Promoting Wholesale Competition Through Open Access Non- Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities
Federal RegisterMar 14, 1997
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SUMMARY: The Federal Energy Regulatory Commission (Commission)
reaffirms its basic determinations in Order No. 888 and clarifies
certain terms. Order No. 888 requires 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. Order No. 888 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 rule is effective on May 13, 1997.
FOR FURTHER INFORMATION CONTACT:
David D. Withnell (Legal Information--Docket No. RM95-8-001), Office of
the General Counsel, Federal Energy Regulatory Commission, 888 First
Street, N.E., Washington, D.C. 20426, (202) 208-2063
Deborah B. Leahy (Legal Information--Docket No. RM94-7-002), Office of
the General Counsel, Federal Energy Regulatory Commission, 888 First
Street, N.E., Washington, D.C. 20426, (202) 208-2039
Dan T. Hedberg (Technical Information--Docket No. RM95-8-001), Office
of Electric Power Regulation, Federal Energy Regulatory Commission, 888
First Street, N.E., Washington, D.C. 20426, (202) 208-0243
Joseph M. Power (Technical Information--Docket No. RM94-7-002), Office
of Electric Power Regulation, Federal Energy Regulatory Commission, 888
First Street, N.E., Washington, D.C. 20426, (202) 208-1242
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, N.E., Washington, D.C. 20426.
The Commission Issuance Posting System (CIPS), an electronic
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be available on CIPS in ASCII and WordPerfect 5.1 format. CIPS user
assistance is available at 202-208-2474.
CIPS is also available through the Fed World system. Telnet
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FedWorld may also be accessed by Telnet at the address fedworld.gov.
Finally, the complete text on diskette in Wordperfect format may be
purchased from the Commission's copy contractor, La Dorn Systems
Corporation. La Dorn Systems Corporation is also located in the Public
Reference Room at 888 First Street, N.E., Washington, D.C. 20426.
I. Introduction and Summary
II. Public Reporting Burden
III. Background
IV. Discussion
A. Scope of the Rule
1. Introduction
2. Functional Unbundling
3. Market-based Rates
a. Market-based Rates for New Generation
b. Market-based Rates for Existing Generation
4. Merger Policy
5. Contract Reform
6. Flow-based Contracting and Pricing
B. Legal Authority
C. Comparability
1. Eligibility to Receive Non-discriminatory Open Access
Transmission
a. Unbundled Retail Transmission and ``Sham Wholesale
Transactions''
b. Transmission Providers Taking Service Under Their Tariff
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
a. Distribution Function
b. Retail Transmission Service
c. Transmission Provider
1. Taking Service Under the Tariff
2. Accounting Treatment
D. Ancillary Services
1. Specific Ancillary Services
a. Scheduling, System Control and Dispatch Service
b. Reactive Supply and Voltage Control from Generation Sources
Service
c. Energy Imbalance Service
(1) Description of Energy Imbalance
(2) Energy Imbalance Bandwidth
2. Ancillary Services Obligations
a. Obligation of a Control Area Utility
b. Obligation to Provide Dynamic Scheduling
c. Obligation As Agent
3. Miscellaneous Ancillary Services Issues
a. Transmission Provider as Ancillary Services Merchant
b. QF Receipt of Ancillary Services
c. Pricing of Ancillary Services
E. Real-Time Information Networks
F. Coordination Arrangements: Power Pools, Public Utility
Holding Companies, Bilateral Coordination Arrangements, and
Independent System Operators . . . 179
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
a. Non-Price Terms and Conditions
b. Network and Point-to-Point Customers' Uses of the System (so
called ``Headroom'')
c. Load Ratio Sharing Allocation Mechanism for Network Service
(1) Multiple Control Area Network
Customers
(2) Twelve Monthly Coincident Peak v. Annual System Peak
(3) Load and Generation ``Behind the Meter''
(4) Existing Transmission Arrangements associated with
Generating Capacity Entitlements (e.g., ``preference power''
customers of PMAs)
d. Annual System Peak Pricing for Flexible Point-to-Point
Service
e. Opportunity Cost Pricing
[[Page 12275]]
(1) Recovery of Opportunity Costs
(2) Redispatch Costs
f. Expansion Costs
g. Credit for Customers' Transmission Facilities
h. Ceiling Rate for Non-firm Point-to-Point Service
i. Discounts
j. Other Pricing Related Issues Not Specifically Addressed in
the Final Rule
(1) Demand Charge Credits
(2) In-Kind Transactions
2. Priority For Obtaining Service
a. Reservation Priority for Existing Firm Service Customers
b. Reservation Priority for Firm Point-to-Point and Network
Service
c. Reservation Priorities for Non-firm Service
3. Curtailment and Interruption Provisions
a. Pro-rata Curtailment Provisions
b. Curtailment and Interruption Provisions for Non-firm Service
4. Reciprocity Provision
5. Liability and Indemnification
6. Umbrella Service Agreements
7. Other Tariff Provisions
a. Minimum and Maximum Service Periods
b. Amount of Designated Network Resources
c. Eligibility Requirements
d. Two-Year Notice of Termination Provision
e. Termination of Service for Failure to Pay Bill
f. Definition of Native Load Customers
g. Off-System Sales
h. Requirements Agreements
i. Use of Distribution Facilities
j. Losses
k. Modification of Non-rate Terms and Conditions
l. Miscellaneous Tariff Modifications
(1) Ancillary Services
(2) Clarification of Accounting Issues
(a) Transmission Provider's Use of Its System (Charging
Yourself)
(b) Facilities and System Impact Studies
(c) Ancillary Services
(3) Miscellaneous Clarifications
(a) Electronic Format
(b) Administrative Changes
8. Specific Tariff Provisions
9. Miscellaneous Tariff Administrative Changes
10. Pro Forma Tariff Compliance Filings
H. Implementation
1. Group 1 Public Utilities
2. Group 2 Public Utilities
3. Clarification Regarding Terms and Conditions Reflecting
Regional Practices
4. Future Filings
5. Waiver
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
a. Bonneville Power Administration (BPA)
b. Other Power Marketing Agencies
6. Tennessee Valley Authority
7. Hydroelectric Power
8. Residential Customers
9. Miscellaneous Issues
V. Environmental Statement
A. The Appropriate No-Action Alternative
B. Challenges to Modeling Assumptions
1. Appropriate Base Case
2. Challenge to the Use of Computer Modeling
3. Transmission Assumptions
4. Plant Availabilities and Heat Rates
5. Reserve Margins
6. Northeast MOU
7. Natural Gas Prices
8. Expanded Transmission Analysis
C. Mitigation
D. Emissions Standards Disparity
E. Short-Term Consequences of the Rule
G. Cost Benefit Analysis
H. Socioeconomic Impacts
I. Coastal Zone Management Act
VI. Regulatory Flexibility Act Certification
A. Docket No. RM95-8-000 (Open Access Final Rule)
1. Public Utilities
2. Non-Public Utilities
B. Docket No. RM94-7-000 (Stranded Cost Final Rule)
1. Public Utilities
2. Non-Public Utilities
VII. Information Collection Statement
VIII.Effective Date
Regulatory Text
Appendix A--List of Petitioners
Appendix B--Pro Forma Open Access Transmission Tariff
Statement of Commissioner Hoecker
Statement of Commissioner Massey
I. Introduction and Summary
On April 24, 1996, the Commission issued Final Rules (Order Nos.
888 and 889) intended to remedy undue discrimination in the
provision of interstate transmission services by public utilities
and to address the stranded costs that may result from the
transition to more competitive electricity markets.1 At the
heart of these rules is a requirement that prohibits owners and
operators of monopoly transmission facilities from denying
transmission access, or offering only inferior access, to other
power suppliers in order to favor the monopolists' own generation
and increase monopoly profits--at the expense of the nation's
electricity consumers and the economy as a whole.
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\1\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities and
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, Order No. 888, 61 FR 21,540 (May 10, 1996), FERC Stats. &
Regs. para. 31,036, clarified, 76 FERC para. 61,009 and 76 FERC
para. 61,347 (1996). Order No. 889 is an accompanying rule and
specific rehearing arguments on that rule will be addressed
separately.
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The electric utility industry today is not the industry of ten
years ago, or even five years ago. While historically it was assumed
that local utilities would be the only ones to generate and transmit
power for their customers, today there is a broad array of potential
competitors to supply power and widespread transmission facilities that
can carry power vast distances. But competitors cannot reach customers
if they cannot have fair access to the transmission wires necessary to
reach those customers. It is against this industry backdrop that the
Commission in Order No. 888 exercised its public interest
responsibilities pursuant to sections 205 and 206 of the Federal Power
Act (FPA), to reexamine undue discrimination in interstate transmission
services and the effect of that discrimination on the electricity
customers whom we are bound to protect under the FPA.
We here reaffirm the legal and policy bases on which Order No. 888
is grounded. Utility practices that were acceptable in past years, if
permitted to continue, will smother the fledgling competition in
electricity markets and undermine the national policies reflected in
the Energy Policy Act of 1992 to encourage the development of
competitive markets. We firmly believe that our authorities under the
FPA not only permit us to adapt to changing economic realities in the
electric industry, but also require us to do so, as necessary to
eliminate undue discrimination and protect electricity customers. The
record supports our conclusion that, absent open access, undue
discrimination will continue to be a fact of life in today's and
tomorrow's electric power markets. As recent events clearly
demonstrate, unbundled electric transmission service will be the
centerpiece of a freely traded commodity market in electricity in which
wholesale customers can shop for competitively-priced power.
[[Page 12276]]
The only way to effectuate competitive markets and remedy
discrimination is through readily available, non-discriminatory
transmission access. The Commission estimates the potential
quantitative benefits from such access will be approximately $3.8 to
$5.4 billion per year in 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.
Order No. 888 has two central components. The first requires all
public utilities that own, operate or control interstate transmission
facilities to offer network and point-to-point transmission services
(and ancillary services) to all eligible buyers and sellers in
wholesale bulk power markets, and to take transmission service for
their own uses under the same rates, terms and conditions offered to
others. In other words, it requires non-discriminatory (comparable)
treatment for all eligible users of the monopolists' transmission
facilities. The non-discriminatory services required by Order No. 888,
known as open access services, are reflected in a pro forma open access
tariff contained in the Rule. The Rule also requires functional
separation of the utilities' transmission and power marketing functions
(also referred to as functional unbundling) and the adoption of an
electric transmission system information network.
The second central component of Order No. 888 was to address
whether and how utilities will be able to recover costs that could
become stranded when wholesale customers use the open access tariffs,
or FPA section 211 tariffs, 2 to leave their utilities' power
supply systems and shop for power elsewhere. Because of competitive
changes occurring at the retail level, as numerous states have begun
retail transmission access programs, Order No. 888 also clarifies
whether and when the Commission may address stranded costs caused by
retail wheeling and the extent of the Commission's jurisdiction over
unbundled retail transmission. The Commission further addresses the
circumstances under which utilities and their wholesale customers may
seek to modify contracts made under the old regulatory regime, taking
into account the goals of reasonably accelerating customers' ability to
benefit from competitively priced power and at the same time ensuring
the financial stability of electric utilities during the transition to
competition.
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\2\ Under section 211 of the FPA, the Commission, on a case-by-
case basis upon application by an eligible customer, may order both
public utilities and non-public utilities that own or operate
transmission facilities used for the sale of electric energy at
wholesale to provide transmission services to the applicant if it
finds it is in the public interest to issue such order.
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137 entities filed requests for rehearing and/or clarification of
Order No. 888. While these parties raise a variety of arguments--
including legal, policy, and technical arguments--the majority
(including a majority of public utilities) agree that we need to
harness the benefits that competitive electricity markets can bring to
the nation. The disagreements primarily focus on the mechanics of how
we should do this, who should pay the costs of the transition to
competition, and how long the transition should take.
First, parties disagree on what is necessary to remedy undue
discrimination and to develop truly competitive wholesale markets. Many
focus specifically on the tariff terms and conditions of good
transmission access and seek changes in the Order No. 888 pro forma
tariff. In response to these types of rehearing arguments, the
Commission has fine-tuned or changed some of the pro forma tariff terms
and conditions to better ensure that they do not permit discrimination
and that they result in well-functioning markets. Other petitioners
focus on additional structural changes which they believe are
necessary, such as mandatory corporate restructuring (divestiture of
generation assets) or mandatory creation of independent transmission
system operators (ISOs). With regard to restructuring, the Commission
continues to believe that functional unbundling of the utility's
business, not corporate divestiture or mandatory ISOs, is sufficient to
remedy undue discrimination at this time.
The most contentious arguments raised on rehearing involve how we
deal with the transition costs associated with moving to competition.
Some utilities have invested millions of dollars in facilities and
purchased power contracts based on an explicit or implicit obligation
to serve customers and the expectation that those customers would
remain on their systems for the foreseeable future. These utilities
face so-called ``stranded costs'' which, if not recovered from the
customers that caused the costs to be incurred, could be shifted to
other customers.
There are two basic categories of rehearing arguments regarding
stranded cost recovery. Most utilities want a guarantee from this
Commission that they will recover all stranded costs, whether caused by
losing retail customers or wholesale customers. Many customers, on the
other hand, want to be able to abrogate existing power supply contracts
so that they can immediately leave their current suppliers' systems and
shop for cheaper power elsewhere, without paying the sunk costs that
their suppliers incurred on their behalf.
