Promoting Wholesale Competition Through Open Access Non- discriminatory Transmission Services by Public Utilities, Recovery of Stranded Costs by Public Utilities and Transmitting Utilities; Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket Nos. RM95-8-000 and RM94-7-001]

Promoting Wholesale Competition Through Open Access Non-

discriminatory Transmission Services by Public Utilities, Recovery of

Stranded Costs by Public Utilities and Transmitting Utilities; Proposed

Rulemaking and Supplemental Notice of Proposed Rulemaking

March 29, 1995.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking and supplemental notice of

proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) is

proposing to require that public utilities owning and/or controlling

facilities used for the transmission of electric energy in interstate

commerce have on [[Page 17663]] file tariffs providing for non-

discriminatory open access transmission services. The Commission is

also proposing to permit public utilities and transmitting utilities to

recover legitimate and verifiable stranded costs. The Commission's goal

is to encourage lower electricity rates by structuring an orderly

transition to competitive bulk power markets. The Commission is seeking

public comment on its proposals.

DATES: Written comments must be received by the Commission by August 7,

1995. Reply comments must be received by the Commission by October 4,

1995.

FOR FURTHER INFORMATION CONTACT:

David D. Withnell, Office of the General Counsel, Federal Energy

Regulatory Commission, 825 North Capitol St., NE., Washington, DC

20426, telephone: (202) 208-2063, (Docket No. RM95-8-000--legal

issues).

Deborah B. Leahy, Office of the General Counsel, Federal Energy

Regulatory Commission, 825 North Capitol Street, NE., Washington, DC

20426, telephone: (202) 208-2039, (Docket No. RM94-7-001--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).

ADDRESSES: Send comments to: Office of the Secretary Federal Energy

Regulatory Commission 825 North Capitol Street, N.E. Washington, D.C.

20426.

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 3401, 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 19200, 14400, 12000, 9600, 7200, 4800, 2400, 1200 or

300bps, full duplex, no parity, 8 data bits and 1 stop bit. The full

text of this document will be available on CIPS for 60 days from the

date of issuance in ASCII and WordPerfect 5.1 format. After 60 days the

document will be archived, but still accessible. 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.

Promoting Wholesale Competition Through Open Access Non-

discriminatory Transmission Services by Public Utilities

Docket No. RM95-8-000

Recovery of Stranded Costs by Public Utilities and Transmitting

Utilities

Docket No. RM94-7-001

Notice of Proposed Rulemaking and Supplemental Notice of Proposed

Rulemaking

March 29, 1995.

Table of Contents

I. Introduction

II. Public Reporting Burden

III. Discussion

A. Summary of Authority and Findings

B. Legal Authority

1. Undue Discrimination/Anticompetitive Effects

2. Section 211 Services

C. Background

1. Structure of the Electric Industry at Enactment of Federal

Power Act

2. Significant Changes in the Electric Industry

3. The Public Utility Regulatory Policies Act and the Growth of

Competition

4. The Energy Policy Act

5. The Present Competitive Environment

a. Use of Sections 211 and 212 to Obtain Transmission Access

b. Commission's Comparability Standard

c. Lack of Market Power in New Generation

d. Further Commission Action Addressing a More Competitive

Electric Industry

D. Need for Reform

1. Market Power

2. Discriminatory Access

3. Analogies to the Natural Gas Industry

4. Coordination Rates

E. The Proposed Regulations

1. Non-discriminatory Open Access Tariff Requirement

2. Implementing Non-discriminatory Open Access: Functional

Unbundling

3. Real-time Information Networks

4. Non-discriminatory Open Access Tariff Provisions

5. Pro Forma Tariffs

6. Broader Use of Section 211

7. Status of Existing Contracts

8. Effect of Proposed Rule on Commission's Criteria for Market-

based Rates

9. Effect of Proposed Rule on Regional

Transmission Groups

F. Stranded Costs and Other Transition Costs

G. Transmission/Local Distribution

H. Implementation

IV. Regulatory Flexibility Act

V. Environmental Statement

VI. Information Collection Statement

VII. Public Comment Procedures Regulatory Text

Appendices (Appendices A, B and C will not be published in the

Federal Register.)

A. Electric Utility Average Revenue Per Kilowatthour, by State

B. Point-to-Point Tariff

C. Network Tariff

D. List of Commenters in Docket No. RM94-7-000

I. Introduction

The electric power industry is today an industry in transition. In

response to changes in the law, technology, and markets, competitive

pressures are steadily building in the industry. Once the primary

domain of large, vertically integrated utilities providing power at

regulated rates, the industry now includes companies selling

``unbundled'' power at rates set by competitive markets. New generating

facilities are being built at costs well below the average costs of

some vertically integrated utilities. In this environment, more

competition will mean lower rates for wholesale customers and,

ultimately, for consumers.

The Commission's goal is to encourage lower electricity rates by

structuring an orderly transition to competitive bulk power markets.

Development of such markets is certain. The questions are when and how.

Experience has shown that competitive pressures cannot be contained for

long without serious economic distortions. Competition will, we are

confident, result in lower rates. But experience has also shown that a

measured transition from regulated to competitive markets is absolutely

essential.

Moving to competitive generation markets will fundamentally change

long-standing regulatory relationships. Utilities have invested

billions of dollars in order to meet their obligations. Those

investments have been made under a ``regulatory compact'' whereby

utilities--and their shareholders--expect to recover prudently incurred

costs. With the advent of competition, even prudent investments may

become stranded. Reliance on past contractual and regulatory practices

must be recognized and past investments must be protected to assure an

orderly, fair transition to competition.

The focus of our proposal today is to facilitate competitive

wholesale electric power markets. The key to competitive bulk power

markets is opening up transmission services. Transmission is the vital

link between sellers and buyers. To achieve the benefits of robust,

competitive bulk power markets, all wholesale buyers and sellers must

have equal access to the transmission [[Page 17664]] grid. Otherwise,

efficient trades cannot take place and ratepayers will bear unnecessary

costs. Thus, market power through control of transmission is the single

greatest impediment to competition. Unquestionably, this market power

is still being used today, or can be used, discriminatorily to block

competition.

The Commission has an obligation to prevent unduly discriminatory

practices in transmission access. In current circumstances, the absence

of tariffs offering open access, non-discriminatory transmission

services by each public utility impedes the transition to competitive

markets greatly enough to be unduly discriminatory under section 206 of

the Federal Power Act (FPA). Proceeding as we have in the past, case-

by-case, would delay unreasonably the transition to competitive

markets. A patchwork of transmission systems--some open and some not--

would also lead to unfair practices and inequitable burdens.

At the same time, while fulfilling our duty under section 206 of

the FPA to cure undue discrimination, we see no need now to abrogate

existing contractual relationships. Rather, we propose to provide a

transition to a competitive generation industry that allows for the

recovery of legitimate, prudent and verifiable costs lawfully incurred

to serve customers under the terms of existing contracts. In the

context of today's electric industry, the goals of increased

competition and lower bulk power rates are best pursued through a

structured transition rather than through abrogating all existing

contracts.

In short, at this crossroad for the industry, it is critical to

take the regulatory steps now to facilitate the transition to

competitive bulk power markets in an orderly manner. The most important

of these steps are to ensure non-discriminatory access to the

transmission grid for all wholesale buyers and sellers of electric

energy in interstate commerce, and to address the transition costs

associated with open transmission access. The Commission will take

these steps in a manner consistent with maintaining the reliability of

the interstate transmission grid.

In this proceeding, the Commission pursuant to its authority under

sections 205 and 206:

proposes to require all public utilities owning or

controlling facilities used for transmitting electric energy in

interstate commerce to file open access transmission tariffs;

proposes to require the utilities to take transmission

service (including ancillary services) for their own wholesale sales

and purchases of electric energy under the open access tariffs;

issues a supplemental proposed rule to permit the

recovery of legitimate and verifiable stranded costs associated with

requiring open access tariffs; and

proposes regulations to implement the filing of the

open access tariffs and the initial rates under these tariffs.

The open access tariffs--to be offered to all sellers and buyers of

electric energy sold at wholesale in interstate commerce--must offer

wholesale transmission services (network and point-to-point), including

ancillary services, on a non-discriminatory basis to third

parties.1 In addition, the public utility must price separately

all wholesale generation and transmission services (including ancillary

services) and take wholesale transmission service under its own tariff,

i.e., ``functionally unbundle'' its wholesale generation and

transmission services. The proposed rule does not mandate the corporate

separation of generation, transmission, and distribution functions.

\1\Throughout this NOPR this requirement will be referred to as

the ``non-discriminatory open access'' requirement.

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The proposed rule proposes pro forma tariffs for network and point-

to-point services, defines non-discriminatory open access to include

access to ancillary services, and requires that tariffs include a

reciprocity provision requiring any user or agent of the user of the

tariff that owns and/or controls transmission facilities to provide

non-discriminatory access to the tariff provider.

To assure that the open access tariffs promote competition and do

not operate in an unduly discriminatory manner, the proposed rule would

require public utilities to provide all actual or potential

transmission users the same access to information as the public utility

enjoys. The Commission is proposing to develop industry-wide real-time

information networks in a separate Notice of Technical Conference that

is being issued concurrently with this proposed rule.2

\2\Notice of Technical Conference and Request for Comments,

Docket No. RM95-9-000.

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Not all transmitting utilities are public utilities subject to the

Commission's jurisdiction under section 206 of the FPA.3 The

Commission cannot pursuant to section 206 require non-public utilities

to file open access tariffs . Therefore, the proposed rule would

encourage the broad application of section 211 as an additional means

of achieving the goal in the Energy Policy Act of 1992 of promoting

increased wholesale competition. Without broader application of section

211, wholesale bulk power market participants could be denied access to

more competitive generation sources to the detriment of consumers.

\3\Section 206 of the FPA applies to public utilities, whereas

section 211 applies to transmitting utilities. 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 sections 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 that are used for

the sale of electric energy at wholesale is a transmitting utility,

but is not a public utility.

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We presently do not find it necessary to use our authority under

section 206 of the FPA to reform public utilities' existing

requirements contracts or any other contracts to eliminate undue

discrimination or attain more competitive bulk power markets. However,

we seek information about existing requirements contracts, including

the remaining life and notice provision in each such contract, and

whether it would be in the public interest to modify any existing

contracts.

The Commission believes that the open access requirement will

eliminate the transmission market power of public utilities by ensuring

that all participants in wholesale power markets will have non-

discriminatory open access to the transmission systems of public

utilities. This market power has been the Commission's primary concern

in recent years in analyzing requests for market-based generation

rates. We therefore seek comments on the effect of industry-wide non-

discriminatory open access on the Commission's criteria for authorizing

power sales at market-based rates.

The Commission's market-rate criteria also have included other

aspects of market power, such as generation dominance. In particular,

we note the Commission's recent KCP&L decision, in which we dropped the

generation dominance standard for market-based sales from new

capacity.4 This rule proposes to codify that decision, and seeks

comment on whether the generation dominance standard should also be

dropped for market-based sales from existing capacity.

\4\See Kansas City Power & Light Company, 67 FERC para. 61,183

at 61,557 (1994) (KCP&L).

In issuing this proposed rule, we are particularly concerned with

its possible effect on stranded costs. It is important

[[Page 17665]] to couple our open access rule with a rule ensuring

recovery of all legitimate transition costs, consistent with the

guidelines established herein. Accordingly, we are making preliminary

findings with respect to the Stranded Cost NOPR issued on June 29,

1994, seeking additional comments, and consolidating the Stranded Cost

NOPR5 with this proposed rule.

\5\See Recovery of Stranded Costs by Public Utilities and

Transmitting Utilities, Notice of Proposed Rulemaking, 59 FR 35274

(July 11, 1994), IV FERC Stats. & Regs., Proposed Regulations

para.32,507 (Stranded Cost NOPR).

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Because of the benefits associated with the transition to a

competitive regime, it is important to have the open access tariffs in

place as soon as possible. Thus, we propose a two-stage procedure to

accomplish that goal. In Stage One, we would place generic open access

tariffs in effect simultaneously on a date certain for every public

utility that owns and/or controls transmission facilities6 and

would establish rates for each public utility based on the most current

Form No. 1 data available. In Stage Two, utilities would be free to

propose changes to the rates, terms, and conditions in the generic

tariffs and customers and others would be free to file complaints

seeking changes in the rates, terms, and conditions. However, Stage Two

tariffs must contain at least the non-price tariff terms and conditions

contained in the pro forma tariffs.

\6\Because power pools raise complex issues, we seek comments on

how to implement the NOPR for power pools.

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Comments of all interested persons should be filed pursuant to the

procedures set out below.

II. Public Reporting Burden

A. Docket No. RM95-8-000

The proposed rule specifies filing requirements to be followed by

public utilities in making non-discriminatory open access tariff

filings. 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 784,488 hours.

The proposed rule requires public utilities filing non-

discriminatory open access tariffs 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 300 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 328 public utilities, including marketers

and wholesale generation entities. The Commission estimates that

approximately 137 of these utilities own or control facilities used for

the transmission of electric energy in interstate commerce and will

respond to the information collection. The respondents would be all

public utilities required to file non-discriminatory open access

tariffs. These are the public utilities that are also transmitting

utilities and either file Form 715 or have it filed on their behalf.

The information will be provided with each filing by a respondent.

Accordingly, the public reporting burden is estimated to be 41,100

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 (202) 395-3087].

B. Docket No. RM94-7-001

The initially proposed rule would require public utilities seeking

to recover stranded costs to provide certain information to the

Commission. The Commission estimated that the public reporting burden

for the information collection requirements contained in the initially

proposed rule would be 50 hours per response. The Commission also

estimated that there would be ten respondents to the information

collection annually.

Under the proposed rule contained in this supplemental notice of

proposed rulemaking, the information that public utilities will be

required to file is not substantially different from that required by

the initially proposed rule. The Commission also believes that the

average filing burden and frequency of filing will be approximately the

same as under the initially proposed rule. Therefore, the Commission

estimates that there will be no additional public filing burden

associated with the proposed rule.

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 (202) 395-3087].

III. Discussion

A. Summary of Authority and Findings

The primary purposes of the Federal Power Act are to curb abusive

practices by public utility companies and to protect consumers from

excessive rates and charges. To achieve these ends, section 205 of the

FPA requires that no public utility shall ``make or grant any undue

preference or advantage to any person or subject any person to any

undue preference or disadvantage,'' with respect to the transmission of

electric energy in interstate commerce or the sale for resale of

electric energy in interstate commerce. 7 Section 206 of the FPA

authorizes the Commission to investigate and remedy unduly

discriminatory or preferential rules, regulations, practices or

contracts affecting public utility rates for transmission in interstate

commerce or for sales for resale in interstate commerce.

\7\16 U.S.C. 824d(b) and 824(d).

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The significant technological, structural, statutory, and

regulatory changes over the past twenty years have affected the

electric utility industry such that competitive bulk power markets are

now emerging. This transition has expanded what the Commission must

consider to be undue discrimination in the rates, terms, and conditions

offered by public utilities. We find that utilities owning or

controlling transmission facilities possess substantial market power;

that, as profit maximizing firms, they have and will continue to

exercise that market power in order to maintain and increase market

share, and will thus deny their wholesale customers access to

competitively priced electric generation; and that these unduly

discriminatory practices will deny consumers the substantial benefits

of lower electricity prices. We propose to prevent this discrimination

by requiring all public utilities owning and/or controlling

transmission facilities to offer non-discriminatory open access

transmission services.

