Recovery of Stranded Costs by Public Utilities and Transmitting Utilities
Federal RegisterJul 11, 1994
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 35
[Docket No. RM94-7-000]
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities
June 29, 1994.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Commission is proposing to amend its regulations to
establish provisions concerning the recovery of wholesale and retail
stranded costs by public utilities and transmitting utilities under
sections 205, 206, 211 and 212 of the Federal Power Act. The Commission
seeks public comment concerning the issues raised by the proposed
rulemaking.
DATES: Written comments must be received by the Commission by September
9, 1994. Reply comments must be received by the Commission by October
11, 1994.
ADDRESSES: Send comments to: Office of the Secretary, Federal Energy
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC
20426.
FOR FURTHER INFORMATION CONTACT:
James H. Douglass, Office of the General Counsel, Federal Energy
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC
20426; Telephone: (202) 208-2143 (legal issues).
Michael A. Coleman, Office of Electric Power Regulation, Federal Energy
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC
20426; Telephone: (202) 208-1236 (technical issues).
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission also provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in room 3104, at 941 North
Capitol Street, NE., Washington, DC 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and may be accessed using a personal computer with a modem by
dialing (202) 208-1397. To access CIPS, set your communications
software to use 300, 1200, or 2400 bps, full duplex, no parity, 8 data
bits and 1 stop bit. CIPS can also be accessed at 9600 bps by dialing
(202) 208-1781. The full text of this order will be available on CIPS
for 30 days from the date of issuance. The complete text on diskette in
WordPerfect format may also be purchased from the Commission's copy
contractor, La Dorn Systems Corporation, also located in room 3104, 941
North Capitol Street, NE., Washington, DC 20426.
Notice of Proposed Rulemaking
June 29, 1994.
Table of Contents
I. Introduction
II. Public Reporting Burden
III. Discussion
A. Background
B. Current Stranded Cost Policy
1. Wholesale Customers Leaving The System
2. Retail-Turned-Wholesale Customers Leaving The System
3. Retail Customers Leaving The System
C. The Proposed Regulations
1. Recovery of Stranded Costs Associated With New Wholesale
Power Sales Contracts
2. Recovery of Stranded Costs Associated With Existing Wholesale
Power Sales Contracts
3. Recovery Of Wholesale Stranded Costs In Wholesale
Transmission Rates
4. Filing Requirements For Wholesale Stranded Cost Recovery
5. Evidentiary Demonstration For Wholesale Stranded Cost
Recovery
6. Recovery Of Retail Stranded Costs
i. Jurisdictional Analysis
ii. Treatment of Retail Costs
IV. Regulatory Flexibility Act
V. Environmental Statement
VI. Information Collection Statement
VII. Public Comment Procedures
Regulatory Text
I. Introduction
The Federal Energy Regulatory Commission (Commission) seeks public
comment on amending its regulations to establish provisions concerning
the recovery of wholesale and retail stranded costs by public utilities
and transmitting utilities under sections 205, 206, 211 and 212 of the
Federal Power Act (FPA).\1\ Wholesale stranded costs are defined as any
legitimate, prudent and verifiable costs incurred by a public utility
or a transmitting utility to provide service to a wholesale
requirements customer that subsequently becomes, in whole or in part,
an unbundled transmission services customer\2\ of that public utility
or transmitting utility. Retail stranded costs are defined as any
legitimate, prudent and verifiable costs incurred by a public utility
or transmitting utility to provide service to a retail franchise
customer that subsequently becomes, in whole or in part, directly or
indirectly, an unbundled transmission services customer of that public
utility or transmitting utility.
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\1\A public utility is defined under section 201(e) of the FPA
as ``any person who owns or operates facilities subject to the
jurisdiction of the Commission under this Part (other than
facilities subject to such jurisdiction solely by reason of section
210, 211, or 212).'' A transmitting utility is defined under section
3(23) of the FPA as ``any electric utility, qualifying cogeneration
facility, qualifying small power production facility, or Federal
power marketing agency which owns or operates electric power
transmission facilities which are used for the sale of electric
energy at wholesale.'' Not all transmitting utilities are public
utilities. For instance, a municipally-owned electric utility that
owns transmission facilities which are used for the sale of electric
energy at wholesale is a transmitting utility, but is not a public
utility.
\2\An unbundled transmission services customer is one who
purchases transmission as a product that is separate from the
purchase of generation.
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For recovery of wholesale stranded costs, the proposed rule
distinguishes between stranded costs associated with wholesale
requirements contracts executed after the date the proposed rule is
published in the Federal Register (``new'' contracts) and stranded
costs associated with wholesale requirements contracts executed on or
before that date (``existing'' contracts).
The proposed rule would not allow a public utility or transmitting
utility to seek recovery of stranded costs associated with ``new''
wholesale requirements contracts through transmission rates for section
205 or 211 transmission services. Recovery of such costs will not be
allowed except through explicit stranded cost provisions contained in
new wholesale requirements contracts.
If the seller under a new wholesale requirements contract is a
public utility, and the new contract explicitly addresses stranded cost
recovery, the public utility may seek recovery, in accordance with the
contract, under sections 205-206 of the FPA.\3\ The public utility may
not seek recovery of wholesale stranded costs through any transmission
rate for section 205 or 211 transmission services. If the seller under
a new wholesale requirements contract is a transmitting utility subject
to the Commission's jurisdiction under section 211, but not also a
public utility subject to the Commission's section 205-206
jurisdiction,\4\ there will be no Commission forum for addressing
wholesale stranded costs associated with the new contract. Such
utilities will not be able to seek recovery of wholesale stranded costs
associated with such new contracts through rates for transmission
services ordered under section 211, and the Commission does not have
jurisdiction over their power sales contracts. Therefore, these
utilities must address recovery of stranded costs through their new
wholesale requirements contracts subject to the appropriate regulatory
authority approval.
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\3\For example, when a public utility files a new wholesale
requirements contract that contains an explicit exit fee amount, it
may request that the Commission allow it to recover the fee, in
accordance with the contract, without having to make a subsequent
section 205 filing, as long as the exit fee provision is
sufficiently specific. Customers are contractually obligated to pay
such exit fees previously approved by the Commission, and such an
exit fee is part of the filed rate.
\4\Compare 16 U.S.C. 796(23) with 16 U.S.C. 824(e).
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With regard to stranded costs associated with ``existing''
wholesale requirements contracts, the proposed rule provides a three-
year transition period during which public utilities must attempt and
non-public utilities are encouraged to attempt to renegotiate certain
existing contracts, and during which they may seek recovery of stranded
costs as follows:
(a) If an existing wholesale requirements contract explicitly
addresses stranded costs through an exit fee or other stranded cost
provision, no public utility or transmitting utility may seek recovery
of stranded costs associated with that contract through transmission
rates; the utility may recover such costs only as specified in the
requirements contract.
(b) If an existing wholesale requirements contract does not
explicitly address stranded costs through an exit fee or other stranded
cost provision, the parties to the contract, within a three-year
transition period, must make a good faith attempt to negotiate a
stranded cost amendment to the contract. If the parties are able to
negotiate an amendment, and the selling utility under the contract is a
public utility, the amendment should be filed for Commission approval
under section 205 or 206 of the FPA prior to the end of the three-year
period. If the parties to the existing contract are not able to
negotiate an amendment, and the selling utility under the contract is a
public utility, the public utility may unilaterally file a proposed
amendment, under section 205 or 206 of the FPA, prior to the end of the
three-year period.\5\ If an amendment is not filed and the customer
leaves the public utility's system after the end of the three-year
transition period, the Commission will deny any extra-contractual
stranded cost claim in a section 205 or 206 requirements rate
proceeding arising under the contract in question.
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\5\If the selling utility is a transmitting utility that is not
also a public utility, its wholesale requirements contracts are not
subject to this Commission's jurisdiction. Therefore, such
transmitting utility should within the three-year transition period
take whatever steps are permitted or required under its regulatory
requirements to unilaterally propose to its regulatory authority a
stranded cost provision as an amendment to its existing contract.
Under this proposal, it will not be permitted to seek stranded cost
recovery from this Commission after the close of the three-year
transition period.
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(c) If an existing wholesale requirements contract does not
explicitly address stranded costs through an exit fee or other stranded
cost provision, and if, prior to the end of the three-year transition
period, the customer gives notice pursuant to the contract\6\ that it
will no longer purchase all or part of its requirements from the
selling utility but instead will purchase from the selling utility
unbundled section 205 or section 211 transmission services\7\ that will
begin prior to the end of the three-year period, then the selling
utility may seek to recover stranded costs from that customer through
jurisdictional transmission rates. This is the only circumstance in
which the rule proposes to allow wholesale stranded cost recovery
through transmission rates.
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\6\This refers to proper notice given in accordance with the
contract. If the customer attempts to breach the contract, the
utility will have the usual recourse.
\7\I.e., services pursuant to a transmission tariff or agreement
on file with the Commission under FPA section 205, or services
pursuant to a request for an order under FPA section 211.
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(d) If a utility does seek recovery of stranded costs as permitted
by the proposed rule, and the existing wholesale requirements contract
contains a notice provision, there will be a rebuttable presumption
that the utility had no legitimate expectation of continuing to serve
the customer beyond the period provided for in the notice provision.
With regard to retail stranded costs, the proposed rule adopts a
strong policy preference that appropriate State or local regulatory
authorities address, in whatever manner they deem appropriate, stranded
cost recovery. The proposed rule provides alternative proposals for how
the Commission will address retail stranded costs. The Commission
expresses no preference in favor of either alternative. Under the first
alternative, the rule provides that if the appropriate State or local
authority does not explicitly address retail stranded costs,\8\ or if
there is conflict among authorities within a State or among different
States, the Commission will entertain requests to recover stranded
costs in section 205-206 rates for wholesale or retail transmission
services in interstate commerce,\9\ or in section 212 rates for
wholesale transmission services ordered under section 211. Under the
second alternative, the rule provides that the Commission will not
entertain any request for recovery of retail stranded costs. However,
the Commission solicits comments on whether there should be exceptions
to this alternative rule.
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\8\See discussion, infra, section III.C.(6)(ii), regarding
mechanisms by which states might explicitly address retail stranded
costs.
\9\``Wholesale transmission services'' means the transmission of
electric energy sold, or to be sold, at wholesale in interstate
commerce. This is the definition contained in FPA section 3(24).
For purposes of this proposed rulemaking, ``retail transmission
services'' refers to the transmission of electric energy sold, or to
be sold, in interstate commerce directly to a retail customer.
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Finally, the proposed rule provides guidance as to the substantive
criteria and evidentiary demonstration necessary for wholesale and
retail stranded cost recovery.
The Commission requests the general views, comments and analyses of
all interested persons, pursuant to the procedures herein. It has set
forth enumerated questions in the Appendix attached hereto on which it
solicits comment in particular.
II. Public Reporting Burden
The proposed rule specifies filing requirements to be followed by
public utilities seeking to recover stranded costs. The information
collection requirements of the proposed rule are attributable to FERC-
516 ``Electric Rate Filings''. The current total annual reporting
burden for FERC-516 is 783,700 hours.
The proposed rule requires public utilities seeking to recover
stranded costs to provide certain information to the Commission. The
public reporting burden for the information collection requirements
contained in the proposed rule is estimated to average 50 hours per
response. This estimate includes time for reviewing the requirements of
the Commission's regulations, searching existing data sources,
gathering and maintaining the necessary data, completing and reviewing
the collection of information, and filing the required information.