In response to these diverse arguments, the Commission has struck a
reasonable balance that, for certain defined circumstances, permits
utilities the opportunity to seek extra-contractual recovery of
stranded costs from their departing customers and permits customers the
opportunity to make a showing that their contracts should be shortened
or terminated. Based on our experience in the natural gas area, we have
learned that it is critical to address these issues early, but we also
have chosen an approach different from that taken in the gas area
because of the different circumstances facing the electric industry.
In balancing the wide array of interests reflected in the rehearing
petitions, we have made a number of clarifications and granted
rehearing on some issues, but we reaffirm the core elements and
framework of Order No. 888. Since the time the final rules issued, as
discussed in Section III, the pace of competitive change has continued
to escalate in the industry at both the wholesale and retail levels as
competitors, customers and state regulatory authorities aggressively
seek ways to lower the price of electricity. We therefore believe it is
all the more critical that we remedy undue discrimination in interstate
transmission services now, and that we do so generically, if we are to
fulfill our responsibilities under the FPA to protect consumers and
provide a fair and orderly transition to new competitive markets.
Finally, with respect to environmental issues associated with this
rulemaking, certain parties on rehearing continue to challenge the
adequacy of our Final Environmental Impact Statement (FEIS). The
central issues are whether the Final Rule will increase emissions of
nitrogen oxides (NOx) from certain fossil-fuel fired generators, which
could affect air quality in downwind areas to which these emissions may
be carried, and the Commission's authority to mitigate environmental
consequences.
We deny rehearing on the environmental issues raised and affirm our
conclusion that we have satisfied our obligations under NEPA. As
discussed in detail in the Final Rule, this rulemaking is expected to
slightly increase or slightly decrease total future
[[Page 12277]]
NOx emissions, depending on whether competitive conditions in the
electric industry favor the utilization of natural gas or coal as a
fuel for the generation of electricity. We also examined mitigation
options over the longer term, and found that the preferred approach for
mitigating any adverse environmental consequences would be for the
Environmental Protection Agency (EPA) and the states to address the
problem through regulatory authorities available under the Clean Air
Act. The petitions for rehearing have not persuaded us to change this
approach. Indeed, we note that since the issuance of Order No. 888, the
EPA has concluded that the Rule is unlikely to have any immediate
significant adverse environmental impact and thus concurred that the
Commission's analysis is adequate under NEPA. We further note that EPA
has recently taken steps under the Clean Air Act to address NOx
emissions as part of a comprehensive emissions control program, along
the lines endorsed by the Commission in the EIS.
In summary, the Commission believes that our authorities under the
FPA not only permit us to adapt to changing economic realities in the
electric industry, but also require us to do so to eliminate undue
discrimination and protect electricity customers. The measures required
in Order No. 888 are necessary to remedy undue discrimination in
interstate transmission services and provide an orderly and fair
transition to competitive bulk power markets.
To assist the reader, we provide below a section-by-section summary
of key elements of this Order on Rehearing.
Scope of the Rule
In this section we discuss petitions to rehear our requirement that
transmission and power sales services be contracted for separately
(unbundled). We reaffirm that this requirement is a reasonable and
workable means of assuring non-discriminatory open access transmission.
In doing so we refuse invitations to require that utilities under our
jurisdiction divest themselves of generation or transmission assets. We
do, however, make an important clarification involving how we will deal
with existing contracts that contain so-called Mobile-Sierra clauses
(clauses under which one or both parties agreed not to seek
modification of contract terms unless they could show that it is
contrary to the public interest not to permit the modification).
In Order No. 888 we concluded that contracts would not be abrogated
by operation of the Rule. Instead, preexisting contracts would continue
to be honored until such time as they were revised or terminated. We
also found that those who were operating under pre-existing
requirements contracts containing Mobile-Sierra clauses would
nonetheless be allowed to seek reform of the contracts on a case-by-
case basis. On rehearing we affirm that public utilities will be
allowed to file to amend their Mobile-Sierra contracts for the limited
purpose of providing an opportunity to seek recovery of stranded costs,
without having to make a public interest showing that such cost
recovery should be permitted. However, these utilities will have the
burden, on a case-by-case basis, of showing that they had a reasonable
expectation of continuing to serve the departing customer after the
contract term. We clarify that if the utilities under such contracts
seek to modify provisions that do not relate to stranded costs, they
will have the burden of showing that the provisions are contrary to the
public interest.
We here make clear that, in turn, customers will be allowed to file
to amend their Mobile-Sierra contracts to modify any contract term or
to terminate the contract, without having to make a showing that the
contract terms are contrary to the public interest. Instead, customers
seeking modifications must demonstrate that the provisions they wish
modified are no longer ``just and reasonable.'' We reaffirm our
conclusion in the Final Rule that if a customer seeks to shorten or
eliminate the term of its contract, however, any contract modification
approved by the Commission will provide for appropriate stranded cost
recovery by the customer's supplying utility.
These various provisions meet the two-fold need to deal with
stranded costs and the contracts under which those costs were incurred.
However, as described in Order No. 888, the opportunity to reform
Mobile-Sierra contracts extends only to a limited set of contracts--
those entered into on or before July 11, 1994, for requirements power.
Comparability
In this section we deal with those requesting rehearing of our
conclusions regarding what ``comparable'' service is, who is eligible
for that service, and how it is to be implemented. We reaffirm our
finding that, as a matter of law, we have jurisdiction over the rates,
terms and conditions of unbundled transmission service provided to
retail customers. We also clarify that we have authority to order
``indirect'' unbundled retail transmission services and that if such
transmission is ordered by us in the future, or if it is provided
voluntarily, otherwise eligible customers may obtain such service under
the open access tariff. We expect public utilities to provide such
service in the future and, if they do not, we will not hesitate to
order it.
We modify in two respects the definition of who is eligible for
open access transmission service. First, we clarify that, with respect
to service that this Commission is prohibited from ordering by section
212(h) of the Federal Power Act (retail wheeling directly to an
ultimate consumer and ``sham'' wholesale wheeling), entities are
eligible for such service under the tariff only if it is provided
pursuant to a state requirement or is provided voluntarily. Second, we
clarify that retail customers taking unbundled service pursuant to a
state requirement (i.e., direct retail service) are eligible for such
service only from those transmission providers that the state orders to
provide service. These changes are made to make clear that our rules
cannot be used to circumvent the proscriptions placed on the Commission
against ordering direct retail wheeling.
Ancillary Services
In this section we deal with petitions to rehear our definitions of
ancillary services--those services such as scheduling, voltage control,
and supplemental reserve service that must or can attend the providing
of transmission service--as well as the provisions involving these
services. We reaffirm that tariffs must separately state the charges
for these services. We do modify some of the definitions of these
services to conform to industry needs and practices. Most importantly,
we make clear that the transmission provider's sale of ancillary
services associated with providing basic transmission service is not a
wholesale merchant function and thus does not violate the standards of
conduct imposed with Order No. 889.
Coordination Arrangements
The requirement to provide non-discriminatory open access
transmission applies to any agreement between utilities that contains
transmission rates, terms or conditions. This includes pooling
arrangements and agreements between companies contracting to provide
each other mutually beneficial transmission services. In Order No. 888
we laid out rules under which the open access comparability
requirements would apply to tight and loose power pools, public utility
holding companies and bilateral coordination agreements.
[[Page 12278]]
We also set out principles that would govern our approval of
independent system operator (ISO) agreements.
In this section we affirm the rules governing coordination
agreements. In doing so we clarify the definition of ``loose pool.'' We
also make clear that, unlike in other situations where we require
utilities to provide not only the services they provide themselves but
those they could provide themselves, we will require members of loose
pools to offer to third parties only those transmission services that
they provide themselves under their pool-wide agreements.
We also reaffirm our strong commitment to the concept of ISOs and
the ISO principles described in Order No. 888. In doing so we reject
arguments that we should require that ISOs be formed. At the same time,
we emphasize that while there is no ``cookie-cutter'' approach to
forming an acceptable ISO, the requirement of fair and non-
discriminatory rules of governance (Principle One) and the requirement
that ISO employees have no financial interest in the economic interests
of power marketers--backed by strict conflict of interest provisions--
(Principle Two) are fundamental to our approving any ISO.
Pro Forma Tariff Provisions
The pro forma tariff is the basic mechanism implementing the
requirements of comparable open access transmission. It provides the
details of the transmission service obligations imposed on
jurisdictional utilities by the Rule. On rehearing we affirm most of
the provisions set out in Order No. 888 for the pro forma tariff. We do
make changes to conform the pro forma tariff to changes adopted under
other sections (for example, the definition of ``eligible customer'').
The rehearing petitions raised many questions about how particular
aspects of the tariff will work. For the most part, these questions
cannot be answered generically, but must be resolved on a case-by-case
basis in the context of specific fact situations. However, the
petitions brought to light issues that require clarifications and in
some cases revisions to the tariff. The most significant of these
involve discounting practices, provisions governing priority of service
and curtailment, and the reciprocity provision.
Discounting practices. Originally, we provided different rules
depending upon whether the transmission provider was offering a
discount to itself or an affiliate or offering a discount to a non-
affiliate. In response to the rehearing petitions, we are making three
significant changes to the discounting requirements to better permit
the ready identification of discriminatory discounting practices while
also providing greater discount flexibility.
First, any discount offered on transmission services (including
supporting ancillary services) by a transmission provider or requested
by any customer must now be made only over the OASIS. With this change,
all will have the same, timely access to discounted services. In making
this change, we clarify that a transmission provider may limit its
discounted service to particular time periods.
Second, once the provider and customer agree on a discount, the
details of the discounted service--the price, points of receipt and
delivery, and length of service--must be immediately posted on the
OASIS.
Third, we revise our Rule respecting what other transmission paths
must be offered at a discount. Originally, in Order No. 888, we
required that when a discount was offered over one path, the
transmission provider would have to provide that discount over all
other unconstrained paths on its system. We will no longer require
this. Instead, the discount will be limited to those unconstrained
paths that go to the same point(s) of delivery as the discounted
service being provided on the transmission provider's system. The
discount will extend for the same time period and must be offered to
all transmission service customers.
Priority and Curtailment. We affirm the right of first refusal
policy that reservation priority continues for firm service customers
served under a contract of one year or more. We also affirm that
curtailment must be made on a pro-rata basis and clarify that non-firm
point-to-point service is subordinate to firm service. However, we
clarify that the pro-rata curtailment requirement extends to only those
transactions that alleviate the constraint.
Reciprocity. In Order No. 888 we conditioned the use of a public
utility's open access service on the agreement that, in return, it is
offered reciprocal service by non-public utilities that own or control
transmission facilities. Such reciprocal service does not have to be
through an open access tariff, i.e., a tariff available to all eligible
customers, but may be limited to those public utilities from whom the
non-public utility obtains open access service. We affirm the
reciprocity condition. In doing so, however, we make several
clarifications.
First, a public utility is free to offer transmission service to a
non-public utility without requiring reciprocal service in return. In
other words, it may voluntarily waive the reciprocity condition.
However, if it chooses to do so, transmission service must be provided
through the pro forma tariff. Alternatively, bilateral agreements for
transmission service provided by the public utility will not be
permitted.
Second, we clarify that under the reciprocity condition a non-
public utility must agree to offer the Transmission Provider any
transmission service the non-public utility provides or is capable of
providing on its system. This means that the non-public utility
undertaking reciprocity must have an OASIS and must operate under the
standards of conduct imposed under Order No. 889 unless it is granted a
waiver by the Commission or, where appropriate, by a regional
transmission group (RTG) of which it is a member. We also clarify that
a non-public utility cannot avoid its responsibilities by obtaining
transmission service through other transmission customers. Further, the
seller as well as the buyer in the chain of a transaction involving a
non-public utility will have to comply with the reciprocity condition.
Third, we adhere to our decision not to treat generation and
transmission (G&T) cooperatives and their member distribution
cooperatives as a single unit. Thus, the reciprocity provision extends
to the G&T Cooperative and not to its member distribution cooperatives.
Fourth, we clarify the ``safe harbor'' provision under which a non-
public utility may get a Commission decision that its transmission
tariff suffices to meet reciprocity. A non-public utility may limit the
use of any reciprocity tariff that it voluntarily files at the
Commission to those transmission providers from whom the non-public
utility obtains open access service. A non-public utility also may
satisfy reciprocity through bilateral agreements with a public utility.
As a related matter, if a public utility believes a non-public utility
is violating the reciprocity condition, it may file with the Commission
a petition to terminate its service to the non-public utility.
Fifth, we clarify that non-public utilities may include stranded
cost provisions in their reciprocity tariffs.
Sixth, the order on rehearing removes the term ``interstate'' from
the reciprocity provisions. This is to make clear that reciprocity
applies even to those who do not own or control interstate transmission
facilities; i.e., foreign utilities and those located in the ERCOT
region of Texas.
As to local furnishing bonds held by some public utilities, we
clarify that all costs associated with the loss of tax-
[[Page 12279]]
exempt status of those bonds caused by providing open access
transmission service are properly considered costs of providing that
service. This includes costs of defeasing, redeeming, and refinancing
those bonds.