At the same time, we see no need now to abrogate existing

contractual relationships. Instead, contracts should [[Page 17666]] be

permitted to run their course. Additionally, we believe that recovery

of legitimate stranded costs is critical to the successful transition

of the electric utility industry from a tightly regulated, cost-of-

service utility industry to an open access, competitively priced power

industry.

The requirement of open access coupled with the recovery of

legitimate stranded costs furthers the Congressional purposes embodied

in the Federal Power Act and the Energy Policy Act of 1992 of

protecting consumers, ensuring reasonable rates, and encouraging

competition.

Below, we set out the Commission's legal authority to require non-

discriminatory open access, the relevant historical developments in the

electric industry, and the need for regulatory reform.8

\8\On February 16, 1995, the Coalition for a Competitive

Electric Market filed a petition for a rulemaking on comparability.

The Industrial Consumers and the Transmission Access Policy Study

Group filed comments in support of the petition. The Commission will

not separately notice the Coalition's petition, but seeks comment on

that pleading, and the supporting pleadings, in this notice of

proposed rulemaking.

B. Legal Authority

1. Undue Discrimination/Anticompetitive Effects

The Commission has authority to remedy undue discrimination. That

is clear. Some may argue that case law under the FPA limits our

authority to order wheeling. We have carefully analyzed relevant cases

examining our wheeling authority. We conclude that we have authority to

require wheeling, or non-discriminatory open access, as a remedy for

undue discrimination. Our analysis of the case law is set forth below.

In upholding the Commission's order requiring non-discriminatory

open access in the natural gas industry, the court in Associated Gas

Distributors v. FERC stated that the Natural Gas Act ``fairly

bristles'' with concern for undue discrimination.9 The same is

true of the FPA. The Commission has a mandate under sections 205 and

206 of the FPA to ensure that, with respect to any transmission in

interstate commerce or any sale of electric energy for resale in

interstate commerce by a public utility, no person is subject to any

undue prejudice or disadvantage. We must determine whether any rule,

regulation, practice or contract affecting rates for such transmission

or sale for resale is unduly discriminatory or preferential, and must

prevent those contracts and practices that do not meet this standard.

As discussed below, AGD demonstrates that our remedial power is very

broad and includes the ability to order industry-wide non-

discriminatory open access as a remedy for undue discrimination.

Moreover, the Commission's power under the FPA ``clearly carries with

it the responsibility to consider, in appropriate circumstances, the

anticompetitive effects of regulated aspects of interstate utility

operations pursuant to [FPA] sections 202 and 203, and under like

directives contained in sections 205, 206, and 207.''10

\9\Associated Gas Distributors v. FERC, 824 F.2d 981, 998

(D.C.Cir. 1987), cert. denied, 485 U.S. 1006 (1988) (AGD).

\10\See Gulf States Utilities Company v. FPC, 411 U.S. 747, 758-

59 (1973).

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Based on the mandates of sections 205 and 206 of the FPA and the

case law interpreting the Commission's authority over transmission in

interstate commerce, we conclude that we have ample legal authority--

indeed, a responsibility--under section 206 of the FPA to order the

filing of non-discriminatory open access transmission tariffs if we

find such order necessary as a remedy for undue discrimination or

anticompetitive effects.11 We discuss below the primary court

decisions that touch on our wheeling authority under sections 205 and

206.

\11\In most situations, discrimination that precludes

transmission access or gives inferior access will have at least

potential anticompetitive effects because it limits access to

generation markets and thereby limits competition in generation.

Similarly, it is probable that any transmission provision that has

anticompetitive effects would also be found to be unduly

discriminatory or preferential because the anticompetitive provision

would most likely favor the transmission owner vis-a-vis others.

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The Commission's authority to order access as a remedy for undue

discrimination under the NGA was upheld and discussed in detail in AGD.

In AGD, the court upheld in relevant part the Commission's Order No.

436.12 That order found the prevailing natural gas company

practices to be ``unduly discriminatory'' within the meaning of section

5 of the NGA (the parallel to section 206 of the FPA) and held that if

pipelines wanted blanket certification for their transportation

services, they must commit to transport gas for others on a non-

discriminatory basis; in other words, they must provide non-

discriminatory open access.

\12\Order No. 436, Regulation of Natural Gas Pipelines After

Partial Wellhead Decontrol, III FERC Stats. & Regs., Regulations

Preambles para.30,665 (1985).

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In upholding the Commission's authority to require open access, the

court first noted that the opponents' arguments against such authority

were ``uphill.'' The statute contains no language forbidding the

Commission to impose common carrier status on pipelines, let alone

forbidding the Commission to impose ``a specific duty that happens to

be a typical or even core component of such status.'' The court found

that the legislative history cited by the opponents came nowhere near

overcoming this statutory silence. Rather, the legislative history

supported only the proposition that Congress itself declined to impose

common carrier status.13 Emphasizing Congress' deep concern with

undue discrimination, the court found that the Commission had ample

authority to ``stamp out'' such discrimination:

\13\AGD, supra, 824 F.2d at 997.

The issue seems to come down to this: Although Congress

explicitly gave the Commission the power and the duty to achieve one

of the prime goals of common carriage regulation (the eradication of

undue discrimination), the Commission's attempted exercise of that

power is invalid because Congress in 1906 and 1914 and 1935 and 1938

itself refrained from affixing common carrier status directly onto

the pipelines and from authorizing the Commission to do so. And this

proposition is said to control no matter how sound the Order may be

as a response to the facts before the Commission. We think this

turns statutory construction upside down, letting the failure to

grant a general power prevail over the affirmative grant of a

specific one.14

\14\Id. at 998.

The AGD court found that court decisions under the FPA did not

support the view that the Commission's authority to ``stamp out'' undue

discrimination is hamstrung by an inability to require non-

discriminatory open access as a remedy. These decisions are discussed

below.

One of the earliest cases on wheeling is Otter Tail Power Company

v. United States (Otter Tail)15 That case was a civil antitrust

suit against an electric utility. The Court rejected the argument that

the District Court could not order wheeling because to do so would

conflict with the Federal Power Commission's (FPC) purported wheeling

authority.16 It pointed out that Congress had decided not to

impose a common carrier obligation on the electric power industry and

noted that the Commission was not at that time granted power to order

wheeling. The Otter Tail case, however, did not address whether the

Commission can require transmission in fulfillment of its duty to

remedy undue discrimination.

\15\410 U.S. 366 (1974).

\16\Id. at 375-76.

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Richmond Power & Light Company v. FERC (Richmond)17 also did

not involve [[Page 17667]] requiring wheeling to remedy undue

discrimination. In that case, the FPC, in reaction to the 1973 oil

embargo, was attempting to reduce dependence on oil. The FPC requested

that utilities with excess capacity wheel power to the New England

Power Pool (NEPOOL). In response, several suppliers and transmission

owners filed rate schedules with the FPC that provided for voluntary

wheeling. Richmond Power & Light Company (Richmond) objected to these

filings, claiming that they were unreasonable because they did not

guarantee transmission access. The FPC refused to compel the utilities

to wheel Richmond's power, stating that it did not have the authority

to order a public utility to act as a common carrier.

\17\574 F.2d 610 (D.C. Cir. 1978).

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The D.C. Circuit upheld the Commission. It acknowledged that

Richmond's argument was persuasive in some respects, but stated that

any conditions the Commission might impose could not contravene the

FPA. The court examined the legislative history of the FPA and stated

that ``[i]f Congress had intended that utilities could inadvertently

bootstrap themselves into common-carrier status by filing rates for

voluntary service, it would not have bothered to reject mandatory

wheeling * * *.''18

\18\Id. at 620.

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However, the D.C. Circuit in no way indicated that the Commission

was foreclosed from ordering transmission as a remedy for undue

discrimination. Richmond also had argued that the alleged refusal of

the American Electric Power Company (AEP) and its affiliate, Indiana &

Michigan Electric Company (Indiana), to wheel Richmond's excess energy

was unlawful discrimination because AEP and Indiana wheeled higher-

priced electricity from other AEP affiliates. The court acknowledged

that Richmond's claim of unlawful discrimination was theoretically

valid, but found that Richmond had failed to prove its case. It noted

that if Richmond had argued that the rates were unjustifiably

discriminatory, or that Indiana's failure to use its transmission

capability fully or to purchase less expensive electricity for wheeling

resulted in unnecessarily high rates, a different case would be before

the court.19 The case thus does not in any way limit the

Commission's authority to remedy undue discrimination.

\19\Id. at 623, nn. 53 and 57.

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In Central Iowa Power Cooperative v. FERC,20 the FPC21

reviewed the terms of the Mid-Continent Area Power Pool (MAPP)

Agreement under its section 205 and 206 authority. The agreement

contained two membership limitations. First, the agreement established

two classes of membership, with one class being entitled to more

privileges than the other. Second, the agreement excluded non-

generating distribution systems from pool services. The FPC found the

first limitation on membership--the two-class system--to be unduly

discriminatory and not reasonably related to MAPP's objectives. The FPC

conditioned approval of the agreement under section 206 on the removal

of the unduly discriminatory provision. The FPC found that the second

limitation, the exclusion of non-generating distribution systems, was

not anticompetitive and did not render the agreement inconsistent with

the public interest.

\20\606 F.2d 1156 (D.C. Cir. 1979).

\21\While Central Iowa was pending, certain of the functions of

the FPC were transferred to the FERC under the DOE Organization Act.

Accordingly, the FERC was substituted for the FPC as the respondent

in the case.

On appeal, the D.C. Circuit affirmed the FPC's decision. The court

found that the FPC did have authority to order changes in the scope of

the MAPP agreement, if the agreement was unjust, unreasonable, unduly

discriminatory or preferential under section 206 of the FPA. The court

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stated:

The Commission had authority, * * * under section 206 of the

Act, * * * to order changes in the limited scope of the Agreement,

including the addition of pool services, if, in the absence of such

modifications, the Agreement presented ``any rule, regulation,

practice or contract [that was] unjust, unreasonable, unduly

discriminatory or preferential.'' [22]

\22\606 F.2d at 1168.

However, the court agreed with the FPC's conclusion that the

limited scope of MAPP was not unjust, unreasonable, or unduly

discriminatory. The court recognized that a pool was not invalid under

section 206 merely because a more comprehensive arrangement was

possible.

The D.C. Circuit upheld the Commission's refusal to eliminate the

second limitation on membership by ordering MAPP participants to wheel

to non-generating electric systems.23 However, neither the

Commission nor the court was presented with the argument that wheeling

was necessary as a remedy for undue discrimination.

\23\Id. at 1169; see also Municipalities of Groton v. FERC, 587

F.2d 1296 (D.C. Cir. 1978).

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In Florida Power & Light Company v. FERC (Florida),24 the

Commission ordered Florida Power & Light Company (FP&L) to file a

tariff setting forth FP&L's policy relating to the availability of

transmission service.25 FP&L objected to including such a policy

statement in its tariff and argued that the filing of such a policy

would convert FP&L into a common carrier by obligating it to offer

service to all customers.26 There was no finding that the action

ordered was necessary to remedy undue discrimination.

\24\660 F.2d 668 (5th Cir. 1981), cert. denied sub nom. Fort

Pierce Utilities Authority v. FERC, 459 U.S. 1156 (1983).

\25\FP&L provided transmission service when four conditions were

met: (1) The specific potential seller and buyer were contractually

identified; (2) the magnitude, time and duration of the transaction

were specified prior to the commencement of the transmission; (3) it

could be determined that the transmission capacity would be

available for the term of the contract; and (4) the rate was

sufficient to cover FP&L's costs.

\26\All utilities requesting wheeling services, subject to

availability, would be entitled to receive transmission service

under the filed terms. Any changes to a filed rate must be filed

with the Commission. This is the so-called ``filed rate doctrine.''

See Northwestern Public Service Company v. Montana-Dakota Utilities

Company, 181 F.2d 19, 22 (8th Cir. 1980), aff'd, 341 U.S. 246

(1951).

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The Fifth Circuit Court of Appeals agreed with FP&L that the

mandatory filing of the policy statement would require FP&L to provide

transmission service beyond its voluntary commitment because such a

requirement would change its duties and liabilities.27 The

Commission order would impose common carrier status on FP&L, the court

found.28 The court noted that the Commission did not rely on a

finding of anticompetitive behavior and therefore the court did not

address the Commission's power to remedy antitrust violations.29

\27\Under the filed rate doctrine, a refusal to wheel would be

unduly discriminatory under section 206 of the FPA. As the court

acknowledged, a customer refused service could petition the

Commission to find that FP&L's policy of availability was unduly

discriminatory under section 206(a) of the FPA. The court said that

in the absence of a tariff on file, a utility refused wheeling

services would be unable to claim discrimination under section

206(a) of the FPA. 660 F.2d at 675 (expressing ``serious doubts that

such a petition would be successful in the absence of a tariff'').

\28\Id. at 676.

\29\Id. at 678.

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The AGD court explicitly rejected the claim that the above line of

cases establishes that the Commission lacks authority to require non-

discriminatory open access.30 Opponents of the Commission's order

argued in AGD that Richmond and Florida, supra, stand for the

proposition that the Commission cannot indirectly do what it allegedly

cannot do directly, that is, impose common carriage. The AGD court

rejected these arguments, stating that [[Page 17668]] the petitioners

read the electric cases far too broadly:

\30\The AGD court did not address New York State Electric & Gas

Corporation v. FERC, 638 F.2d 388 (2d Cir. 1980), cert. denied, 454

U.S. 821 (1981) (NYSEG), presumably because that case did not

concern whether the Commission could order wheeling as a remedy for

undue discrimination.

[n]either Richmond nor Florida comes anywhere near stating that

the Commission is barred from imposing an open-access condition in

all circumstances. [31]

\31\824 F.2d at 999.

The court noted that the Florida case had expressly left open the

question of whether the Commission would be entitled to use an open

access condition as a remedy for anticompetitive conduct, and that in

Richmond the D.C. Circuit had said little more than that unwillingness

to transmit for all could not be automatically deemed undue

discrimination. The court also noted the Central Iowa case, supra, in

which it had upheld a Commission order that found a power pooling

agreement discriminatory on its face because the agreement gave one

class of membership privileged status over another. The court stated

that the Central Iowa case ``upholds the power of the Commission to

subject approval of a set of voluntary transactions to a condition that

providers open up the class of permissible users.''32 The court

added that it refused to ``turn statutory construction upside down'' by

letting Congress' failure to grant a general power of common carriage

prevail over the affirmative grant of the specific power to eradicate

undue discrimination.33

\32\Id. at 999.

\33\Id. at 1006.

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We conclude that AGD's analysis of undue discrimination under

sections 4 and 5 of the Natural Gas Act is equally applicable to an

undue discrimination analysis under sections 205 and 206 of the FPA.

The Commission and courts have long recognized that the NGA was

patterned after the FPA and that the two statutes should be interpreted

in the same manner.34 Thus, we conclude that we have the authority

to remedy undue discrimination and anticompetitive effects by requiring

all public utilities that own and/or control transmission facilities to

file non-discriminatory open access transmission tariffs.

