# Promoting Wholesale Competition Through Open Access Non- Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A96-10694 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** May 10, 1996 - **Citation:** 61 FR 21540 ## Text SUMMARY: The Federal Energy Regulatory Commission (Commission) is issuing a Final Rule requiring all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to have on file open access non-discriminatory transmission tariffs that contain minimum terms and conditions of non- discriminatory service. The Final Rule also permits public utilities and transmitting utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open access and Federal Power Act section 211 transmission services. The Commission's goal is to remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation's electricity consumers. EFFECTIVE DATE: This Final Rule will become effective on July 9, 1996. FOR FURTHER INFORMATION CONTACT: David D. Withnell (Legal Information--Docket No. RM95-8-000), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 208-2063 Deborah B. Leahy (Legal Information--Docket No. RM94-7-001), Office of the General Counsel, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 208-2039 Michael A. Coleman (Technical Information), Office of Electric Power Regulation, Federal Energy Regulatory Commission, 888 First Street NE., Washington, DC 20426, (202) 208-1236. 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 the Public Reference Room at 888 First 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 if dialing locally, or 1-800-856-3920 if dialing long distance. CIPS is also available through the Fed World system (by modem or Internet). To access CIPS, set your communications software to 19200, 14400, 12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex, no parity, 8 data bits and 1 stop bit. The full text of this order will be available on CIPS indefinitely in ASCII and WordPerfect 5.1 format. 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 the Public Reference Room at 888 First Street NE., Washington, DC 20426. Table of Contents I. Introduction/Summary II. Public Reporting Burden III. Background IV. Discussion A. Scope of the Rule 1. Introduction 2. Functional Unbundling 3. Market-based Rates 4. Merger Policy 5. Contract Reform 6. Flow-based Contracting and Pricing B. Legal Authority 1. Bases for Legal Authority 2. Response to Commenters Opposing our Legal Authority C. Comparability 1. Eligibility to Receive Non-discriminatory Open Access Transmission 2. Service that Must be Provided by Transmission Provider 3. Who Must Provide Non-discriminatory Open Access Transmission 4. Reservation of Transmission Capacity by Transmission Customers 5. Reservation of Transmission Capacity for Future Use by Utility 6. Capacity Reassignment 7. Information Provided to Transmission Customers 8. Consequences of Functional Unbundling D. Ancillary Services 1. Definitions and Descriptions 2. Obligations of Transmission Providers and Transmission Customers with Respect to Ancillary Services 3. Unbundling and Bundling Ancillary Services 4. Reassignment of Ancillary Services 5. Pricing of Ancillary Services 6. Accounting for Ancillary Services E. Real-Time Information Networks F. Coordination Arrangements: Power Pools, Public Utility Holding Companies, Bilateral Coordination Arrangements, and Independent System Operators 1. Tight Power Pools 2. Loose Pools 3. Public Utility Holding Companies 4. Bilateral Coordination Arrangements G. Pro Forma Tariff 1. Tariff Provisions That Affect The Pricing Mechanism 2. Priority for Obtaining Service 3. Curtailment Provisions 4. Specific Tariff Provisions H. Implementation I. Federal and State Jurisdiction: Transmission/Local Distribution J. Stranded Costs 1. Justification for Allowing Recovery of Stranded Costs 2. Cajun Electric Power Cooperative, Inc. v. FERC 3. Responsibility for Wholesale Stranded Costs (Whether to Adopt Direct Assignment to Departing Customers) 4. Recovery of Stranded Costs Associated with New Wholesale Requirements Contracts 5. Recovery of Stranded Costs Associated with Existing Wholesale Requirements Contracts 6. Recovery of Stranded Costs Caused by Retail-Turned-Wholesale Customers 7. Recovery of Stranded Costs Caused by Retail Wheeling 8. Evidentiary Demonstration Necessary--Reasonable Expectation Standard 9. Calculation of Recoverable Stranded Costs 10. Stranded Costs in the Context of Voluntary Restructuring 11. Accounting Treatment for Stranded Costs 12. Definitions, Application, and Summary K. Other 1. Information Reporting Requirements for Public Utilities 2. Small Utilities 3. Regional Transmission Groups 4. Pacific Northwest 5. Power Marketing Agencies 6. Tennessee Valley Authority 7. Hydroelectric Power 8. Residential Customers V. Environmental Statement VI. Regulatory Flexibility Act Certification VII. Information Collection Statement VIII. Effective Date Regulatory Text Appendices (These Appendices will not appear in the Code of Federal Regulations) A. List of Section 211 Applications B. List of Commenters in Docket Nos. RM95-8-000 and RM94-7-001 C. Allegations of Public Utilities Exercising Transmission Dominance D. Pro Forma Open Access Transmission Tariff E. List of Group 1 Public Utilities F. List of Group 2 Public Utilities G. Legal Analysis of Commission Jurisdiction Over the Rates, Terms and Conditions of Unbundled Retail Transmission In Interstate Commerce H. U.S. NOX Emissions [[Page 21541]] Statement of Commissioner Hoecker Statement of Commissioner Massey I. Introduction/Summary Today the Commission issues three final, interrelated rules designed to remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation's electricity consumers.1 The legal and policy cornerstone of these rules is to remedy undue discrimination in access to the monopoly owned transmission wires that control whether and to whom electricity can be transported in interstate commerce. A second critical aspect of the rules is to address recovery of the transition costs of moving from a monopoly-regulated regime to one in which all sellers can compete on a fair basis and in which electricity is more competitively priced. --------------------------------------------------------------------------- \1\ These rules are the rules on open access and stranded costs in the above dockets (FERC Stats. & Regs. para. 31,036), and an accompanying rule on Open Access Same-Time Information System and Standards of Conduct (OASIS Final Rule) (FERC Stats. & Regs. para. 31,037) being issued contemporaneously. The Commission also is issuing contemporaneously a notice of proposed rulemaking on capacity reservation open access transmission tariffs in Docket No. RM96-11-000, FERC Stats. & Regs. para. 32,517. These final rules and proposed rule are being published concurrently in the Federal Register. --------------------------------------------------------------------------- In the year since the proposed rules were issued,2 the pace of competitive changes in the electric utility industry has accelerated. By March of last year, 38 public utilities had filed wholesale open access transmission tariffs with the Commission. Today, prodded by such competitive changes and encouraged by our proposed rules, 106 of the approximately 166 public utilities that own, control, or operate 3 transmission facilities used in interstate commerce have filed some form of wholesale open access tariff. In addition, since the time the proposed rules were issued, numerous state regulatory commissions have adopted or are actively evaluating retail customer choice programs or other utility restructuring alternatives. These events have been spurred by continuing pressures in the marketplace for changes in the way electricity is bought, sold, and transported. Increasingly, customers are demanding the benefits of competition in the growing electricity commodity market. --------------------------------------------------------------------------- \2\ On March 29, 1995, the Commission issued two notices of proposed rulemaking concerning open access transmission and stranded cost recovery. Promoting Wholesale Competition Through Open-Access Non-Discriminatory Transmission Service by Public Utilities and Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking, 60 FR 17662 (April 7, 1995), FERC Stats. & Regs. para. 32,514 (1995). On December 13, 1995, the Commission issued a notice of proposed rulemaking on information systems. Real- Time Information Networks and Standards of Conduct, Notice of Proposed Rulemaking, 60 FR 66182 (December 21, 1995), FERC Stats. & Regs. para. 32,516 (1995). \3\ The Commission's notice of proposed rulemaking in the above dockets proposed to apply the proposed requirements to public utilities that own and/or control facilities used for the transmission of electric energy in interstate commerce. ``Own and/or control'' is intended to include public utilities that ``operate'' facilities used for the transmission of electric energy in interstate commerce. However, we have modified the Final Rule regulatory text to remove any ambiguity. --------------------------------------------------------------------------- The Commission estimates the potential quantitative benefits from the Final Rule will be approximately $3.8 to $5.4 billion per year of cost savings, in addition to the non-quantifiable benefits that include better use of existing assets and institutions, new market mechanisms, technical innovation, and less rate distortion. The continuing competitive changes in the industry and the prospect of these benefits to customers make it imperative that this Commission take the necessary steps