Other Clarifications. In this order on rehearing we take the
opportunity to clarify various other tariff provisions. Among these:
Transmission providers do not have to take service under the open
access tariff for transmitting power purchased on behalf of their
bundled retail customers. Also, the ability to reserve capacity to meet
the reliability needs of a transmission provider's native load applies
equally to present transmission and transmission that is built in the
future.
Implementation
On rehearing, we make no substantive changes to the implementation
provisions originally required under Order No. 888. For the most part,
the implementation process has been completed. Utilities have made the
requisite tariff and compliance filings and public and non-public
utilities have, through other orders, been provided guidance as to
obtaining waivers of Order No. 888 and Order No. 889 requirements.
We emphasize that we do not require the abrogation of existing
contracts. Rather, the Rule requires only that transmission providers
offer transmission under the open access tariff in addition to existing
service obligations. Commitments made under existing contracts will
continue. Of course, both transmission providers and their customers
may seek to revise the terms and conditions of existing contracts by
making the necessary filings, as appropriate, under Sections 205 or 206
of the Federal Power Act.
State and Federal Jurisdiction
On rehearing we reaffirm our decision that when transmission
service is provided to serve retail customers apart from any contract
for the retail sale of power, i.e., when it is provided on an unbundled
basis, that transmission service is under our jurisdiction. In today's
market, and increasingly in the future as more states adopt retail
wheeling programs, retail transactions are, and will be, broken down
into products that are sold separately--transmission and generation--
and sold by different entities. The exercise of our jurisdiction over
the rates, terms and conditions of unbundled retail transmission will,
therefore, become more important. We also recognize that states have
jurisdiction over facilities used for local distribution.
On rehearing we also reaffirm the seven-factor test of Order No.
888 to distinguish transmission under our jurisdiction from state-
jurisdictional local distribution. In doing so, we recognize that our
test does not resolve all possible issues. There may be other factors
that should be taken into account. The test, therefore, is designed for
flexibility to include unique local characteristics and usages. To that
end, we will continue to defer to state findings on these matters.
In addition, we clarify that states have the authority to determine
the retail marketing areas of the electric utilities within their
respective jurisdictions. We also recognize that states have the
concomitant authority to determine the end user services these
utilities provide.
Stranded Costs
On rehearing, we reaffirm our basic decisions surrounding the
recovery of stranded costs. Utilities will be allowed the opportunity
to seek to recover legitimate, prudent, and verifiable wholesale
stranded costs. This opportunity is limited to costs associated with
serving customers under wholesale requirements contracts executed on or
before July 11, 1994 that do not contain explicit stranded cost
provisions; and costs associated with serving retail-turned-wholesale
customers.
We clarify that we will consider on a case-by-case basis whether to
treat a contract extended or renegotiated without a stranded cost
provision as an existing contract for stranded cost purposes.
In each case, the opportunity to seek stranded costs is limited to
situations in which there is a direct nexus between the availability
and use of a Commission-required transmission tariff and the stranding
of the costs. The Rule does not allow the recovery of costs that do not
arise from the new, accelerated availability of non-discriminatory
transmission access.
The Commission also reaffirms its decision that stranded costs
should be recovered from the customer that caused the costs to be
incurred. The Commission is not requiring other remaining customers, or
the utility, to shoulder a portion of its stranded costs that meet the
requirements for recovery.
The Commission, as described in Order No. 888, will be the primary
forum for addressing the recovery of stranded costs caused by retail-
turned-wholesale customers. With respect to such cases, we have made
several changes.
First, the Commission has reconsidered its decision respecting
cases involving existing municipal utilities that annex retail customer
service territories. Under Order No. 888, we found that in such cases
the Commission should not be the primary forum for determining stranded
cost recovery. On rehearing we now find that such cases should fall
within our province.
Second, we clarify that the opportunity for recovery of stranded
costs associated with retail-turned-wholesale customers applies
regardless of whether the customer or its new supplier is the one
requesting and contracting for the transmission service. To this end,
we have revised the definition of ``wholesale stranded cost.''
With respect to the recovery of stranded costs caused by unbundled
retail wheeling, we affirm that the only circumstance in which we will
entertain requests for these types of costs is when the state
regulatory authority does not have authority under state law to address
stranded costs when the retail wheeling is required. We clarify that if
a state regulatory authority has in fact addressed such costs,
regardless of whether it has allowed full recovery, partial recovery or
no recovery, utilities may not apply to the Commission to recover
stranded costs caused by the retail wheeling.
Other
In this section we resolve questions concerning our information
reporting requirements, regional transmission groups, and the special
situations posed by utilities in the Pacific Northwest and by federal
power marketing and similar agencies. Here we make some minor
clarifications but make no significant changes to Order No. 888.
We are not persuaded that the information reporting requirements
need to be changed at this time. Finally, we reject arguments that
would have us fix generically any particular rate methodology for
providing open access transmission service under the pro forma tariff.
II. Public Reporting Burden
This order on rehearing issues a number of minor revisions to the
Final Rule. We find, after reviewing these revisions, that they do not,
on balance, increase the public reporting burden.
The Final Rule contained an estimated annual public reporting
burden based on the requirements of the Open Access Final Rule and the
Stranded Cost Final Rule.3 Using the
[[Page 12280]]
burden estimate contained in the Final Rule as a starting point, we
evaluated the public burden estimate contained in the Final Rule in
light of the revisions contained in this order and assessed whether
this estimate needed revision. We have concluded, given the minor
nature of the revisions, and their offsetting nature, that our estimate
of the public reporting burden of this order on rehearing remains
unchanged from our estimate of the public reporting burden contained in
the Final Rule. The Commission has conducted an internal review of this
conclusion and has assured itself that there is specific, objective
support for this information burden estimate. Moreover, the Commission
has reviewed the collection of information required by the Final Rule,
as revised by this order on rehearing, and has determined that the
collection of information is necessary and conforms to the Commission's
plan, as described in the Final Rule, for the collection, efficient
management, and use of the required information.
---------------------------------------------------------------------------
\3\ 61 FR 21540 at 21543; FERC Stats. & Regs. para. 31,036 at
31,638 (1996). No comments were filed in objection to the public
burden estimate contained in the Open Access Final Rule and the
Stranded Cost Final Rule.
---------------------------------------------------------------------------
Persons wishing to comment on the collections of information
required by the Final Rule, as modified by this order on rehearing,
should direct their comments to the Desk Officer for FERC, Office of
Management and Budget, Room 3019 NEOB, Washington, D.C. 20503, phone
202-395-3087, facsimile: 202-395-7285 or via the Internet at
[email protected]. Comments must be filed with the Office of
Management and Budget within 30 days of publication of this document in
the Federal Register. Three copies of any comments filed with the
Office of Management and Budget also should be sent to the following
address: Ms. Lois Cashell, Secretary, Federal Energy Regulatory
Commission, Room 1A, 888 First Street, N.E., Washington, D.C. 20426.
For further information, contact Michael Miller, 202-208-1415.
III. Background
In the Final Rule, we detailed the events that led up to this
rulemaking, including the significant technical, statutory and
regulatory changes that have occurred in the electric industry since
the FPA was enacted in 1935.4 In particular, we focused on the
competitive influences of the Public Utility Regulatory Policies Act of
1978, the Congressional mandate in the Energy Policy Act of 1992 to
encourage competition in electricity markets, and the need for reform
in the industry if consumers are to achieve the benefits that greater
competition can bring.
---------------------------------------------------------------------------
\4\ FERC Stats. & Regs. at 31,638-52; mimeo at 13-51.
---------------------------------------------------------------------------
In the ten months since the Final Rule issued, competitive changes
have escalated at an even faster pace in virtually all areas of the
electric industry. These changes are driven not only by the
Commission's Final Rule, but also by state restructuring initiatives
and by continuing pressures from customers to take advantage of
emerging competitive markets and the lower electricity rates they can
bring.
All of the existing 166 public utilities that own, control or
operate interstate transmission facilities (listed as Group 1 and Group
2 utilities in the Final Rule) have filed the Order No. 888 pro forma
open access tariff or requested a waiver of the requirement. Similarly,
they either have adopted an electronic information network or requested
a waiver of the requirement. Five non-public utilities have submitted
reciprocal transmission tariffs and more than 20 have requested a
waiver of the reciprocity condition in the pro forma tariff.5
---------------------------------------------------------------------------
\5\ As a condition of using a public utility's open access
tariff, any user, including non-public utilities, must offer
reciprocal comparable transmission access to the public utility in
return. Order No. 888 provides a voluntary mechanism whereby non-
public utilities can obtain Commission confirmation that what they
are offering meets the tariff reciprocity condition. Non-public
utilities also may seek a waiver of the reciprocity condition.
---------------------------------------------------------------------------
Significant competitive changes also have accelerated with respect
to power pooling, state restructuring initiatives, and Independent
System Operators (ISOs). Under Order No. 888 and subsequent
implementation orders, the Commission required the filing of revised
pooling agreements and joint pool-wide transmission tariffs by December
31, 1996, in order to remedy undue discrimination in transmission
services provided through interstate power pooling arrangements. Among
the power pool filings were a New England (NEPOOL) comprehensive
restructuring proposal, a New York proposal, a Pennsylvania-New Jersey-
Maryland (PJM) compliance filing and a Western Systems Power Pool
filing.
In response to the Commission's encouragement in Order No. 888 of
ISOs as a possible means for accomplishing comparable access, a number
of utilities and states are well underway in developing this new
institution. The fundamental purpose of an ISO is to operate the
transmission systems of public utilities in a manner that is
independent of any business interest in sales or purchases of electric
power by those utilities. The Commission has received several proposals
for forming ISOs, one as part of the multi-docketed filing engendered
by California's restructuring plan, and others relating to power pool
filings. A number of regions are also developing ISO proposals. Some
regions previously considering regional transmission groups (RTGs),
whose primary purpose is regional planning of transmission facility
construction and upgrades, have now broadened their discussions to
include an ISO.
Investor-owned utilities in California, at the order of both the
state commission and the legislature, have filed proposals with the
Commission that would transfer control of transmission facilities to an
ISO in conjunction with the formation of a state-wide power exchange to
facilitate both wholesale and retail access. While the case presents
many complex issues for the Commission to resolve, the California
proposal is fundamentally compatible with the pro-competitive open-
access requirements of Order Nos. 888 and 889. The Commission's open-
access policies therefore have provided a framework for California, and
other states, to explore customer choice initiatives.
Other major regions of the country also are instituting ISOs.
Member utilities of the PJM Power Pool filed competing ISO proposals
with the Commission and are currently working to reconcile the
differences between their proposals. The New York Power Pool recently
filed a proposal to create an ISO and a power exchange for New York.
The New England Power Pool is exploring a new industry structure for
its region that centers on the creation of an ISO. Utilities and other
market participants in the Electric Reliability Council of Texas have
also formed an ISO. Discussions are underway among utilities from
Virginia to Wisconsin in an attempt to create a Midwestern ISO. Members
of the Mid-America Power Pool are discussing an ISO proposal. In the
Pacific Northwest, utilities are involved in negotiations intended to
lead to the formation of an independent grid operator (Indego).
The combined available generation resources of the utilities in
these groups is on the order of 428 GW out of a total of approximately
732 GW for total U.S. resources (as of the end of 1996). Thus, assuming
these ISO arrangements come to fruition, about three-fifths of the
industry may have independent system operators controlling their
transmission systems.
Moreover, every state but one has proposed or is considering or
developing retail competition programs. For example, New Hampshire,
Illinois
[[Page 12281]]
and Massachusetts began pilot programs in the past year, and retail
transmission service for these pilot programs currently is being taken
pursuant to tariffs approved by both the state commissions and this
Commission. The Massachusetts Department of Public Utilities has sent a
proposal to the state legislature calling for retail competition to
begin in January 1998. The New York Public Service Commission has
issued an order proposing that retail competition begin in early 1998.
The New Jersey Board of Public Utilities has issued a proposal
permitting customer choice beginning in October of 1998. The Vermont
Public Service Board has sent a plan to the legislature recommending
that full customer choice begin by the end of 1998. The Arizona
Corporation Commission has adopted rules to phase in competition over
four years, beginning in January 1999. Recently, the Maine Public
Utilities Commission issued a final report and recommendation to the
legislature for retail competition to begin in January 2000. In
addition, Rhode Island and Pennsylvania both have new laws requiring
customer choice. These are only a few of the many state initiatives
that are under way that will dramatically alter the structure of the
electric industry.
Since Order No. 888 was issued, significant efforts also have been
made to ensure that reliability of the transmission grid is maintained
and that reliability criteria are compatible with competitive markets.
The North American Electric Reliability Council (NERC) has continued
its efforts to broaden its membership and to fashion reliability
requirements to fit a more competitive electric power industry. For
example, the NERC Board of Directors voted to require mandatory
compliance by all power market participants with its reliability
standards. NERC is also establishing new entities called regional
security coordinators to oversee the stability of grid operations and
to direct the development of an extensive new communications network.
Various NERC committees are considering ways to improve the tracking of
power transactions, identify the network impacts of transactions, and
reflect the actual flow of power over the network when making
reservations for transmission service. These efforts are likely to
intensify as the industry continues to adapt to competitive changes
occurring in the marketplace.
