# 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 > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A95-8534 ## Record - **Collection:** Federal Register - **Document type:** Proposed Rule - **Published:** April 7, 1995 - **Citation:** 60 FR 17662 ## Text 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. ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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.''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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 * * *''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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.''). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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)). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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 [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A95-8534. Public record. Not legal advice.