within its jurisdiction to ensure that all wholesale buyers and sellers of electric energy can obtain non-discriminatory transmission access, that the transition to competition is orderly and fair, and that the integrity and reliability of our electricity infrastructure is maintained. In this Rule, the Commission seeks to remedy both existing and future undue discrimination in the industry and realize the significant customer benefits that will come with open access. Indeed, it is our statutory obligation under sections 205 and 206 of the Federal Power Act (FPA) to remedy undue discrimination. To do so, we must eliminate the remaining patchwork of closed and open jurisdictional transmission systems and ensure that all these systems, including those that already provide some form of open access, cannot use monopoly power over transmission to unduly discriminate against others. If we do not take this step now, the result will be benefits to some customers at the expense of others. We have learned from our experience in the natural gas area the importance of addressing competitive transition issues early and with as much certainty to market participants as possible. Accordingly, in this proceeding and in the accompanying proceeding on OASIS, the Commission, pursuant to its authorities under sections 205 and 206 of the FPA: Requires all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce To file open access non-discriminatory transmission tariffs that contain minimum terms and conditions of non-discriminatory service; To take transmission service (including ancillary services) for their own new wholesale sales and purchases of electric energy under the open access tariffs; To develop and maintain a same-time information system that will give existing and potential transmission users the same access to transmission information that the public utility enjoys, and further requires public utilities to separate transmission from generation marketing functions and communications; Clarifies Federal/state jurisdiction over transmission in interstate commerce and local distribution and provides for deference to certain state recommendations; and Permits public utilities and transmitting utilities to seek recovery of legitimate, prudent and verifiable stranded costs associated with providing open access and FPA section 211 transmission services. Open Access The Final Rule requires public utilities to file a single open access tariff that offers both network, load-based service and point- to-point, contract-based service. The Rule contains a pro forma tariff that reflects modifications to the NOPR's proposed terms and conditions and also permits variations for regional practices. All public utilities subject to the Rule, including those that already have tariffs on file, will be required to make section 206 compliance filings to meet the new pro forma tariff non-price minimum terms and conditions of non-discriminatory transmission. Utilities may propose their own rates in a section 205 compliance filing. The Rule provides that public utilities may seek a waiver of some or all of the requirements of the Final Rule. In addition, non-public utilities may seek a waiver of the tariff reciprocity provisions. The Final Rule does not generically abrogate existing requirements contracts, but will permit customers and public utilities to seek modification, or termination, of certain existing requirements contracts on a case-by-case basis. As to coordination arrangements and contracts, the Rule finds that these arrangements and contracts may need to be modified to remove unduly discriminatory transmission access and/or pricing provisions. Such arrangements and agreements include power pool agreements, public utility [[Page 21542]] holding company agreements, and certain bilateral coordination agreements. The Rule provides guidance and timelines for modifying unduly discriminatory coordination arrangements and contracts, and specifies when the members of such arrangements must begin to conduct trade with each other using the same open access tariff offered to others. The Rule also provides guidance regarding the formation of independent system operators (ISOs). The Rule does not require any form of corporate restructuring, but will accommodate voluntary restructuring that is consistent with the Rule's open access and comparability policies. As discussed in the NOPR, not all owners or controllers of interstate transmission facilities are subject to the Commission's jurisdiction under sections 205 and 206 of the FPA and therefore are not subject to this Rule's open access requirements. Therefore, the Final Rule retains the proposed reciprocity provision in the pro forma tariff. Without such a provision, non-open access utilities could take advantage of the competitive opportunities of open access, while at the same time offering inferior access, or no access at all, over their own facilities. Thus, open access utilities would be unfairly burdened. We note that some non-jurisdictional utilities have expressed an interest in a mechanism for obtaining a Commission determination that their transmission tariffs satisfy the reciprocity provisions in the pro forma tariffs, and we provide such a mechanism in the Rule. The Final Rule does not generically provide for market-based generation rates. Although the Rule codifies the Commission's prior decision that there is no generation dominance in new generating capacity, intervenors in cases may raise generation dominance issues related to new capacity. In addition, to obtain market-based rates for existing generation, we will continue to require public utilities to show, on a case-by-case basis, that there is no generation dominance in existing capacity. Further, in all market-based rate cases, we will continue to look at whether an applicant and its affiliates could erect other barriers to entry and whether there may be problems due to affiliate abuse or reciprocal dealing. Finally, contemporaneously with this Rule the Commission issues an NOPR on capacity reservation tariffs as an alternative, and perhaps superior, means of remedying undue discrimination. Transmission/Local Distribution The Rule clarifies the Commission's interpretation of the Federal/ state jurisdictional boundaries over transmission and local distribution. While we reaffirm our conclusion that this Commission has exclusive jurisdiction over the rates, terms, and conditions of unbundled retail transmission in interstate commerce by public utilities, we nevertheless recognize the very legitimate concerns of state regulatory authorities as they contemplate direct retail access or other state restructuring programs. Accordingly, we specify circumstances under which we will give deference to state recommendations. Although jurisdictional boundaries may shift as a result of restructuring programs in wholesale and retail markets, we do not believe this will change fundamental state regulatory authorities, including authority to regulate the vast majority of generation asset costs, the siting of generation and transmission facilities, and decisions regarding retail service territories. We intend to be respectful of state objectives so long as they do not balkanize interstate transmission of power or conflict with our interstate open access policies. Stranded Costs With regard to stranded costs, the Final Rule adopts the Commission's supplemental proposal. It will permit utilities to seek extra-contractual recovery of stranded costs associated with a limited set of existing (executed on or before July 11, 1994) wholesale requirements contracts and provides that the Commission will be the primary forum for utilities to seek recovery of stranded costs associated with retail-turned-wholesale transmission customers. It also will allow utilities to seek recovery of stranded costs caused by retail wheeling only in circumstances in which the state regulatory authority does not have authority to address retail stranded costs at the time the retail wheeling is required. The Rule retains the revenues lost approach for calculating stranded costs and provides a formula for calculating such costs. Environmental Issues The Commission has prepared a Final Environmental Impact Statement (FEIS) evaluating the possible environmental consequences of changes in the bulk power marketplace expected to occur as a result of the open access requirements of this Final Rule. The FEIS focuses, as do most commenters, on possible increases in emissions of nitrogen oxides (NOX) from certain fossil-fuel fired generators, which could affect air quality in the producing region and in areas to which these emissions may be carried. In response to comments on the Draft EIS, the Commission performed numerous additional studies. The FEIS finds that the relative future competitiveness of coal and natural gas generation is the key variable affecting the impact of the Final Rule. If competitive conditions favor natural gas, the Rule is likely to lead to environmental benefits. Both EPA and the Commission staff believe this projected scenario is the more likely one. If competitive conditions favor coal, the Rule may lead to small negative environmental impacts. However, even using the most extreme, unlikely assumptions about the future of the industry, the negative consequences are not likely to occur until after the turn of the century. Because the impacts will remain modest at least until 2010, there is no need for an interim mitigation program. In addition, even if the data showed more significant negative consequences requiring mitigation, the Commission does