Thus, all segments of the electric industry have taken significant
steps in the past year in response to the emerging wholesale
competitive markets enabled by Order No. 888 as well as state retail
competition initiatives. The competitive framework established by Order
No. 888, whose centerpiece is non-discriminatory transmission services
and a fair and orderly stranded cost recovery mechanism, is critical to
the successful transition to, and full development of, the industry
restructuring proposals that are well underway in all major regions of
the country.
IV. Discussion
A. Scope of the Rule
1. Introduction
Rehearing Requests
Severability of Rules
Several entities assert that the Commission should find that the
requirements of open access transmission and stranded cost recovery are
not severable.6 They argue that if one of these provisions is
invalidated by a court or otherwise removed, the orders in their
entirety should be withdrawn or stayed pending reconsideration by the
Commission, and public utilities should be allowed to withdraw or file
amended transmission tariffs.
---------------------------------------------------------------------------
\6\ E.g., Nuclear Energy Institute, Southern, EEI. EEI and
Nuclear Energy Institute also argue that Order No. 889 should not be
severable.
---------------------------------------------------------------------------
Commission Conclusion
The Commission will not, at this time, make any determination
whether or not the open access transmission, stranded cost recovery and
OASIS provisions of Order Nos. 888 and 889 are severable. Accordingly,
we make no finding whether, if one of these provisions is invalidated,
Order Nos. 888 and 889 should be withdrawn or stayed in their entirety.
We believe that our decisions in Order Nos. 888 and 889 will be upheld
by the courts. Moreover, it would be premature to consider the
appropriateness of a stay or withdrawal at this time. Circumstances at
the time of any court order would dictate how we should proceed and we
would consider all such circumstances, and the entirety of our policy
decisions, before determining how to respond to a court decision.
2. Functional Unbundling
In the Final Rule, the Commission found that functional unbundling
of wholesale generation and transmission services is necessary to
implement non-discriminatory open access transmission.7 At the
same time, the Commission recognized that additional safeguards were
necessary to protect against market power abuses. Thus, the Commission
adopted a code of conduct, discussed in detail in the final rule on
OASIS, to ensure that the transmission owner's wholesale power
marketing personnel and the transmission customer's power marketing
personnel have comparable access to information about the transmission
system. The Commission also noted that section 206 of the FPA is
available if a public utility seeks to circumvent the functional
unbundling requirements.
---------------------------------------------------------------------------
\7\ FERC Stats. & Regs. at 31,654-56; mimeo at 57-61.
---------------------------------------------------------------------------
As a further precaution against unduly discriminatory behavior, the
Commission stated that it will continue to monitor electricity markets
to ensure that functional unbundling adequately protects transmission
customers. The Commission also indicated that it would continue to
observe both the evolution of competitive power markets and the
progress of the industry in adapting structurally to competitive
markets. If it subsequently becomes apparent that functional unbundling
is inadequate or unworkable in assuring non-discriminatory open access
transmission, the Commission indicated that it would reevaluate its
position and decide whether other mechanisms, such as ISOs, should be
required.
The Commission concluded 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, the Commission
indicated that it was not prepared to adopt a more intrusive and
potentially more costly mechanism--corporate unbundling--at this time.
Rehearing Requests
Several entities disagree with the Commission's decision to require
functional unbundling of wholesale generation and transmission as a
means of assuring non-discriminatory open access transmission.8
American Forest & Paper argues that utilities must be required to
divest or spin-off their generating assets through operational
unbundling or divestiture. It alleges that it was arbitrary and
capricious, and not supported by evidence, for the Commission to rely
on a monopolist's code of conduct to protect against monopoly abuses.
Nucor asserts that a financial conflict of interest remains and that
the Commission cannot monitor the exchanges of information between
utility generation and transmission employees. It declares that a
credible
[[Page 12282]]
information disclosure requirement is needed that makes generation cost
and production data visible to all participants on a same-time basis.
NY Municipal Utilities also believes that the Commission did not go far
enough and argues that the Commission should have required operational
unbundling, at least for tight power pools.
---------------------------------------------------------------------------
\8\ E.g., American Forest & Paper, Nucor, NY Municipal
Utilities.
---------------------------------------------------------------------------
Commission Conclusion
The Commission reaffirms its finding in the Final Rule that, based
on the information available at this time, functional unbundling, along
with the flexible safeguards discussed in the Final Rule, is a
reasonable and workable means of assuring non-discriminatory open
access transmission. We see no need to adopt a more intrusive and
potentially more costly approach at this time based on speculative
allegations that functional unbundling may not work and that more
severe measures may be needed. Indeed, despite a number of
opportunities to do so, no entity has submitted any evidence suggesting
that this less intrusive approach would not work. We do emphasize,
however, that we have not adopted a rigid approach, but have indicated
a willingness to monitor the situation and, if events require,
reevaluate our decision and decide whether another mechanism may be
more appropriate. Until we see evidence that functional unbundling will
not work, we will continue to require functional unbundling, with the
safeguards enumerated in the Final Rule and in Order No. 889.
3. Market-Based Rates
a. Market-Based Rates for New Generation
In the Final Rule, the Commission codified its determination in
Kansas City Power & Light Company (KCP&L) 9 that the generation
dominance standard for market-based sales from new capacity should be
dropped.10 The Commission explained that it had yet to find an
instance of generation dominance in long-run bulk power markets and no
commenter had presented any evidence to that effect. However, the
Commission emphasized that it will not ignore specific evidence
presented by an intervenor that a seller requesting market-based rates
for sales from new generation nevertheless possesses generation
dominance.
---------------------------------------------------------------------------
\9\ 67 FERC para. 61,183 at 61,557 (1994).
\10\ FERC Stats. & Regs. at 31,656-57; mimeo at 63-66.
---------------------------------------------------------------------------
The Commission further clarified 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.
Rehearing Requests
Several entities take issue with the Commission's determination to
drop the generation dominance standard for market-based sales from new
capacity.11 American Forest & Paper argues that the Commission
should delay its decision until effective competition has been
demonstrated to exist in all markets. SC Public Service Authority
maintains that the Commission must determine on a case-by-case basis
whether public utilities have market power (for both existing and new
capacity). It further argues that the Commission must develop an
analysis of structural conditions to use in assessing the potential for
market power consistent with that used by DOJ and FTC in merger
proceedings and that reflects the conditions of the industry. SC Public
Service Authority also asserts that the Commission must require as a
condition of market rates for sales in the bulk power market, which it
defines to be limited to sales to integrated utilities, that the
selling utility file rate cases with the Commission and the applicable
state commissions to avoid subsidization by captive consumers.
---------------------------------------------------------------------------
\11\ E.g., American Forest & Paper, SC Public Service Authority,
TDU Systems, LEPA, San Francisco.
---------------------------------------------------------------------------
TDU Systems alleges that the long-run bulk power market upon which
the KCP&L decision was based is overly broad and ignores the
distinction between firm power, which ``entities subject to others'
market power are most commonly in need of'' and other bulk power
services. TDU Systems take issue with the Commission's conclusion in
KCP&L that large numbers of capacity offers from IPPs and QFs
demonstrate that the market abounds with competitors. TDU Systems
argues that the Commission's ``assumption that large numbers of offers
of power equate with large numbers of offers of firm power is
questionable at best, and very likely incorrect.'' 12 Similarly,
LEPA argues that the Commission ignored evidence submitted by LEPA in
comments ``that the transmission dominant utility still retained
monopoly power over RQ [requirements] markets on which LEPA's members
are dependent for their bulk power supply.'' Because the Commission
ignored the RQ market and the evidence of concentration in that market,
LEPA asserts that the Commission's decision is reversible error. LEPA
further argues that the Commission ignored the undisputed testimony of
LEPA's witness that reliability requirements constrain the geographic
scope of the RQ market severely.
---------------------------------------------------------------------------
\12\ TDU Systems at 92.
---------------------------------------------------------------------------
San Francisco argues that the burden to demonstrate affirmatively
the absence of capacity constraints as a precondition to receiving
authority to charge market-based rates for sales from new capacity
should be upon public utility applicants, who possess the information
concerning capacity constraints.
Commission Conclusion
We reaffirm our decision to codify the determination in KCP&L that
the generation dominance standard for market-based sales from new
capacity should be dropped. Petitioners have not presented any evidence
that demonstrates generation dominance in long-run bulk power markets
and, as discussed in Order No. 888, we have found no such evidence of
generation dominance in any of the numerous market-based rate cases
decided by the Commission since KCP&L. In addition, as described in
Order No. 888, the Commission will consider evidence of generation
dominance, including generation dominance that results from
transmission constraints, when such evidence is presented by an
intervenor in a market-based rate case in which a utility seeks market-
based pricing associated with new capacity.
American Forest & Paper's argument that the Commission should delay
codification of KCP&L until effective competition has been demonstrated
to exist in all markets ignores the fact that we have eliminated the
generation dominance standard for market-based rates from new capacity
only, and that the generation standard still applies to applications
for market-based rates from existing generation. Other entities
similarly argue that other markets in which utilities may sell power
from new capacity may be highly concentrated with respect to
generation, or that these utilities may otherwise be able to exert
market power. Specifically, TDU Systems and LEPA express concern that
the new policy may result in the exercise of market power over very
specific bulk power products.
To allay these concerns, we note that eliminating the generation
dominance showing applies only to sales from new capacity. It does not
apply to entire classes of service or to specific products. In
addition, the policy eliminates the showing only as a matter of routine
in each filing. We reemphasize that the Commission will consider
specific evidence of generation dominance
[[Page 12283]]
associated with new capacity at the time the seller seeks market-based
rates for the new capacity, including whether the addition of the new
capacity, when combined with existing capacity, results in generation
dominance. This clearly includes situations where existing sources of
generation must be combined with new resources to produce a firm power
supply. Where entry barriers are a concern, intervenors are free to
raise the issue.
SC Public Service Authority also raises a number of concerns
relating to the ability of utilities to exercise market power if they
are permitted to sell new capacity at market-based rates. These
concerns generally include how the Commission determines product and
geographic markets, and the standards used to determine whether sellers
can exercise market power. In response to these concerns, as noted
above public utility owners of new capacity must still seek case-by-
case approval before they can sell power from new capacity at market-
based rates and, as stated in the Final Rule, intervenors may present
specific evidence that a seller requesting such market rates possesses
generation dominance or otherwise has market power.13 These
requirements include considerations of transmission market power,
whether other barriers to entry exist and whether there is evidence of
affiliate abuse or reciprocal dealing.
---------------------------------------------------------------------------
\13\ We do not agree with entities that claim that our decision
to rely on evidence raised by intervenors in particular cases with
respect to transmission constraints improperly shifts the burden
away from the utility, which has the greatest access to information
concerning those constraints. Given that we have yet to see any
evidence of generation dominance in long-term bulk power markets we
do not believe that it is appropriate to burden all market-based
rate applicants with significant information requirements as an
initial matter. However, if an intervenor raises a specific factual
concern with respect to a transmission constraint that may result in
the exercise of market power in a particular case, we will examine
those facts in a paper or formal hearing. In that context, the
utility would be required to come forward with information
sufficient to permit a full examination of the effect of the
constraint on the applicant's ability to exercise market power.
---------------------------------------------------------------------------
b. Market-based Rates for Existing Generation
In the Final Rule, the Commission found that there is not enough
evidence on the record to make a generic determination about whether
market power may exist for sales from existing generation.14 The
Commission indicated that it would continue its case-by-case approach
that allows market-based rates based on an analysis of generation
market power in first tier and second tier markets.15 The
Commission further indicated that while it will continue to apply the
first-tier/second-tier analysis, it will allow applicants and
intervenors to challenge the presumption implicit in the Commission's
practice that the relevant geographic market is bounded by the second-
tier utilities. Finally, the Commission stated that it would maintain
its current practice of allowing market-based rates for existing
generation to go into effect not subject to refund.16 To the
extent that either the applicant or an intervenor in individual cases
offers specific evidence that the relevant geographic market ought to
be defined differently than under the existing test, the Commission
indicated that it will examine such arguments through formal or paper
hearings.
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\14\ FERC Stats. & Regs. at 31,660; mimeo at 73-75.
\15\ See, e.g., Southwestern Public Service Company, 72 FERC
para. 61,208 at 61,996 (1995), reh'g pending.
\16\ The Final Rule contained a typographical error in which the
word ``not'' was erroneously omitted.
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Rehearing Requests
No rehearing requests were filed with respect to this matter.
4. Merger Policy
In the Final Rule, the Commission explained that it had issued a
Notice of Inquiry (NOI) on the Commission's merger policy in Docket No.
RM96-6-000.17 The Commission indicated that it will review whether
its criteria and policies for evaluating mergers need to be modified in
light of the changing circumstances, including the Final Rule, that are
occurring in the electric industry. The Commission concluded that it
would review its merger policy in the ongoing NOI proceeding.18
---------------------------------------------------------------------------
\17\ FERC Stats. & Regs. para. 35,531 (1996).
\18\ FERC Stats. & Regs. at 31,661; mimeo at 77-78.
---------------------------------------------------------------------------
Rehearing Requests
No rehearing requests were filed with respect to this matter.
Commission Conclusion
We note that on December 18, 1996, the Commission issued, in the
NOI proceeding, a Policy Statement that updates and clarifies the
Commission's procedures, criteria and policies concerning public
utility mergers.19
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\19\ Order No. 592, Policy Statement Establishing Factors the
Commission will Consider in Evaluating Whether a Proposed Merger is
Consistent with the Public Interest, 77 FERC para. 61,263 (1996).