There are approximately 200 public utilities. The Commission
estimates that approximately ten of these utilities will respond to the
information collection annually. The respondents would be public
utilities who seek to recover stranded costs. The information will be
collected on an annual basis. Accordingly, the public reporting burden
is estimated to be no more than 500 hours.
Send comments regarding this burden estimate or any other aspect of
the Commission's collection of information, including suggestions for
reducing this burden, to the Federal Energy Regulatory Commission, 941
North Capitol Street, NE., Washington, DC 20426 [Attention: Michael
Miller, Information Services Division, (202) 208-1415], and to the
Office of Information and Regulatory Affairs of the Office of
Management and Budget [Attention: Desk Officer for Federal Energy
Regulatory Commission].
III. Discussion
A. Background
Historically, electric utilities entered into long-term contracts
to make wholesale requirements sales (bundled sales of generation and
transmission) to municipal, cooperative and investor-owned utilities.
Under these contracts, utilities often committed to provide all (full
requirements) or part (partial requirements) of a customer's power
needs for the contract period. Although these wholesale requirements
contracts are typically for defined terms, they often were rolled over
or extended when the contract term expired.
The historical supply relationship between utilities and their
wholesale requirements customers, however, has begun to undergo
significant change as a result of increased competition in wholesale
power generation and greater customer access to transmission services.
Increased competition in wholesale power generation began with the
enactment of the Public Utility Regulatory Policies Act of 1978
(PURPA).\10\ PURPA provided incentives for the development of
alternative generation sources known as qualifying facilities (QFs). In
addition, state-approved competitive bidding programs paved the way for
the growth of non-traditional utility generators. Finally, the Energy
Policy Act of 1992 (Energy Policy Act)\11\ provided regulatory
exemptions to encourage a new class of wholesale power producers known
as exempt wholesale generators (EWGs).
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\10\16 U.S.C. 2601, et seq.
\11\Pub. L. 102-486, 106 Stat. 2776 (1992).
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As competition in wholesale power generation has increased, so has
the ability of customers to gain access to the transmission services
necessary to reach competing suppliers. In earlier years, a few
customers were able to obtain access as a result of court proceedings,
beginning with the Supreme Court's decision in Otter Tail Power Co. v.
United States, 410 U.S. 366 (1973). In recent years, a growing number
of public utilities voluntarily agreed to file transmission tariffs of
general applicability, i.e., tariffs that permit transmission access
for any entity that will be making sales for resale of electric
energy.12 In most instances, access was provided in order to
obtain Commission approval of a merger or consolidation13 or
Commission authorization of market-based rates for generation
services.14 The Commission, in many instances, conditioned its
approval of certain mergers upon transmission access in order to
mitigate potential anticompetitive effects.15
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\1\2See, e.g., Entergy Services, Inc., 58 FERC 61,234, order
on reh'g, 60 FERC 61,168 (1992), appeal pending sub nom. Cajun
Electric Power Cooperative, Inc., et al. v. FERC, Nos. 92-1461, et
al. (D.C. Cir. filed Sept. 24, 1992) (Entergy).
\1\3See, e.g., Public Service Company of Colorado, 59 FERC
61,311 (1992), reh'g denied, 62 FERC 61,013 (1993).
\1\4See, e.g., Entergy, 58 FERC at 61,740.
\1\5See, e.g., Utah Power & Light Company, et al., Opinion No.
318, 45 FERC 61,095 (1988), order on reh'g, Opinion No. 318-A, 47
FERC 61,209 (1989), order on reh'g, Opinion No. 318-B, 48 FERC
61,035 (1989), aff'd in relevant part sub nom. Environmental Action
Inc., et al. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991); Northeast
Utilities Service Company (Re Public Service Company of New
Hampshire), Opinion No. 364-A, 58 FERC 61,070, reh'g denied,
Opinion No. 364-B, 59 FERC 61,042, order granting motion to vacate
and dismissing request for rehearing, 59 FERC 61,089 (1992),
affirmed in relevant part sub nom. Northeast Utilities Service
Company v. FERC, Nos. 92-1165, et al. (1st Cir. May 19, 1993).
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The trend toward greater transmission access has been accelerated
by the passage of the Energy Policy Act, which substantially expanded
the Commission's authority to order transmission services. Under
amended section 211 of the FPA, the Commission may order wholesale
transmission services, upon application, to any electric utility,
Federal power marketing agency, or any other person generating electric
energy for sale for resale.16 Thus far, the Commission has granted
requests for mandatory transmission services pursuant to section 211 in
five of the six cases it has acted on, including four proposed orders
and one final order. In addition, several public utilities have filed
voluntary wholesale transmission tariffs subsequent to the passage of
the Energy Policy Act.17
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\1\6Under section 212(h), no order issued by the Commission
shall be conditioned on or require the transmission of electric
energy to an ultimate consumer or to a ``sham'' wholesale customer.
However, the Commission may order services to a ``non-sham''
wholesale customer, e.g., a person having an obligation under State
or local law to provide electric services to the public and who
would utilize transmission or distribution facilities that it owns
or controls to deliver all such electric energy to such electric
consumer.
\1\7See, e.g., American Electric Power Service Corporation, 67
FERC 61,168 (1994); Commonwealth Edison Company, 65 FERC 61,288
(1993), order on reh'g, 67 FERC 61,325 (1994); Florida Power &
Light Company, 64 FERC 61,361 (1993), order on policy issues, 66
FERC 61,227 (1994), order on reh'g, 67 FERC XXX (1994);
Northern States Power Company (Minnesota) and Northern States Power
Company (Wisconsin), 67 FERC 61,240 (1994).
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During the transition to a fully competitive wholesale power
market, some utilities may incur stranded costs as wholesale customers
leave their systems to purchase power elsewhere. A utility may have
built facilities or entered into long-term fuel or purchased power
supply contracts with the reasonable expectation, based on historical
experience and the behavior of its customer, that its wholesale
requirements contract to sell electric energy to that customer would be
renewed, and that the customer would pay its proportionate share of
long-term investments and other costs incurred. If the customer is able
to obtain unbundled transmission service from the utility in order to
reach other power suppliers, the utility may have ``stranded costs.''
If the utility does not have an alternative buyer for the power
previously sold to the departing wholesale requirements customer, or
some other means of mitigating the stranded costs, the costs must be
recovered from either thedeparting customer or the remaining customers
or borne by the utility's shareholders.
Changes are also occurring in retail electric markets, which could
also cause retail stranded costs.18 For instance, as a result of
recent action by the Massachusetts legislature, discussed infra, the
Massachusetts Bay Transit Authority (MBTA) changed from being a retail
franchise customer to a wholesale transmission customer of
Massachusetts Electric Company. Another example is the California
Public Utilities Commission's recent initiation of a proceeding to
consider the restructuring of California's retail electric industry to
allow all consumers to obtain direct access to competing generation
service providers.19 The Michigan Public Service Commission is
also considering a plan to offer consumer access to competing
generation suppliers on a limited basis.20
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\1\8Retail stranded costs may occur when a retail franchise
customer of a public utility or transmitting utility obtains
unbundled transmission service from the utility; the franchise
customer may become a wholesale transmission customer of the utility
or a retail transmission customer of the utility. Retail stranded
costs may also result from customer ``self-help'' actions such as
customer self-generation, or a customer building its own
transmission line, or a customer relocating to another utility's
service territory. These types of retail stranded costs have long
been a fact of life for utilities. This proceeding is not intended
to address stranded costs resulting from customer ``self-help''
actions.
\1\9Order Instituting Rulemaking and Order Instituting
Investigation on the Commission's Proposed Policies Governing
Restructuring California's Electric Services Industry and Reforming
Regulation, California Public Utilities Commission Nos. R. 94-04-
031, I. 94-04-052 (April 20, 1994).
\2\0In the matter of the application of the Association of
Businesses Advocating Tariff Equity for approval of an experimental
retail wheeling tariff for Consumers Power Company, et al., MPSC
Case Nos. U-10143 and U-10176 Opinion and Interim Order Remanding to
the Administrative Law Judge for Further Proceedings, Michigan
Public Service Commission, 150 P.U.R.4th 409 (April 11, 1994),
appeal dismissed for lack of jurisdiction, Attorney General v.
Michigan Public Service Commission, No. 175245 (Mich. Ct. App. June
15, 1994).
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In summary, as a result of the transition to a competitive
wholesale power market, we must be concerned with three ways in which
stranded costs are most likely to occur:
Scenario 1: A wholesale requirements customer (i.e., a wholesale
purchaser of bundled generation and transmission services) may obtain
unbundled transmission services from its existing supplier in order to
reach an alternative generation supplier. It may obtain wholesale
transmission services either through a voluntary bilateral agreement or
voluntary open-access tariff filed by a utility under FPA section 205,
or by obtaining a Commission order under FPA section 211;
Scenario 2: A retail franchise customer (or a group of retail
franchise customers) may, through State or local government action,
become a wholesale customer who obtains from its existing supplier
either voluntary unbundled wholesale transmission services under
section 205 agreements or tariffs as described above, or obtains such
services pursuant to a Commission order under section 211;
Scenario 3: A retail franchise customer may obtain unbundled retail
transmission services from its existing supplier in order to reach a
new generation supplier, either through voluntary unbundled retail
transmission services or as a result of a State or local action
requiring the existing supplier to provide such retail transmission
services.21
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\2\1The Commission takes no position in this proceeding
regarding the legal issue of whether States have the authority to
order retail wheeling in interstate commerce.
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Below we discuss the Commission's precedent for each of these
scenarios, and how we propose to deal with such stranded costs in the
future.
B. Current Stranded Cost Policy
1. Wholesale Customers Leaving The System
The Commission has always permitted public utilities to include
reasonable cancellation provisions in power sales contracts in order to
protect themselves from stranded costs and to plan for the future needs
of their systems.22 Reasonable cancellation provisions may include
specified ``exit fees'' or ``termination charges'' that must be paid by
a purchaser if it terminates service prior to a contract's termination
date. They may also include requirements that customers provide
sufficient prior notice of cancellation to allow utilities to avoid
stranded costs.
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\2\2See Kentucky Utilities Company, Opinion No. 169, 23 FERC
61,317 at 61,668, order on reh'g, Opinion No. 169-A, 25 FERC
61,205 (1983), vacated and remanded on other grounds, Kentucky
Utilities Co. v. FERC, 766 F.2d 239 (6th Cir. 1985) (remanded for
lack of evidence supporting the length of the notice provision),
order on remand, 37 FERC 61,299 (1986).
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Contracts negotiated prior to the recent movement toward increased
transmission access and competitive bulk power markets may not contain
provisions requiring notice of termination and/or allocating
responsibility for stranded costs. Accordingly, the Commission has
permitted public utilities to include wholesale stranded investment
cost recovery provisions in wholesale transmission rates when a public
utility has filed a transmission tariff of general applicability.
In Entergy, public utilities sought to include provisions for the
recovery of wholesale stranded investment costs as part of their
proposed transmission tariff of general applicability. In that case,
the Commission stated:
If Entergy has made investment decisions based on a contractual
commitment or reasonable expectation at that time that it would
continue to serve these customers, it should be able to recover from
them the legitimate and verifiable costs invested on their
behalf.\23\
\2\3Entergy, 60 FERC at 61,631.