not have the statutory authority under the Federal Power Act or the expertise to address this possible far-term problem. The Commission believes, however, that there is time for federal and state air quality authorities to address any potential adverse impact as part of a comprehensive NOX regulatory program under the Clean Air Act.4 --------------------------------------------------------------------------- \4\ 42 U.S.C. 7401, et seq. --------------------------------------------------------------------------- Despite our conclusions regarding the lack of environmental impacts expected to result from the Rule, the Commission has examined a wide variety of proposals for mitigating possible adverse effects. We share the view of most commenters that the preferred approach for mitigating increased NOX emissions generally is a NOX cap and trading regulatory program comparable to that developed by Congress to address sulfur dioxide emissions in the Clean Air Act Amendments of 1990.5 The Commission has examined various means of establishing such a program, including use of existing federal authorities under the Clean Air Act, cooperative efforts by state and federal air quality regulators, and development of a new emissions regulatory program administered by the Commission under the Federal Power Act. The Commission has concluded that a NOX regulatory program could best be developed and administered under the Clean Air Act, in cooperation with interested states, and offers to lend Commission support [[Page 21543]] to that effort should it become necessary. --------------------------------------------------------------------------- \5\ 42 U.S.C.A. 7651b-e. --------------------------------------------------------------------------- Conclusion The Commission believes that the Final Rule will remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets. II. Public Reporting Burden The Open Access Final Rule and the Stranded Cost Final Rule specify filing requirements to be followed by public utilities that own, control or operate transmission facilities in interstate commerce in making non-discriminatory open access tariff filings and filings to recover legitimate, prudent and verifiable stranded costs. The information collection requirements of the final rules are attributable to FERC-516 ``Electric Rate Filings.'' The current total annual reporting burden for FERC-516 is 828,300 hours. A. Docket No. RM95-8-000 (Open Access Final Rule) The Open Access Final Rule requires public utilities filing non- discriminatory open access tariffs to provide certain information to the Commission. The Commission estimated that the public reporting burden for the information collection would average 300 hours per response. This estimate included 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 revised information. No comments on the burden estimate were received. Because the Final Rule adopts essentially the same information requirements that are contained in the proposed rule, we believe that the average filing burden is same for the Final Rule. In the proposed rule, the Commission noted that there are approximately 328 public utilities, including marketers and wholesale generation entities. We initially estimated that 137 public utilities own, control or operate facilities used for the transmission of electric energy in interstate commerce, and would be subject to the filing requirements of the proposed rule. Upon further review, the Commission believes that approximately 166 public utilities will respond to the information collection. Accordingly, the public reporting burden is estimated to be 49,800 hours. B. Docket No. RM94-7-001 (Stranded Cost Final Rule) In the supplemental notice of proposed rulemaking, the Commission estimated that the information requirements of the proposed rule would not differ substantially from those contained in the initial proposed rule. In that notice, the Commission estimated that the public reporting burden for the information requirements contained in the proposed rule would be 50 hours per response with 10 responses annually. No comments on this filing burden were received. The information requirements adopted in the Stranded Cost Final Rule are not substantially different from those in the proposed rule. Therefore, the Commission concludes that there will be no additional public filing burden associated with the Stranded Cost Final Rule. III. Background In the NOPR, we set out a detailed statement of the events leading up to this rulemaking. We repeat that background here, updated to reflect what has happened since March 1995, and discuss why it is necessary to undertake regulatory reform in the electric industry at this time. We do so to provide the necessary backdrop to our action in adopting this Rule. A. 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.6 Thus, there was no pressure on regulatory commissions to use regulation to affect the structure of the industry.7 --------------------------------------------------------------------------- \6\ 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). \7\ See Joskow, supra at 312; see also Phillips, supra at 12. --------------------------------------------------------------------------- B. 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.8 This was the beginning of periods of rapid inflation, higher nominal interest rates, and higher electricity rates.9 During this time, consumers became concerned about higher electricity rates and questioned any price increases filed by utilities.10 --------------------------------------------------------------------------- \8\ See Joskow, supra at 312; see also Phillips, supra at 12-13. \9\ See Joskow, supra at 312-13; see also Phillips, supra 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). \10\ See Joskow, supra at 313; see also Phillips, supra 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.11 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.12 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.13 In addition, by the 1980s, the oil cartel collapsed, with a resulting glut of low- priced oil.14 At the same time, inflation substantially increased the costs of these large [[Page 21544]] baseload generating plants.15 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.16 --------------------------------------------------------------------------- \11\ See generally Jersey Central Power & Light Company v. FERC, 810 F.2d 1168, 1171 (D.C. Cir. 1987). \12\ Id. \13\ See Pierce, supra 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. \14\ Id. \15\ 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%.''). \16\ See Phillips, supra 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 for which there was little or no demand, came onto the market or were in the process of being constructed. Accordingly, between 1970 and 1985, average residential electricity prices more than tripled in nominal terms, and increased by 25% after adjusting for general inflation.17 Moreover, average electricity prices for industrial customers more than quadrupled in nominal terms over the same period and increased 86% after adjusting for inflation.18 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. --------------------------------------------------------------------------- \17\ 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)). \18\ 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.19 These writeoffs significantly reduced the earnings of the affected utilities.20 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.21 --------------------------------------------------------------------------- \19\ See Black & Pierce, supra at 1346 (These writeoffs were ``about 17% of the book value of total 1992 utility investment.''). \20\ Id. \21\ 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.22 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.23 A significant factor was that larger generation units were found to need relatively greater maintenance and experience longer downtimes.24 The electric industry faced the situation ``where the price of each incremental unit of electric power exceeded the average cost.'' 25 Bigger was no longer better. --------------------------------------------------------------------------- \22\ 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). \23\ Id. at 965. \24\ 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.'') \25\ 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.26 --------------------------------------------------------------------------- \26\ ``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.27 Similarly, the circulating fluidized bed combustion boilers, fueled by coal and other conventional fuels, provide a more efficient and less polluting resource. --------------------------------------------------------------------------- \27\ 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).'' 