\34\See, e.g., FPC v. Sierra Pacific Power Company, 350 U.S.

348, 353 (1956); Arkansas Louisiana Gas Company v. Hall, 453 U.S.

571, 577 n.7 (1981); and Kentucky Utilities Company v. FERC, 760

F.2d 1321, 1325 n.6 (D.C. Cir. 1985). Section 206 of the FPA was

recently revised and now differs from section 5 of the NGA, but not

in a manner significant to our discussion here. See 16 U.S.C.

824e(b) and (c).

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2. Section 211 Services

In concluding that we must invoke our section 206 authority to

remedy undue discrimination and anticompetitive actions in the electric

industry, we have carefully considered the goals of Title VII of the

Energy Policy Act, and whether section 211, by itself, is sufficient to

remedy undue discrimination in public utility transmission

services.35 Title VII of the Energy Policy Act, which amended

section 211 of the FPA, reflects the intent of Congress to encourage

competitive wholesale electric markets. Section 211 provides a means

for wholesale power sellers and buyers to obtain transmission services

necessary to compete in, or to reach, competitive markets, and is a

valuable tool to encourage competitive markets. However, as discussed

below, reliance on section 211 alone in some circumstances can result

in the perpetuation of, rather than the elimination of, undue

discrimination and anticompetitive effects.

\35\In amending section 211 Congress left unaltered the

authorities and obligations of the Commission under sections 205 and

206 (similar to our authorities and obligations under sections 4 and

5 of the Natural Gas Act) to remedy undue discrimination.

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First, there are inherent delays in the procedures for obtaining

service under section 211. However, for competitive reasons, many

transactions must be negotiated relatively quickly. Many competitive

opportunities will be lost by the time the Commission can issue a final

order under section 211. While we interpret section 211 to permit a

customer or group of customers to seek broad tariff-like

arrangements,36 case-by-case section 211 proceedings are not a

substitute for tariffs of general applicability that permit timely,

non-discriminatory access on request.

\36\See El Paso Electric Company and Central and South West

Services Inc., 68 FERC para.61,181 at 61,916 (1994) (CSW), reh'g

pending.

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Second, discrimination is inherent in the current industry

environment in which some customers and sellers are served by open

access systems, and others have to rely on negotiated bilateral

arrangements or the mandatory section 211 process. The end result is

discrimination in the ability to obtain transmission services, as well

as in the quality and prices of the services. This national patchwork

of open and closed transmission systems cannot be cured effectively

through section 211.

The Commission believes that its actions under sections 205 and 206

will complement the section 211 procedures in achieving the goals of

creating more competitive bulk power markets and lower rates for

consumers, while avoiding many years of costly and unnecessary

litigation. Section 211 will be particularly important for developing

non-discriminatory access by non-public utilities.

C. Background

1. Structure of the Electric Industry at Enactment of Federal Power Act

The Federal Power Act was enacted in an age of mostly self-

sufficient, vertically integrated electric utilities, in which

generation, transmission, and distribution facilities were owned by a

single entity and sold as part of a bundled service (delivered electric

energy) to wholesale and retail customers. Most electric utilities

built their own power plants and transmission systems, entered into

interconnection and coordination arrangements with neighboring

utilities, and entered into long-term contracts to make wholesale

requirements sales (bundled sales of generation and transmission) to

municipal, cooperative, and other investor-owned utilities (IOUs)

connected to each utility's transmission system. Each system covered

limited service areas. This structure of separate systems arose

naturally due primarily to the cost and technological limitations on

the distance over which electricity could be transmitted.

Through much of the 1960s, utilities were able to avoid price

increases, but still achieve increased profits, because of substantial

increases in scale economies, technological improvements, and only

moderate increases in input prices.37 Thus, there was no pressure

on regulatory commissions to use regulation to affect the structure of

the industry.38

\37\Paul L. Joskow, Inflation and Environmental Concern:

Structural Change in the Process of Public Utility Regulation, 17 J.

Law & Econ. 291, 312 (1974); see also Charles F. Phillips, Jr., The

Regulation of Public Utilities 11 (1988).

\38\See Joskow, supra note 37, at 312; see also Phillips, supra

note 37, at 12.

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2. Significant Changes in the Electric Industry

In the late 1960s and throughout the 1970s, a number of significant

events occurred in the electric industry that changed the perceptions

of utilities and began a shift to a more competitive marketplace for

wholesale power.39 This was the beginning of periods of rapid

inflation, higher nominal interest rates, and higher electricity

rates.40 During [[Page 17669]] this time, consumers became

concerned about higher electricity rates and questioned any price

increases filed by utilities.41

\39\See Joskow, supra note 37, at 312; see also Phillips, supra

note 37, at 12-13.

\40\See Joskow, supra note 37, at 312-13; see also Phillips,

supra note 37, at 13. The Arab oil embargo resulted in significantly

higher oil prices through the 1970s. See Richard J. Pierce, Jr., The

Regulatory Treatment of Mistakes in Retrospect: Canceled Plants and

Excess Capacity, 132 U. Pa. L. Rev. 497, 501 (1984).

\41\See Joskow, supra note 37, at 313; see also Phillips, supra

note 37, at 13.

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During this same time frame, the construction of nuclear and other

capital-intensive baseload facilities--actively encouraged by federal

and some state governments--contributed to the continuing cost

increases and uncertainties in the industry.42 These investments

were made based on the assumptions that there would be steady increases

in the demand for electricity and continued large increases in the

price of oil.43 However, due to conservation and economic

downturns, the expected demand increases did not materialize. Load

growth virtually disappeared in some areas, and many utilities

unexpectedly found themselves with excess capacity.44 In addition,

by the 1980s, the oil cartel collapsed, with a resulting glut of low-

priced oil.45 At the same time, inflation substantially increased

the costs of these large baseload generating plants.46 Surging

interest rates further increased the cost of the capital needed to

finance and capitalize these projects and completion schedules were

significantly extended by, in part, more stringent safety and

environmental requirements.47

\42\See generally Jersey Central Power & Light Company v. FERC,

810 F.2d 1168, 1171 (D.C. Cir. 1987).

\43\Id.

\44\See Pierce, supra note 40, at 503. By 1983, the Department

of Energy had estimated that the sunk costs for canceled nuclear

plants alone amounted to $10 billion. Id. at 498.

\45\Id.

\46\See Bernard S. Black & Richard J. Pierce, Jr., The Choice

Between Markets and Central Planning in Regulating the U.S.

Electricity Industry, 93 Col. L. Rev. 1339, 1346 (1993) (``Actual

costs of nuclear power plants vastly exceeded estimates, sometimes

by as much as 1000%.'').

\47\See Phillips, supra note 37, at 13. Fossil fuel-fired plants

became subject to increased regulation as a result of the Clean Air

Act of 1970, and its 1977 amendments. 42 U.S.C. 7401-7642. In 1971,

nuclear plant licensing became subject to the environmental impact

statement requirements of the National Environmental Policy Act of

1969. 42 U.S.C. 4332. Following the 1979 accident at the Three Mile

Island nuclear plant, nuclear plants also became subject to

additional safety regulations, resulting in higher costs. See Energy

Information Administration, The Changing Structure of the Electric

Power Industry 1970-1991 (March 1993) 35. Between 1976 and 1980,

most states and many localities instituted laws governing power

plant siting.

As a result, expensive large baseload plants came onto the market

or were in the process of being constructed, for which there was little

or no demand. Accordingly, between 1970 and 1985, average residential

electricity prices more than tripled in nominal terms, and increased by

25% after adjusting for general inflation.48 Moreover, average

electricity prices for industrial customers more than quadrupled in

nominal terms over the same period and increased 86% after adjusting

for inflation.49 The rapidly increasing rates for electric power

during this period, together with the opportunities provided by the

Public Utility Regulatory Policies Act of 1978 (PURPA) (discussed

infra), also prompted some industrial customers to bypass utilities by

constructing their own generation facilities. This further exacerbated

rate increases for remaining customers--primarily residential and

commercial customers.

\48\Based on retail prices reported in Energy Information

Administration (EIA), Monthly Energy Review, January 1995, Table 9.9

(Prices adjusted for inflation using the GDP Deflator (1987 = 100)).

\49\Id.

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Consumers responded to these ``rate shocks'' by exerting pressure

on regulatory bodies to investigate the prudence of management

decisions to build generating plants, especially when construction

resulted in cost overruns, excess capacity, or both. Between 1985 and

1992, writeoffs of nuclear power plants totalled $22.4 billion.50

These writeoffs significantly reduced the earnings of the affected

utilities.51 Delays in obtaining rate increases to reflect the

effects of inflation further reduced investor returns. Thus, many

utilities became reluctant to commit capital to long-term construction

decisions involving large scale generating plants.52

\50\See Black & Pierce, supra note 46, at 1346 (These writeoffs

were ``about 17% of the book value of total 1992 utility

investment.'').

\51\Id.

\52\Id. (``The high perceived risk of future disallowances

reversed utilities' incentives to overinvest, and made utilities

extremely reluctant to build new power plants.'').

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In addition to economic changes in the industry, significant

technological changes in both generation and transmission have occurred

since 1935. Through the 1960s, bigger was cheaper in the generation

sector and the industry was able to capitalize on economies of scale to

produce power at lower per-unit costs from larger and larger

plants.53 As a result, large utility companies that could finance

and manage construction projects of larger scale had a price advantage

over smaller utility companies and customers who might otherwise have

considered building their own generating units. Scale economies

encouraged power generation by large vertically-integrated utility

companies that also transmitted and distributed power. Beginning in the

1970s, however, additional economies of scale in generation were no

longer being achieved.54 A significant factor was that larger

generation units were found to need relatively greater maintenance and

experience longer downtimes.55 The electric industry faced the

situation ``where the price of each incremental unit of electric power

exceeded the average cost.''56 Bigger was no longer better.

\53\See Preston Michie, Billing Credits for Conservation,

Renewable, and Other Electric Power Resources: an Alternative to

Marginal-Cost-Based Power Rates in the Pacific Northwest, 13

Environmental Law 963, 964-65 (1983).

\54\Id. at 965.

\55\Energy Information Administration, The Changing Structure of

the Electric Power Industry 1970-1991 (March 1993) 37 (``As larger

units were constructed, however, utilities discovered that downtime

was as much as 5 times greater for units larger than 600 megawatts

than for units in the 100-megawatt range.'')

\56\Id.; see also George A. Perrault, Downsizing Generation:

Utility Plans for the 1990s, Pub. Util. Fort. 15-16 (Sept. 27, 1990)

(``The large base-load generating units that form the backbone of

utility systems are almost totally absent from capacity plans for

the 1990s.'').

Further dictating against larger generation units were advances in

technologies that allowed scale economies to be exploited by smaller

size units, thereby allowing smaller new plants to be brought on line

at costs below those of the large plants of the 1970s and earlier. Such

new technologies include combined cycle units and conventional steam

units that use circulating fluidized bed boilers.57

\57\``From 1982 through 1991, the average capacity of fluidized-

bed units increased rapidly to 72 megawatts for 4 units in 1991. The

average capacity for the 19 units planned to begin operating in 1992

through 1995 increases to 83 megawatts.'' Energy Information

Administration, The Changing Structure of the Electric Power

Industry 1970-1991 (March 1993) 38.

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The combined cycle generating plants generally use natural gas as

their primary fuel. This technology has been made possible by the

development of more efficient gas turbines, shorter construction lead

times, lower capital costs, increased reliability, and relatively

minimal environmental impacts.58 Similarly, the circulating

fluidized bed combustion boilers, fueled by coal and other conventional

fuels, provide a more efficient and less polluting resource.

\58\See Charles E. Bayless, Less is More: Why Gas Turbines Will

Transform Electric Utilities, Pub. Util. Fort. (Dec. 1, 1994) 21.

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Today, ``the optimum size [of generation plants] has shifted from

[more than 500 MW] (10-year lead time) to smaller units (one-year lead

time) [in the 50- to 150-MW range].''59

\59\Id. at 24.

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Indeed, smaller and more efficient gas-fired combined-cycle

generation facilities can produce power on the grid at a cost between 3

and 5 cents per [[Page 17670]] kWh.60 This is significantly less

than the costs for large plants constructed and installed by utilities

over the last decade, which were typically in the range of 4 to 7 cents

per kWh for coal plants and 9 to 15 cents for nuclear plants.61

\60\FERC staff calculations based in part on combined-cycle

plant cost data reported in 1993 FERC Form No. 1 for a sample of

units placed in service during 1990-92. Costs vary with regional

fuel and construction costs, among other reasons.

\61\Coal and Nuclear plant cost data reported in 1993 FERC Form

No. 1 and the EIA report, Electric Plant Cost and Power Production

Expenses 1991, 1993 DOE/EIA-0455 (91), for plants placed in service

during 1986-93; see also The 1994 Electric Executives' Forum, Bakke

(President and CEO of the AES Corporation), Pub. Util. Fort. (June

1, 1994) 45 (``New generation can be built at about 3 cents per

kilowatt-hour (U.S. average). Old generation costs about twice that

* * *'').

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Significant changes have also occurred in the transmission sector

of the industry. Technological advances in transmission have made

possible the economic transmission of electric power over long

distances at higher voltages.62 This has made it technically

feasible for utilities with lower cost generation sources to reach

previously isolated systems where customers had been captive to higher

cost generation. In addition, the nature and magnitude of coordination

transactions63 have changed dramatically since enactment of the

FPA, allowing increased coordinated operations and reduced reserve

margins. Substantial amounts of electricity now move between regions,

as well as between utilities in the same region. Physically isolated

systems have become a thing of the past.

\62\See Black & Pierce, supra note 46, at 1345 (In the late

1960s and 1970s, improved transmission efficiency and development of

regional transmission networks ``made it possible to build power

plants up to 1000 miles from power users.'').

\63\Coordination transactions are voluntary sales or exchanges

of specialized electricity services that allow buyers to realize

cost savings or reliability gains that are not attainable if they

rely solely on their own resources. For sellers, these transactions

provide opportunities to earn additional revenue, and to lower

customer rates, from capacity that is temporarily excess to native

load capacity requirements.

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3. The Public Utility Regulatory Policies Act and the Growth of

Competition

In enacting PURPA,64 Congress recognized that the rising costs

and decreasing efficiencies of utility-owned generating facilities were

increasing rates and harming the economy as a whole.65 To lessen

dependence on expensive foreign oil, avoid repetition of the 1977

natural gas shortage, and control consumer costs, Congress sought to

encourage electric utilities to conserve oil and natural gas.66 In

particular, Congress sanctioned the development of alternative

generation sources designated as ``qualifying facilities'' (QFs) as a

means of reducing the demand for traditional fossil fuels.67 PURPA

required utilities to purchase power from QFs at a price not to exceed

the utility's avoided costs and to sell backup power to QFs.68

\64\Pub. L. 95-617, 92 Stat. 3117 (codified in U.S.C. sections

15, 16, 26, 30, 42, and 43).

\65\See generally FERC v. Mississippi, 456 U.S. 742, 745-46

(1982).

\66\The Power Plant and Industrial Fuel Use Act of 1978. Pub. L.