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The Commission reasoned that the existence of a transmission tariff
of general applicability could increase a public utility's risk of
stranded investment far beyond what was contemplated when the public
utility originally negotiated its power supply contracts.\24\ The
Commission further observed that public utilities may not voluntarily
offer expanded transmission access if doing so means becoming subject
to an increased risk of stranded investment.\25\ Therefore, the
Commission stated that it would be appropriate for Entergy to seek to
recover legitimate and verifiable stranded investment costs through
transmission rates, if such costs were associated with contracts
entered into before the date of the Commission's order. However, the
Commission stated that it would not allow the Entergy utilities to seek
recovery of stranded costs associated with contracts entered into or
extended after that date. The Commission further indicated in Entergy
that while a public utility may seek to recover stranded costs,
recovery is by no means guaranteed. The public utility bears the heavy
burden of showing, among other things, that it made relevant investment
decisions based on a ``contractual commitment or reasonable
expectation'' that it would continue to serve its existing wholesale
power customers.\26\
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\24\Entergy, 58 FERC at 61,770.
\25\Id.
\26\Entergy, 60 FERC at 61,631.
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2. Retail-Turned-Wholesale Customers Leaving The System
The Commission has been presented with the question of whether it
should permit public utilities to seek recovery in wholesale
transmission rates of stranded investment costs incurred to serve
former retail franchise customers.\27\ In United Illuminating Company,
the Commission held that retail franchise matters are state matters
that should be handled, in the first instance, by the appropriate state
regulatory bodies or courts.\28\ In Massachusetts Electric Company, the
Commission accepted for filing and set for hearing the reasonableness
of a proposed stranded cost charge involving a utility seeking to
recover stranded costs in transmission rates from a former retail
franchise customer that became a wholesale requirements customer and
then became a transmission-only wholesale customer.29
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\27\For example, stranded costs may occur if a newly-formed
municipal utility reduces or terminates service from its current
supplier.
\28\See United Illuminating Company, 63 FERC 61,212 at 62,583,
reh'g denied, 64 FERC 61,087 (1993) (UI).
\29\Massachusetts Electric Company, 66 FERC 61,036 (1994)
(Mass Electric). The Massachusetts Department of Public Utilities
(Massachusetts Commission) recently requested that the Commission
suspend the hearing it ordered in this proceeding for six months to
allow time for its investigation of the utility's stranded cost
claims. On June 6, 1994, the presiding administrative law judge
denied the Massachusetts Commission's motion. On June 29, 1994, the
Massachusetts Commission filed an interlocutory appeal to the
Commission of the presiding judge's June 22, 1994 denial of the
motion.
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3. Retail Customers Leaving The System
The Commission has not been presented with the question of whether
it can or should permit public utilities to seek recovery, in rates for
unbundled interstate transmission services provided to retail
customers, of stranded costs incurred to serve retail franchise
customers. However, this issue could arise as a result of voluntary
retail wheeling or State or local actions resulting in retail wheeling
arrangements such as those being considered in California, Michigan and
elsewhere.
C. The Proposed Regulations
Consistent with the policy objectives of Congress in enacting the
electric provisions of the Energy Policy Act, the Commission is
committed to developing a competitive, open transmission access,
wholesale bulk power market. Our goal is to facilitate the development
of competitively priced generation supply options, and to ensure that
wholesale purchasers of electric energy can reach alternative power
suppliers and vice versa. We therefore believe it is important at this
stage of the evolution of the electric industry to address stranded
costs.
The financial stability of the electric industry during the
transition to a competitive wholesale generation market will depend in
large part on: (1) Whether the transition to a competitive environment,
at either the wholesale or retail level, will leave utility companies
without an adequate opportunity to recover costs invested to serve
customers under less competitive circumstances; and (2) whether and how
regulators address recovery of some or all of those ``stranded'' costs.
While there is no universally accepted estimate of the potential
magnitude of stranded costs, some observers have suggested that
stranded costs could total tens of billions of dollars, while others
have suggested $200 billion or more. These estimates are based, to a
large degree, on the difference between the book value of generating
assets and their presumed market value.\30\
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\30\These estimates include both wholesale and retail stranded
costs. It has been suggested that the potential amount of retail
stranded costs may be an order of magnitude larger than the
potential amount of wholesale stranded costs, given that only 10-15
percent of generating investment by investor-owned utilities is in
wholesale rate base.
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In addition to concerns about the financial stability of the
industry, we believe it is important to provide as much regulatory
certainty as possible, as early as possible, to buyers and sellers of
electric energy and transmission, regarding the recovery of these
potentially significant costs. Buyers seeking competitive generation
alternatives need to know the costs associated with leaving their
existing suppliers in order to make reasoned decisions. Likewise,
sellers need to know the extent, if any, to which they will be
obligated to provide requirements service on an extra-contractual basis
so that they can plan their participation in competitive generation
markets.
Accordingly, the Commission believes it can best fulfill its
regulatory responsibilities by addressing the issue of stranded costs
during the initial stages of the transition to a competitive wholesale
generation market.\31\ The Commission therefore is proposing to
establish generic policies and procedures covering the treatment of
stranded costs by public utilities and transmitting utilities.
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\31\Indeed, our experience during the regulatory restructuring
of the gas pipeline industry, including the issue of ``take-or-pay''
contracts, tells us that reasoned decisionmaking requires thorough
consideration of the effects of regulatory and statutory changes,
including stranded costs. See Associated Gas Distributors v. FERC,
824 F.2d 981, 1021-1030 (D.C. Cir. 1987).
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The Commission believes that stranded cost recovery is a transition
problem. In the past, costs may have been incurred by wholesale
suppliers under an implicit regulatory ``bargain,'' i.e., based on a
reasonable expectation that captive customers would continue taking
service beyond the term of their contracts and that the utility would
continue to plan for their needs.\32\ This regulatory ``bargain,''
particularly in the context of the recovery of extra-contractual
stranded costs, may not be sustainable in the face of wholesale market
forces. The expectation is that market forces will ensure adequate
supply and wholesale customers will be able to contract for services
from alternative suppliers.
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\32\See also 18 CFR 35.15 (requiring utilities to make a filing
with the Commission before terminating a rate schedule); Pacific Gas
& Electric Company, 25 FERC 61,142 at 61,381 (1983) (``termination
is a change in service for which notice is statutorily required'').
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Whereas any obligation to serve requirements customers at the
wholesale level is a contractual one, the traditional obligation to
serve at the retail level arises through utility monopoly franchise
rights. The traditional retail regulatory compact has ensured the
utility's financial integrity by granting it an opportunity to recover
prudently incurred costs plus a fair rate of return, in exchange for
regulation by the State regulatory authority and the duty to provide
safe, reliable, reasonably priced electric service on demand. Some
states have recently considered whether the traditional franchise duty
to serve all customers within the boundaries of the designated
franchise area ought to evolve and whether this duty should be modified
by the State.\33\
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\33\See, e.g., California Commission Order Instituting
Rulemaking, supra, section III.A. & n.19.
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The Commission notes that new generating capacity can be built and
operated at costs that are less than many utilities' current embedded
generating costs. This simple fact of current economic conditions is
encouraging many users to seek access to the new lower cost sources of
supply. Utilities traditionally have been obligated to serve all retail
customers within their franchise territory and all wholesale
requirements customers to whom they have contractually agreed to
provide service. They have constructed or contracted for generating
capacity sufficient to meet these service obligations. If existing
customers leave their current utility suppliers, the utilities may not
be able to recover all of their prudently incurred costs. In light of
the utilities' status as regulated entities with retail franchise
service obligations and contractual (and perhaps extra-contractual)
wholesale service commitments, the Commission believes it is
appropriate to provide a mechanism for utilities to seek to recover
prudently incurred costs that are stranded during the transition to a
competitive electricity supply market.
However, the amount of and responsibility for any costs stranded in
the transition to competitive markets should be resolved in as short a
time as possible, so as not to inhibit customers from taking advantage
of the competitive market and so that sellers can restructure their
marketing strategy to reflect competitive markets.\34\
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\34\In competitive markets, sellers can recover their costs,
whether prudently incurred or not, only up to the market price.
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The Commission assumes that stranded costs will be dominated by
generating capacity. However, we believe that it is appropriate to
consider stranded costs more broadly, including the possibility that
fuel supply costs, purchased power costs, nuclear decommissioning
costs, regulatory assets and possibly other costs that the utility
seller is obligated to pay may be stranded. The Commission seeks public
comment on what categories of costs, in addition to investment costs,
should be eligible for stranded cost recovery. The Commission also
seeks comment concerning how stranded costs should be allocated to
specific customers.
The proposed regulations discussed below would allow utilities the
opportunity to seek to directly assign stranded costs to the departing
wholesale and perhaps retail customers. However, an alternative policy
might assign wholesale or retail stranded costs more broadly. For
example, some stranded cost proposals would require all transmission
customers (including native load which takes bundled service) to pay an
access charge related to use of the transmission system. The Commission
invites comments on the direct assignment and alternative methods of
stranded cost recovery. The Commission also invites comments on whether
alternative methods, e.g., an access charge, might give customers
reasonable certainty on the scope of their stranded cost obligation
more quickly than a direct assignment approach would, and thus might
expedite the transition to a more competitive wholesale market.
The proposed regulations are discussed in detail below.
1. Recovery of Stranded Costs Associated With New Wholesale Power Sales
Contracts
The Commission believes that future wholesale contracts should
explicitly address the mutual obligations of the seller and buyer,
including the seller's obligation to continue to serve the buyer, if
any, and the buyer's obligation, if any, if it changes suppliers.
Therefore, the proposed regulations regarding wholesale stranded costs
encourage the resolution of future stranded cost issues through
negotiated agreement. At the same time, we are aware that many existing
contracts, entered into prior to the time that unbundled transmission
access became more widely available, may not have adequately addressed
the potential for stranded costs.
The proposed regulations regarding wholesale stranded costs
distinguish between new and existing wholesale requirements contracts.
New contracts are defined as contracts executed after the date that the
proposed rule is published in the Federal Register. Existing contracts
are defined as contracts executed on or before the date that the
proposed rule is published in the Federal Register.
The proposed regulations would disallow extra-contractual recovery
of wholesale stranded costs associated with any new requirements
contract. That is, we will not allow any request for recovery unless
the contract contains specific provisions allowing stranded cost
recovery when it is accepted by the Commission.\35\ In addition, the
Commission will not allow any stranded costs associated with new
requirements contracts to be recovered through transmission rates.
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\35\Proposed provisions to allow stranded cost recovery will, of
course, be subject to the approval of the Commission and must be
just and reasonable and not unduly discriminatory or preferential.
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Therefore, in the future, wholesale power suppliers and their
customers must address stranded cost issues by including appropriate
notice and exit fee provisions, or any other explicit statement related
to stranded cost recovery, in their new requirements contracts. For
example, sellers may wish to require adequate notice in contracts to
reflect the realities of supply planning, and may wish to include exit
fees that buyers would be required to pay if the buyer prematurely
exits the system. Similarly, buyers may wish to preserve the rights to
exit contracts when market conditions warrant it.
In addition to encouraging parties to explicitly address their
mutual obligations in new wholesale requirements contracts, the
Commission believes it is important to address any future regulatory
obligation to serve at the wholesale level. Competitive generation
markets not only require that customers be able to freely shop for
competitively priced generation, but that sellers be free to enter new
markets and to exit markets. Asymmetrical rights and obligations that
allow existing customers to leave their current suppliers consistent
with their existing contractual obligations, but that require sellers
to continue to serve those customers beyond the terms of their existing
contracts, would not be efficient or fair. Therefore, the Commission
does not believe that it is appropriate to impose on wholesale
requirements suppliers a regulatory obligation to continue to serve
their existing requirements customers beyond the end of the contract
term. This means that a requirements customer is responsible for
planning to meet its power needs beyond the end of the contract term.