---------------------------------------------------------------------------
5. Contract Reform
Requirements and Transmission Contracts
In the Final Rule, the Commission concluded that it was not
appropriate to order generic abrogation of existing requirements and
transmission contracts, but concluded nonetheless that the modification
of certain requirements contracts (those executed on or before July 11,
1994) on a case-by-case basis may be appropriate.20 The Commission
further concluded that, even if customers under such requirements
contracts are bound by so-called Mobile-Sierra clauses, they ought to
have the opportunity to demonstrate that their contracts no longer are
just and reasonable.
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\20\ FERC Stats. & Regs. at 31,663-66; mimeo at 84-92.
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The Commission found that it would be against the public interest
to permit a Mobile-Sierra clause in an existing wholesale requirements
contract 21 to preclude the parties to such a contract from the
opportunity to realize the benefits of the competitive wholesale power
markets. Thus, it explained, a party to a requirements contract
containing a Mobile-Sierra clause no longer will have the burden of
establishing independently that it is in the public interest to permit
the modification of such contract. The party, however, still will have
the burden of establishing that such contract no longer is just and
reasonable and therefore ought to be modified.
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\21\ The Commission defined these as contracts executed on or
before July 11, 1994.
---------------------------------------------------------------------------
The Commission explained that this finding complements the
Commission's finding that, notwithstanding a Mobile-Sierra clause in an
existing requirements contract, it is in the public interest to permit
amendments to add stranded cost provisions to such contracts if the
public utility proposing the amendment can meet the evidentiary
requirements of the Final Rule. Accordingly, the Commission required
that any contract modification approved under this Section must provide
for the utility's recovery of any costs stranded consistent with the
contract modification. Further, the Commission concluded that if a
customer is permitted to argue for modification of existing contracts
that are less favorable to it than other generation alternatives, then
the utility should be able to seek modification of contracts that may
be beneficial to the customer.
Coordination Agreements
The Commission concluded that to assure that non-discriminatory
open access becomes a reality in the relatively near future, it was
necessary to modify existing economy energy coordination agreements.
The Commission stated that it would condition future sales and
[[Page 12284]]
purchase transactions under existing economy energy coordination
agreements 22 to require that the transmission service associated
with those transactions be provided pursuant to the Final Rule's
requirements of non-discriminatory open access, no later than December
31, 1996. The Commission also required that, for new economy energy
coordination agreements 23 where the transmission owner uses its
transmission system to make economy energy sales or purchases, the
transmission owner must take such service under its own transmission
tariff as of the date trading begins under the agreement.24
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\22\ The Commission defined ``existing'' as those agreements
executed prior to 60 days after publication of the Final Rule in the
Federal Register.
\23\ The Commission defined ``new'' as those agreements executed
60 days after publication of the Final Rule in the Federal Register.
\24\ Accordingly, the Commission explained, transmission service
needed for sales or purchases under all new economy energy
coordination agreements will be pursuant to the Final Rule pro forma
tariff.
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Finally, the Commission concluded that it would not require the
modification of non-economy energy coordination agreements. However,
the Commission noted that this does not insulate such agreements from
complaints that transmission service provided under such agreements
should be provided pursuant to the Final Rule pro forma tariff.
Rehearing Requests
Various utilities oppose the Commission's finding that it is in the
public interest to permit the modification of existing requirements
contracts that contain Mobile-Sierra clauses. On the other hand, a
number of customers assert that the Commission did not go far enough
and seek enhanced contract reformation rights.
Utilities Against Contract Reformation
Several utilities argue that the Commission's finding is not
supported by substantial evidence.25 Utilities For Improved
Transition asserts that the Commission cannot rely on economic theory
as a substitute for substantial evidence.26 It argues that the
record in this proceeding demonstrates that the marketplace is becoming
increasingly competitive without mandatory tariffs, which is evidence
of market health, not market problems. It further argues that even if
undue discrimination is proven, the remedy is not needed because the
record shows that existing programs are meeting the industry's needs.
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\25\ Utilities For Improved Transition, Union Electric, PSE&G,
Carolina P&L.
\26\ Union Electric adds that there is no evidence that any
existing economy energy coordination agreements are unduly
discriminatory and require modification.
---------------------------------------------------------------------------
Southwestern argues that the Commission has improperly chosen to
ignore the public interest standard and has failed to make the contract
specific analysis here that it performed in Northeast Utils. Serv. Co.,
66 FERC para. 61,332 (1994), aff'd, 55 F.3d 686 (1st Cir. 1995). PSE&G
and Carolina P&L also argue that the Commission failed to demonstrate
the ``unequivocal public necessity'' for generically abrogating the
Mobile-Sierra clauses and assert that the Commission has presented no
evidence as to how the public interest will be served by abrogating
these contracts. PSE&G and Carolina P&L further argue that the
Commission cannot avoid making a public interest determination ``by the
simple expedient of asserting that the public interest requires it to
ignore the Mobile-Sierra clauses that required that public-interest
determination in the first place.'' 27
---------------------------------------------------------------------------
\27\ PSE&G at 6.
---------------------------------------------------------------------------
Union Electric and PSE&G argue that the Commission, in justifying
its public interest finding, inappropriately focused on the interests
of the parties to the contract instead of on whether non-parties will
be adversely affected by the existing contracts.
Public Service Co of CO asserts that the Commission should clarify
the definition of requirements contract to include long-term block
purchases of electricity. It states that it purchases a large
percentage of its system requirements under long-term block purchase
agreements, and that under the Commission's abrogation policy in Order
No. 888, its ability to abrogate these supply arrangements would be
treated differently because its contracts do not meet the definition of
a ``wholesale requirements contract,'' as defined in new section
35.26(b)(1) of the Commission's Regulations. Public Service Co of CO
further asserts that the Commission has not adequately explained why it
is appropriate or in the public interest to allow partial requirements
customers to abrogate their contracts, but not similarly to allow a
public utility to abrogate its supply arrangements.28
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\28\ See also PSE&G.
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PSE&G and Carolina argue that the availability of stranded cost
recovery cannot support allowing customers to modify rates under
Mobile-Sierra clauses that required that public-interest determination
in the first place.
PSE&G and Carolina P&L also argue that no Mobile-Sierra contracts
entered into after October 24, 1992 (the date EPAct became law) should
be subject to the Rule because since that date customers have been able
to apply for an order under section 211 to have power transmitted to
them from suppliers other than the utility to whom they are
interconnected.
PSE&G requests that the Commission clarify that the just and
reasonable standard used in considering a contract abrogation claim
will be limited to a determination of whether the rate is just and
reasonable within the cost-based zone of reasonableness of the selling
public utility. Such an analysis, PSE&G asserts, should not include a
comparison to what other utilities offer to their customers.29
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\29\ See also Carolina P&L.
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Customers Seek Enhanced Contract Reformation Rights
TAPS argues that the Commission should apply a just and reasonable
standard to requests by all ``victims'' of undue discrimination to seek
modifications of requirements or transmission contracts, whether they
are subject to Mobile-Sierra or not. On the other hand, TAPS asserts
that utilities should be bound to the bargain they extracted from
transmission customers. Wisconsin Municipals request that the
Commission clarify that parties may seek mandatory abrogation of
preexisting transmission contracts or provisions and that the
Commission will apply a rebuttable presumption that terms and
conditions inferior to the pro forma tariff are unjust and unreasonable
on their face.
CCEM argues that requirements customers should receive blanket
conversion rights. At a minimum, CCEM asserts, if a customer seeks
conversion, the burden of proof in the proceeding should shift to the
utility. CCEM also emphasizes that the question remains why conversion
was deemed essential in natural gas markets, but not in the transition
to competition in the electric industry.
Blue Ridge argues:
In neither the power supply nor transmission access case should
a provider be allowed to modify existing power supply contracts
under any but the Mobile Sierra public interest burden of proof. In
both the power supply or transmission access cases, the Commission
should articulate the suggested standards for what constitutes a
prima facia case. [30]
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\30\ Blue Ridge at 16.
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Commission Conclusion
Before responding to the rehearing arguments raised, we wish to
clarify our Mobile-Sierra findings. We explained in Order No. 888 that
we were making two
[[Page 12285]]
complementary public interest findings. First, as discussed further in
Section IV.J, we found that it is in the public interest to permit
public utilities to seek stranded cost amendments to existing
requirements contracts with Mobile-Sierra clauses. Second, we found
that a ``party'' to a requirements contract containing a Mobile-Sierra
clause no longer will have the burden of establishing independently
that it is in the public interest to permit the modification of such
contract, but still will have the burden of establishing that such
contract no longer is just and reasonable and therefore ought to be
modified. We clarify that, in making this second finding, our reference
to a ``party'' to a requirements contract containing a Mobile-Sierra
clause was directed at modification of contract provisions by
customers. 31 Additionally, it applies to any contract revisions
sought, whether or not they relate to stranded costs. 32
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\31\ We note that the fact that a contract may bind a utility to
a Mobile-Sierra public interest standard does not necessarily mean
that the customer is also bound to that standard. Unless a customer
specifically waives its section 206 just and reasonable rights, the
Commission construes the issue in favor of the customer. See Papago
Tribal Utility Authority v. FERC, 723 F.2d 950, 954 (D.C. Cir.
1983).
\32\ In situations in which a customer institutes a section 206
proceeding to modify a contract that binds the utility to a Mobile-
Sierra public interest standard, the utility may make whatever
arguments it wants regarding any of the contract terms, including
those unrelated to stranded costs, but will be bound to a Mobile-
Sierra public interest standard for contract terms that do not
relate to stranded costs.
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In response to the Mobile-Sierra rehearing arguments described
above, as well as the Mobile-Sierra arguments described in Section IV.J
concerning our determinations regarding stranded cost amendments to
contracts, the Commission believes it is important to first address the
general context in which our Mobile-Sierra determinations have been
made. In Order No. 888, the Commission removed the single largest
barrier to the development of competitive wholesale power markets by
requiring non-discriminatory open access transmission as a remedy for
undue discrimination. This action carries with it the regulatory public
interest responsibility to address the difficult transition issues that
arise in moving from a monopoly, cost-based electric utility industry
to an industry that is driven by competition among wholesale power
suppliers and increasing reliance on market-based generation rates.
There are two predominant, overlapping transition issues that arise
as a result of our actions in this rulemaking: first, how to deal with
the uneconomic sunk costs incurred, and second, how to deal with the
contracts that were entered into, under an industry regime that rested
on a regulatory framework and set of expectations that are being
fundamentally altered. To address these issues, the Commission has
balanced a number of important interests in order to achieve what it
believes will be a fair and orderly transition to competitive markets.
These interests include the financial stability of the electric utility
industry and permitting customers to obtain the benefits of competitive
markets without undue disruption or unfairness to other customers or
industry participants.
As the above rehearing arguments demonstrate, there is no consensus
on how the Commission should manage the transition. In fact, parties
offer diverse and conflicting views as to what the Commission should do
regarding existing contracts. Some would have us let all contracts run
their course with no opportunity for customers to modify or terminate
their contracts, no matter how long the contracts or how onerous their
terms. Others advocate automatic generic abrogation of all contracts.
Yet others want a guaranteed automatic right to renew a contract if it
happens to contain favorable rates and terms.33
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\33\ Similarly, as discussed in Section IV.J, parties have taken
extreme positions as to stranded cost recovery.
---------------------------------------------------------------------------
Rather than adopting one extreme position or the other, the
Commission has taken a measured approach with regard to contract
modification, including modification of contracts that contain Mobile-
Sierra clauses. Our goal is to balance the desire to honor existing
contractual arrangements with the need to provide some means to
accelerate the opportunity of parties to participate in competitive
markets. To accomplish this balance, the Commission, first, has made
Mobile-Sierra public interest findings (discussed further below) only
as to a limited set of contracts: those wholesale requirements
contracts executed on or before July 11, 1994, which is the date of our
first stranded cost proposed rulemaking and which served to put the
industry and customers on notice that future contracts should
explicitly address the rights, obligations and expectations of parties,
including stranded cost obligations.34
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\34\ As to existing economy energy coordination agreements, the
Commission concludes that the evidence also supports its decision to
condition future sales and purchase transactions that may occur
under the ongoing umbrella coordination agreements. Specifically, we
are requiring that the transmission service associated with these
future transactions be provided pursuant to the Final Rule pro forma
tariff. See Public Service Electric & Gas Company, 78 FERC para.
61,119, slip op. at 4 and n.7 (1997).
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Second, with regard to contract modifications sought by utilities,
as discussed in more detail in Section IV.J, utilities that seek to add
stranded cost provisions have a high evidentiary burden to meet before
they can add contract provisions that permit stranded cost recovery
beyond the end of their contract terms; the burden is particularly high
in the case of contracts with notice provisions. With regard to
modifications of contract provisions that do not relate to stranded
costs, a utility with a Mobile-Sierra contract clause will have the
burden of showing that the provisions are contrary to the public
interest.35
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\35\ As discussed below, pre-July 11, 1994 contracts were
entered into during an era in which transmission providers exerted
monopoly control over access to their transmission facilities. The
unequal bargaining power between utilities and captive customers is
the basis for our determination that utilities that have pre-July 11
Mobile-Sierra requirements contracts will have to satisfy the public
interest standard in order to effectuate any non-stranded cost
change to the contract, but that customers to such contracts will be
able to effectuate any change by satisfying a just and reasonable
standard.