95-617, 92 Stat. 3117 (codified in U.S.C. sections 15, 16, 26, 30,

42, and 43).

\67\QFs include certain cogenerators and small power producers.

PURPA also added sections 210, 211 and 212 to the FPA, providing the

Commission with authority to approve applications for

interconnections and, in limited circumstances, wheeling. However,

under section 211, as enacted in PURPA, the Commission could approve

an application for wheeling only if it found, inter alia, that the

order ``would reasonably preserve existing competitive

relationships.'' Because of this and other limitations in sections

211 and 212 as originally enacted, the provision was virtually

ineffective. Only one section 211 order was ever issued pursuant to

the original provision, and it was pursuant to a settlement. See

Public Service Company of Oklahoma, 38 FERC para.61,050 (1987). As

discussed infra, section 211 was subsequently revised by the Energy

Policy Act of 1992.

\68\456 U.S. at 750. Congress recognized that encouragement was

needed in part because utilities had been reluctant to purchase

electric power from, and sell power to, nonutility generators. Id.

at 750-51.

PURPA specifically set forth limitations on who, and what, could

qualify as QFs. In addition to technological and size criteria, PURPA

set limits on who could own QFs.69 Notwithstanding these

limitations, QFs proliferated. In 1989, there were 576 QF facilities.

By 1993, there were more than 1,200 such facilities.70 For the

same time period, installed QF capacity increased from 27,429 megawatts

to 47,774 megawatts.71 The rapid expansion and performance of the

QF industry demonstrated that traditional, vertically integrated public

utilities need not be the only sources of reliable power.

\69\For example, PURPA provided that a cogeneration facility or

small power production facility could not be owned by a person

primarily engaged in the generation or sale of electric power (other

than from cogeneration or small power production facilities). See 16

U.S.C. 796 (17) and (18).

\70\Energy Information Administration, Electric Power Annual

1993 (December 1994) 124 (Table 77).

\71\Id. EIA data for 1989 through 1991 was for facilities of 5

megawatts or more and for 1992 and 1993 was for facilities of 1

megawatt or more. A comparison with Table 74 on page 121 for the

years 1992 and 1993 reveals that this mixing of data bases is likely

of minimal effect.

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During this period, the profile of generation investment began to

change, and a market for non-traditional power supply beyond the

purchases required by PURPA began to emerge. QFs were limited to

cogenerators and small power producers.72 However, other non-

traditional power producers who could not meet the QF criteria began to

build new capacity to compete in bulk power markets, without such PURPA

benefits as the mandatory purchase requirements. These producers, known

as independent power producers (IPPs), were predominantly single-asset

generation companies that did not own any transmission or distribution

facilities. While traditional utilities were generally reluctant at

that time to invest in new generating facilities under cost of service

regulation, utilities increasingly became interested in participating

in this new generation sector. They organized affiliated power

producers (APPs), with assets not included in utility rate base, and

sought to sell power in their own service territories and the

territories of other utilities. At the same time, power marketers

arose. These entities--owning no transmission or generation--buy and

sell power.73

\72\Generally, the law has imposed an 80 MW cap on small power

producers. A limited exception enacted in 1990 permitted small power

facilities that could exceed 80 MW and still qualify as QFs under

PURPA. This exception was limited to certain solar, wind, waste, and

geothermal small power production facilities and only covered

applications for certification of facilities as qualifying small

power production facilities that were submitted no later than

December 31, 1994 and for which construction commences no later than

December 31, 1999. See Solar, Wind, Waste, and Geothermal Power

Production Incentives Act of 1990, Pub. L. 101-575, 104 Stat. 2834

(1990), amended, Pub. L. 102-46, 105 Stat. 249 (1991).

\73\The first power marketer in the electric industry was

Citizens Energy Corporation. See Citizens Energy Corporation, 35

FERC para. 61,198 (1986). Power marketers take title to electric

energy. Power brokers, on the other hand, do not take title and are

limited to a matchmaking role.

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There were two major impediments to the development of IPPs and

APPs. First, the ownership restrictions of the Public Utility Holding

Company Act (PUHCA)74 severely inhibited these new entities from

entering the generation business.75 Second, these entities needed

transmission service in order to compete in electricity markets.

\74\15 U.S.C. 79 et seq.

\75\As discussed infra, Congress eventually provided a means to

avoid the PUHCA restrictions by creating exempt wholesale generators

(EWGs) in the Energy Policy Act.

While the Commission had no authority to remove PUHCA

restrictions,76 it encouraged the development of IPPs and APPs, as

well as emerging power marketers, by authorizing market-based rates for

their power sales on a case-by-case basis and [[Page 17671]] by

encouraging more widely available transmission access. From 1989

through 1993, facilities owned by IPPs and other non-traditional

generators (other than QFs) increased from 249 to 634 and their

installed capacity increased from 9,216 megawatts to 13,004

megawatts.77 Indeed, ``[i]n 1992, for the first time, generating

capacity added by independent producers exceeded capacity added by

utilities.''78

\76\The industry was successful to some extent in developing

ownership structures that permitted such investment. See, e.g.,

Commonwealth Atlantic Limited Partnership, 51 FERC para.61,368 at

62,240 and n.20 (1990).

\77\Energy Information Administration, Electric Power Annual

1993 (December 1994) 124 (Table 77).

\78\Black & Pierce, supra note 46, at 1349 n.25. possessed.

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Market-based rates helped to develop competitive bulk power

markets. A generating utility allowed to sell its power at market-based

rates could move more quickly to take advantage of short-term or even

long-term market opportunities than those laboring under traditional

cost-of-service tariffs, which entail procedural delays in achieving

tariff approvals and changes.

In approving these market-based rates, the Commission required,

inter alia, that the seller and any of its affiliates lack market power

or mitigate any market power that they may have possessed.79 The

major concern of the Commission was whether the seller or its

affiliates could limit competition and thereby drive up prices. A key

inquiry became whether the seller or its affiliates owned or controlled

transmission facilities in the relevant service area and therefore, by

denying access or imposing discriminatory terms or conditions on

transmission service, could foreclose other generators from

competing.80 As we have previously explained:

\79\See, e.g., Ocean State Power, 44 FERC para.61,261 (1988);

Commonwealth Atlantic Limited Partnership, 51 FERC para.61,368

(1990); Citizens Power & Light Company, 48 FERC para.61,210 (1989);

Orange and Rockland Utilities, Inc., 42 FERC para.61,012 (1988);

Doswell Limited Partnership, 50 FERC para.61,251 (1990) (Doswell);

and Dartmouth Power Associates Limited Partnership, 53 FERC

para.61,117 (1990).

\80\See, e.g., Doswell, 50 FERC at 61,757.

The most likely route to market power in today's electric

utility industry lies through ownership or control of transmission

facilities. Usually, the source of market power is dominant or

exclusive ownership of the facilities. However, market power also

may be gained without ownership. Contracts can confer the same

rights of control. Entities with contractual control over

transmission facilities can withhold supply and extract monopoly

prices just as effectively as those who control facilities through

ownership.81

\81\Citizens Power & Light Corporation, 48 FERC para.61,210 at

61,777 (1989) (emphasis in original); see also Utah Power & Light

Company, PacifiCorp and PC/UP&L Merging Corporation, 45 FERC

para.61,095 at 61,287-89 (1988), order on reh'g, 47 FERC

para.61,209, order on reh'g, 48 FERC para.61,035 (1989), remanded in

part sub nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057

(D.C. Cir. 1991), order on remand, 57 FERC para.61,363 (1991).

As entry into wholesale power generation markets increased, the

ability of customers to gain access to the transmission services

necessary to reach competing suppliers became increasingly

important.82 In addition, beginning in the late 1980s, public

utilities seeking Commission approval of mergers or consolidations

under section 203 of the FPA or Commission authorization for blanket

approval of market-based rates for generation services under section

205 of the FPA, filed ``open access'' transmission tariffs of general

applicability to mitigate their market power to meet Commission

conditions.83 The Commission applied its market rate analysis to

IOUs, as well as IPPs, APPs, and marketers, and allowed IOUs to sell at

market-based rates only if they opened their transmission systems to

competitors.84 The Commission also approved proposed mergers on

the condition that the merging companies remedy anticompetitive effects

potentially caused by the merger by filing ``open access'' tariffs.

These early ``open access'' tariffs required only that the companies

provide point-to-point transmission services, which is a much narrower

requirement than that being proposed in this rule. However, only 21

public utilities have any form of open access transmission; the vast

majority of IOUs still do not provide any form of ``open access''

transmission over their transmission systems.

\82\In earlier years, a few customers were able to obtain access

as a result of litigation, beginning with the Supreme Court's

decision in Otter Tail, 410 U.S. 366 (1973). Additionally, some

customers gained access by virtue of Nuclear Regulatory Commission

license conditions and voluntary preference power transmission

arrangements associated with federal power marketing agencies. See,

e.g., Consumers Power Company, 6 NRC 887, 1036-44 (1977) and The

Toledo Edison Company and Cleveland Electric Illuminating Company,

10 NRC 265, 327-34 (1979). See Florida Municipal Power Agency v.

Florida Power and Light Company, 839 F. Supp. 1563 (M.D. Fla. 1993).

See also Electricity Transmission: Realities, Theory and Policy

Alternatives, The Transmission Task Force Report to the Commission,

October 1989, 197.

\83\See, e.g., Public Service Company of Colorado, 59 FERC

para.61,311 (1992), reh'g denied, 62 FERC para.61,013 (1993); Utah

Power & Light Company, et al., Opinion No. 318, 45 FERC para.61,095

(1988), order on reh'g, Opinion No. 318-A, 47 FERC para.61,209

(1989), order on reh'g, Opinion No. 318-B, 48 FERC para.61,035

(1989), aff'd in relevant part sub nom. Environmental Action Inc. v.

FERC, 939 F.2d 1057 (D.C. Cir. 1991); Northeast Utilities Service

Company (Public Service Company of New Hampshire), Opinion No. 364-

A, 58 FERC para.61,070, reh'g denied, Opinion No. 364-B, 59 FERC

para.61,042, order granting motion to vacate and dismissing request

for rehearing, 59 FERC para.61,089 (1992), affirmed in relevant part

sub nom. Northeast Utilities Service Company v. FERC, 993 F.2d 937

(1st Cir. 1993).

\84\See, e.g., Public Service of Indiana, Inc., 51 FERC

para.61,367 (1990), reh'g denied, 52 FERC para.61,260 (1990), appeal

dismissed sub nom. Northern Indiana Public Service Company v. FERC,

954 F.2d 736 (D.C.Cir. 1992).

The economic and technological changes in the transmission and

generation sectors helped give impetus to the many new entrants in the

generating markets who could sell electric energy profitably with

smaller scale technology at a lower price than many utilities selling

from their existing generation facilities at rates reflecting cost.

However, the advantages of these technological advances can be achieved

only if more efficient generating plants can obtain access to the

regional transmission grids. Because the traditional vertically

integrated utilities still favor their own generation if and when they

provide transmission access to third parties, barriers continue to

exist to cheaper, more efficient generation sources.

4. The Energy Policy Act

In response to the competitive developments following PURPA, and

the fact that PUHCA and lack of transmission access85 remained

major barriers to new generators, Congress enacted Title VII of the

Energy Policy Act of 1992 (Energy Policy Act).86 A goal of the

Energy Policy Act was to promote greater competition in bulk power

markets by encouraging new generation entrants, known as exempt

wholesale generators (EWGs), and by expanding the Commission's

authority under sections 211 and 212 of the FPA to approve applications

for transmission services.87

\85\See infra sections III.D.1 and 2.

\86\Pub. L. 102-486, 106 Stat. 2776 (1992).

\87\See El Paso Electric Company and Central and South West

Services Inc., 68 FERC para.61,181 at 61,914 (1994); see also Paul

Kemezis, FERC's Competitive Muscle: The Comparability Standard,

Electrical World 45 (Jan. 1995) (``In EPAct, Congress made it clear

that the electric-power industry was to move toward a fully

competitive market system, but left most of the implementation to

FERC.'').

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An EWG is defined as

any person determined by the Federal Energy Regulatory

Commission to be engaged directly, or indirectly through one or more

affiliates as defined in [PUHCA] section 2(a)(11)(B), and

exclusively in the business of owning or operating, or both owning

and operating, all or part of one or more eligible facilities and

selling electric energy at wholesale.88

\88\15 U.S.C. 79z-5a.

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If the Commission, upon an application, determines that a person is an

EWG, that person will be exempt from PUHCA.89 This provision

removed a significant impediment to the development of IPPs and APPs by

[[Page 17672]] allowing them to develop projects as EWGs free from the

strictures of PUHCA or the QF PURPA limitations.

\89\15 U.S.C. 79z-5a(e).

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While sections 211 and 212, as enacted by PURPA, were intended to

provide greater access to the transmission grid, the limitations placed

on these sections made them unusable in most circumstances.90

However, as amended by the Energy Policy Act, these sections now give

the Commission broader authority to order transmitting utilities to

provide wholesale transmission services, upon application, to any

electric utility, Federal power marketing agency, or any other person

generating electric energy for sale for resale.

\90\See supra note 67.

The Energy Policy Act also added section 213 to the FPA. Section

213(a) requires a transmitting utility that does not agree to provide

wholesale transmission service in accordance with a good faith request

to provide a written explanation of its proposed rates, terms, and

conditions and its analysis of any physical or other

constraints.91 Section 213(b) required the Commission to enact a

rule requiring transmitting utilities to submit annual information

concerning potentially available transmission capacity and known

constraints.92

\91\See Policy Statement Regarding Good Faith Requests for

Transmission Services and Responses by Transmitting Utilities Under

Sections 211(a) and 213(a) of the Federal Power Act, as Amended and

Added by the Energy Policy Act of 1992, 58 FR 38964 (July 21, 1993),

III FERC Stats. & Regs., Regulations Preambles para. 30,975 (1993)

(Policy Statement Regarding Good Faith Requests for Transmission

Services).

\92\See Order No. 558, New Reporting Requirements Implementing

Section 213(b) of the Federal Power Act and Supporting Expanded

Regulatory Responsibilities Under the Energy Policy Act of 1992, and

Conforming and Other Changes to Form No. FERC-714, III FERC Stats. &

Regs., Regulations Preambles para. 30,980, reh'g denied, Order No.

558-A, 65 FERC para. 61,324 (1993), regulations modified, 59 FR

15333 (April 1, 1994), III FERC Stats. & Regs., Regulations

Preambles para. 30,993.

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5. The Present Competitive Environment

Following the Energy Policy Act, the Commission established rules:

(1) for certain generators to obtain EWG status and thus an exemption

from PUHCA;93 and (2) that required transmission information

availability. The Commission also pursued a number of initiatives aimed

at fostering the development of more competitive bulk power markets,

including aggressive implementation of section 211, a new look at undue

discrimination under the FPA, easing of market entry for sellers of

generation from new facilities, and initiation of a number of industry-

wide reforms. As stated by the Commission, in recognition of the

Congressional goal in the Energy Policy Act of creating competitive

bulk power markets:

\93\See Order No. 550, Filing Requirements and Ministerial

Procedures for Persons Seeking Exempt Wholesale Generator Status, 58

FR 8897 (February 18, 1993), III FERC Stats. & Regs., Regulations

Preambles para. 30,964, order on reh'g, Order No. 550-A, 58 FR 21250

(April 20, 1993), III FERC Stats. & Regs., Regulations Preambles

para. 30,969 (1993). As recognized by Congress and the Commission,

availability of transmission information is critical in developing

competitive markets. See supra notes 91 and 92. This opened the

``black box'' of information that previously was available only to

transmission owners.