It may re-contract with its existing supplier, or it may contract with
new suppliers, using its existing supplier's transmission system.
The Commission invites public comment on the extent to which there
is or should be a regulatory obligation to continue to serve wholesale
requirements customers beyond the end of the contract term and the
source of any such obligation. The Commission also seeks comment
concerning whether section 35.15 of the Commission's regulations, which
concerns notice of termination, should be deleted in its entirety, or
only in certain circumstances (e.g., when the seller provides
transmission access on a comparable basis to the seller's own uses of
its system).
2. Recovery of Stranded Costs Associated With Existing Wholesale Power
Sales Contracts
Because stranded costs are a transitional problem, and neglecting
their recovery could delay the realization of a fully competitive bulk
power market, it is important to set a date beyond which the Commission
will no longer permit extra-contractual recovery of stranded costs that
result from existing requirements contracts.
The proposed regulations would establish a three-year transition
period during which utilities must make a good faith effort to
negotiate with their customers to add appropriate stranded cost
provisions to their existing contracts that do not already contain exit
fee or other explicit stranded cost provisions. For purposes of this
rule, if an existing contract contains an exit fee provision, that
provision will be deemed to be an explicit stranded cost provision
which cannot be renegotiated unless explicitly provided for in the
contract.
One purpose of setting a time limit for renegotiation is to provide
an incentive for utilities and their customers to attempt to promptly
renegotiate existing requirements contracts that do not address
stranded costs, so that the contracts reflect the new realities of
emerging competitive generating markets. In these situations, the
Commission expects utilities and their customers to make a good-faith
effort to reach a mutually agreeable resolution. If the parties
negotiate such a provision and the seller is a public utility, the
utility must file the provision as an amendment to the existing power
sales contract prior to the end of the three-year period.
If the parties to an existing wholesale requirements contract
cannot negotiate a stranded cost provision, the selling utility, if it
is a public utility, may, before the end of the three-year transition
period, unilaterally file under FPA section 205 or 206 a proposed
stranded cost provision as an amendment to the existing contract.\36\
This is discussed in further detail below.
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\36\See, supra, n.5, regarding transmitting utilities that are
not also public utilities.
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Alternatively, as discussed in the following section, if the
customer under the existing wholesale requirements contract: (1) Gives
notice pursuant to the contract, before the end of the three-year
transition period, that it will no longer purchase all or part of its
requirements from the selling utility, but instead will purchase
unbundled section 205 or section 211 transmission services from the
utility in order to reach a different supplier of electric energy; and
(2) the transmission services will commence prior to the end of the
three-year transition period, the selling utility may file before the
end of the three-year transition period a proposal to recover stranded
costs through rates for the requested wholesale transmission services.
This is the only circumstance under which the Commission will allow
utilities to seek wholesale stranded cost recovery through transmission
rates.37
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\3\7We note that the rebuttable presumption we are proposing for
contracts with notice provisions, infra, p. 30, also applies in this
instance. We clarify further that, under this proposal, in order for
utilities to protect themselves against a customer exercising
(inside or outside the three-year transition period) a notice of
termination provision which takes effect outside of the three-year
transition period, utilities must propose to change their existing
contracts within the three-year period. However, the rebuttable
presumption will apply in this instance as well.
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Existing requirements contracts are highly variable with respect to
exit conditions. While some existing contracts may have explicit exit
fee or other stranded cost provisions, many others may be totally
silent with respect to exit conditions. Yet others may have notice
provisions, but may not be explicit as to stranded cost recovery.
If a contract includes an explicit provision for payment of
stranded costs or an exit fee, it will be assumed that the parties
fully intended the contract to cover the contingency of the buyer
leaving the system. Therefore, as a matter of policy announced here,
the Commission proposes to reject stranded cost amendments to existing
contracts that already contain such provisions. If existing contracts
permit renegotiation of existing stranded cost provisions, the parties
may renegotiate in accordance with the contract. However, if existing
contracts prohibit stranded cost recovery, or explicitly prohibit
renegotiation of an existing stranded cost or exit fee provision, or
prohibit renegotiation until after the three-year period has expired,
the parties will not be required to renegotiate within the three-year
period. The Commission invites comments on what other types of
contractual provisions, if any, might demonstrate a sufficient
``meeting of the minds'' between parties so that renegotiation should
be barred. The Commission also solicits comments on whether to apply
these rules regarding existing contracts only to contracts between
unaffiliated entities.
If a contract does not include an exit fee or other explicit
stranded cost provision, but does contain a notice provision, there
will be a rebuttable presumption that the selling utility had no
reasonable expectation of continuing to serve the customer beyond the
period provided for in the notice provision. This presumption will
apply when public utilities propose unilateral amendments to
requirements contracts, as described above, as well as when public
utilities or transmitting utilities seek stranded cost recovery through
transmission rates, as described above. The Commission solicits comment
on whether the rebuttable presumption should also be applied to any
contract entered into after the date of enactment of the Energy Policy
Act, even though such contract does not contain an exit fee or other
explicit stranded cost provision, or a notice provision.
For existing contracts that do not contain specific exit fee or
other explicit stranded cost provisions, the Commission proposes to
require parties to make a good faith attempt at renegotiation. This is
because many of these contracts were negotiated twenty years ago, or
more, when the parties likely did not foresee the advent of competition
in wholesale generation markets and the ability of transmission-
dependent utilities to gain access to their supplier's transmission
system to reach other sellers.
The Commission recognizes that new requirements contracts and
renegotiated existing requirements contracts may contain contractual
features that have heretofore not been included in requirements
contracts. Buyers and sellers will seek to protect themselves from
contingencies made more likely as a result of increased competition in
power markets. The Commission will not impose a preconceived notion of
what those contract provisions should look like, and does not
necessarily believe that a ``one size fits all'' approach is
appropriate.
We recognize that some utilities' existing contracts may be Mobile-
Sierra contracts that prohibit unilateral rate changes.38 Under
the Mobile-Sierra doctrine, for instance, a customer may waive its
right to challenge the contract and/or the utility may waive its right
to make unilateral rate changes. However, the parties may not waive the
indefeasible right of the Commission to alter rates that are contrary
to the public interest.39 Accordingly, the Commission could permit
public utilities that have contracts containing Mobile-Sierra
provisions an opportunity to file unilateral rate changes if the
Commission finds that such an action is required in the public
interest.\40\
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\3\8See United Gas Pipeline Co. v. Mobile Gas Service Corp., 350
U.S. 332 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348
(1956).
\3\9Papago Tribal Utility Authority v. FERC, 723 F.2d at 950,
953 (D.C. Cir. 1983).
\4\0350 U.S. at 355.
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The Commission believes that a failure to permit public utilities
to address stranded costs through negotiation or unilateral rate
changes could harm the public interest in at least two ways. First, the
inability to seek recovery of stranded costs could impair the financial
ability of a utility to continue to provide reliable service. This will
depend on the magnitude of stranded costs and the prospect or lack
thereof for recovering such costs from ratepayers. The prospect of not
recovering from ratepayers significant amounts of stranded costs could
seriously erode a utility's access to capital markets, or could drive
the utility's cost of capital to unprecedented levels. This high cost
of capital could precipitate other customers leaving the system which,
in turn, could cause others to leave. Such a spiral could be difficult
to stop once begun. Second, if some customers are permitted to leave
their suppliers without paying for stranded costs, this may cause an
excessive burden on the remaining customers who for whatever reason
cannot leave and therefore may have to bear those costs. For these
reasons, our preliminary view is that it is in the public interest to
permit public utilities with Mobile-Sierra contracts a limited
opportunity to unilaterally propose contract changes to address
stranded costs, if those contracts do not already explicitly address
stranded costs.41
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\4\1Customers with Mobile-Sierra contracts that do not
explicitly address stranded costs may also file complaints under
section 206 of the FPA, within the three-year transition period, to
propose to address stranded costs in existing contracts.
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We clarify that if a public utility unilaterally files a proposed
stranded cost amendment under either section 205 or 206, this does not
necessarily mean that the Commission ultimately will find it
appropriate to allow any amendment. The same is true for customer
complaints under section 206. In addition, the Commission intends to
allow the customer to the contract to present any other proposed
stranded cost amendment which it believes reasonable.42 Further,
in analyzing what is an appropriate stranded cost amendment in the
particular circumstances, we will take into account the other
contractual provisions and hear arguments as to why other contractual
provisions may also need to be amended.
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\4\2If the customer is the initial proponent of the change, it
will bear the burden under section 206 of the FPA.
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The Commission invites public comment on the proposal to establish
a transition period during which utilities may renegotiate their
existing contracts. The Commission also invites public comment on
whether public utilities or customers with Mobile-Sierra contracts
should be able to make unilateral filings or file complaints. The
Commission also invites comments on whether the Commission should make
a Mobile-Sierra public interest finding based on company-specific
findings instead of generic industry-wide findings.
The Commission is uncertain how long the proposed transition period
should be. On the one hand, the renegotiation process is likely to be
time-consuming, since difficult issues are at stake and some utilities
have multiple contracts and may therefore be engaged in negotiations
with a number of parties at the same time. On the other hand, we do not
want to extend the transition period more than is necessary, since the
uncertainty concerning stranded cost recovery may inhibit wholesale
customers from pursuing more efficient or cheaper supply alternatives.
The Commission's preliminary view is that a transition period of three
years strikes an appropriate balance. However, the Commission invites
comment on the appropriate length of the proposed transition period.
The Commission requests that utility commenters include in their
comments an estimate of the number of requirements contracts that they
would seek to renegotiate to address stranded cost issues. How many of
these contracts are silent on this question? How many have notice
provisions, and of what duration? The Commission requests that
responding utilities estimate the amount of stranded costs associated
with such contracts, the relationship of the estimated stranded costs
to the utility's total costs or revenues, and the potential cost shift
to remaining customers.
3. Recovery of Wholesale Stranded Costs in Wholesale Transmission Rates
The Commission has previously authorized provisions that permit
public utilities to seek recovery of stranded costs in wholesale
transmission rates in the context of utilities filing transmission
tariffs of general applicability, e.g., Entergy.
As discussed in the prior section, during the transition period the
proposed regulations would permit utilities to file rates for
transmission services that include stranded costs associated with
existing wholesale requirements contracts, but only if: (1) the
wholesale requirements customer gives notice pursuant to the contract,
prior to the end of the three-year transition period, that it will no
longer purchase all or part of its requirements from the selling
utility, but instead will purchase unbundled section 205 or section 211
transmission services from the utility in order to reach a different
supplier of electric energy; and (2) the transmission services will
begin prior to the end of the three-year transition period. After the
transition period, public utilities and transmitting utilities would no
longer be permitted to recover wholesale stranded costs in rates for
transmission services under section 205 or 211 of the FPA.
The Commission believes that utilities should retain the option of
seeking recovery of stranded costs in rates for transmission services
during the transition period, but only in the limited circumstance
described.43 The Commission is proposing this limitation in order
to encourage utilities and their customers to negotiate stranded cost
provisions in accordance with the other provisions of the proposed
regulations.
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\4\3See also, supra, n.1 (discussing transmitting utilities that
are not public utilities).
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The Commission proposes to apply the above limitations on recovery
of stranded costs in wholesale transmission rates to all utilities,
whether or not they currently have on file transmission tariffs
containing stranded cost provisions.44 The Commission seeks
comment on this proposal.
---------------------------------------------------------------------------
\4\4See, e.g., Entergy.