28 Indeed, smaller and more efficient gas-fired combined-cycle generation facilities can produce power on the grid at a cost ranging from 5 cents per kWh to less than 3 cents per kWh.29 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.30 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.31 This has [[Page 21545]] 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 transactions 32 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. --------------------------------------------------------------------------- \28\ Id. at 24. See also Wallace E. Brand, Is Bigger Better? Market Power in Bulk Power Supply: From FDR to NOPR, Pub. Util. Fort. (Feb. 15, 1996) 23 at 25 (while the optimal baseload unit size is about 500 MW for coal-fired steam turbines, the optimal size for gas fired combined-cycle units is about 150 to 200 MW). \29\ FERC staff calculations based in part on combined-cycle plant cost data reported in 1994 FERC Form No. 1 for a sample of units placed in service during 1990-94. Costs vary with regional fuel and construction costs, among other reasons. \30\ Coal and Nuclear plant cost data reported in 1994 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 1986-94; 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 * * *''). \31\ See Black & Pierce, supra 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.''). \32\ 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. --------------------------------------------------------------------------- C. The Public Utility Regulatory Policies Act and the Growth of Competition In enacting PURPA,33 Congress recognized that the rising costs and decreasing efficiencies of utility-owned generating facilities were increasing rates and harming the economy as a whole.34 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.35 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.36 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.37 --------------------------------------------------------------------------- \33\ Pub. L. No. 95-617, 92 Stat. 3117 (codified in U.S.C. sections 15, 16, 26, 30, 42, and 43). \34\ See generally FERC v. Mississippi, 456 U.S. 742, 745-46 (1982). \35\ The Power Plant and Industrial Fuel Use Act of 1978. Pub. L. No. 95-617, 92 Stat. 3117 (codified in U.S.C. sections 15, 16, 26, 30, 42, and 43). \36\ 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. \37\ 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.38 Notwithstanding these limitations, QFs proliferated. In 1989, there were 576 QF facilities. By 1993, there were more than 1,200 such facilities.39 For the same time period, installed QF capacity increased from 27,429 megawatts to 47,774 megawatts.40 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. --------------------------------------------------------------------------- \38\ 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. \39\ Energy Information Administration, Electric Power Annual 1993 (December 1994) 124 (Table 77). \40\ 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.41 --------------------------------------------------------------------------- \41\ 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. No. 101-575, 104 Stat. 2834 (1990), amended, Pub. L. No. 102-46, 105 Stat. 249 (1991). --------------------------------------------------------------------------- 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.42 --------------------------------------------------------------------------- \42\ 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) 43 severely inhibited these new entities from entering the generation business.44 Second, these entities needed transmission service in order to compete in electricity markets. --------------------------------------------------------------------------- \43\ 15 U.S.C. 79 et seq. \44\ 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,45 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 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.46 Indeed, ``[i]n 1992, for the first time, generating capacity added by independent producers exceeded capacity added by utilities.'' 47 --------------------------------------------------------------------------- \45\ 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). \46\ Energy Information Administration, Electric Power Annual 1993 (December 1994) 124 (Table 77). \47\ Black & Pierce, supra at 1349 n.25. --------------------------------------------------------------------------- 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 [[Page 21546]] power that they may have possessed.48 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.49 As we have previously explained: \48\ 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) (Doswel); and Dartmouth Power Associates Limited Partnership, 53 FERC para. 61,117 (1990). \49\ 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.50 --------------------------------------------------------------------------- \50\ 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.51 In addition, beginning in the late 1980s, in order to mitigate their market power to meet Commission conditions, 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.52 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.53 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 imposed in this Rule and did not require transmission owners to provide to others the same quality of service that they themselves enjoyed. --------------------------------------------------------------------------- \51\ 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 Power Company v. United States, 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. \52\ 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). \53\ 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). --------------------------------------------------------------------------- Following PURPA, 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, it became increasingly clear that the potential consumer benefits that could be derived from these technological advances could be realized only if more efficient generating plants could obtain access to the regional transmission grids. Because many traditional vertically integrated utilities still did not provide open access to third parties and still favored their own generation if and when they provided transmission access to third parties, barriers continued to exist to cheaper, more efficient generation sources. D. The Energy Policy Act In response to the competitive developments following PURPA, and the fact that PUHCA and lack of transmission access remained major barriers to new generators, Congress enacted Title VII of the Energy Policy Act of 1992 (Energy Policy Act).54 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.55 --------------------------------------------------------------------------- \54\ Pub. L. No. 102-486, 106 Stat. 2776 (1992), codified at, among other places, 15 U.S.C. 79z-5a and 16 U.S.C. 796 (22-25), 824j-l. \55\ See El Paso Electric Company and Central and South West Services Inc., 68 FERC para. 61,181 at 61,914 (1994) (CSW); 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.56 --------------------------------------------------------------------------- \56\ 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.57 This provision removed a significant impediment to the development of IPPs and APPs by allowing them to develop projects as EWGs free from the strictures of PUHCA or the QF PURPA limitations. --------------------------------------------------------------------------- \57\ 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 virtually all circumstances.58 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. --------------------------------------------------------------------------- \58\ See supra note 36. --------------------------------------------------------------------------- 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 [[Page 21547]] physical or other constraints.59 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.60 --------------------------------------------------------------------------- \59\ 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), FERC Stats. & Regs., Regulations Preambles para. 30,975 (1993) (Policy Statement Regarding Good Faith Requests for Transmission Services). \60\ See 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, 58 FR 52420 (October 8, 1993), FERC Stats. & Regs., Regulations Preambles para. 30,980 (Order No. 558), reh'g denied, Order No. 558-A, 65 FERC para. 61,324 (1993), regulations modified, 59 FR 15333 (April 1, 1994), FERC Stats. & Regs., Regulations Preambles para. 30,993. --------------------------------------------------------------------------- E. 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; 61 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: \61\ See Order No. 550, Filing Requirements and Ministerial Procedures for Persons Seeking Exempt Wholesale Generator Status, 58 FR 8897 (February 18, 1993), FERC Stats. & Regs., Regulations Preambles para. 30,964, order on reh'g, Order No. 550-A, 58 FR 21250 (April 20, 1993), 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 59 and 60. 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. 62 --------------------------------------------------------------------------- \62\ See Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking, 59 FR 35274 (July 11, 1994), FERC Stats. & Regs., Proposed Regulations para. 32,507 at 32,866 (Stranded Cost NOPR); American Electric Power Service Corporation, 67 FERC para. 61,168, clarified, 67 FERC para. 61,317 (1994). --------------------------------------------------------------------------- 1. 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.63 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 (proposed or final) requiring wheeling in 12 of the 14 cases it has acted on.64 --------------------------------------------------------------------------- \63\ 16 U.S.C.A. 824j-824k (West 1985 and Supp. 1994). \64\ See, e.g., final orders issued in City of Bedford, 68 FERC para. 61,003 (1994), reh'g denied, 73 FERC para. 61,322 (1995); Florida Municipal Power Agency v. Florida Power & Light Company, 67 FERC para. 61,167 (1994), order on reh'g, 74 FERC para. 61,006 (1996); 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 Appendix A. --------------------------------------------------------------------------- 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.65 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.66 --------------------------------------------------------------------------- \65\ 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), order on reh'g, 74 FERC para. 61,006 (1996). 