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.94

\94\See Stranded Cost NOPR at 32,866; American Electric Power

Service Corporation, 67 FERC para. 61,168, clarified, 67 FERC para.

61,317 (1994).

a. Use of Sections 211 and 212 to Obtain Transmission Access. The

Commission has aggressively implemented sections 211 and 212 of the

FPA, as amended by the Energy Policy Act, in order to promote

competitive markets.95 When wheeling requests under sections 211

and 212 have been made, the Commission has required wheeling in almost

all of the requests it has processed. To date, the Commission has

issued orders requiring wheeling in 9 of the 10 cases it has acted on,

including 3 proposed orders and 6 final orders.96

\95\16 U.S.C.A. 824j-824k (West 1985 and Supp. 1994).

\96\See, e.g., final orders issued in City of Bedford, 68 FERC

para. 61,003 (1994), reh'g pending; Florida Municipal Power Agency

v. Florida Power & Light Company, 67 FERC para. 61,167 (1994), reh'g

pending; Minnesota Municipal Power Agency, 68 FERC para. 61,060

(1994); and Tex-La Electric Cooperative of Texas, 69 FERC para.

61,269 (1994); see also supra note 168.

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As a general matter, section 211 has permitted some inroads to be

made by customers in obtaining transmission service from public

utilities that historically have declined to provide access to their

systems, or have offered service only on a discriminatory basis. Under

section 211, the Commission has granted requests for the broader type

of service that most utilities historically have refused to provide--

network service. Although transmission owners have provided limited

amounts of unbundled point-to-point transmission service, third-party

customers have not been able to obtain the flexibility of service that

transmission owners enjoy.

In Florida Municipal, a section 211 case, the Commission ordered

``network,'' rather than the narrower ``point-to-point,''

service.97 Network service permits the applicant to fully

integrate load and resources on an instantaneous basis in a manner

similar to the transmission owner's integration of its own load and

resources. At the same time, the Commission made the generic finding

that the availability of transmission service will enhance competition

in the market for power supplies and lead to lower costs for consumers.

The Commission explained that as long as the transmitting utility is

fully and fairly compensated and there is no unreasonable impairment of

reliability, transmission service is in the public interest.98

\97\See Florida Municipal Power Agency v. Florida Power & Light

Company, 65 FERC para. 61,125, reh'g dismissed, 65 FERC para. 61,372

(1993), final order, 67 FERC para. 61,167 (1994), reh'g pending. The

Commission has ``characterized point-to-point service as involving

designated points of entry into and exit from the transmitting

utility's system, with a designated amount of transfer capability at

each point.'' El Paso Electric Company v. Southwestern Public

Service Company, 68 FERC para. 61,182 at 61,926 n.9 (1994) (citing

Entergy Services, Inc., 58 FERC para. 61,234 at 61,768 (1993), reh'g

dismissed, 68 FERC para. 61,399 (1994)). Network service allows more

flexibility by allowing a transmission customer to use the entire

transmission network to provide generation service for specified

resources and specified loads without having to pay multiple charges

for each resource-load pairing.

\98\Florida Municipal, 67 FERC at 61,477.

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As discussed in more detail above, however, our preliminary

conclusion is that section 211 alone is not enough to eliminate undue

discrimination. The significant time delays involved in filing an

individual service request for bilateral service under section 211

places the customer at a severe disadvantage compared to the

transmission owner and can result in discriminatory treatment in the

use of the transmission system. It is an inadequate procedural

substitute for readily available service under a filed non-

discriminatory open access tariff. As the Commission noted in Hermiston

Generating Company, ``[t]he ability to spend time and resources

litigating the rates, terms and conditions of transmission access is

not equivalent to an enforceable voluntary offer to provide comparable

service under known rates, terms and conditions.''99

\99\69 FERC para. 61,035 at 61,165 (1994), reh'g pending; see

also Southwest Regional Transmission Association, 69 FERC para.

61,100 at 61,398 (1994) (SWRTA).

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b. Commission's Comparability Standard. In the Spring of 1994, the

Commission began to address the problem of the disparity in

transmission service that utilities provided to third parties in

comparison to their own uses of the transmission system. In the seminal

case in this area, American Electric Power Service Corporation (AEP),

the company voluntarily proposed a tariff of general applicability that

would offer firm, point-to-point [[Page 17673]] transmission service

for a minimum of one month.100 The Commission accepted the

proposed transmission tariff for filing and suspended its effectiveness

for one day, subject to refund.101 Rehearing requests challenged

the Commission's summary approval of the restriction of service to

point-to-point as being discriminatory and anticompetitive.102 The

rehearing requests argued that the tariff should be expanded to include

network services such as those used by the transmission owner. On

rehearing, the Commission announced a new standard for evaluating

claims of undue discrimination.

\100\64 FERC para. 61,279 (1993), reh'g granted, 67 FERC para.

61,168, clarified, 67 FERC para. 61,317 (1994).

\101\The Commission explained that AEP could limit the service

it was offering because it was ``providing the service voluntarily

under a tariff of general applicability.'' 64 FERC at 62,978.

\102\AEP, 67 FERC at 61,489.

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The Commission found that a voluntarily offered, new open access

transmission tariff that did not provide for services comparable to

those that the transmission owner provided itself was unduly

discriminatory and anticompetitive.103 In reaching that

conclusion, the Commission broadened its undue discrimination analysis

(which traditionally had focused on the rates, terms, and conditions

faced by similarly situated third-party customers) to include a focus

on the rates, terms, and conditions of a utility's own uses of the

transmission system:

\103\With respect to anticompetitive effects, the Commission

explained that it has ``adhered to the Supreme Court's determination

that the Commission's `important and broad regulatory power * * *

carries with it the responsibility to consider, in appropriate

circumstances, the anticompetitive effects of regulated aspects of

interstate utility operations pursuant to sections 202 and 203, and

under like directives contained in sections 205, 206 and 207.' Gulf

States Utilities Company v. FPC, 411 U.S. 747, 758-59 (1972).'' Id.

at 61,490 (footnote omitted). The Commission reaffirmed that it

would examine how best to fulfill this responsibility, as well as

its responsibility to prevent undue discrimination, in light of the

changing conditions in the electric utility industry. Id.

[A]n open access tariff that is not unduly discriminatory or

anticompetitive should offer third parties access on the same or

comparable basis, and under the same or comparable terms and

conditions, as the transmission provider's uses of its

system.104

\104\Id. at 61,490.

Refocusing the analysis was necessitated by the changing conditions in

the electric utility industry, including the emergence of non-

traditional suppliers and greater competition in bulk power markets.

Because a transmission provider may use its system in different ways

(e.g., to integrate load and resources when serving retail native load,

to make off-system sales or purchases, or to serve wholesale

requirements customers), the Commission set for hearing the factual

issues associated with identifying those uses, as well as any potential

impediments or consequences to providing comparable services to third

parties.105

\105\Id. at 61,490-91.

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After AEP, the Commission applied this comparability standard to a

proposed open access transmission tariff that was filed by Kansas City

Power & Light Company in support of a proposal to sell generation at

market-based

rates.106 The Commission explained that, in light of AEP, the

utility's proposed open access transmission tariff (which provided only

for point-to-point service) did not adequately mitigate its

transmission market power so as to justify allowing the requested

market-based rates. KCP&L could charge market-based rates for sales

only if it modified its proposed transmission tariff to reflect the AEP

comparability standard.

\106\See Kansas City Power & Light Company, 67 FERC para. 61,183

(1994), reh'g pending.

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Since then, the Commission has required comparable service in a

variety of contexts, and has set for hearing the factual issues

associated with comparable service. For example, the Commission found

that market power can be adequately mitigated only if a merged company

offers transmission services in accordance with the AEP comparability

standard.107 The Commission further held that, even if a merger

does not result in an increase in market power, the merger would not be

consistent with the public interest under section 203 of the FPA unless

the merged company offers comparable transmission services, as defined

in AEP.108 The Commission therefore announced a transmission

comparability requirement for all new mergers:

\107\E.g., CSW, supra 68 FERC at 61,914.

\108\Id.

Given the transition of the electric utility industry as a

whole, we conclude that, absent other compelling public interest

considerations, coordination in the public interest can best be

secured only if merging utilities offer comparable transmission

services.109

\109\Id. at 915 (footnote omitted).

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In Heartland Energy Services, Inc.,110 the Commission applied

its comparability standard to an affiliated electric power marketer

seeking blanket authorization to sell electricity at market-based

rates. The Commission explained that

\110\68 FERC ] 61,223 (1994).

for all future cases involving blanket approval of market-based

rates an offer of comparable transmission services will be required

before the Commission will be able to find that transmission market

power has been adequately mitigated. In the context of an affiliated

power marketer, this means that all of its affiliated utilities must

have a comparable transmission tariff on file.111

\111\Id. at 62,060. In InterCoast Power Marketing Company, 68

FERC para. 61,248, clarified, 68 FERC para. 61,324 (1994), the

Commission rejected an affiliated marketer's proposal to sell at

market rates without its affiliate utility offering comparable

transmission services. The Commission stated that the only way to

ensure that InterCoast does not have transmission market power is to

require its affiliated public utility to offer comparable

transmission services. See also LG&E Power Marketing Inc., 68 FERC

para. 61,247 at 62,120-21 (1994). The Commission added that this is

consistent with encouraging competitive bulk power markets as

envisioned by the Energy Policy Act of 1992. Id. at 62,132.

The Commission also denied a request by a company affiliated with a

transmission-owning utility seeking permission to sell power at market-

based rates to a particular customer. The denial was without prejudice

to refiling such a request in a new section 205 proceeding, but only

after the affiliated transmission-owning utility filed a comparable

transmission service

tariff.112 The Commission added that it

\112\See Hermiston Generating Company, 69 FERC para. 61,035 at

61,164 (1994), reh'g pending. The Commission subsequently accepted

the rates on a cost basis. See Letter Order dated November 10, 1994.

will require comparability in any situation in which a seller

seeking market-based rates is affiliated with an owner or controller

of transmission facilities.113

\113\Id. at 61,165.

The Commission has also stated that ``it will henceforth apply the

transmission comparability standard announced in the AEP case to all

transmitting utility members of an RTG.''114 The Commission

further declared that comparable services must be provided through

``open access'' tariffs rather than only on a contract-by-contract

basis:

\114\See SWRTA, 69 FERC at 61,397; see also PacifiCorp, the

California Municipal Utilities Association, and the Independent

Energy Producers (on behalf of Western Regional Transmission

Association), 69 FERC para.61,099, order on reh'g, 69 FERC

para.61,352 (1994) (WRTA). An RTG is a regional transmission group.

It is defined as ``a voluntary organization of transmission owners,

transmission users, and other entities interested in coordinating

transmission planning (and expansion), operation and use on a

regional (and inter-regional.'' Policy Statement Regarding Regional

Transmission Groups, 58 FR 41626 (August 5, 1993), III FERC Stats. &

Regs., Regulations Preambles para.30,976 at 30,870 n.4 (RTG Policy

Statement).

[T]ariffs are essential to the provision of comparable services.

Tariffs set out the services that are available and the terms and

[[Page 17674]] conditions under which those services will be made

available * * *. [In contrast], a negotiation process creates

uncertainty and imposes on customers delay and other transaction

costs that the transmitting utility members of an RTG do not incur

when using the transmission for their own benefit. Moreover, the

ability to execute separate transmission agreements with different

but similarly situated customers is the ability to unduly

discriminate among them. A tariff ensures against such

discrimination in the RTG.115

\115\SWRTA, 69 FERC at 61,398.

Thus, the Commission required the RTGs to amend their bylaws to commit

all transmitting utility members to offer comparable transmission

services to other RTG members pursuant to a transmission tariff or

tariffs.

Most recently, the Commission has set for hearing whether

transmission tariffs meet the AEP comparability standard in

Commonwealth Edison Company,116 Wisconsin Electric Power

Company,117 and Wisconsin Public Service Corporation.118 In

all three cases, the company agreed in principle to provide comparable

service, but issues arose as to what constitutes such service.

\116\70 FERC para.61,204 (1995).

\117\70 FERC para.61,074 (1995).

\118\70 FERC para.61,075 (1995).

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c. Lack of Market Power in New Generation. In KCP&L, discussed in

the prior section, the Commission continued to recognize that

transmission remains a natural monopoly. However, it found that, in

light of the industry and statutory changes that now allow ease of

market entry, no wholesale seller of generation has market power in

generation from new facilities.119 In particular, the Commission

explained that it had previously noted in Entergy Services, Inc. that

\119\KCP&L, 67 FERC para.61,183 (1994).

there was significant evidence that non-traditional power

project developers, including qualifying facilities and independent

power projects, are becoming viable competitors in long-run

markets.120

\120\Id. at 61,557 (citing Entergy Services, Inc., 58 FERC

para.61,234 at 61,756 and nn.63 and 65 (Entergy)).

The Commission further explained that since Entergy, Congress had

enacted the Energy Policy Act, which had lowered barriers to the entry

of new suppliers by creating a new class of power suppliers--EWGs--that

are exempt from the provisions of PUHCA.121 The Commission

concluded that, in considering market-based rate proposals for

generation sales, it need only focus on market power in transmission,

generation market power in short-run markets, and other barriers to

entry.122

\121\Id. The Commission added that ``after examining generation

dominance in many different cases over the years, we have yet to

find an instance of generation dominance in long-run bulk power

markets.'' Id.

\122\Id. In KCP&L, the Commission declined to dismiss the

possibility of market power in generation associated with sales out

of existing capacity. As noted, however, we here seek comments on

whether, and if so under what conditions, to drop the generation

dominance standard in short-run markets, i.e., for sales from

existing capacity.

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d. Further Commission Action Addressing a More Competitive Electric

Industry. To address the fact that the electric industry is becoming

more competitive, and to remove barriers that might inhibit a more

competitive industry, the Commission has initiated a number of

additional proceedings: (1) Stranded Cost Notice of Proposed

Rulemaking,123 (2) Transmission Pricing Policy Statement,124

(3) Pooling Notice of Inquiry,125 and (4) Regional Transmission

Group (RTG) Policy Statement.126

\123\See supra note 5.

\124\See Inquiry Concerning the Commission's Pricing Policy for

Transmission Services Provided by Public Utilities Under the Federal

Power Act, 59 FR 55031 (November 3, 1994), III FERC Stats. & Regs.,

Regulations Preambles para.31,005 (Transmission Pricing Policy

Statement).

\125\See Inquiry Concerning Alternative Power Pooling

Institutions Under the Federal Power Act, 59 FR 54851 (October 26,

1994), IV FERC Stats. & Regs., Notices para.35,529 (1995) (Pooling

Notice of Inquiry).

\126\See Policy Statement Regarding Regional Transmission

Groups, 58 FR 41626 (August 5, 1993), III FERC Stats. & Regs.,

Regulations Preambles para.30,976 (RTG Policy Statement).