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Filings to recover stranded costs in transmission rates during the
transition period will be permitted regardless of whether the service
is voluntarily provided (under section 205 of the FPA pursuant to an
open-access tariff, a tariff of general applicability or an individual
contract) or mandated under section 211 of the FPA. However, the
Commission invites public comment on the issue of whether stranded cost
recovery should be different depending on whether transmission service
is under section 205 or 211.
As noted earlier, supra, section III.C., the proposed regulations
allow utilities an opportunity to seek direct assignment of stranded
costs to the departing wholesale customer. We request comment on
whether, in lieu of direct assignment, utilities should be able to seek
a general surcharge to all of their transmission customers to cover the
costs stranded by a departing customer.45
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\4\5For example, the Commission followed this type of approach
in Order No. 636 with respect to gas supply realignment charges. See
Pipeline Service Obligations and Revisions to Regulations Governing
Self-Implementing Transportation; and Regulation of Natural Gas
Pipelines After Partial Wellhead Decontrol, 57 FR 13267 (Apr. 16,
1992), III FERC Stats. & Regs. Preambles 30,939 at 30,457-460
(Apr. 8, 1992), order on reh'g, Order No. 636-A, 57 FR 36128 (Aug.
12, 1992), III FERC Stats. & Regs. Preambles 30,950 (Aug. 3,
1992), order on reh'g, Order No. 636-B, 57 FR 57911 (Dec. 8, 1992),
61 FERC 61,272 (1992), appeal re-docketed sub nom., Atlanta Gas
Light Company and Chattanooga Gas Company, et al. v. FERC, No. 94-
1171 (D.C. Cir. May 27, 1994).
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The Commission does not in this proposed rulemaking address who
will bear the stranded costs caused by a departing customer if the
Commission finds that the utility had no reasonable expectation of
continuing to serve that customer. Under the proposed rule, the costs
cannot be recovered from the departing customer through transmission
rates for that customer or through a unilateral exit fee amendment in
that customer's power sales contract. We anticipate that in such a case
a public utility will seek in subsequent requirements rate cases to
have the costs reallocated among the remaining customers on its system.
The Commission recognizes that stranded costs can occur when a
customer fails to renew its requirements contract and, instead of
obtaining unbundled transmission services from its former requirements
supplier, obtains unbundled transmission services from another utility.
We anticipate that in such a case any prudent costs that are stranded
as a result of the customer's departure would be reallocated to
remaining customers in the utility's next requirements rate case. This
results in the departing customer bearing none of the costs which it
may have caused to be stranded. We request comments on how the
Commission should deal with such costs.
4. Filing Requirements for Wholesale Stranded Cost Recovery
The Commission proposes to amend Part 35, Chapter I, Title 18 of
the Code of Federal Regulations to establish filing requirements for
public utilities (as defined in FPA section 201(e)) and transmitting
utilities (as defined in FPA section 3(23)) that seek stranded cost
recovery. Our view is that the only circumstance in which transmitting
utilities that are not also public utilities may seek stranded cost
recovery from this Commission is through rates for transmission
services under FPA sections 211 and 212.
The proposed regulations define ``wholesale stranded cost'' as
``any legitimate, prudent and verifiable cost incurred by a public
utility or transmitting utility to provide service to a wholesale
requirements customer that subsequently becomes, in whole or in part,
an unbundled transmission customer of such public utility or
transmitting utility.''46
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\4\6In theory, a utility's stranded costs could include
transmission and distribution facilities. However, when a customer
switches from being a requirements customer and becomes a
transmission service-only customer, the public utility or
transmitting utility probably will continue to provide roughly
equivalent amounts of transmission services and, if relevant,
distribution services. Thus, the Commission's preliminary view is
that stranded costs will primarily be related to power production,
i.e., generation costs.
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The proposed regulations would permit a public utility or
transmitting utility to seek recovery of wholesale stranded costs as
follows. First, for stranded costs associated with new wholesale
requirements contracts (i.e., any wholesale requirements contract
executed after the date that this order is published in the Federal
Register), the proposed regulations would allow recovery of stranded
costs only if the contract explicitly provides for recovery of stranded
costs.
Second, for existing wholesale requirements contracts (i.e., any
wholesale requirements contract executed on or before the date that
this order is published in the Federal Register), the proposed
regulations would specify that a utility may not recover stranded costs
associated with such contract if recovery is explicitly prohibited by
the contract (including associated settlements) or by any power sales
or transmission tariff on file with the Commission.47
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\4\7See Maine Public Service Company, 61 FERC 61,319 (1992),
reh'g denied, 62 FERC 61,226 (1993).
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Third, for existing wholesale requirements contracts that do not
address stranded costs through exit fee or other explicit stranded cost
provisions, the proposed rule would allow a public utility to seek
recovery of stranded costs only if: (1) The existing contract contains
a specific provision allowing recovery of stranded costs; or (2) the
parties to the existing contract renegotiate the contract in accordance
with this rule and file an amendment dealing with stranded costs prior
to the expiration of the three-year transition period; or (3) if the
parties to the existing contract do not renegotiate a stranded cost
amendment, the selling utility unilaterally files, no later than the
end of the transition period, a proposed stranded cost amendment to the
parties' existing contract; or (4) if the parties to the existing
contract do not renegotiate an amendment, the public utility files a
request to recover stranded costs in its transmission rates under FPA
sections 205-206, or 211-212, under the limited circumstance described
in section III.C.(3) herein.
Fourth, if the selling utility under an existing wholesale
requirements contract is a transmitting utility but not also a public
utility, and the contract does not address stranded costs through an
explicit exit fee or other stranded cost provision, the transmitting
utility may file a request to recover stranded costs in transmission
rates under FPA sections 211-212, as described in section III.C.(3)
herein.
5. Evidentiary Demonstration Necessary for Wholesale Stranded Cost
Recovery
In Entergy and subsequent cases, the Commission provided guidance
concerning the evidentiary demonstration that utilities must make to
recover stranded costs in wholesale transmission rates. The Commission
believes that this demonstration is still relevant and appropriate. We
therefore propose to apply it to any proposal for extra-contractual
recovery in accordance with this proposed rule.48
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\4\8This would include public utilities who unilaterally seek to
amend an existing wholesale requirements contract as described
herein and public utilities and transmitting utilities that seek to
recover stranded costs through transmission rates.
---------------------------------------------------------------------------
The following is the proposed demonstration that a public utility
or transmitting utility must satisfy in order to recover stranded costs
in wholesale transmission rates, and that a public utility must satisfy
if it proposes a unilateral amendment to its wholesale requirements
contract:
(1) A utility must show that it incurred stranded costs based on an
expectation that was reasonable when the costs were incurred that the
applicable contract would be extended;
(2) A utility must show that the stranded costs it incurred are not
more than the customer would have contributed to the utility had the
customer remained a wholesale requirements customer of the utility;
(3) A utility must show that it has taken and will take reasonable
and prudent measures to mitigate stranded costs.
The question of whether a utility had a reasonable expectation of
continuing to serve a customer is a factual matter that will depend on
the evidence produced in each case. Whether the utility's expectation
was reasonable will depend on the circumstances at the time that
stranded costs were incurred, including, for instance, whether the
customer at that time had access to alternative suppliers. A utility
also must offer evidence that its expectation was based on the actual
conduct or course of dealing of the two parties (the utility and its
customer). However, the Commission does not believe it is in the public
interest to have prolonged litigation on these issues. Therefore, we
will provide general guidance as to the type of evidence that would
tend to prove or disprove the existence of a reasonable expectation.
When a public utility seeks to include certain types of
construction-work-in-progress (CWIP) in rate base for a particular
customer, the utility must use forward-looking cost allocators
(estimates of the customer's cost responsibility when the facility will
be in service).49 Therefore, the fact that a utility has recovered
CWIP from a particular customer (without the customer's objection) may
provide persuasive evidence of a reasonable expectation that it would
continue to serve that customer for a certain term. The Commission is
aware, however, that few utilities have taken advantage of the CWIP
rule, perhaps because few utilities have been undertaking major
construction projects.
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\4\9See 18 CFR 35.25(c)(4).
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A reasonable expectation that a contract would be extended could
also be shown by communications between supplier and customer
concerning system planning. For example, if a buyer has indicated that
the seller should continue to include the buyer's load in the seller's
resource planning beyond the contract term or has indicated to the
seller that it has not taken active steps to secure a new supplier, the
seller may have legitimately had a reasonable expectation of continuing
the service, particularly if the parties have routinely extended the
contract in the past.
On the other hand, a utility very likely would have no reasonable
expectation that a contract would be extended if the contract includes
a notice of cancellation provision. Therefore, there will be a
rebuttable presumption that if a contract contains a notice provision,
the utility had no reasonable expectation of serving the customer
beyond the period provided for in the notice provision. The Commission
invites comments on all aspects of the evidence necessary to
demonstrate a reasonable expectation. We specifically request comments
on our proposal that any notice provision creates a rebuttable
presumption of no reasonable expectation, or whether we should adopt a
minimum notice period that would provide a presumption that the utility
had no reasonable expectation of continuing to provide service beyond
the notice period, e.g., a five-year notice period.
The second element described above concerns reasonable compensation
for stranded costs. We request comments on what is reasonable
compensation:
(a) Would it be reasonable for the Commission to limit the
annual amount of stranded costs that a former requirements customer
must pay to be no more than what the customer would have contributed
to the utility's capital (customer revenues minus variable costs),
or would some alternative concept be appropriate?
(b) Would it be reasonable for the Commission to limit the
future time period over which a customer's liability for stranded
costs would be determined? That is, the present value of the
customer's liability could be the discounted value of an annual
amount for a limited time period. This total amount could be paid in
a lump sum or over any mutually agreeable period. The limited time
period over which the customer's liability is determined could be
called the reasonable compensation period. If so:
(i) Would the Commission apply the reasonable compensation
period to assess the reasonableness of an exit fee in a revised
requirements contract as well as a transmission surcharge?
(ii) How long should such a time period be, e.g., five years or
ten years or some other period; and
(iii) When should such a period begin, e.g., if five years is a
reasonable time over which a customer is liable for stranded costs,
does the five-year period begin when the Commission adopts a final
rule or when the utility files for stranded cost recovery in the
future?
(c) Should the length of a reasonable compensation period be
based on what would constitute a reasonable notice period in
requirements contracts or would some other concept be appropriate?
(d) Establishing a reasonable compensation period effectively
would also establish a future date beyond which requirements
customers would no longer have any liability for stranded costs,
either as an exit fee in revised requirements contracts or as a
surcharge on transmission rates. Would this be appropriate? In
responding, commenters should keep in mind that the concept of a
reasonable time period for computing stranded cost liability is
independent of the proposed three-year recontracting period for
which the Commission is also requesting separate comments.
The third element described above concerns mitigation measures.
Adequate mitigation measures might include: (1) Evidence that the
utility has tried to market the asset or assets, market the generating
capacity, reconfigure or delay investment in or purchase of new
generating capacity, or reform fuel supply contracts that form the
basis for the stranded costs charge, and that such measures to mitigate
stranded costs will continue for the entire period for which the
stranded costs charge will be paid; or (2) the utility has given the
customer the option to market the generating capacity or supply of fuel
or purchased power that forms the basis for the stranded costs charge
in order to afford the customer an opportunity to lower its stranded
costs charge.
The Commission expects the utility to use its best efforts to
market its existing generating capacity as one way of mitigating costs.
The Commission would expect to require revenues generated from sales of
the capacity to be credited against the stranded costs to be recovered
through transmission rates to the departing customer.
The Commission invites comment on the requirement that a utility
must demonstrate reasonable measures to mitigate stranded costs and
what such measures may include.