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Third, with regard to contract modifications sought by customers, a
customer will have to show that the provisions it seeks to modify are
no longer just and reasonable.36 If a customer seeks to shorten or
eliminate the term of an existing contract, any contract modification
approved by the Commission will take into account the issue of
appropriate stranded cost recovery by the customer's supplying utility.
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\36\ We will not grant the request by PSE&G and Carolina P&L
that the just and reasonable standard will be limited to a
determination of whether the rate is just and reasonable within the
cost-based zone of reasonableness of the selling utility and should
not include a comparison to what other utilities offer their
customers. Because stranded costs will be taken into account when
customers seek contract termination or modification, it would not be
appropriate to limit customers in the evidence they may present.
---------------------------------------------------------------------------
In permitting customers the opportunity to seek these types of
modifications, even for contracts that contain Mobile-Sierra clauses,
the Commission has based its public interest findings on the
unprecedented industry changes facing utilities and their customers.
While, as we stated in the Final Rule, there is no market failure in
the electric industry that would justify generic abrogation of existing
contracts, nevertheless the industry is in the midst of fundamental
change. We cannot conclude that it is in the public interest to require
all customers to be
[[Page 12286]]
held to requirements contracts that were executed under the prior
industry regime, no matter what the circumstances of those contracts.
In response to parties who challenge the Commission's finding that
it would be against the public interest to deny customers an
opportunity to seek modification of wholesale requirements contracts
executed on or before July 11, 1994,37 these parties ignore the
fact that these contracts were entered into during an era in which
transmission providers exercised monopoly control over access to their
transmission facilities.38 The majority of customers under these
types of contracts were captive, i.e., they had no realistic choice but
to purchase generation from their local utility because they had no
transmission to reach another supplier. Many of these contracts were
the result of uneven bargaining power between customers and monopolist
transmission providers.39 While monopolist transmission providers
may not have exercised monopoly power in all situations,40 the
unprecedented competitive changes that have occurred (and are
continuing to occur) in the industry may render their contracts to be
no longer in the public interest or just and reasonable. These changed
circumstances, discussed at length in the Final Rule, and the further
changes that will occur as a result of open access transmission, may
affect whether such contracts continue to be just and reasonable or not
unduly discriminatory both as to the direct customers of the contracts,
as well as to indirect, third-party consumers as well.41
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\37\ We note that some of the very parties making this challenge
either do not object to the Commission's Mobile-Sierra findings
permitting utilities to add stranded cost amendments to their
contracts, or ask the Commission to broaden even further the scope
of extra-contractual stranded cost recovery under the rule.
\38\ We also reject arguments that a remedy is not needed
because existing programs, i.e., those prior to Order No. 888, are
meeting the needs of the industry. This very rulemaking, with the
substantial comments filed by entities pointing out the failures of
the current system and the need for change, and the extensive
restructurings and state-initiated open access programs occurring
around the country, on their face, refute these arguments.
\39\ It is also clear from the number of entities filing
comments on the NOPR and rehearing requests of the Final Rule that
many entities believe that their contracts were the result of uneven
bargaining power and that they should be provided the opportunity to
seek to terminate their existing contracts.
\40\ In an era that was not characterized by competition in the
generation sector, the Commission's response was to ensure that the
rates for such contracts were no higher than the seller's cost
(including a reasonable return on equity). In this way, the
Commission sought to limit the seller's ability to reap the benefits
of the seller's monopoly position.
\41\ See FPC v. Sierra Pacific Power Company, 350 U.S. 348, 355
(1956); Northeast Utilities Service Company, 66 FERC para. 61,332
(1994), aff'd, 55 F.3d 686, 691 (1st Cir. 1995); Mississippi
Industries v. FERC, 808 F.2d 1525, 1553 (D.C. Cir. 1987).
---------------------------------------------------------------------------
We therefore reject arguments that there is no ``evidence'' to
support our finding that it is in the public interest to permit review
of these contracts in light of the specific circumstances surrounding
the contracts and in light of dramatically changed industry
circumstances. We emphasize, however, that our decision is to permit an
opportunity for review and that we will require a case-by-case showing
that any modifications should be permitted. 42 As we explained in
the Final Rule, this decision complements our decision that it is in
the public interest to permit amendments to add stranded cost
provisions to existing contracts if case-by-case evidentiary burdens
are met.
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\42\ We will not exclude Mobile-Sierra contracts entered into
after the effective date of EPAct, as argued by PSE&G and Carolina
P&L. As we explained in the Final Rule, there are significant time
delays associated with section 211 proceedings. Accordingly, the
availability of a section 211 proceeding cannot substitute for
readily available service under a filed non-discriminatory open
access tariff. FERC Stats. & Regs. at 31,646; mimeo at 35. We do not
believe that EPAct created the expectation of open access on such a
broad scale that we can assume that parties no longer generally
expected ``business as usual'' to continue, and we will not presume
that the exercise of market power was not at work when Mobile-Sierra
contracts were entered into after EPAct. We also note that these
arguments are similar to those proffered by opponents of stranded
cost recovery, who argue that after EPAct utilities had no
reasonable expectation of continuing to serve customers beyond the
terms of existing contracts. In this context as well, we will not
presume that, after EPAct, utilities could have no reasonable
expectation of continuing to serve a customer beyond the contract
term.
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As we discuss further in our detailed stranded cost discussion in
Section IV.J, we do not interpret the Mobile-Sierra public interest
standard as practically insurmountable 43 in the extraordinary
situation before us where historic statutory and regulatory changes
have converged to fundamentally change the obligations of utilities and
the markets in which both they and their customers will operate. The
ability to meet our overarching public interest responsibilities and to
protect consumers would be virtually precluded if we were to apply a
practically insurmountable standard of review before taking into
account these fundamental industry-wide changes.44
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\43\ As the D.C. Circuit explained in Papago Tribal Utility
Authority v. FERC, 723 F.2d 950 (D.C. Cir. 1983) (Papago), there are
essentially three contractual arrangements for rate revision: (1)
the parties agree that the utility may file new rates under section
205, subject to the just and reasonable standard of review; (2) the
parties agree to eliminate the utility's right to file rates under
section 205 and the Commission's right to change pre-existing rates
under section 206's just and reasonable standard (leaving the
Commission's indefeasible right to change pre-existing rates that
are contrary to the public interest); and (3) the parties agree to
eliminate the utility's right to file new rates under section 205,
but leave unaffected the Commission's power to change pre-existing
rates under section 206's just and reasonable standard of review.
723 F.2d at 953. The same contractual arrangements also would apply
to non-rate terms and conditions. We here address those contractual
arrangements that eliminate the rights of one or both parties to
modify a contract under the just and reasonable standard. We note
that the Commission always has the indefeasible right under section
206 to change rates, terms or conditions that are contrary to the
public interest. 723 F.2d at 953-55; see also Florida Power & Light
Company, 67 FERC para. 61,141 at 61,398 (1994) appeal dismissed, No.
94-1483 (D.C. Cir. July 27, 1995) (unpublished); Southern Company
Services, Inc., 67 FERC para. 61,080 at 61,227-28 (1994);
Mississippi Industries v. FERC, 808 F.2d 1525, 1552 n.112.
\44\ We reject the arguments of PSE&G and Carolina P&L that we
have failed to demonstrate the ``unequivocal public necessity'' for
generically ``abrogating'' Mobile-Sierra clauses and that we have
presented no evidence as to how the public interest will be served
by abrogating these contracts. We have concluded that there is a
public necessity to permit the opportunity to seek contract changes
in light of fundamental industry changes. However, we have not
abrogated any contracts by this Rule.
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With respect to Public Service Co of CO's argument, we disagree
that the definition of a wholesale requirements contract should be
modified to include a long-term block purchase of electricity. In the
majority of circumstances, such long-term supply contracts are
voluntary arrangements in which neither party had market power. It
would be inappropriate to make generic Mobile-Sierra findings as to
these types of contracts. Parties can avail themselves of the section
205 and 206 procedures already available to them if they want to seek
modification of such contracts.
Finally, we reject CCEM's argument that all customers should
receive automatic conversion rights because customers were provided
such a right in the restructuring of the natural gas industry. We have
taken, as is within our discretion, a substantially different approach
here from that taken when we restructured the natural gas industry. As
we stated in the Final Rule, and as alluded to above, at the time the
Commission addressed this situation in the natural gas industry it was
faced with shrinking natural gas markets, statutory escalations in
natural gas ceiling prices under the Natural Gas Policy Act, and
increased production of gas.\45\ Moreover, the natural gas industry was
plagued with escalating take-or-pay liabilities.
---------------------------------------------------------------------------
\45\ FERC Stats. & Regs. at 31,664; mimeo at 84.
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There was a market failure in the natural gas industry that
required the
[[Page 12287]]
extraordinary measure of generically allowing all customers to break
their contracts with pipelines. In contrast, market circumstances in
the electric industry today do not compel generic abrogation of
contracts. The more moderate approach we have taken will permit us to
take into account the fundamental industry changes that have occurred
(and will continue to occur), to balance the interests of all affected
parties, and to help avoid drastic shocks to industry participants.
Right of First Refusal
In the Final Rule, the Commission concluded that all firm
transmission customers (requirements and transmission-only), upon the
expiration of their contracts or at the time their contracts become
subject to renewal or rollover, should have the right to continue to
take transmission service from their existing transmission
provider.\46\ If not enough capacity is available to meet all requests
for service, the right of first refusal gives the existing customer who
had contractually been using the capacity on a long-term, firm basis
the option of keeping the capacity. However, the limitations imposed by
the Commission are that the underlying contract must have been for a
term of one-year or more and the existing customer must agree to match
the rate offered by another potential customer, up to the transmission
provider's maximum filed transmission rate at that time, and to accept
a contract term at least as long as that offered by the potential
customer.\47\ Moreover, the Commission indicated that this right of
first refusal is an ongoing right that may be exercised at the end of
all firm contract terms (including all future unbundled transmission
contracts).
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\46\ FERC Stats. & Regs. at 31,665; mimeo at 88.
\47\ The Commission explained that this right of first refusal
exists whether or not the customer buys power from the historical
utility supplier or another power supplier. If the customer chooses
a new power supplier and this substantially changes the location or
direction of its power flows, the customer's right to continue
taking transmission service from its existing transmission provider
may be affected by transmission constraints associated with the
change.
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Requests for Rehearing
On rehearing, most petitioners agree with or do not contest the
notion of providing existing transmission customers with a right of
first refusal, but many have requested modification or clarification of
the Commission-imposed limitations on such a right. A variety of
transmission customers assert that the Commission's right of first
refusal provision fails to adequately protect existing transmission
customers' rights to continued service and seek changes to the
Commission's provision. On the other hand, a number of utilities
believe that the Commission should provide additional restrictions on
the right of first refusal.
Customers' Positions
APPA argues that (1) existing customers should only have to agree
to service that matches the term of any power supply contract for which
it will use the transmission arrangement or, in the absence of a
generation contract, one year, and (2) the pricing provision should be
changed to reflect the current just and reasonable rate, as approved by
the Commission, for similar transmission service.
NRECA also argues that the term and pricing provisions of section
2.2 need to be changed. With respect to the term of the contract the
customer should be required to match, NRECA asserts that it should be
one year, which corresponds to the definition of long-term firm service
in the tariff. With respect to the rate, NRECA requests that the
Commission cap the obligation to match the price offered by another
customer at the maximum transmission rate the incumbent customer is
obligated to pay to the transmission provider at the close of the prior
contract term.
TDU Systems argue that the right of first refusal provision fails
to take into consideration amounts that TDUs have contributed to the
development of the transmission systems through prior transmission
rates. TDU Systems are concerned about the possibility of an increase
in the price of transmission capped only by the cost of increasing the
capacity of the provider's transmission system.
TAPS requests that the Commission clarify that the transmission
provider may only charge its then effective rates for existing, non-
constrained transmission capacity because to allow opportunity or
expansion costs would perpetually put the existing transmission
customers on the margin at the end of their contract terms subjecting
them to higher rates than the transmission provider.\48\
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\48\ See also AEC & SMEPA.
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Blue Ridge raises a possible discrepancy between the language in
the tariff and the language in the preamble. It asserts that section
2.2 ``requires the existing customer to `pay the current just and
reasonable rate, as approved by the Commission,' while the Regulatory
Preamble requires the customer to `match the rate offered by another
potential customer, up to the transmission provider's maximum filed
transmission rate at that time.' Order No. 888, mimeo at 88.''
Tallahassee asks the Commission to clarify that the right of first
refusal to presently bundled transmission capacity accrues to the power
customer paying the bundled rate and not to the intermediary acting on
behalf of the customer.
AEC & SMEPA maintain that the price and term limitations of section
2.2 would place TDUs at a competitive disadvantage vis-a-vis the
transmission provider by subjecting TDUs to incremental costs,
including the costs of system upgrades, if other new customers are
vying to use the transmission system. They state that the Commission
must provide existing transmission customers the same rights as the
transmission provider's other native load customers.
Utilities' Positions
PSNM argues that imposing a right of first refusal is inconsistent
with the Commission's finding that contracts should not be abrogated.