In the Stranded Cost NOPR the Commission recognized that the trend

toward greater transmission access and the transition to a fully

competitive bulk power market could cause some utilities to incur

stranded costs as wholesale requirements customers (or retail

customers) use their supplier's transmission to purchase power

elsewhere. As the Commission noted, a utility may have built facilities

or entered into long-term fuel or purchased power supply contracts with

the reasonable expectation that its customers would renew their

contracts and would pay their share of long-term investments and other

incurred costs. If the customer obtains another power supplier, the

utility may have stranded costs. If the utility cannot locate an

alternative buyer or somehow mitigate the stranded costs, the

Commission explained that ``the costs must be recovered from either the

departing customer or the remaining customers or borne by the utility's

shareholders.''127 Accordingly, the Commission proposed to

establish provisions concerning the recovery of wholesale and retail

stranded costs by public utilities and transmitting utilities.128

\127\Stranded Cost NOPR at 32,864.

\128\The Commission herein is making preliminary findings on

stranded costs and issuing a supplemental Stranded Cost NOPR,

seeking comments on the impact of our proposed open access NOPR on

stranded costs.

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In the Transmission Pricing Policy Statement, the Commission

announced a new policy providing greater flexibility in the pricing of

transmission services provided by public utilities and transmitting

utilities. The Commission traditionally had allowed only postage-stamp,

contract-path pricing.129 Under the new policy, it will permit a

variety of proposals, including distance sensitive and flow-based

pricing,130 which may be more suitable for competitive wholesale

power markets. The Commission explained that this ``[g]reater pricing

flexibility is appropriate in light of the significant competitive

changes occurring in wholesale generation markets, and in light of our

expanded wheeling authority under the Energy Policy Act of

1992.''131 However, the Commission explained that any new

transmission pricing proposal must meet the Commission's AEP

comparability standard. The Commission further explained that

comparability of service applies to price as well as to terms and

conditions.132

\129\Most transmission contracts set a single price for energy

flow over a utility's transmission system. This single-price policy

is called ``postage stamp'' pricing because the rate does not depend

on how far the power moves within a company's transmission system.

If power flows through several companies, traditional industry

practice is to specify that power flows along a ``contract path''

consisting of the transmission-owning utilities between the ultimate

receipt and delivery points. See infra discussion of Indiana

Michigan Power Company, 64 FERC para.61,184.

\130\Unlike with postage stamp pricing, with distance-sensitive

pricing the cost of moving power through a company depends on how

far the power moves within the company. In contrast to contract path

pricing, flow-based pricing establishes a price based on the costs

of the various parallel paths actually used when the power flows.

Because flow-based pricing can account for all parallel paths used

by the transaction, all transmission owners with facilities on any

of the parallel paths would be compensated for the transaction.

\131\Transmission Pricing Policy Statement at 31,136.

\132\Id. at 31,142.

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The Commission issued the Pooling Notice of Inquiry to receive

comments on traditional power pools and on alternative power pooling

institutions that are being explored in today's more competitive

environment. The Commission expressed concern that

[g]iven the ongoing changes in the competitive environment of

the electric utility industry--in particular, the potential for

substantially increased access to transmission--we must consider

whether we [[Page 17675]] are appropriately balancing our dual

objectives of promoting coordination and competition.133

\133\Pooling Notice of Inquiry at 35,715.

Accordingly, the Commission explained that it wished to look at

alternative power pooling institutions and to re-examine the role of

more traditional power pools in today's environment of increased

competition. In particular the Commission expressed its intent to

ensure that its policies ``are consistent with the development of a

competitive bulk power market.''134

\134\Id. at 35,714.

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In the RTG Policy Statement, the Commission announced a policy

encouraging the development of RTGs. The Commission explained that a

primary purpose of RTGs is to facilitate transmission access for

potential users and voluntarily resolve disputes over such service. The

Commission has recently conditionally approved the formation of two

RTGs.135 One of the conditions is that each RTG member must offer

comparable transmission services by tariff to other RTG members.

\135\See WRTA and SWRTA, supra.

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In addition to the Commission's actions, a number of states have

initiated proceedings concerning retail wheeling or proposed

legislation for retail wheeling, that is, for ultimate consumers to

choose their supplier of power.136

\136\The Energy Information Administration recently indicated

that at least nine states--California, Connecticut, Illinois,

Michigan, Nevada, Ohio, Texas, Utah, and Vermont have proposals or

legislation for retail wheeling. EIA, Performance Issues for a

Changing Electricity Power Industry, January 1995 19-22. Most

prominent among the recent state proposals are the California Public

Utility Commission's ``Blue Book'' proposal (Order Instituting

Rulemaking on the Commission's Proposed Policies Governing

Restructuring California's Electric Services Industry and Reforming

Regulation, R. 94-04-031; Order Instituting Investigation on the

Commission's Proposed Policies Governing Restructuring California's

Electric Services Industry and Reforming Regulation, I. 94-04-032)

and the Michigan Public Service Commission's proposal (Interim Order

on Experimental Retail Wheeling Program, Case No. U-10143/U-10176

(April 11, 1994)).

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D. Need for Reform

The many changes discussed above have converged to create a

situation in which new generating capacity can be built and operated at

prices substantially lower than many utilities' embedded costs of

generation. As discussed above, new generation facilities can produce

power on the grid at a cost of 3 to 5 cents per kWh, yet the costs for

large plants constructed and installed over the last decade were

typically in the range of 4 to 7 cents per kWh for coal plants and 9 to

15 cents for nuclear plants. Non-traditional generators are taking

advantage of this opportunity to compete. Indeed, the non-traditional

generators' share of total U.S. electricity generation increased from 4

percent in 1985 to 10 percent in 1993.137 Much of this increased

share of generation is the result of competitive bidding for new

generation resources that has occurred in 37 states. Since 1984, almost

4,000 projects, representing over 400,000 MW, have been offered in

response to requests. Over 350 projects have been selected to supply

20,000 MW, and, of these, 126 are now online producing almost 7,800 MW

of power.138 In addition, the cost of utility-generated

electricity differs widely across the major regions of the United

States. Average utility rates range from 3 to 5 cents in the Northwest

to 9 to 11 cents in California.139 Electricity consumers are

demanding access to lower cost supplies available in other regions of

the United States, and access to the newer, lower cost generation

resources. It is also important that the non-traditional generators of

cheaper power be able to gain access to the transmission grid on a non-

discriminatory open access basis.

\137\Energy Information Administration, Performance Issues for a

Changing Electric Power Industry (January 1995) 10 and (Figure 5).

\138\Current Competition, November 1994, Vol. 5, No. 8, at 8.

\139\See map attached as Appendix A. This Appendix will not

appear in the Federal Register.

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The Commission's goal is to ensure that customers have the benefits

of competitively priced generation. However, we must do so without

abandoning our traditional obligation to ensure that utilities have a

fair opportunity to recover prudently incurred costs and that they

maintain power supply reliability. As well, the benefits of competition

should not come at the expense of other customers. The Commission

believes that requiring utilities to provide non-discriminatory open

access transmission tariffs, while simultaneously resolving the

extremely difficult issue of recovery of transition costs (discussed

infra), is the key to reconciling these competing demands.

Non-discriminatory open access to transmission services is critical

to the full development of competitive wholesale generation markets and

the lower consumer prices achievable through such competition.140

Transmitting utilities own the transportation system over which bulk

power competition occurs and transmission service continues to be a

natural monopoly. Denials of access (whether they are blatant or

subtle), and the potential for future denials of access, require the

Commission to revisit and reform its regulation of transmission in

interstate commerce. Such action is required by the FPA's mandate that

the Commission remedy undue discrimination.

\140\As discussed above, only a minimal number of public

utilities have any form of an ``open access'' tariff on file with

the Commission and no public utility has on file a non-

discriminatory open access tariff as defined by this rule.

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1. Market Power

Unlike new generating capacity (see prior discussion of KCP&L),

transmission remains and is expected to remain a natural monopoly. The

Commission has addressed the natural monopoly character of transmission

in the major cases summarized above and in the Commission's recent

Transmission Pricing Policy Statement. The monopoly characteristic

exists in part because entry into the transmission market is restricted

or difficult.141 In addition, as unit costs are less for larger

lines and networks, transmission facilities still exhibit scale

economies. From an economic, environmental, and aesthetic viewpoint, it

is often better for a single owner (or group of owners) to build a

single large transmission line rather than for many transmission owners

to build smaller parallel lines on a non-coordinated basis.

\141\An example of this is that, except in the limited case of

licensed hydroelectric projects under Part I of the FPA, there is no

Federal right of eminent domain available to assist in acquiring

rights of way for new transmission lines. In addition, the

regulatory requirements to build a transmission line vary from state

to state. In all states, siting new transmission lines is getting

harder.

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Further, effective competition among owners of parallel

transmission lines is unlikely, and often impossible, with existing

practices and technology. For example, on an alternating current (AC)

electric system, electricity flows on parallel paths based on the

impedance of each path. With two electric systems providing parallel

contract paths, a share of the actual power flows would occur on each

system according to the physical characteristics of the system. Thus,

each of the two transmission service providers would have the incentive

to underbid the other because the winner would receive all of the

transmission revenues, but only incur a fraction of the costs. The

loser, on the other hand, would incur the remaining costs, but would

receive no revenues.

In today's electric industry, which is dominated by vertically

integrated utilities, an owner or controller of transmission service

can exclude generation competitors from the market, thereby favoring

the transmission [[Page 17676]] owner's own generation. This can occur

through outright denial of transmission access, or, as is more likely,

through access that is discriminatory as to rates, terms or conditions

of service.142 Thus, in the absence of non-discriminatory open

access tariffs, the development of fully competitive bulk power markets

cannot occur, and consumers will be deprived of the benefits that would

be expected from such a competitive market.

\142\See, e.g., David W. Penn, A Municipal Perspective on

Electric Transmission Access Questions, Pub. Util. Fort. 18-19 (Feb.

6, 1986).

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2. Discriminatory Access

Some transmission-owning utilities have voluntarily begun to offer

unbundled transmission tariff services to third-party suppliers and

purchasers of wholesale power, though none have done so to the extent

proposed by this proposed rule.143 However, because utilities are

naturally profit maximizers and monopoly suppliers to their native

load, the vast majority of transmission-owning utilities have not

agreed to give up their market power voluntarily. Transmission-owning

utilities have an incentive to deny access either by not filing any

open access tariff or by filing a tariff that offers services inferior

to those used by the transmission owner. This is particularly true for

those utilities that emerged from the recent decades of technological

and legal changes as high-cost generation companies. Open access

transmission places their existing generation at risk because their

wholesale customers may seek alternative lower price suppliers. It is

in their self-interest to maintain and use market power to retain (or

expand) market share for their existing generation facilities, at least

until they can get their generation costs in line with current market

prices. Because generating units are usually depreciated over a 30- to

50-year physical life, many high cost companies may attempt to exercise

transmission market power for decades to preserve the value of past

generation investments.

\143\The majority have offered only point-to-point services.

However, a few utilities have sought to comply with the non-

discrimination (comparability) standard announced in AEP. For

example, Kansas City Power & Light Company (KCP&L) and Louisville

Gas & Electric Company (LG&E) recently filed settlements to this

effect. KCP&L, Docket No. ER94-1045 (settlement filed February 14,

1995) and LG&E, Docket No. ER94-1380 (settlement filed February 10,

1995).

Unless all public utilities are required to provide non-

discriminatory open access transmission, the ability to achieve full

wholesale power competition, and resulting consumer benefits, will be

jeopardized. If utilities are allowed to discriminate in favor of their

own generation resources at the expense of providing access to others'

lower cost generation resources by not providing open access on fair

terms, the transmission grid will be a patchwork of open access

transmission systems, systems with bilaterally negotiated arrangements,

and systems with transmission ordered under section 211. Under such a

patchwork of transmission systems, sellers will not have access to

transmission on an equal basis, and some sellers will benefit at the

expense of others. The ultimate loser in such a regime is the consumer.

A patchwork of transmission systems will also result in

inefficiencies across the Nation's transmission grids. Because of the

physical properties of the transmission system, electric power moves

over parallel transmission lines from generator to load, without regard

to whether a line is part of a system providing open access or

not.144 However, today the industry develops transmission

contracts as if power flowed along one series of lines belonging to

specific owners, which is called the ``contract path.'' Thus,

transmission users will search for contract paths through open access

systems to take advantage of the non-discriminatory open access

tariffs. Because open access transmission tariffs include an obligation

to expand when necessary to accommodate third-party requirements for

service, transmitting companies offering open access services across

their systems could end up constructing a disproportionate share of new

transmission facilities.

\144\In Indiana Michigan Power Company, 64 FERC para. 61,184

(1993), the Commission explained loop flows and parallel power

flows:

In general, utilities transact with one another based on a

contract path concept. For pricing purposes, parties assume that

power flows are confined to a specified sequence of interconnected

utilities that are located on a designated contract path. However,

in reality power flows are rarely confined to a designated contract

path. Rather, power flows over multiple parallel paths that may be

owned by several utilities that are not on the contract path. The

actual power flow is controlled by the laws of physics which cause

power being transmitted from one utility to another to travel along

multiple parallel paths and divide itself among those paths along

the lines of least resistance. This parallel path flow is sometimes

called ``loop flow.''

Id. at 62,545.

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Expansion cannot be efficient under such a patchwork of open access

transmission systems. Not only would this misallocate cost burdens to

open access companies, but it is unlikely that the optimal transmission

development will always be within their service territories. Expansion

on closed systems, instead of open systems, may in some cases be the

more efficient way to relieve constraints. Thus, a patchwork of open

access systems will not result in the least cost expansion of the

Nation's transmission grids. In addition, states with open access

utilities may refuse to site new lines if their closed access neighbors

are not doing their share.145

\145\The Commission partially addressed this concern by allowing

reciprocity provisions in open access transmission tariffs. See,

e.g., Southwestern Electric Power Company and Public Service Company

of Oklahoma, 65 FERC para. 61,212 at 61,981-82 (1993), order on

reh'g, 66 FERC para. 61,099 (1994).

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A discriminatory, patchwork system also works against pricing

parallel power flows on a sensible regional basis. The formation of

effective regional transmission groups, which the Commission strongly

encourages, would be fostered if all utilities in a region offered non-

discriminatory open access.146 In fact, optimal cooperative

regional action would involve all transmission systems in the region

offering non-discriminatory open access to all wholesale customers.

\146\While the Commission has conditioned its approval of RTGs

to achieve this same result, the formation of RTGs is voluntary. By

contrast, compliance with the final rules adopted in this proceeding

will be required.

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A transmission-owning utility may deny access to third parties not

only to avoid losing its own generation sales, but also to maintain

other trading gains. For example, a company can buy low cost power for

its own use from a neighbor at a low price if other buyers cannot reach

that neighbor to bid up the price. Furthermore, if it does not need the

energy, it can market that power by buying low and selling high.