The Commission also invites comment on how to determine the amount
of stranded costs that the departing customer may be liable to pay. In
Entergy, the Commission said that stranded costs could be no more than
the revenues the departing customer would pay to the seller over the
life of the contract. However, given that parties to requirements
contracts are encouraged to include exit conditions (including notice
provisions) in new contracts and renegotiated existing requirements
contracts, it can be argued that stranded cost recovery should be
capped at the revenues that the departing customer would pay after
having given notice to the seller that it wishes to end all or some
portion of its purchase. The problem then becomes what is a reasonable
notice period, given the needs of sellers to adequately plan supply and
the ability of sellers to find alternative buyers for power not taken
by existing buyers. This issue pertains not only to determining
stranded cost recovery in transmission rates but also to determining
appropriate stranded cost provisions in new requirements contracts. The
Commission invites comments on reasonable notice periods.
6. Recovery of Retail Stranded Costs
As discussed earlier, there are two general ways in which retail
stranded costs are likely to occur:\50\ (1) A retail franchise customer
may, through State or local government action, become a wholesale
customer who can then obtain unbundled transmission services in order
to reach a new power supplier;\51\ (2) a retail franchise customer may
obtain voluntary unbundled retail transmission services from its
existing power supplier in order to reach a new power supplier, or
there may be a State or local action that results in the existing
supplier providing such retail transmission services.
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\50\Retail stranded costs may result from ``self-help'' actions
such as customer self-generation, and this has long been a fact of
life for utilities. See, supra, n.18. This proceeding does not
address these situations.
\51\In addition, certain retail customers may become retail
customers of a newly-created wholesale entity.
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In the first example (a retail franchise customer becomes an
unbundled wholesale power and transmission customer), the Commission
clearly has exclusive jurisdiction under sections 201, 205 and 206, or
section 212 of the FPA, over the rate for the wholesale interstate
transmission services\52\ used by the new wholesale entity in order to
reach its new generation supplier. In the second example, in which a
retail franchise customer becomes a retail unbundled transmission
customer of its former franchise utility, and a retail power customer
of another utility, we conclude that we also have exclusive
jurisdiction over the rates, terms and conditions for the retail
interstate transmission services.\53\
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\52\Under FPA section 211, the Commission's authority to order
wheeling does not turn on whether the transmission services will be
in interstate commerce.
\53\We make no determination here regarding the physical or
jurisdictional distinctions between transmission and local
distribution. Section 201(b)(1) of the FPA states that the
Commission has no jurisdiction, except as specifically provided in
Parts II and III of the FPA, over facilities used for local
distribution. Nor do we address here whether States have authority
to order retail wheeling in interstate commerce.
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(i) Jurisdictional Analysis
The Commission's jurisdiction over the rates, terms and conditions
of transmission in interstate commerce derives from Congress' power to
regulate interstate commerce under the United States Constitution\54\
and the FPA. When Congress enacted the FPA, it gave the Commission
exclusive jurisdiction over the rates, terms and conditions of
transmission in interstate commerce by public utilities. The Supremacy
Clause of the Constitution provides that federal laws enacted pursuant
to the powers delegated to the federal government by the United States
Constitution are the supreme law of the land.\55\ Accordingly, to the
extent that retail wheeling involves transmission in interstate
commerce by public utilities, the rates, terms and conditions of such
service are subject to the exclusive jurisdiction of the Commission,
and the rates for such service must be filed with the Commission.\56\
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\54\U.S. Const. Art. I, Sec. 8, cl.3.
\55\U.S. Const. Art. VI, cl.2.
\56\See Montana-Dakota Utilities Co. v. Northwestern Public
Service Co., 341 U.S. 246, 251-52 (1951) (Montana-Dakota).
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Section 201 of the FPA, by its very words, does not limit the
Commission's jurisdiction over transmission to transmission of electric
energy in interstate commerce sold at wholesale.
Subsection 201(b)(1) of the FPA provides:
(b)(1) The provisions of this Part shall apply to the
transmission of electric energy in interstate commerce and to the
sale of electric energy at wholesale in interstate commerce * * *
The Commission shall have jurisdiction over all facilities for such
transmission or sale of electric energy * * *
16 U.S.C. Sec. 824(b)(1).
Much of the legislative history of the FPA indicates that Congress
intended the Commission's jurisdiction to extend only to those matters
which the Attleboro decision\57\ held to be beyond the reach of the
States. For instance, the report accompanying the Senate bill states
that subsection (b) ``leaves to the States the authority to fix local
rates even in cases where the energy is brought in from another
state.''\58\ The Senate report also states:
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\57\Public Utilities Commission v. Attleboro Steam & Electric
Co., 273 U.S. 83 (1927) (Attleboro). In Attleboro, the Supreme Court
held that State regulation of the interstate sale of electricity was
barred by the Commerce Clause because such regulation would impose a
``direct burden'' on interstate commerce.
\58\S. Rep. No. 621, 74th Cong., 1st Sess. 48 (1935). See also
H.R. Rep. No. 1318, 74th Cong., 1st Sess. 8 (1935).
The rate-making powers of the Commission are confined to those
wholesale transactions which the Supreme Court held in [Attleboro]
to be beyond the reach of the States. Jurisdiction is asserted also
over all interstate transmission lines whether or not there is sale
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of the energy carried by those lines. * * *
S. Rep. No. 621, 74th Cong., 1st Sess. 48 (1935). Thus, federal
jurisdiction over transmission lines is not dependent on whether those
lines are used to effect a sale, wholesale or otherwise.
While the provisions of section 201 reserving certain regulatory
authority to the States have been interpreted narrowly,\59\ the courts
have construed ``in interstate commerce'' broadly. The term does not
turn on whether the contract path for a particular power or
transmission sale crosses state lines, but rather follows the physical
flow of electricity. Because of the highly integrated nature of the
electric system, this results in most transmission of electric energy
being ``in interstate commerce.''
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\59\While Congress may exercise its Commerce Clause authority to
grant the States that ``ability to restrict the flow of interstate
commerce that they would not otherwise enjoy,'' Lewis v. BT
Investment Managers, Inc., 447 U.S. 27, 44 (1980), States may not
exercise such regulatory powers unless Congress has expressly stated
its intention to make such an affirmative grant of power. New
England Power Co. v. New Hampshire, 55 U.S. 331, 343 (1982).
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For example, in Jersey Central Power & Light Co. v. FPC, 319 U.S.
61 (1943), the Court stated:
It is impossible for us to conclude that this definition [of
transmission in interstate commerce] means less than it says and
applies only to the energy at the instant it crosses the state line
and so only to the facilities which cross the line and only to the
company which owns the facilities that cross the line.
319 U.S. at 71. Thus, a critical question regarding the jurisdictional
status of a wheeling transaction is whether the facilities used to
provide the service transmit electric energy in interstate commerce.
See also Connecticut Light & Power Co. v. FPC, 324 U.S. 515 (1945)
(CL&P); FPC v. Florida Power & Light Co., 404 U.S. 453 (1972). In CL&P,
the Court emphasized that whether certain facilities transmit electric
energy in interstate commerce is more a technical than a legal
question. The Court stated, ``[f]ederal jurisdiction was to follow the
flow of electric energy, an engineering and scientific, rather than a
legalistic or governmental, test.'' 324 U.S. at 529.
In all of the above cases, the Court's decisions turned on whether
energy flowed in interstate commerce as a technical matter. The
decisions did not turn on whether the energy flowing in interstate
commerce was being sold for resale or was being sold to an end user.
However, under FPA section 201(b), the Commission does not have
jurisdiction over facilities used in local distribution. In CL&P, the
Court stated that local distribution facilities are exempt from
Commission jurisdiction even if those facilities ``carry no energy
except extra-state energy.'' 324 U.S. at 531. The Court rejected the
argument that transmission and local distribution facilities could be
distinguished by the proportion or amount of interstate energy that
they carried:
We do not find that Congress has conditioned the jurisdiction of
the Commission upon any particular volume or proportion of
interstate energy involved, and we do not think it would be
appropriate to supply such a jurisdictional limitation by
construction.
324 U.S. at 536. The determination of whether facilities are local
distribution facilities remains a factual matter to be decided in the
first instance by the Commission. See FPC v. Southern California Edison
Co., 376 U.S. 205 (1964).
While the precise demarcation between transmission and local
distribution remains unclear, and the Commission has not yet
definitively addressed this issue, there is nothing in the statute, its
legislative history, or the case law to indicate that the Commission's
jurisdiction over rates, terms and conditions of transmission in
interstate commerce extends only to wholesale transmission and not
retail transmission.
(ii) Treatment of Retail Costs
Because the Commission has jurisdiction over the rates, terms and
conditions of both wholesale and retail transmission services in
interstate commerce by public utilities, arguably it may allow retail
stranded cost recovery in rates for either wholesale or retail
transmission services. There nevertheless may be important legal or
policy reasons to exclude retail stranded costs from transmission
rates. As noted earlier, however, the Commission has been presented
only with the question of whether it should permit public utilities to
seek recovery in wholesale transmission rates of stranded investment
costs incurred to serve former retail customers (Scenario 2, section
III.A.). The Commission has not been presented with the question of
whether it should permit public utilities to seek recovery in retail
transmission rates of stranded costs incurred to serve the customer
when it was a retail customer (Scenario 3, section III.A.).
While we believe the Commission has the authority to address retail
stranded costs through its jurisdiction over the rates, terms and
conditions of interstate transmission services used by retail or newly-
created wholesale customers, we also believe that the recovery of the
costs of transition to competition at the retail level is a matter that
should be addressed by State authorities. This is because retail
stranded costs will occur primarily as a result of State and local
decisionmaking regarding retail franchise areas and the creation of new
wholesale entities. In particular, the Commission believes it is
incumbent upon states to deal with the consequences of stranded costs
that occur as a result of retail wheeling. Our strong policy preference
is that states explicitly address the issue. State and local
decisionmakers have a first-hand understanding of the regulatory
bargain with respect to stranded costs incurred to serve retail
customers, and they are familiar with the planning, investment and
purchase activities of the utilities they regulate.
There are a number of procedural mechanisms which we believe States
can use to address retail stranded costs. For example, a State that
permits a retail franchise customer to become a wholesale entity may
consider whether to impose an exit fee prior to, or as a condition of,
creating the wholesale entity. Similarly, a State may consider whether
to require payment of an exit fee prior to a franchise customer being
permitted to obtain unbundled retail wheeling. In situations in which
local distribution facilities are used by a retail wheeling customer,
the State may consider whether to allow recovery of stranded costs
through rates for local distribution services. If a State decides not
to impose exit fees, or a surcharge through distribution rates, it may
consider whether to allow recovery of stranded costs from remaining
customers.
In situations in which a new wholesale entity obtains ownership or
control of a franchise utility's transmission or distribution
facilities, it is possible that State condemnation proceedings will
provide a forum for a utility to seek recovery of any stranded costs.
What types of payments, if any, do new municipal utilities make to
prior service providers? Do these reimbursements allow for recovery of
stranded generation costs? Is there variation among the States as to
the legal ability of local entities to municipalize? Is there variation
among the States as to the payments made by new municipal utilities to
previous suppliers?
There may, of course, be other mechanisms which States can use to
determine whether to allow stranded cost recovery, and from whom to
allow recovery. The Commission solicits comments on what other
mechanisms might be used, and whether these mechanisms are adequate to
deal with retail stranded costs.