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. \66\ Florida Municipal, 67 FERC at 61,477. --------------------------------------------------------------------------- As discussed infra, based on the mounting competitive pressures in the industry and rapidly evolving markets, we have concluded that section 211 alone is not enough to eliminate undue discrimination. The comments received on the proposed rules, discussed in detail infra, confirm this conclusion. The significant time delays involved in filing an individual service request for bilateral service under section 211 place 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.'' 67 --------------------------------------------------------------------------- \67\ 69 FERC para. 61,035 at 61,165 (1994), reh'g denied, 72 FERC para. 61,071 (1995); see also Southwest Regional Transmission Association, 69 FERC para. 61,100 at 61,398 (1994), order on compliance filing, 73 FERC para. 61,147 (1995) (SWRTA). --------------------------------------------------------------------------- 2. 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 transmission service for a minimum of one month.68 The Commission accepted the proposed transmission tariff for filing and suspended its effectiveness for one day, subject to refund.69 Rehearing requests challenged the Commission's summary approval of the restriction of service to point-to-point as being discriminatory and anticompetitive.70 The rehearing [[Page 21548]] 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. --------------------------------------------------------------------------- \68\ 64 FERC para. 61,279 (1993), reh'g granted, 67 FERC para. 61,168, clarified, 67 FERC para. 61,317 (1994). \69\ 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. \70\ 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.71 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: \71\ 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.72 \72\ 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.73 --------------------------------------------------------------------------- \73\ 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 (KCP&L) in support of a proposal to sell generation at market-based rates.74 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. --------------------------------------------------------------------------- \74\ 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.75 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.76 The Commission therefore announced a transmission comparability requirement for all new mergers: \75\ E.g., CSW, supra, 68 FERC at 61,914. \76\ 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.77 \77\ Id. at 61,915 (footnote omitted). --------------------------------------------------------------------------- In Heartland Energy Services, Inc.,78 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 \78\ 68 FERC para. 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.79 --------------------------------------------------------------------------- \79\ 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.80 The Commission added that it \80\ 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.81 \81\ 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.'' 82 --------------------------------------------------------------------------- \82\ 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), order on compliance filing, 71 FERC para. 61,158 (1995) (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), FERC Stats. & Regs., Regulations Preambles para. 30,976 at 30,870 n. 4 (RTG Policy Statement). --------------------------------------------------------------------------- The Commission further declared that comparable services must be provided through ``open access'' tariffs rather than only on a contract-by-contract basis: (T)ariffs are essential to the provision of comparable services. Tariffs set out the services that are available and the terms and 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.83 \83\ SWRTA, 69 FERC at 61,398. --------------------------------------------------------------------------- [[Page 21549]] 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. As discussed below, since the AEP comparability standard was announced, the Commission has set for hearing 44 open access tariffs to determine what constitutes comparable service. This number includes tariffs filed subsequent to the Open Access NOPR. All tariffs have now been made subject to the outcome of the Final Rule. 3. Lack of Market Power in New Generation In 1994 in the KCP&L case, 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.84 In particular, the Commission explained that it had previously noted in Entergy Services, Inc. that \84\ 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.85 --------------------------------------------------------------------------- \85\ 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.86 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.87 --------------------------------------------------------------------------- \86\ 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. \87\ Id. --------------------------------------------------------------------------- 4. 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 proceedings: (1) Stranded Cost NOPR,88 (2) Transmission Pricing Policy Statement,89 (3) Pooling Notice of Inquiry,90 (4) Regional Transmission Group (RTG) Policy Statement,91 and (5) Notice of Inquiry on Merger Policy.92 --------------------------------------------------------------------------- \88\ FERC Stats. & Regs. para. 32,507 (1994). \89\ 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), FERC Stats. & Regs., Regulations Preambles para. 31,005 (Transmission Pricing Policy Statement). \90\ Inquiry Concerning Alternative Power Pooling Institutions Under the Federal Power Act, 59 FR 54851 (October 26, 1994), FERC Stats. & Regs., Notices para. 35,529 (1995) (Pooling Notice of Inquiry). \91\ FERC Stats. & Regs. para. 30,976 (RTG Policy Statement). \92\ FERC Stats. & Regs. para. 35,531 (1996). --------------------------------------------------------------------------- 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.'' 93 Accordingly, the Commission proposed to establish provisions concerning the recovery of wholesale and retail stranded costs by public utilities and transmitting utilities. --------------------------------------------------------------------------- \93\ FERC Stats. & Regs. para. 32,507 at 32,864. --------------------------------------------------------------------------- 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.94 Under the new policy, we will permit a variety of proposals, including distance sensitive and flow-based pricing, which may be more suitable for competitive wholesale power markets.95 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.'' 96 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.97 --------------------------------------------------------------------------- \94\ 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 Indiana Michigan Power Company, 64 FERC para. 61,184 at 62,545 (1993). \95\ 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 could be compensated for the transaction. \96\ FERC Stats. & Regs. para. 31,005 at 31,136. \97\ 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 are appropriately balancing our dual objectives of promoting coordination and competition.98 \98\ FERC Stats. & Regs. para. 35,529 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.'' 99 --------------------------------------------------------------------------- \99\ Id. at 35,714. As explained below, the Commission held technical conferences on issues surrounding power pools and competition. --------------------------------------------------------------------------- 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 approved the formation of three [[Page 21550]] RTGs.100 One of the conditions is that each RTG member must offer comparable transmission services by tariff to other RTG members. --------------------------------------------------------------------------- \100\ See WRTA and SWRTA, supra, and Northwest Regional Transmission Association, 71 FERC para. 61,397 (1995). --------------------------------------------------------------------------- In the merger NOI, the Commission indicated that it will review whether its criteria and policy for evaluating mergers need to be modified in light of the changing circumstances occurring in the electric industry. 