In effect, it argues that imposition of the right of first refusal
abrogates existing contracts executed with the expectation that
capacity could be recalled for the utility's own use upon expiration of
the contracts. PSNM explains that it has a constrained transmission
system and has been balancing specific contract durations against
projected future native loads so that required capacity may be made
available for use by third parties in the short-term, but not be
committed to those parties at the time it is needed to be recalled.
Moreover, PSNM asserts that Order No. 888 is not supported by the right
of first refusal process of Order No. 636 because the Commission does
not have abandonment authority under the FPA and its authority to
require continuation of service is not well-defined and is
controversial.\49\
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\49\ All transmission contracts with public utility transmitters
can only be terminated by a filing with the Commission under FPA
section 205. Thus, the Commission has interpreted its section 205
authority as permitting it to suspend termination of service for 5
months beyond the expiration of a contract's term if such action is
necessary to protect ratepayers. See, e.g., Kentucky Utilities
Company, 67 FERC para. 61,189 at 61,573 (1994). (While the
termination procedures for power sales contracts executed after July
9, 1996 were modified in Order No. 888, there were no changes
regarding termination procedures for transmission contracts.).
---------------------------------------------------------------------------
Utilities For Improved Transition and Florida Power Corp argue that
section 2.2 of the pro forma tariff should be modified by ``restricting
rollover rights to the same points of receipt and delivery as the
terminating service and
[[Page 12288]]
by providing the customer notice of a competing application and 90 days
in which to file its own application for service for a term at least as
long as the competing application.'' (Florida Power Corp at 11-13;
Utilities For Improved Transition at 50-53). Similarly, EEI argues that
to obtain a priority for continuation of service, customers must be
seeking service that is substantially similar to or a continuation of
the service they already receive and must be subject to a time limit on
the reservation priority. CSW Operating Companies assert that it is
unclear how the right of first refusal provision will be implemented.
State Commission Position
VT DPS states that the right of first refusal provision offers
inadequate protection: ``While it is true that the existing customer
could secure a five year transmission arrangement under a new contract,
its right to continuous service is placed in jeopardy if it does not
match the six year offer of the competing bidder.'' VT DPS argues that
the Commission's bare bones provision opens the opportunity for
competitive mischief by the transmission provider. VT DPS proposes that
``the existing customer should be able to renew its contract by
matching the highest transmission price offered in the marketplace (up
to the tariff maximum rate) and by offering to extend its contract for
seven years or the prevailing length of firm transmission contracts in
the marketplace, whichever is shorter.'' (VT DPS at 17-21).
Commission Conclusion
In this order, the Commission reaffirms its decision to give a
reservation priority to existing and future firm transmission customers
served under a contract of one year or more, and also addresses
petitioner arguments regarding the Commission-imposed limitations
associated with the exercise of that priority.
Rationale
Our policy rationale for giving an existing firm transmission
customer (requirements and transmission-only),\50\ served under a
contract of one year or more, a reservation priority (right of first
refusal) when its contract expires is that it provides a mechanism for
allocating transmission capacity when there is insufficient capacity to
accommodate all requestors. If there are capacity limitations and both
customers (existing and potential) are willing to pay for firm
transmission service of the same duration, the right of first refusal
provides a tie-breaking mechanism that gives priority to existing
customers so that they may continue to receive transmission
service.\51\
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\50\ We clarify that we did not intend the term ``all firm
transmission customers'' to include only requirements and
transmission-only customers, but intended that it include all
bundled firm customers as well.
\51\ We reject Tallahassee's argument that the right of first
refusal should accrue to the power customer paying the bundled rate
and not to any intermediary acting on its behalf. Our right of first
refusal mechanism is simply a tie-breaker that gives priority to
existing firm transmission customers.
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Contract Term Limitation
We reject arguments to modify the requirement in section 2.2 that
existing long-term firm transmission customers seeking to exercise
their right of first refusal must agree to a contract term at least as
long as that sought by a potential customer. The objective of a right
of first refusal is to allow an existing firm transmission customer to
continue to receive transmission service under terms that are just,
reasonable, not unduly discriminatory, or preferential. Absent the
requirement that the customer match the contract term of a competing
request, utilities could be forced to enter into shorter-term
arrangements that could be detrimental from both an operational
standpoint (system planning) and a financial standpoint.
Rate Limitation
We also reject the proposition that either existing wholesale
customers or transmission providers providing service to retail native
load customers should be insulated from the possibility of having to
pay an increased rate for transmission in the future. The fact that
existing customers historically have been served under a particular
rate design does not serve to ``grandfather'' that rate methodology in
perpetuity. Because the purpose of the right of first refusal provision
is to be a tie-breaker, the competing requests should be substantially
the same in all respects.\52\
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\52\ The proposal to restrict the right of first refusal
provision to exactly the same points of receipt and delivery as the
terminating service would competitively disadvantage existing
customers seeking new sources of generation. However, as we stated
in Order No. 888, if the customer chooses a new power supplier and
this substantially changes the location or direction of the power
flows it imposes on the transmission provider's system, the
customer's right to continue taking transmission service from its
existing transmission provider may be affected by transmission
constraints associated with the change. FERC Stats. & Regs. at
31,666 n.176; mimeo at 89 n.176.
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In response to Blue Ridge's concern regarding a discrepancy between
the language in section 2.2 of the tariff and the preamble, we clarify
that existing customers who exercise their right of first refusal will
be required to pay the just and reasonable rate, as approved by the
Commission at the time that their contract ends.\53\
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\53\ As Order No. 888 indicates, they may be required to pay the
transmission provider's maximum transmission rate.
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Mechanics of the Right of First Refusal Process
CSW Operating Companies asked the Commission to clarify the
mechanics of exercising the right of first refusal. We have determined
not to specify in this order the mechanics by which the right of first
refusal mechanism will be exercised for existing firm transmission
arrangements. Instead, we intend to address such issues on a case-by-
case basis, if and when a dispute arises. However, we encourage
utilities and their customers to include specific procedures for
exercising the right of first refusal in future transmission service
agreements executed under the pro forma tariff. And of course,
utilities are free to make section 205 filings to propose additions to
the pro forma tariff to generically specify procedures for dealing with
the issues.
Existing Contracts
By providing existing customers a right of first refusal, we are
not, as PSNM claims, abrogating contracts. Moreover, PSNM's concern
that the right of first refusal will prohibit utilities from
``recalling'' existing capacity to meet native load growth that was
anticipated at the time existing third-party transmission contracts
were executed can be addressed in the context of a specific filing by a
utility demonstrating that it had no reasonable expectation of
continuing to provide transmission service to the wholesale
transmission customer at the end of its contract. For future
transmission contracts, Order No. 888 permits utilities to reserve
existing transmission capacity to serve the needs (current and
reasonably forecasted) of its existing native load (retail) customers.
Moreover, if a utility provides firm transmission service to a third
party for a time until native load needs the capacity, it should
specify in the contract that the right of first refusal does not apply
to that firm service due to a reasonably forecasted need at the time
the contract is executed.
Informational Filings
With respect to all existing requirements contracts and tariffs
that provide for bundled rates, the Commission, in the Final Rule,
required all public utilities to make informational
[[Page 12289]]
filings setting forth the unbundled power and transmission rates
reflected in those contracts and tariffs.54
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\54\ FERC Stats. & Regs. at 31,665-66; mimeo at 89-90.
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Requests for Rehearing
Utilities For Improved Transition and VEPCO ask the Commission to
clarify whether the unbundled transmission rate should be the current
transmission tariff rate (bundled rate likely not to include the
current price for transmission service) or an approximation of the rate
at the time the contract was executed (may be impossible to determine).
Commission Conclusion
We previously addressed the determination of the unbundled
transmission rate in informational filings in an order issued October
16, 1996.55 In that order, we noted that Order No. 888 does not
prescribe any specific method for calculating separately-stated
transmission and generation rates and public utilities have used
different methods in their informational filings. Because of the
general lack of controversy over the informational filings and the fact
that they are for informational purposes as a benefit to existing
customers, the Commission accepted the vast majority of the
informational filings. The Commission added, however, that it did not
consider the informational rates binding for any future transactions.
Accordingly, we need not now prescribe a specific method to calculate
the unbundled transmission rate included in informational filings.
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\55\ 77 FERC para. 61,025.
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Existing Contracts
In the Final Rule, the Commission explained that because it was not
abrogating existing requirements and transmission contracts generically
and because the functional unbundling requirement applies only to new
wholesale services, the terms and conditions of the Final Rule pro
forma tariff do not apply to service under existing requirements
contracts.56
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\56\ FERC Stats. & Regs. at 31,665; mimeo at 87-88.
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Rehearing Requests
San Francisco asks that the Commission clarify that nothing in
Order No. 888 is intended to affect prices, or price-setting
methodologies, in existing contracts.
Commission Conclusion
By order issued July 2, 1996, we clarified that
the filing of an open access compliance tariff on or before July
9, 1996 does not supersede an existing transmission agreement that
has been accepted by the Commission unless specifically permitted in
the agreement on file. If a utility seeks to modify or terminate an
existing transmission agreement, it must separately file to modify
or terminate such contracts under appropriate procedures under
section 205 or 206 of the Federal Power Act, consistent with the
terms of its contract.[57]
\57\ 76 FERC para. 61,009 at 61,028 (1996).
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Thus, nothing in Order No. 888 affects prices or price-setting
methodologies in existing contracts, unless specifically permitted in
the contract on file.
6. Flow-based Contracting and Pricing
In Order No. 888, the Commission explained that it would not, at
that time, require that flow-based pricing and contracting be used in
the electric industry.58 It recognized that there may be
difficulties in using a traditional contract path approach in a non-
discriminatory open access transmission environment. At the same time,
however, the Commission noted that contract path pricing and
contracting is the longstanding approach used in the electric industry
and it is the approach familiar to all participants in the industry.
Thus, the Commission was concerned that to require a dramatic overhaul
of the traditional approach--such as a shift to some form of flow-based
pricing and contracting--could severely slow, if not derail for some
time, the move to open access and more competitive wholesale bulk power
markets. In addition, the Commission indicated its belief that it would
be premature to impose generically a new pricing regime without the
benefit of any experience with such pricing. Accordingly, the
Commission welcomed new and innovative proposals, but determined not to
impose some form of flow-based pricing or contracting in the Final
Rule.
---------------------------------------------------------------------------
\58\ FERC Stats. & Regs. at 31,668; mimeo at 96-98.
---------------------------------------------------------------------------
Rehearing Requests
American Forest & Paper argues that contract path pricing should be
prohibited. American Forest & Paper asserts that QFs and other
independents are being forced by contract path wheeling utilities to
indemnify them from liability for third-party claims of inadvertent
flow costs resulting from the transaction, while paying postage stamp
rates for the entire amount of contracted transmission. American Forest
& Paper supports an average postage stamp rate by region, with the
utilities within the region agreeing on a way to divide up the rate
appropriately.
Commission Conclusion
As the Commission explained in the Final Rule, we are concerned
that a dramatic overhaul of the traditional contract path approach
could slow or derail the move to open access and, in any event, is
premature without the benefit of any experience with alternative
pricing regimes. The Commission, however, welcomes new and innovative
proposals from the industry. American Forest & Paper has not presented
a case-specific proposal of any detail that would provide the
Commission and interested parties the opportunity to test the
appropriateness of a change from the contract path approach. Until the
Commission has such an opportunity, we are not prepared to change
generically the traditional contract path approach with which the
electric industry is so familiar.
Moreover, American Forest & Paper's proposal to prohibit contract
path pricing and mandate regional postage-stamp rates would be
inconsistent with the rate flexibility that the Commission provided in
the Transmission Pricing Policy Statement and embraced in the Final
Rule.
B. Legal Authority
In the Final Rule, the Commission responded to commenters
challenging the Commission's authority to require open access and
reaffirmed its conclusion in the NOPR that it has the authority under
the FPA to order wholesale transmission services in interstate commerce
to remedy undue discrimination by public utilities.59
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\59\ FERC Stats. & Regs. at 31,668-79 and 31,686-87; mimeo at
98-129 and 148-51.
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Rehearing Requests
Authority To Order Open Access Tariffs
Union Electric challenges the Commission's authority to require
wheeling based on arguments that: (1) the Rule overlooks the fact that
the AGD case 60 pertained to voluntary actions by the pipelines
and the Commission's imposition of open access requirements as a
condition on permitting the desired authorizations; (2) the Commission
incorrectly treats the Otter Tail case; 61 (3) the legislative
histories of the NGA and FPA are different and the legislative history
of the FPA does not support the Commission's authority to order
wheeling; (4) the Commission made prior contrary statements to the U.S.
[[Page 12290]]
Supreme Court [in its opposition to the grant of certiorari to review
the AGD decision] about the nature of Commission authority to order
open access and judicial construction of that authority in AGD and
Otter Tail;'' (5) as a matter of statutory construction, the Commission
cannot rely on sections 205 and 206, which are silent as to wheeling,
when sections 211 and 212 contain express wheeling provisions; (6) the
four relevant cases recognized by the Commission indicate that the
Commission may not directly or indirectly order a public utility to
wheel or transmit energy for another entity under sections 205 and 206,
notwithstanding the Commission's circumscribed ability to order
wheeling under sections 211 and 212; (7) prior to the issuance of the
Final Rule the Commission, with a full appreciation of the legislative
history behind Part II, consistently held that it lacks the authority
to order wheeling under FPA Part II; (8) the Rule fails to assign
``considerable importance'' to the Commission's ``longstanding
interpretation of the statute in accordance with its literal
language;'' and (9) in legislative hearings preceding enactment of
EPAct, the Office of the General Counsel acknowledged the limitations
on the Commission's wheeling power.