In the past, transmission-owning utilities have discriminated

against others seeking transmission access. Transmission-owning

utilities have denied access by outright refusals to deal. While such

actions tend to be rare, likely because transmission owners fear they

may trigger antitrust action,147 they have occurred.148 More

often, however, discrimination is likely to be manifested more subtly

and indirectly.149 One such [[Page 17677]] way would be for

transmission owners to adopt a negotiating strategy that involves a

sequence of informational and other requirements over a protracted

period of time. By the time all of the requirements are finally

satisfied, the window for the customer's trade opportunity has

closed.150 Another way of frustrating access is to substantially

change the terms of negotiated agreements through protracted delay,

including filings with regulatory agencies.151

\147\See, e.g., Penn, supra note 142, at 18.

\148\Otter Tail Power Company refused to wheel power for the

village of Elbow Lake. The Supreme Court ultimately ruled against

Otter Tail on antitrust grounds. Otter Tail Power Company, 410 U.S.

366 (1974). The Commission has also found that Utah Power & Light

Company consistently refused to permit the wheeling of low-cost

power across its system in order to use its strategically located

bottleneck transmission system to extract monopoly prices. Utah

Power & Light Company, supra, 45 FERC at 61,287 and n.137 (1988).

\149\See, e.g., Penn, supra note 142, at 18-19 (discussion of

methods used to deny access). Penn also noted in his 1986 article

that the American Public Power Association had conducted a survey of

its members in which about 25% indicated a problem in securing

transmission in effecting coordination services and about an equal

amount had reported being denied transmission access in the recent

past. Id. at 18. See also Pacific Gas & Electric Company, 51 FPC

1030, 1031-32, reh'g denied, 51 FPC 1543 (1974) (parties alleged

that public utility proposed ``a wholesale rate so high that its

wholesale customers would be unable to compete with PG&E for large

industrial retail loads'' and entered into restrictive and

anticompetitive contracts that strengthened public utility's

monopoly).

\150\Members of the Coalition for a Competitive Electricity

Market alleged that they have encountered this strategy. Coalition

Petition at 13, n.19.

\151\An example of this tactic is evident in the history of

Pacific Gas and Electric Company's (PG&E) attempt to avoid its

commitments made to the California owners of the California-Oregon

Transmission Project (COTP). The owners had originally planned the

COTP to have its southern terminus at the Midway station with

Southern California Edison. PG&E convinced them to terminate the

project instead at PG&E's Tesla station and indicated that PG&E

would provide transmission service the rest of the way south to

Midway. PG&E promised this service in 1989 (in what came to be known

as the South of Tesla Principles). PG&E spent the next four years

filing substitute provisions for what it had promised in the

Principles. See Pacific Gas and Electric Company, 65 FERC para.

61,312 at 62,428-30 and n.22, remanded on other grounds, Pacific Gas

& Electric Company v. FERC, No. 94-70037 (9th Cir. June 23, 1994)

(unpublished opinion), order on remand, 69 FERC para. 61,006 (1994).

Another way for transmission-owning utilities to frustrate access

and competition is to allow access, but only on non-comparable or

unsupportable terms and conditions that are inferior to the conditions

under which the transmission owners themselves use or could use the

transmission grid or on terms and conditions that have no operational

or financial basis. Discrimination can be exercised this way in the

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following areas:

(1) Network Service. Network service allows a transmission

customer to distribute a given amount of transmission usage between

specified resources and specified loads without having to pay

multiple charges for each resource-load pairing. Transmission owners

can refuse to provide service on these terms and instead insist on

charges that are a function of the number of resource load

pairings.152 This can dramatically increase the cost of such

service. Such treatment does not reflect the way transmission

owners' costs are allocated to their own native load customers.

\152\See Pacific Gas and Electric Company, 52 FERC para. 61,347

at 62,375-76 (1990) (proposal to charge a base demand and a

flexibility adder for an integrating transmission service). PG&E

eventually withdrew the proposal. 56 FERC para. 61,373 at 62,429

(1991); see also Florida Municipal Power Agency v. Florida Power &

Light Company, 65 FERC para. 61,125 (1993) (Federal Municipal Power

Agency requested a section 211 order directing network service);

Tex-La Electric Cooperative of Texas, 67 FERC para. 61,019 at 61,057

(1994) (Tex-La requested a section 211 order directing network

service).

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(2) Pricing. Transmission service can be made unattractive to

third-party customers by pricing such service on a basis that is

different from that used by the transmission owner and that results

in higher rates. One example would be charging third-party customers

distance-sensitive rates, while pricing all similar transmission

bundled with power services on a postage stamp basis.153

\153\See notes 129 and 130, supra; see also Tex-La Electric

Cooperative of Texas, 69 FERC para. 61,269 at 62,034-35 (1994), in

which the Commission found this practice to be unduly

discriminatory.

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(3) Service Priority. The priority of transmission service is a

critical service factor. The transmission provider could

disadvantage third-party transmission customers by making firm

transmission service to them subordinate to the transmission

utility's native load service.154

\154\See AEP, 64 FERC at 62,971-72.

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(4) Scheduling and Balancing Provisions. A transmission owner

could hold transmission customers to unnecessarily long lead times

to change power schedules. In some cases, scheduling could be

required as much as a month ahead of time.155 This precludes

transmission customers from using their service for short-term

trading. Transmitting utilities may also insist that customers keep

strict adherence to scheduling and balancing provisions by requiring

them to get back on schedule quickly or face stiff

penalties.156 One example of a stiff penalty for failure to

schedule sufficient power would be to assess shortfalls based on a

partial requirements rate with an 11-month ratchet.157 In

contrast, transmitting utilities may have access to less costly

balancing alternatives, such as substituting resources without

notice or borrowing capacity from neighboring utilities and settling

the imbalance by returning energy in-kind within a much longer time

period than allowed to customers.158

\155\Id.

\156\See Coalition Petition at 20-21.

\157\See Borough of Zelienople, 70 FERC para. 61,073 at 61,184

(1995) (load exceeding schedule by 1 MW would be filled at a partial

requirements rate using a 60% demand ratchet for 11 months, i.e., 1

MW times 60% times $9.30 per kW times 11, for a total of $61,380).

\158\See Coalition Petition at 20-21.

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(5) Use of Firm Transmission Capacity. Transmission owners can

unnecessarily restrict the firm transmission capacity made available

to transmission customers. One way to restrict service would be to

prohibit the customer from reassigning such capacity when it is not

needed.159 This restricts the customer's ability to manage the

risk of long-term capacity purchases and to compete as a seller in

the transmission service market. Another example would be that the

transmission owner could restrict a customer's use of transmission

capacity by allowing sales only from the customer's generating

resources that are temporarily in excess of actual load

needs.160 Transmission owners do not face these restrictions in

their own use of transmission capacity.

\159\See, e.g., Pacific Gas and Electric Company, 53 FERC para.

61,145 at 61,505 (1990) (utility proposed a reassignment prohibition

on the use of Reserve Transmission Service available to the

Sacramento Municipal Utility District under a proposed

Interconnection Agreement).

\160\Id. at 61,504-05 (utility proposed an export restriction on

the use of Reserve Transmission Service available to the Sacramento

Municipal Utility District under a proposed Interconnection

Agreement).

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(6) Ancillary Services. A transmitting utility may offer to a

transmission customer ancillary services (e.g., scheduling) that are

inferior to the services it provides for itself. Transmission owners

may be free to choose whether to supply some of these services to

themselves or contract for them if available more cheaply

elsewhere.161 Third-party transmission customers do not always

have this option on a comparable basis.

\161\See Coalition Petition at 28-29 and 32.

(7) Creditworthiness and Security Deposits. Customers are

sometimes required to make onerous deposits in order to obtain

service.162

\162\For example, it is reported that one customer was told that

a $13 million line of credit would be required to ensure

creditworthiness for a request of only one MW of transmission

capacity for a coordination trade. See Coalition Petition at 30.

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(8) Reciprocity Double Payments. Transmission agreements often

require reciprocity. Non-transmission owners could be required to

contract with, and pay, third-party transmitting utilities to

provide the required reciprocal service.163 Transmission owners

do not face such obstacles in using their own systems.

\163\See Coalition Petition at 25; see also AES Power, Inc., 69

FERC para.61,345 at 62,295 and 62,301 (1994) (AES).

Finally, an additional way for transmission-owning utilities to

frustrate access and competition is by granting each other superior

rights and lower rates--compared to those available to non-transmission

owning customers--in pools, interconnection agreements, and other

protocols.164 For example, pool-wide transmission service can be

made available to members at rates less than those that each member

would separately propose under traditional rate methods. This could

disadvantage non-transmission owners if pool membership is restricted

or if it requires excessive or vaguely stated transmission

contributions that could be difficult to meet.165

\164\See Coalition Petition at 13-14.

\165\See Mid-Continent Area Power Pool, 69 FERC para.61,347 at

62,308 (1994).

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Section 211 is not always a sufficient remedy for this

discriminatory behavior. Third parties may seek non-discriminatory

transmission under section 211, but they will not be able to compete if

the sale or purchase [[Page 17678]] opportunity is gone before a final

order can be obtained under section 211. This could be the case in many

situations because of the procedural requirements of sections 211 and

212.166 Indeed, to date, the Commission has received eighteen

section 211 transmission requests,167-168 which it has tried to

process expeditiously within the procedural constraints contained in

sections 211 and 212. As to the seven requests that have received a

final order, the average elapsed time from date of filing to the date

of a final order was 9 months. The remaining ten requests have been

pending, on average, more than 6 months.

\166\For example, an applicant must make a request for

transmission service to the transmitting utility at least 60 days

before filing an application with the Commission for an order to

provide transmission. The Commission must first issue a proposed

order and allow the parties a reasonable time to negotiate agreeable

terms and conditions before it can issue a final order. Moreover, a

final order faces possible rehearing and a court appeal.

\167-168\One request was withdrawn.

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The following sets forth the status of the section 211 cases filed

with the Commission:

------------------------------------------------------------------------

Date of Months

Docket No. application Status pending

------------------------------------------------------------------------

TX93-1...... 01/19/93 Final Order-7/29/93................. 6

TX93-2...... 06/18/93 Final Order-7/1/94.................. 12

TX93-3...... 06/30/93 Withdrew-9/10/93.................... 2

TX93-4...... 07/02/93 Final Order-5/11/94................. 10

TX94-1...... 10/21/93 Final Order-7/6/94.................. 9

TX94-2...... 11/04/93 Pendinga............................ 16

TX94-3...... 11/09/93 Final Order-7/13/94................. 8

TX94-4...... 12/15/93 Final Order-12/1/94................. 11

TX94-5...... 04/15/94 Final Order-3/23/95................. 11

TX94-6...... 07/05/94 Pending............................. 8

TX94-7...... 07/15/94 Pendinga............................ 8

TX94-8...... 08/05/94 Pending............................. 7

TX94-9...... 09/09/94 Pendinga............................ 6

TX94-10..... 09/16/94 Pending............................. 6

TX95-1...... 10/11/94 Pending............................. 5

TX95-2...... 10/17/94 Pending............................. 5

TX95-3...... 01/19/95 Pending............................. 2

TX95-4...... 01/24/95 Pending............................. 2

------------------------------------------------------------------------

aA proposed order has been issued.

As the wholesale power markets become more competitive, delayed

access becomes a matter of increasing concern. Not only have long-term

purchases from non-traditional generators become more important, but

short-term firm and non-firm power sales and purchases create

significant profit or cost-saving opportunities for utilities,

marketers, and their customers. As a result, market participants are

exploring various ways to reduce their costs through trading. These

include poolcos, changes to existing pools, short-term trading systems,

and futures contracts.169 We do not see how such options will work

unless all parties have non-discriminatory transmission access rights

and hour-to-hour access without having to go through a regulatory

proceeding for each trade.

\169\We note that NEPOOL and MAPP are currently exploring ways

to modify their pool structures to accommodate competitive power

markets. As noted in the Pooling Notice of Inquiry, supra, the

poolco concept basically involves an independent entity that would

control the operation of all transmission facilities and some or all

generating facilities in a region. It would be open and would

provide transmission service to all generators. Thus, the poolco

would create a spot market for power in the region.

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In today's emerging competitive wholesale power markets, the

practices of some transmission-owning utilities are unduly

discriminatory and anticompetitive. These practices produce market

distortions today, undermine the goal of the Energy Policy Act to

create competitive bulk power markets, and will continue if this

Commission does not take action. Most important, they can harm

consumers by denying them the benefits of competitively priced power.

We seek additional specific examples of such practices.

3. Analogies to the Natural Gas Industry

The electric industry today is analogous in many ways to the

natural gas industry before the Commission issued Order Nos. 436 and

636.170 Then, natural gas pipelines were primarily merchants

offering a bundled sales service, which provided gas to customers at

the city-gate from the pipelines' own system supplies. In addition,

pipelines moved a relatively small amount of third-party gas under a

separate transportation service. To meet their sales service

obligations, pipelines purchased most of their system supply from

third-party producers under long-term contracts. In the early 1980s,

due to changing market conditions, the prices under many of these

contracts ended up being higher than those available in the then

evolving spot market. Because of the long-term contracts and the

resulting higher cost gas, system supply gas tended to be more costly

than gas that the customers could buy in the competitive spot market.

At the same time, the transportation service bundled with a pipeline's

sales service was usually superior to the transportation service third

parties could obtain. Essentially, the pipeline would provide itself

service that had much greater flexibility and often promised greater

reliability than that available to third-party shippers. Pipelines had

a considerable incentive to maintain this difference in transportation

service quality to make their own, more expensive gas more attractive.

\170\Order No. 436, Regulation of Natural Gas Pipelines After

Partial Wellhead Decontrol, FERC Regulations Preambles para.30,665

(1985); Order 636, Pipeline Service Obligations and Revisions to

Regulations Governing Self-Implementing Transportation Under Part

284 of the Commission's Regulations; and Regulation of Natural Gas

Pipelines After Partial Wellhead Decontrol, 57 FR 13267 (April 16,

1992), III FERC Stats. & Regs., Regulations Preambles para.30,939

(Order No. 636), appeal pending.

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A similar situation exists today in the electric industry.

Traditional public utilities deliver bundled service--generation and

transmission--to most of their wholesale customers. They have monopoly

control over transmission facilities and thus control access to their

customers. The lack of non-discriminatory access to transmission

services raises the same general concerns that were prevalent in the

gas industry. Accordingly, unless similar regulatory measures are

undertaken, the Commission expects the same type of discriminatory and

anticompetitive behavior will continue in the electric industry as was

present in the gas industry, because denying non-discriminatory access

will continue to be in the economic self-interest of transmission

monopolists, absent regulatory changes.171

\171\See AGD, supra, 824 F.2d at 1008 (``Agencies do not need to

conduct experiments in order to rely on the prediction that an

unsupported stone will fall.''). The ongoing discriminatory behavior

by owners or controllers of transmission in the electric industry is

detailed supra.

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In its regulation of interstate pipelines under the Natural Gas Act

(NGA) the Commission initially addressed the problem of undue

discrimination in Order No. 436, finding natural gas pipeline practices

to be unduly [[Page 17679]] discriminatory under the NGA172 and

effectuating ``open access'' transportation. The Commission in that

order sought to make transportation available to third parties on a

non-discriminatory basis. The Commission provided that, if a pipeline

held itself out as a transporter of gas for others, it must provide

that service to all shippers without discrimination. At the same time,

the Commission allowed pipelines and their customers to retain the

traditional bundled sales and transportation services under existing

certificate authority.