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, or other restructuring proposals.101 --------------------------------------------------------------------------- \101\ At least 12 states have retail wheeling proposals, legislation, or pilot programs underway--Alabama, California, Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New York, Ohio, Rhode Island, Vermont, and Wisconsin. At least 14 other states are investigating retail wheeling. Currently, according to a report of the NARUC-affiliated National Council on competition and the Electric Industry, 41 States are actively involved in investigating whether and how to restructure their respective electric power markets. Of this total, 29 State regulatory authorities * * * have initiated investigations. In addition, five State legislatures are involved in similar investigations, while seven other States have joint regulatory/ legislative proceedings underway. Testimony of the Honorable Cheryl L. Parrino, Chair of the Wisconsin Public Service Commission, on behalf of the National Association of Regulatory Utility Commissioners, before the United States Senate Committee on Energy and Natural Resources (March 6, 1996). --------------------------------------------------------------------------- 5. Events Since Issuance of Open Access NOPR Since issuance of the Open Access NOPR, public utilities have filed, in some form or another, 47 open access tariffs. In acting on those filings, the Commission has made all of the non-rate terms and conditions of those proposed tariffs subject to the outcome of this Final Rule.102 --------------------------------------------------------------------------- \102\ See American Electric Power Service Corporation, et al., 72 FERC para. 61,287 at 61,238 (1995). --------------------------------------------------------------------------- Over the last year, the Commission also has received and analyzed more than 20,000 pages of comments that were received from over 400 commenters, as well as additional information provided by industry participants at a number of Commission-initiated technical conferences.103 Those technical conferences addressed several issues--ancillary services, pro forma tariffs, power pools, and ISOs-- and provided significant input to the Commission's formulation of this Final Rule. --------------------------------------------------------------------------- \103\ Attached to this Final Rule as Appendix B is a list of commenters and the abbreviations used to designate them, including those commenters that filed late. --------------------------------------------------------------------------- F. 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 less than 3 cents per kWh 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 1993.104 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.105 --------------------------------------------------------------------------- \104\ Energy Information Administration, Performance Issues for a Changing Electric Power Industry (January 1995) 10 and (Figure 5). \105\ Current Competition, November 1994, Vol. 5, No. 8, at 8. --------------------------------------------------------------------------- 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. 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. Therefore, it is 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. 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.106 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. As discussed in detail in Section IV.B., such action is required by the FPA's mandate that the Commission remedy undue discrimination. --------------------------------------------------------------------------- \106\ As discussed above, a significant number of public utilities still do not 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. --------------------------------------------------------------------------- Since the time the NOPR issued, the Commission staff has completed an FEIS that provides a quantitative estimate of some of the cost savings expected from this Rule: approximately $3.8 to $5.4 billion per year. Other non-quantifiable benefits are also expected from this Rule and include: (1) Better use of existing assets and institutions; (2) new market mechanisms; (3) technical innovation; and (4) less rate distortion. These potential benefits to the Nation's electricity consumers and the economy as a whole confirm the need to take generic action to remove barriers to competition. In what follows, we set out the changes necessary to remedy undue discrimination and to ensure a fair transition to a more competitive regulatory regime. IV. Discussion A. Scope of the Rule 1. Introduction The Commission has determined that non-discriminatory open access transmission services (including access to transmission information) and stranded cost recovery are the most critical components of a successful transition to competitive wholesale electricity markets. These issues are the focal point of this Rule, the accompanying rule on open access same-time information systems, and the accompanying proposed rule on capacity reservation tariffs. [[Page 21551]] In undertaking these initiatives, however, we are mindful that they are part of a broader picture of evolving issues affecting the electric industry and that other Commission policies will play an important role in ensuring the full development of competitive markets. Among the many issues that are important to competitive bulk power markets are: independent system operators (ISOs); regional transmission groups; generation market power; utility merger policy; and the development of innovative transmission pricing alternatives, such as flow-based, distance-sensitive transmission pricing methodologies that reflect incremental costs. In particular, we believe that ISOs have great potential to assist us and the industry to help provide regional efficiencies, to facilitate economically efficient pricing, and, especially in the context of power pools, to remedy undue discrimination and mitigate market power. Although we discuss some of these issues in this Rule, we will further develop our policies in other proceedings as well to accommodate and encourage more efficient market structures. We now address the comments received on the scope of the proposed rulemaking. 2. Functional Unbundling In the NOPR, the Commission preliminarily found that functional unbundling of wholesale generation and transmission services is necessary to implement non-discriminatory open access transmission.107 At the same time, the Commission explained that the proposed rule would accommodate, but not require, corporate unbundling (which could include selling generation or transmission assets to a non-affiliate (divestiture) or the less aggressive step of establishing separate corporate affiliates to manage a utility's transmission and generation assets). However, we invited comments on functional unbundling and asked whether it is a strong enough measure to ensure non-discriminatory open access transmission without some form of corporate restructuring. --------------------------------------------------------------------------- \107\ FERC Stats. & Regs. para.32,514 at 33,080. --------------------------------------------------------------------------- Comments Commenters take both sides on whether functional unbundling is sufficient to assure non-discriminatory open access transmission or whether a stronger measure, such as corporate unbundling, is needed. Supporting Functional Unbundling Various commenters, including utilities and state commissions, generally support functional unbundling as sufficient to assure non- discriminatory open access transmission and oppose requiring corporate unbundling or divestiture.108 Several commenters state that functional unbundling will remedy discrimination without creating the inefficiencies and additional costs that corporate restructuring would create.109 --------------------------------------------------------------------------- \108\ E.g., Ohio Edison, UtiliCorp, Pennsylvania P&L, Atlantic City, Montana Power, IL Com, Seattle, OK Com, TX Industrials, MidAmerican, Southwestern, Southern, DOD, Public Service Co of CO, SC Public Service Authority, Florida Power Corp, DOE, WP&L, Com Ed, SBA, Consumers Power, CA Com, UT Com, Houston L&P, KCPL, EEI. \109\ E.g., Florida Power Corp, El Paso, PSNM, and SC Public Service Authority. --------------------------------------------------------------------------- A number of other commenters argue that the Commission has no authority under the FPA to require divestiture of transmission assets.110 Several of these commenters assert that, even if the Commission has the authority, the electric industry, unlike the natural gas industry, is not ready for mandated corporate unbundling because electric utilities still serve a high percentage of retail customers and own large amounts of the generating capacity. They assert that transmission system operation requires the operator to have control over much of the generating capacity. --------------------------------------------------------------------------- \110\ E.g., Southwestern, PECO, El Paso, Florida Power Corp, NSP, Public Service E&G, MidAmerican. --------------------------------------------------------------------------- Various other commenters also support functional unbundling, but believe that safeguards are needed to make it work.111 Power Marketing Association, for example, suggests a number of safeguards: adoption of cost allocation mechanisms to ensure that utilities do not shift costs from generation to transmission; random audits of utility books; a requirement that each utility file a code of conduct that provides for maximum separation of generation and transmission functions; and active oversight and complaint procedures with strong penalties for abuse. OK Com and GA Com believe that functional unbundling along with the safeguard of the Commission's complaint process will provide sufficient incentive for non-discriminatory open access transmission. --------------------------------------------------------------------------- \111\ E.g., NRECA, IN Com, Power Marketing Association, TDU Systems, NorAm, Turlock, Texaco, Utility Shareholders, NSP, El Paso, Utility Investors Analysts, PECO, Florida Power Corp, UT Com, Sierra, Carolina P&L, SoCal Gas, OK Com, FL Com, Southern. --------------------------------------------------------------------------- Supporting