While our strong preference is for States to address retail
stranded costs in whatever way they deem appropriate, we are willing to
explore whether there are circumstances under which this Commission
should consider claims for recovery of retail stranded costs. We will
therefore present two proposed alternatives regarding retail stranded
costs, and seek comment on both. However, as noted above, we express no
preference in favor of either alternative.
Under the first alternative, the proposed rule provides that if in
a specific circumstance an appropriate State authority explicitly
considers and deals with retail stranded costs and there is no conflict
within or among State regulatory bodies regarding a State's disposition
of the issue, this Commission will not entertain a request for retail
stranded cost recovery. However, in the absence of a clear expression
by an appropriate State authority that it has dealt with the issue, or
in the event of a conflict between States60 or among State
officials within a single state, the Commission proposes to entertain
requests to recover retail stranded costs.
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\6\0For example, a conflict between States could result if State
A's legislature allows a former retail customer to become a
wholesale entity and the wholesale entity obtains transmission
services so that it now takes only one half of its 100 MW load from
its current utility supplier, which is a multistate utility. As a
result of State A's action, the utility has retail stranded costs
for 50 MW of generation. State A's commission allocates the
utility's retail costs so that State A's retail customers are
responsible for only one half of the stranded costs. State B's
commission, the other State in which the utility operates, allocates
the utility's retail costs so that none of the retail stranded costs
are allocated to State B's retail customers.
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Under the second alternative, the proposed rule provides that the
Commission will not entertain any request for recovery of retail
stranded costs. Under this proposal, State or local authorities will be
the only forum for addressing the issue. The aforementioned preference
for States to address retail stranded costs in whatever way they deem
appropriate, the need for regulatory certainty, and the States'
knowledge and expertise regarding utility planning, investment and
purchase activities arguably favors the second alterative. However, we
solicit comment on whether there should be limited exceptions to the
second alternative rule.
As to both alternatives, the Commission solicits comments on the
following questions.
Are there circumstances under which it is not necessarily
appropriate to defer to the States (e.g., where one State takes an
action regarding retail stranded costs which has adverse consequences
for another State)? Are there circumstances under which a State may not
have an adequate mechanism for addressing retail stranded costs, and
may want the Commission to provide a forum?
If a State does not explicitly address stranded costs resulting
from an action that allows retail customers to purchase from a supplier
other than the franchised utility, should this Commission entertain
requests from the utilities left with the stranded costs? Beyond
silence from the State, are there other factors that the Commission
should consider before accepting requests for retail stranded cost
recovery? Specifically, would financial health and possible adverse
impacts on reliability be sufficient reason for Federal action?
The Commission further solicits comments on the following
questions:
(1) Does the Commission have legal authority to allow retail
stranded costs in rates for wholesale transmission services? Should the
Commission do so as a matter of policy? If so, which costs?
(2) Does the Commission have legal authority to allow retail
stranded costs in rates for retail transmission service? Should the
Commission do so as a matter of policy? If so, which costs?
(3) Does FPA section 212 give the Commission legal authority to
allow recovery of retail stranded costs in rates for wholesale
transmission services under FPA section 211?
(4) Are there legal or policy reasons why in Scenario 2 (p. 15),
the Commission should entertain requests for recovery of retail
stranded costs in wholesale transmission rates, but should not
entertain requests for recovery of retail stranded costs in retail
transmission rates in Scenario 3 (section III.A.)?
If the Commission determines that it will entertain requests for
recovery of retail stranded costs through rates for wholesale or retail
transmission in interstate commerce, the Commission proposes not to
apply the ``reasonable expectation'' test used for wholesale stranded
costs. To apply such a test would require a hearing on whether the
franchise utility had a reasonable expectation, e.g., of having its
franchise renewed, of municipalization occurring, or of a section
212(h) non-sham wholesale entity being created by the State or local
authority. No such test appears warranted because, in general, there is
at the retail level an obligation to serve which is much stronger than
any contractual obligation to serve at the wholesale level. The
regulatory compact that has governed provision of retail service
includes an implicit obligation to purchase concomitant with the
utility's obligation to serve.
The Commission requests comments on whether these assumptions are
correct, i.e., is the reasonable expectation test inapplicable to
retail stranded costs? Are there situations, for instance, in which
utilities could have expected municipalization to occur based on an
established course of dealing?
Based on these assumptions, if the Commission determines that it
will entertain requests for retail stranded costs, the proposed
regulations for retail stranded costs would require only a showing of
the dollar amounts that have been stranded as a result of the retail
customer no longer taking bundled service from the franchise utility's
system. In essence, this results in direct assignment of retail
stranded costs to the former franchise customer. The Commission
requests comments on how to determine retail stranded costs as a
general matter. Is there a future time when a retail customer's action
of leaving a local franchise no longer has any adverse economic
consequences on the franchise utility? If so, what is an appropriate
way to make such a determination?
IV. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)61 requires that
rulemakings contain either a description and analysis of the effect the
proposed rule will have on small entities or a certification that the
rule will not have a substantial economic effect on a substantial
number of small entities. Because the entities that would be required
to comply with the proposed rule are public utilities and transmitting
utilities that do not fall within the RFA's definition of small
entities,62 the Commission certifies that this rule will not have
a ``significant economic impact on a substantial number of small
entities.''
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\6\15 U.S.C. 601-612.
\6\25 U.S.C. 601(3) (citing section 3 of the Small Business Act,
15 U.S.C. 632). Section 3 of the Small Business Act defines a
``small-business concern'' as a business which is independently
owned and operated and which is not dominant in its field of
operation. 15 U.S.C. 632(a).
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V. Environmental Statement
Commission regulations require the preparation of an environmental
assessment or an environmental impact statement for any Commission
action that may have a significant effect on the human
environment.63 The Commission has categorically excluded certain
actions from this requirement as not having a significant effect on the
human environment.64 No environmental consideration is necessary
for the promulgation of a rule that involves electric rate filings
submitted by public utilities under sections 205 and 206 of the
FPA.65 The proposed rule specifies the standards and procedures
that public utilities must follow in a rate filing proceeding in order
to seek recovery of stranded costs. Accordingly, no environmental
consideration of the proposed rule is necessary.
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\6\3Regulations Implementing National Environmental Policy Act,
FERC Statutes & Regulations 30,783 (1987), 52 FR 47897 (Dec. 17,
1987).
\6\418 CFR 380.4.
\6\518 CFR 380.4(a)(15).
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VI. Information Collection Statement
The Office of Management and Budget's (OMB) regulations66
require that OMB approve certain information and recordkeeping
requirements imposed by an agency.
---------------------------------------------------------------------------
\6\65 CFR 1320.13.
---------------------------------------------------------------------------
The information collection requirements in the proposed regulations
are contained in FERC-516, ``Electric Rate Filings'' (OMB approval No.
1902-0096). The Commission uses the data collected in this information
collection to carry out its responsibilities under Part II of the FPA.
The Commission's Office of Electric Power Regulation uses the data to
review electric rate filings. The data enable the Commission to examine
and evaluate the utility's costs and rate of return.
The Commission is submitting notification of this proposed rule to
OMB. Interested persons may obtain information on the reporting
requirements by contacting the Federal Energy Regulatory Commission,
941 North Capitol Street, NE., Washington, DC 20426 [Attention: Michael
Miller, Information Services Division, (202) 208-1415]. Comments on the
requirements of the proposed rule can also be sent to the Office of
Information and Regulatory Affairs of OMB [Attention: Desk Officer for
Federal Energy Regulatory Commission].
VII. Public Comment Procedures
The Commission invites comments on the proposed rule from
interested persons. An original and 14 copies of written comments on
the proposed rule must be filed with the Commission no later than
September 9, 1994.
The Commission will also permit interested persons to submit reply
comments in response to the initial comments filed in this proceeding.
Reply comments should be submitted no later than October 11, 1994.
In addition, commenters are requested to submit a copy of their
comments on a 3\1/2\ inch diskette in ASCII II format. All comments
should be submitted to the Office of the Secretary, Federal Energy
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC
20426, and should refer to Docket No. RM94-7-000.
All written comments will be placed in the Commission's public
files and will be available for inspection in the Commission's public
reference room at 941 North Capitol Street, NE., Washington, DC, 20426,
during regular business hours.
List of Subjects in 18 CFR Part 35
Electric power rates, Electric utilities, Reporting and
recordkeeping requirements.
By direction of the Commission.
Lois D. Cashell,
Secretary.
In consideration of the foregoing, the Commission proposes to amend
Part 35, Chapter I, Title 18 of the Code of Federal Regulations, as set
forth below.
PART 35--FILING OF RATE SCHEDULES
1. The authority citation for Part 35 continues to read as follows:
Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42
U.S.C. 7101-7352.
2. Part 35 is amended by adding Sec. 35.26 consisting of paragraphs
(a), (b), (c), and one of two proposed alternative paragraphs (d), to
read as follows:
Sec. 35.26 Recovery of stranded costs by public utilities and
transmitting utilities.
(a) Purpose. This section establishes the standards that a public
utility or transmitting utility must satisfy in order to recover
stranded costs.
(b) Definitions. (1) Wholesale stranded cost means any legitimate,
prudent and verifiable cost incurred by a public utility or a
transmitting utility to provide service to a wholesale requirements
customer that subsequently becomes, in whole or in part, an unbundled
transmission services customer of that public utility or transmitting
utility.
(2) Wholesale requirements customer means a customer for whom a
public utility or transmitting utility provides by contract any portion
of its bundled wholesale power requirements.
(3) Wholesale transmission services has the same meaning as
provided in section 3(24) of the Federal Power Act: the transmission of
electric energy sold, or to be sold, at wholesale in interstate
commerce.
(4) Wholesale requirements contract means a contract under which a
public utility or transmitting utility provides any portion of a
customer's bundled wholesale power requirements.
(5) Retail stranded cost means any legitimate, prudent and
verifiable cost incurred by a public utility or transmitting utility to
provide service to a retail franchise customer that subsequently
becomes, in whole or in part, directly or indirectly, an unbundled
transmission services customer of that public utility or transmitting
utility.
(6) Retail transmission services means the transmission of electric
energy sold, or to be sold, in interstate commerce directly to a retail
customer.
(7) New contract means any contract executed after July 11, 1994.
(8) Existing contract means any contract executed on or before July
11, 1994.
(c) Recovery of Wholesale Stranded Costs.
(1) General requirement. A public utility or transmitting utility
will be allowed to seek recovery of wholesale stranded costs only as
follows:
(i) No public utility or transmitting utility may seek recovery of
wholesale stranded costs if such recovery is explicitly prohibited by a
contract or settlement agreement, or by any power sales or transmission
rate schedule or tariff.
(ii) If wholesale stranded costs are associated with a new
wholesale requirements contract containing an exit fee or other
explicit stranded cost provision, and the seller under the contract is
a public utility, the public utility may seek recovery of such costs,
in accordance with the contract, through rates for electric energy
under sections 205-206 of the FPA. The public utility may not seek
recovery of such costs through any transmission rate for section 205 or
211 transmission services.
(iii) If wholesale stranded costs are associated with a new
wholesale requirements contract, and the seller under the contract is a
transmitting utility but not also a public utility, the transmitting
utility may not seek an order from the Commission allowing recovery of
such costs.