\172\In this regard, sections 4 and 5 of the NGA are virtually

identical to sections 205 and 206 of the FPA.

As a result of Order No. 436, pipelines became primarily

transporters of natural gas. However, in Order No. 636, the Commission

noted that pipelines were still providing, albeit at a reduced level, a

bundled, city gate, sales service in competition with third-party sales

and transportation, and concluded that the competition was not

occurring on an equal basis. The Commission also noted that pipelines'

natural gas sales prices exceeded those of their competitors, much as

electric utilities' embedded costs can exceed the cost of new

generating capacity and excess generating capacity of others. In this

regard, the Commission determined that the transportation service

bundled with pipelines' sales service was superior to that made

available to third parties and that pipelines and unregulated

competitors were not selling the same product.173 Accordingly, in

Order No. 636, the Commission found this behavior anticompetitive and

required pipelines to ``unbundle'' their sales services from their

transportation services and to provide open access transportation

service that is equal in quality for all gas supplies whether purchased

from the pipeline or some other supplier.174

\173\Order No. 636 at 30,402. The Commission explained that

pipelines were selling a regulated bundled sales and transportation

service, but that their competitors were generally selling only the

gas commodity. The Commission also recognized that pipelines were at

a competitive disadvantage due to their certificate and contractual

obligations to their firm sales customers. Id. at 30,403.

\174\Order No. 636 at 30,393-94.

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Our experience in the gas area influences our decision that, at a

minimum, functional unbundling of wholesale services is necessary in

order to obtain non-discriminatory open access and to avoid

anticompetitive behavior in wholesale electricity markets.

4. Coordination Rates

In finding a need for non-discriminatory open access transmission,

the Commission has considered the structure of the coordination market,

i.e., the market for wholesale sales to a public utility's non-

requirements customers. Utilities now engage in coordination trades

primarily under rates no lower than the seller's variable cost and no

higher than that variable cost plus 100% contribution to the fixed

costs of the production unit used to price energy and the relevant

transmission facilities. This rate flexibility allows the buyer and

seller to negotiate a price reflecting the market at the time of the

sale, including the number of buyers and sellers, the relative

incremental and decremental variable costs, and the amount of savings

attainable by transacting. Thus, while the seller's ceiling rate

reflects some measure of fixed and variable costs, the actual

transaction price is set, to a certain extent, by the marketplace. This

marketplace, however, may be skewed by the general lack of transmission

access, and the resulting price may be considerably above prices in a

fully competitive market.

Some utilities transact under a split-savings rate that generally

sets the price halfway between the seller's incremental variable cost

and the buyer's decremental variable cost. Here again, price is a

function of the alternatives reachable through the transmission grid at

the time of the transaction. This rate form is primarily used today to

distribute the savings derived from the central dispatch of power pools

on an after-the-fact basis.

The Commission believes that unless the participants in

coordination markets mitigate their transmission market power, market-

driven prices for coordination trades may no longer be just and

reasonable. Thus, our preliminary conclusion is that current

coordination pricing is no longer justified in the absence of a tariff

offer of non-discriminatory open access transmission services by the

seller (owning or controlling transmission) in a coordination

transaction.175 The Commission's past practice of allowing such

pricing for coordination trades appears to be inconsistent with

emerging competitive markets unless those who benefit from such trading

offer access to other, lower-priced trading opportunities. We seek

comments on this issue.

\175\As discussed infra, sellers must also meet the Commission's

other requirements to obtain market-based rates.

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E. The Proposed Regulations

The goals of the proposed regulations are two-fold: (1) To

facilitate the development of competitive wholesale bulk power markets

by ensuring that wholesale purchasers of electric energy and wholesale

sellers of electricity can reach each other by eliminating

anticompetitive practices and undue discrimination in transmission

services; and (2) to address the transition costs associated with the

development of competitive wholesale markets. This section addresses

the elimination of undue discrimination. Transition costs are addressed

below in Section F.

Non-discriminatory open access transmission is critical to the

ability of sellers to compete on a fair basis and the ability of

purchasers to reach the lowest priced generation options. Thus far, the

Commission has developed an open access comparability requirement on a

case-by-case basis. We have directed our administrative law judges, to

whom the various cases have been referred, to examine the factual

circumstances surrounding a utility's use of its own system vis-a-vis

the type of service provided to third parties. Nonetheless, it has now

become evident to us that it is necessary for the Commission to define

the parameters of a non-discriminatory open access tariff much more

precisely.

Until now, we have been applying the new standard of what

constitutes undue discrimination only to new voluntary tariff filings.

We now no longer believe it is appropriate to apply this standard so

narrowly; therefore, we are proposing to require all public utilities

to offer non-discriminatory open access services in accord with the

proposed rule and the attached tariffs. This broad application is

consistent with our determination that undue discrimination by

jurisdictional public utilities must be prevented or remedied. It is

also consistent with our desire to bring further efficiencies to the

provision of electric service by encouraging competitive bulk power

markets.

1. Non-discriminatory Open Access Tariff Requirement

Transmission owners can discriminate by restricting access to, or

restricting expansion of, transmission facilities, or by restricting

access to the ancillary services that control the generation resources

on the transmission grid.176 To ensure that all

[[Page 17680]] participants in wholesale electricity markets have non-

discriminatory open access to the transmission network, transmission

owners must offer non-discriminatory open access transmission and

ancillary services to wholesale sellers and purchasers of electric

energy in interstate commerce.177 This will require tariffs that

offer point-to-point and network transmission services, including

ancillary services. All of these services must be non-discriminatory as

to price as well as to non-price terms and conditions. Services must be

available to any entity that could obtain transmission services under

section 211.

\176\Examples of ancillary services (which include control area

services) are: Scheduling service between control areas, and various

services that facilitate power movements within control areas, e.g.,

dispatch service, load following service, imbalance resolution

service, reactive power support, and operating reserves. We invite

comment on definitions of these terms and their component parts.

Regardless, the proposed rule would require that all ancillary

services be offered on a non-discriminatory basis.

\177\See generally William W. Hogan, Reshaping the Electricity

Industry, Prepared for the Federal Energy Bar Conference, ``Turmoil

for the Utilities,'' 5 Washington, D.C. (Nov. 17, 1994):

Commercial functions must facilitate non-discriminatory,

comparable open access and support market operations in the

competitive sectors. The EPAct requirements and the FERC

implementation emphasize the need to obtain market access under

terms and conditions that support competition. Everyone should have

equal access to and use of essential facilities, particularly

transmission, with the rights of ownership limited to compensation

consistent with opportunity costs in a competitive market.

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In our AEP rehearing order and in several subsequent cases,178

we set for hearing the following issues:

\178\See, e.g., AEP, 67 FERC at 61,491.

1. The different uses that a transmission owner makes of its

transmission system and whether there are any operational

differences between any particular use that the owner makes of the

system and the use third parties might need, and in particular, the

degree of flexibility the transmission owner accords itself in using

its transmission system for different purposes.

2. Any potential impediments or consequences to providing a

particular service to third-party transmission customers which is

the same or comparable to service that the transmission owner

provides itself.

3. The costs that the transmission owner incurs in providing

transmission associated with its use of the system, and whether the

costs to provide such service or comparable service to third parties

would be different.

Based on what we have learned in the past year, the Commission proposes

to address these issues generically. Concurrently with this order, the

Commission is issuing a separate order on how a final rule would apply

to pending cases.179 We believe that the parties and the

administrative law judges in the individual pending proceedings should

continue their efforts, but in doing so should take into account the

principles announced in this proposed rule. This will permit any fine

tuning of the broader principles announced here and set forth in the

pro forma tariffs that may be necessary to recognize the individual

circumstances of particular systems.

\179\Order Providing Guidance Concerning Pending and Future

Proceedings involving Non-discriminatory Open Access Transmission

Services, Docket Nos. ER93-540-000, et al.

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With regard to the first issue, the Commission believes that all

utilities use their own systems in two basic ways: to provide

themselves point-to-point transmission service that supports

coordination sales, and to provide themselves network transmission

service that supports the economic dispatch of their own generation

units and purchased power resources (integrating their resources to

meet their internal loads).180 This network transmission service

is bundled as part of retail service and as part of wholesale

requirements service, and is the fundamental support of a utility's

dispatch that underlies its trading in the wholesale coordination

market.181

\180\While there may be any number of specific services used by

a particular customer, we have concluded, after analyzing the

historical types of transmission service tariffs on file, as well as

the tariffs filed in the ongoing comparability proceedings, that all

transmission services generally fall within these two categories.

\181\A utility's own coordination purchases may involve hourly

scheduled transfers of fixed blocks of power. These schedules are

supported by the utility's own network transmission service used for

its economic dispatch. Consequently, network service is covered by

the proposed rule because it supports a utility's coordination

purchases, regardless of whether or not the utility has any

requirements customers that also would use network service.

The Commission has preliminarily concluded that third parties may

need one or both of these basic uses in order to obtain competitively

priced generation or to have the opportunity to be competitive sellers

of power. The Commission therefore proposes that all public utilities

must offer both firm and non-firm point-to-point transmission service

and firm network transmission service on a non-discriminatory open

access basis in accord with the proposed rule and the attached tariffs.

The Commission believes that a utility's tariff must offer to provide

any point-to-point transmission service and network transmission

service that customers need, even though the utility may not provide

itself the specific service requested. For example, a utility may not

provide itself ``wheeling-through'' service,182 which is a

specific form of point-to-point service. However, because ``wheeling-

through'' service is merely a subset of basic point-to-point service,

which the utility does provide to itself, the Commission will require a

utility to provide such service.183 Similarly, a utility may

contend that it does not provide non-firm point-to-point service to

itself because all of its transmission investment results in firm

entitlements. Nonetheless, the utility provides itself with the

functional equivalent of non-firm service when it uses, subject to

curtailment or interruption, capacity that is temporarily unused by

other firm reservation holders. Therefore, it must offer non-firm

point-to-point service.

\182\``Wheeling through'' refers to transmittal of electric

energy through a transmitting utility's grid, i.e., entering at one

point of interconnection and leaving at another.

\183\This would be true of other services as well.

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We will not allow transmission providers to define terms or specify

transmission uses to erect barriers to fair and equal competition in

power markets, or to engage in undue discrimination.

On the second issue set for hearing in AEP, et al. (potential

impediments to providing a particular service), we believe there are

none, except for impediments to siting. However, any impediments to

siting are the same whether the utility is providing service to itself

or to a third party.

On the third issue set for hearing AEP, et al. (the costs of

providing comparable service), we believe there is no difference in the

costs incurred by a transmission provider in providing transmission to

itself or to a third party. Thus, the transmission owner must charge

itself and third parties the same rates for the use of its system.

All electricity trade is supported and facilitated in one way or

another by ancillary services, and transmission services may be

comprised of many different combinations of ancillary services.

Therefore, the Commission will require that such ancillary services be

offered separately through open access tariffs. These are discussed in

detail infra.

Public utilities that are transmission-only companies or transcos,

i.e., companies that do not own or control generation, do not use their

own transmission systems to sell their own power. However, a public

utility transco would be required to offer open access transmission

services as well as ancillary services. It would also have to provide a

real-time information network, as discussed below. The Commission is

also announcing certain quality-of-service guidelines to aid in

evaluating the quality of transmission service that must be provided by

public utilities. These are described infra and are reflected in

proposed pro forma point-to-point and network tariffs

[[Page 17681]] attached to this notice of proposed rulemaking. Our

preliminary conclusion is that the provisions contained in the pro

forma tariffs are the minimum provisions necessary to meet the

requirement of non-discriminatory open access. We seek comments on

these tariffs.

2. Implementing Non-Discriminatory Open Access: Functional Unbundling

The Commission's preliminary view is that functional unbundling of

wholesale services is necessary to implement non-discriminatory open

access. Accordingly, the proposed rule requires that a public utility's

uses of its own transmission system for the purpose of engaging in

wholesale sales and purchases of electric energy must be separated from

other activities, and that transmission services (including ancillary

services) must be taken under the filed transmission tariff of general

applicability. The proposed rule does not require corporate unbundling

(selling off assets to a non-affiliate, or establishing a separate

corporate affiliate to manage a utility's transmission assets) in any

form, although some utilities may ultimately choose such a course of

action. The proposed rule accommodates corporate unbundling, but does

not require it.

Functional unbundling means three things. First, it means that a

public utility must take transmission services (including ancillary

services) for all of its new wholesale sales and purchases of energy

under the same tariff of general applicability under which others take

service. New wholesale sales and purchases are those under any

contracts executed on or after the open access tariffs required by this

proposed rule become effective. Non-discriminatory service requires

that the utility charge itself the same price for these services that

it charges its third-party wholesale transmission customers. We seek

comment as to the appropriate means to enforce this requirement, such

as a revenue crediting mechanism.

Second, functional unbundling means that a transmission owner must

include in its open access tariffs separately stated rates for the

transmission and ancillary service components of each transmission

service it provides.184 The rates must satisfy the Commission's

Transmission Pricing Policy Statement. Third, functional unbundling

means that the public utility, in order to provide non-discriminatory

open access to transmission and ancillary services information, must

rely upon the same electronic network that its transmission customers

rely upon to obtain transmission information about its system when

buying or selling power.

\184\This means that a customer who buys both generation and

transmission services from the utility will have a separately stated

rate for the generation, transmission, and ancillary services that

it purchases. The rates for transmission and ancillary services

would be stated in the open access tariff. The rates for the

generation service would be under a separate rate schedule.

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For example, the proposed rule requires that a public utility

unbundle its new wholesale requirements service contracts, and its new

wholesale coordination purchase transactions, and take the firm network

transmission component of those services under its own firm network

transmission tariff. Similarly, the proposed rule requires that a

public utility unbundle any new wholesale coordination sales

transactions and take the point-to-point transmission component of that

service under its own point-to-point transmission tariff. Finally, the

proposed rule requires that a utility unbundle ancillary services and

take these services under its network and point-to-point tariffs.

Public utilities also must authorize their power pool agents to

offer any transmission service available under power pool arrangements

to all transmission customers. In addition, public utilities that

participate in a power pool that acts as a control area must authorize

the power pool's control center to offer ancillary services under a

filed tariff, and must take all of their control area services from

that tariff.185 A public utility must take dispatch service and

other ancillary transmission services on the same terms and conditions

as those offered to its transmission customers.186

\185\Similarly, public utilities that own transmission, but get

their ancillary services from another entity must authorize that

entity to provide ancillary services under a filed tariff and must

take their ancillary services from that tariff.

\186\The Commission recognizes that the proposal here overlaps

with the pending Pooling Notice of Inquiry. However, the fundamental

non-discrimination requirements of the FPA, and therefore the basic

requirements of the proposed rule, must be applied to power pools in

which public utilities participate. This issue is discussed further

in the Implementation Section, infra.

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The requirement to provide ancillary services and to take those

services under a tariff is not intended to mandate any federal rules

that would prescribe the actual merit order of dispatch. Rather, it is

a requirement that public utilities ensure that dispatch practices and

procedures applicable to them are also applied to third-party

transmission customers.

The proposed requirement that a public utility take transmission

service used for wholesale requirements service and wholesale

coordination transactions under its own filed tariff means that all

wholesale trade, both that of the public utility and its competitors,

would be taken under a single wholesale transmission tariff.

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