (countries, financial institutions, and ultimately, electricity ratepayers) that their funds are being used wisely. The same types of criteria for avoiding favoritism and graft in the selection of design and construction contractors also may apply to the selection of organizations that will provide project financing, or will operate the interconnection78.

4.4.3. Institutional arrangements for governing grid interconnections

In addition to the types of legal arrangements needed for the day-to-day operation of a transmission interconnection (as noted in section 4.3.3 of this Chapter), legal agreements may be needed to specify how overall governance of transmission facilities connecting the power grids of two or more nations will be accomplished. The governance structure for an interconnection should, ideally, be in place, or at least agreed to, as planning for the interconnection begins, so that each party understands their legal responsibilities as project planning, construction, and operation goes forward. The governance structure for the project could include, for example, a professional Executive Director reporting to a board of representatives from all participating countries, and representing a diverse set of interest groups. Here again, clarity in the organization of the governance structure, and of the legal rights and responsibilities of each participant in the structure, is crucial to project success, and to minimization of conflict as the project develops. These types of governance arrangements, clearly set forth in such a way to give legal standing to the partners in the interconnection, are essential for securing international financing.