Corporate Unbundling A number of commenters see weaknesses in functional unbundling and argue that some form of corporate unbundling is necessary to assure non-discriminatory open access transmission.112 American Forest & Paper says that there is affiliate abuse in the gas industry and argues that the electric industry presents even more serious potential for abuse because it is still dominated by vertically integrated utilities.113 UAMPS asserts that functional unbundling is insufficient because the utility will still favor itself on issues related to transmission planning, capital investment, and operation and maintenance and replacement costs. --------------------------------------------------------------------------- \112\ E.g., American Forest & Power, American National Power, ND Com, IL Com, UAMPS, NIEP, APPA, Public Power Council, Municipal Energy Agency Nebraska, Missouri Basin MPA, Texaco, Direct Services Industries, Calpine, CCEM, Wisconsin Coalition, VT DPS. \113\ See also American National Power, ND Com, Calpine. --------------------------------------------------------------------------- NIEP argues that divestiture of generation assets from transmission and distribution is the preferred mechanism for mitigating market power. It further suggests that if corporate divestiture is not feasible the Commission should Seek to achieve ``virtual divestiture'' by requiring that the utility generation function be separated from transmission and distribution functions in a separate corporate affiliate, or business unit, and that affiliate transaction rules be established to guard against possible abuses. 114 --------------------------------------------------------------------------- \114\ NIEP Initial Comments at 4. It maintains that the Commission has broad authority to protect against undue discrimination and anticompetitive behavior and can order divestiture if such action is required to remedy such behavior.115 --------------------------------------------------------------------------- \115\ See also Municipal Energy Agency Nebraska, Direct Services Industries. --------------------------------------------------------------------------- FTC and DOJ argue that operational unbundling, an example of which is the formation of an independent system operator (ISO), likely would be more effective than functional unbundling and less costly than industry-wide divestiture.116 FTC describes operational unbundling as ``structural institutional arrangements, short of divestiture, that would separate operation of the transmission grid and access to it from economic interests in generation.'' It gives as an example the California proposal under which utilities would continue to own transmission lines, but an independent system operator would have operational control. DOJ also suggests ``a separate authority'' to [[Page 21552]] manage the grid and access to the grid, joint ventures, and voluntary pooling arrangements. These commenters argue that operational unbundling would be easier to enforce than functional unbundling. --------------------------------------------------------------------------- \116\ Others oppose operational unbundling. See, e.g., Carolina P&L, Salt River. --------------------------------------------------------------------------- DOE states that separation of the control of transmission from vertically-integrated companies does not necessarily require a poolco or any particular market mechanism. It suggests the possibility of an ISO that is functionally separate from any buyer or seller of generation, but would not perform all the functions of a poolco. United Illuminating supports ``operational unbundling'' that would either (1) eliminate vertical integration and divestiture of transmission assets, leading to the formation of a regional transmission company, or (2) develop a regional contractual approach to transmission services that eliminates the transmission owner's market power and fairly allocates support of the transmission facilities between native load and third-party users of the system. Commission Conclusion We conclude that functional unbundling of wholesale services is necessary to implement non-discriminatory open access transmission and that corporate unbundling should not now be required. As we explained in the NOPR, functional unbundling means three things: (1) A public utility must take transmission services (including ancillary services) for all of its new wholesale sales and purchases of energy under the same tariff of general applicability as do others; (2) A public utility must state separate rates for wholesale generation, transmission, and ancillary services; (3) A public utility must rely on the same electronic information network that its transmission customers rely on to obtain information about its transmission system when buying or selling power. We believe that these requirements are necessary to ensure that public utilities provide non-discriminatory service.117 These requirements also will give public utilities an incentive to file fair and efficient rates, terms, and conditions, since they will be subject to those same rates, terms, and conditions. --------------------------------------------------------------------------- \117\ When and how functional unbundling is to be achieved for requirements transactions and for various types of coordination arrangements, including power pools, is discussed at Sections IV.A.5 and IV.F. Functional unbundling of ancillary services is discussed in Section IV.D. --------------------------------------------------------------------------- However, we recognize that additional safeguards are necessary to protect against market power abuses. Functional unbundling will work only if a strong code of conduct (including a requirement to separate employees involved in transmission functions from those involved in wholesale power merchant functions) is in place. In the RINs NOPR, the Commission proposed a code of conduct that would apply to all public utility transmission providers. As the Commission explained, [T]his code of conduct would require, among other matters, a separation of the utilities' transmission system operations and wholesale marketing functions, and would define permissible and impermissible contacts between employees that conduct wholesale generation marketing functions and employees that handle transmission system operations and reliability in the system control center or at other facilities or locations.118 \118\ Real-Time Information Networks and Standards of Conduct, Notice of Proposed Rulemaking, 60 FR 66182 (December 21, 1995), FERC Stats. & Regs., Proposed Regulations para. 32,516 at 33,170 (1995). --------------------------------------------------------------------------- Adoption of this code of conduct, discussed in detail in the accompanying final rule on OASIS,119 is needed to ensure that the transmission owner's wholesale marketing personnel and the transmission customer's marketing personnel have comparable access to information about the transmission system. --------------------------------------------------------------------------- \119\ The final rule on information systems no longer uses the terminology RINs. The new terminology used is OASIS--Open Access Same-time Information System--which we will use in this Final Rule. --------------------------------------------------------------------------- As noted by OK Com and GA Com, a further safeguard--section 206--is available if a public utility seeks to circumvent the functional unbundling requirements. Under section 206, any person is free to file a complaint with the Commission detailing any alleged misbehavior on the part of the public utility or its affiliates concerning matters subject to our jurisdiction under the FPA. Similarly, the Commission may, on its own motion, initiate a proceeding to investigate the practices of the public utility and its affiliates. We believe that functional unbundling, coupled with these safeguards, is a reasonable and workable means of assuring that non- discriminatory open access transmission occurs. In the absence of evidence that functional unbundling will not work, we are not prepared to adopt a more intrusive and potentially more costly mechanism-- corporate unbundling--at this time. Several commenters discuss the need to encourage or even to require ISOs in the context of functional unbundling. We believe that ISOs have the potential to provide significant benefits (e.g., to help provide regional efficiencies, to facilitate economically efficient pricing, and, especially in the context of power pools, to remedy undue discrimination and mitigate market power) and will further our goal of achieving a workably competitive market. As we learned at our technical conference on power pools, many utilities are examining ISOs and corporate unbundling in various shapes and forms, particularly in the context of power pools. We discuss ISOs extensively in our section on power pools where we believe they will have an important role to play. However, in the context of individual utility transactions, we believe that the less intrusive functional unbundling approach outlined above is all that we must require at this time. Nevertheless, we see many benefits in ISOs, and encourage utilities to consider ISOs as a tool to meet the demands of the competitive marketplace. As a further precaution against discriminatory behavior, we will continue to monitor electricity markets to ensure that functional unbundling adequately protects transmission customers. At the same time, we will analyze all alternative proposals, including formation of ISOs, and, if it becomes apparent that functional unbundling is inadequate or unworkable in assuring non-discriminatory open access transmission, we will reevaluate our position and decide whether other mechanisms, such as ISOs, should be required. Finally, while we are not now requiring any form of corporate unbundling, we again encourage utilities to explore whether corporate unbundling or other restructuring mechanisms may be appropriate in particular circumstances. Thus, we intend to accommodate other mechanisms that public utilities may submit, including voluntary corporate restructurings (e.g., ISOs, separate corporate divisions, divestiture, poolcos), to ensure that open access transmission occurs on a non-discriminatory basis. We also will continue to monitor--and stand ready to work with parties engaging in--innovative restructuring proposals occurring around the country. 