(iv) If wholesale stranded costs are associated with an existing
wholesale requirements contract, if the seller under such contract is a
public utility, and if the contract does not contain an exit fee or
other explicit stranded cost provision, the parties to the contract
must make a good faith attempt to negotiate an explicit stranded cost
amendment to the contract by [a date three years from the date a final
rule is published in the Federal Register]. If the parties negotiate a
proposed amendment, the public utility seller under the contract must
file the proposed amendment under section 205 or 206 of the FPA no
later than [the end of the three-year period]. If the parties do not
negotiate an explicit stranded cost amendment, the public utility
seller may unilaterally file a proposed stranded cost amendment no
later than [the end of the three-year transition period]. In such case,
the customer may propose an alternate amendment. The filing or proposal
of such amendment(s) will not affect any contractual rights the
customer may have to continue taking service beyond [the end of the
three-year transition period].
(v) If a customer under an existing wholesale requirements
contract, prior to [the end of the three-year period], gives notice
pursuant to the contract that it will no longer purchase requirements
service under the contract but will purchase unbundled section 205 or
section 211 transmission services from the selling utility in order to
reach a different supplier of electric energy, and the transmission
services will commence prior to [the end of the transition period], a
public utility or transmitting utility may file by [the end of the
transition period] a proposal to recover stranded costs in rates for
the wholesale transmission services.
(2) Evidentiary Demonstration for Wholesale Stranded Cost Recovery.
A public utility or transmitting utility seeking to recover wholesale
stranded costs in accordance with paragraphs (c)(1) (iv) and (v) of
this section must demonstrate that:
(i) it incurred stranded costs on behalf of its wholesale
requirements customer based on an expectation that was reasonable when
the costs were incurred that the customer's contract would be extended;
(ii) the stranded costs are not more than the customer would have
contributed to the utility had the customer remained a wholesale
requirements customer of the utility; and
(iii) it has and will take reasonable measures to mitigate stranded
costs.
(3) Rebuttable Presumption. If a public utility or transmitting
utility seeks recovery of wholesale stranded costs associated with an
existing contract, as permitted in paragraph(c)(1) of this section, and
the existing contract contains a notice provision, there will be a
rebuttable presumption that the utility had no reasonable expectation
of continuing to serve the customer beyond the term of the notice
provision.
Alternative A:
(d) Recovery of Retail Stranded Costs.
(1) General requirement.
A public utility or transmitting utility may seek to recover retail
stranded costs through rates for wholesale or retail transmission
services only if: (i) an appropriate State or local regulatory body has
not explicitly considered and addressed retail stranded costs; or (ii)
an appropriate State or local regulatory body has explicitly addressed
stranded costs, but there is a conflict within or among State
regulatory bodies regarding the State or local authority's disposition
of the issue.
(2) Evidentiary Demonstration Necessary for Retail Stranded Cost
Recovery.
A public utility or transmitting utility seeking to recover retail
stranded costs must demonstrate that:
(i) the stranded costs are not more than the customer would have
contributed to the utility had the customer remained a retail customer
of the utility; and
(ii) it has and will take reasonable measures to mitigate stranded
costs.
Alternative B:
(d) Recovery of Retail Stranded Costs.
(1) General requirement.
No public utility or transmitting utility may seek recovery of
retail stranded costs from the Commission.
[Note: The following appendix will not appear in the Code of
Federal Regulations.]
Appendix
For the ease of those submitting comments, the following is a
compendium of the questions contained in the proposed rule:
Index of Questions
1. What categories of costs, in addition to investment costs,
should be eligible for stranded cost recovery? How should stranded
costs be allocated to specific customers?
2. The Commission invites comments on the direct assignment and
alternative methods of stranded cost recovery. Would alternative
methods, e.g., an access charge, give customers reasonable certainty
on the scope of their stranded cost obligation more quickly than a
direct assignment approach would, and thus expedite the transition
to a more competitive wholesale market?
3. To what extent is there or should there be a regulatory
obligation to continue to serve requirements customers beyond the
end of the contract term and the source of any such obligation?
Should section 35.15 of the Commission's regulations, which concerns
notice of termination, be deleted in its entirety, or only in
certain circumstances (e.g., when the seller provides transmission
access on a comparable basis to the seller's own uses of its
system)?
4. What types of contractual provisions (in addition to notice
provisions), if any, might demonstrate a sufficient ``meeting of the
minds'' between parties so that renegotiation of existing contracts
should be barred? Should the proposed rules regarding existing
contracts apply only to contracts between unaffiliated entities?
5. Should the rebuttable presumption which would apply to
contracts containing notice provisions also be applied to any
contract entered into after the date of enactment of the Energy
Policy Act, even though such contract does not contain an exit fee
or other explicit stranded cost provision, or a notice provision?
6. Should there be a transition period during which utilities
may renegotiate their existing contracts? Should utilities or
customers with Mobile-Sierra contracts be able to make unilateral
filings or file complaints? Should the Commission make a Mobile-
Sierra public interest finding based on company-specific findings
instead of generic industry-wide findings?
7. What is the appropriate length for a transition period.
8. The Commission requests that utility commenters include in
their comments an estimate of the number of power sales contracts
that they would seek to renegotiate to address stranded cost issues.
How many of these contracts are silent on this question? How many
have notice provisions, and of what duration? The Commission
requests that responding utilities estimate the amount of stranded
costs associated with such contracts, the relationship of the
estimated stranded costs to the utility's total costs or revenues,
and the potential cost shift to remaining customers.
9. Should the limitations on recovery of stranded costs in
wholesale transmission rates apply to all utilities, whether or not
they currently have on file transmission tariffs containing stranded
cost provisions?
10. Should stranded cost recovery be different depending on
whether transmission service is under section 205 or 211?
11. In lieu of direct assignment, should utilities be able to
seek a general surcharge to all of their transmission customers to
cover the costs stranded by a departing customer?
12. The Commission recognizes that stranded costs can occur when
a customer fails to renew its requirements contract and, instead of
obtaining unbundled transmission service from its former
requirements supplier, obtains unbundled transmission service from
another utility. We anticipate that in such a case any prudent costs
that are stranded as a result of the customer's departure would be
reallocated to remaining customers in the utility's next
requirements rate case. This results in the departing customer
bearing none of the costs which it may have caused to be stranded.
How should the Commission deal with such costs?
13. The Commission invites comments on all aspects of the
evidence necessary to demonstrate a reasonable expectation of
continuing to serve a customer beyond the period provided for in a
notice provision. Should there be a rebuttable presumption that the
existence of a notice provision means the utility had no reasonable
expectation of serving the customer beyond the end of that notice
period? Should we adopt a minimum notice period that would provide a
presumption that the utility had no reasonable expectation of
continuing to provide service beyond the notice period, e.g., a
five-year notice period?
14. In seeking stranded cost recovery, a utility must show that
the stranded costs it incurred are not more than the customer would
have contributed to the utility had the customer remained a
wholesale requirements customer of the utility. This required
evidentiary demonstration concerns the reasonable compensation for
stranded costs. We request comments on what is reasonable
compensation:
(a) Would it be reasonable for the Commission to limit the
annual amount of stranded costs that a power customer must pay to be
no more than what the customer would have contributed to the
utility's capital (customer revenues minus variable costs), or would
some alternative concept be appropriate?
(b) Would it be reasonable for the Commission to limit the
future time period over which a customer's liability for stranded
costs would be determined? That is, the present value of the
customer's liability could be the discounted value of an annual
amount for a limited time period. This total amount could be paid in
a lump sum or over any mutually agreeable period. The limited time
period over which the customer's liability is determined could be
called the reasonable compensation period. If so:
(1) Would the Commission apply the reasonable compensation
period to assess the reasonableness of an exit fee in a revised
power contract as well as a transmission surcharge?
(2) How long should such a time period be, e.g., five years or
ten years or some other period; and
(3) When should such a period begin, e.g., if five years is a
reasonable time over which a customer is liable for stranded costs,
does the five-year period begin when the Commission adopts a final
rule or when the utility files for stranded cost recovery in the
future?
(c) Should the length of a reasonable compensation period be
based on what would constitute a reasonable notice period in power
contracts or would some other concept be appropriate?
(d) Establishing a reasonable compensation period effectively
would also establish a future date beyond which existing power
customers would no longer have any liability for stranded costs,
either as an exit fee in revised power contracts or as a surcharge
on transmission rates. Would this be appropriate? In responding,
commenters should keep in mind that the concept of a reasonable time
period for computing stranded cost liability is independent of the
proposed three year recontracting period for which the Commission is
also requesting separate comments.
15. Should the Commission require that a public utility
demonstrate reasonable measures to mitigate stranded costs? What
should such measures include?
16. How should the Commission determine the amount of stranded
costs that the departing customer may be liable to pay?
17. What are reasonable notice periods for requirements
contracts?
18. What types of payments, if any, do new municipal utilities
make to prior service providers? Do these reimbursements allow for
recovery of stranded generation costs? Is there variation among the
States as to the legal ability of local entities to municipalize? Is
there variation among the States as to the payments made by new
municipal utilities to previous suppliers?
19. What mechanisms can States use to allow retail stranded cost
recovery? Are these mechanisms adequate to deal with retail stranded
costs?
20. The Commission solicits comments on the two proposed
alternatives regarding retail stranded costs. The first proposed
alternative provides that if in a specific circumstance an
appropriate State authority explicitly considers and deals with
retail stranded costs and there is no conflict within or among State
regulatory bodies regarding a State's disposition of the issue, this
Commission will not entertain a request for retail stranded cost
recovery. However, in the absence of a clear expression by an
appropriate State authority that it has dealt with the issue, or in
the event of a conflict between States or among State officials
within a single State, the Commission proposes to entertain requests
to recover retail stranded costs. Is this proposal reasonable? Is it
preferable to the second alternative proposal?
21. Should there be limited exceptions to the second alternative
rule?
22. As to both alternatives, the Commission further solicits
comments on the following questions.
Are there circumstances under which it is not necessarily
appropriate to defer to the States (e.g., where one State takes an
action regarding retail stranded costs which has adverse
consequences for another State)? Are there circumstances under which
a State may not have an adequate mechanism for addressing retail
stranded costs, and may want the Commission to provide a forum?
If a State does not explicitly address stranded costs resulting
from an action that allows retail customers to purchase from a
supplier other than the franchised utility, should this Commission
entertain requests from the utilities left with the stranded costs?
Beyond silence from the State, are there other factors that the
Commission should consider before accepting requests for retail
stranded cost recovery? Specifically, would financial health and
possible adverse impacts on reliability be sufficient reason for
Federal action?
The Commission further solicits comments on the following
questions:
(1) Does the Commission have legal authority to allow retail
stranded costs in rates for wholesale transmission services? Should
the Commission do so as a matter of policy? If so, which costs?
(2) Does the Commission have legal authority to allow retail
stranded costs in rates for retail transmission service? Should the
Commission do so as a matter of policy? If so, which costs?
(3) Does FPA section 212 give the Commission legal authority to
allow recovery of retail stranded costs in rates for wholesale
transmission services under FPA section 211?
(4) Are there legal or policy reasons why in Scenario 2, the
Commission should entertain requests for recovery of retail stranded
costs in wholesale transmission rates, but should not entertain
requests for recovery of retail stranded costs in retail
transmission rates in Scenario 3?
23. Are the Commission's assumptions concerning the reasonable
expectations of utilities with respect to retail customers correct,
i.e., is the reasonable expectation test inapplicable to retail
stranded costs? Are there situations, for instance, in which
utilities could have expected municipalization to occur based on an
established course of dealing?
24. The Commission requests comments on how to determine retail
stranded costs as a general matter. Is there a future time when a
retail customer's action of leaving a local franchise no longer has
any adverse economic consequences on the franchise utility? If so,
what is an appropriate way to make such a determination?
[FR Doc. 94-16626 Filed 7-8-94; 8:45 am]
BILLING CODE 6717-01-P
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.