3. Market-Based Rates a. Market-Based Rates for New Generation In the NOPR, the Commission proposed to codify its determination in Kansas City Power & Light Company 120 [[Page 21553]] that the generation dominance standard for market-based sales from new capacity be dropped.121 The proposed new section 35.27 would provide: \120\ 67 FERC para. 61,183 at 61,557 (1994), reh'g pending (KCP&L). \121\ FERC Stats. & Regs. para. 32,514 at 33,050. --------------------------------------------------------------------------- Notwithstanding any other requirements, any public utility seeking authorization to engage in sales for resale of electric energy at market-based rates shall not be required to demonstrate any lack of market power in generation with respect to sales from capacity first placed in service on or after June 10, 1996.122 \122\ Id. at 33,154. --------------------------------------------------------------------------- However, this proposal would not affect the Commission's continuing authority to look at whether an applicant and its affiliates could erect other barriers to entry and whether there may be affiliate abuse or reciprocal dealing.123 --------------------------------------------------------------------------- \123\ 67 FERC at 61,557. --------------------------------------------------------------------------- Comments A number of commenters support the Commission's determination in KCP&L 124 and several of them explicitly support the Commission's proposed codification.125 EEI asserts that more than 50 percent of new generation is from non-utility sources and that recent competitive solicitations for new capacity have been greatly over-subscribed. Entergy argues that there is no evidence in any proceeding thus far of a market power problem in long-run markets. --------------------------------------------------------------------------- \124\ E.g., Entergy, EEI, Atlantic City, Duke Centerior, Houston L&P, Montana-Dakota Utilities, Canadian Petroleum Producers, DOE, Florida Power Corp, PSNM. \125\ E.g., EEI, Centerior, Houston L&P, NYSEG. --------------------------------------------------------------------------- Other commenters, however, oppose codifying KCP&L.126 They believe that market power in long-run markets exists for both new and old generation due to, for example, constraints on interface capabilities and unduly long notice periods for replacement of purchases. They argue that there is not enough of a distinction between new and old generation to treat them differently. TDU Systems also notes that the Commission in KCP&L did not take into account the differences between firm and non-firm bulk power. NIEP and ELCON conclude that the Commission erroneously found in KCP&L that no wholesale seller of generation has market power in generation from new facilities. NIEP asserts that in each service area there is usually only one wholesale buyer--the utility--who also is virtually always a wholesale seller of generation. Under these circumstances, NIEP argues that there cannot be arm's-length bargaining. Environmental Action complains that the Commission's proposal to codify KCP&L ignores significant factors that impede entry to generation markets, such as utility resistance to purchased power, state government-created barriers to non-utility generation, pancaking of rates under the contract path approach, sunk investment, and scale economies. --------------------------------------------------------------------------- \126\ E.g., TDU Systems, ELCON, NRECA, Environmental Action, NIEP, APPA, Power Marketing Association, EGA. --------------------------------------------------------------------------- Commission Conclusion In reviewing applications to sell at market-based rates, whether from new (unbuilt) capacity or existing capacity, we require that the seller (and each of its affiliates) must not have, or must have mitigated, market power in generation and transmission and not control other barriers to entry. In order to demonstrate the requisite absence or mitigation of transmission market power, a transmission-owning public utility seeking to sell at market-based rates must have on file with the Commission an open access transmission tariff for the provision of comparable service. In addition, the Commission considers whether there is evidence of affiliate abuse or reciprocal dealing.127 --------------------------------------------------------------------------- \127\ See, e.g., MidAmerican Energy Company, 74 FERC para. 61,211 (1996). --------------------------------------------------------------------------- In KCP&L, we stated that ``in light of industry and statutory changes which allow ease of market entry, we therefore will no longer require rate applicants to submit evidence of generation dominance in long-run bulk power markets.'' 128 We further explained that we had examined ``generation dominance in many different cases over the years'' and had ``yet to find an instance of generation dominance in long-run bulk power markets.'' 129 Commenters have criticized our findings in KCP&L, but no commenter has provided any evidence of generation dominance in long-run bulk power markets. Moreover, we have seen no such evidence in any of the market-based rate cases we have considered since KCP&L. Based on the comments received, we will codify the Commission's determination in KCP&L that the generation dominance standard for market-based sales from new capacity should be dropped. Because the Commission's findings in KCP&L applied to long-run markets, we will revise proposed Sec. 35.27 to apply to sales from capacity for which construction has commenced on or after the effective date of this Rule.130 --------------------------------------------------------------------------- \128\ KCP&L, 67 FERC at 61,557. See also discussion in proposed rule, FERC Stats. & Regs. at 33,067-68. \129\ Id. \130\ The NOPR's proposed language that a public utility would not have to demonstrate a lack of market power in generation for sales from capacity first placed in service on or after the date 30 days after the final rule is published in the Federal Register does not properly reflect the finding in KCP&L. Because KCP&L addressed new or unbuilt generation, the proposed language is being revised as indicated above and as set forth in the regulatory text included with this Final Rule. --------------------------------------------------------------------------- The Commission wishes to clarify that dropping the generation dominance standard for new capacity does not affect the demonstration that an applicant must make in order to qualify for market-based rates for sales from its existing generating capacity. In other words, the fact that an applicant need not demonstrate its lack of generation dominance with respect to new capacity cannot be used to ``bootstrap'' the authorization of market-based rates for its existing capacity. Moreover, our evaluation of market-based rates for existing capacity will include consideration of new capacity. In addition, the fact that we are codifying KCP&L does not mean that we will ignore specific evidence presented by an intervenor that a seller requesting market-based rates for sales from new generation nevertheless possesses generation dominance. For example, if the evidence indicated that the new generator, due to its proximity to an existing transmission constraint, could significantly influence the ability to move power across the constraint, we would consider such evidence in determining whether to grant the applicant's request.131 If such evidence is presented, the Commission will evaluate whether the evidence disproves the premise that the seller lacks generation dominance with respect to its new capacity. --------------------------------------------------------------------------- \131\ Cf. Wisconsin Electric Power Company, et al., 74 FERC para. 61,069 at 61,193 (1996). --------------------------------------------------------------------------- If the applicant has existing generation, the sales from which are authorized to be made on a market basis, the Commission would consider whether the new generation (when added to the existing generation with market-based authority) results in the applicant having generation dominance. On the other hand, if the applicant has existing generation, the sales from which are subject to cost-of-service regulation, the Commission would not include this generation in its analysis of the applicant's request for market-based rates for its new generation. The question of whether or not the applicant lacks genera [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%3A96-10694. Public record. Not legal advice.