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\60\ Associated Gas Distributors v. FERC, 824 F.2d 981, 998
(D.C. Cir. 1987), cert. denied, 485 U.S. 1006 (1988) (AGD).
\61\ Otter Tail Power Company v. FPC, 410 U.S. 366 (1974) (Otter
Tail).
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Carolina P&L also challenges the Commission's authority to order
open access tariffs, arguing that: (1) Otter Tail specifically states:
``So far as wheeling is concerned, there is no authority granted the
commission under Part II of the Federal Power Act to order it, * * *'';
(2) the Richmond and FPL cases 62 prohibit the Commission from
doing indirectly what it cannot do directly; (3) the AGD case does not
support the Commission's authority to order open access through the
filing of generic tariffs--in AGD the Commission's authority was based
on voluntary actions by the affected pipelines and there are
substantial differences between the NGA and the FPA; (4) the
legislative history of EPAct indicates that the Commission does not
have the authority to mandate open access and can only order open
access if section 211 procedures are followed--citing NYSEG and FPL;
and (5) section 211 limits the Commission's authority to order open
access on a generic basis--where a specific statute addresses an issue,
a more general statute should not be read in a manner that conflicts
with the specific statute.
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\62\ Richmond Power & Light Company v. FERC, 574 F.2d 610 (D.C.
Cir. 1978) (Richmond) and Florida Power & Light Company v. FERC, 660
F.2d 668 (5th Cir. 1981), cert. denied sub nom. Fort Pierce
Utilities Authority v. FERC, 459 U.S. 1156 (1983) (FPL).
---------------------------------------------------------------------------
PA Com argues that the Commission's reliance on AGD ``impermissibly
expands the limited holding of AGD'' and the Commission improperly
relied on sections 205 and 206 of the FPA to require open access
generically--the Commission only has case-by-case jurisdiction.
VA Com declares that the plain meaning of the FPA and cases
interpreting sections 206 and 211 show that the Commission does not
have the authority to order industry-wide open access.
FL Com and El Paso argue that the Commission only has limited
authority to order wheeling and that the Commission has not made the
required findings under section 211.\63\
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\63\ We note that Indianapolis P&L also has made legal arguments
regarding our authority to order wheeling under Order No. 888.
However, it did so in a request for rehearing of a denial of its
request for waiver of the Order No. 888 requirements, not in its
request for rehearing of Order No. 888. Accordingly, we will address
its arguments when we act on its request for rehearing of its waiver
denial.
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Group Two Section 205 Filings
Union Electric argues that the requirement that Group 2 Public
Utilities make section 205 filings is contrary to the voluntary filing
scheme inherent in section 205.
Commission Conclusion
Overview
The fundamental legal question before us is the scope of the
authority granted to the Commission in 1935 to remedy undue
discrimination in interstate transmission services and whether that
authority permits us sufficient flexibility to define undue
discrimination in light of dramatically changed industry circumstances,
in order to provide electricity customers the benefits of more
competitively priced power. In the NOPR and Order No. 888, the
Commission comprehensively examined case law and legislative history
relevant to our authority to order open access transmission services as
a remedy for undue discrimination.\64\ We also responded at length in
Order No. 888 to arguments that questioned our authority to take this
step.\65\
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\64\ FERC Stats. & Regs. at 31,668-73; mimeo at 98-112. Notice
of Proposed Rulemaking and Supplemental Notice of Proposed
Rulemaking, FERC Stats. & Regs. para. 32,514 at 33,053-56 (1995).
\65\ FERC Stats. & Regs. at 31,673-79; mimeo at 112-129.
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On rehearing, as described above, only a few parties continue to
question the Commission's authority. As a general matter their
rehearings do not raise any arguments, cases, or legislative history
not previously considered, and they do not convince us that our action
in Order No. 888 is not within our authority under sections 205 and 206
of the FPA. We therefore reaffirm our determination that we have not
only the legal authority, but the responsibility, to order the filing
of non-discriminatory open access tariffs if we find such order
necessary to remedy undue discrimination or anticompetitive effects.
There are several broad points we wish to emphasize in response to
the rehearings that have been filed:
First, there is no dispute that the FPA does not explicitly give
this Commission authority to order, sua sponte, open access
transmission services by public utilities. However, the fact remains
that the FPA does explicitly require this Commission to remedy undue
discrimination by public utilities.\66\ The finding of the D.C. Circuit
in the AGD case, with regard to sections 4 and 5 of the NGA (which
parallel sections 205 and 206 of the FPA), are equally applicable here:
the Act ``fairly bristles'' with concerns regarding undue
discrimination and it would turn statutory construction on its head to
let the failure to grant a general power prevail over the affirmative
grant of a specific one.\67\
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\66\ See FERC Stats. & Regs. at 31,669-70; mimeo at 101-03.
\67\ 824 F.2d at 998.
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Second, there also is no dispute that before Congress enacted the
FPA in 1935, it rejected provisions that would have explicitly granted
the Commission authority to order transmission to any person if the
Commission found it ``necessary or desirable in the public interest.''
However, the fact that Congress rejected an extremely broad common
carrier provision does not limit the remedies available to the
Commission to enforce the undue discrimination provisions in the
FPA.\68\
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\68\ See FERC Stats. & Regs. at 31,676-78; mimeo at 120-27.
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Third, entities on rehearing understandably have focused on
statements in case law that indicate limits on the Commission's
wheeling authority. They particularly focus on certain statements by
the Supreme Court in Otter Tail. The Commission in Order No. 888 fully
addressed and considered all relevant case law of which we are aware,
including statements in Otter Tail and other court cases indicating
limitations on our authority.\69\ We do not dispute these statements
and we
[[Page 12291]]
recognize limitations on our authorities. However, the fact remains
that none of the cases cited, including Otter Tail, involved the issue
of whether this Commission can order transmission as a remedy for undue
discrimination and none addressed industry-wide circumstances such as
those before us in Order No. 888.
---------------------------------------------------------------------------
\69\ See FERC Stats. & Regs. at 31,668-73; mimeo at 98-110.
---------------------------------------------------------------------------
Fourth, while Congress in 1978 gave the Commission certain case-by-
case authority to order transmission access by both public utilities
and non-public utilities, and broadened this case-by-case authority in
1992, Congress also specifically provided in section 212(e) of the FPA
that the case-by-case authorities were not to be construed as limiting
or impairing any authority of the Commission under any other provision
of law.\70\ Indeed, the legislative history of EPAct shows that when
Congress amended the section 211-212 wheeling provisions and the
section 212(e) savings clause in 1992,\71\ it was well aware of
arguments regarding the scope of the Commission's wheeling authority as
a remedy for undue discrimination under section 206. Whereas Congress
in 1992 decided to add a flat prohibition on the Commission ordering
direct retail wheeling under any provision of the FPA, it did not add a
prohibition on the Commission ordering wholesale wheeling to remedy
undue discrimination under section 206. It instead retained and
modified the savings clause. The issue before us, therefore, hinges on
the scope of authority given to this Commission to remedy undue
discrimination, not on the scope of authority given to us in 1978 and
1992.
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\70\ See FERC Stats. & Regs. at 31,686-87; mimeo at 148-49.
\71\ The savings clause in section 212(e) originally provided
that no provision of section 210 or 211 shall be treated as
``limiting, impairing, or otherwise affecting any authority of the
Commission under any other provision of law.'' In 1992, the 212(e)
savings clause was amended to provide that sections 210, 211 and 214
``shall not be construed as limiting or impairing any authority of
the Commission under any other provision of law.''
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The Commission is significantly influenced by the decision and case
law discussion by the D.C. Circuit in the AGD case. This court opinion
contains the most recent and comprehensive discussion of the
Commission's legal authority to remedy undue discrimination under NGA
provisions that mirror those in the FPA, including the relevant case
law concerning the Commission's authority to order transmission under
the FPA.\72\ The rehearing arguments do not, and we believe cannot,
reconcile the AGD court's discussion and findings with a conclusion
that the Commission cannot under any circumstances (as these parties
advocate) order wheeling under sections 205 and 206 to remedy undue
discrimination.
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\72\ AGD, 824 F.2d at 996-999. See also FERC Stats. & Regs. at
31,668-73, 31,676-78; mimeo at 98-110 and 120-27.
---------------------------------------------------------------------------
In sum, we believe that the essential question of the Commission's
legal authority to impose the requirements of Order No. 888 turns on
the flexibility of the Commission's remedial authority under sections
205 and 206 of the FPA to remedy undue discrimination. As was true with
respect to the natural gas industry, we acknowledge that Commission
precedent for many years nurtured the expectation that we would not,
under our authority under the FPA, preclude utilities from using their
monopoly power over the nation's transmission systems to secure their
monopoly position as power suppliers. However, as described at length
in Order No. 888, these policies arose in the context of practical,
economic, and regulatory circumstances that gave rise to vertically
integrated monopolies and little, if any, competition among power
suppliers. In this kind of regime, the interests of customers were most
effectively served by the kind of cost-based regulatory regime that has
prevailed until very recently. The evolution of third-party generation,
facilitated by PURPA and significant technological advances,
dramatically altered the economics of power production. The enactment
of EPAct recognized these changes and established a national policy
intended to favor the development of a competitive generation market,
so that the efficiencies of the new marketplace will be available to
customers in the form of lower costs for electricity. Utility practices
that may have been acceptable a few years ago would, if permitted to
continue, smother the fledgling competitive wholesale markets and
undermine the efforts of customers to seek lower-price electricity. We
firmly believe that our authorities under the FPA not only permit us to
adapt to changing economic realities in the electric industry, but also
require us to do so, if that is necessary to eliminate undue
discrimination and protect electricity customers.
Specific Arguments \73\
The Factual Circumstances Underlying AGD Do Not Mandate A Different
Conclusion In This Proceeding
Both Union Electric and Carolina P&L argue that the Commission
cannot rely on AGD in support of its actions in the electric industry,
and they attempt to distinguish the legal basis on which the Commission
acted in requiring open access transportation for gas pipelines.
Specifically, they argue that AGD (Order No. 436) pertained to
voluntary actions by gas pipelines and that the Commission's imposition
of open access requirements was a condition of certificate
authorizations to transport gas, whereas the Commission's action in
Order No. 888 is a direct mandate.\74\ We believe this is a distinction
without a difference. While it is true that the Commission required
open access as a condition of granting blanket authorizations for
pipelines and authorizations for pipelines authorizing pipelines to
transport natural gas,\75\ the critical point is that in both Order No.
436 and Order No. 888 the Commission's actions hinged as a legal matter
on the parallel provisions of the NGA (sections 4 and 5) and the FPA
(sections 205 and 206) that prohibit undue discrimination. Whether
persons are seeking to transport natural gas or wheel electric power in
interstate commerce, by law they must not unduly discriminate or grant
undue preference.\76\
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\73\ We do not repeat our lengthy legal analyses in Order No.
888, but discuss only those arguments that warrant further
discussion.
\74\ See Union Electric and Carolina P&L.
\75\ These authorizations are issued under section 7 of the
Natural Gas Act and section 311 of the Natural Gas Policy Act.
\76\ While there is a difference in the statutes in that natural
gas transporters must obtain a certificate from the Commission
before they can transport gas, there is no difference in the
statutory standard applied to the interstate service.
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In AGD, the court upheld the Commission's reliance upon sections 4
and 5 of the NGA to impose an open-access commitment on any pipeline
that secured a blanket certificate to provide gas transportation under
section 7 of the NGA or provided transportation under section 311 of
the NGPA.\77\ Order No. 436 was not a simple order that relied on the
``voluntary actions'' of affected pipelines. As the court in AGD
understood:
\77\ 824 F.2d at 997-98. The court also noted the Commission's
reliance on section 16 of the NGA.
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The Order envisages a complete restructuring of the natural gas
industry. It may well come to rank with the three great regulatory
milestones of the industry.* * *
[[Page 12292]]
At stake is the role of interstate natural gas pipelines.
Although they are obviously transporters of gas, they have until
recently operated primarily as gas merchants. They buy gas from
producers at the wellhead and resell it, mainly to local
distribution companies (``LDCs'') but also to relatively large end
users. The Commission has concluded that a prevailing pipeline
practice--particularly their general refusal to transport gas for
third parties where to do so would displace their own sales--has
caused serious market distortions. It has found this practice
``unduly discriminatory'' within the meaning of Sec. 5 of the NGA.
Order 436 is its response.
The essence of Order No. 436 is a tendency, in the industry
metaphor, to ``unbundle'' the pipelines' transportation and merchant
roles. If it is effective, the pipelines will transport the gas with
which their own sales compete; competition from other gas sellers
(producers or traders) will give consumers the benefit of a
competitive wellhead market. [\78\]
\78\ 824 F.2d at 993-94.
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Indeed, since Order No. 436 issued, virtually all jurisdictional
natural gas pipelines became ``open access'' transporters of natural
gas.
In analyzing the Commission's authority to remedy undue
discrimination, the court never made the distinctions now being put
forth by Union Electric and Carolina P&L. Rather, the court
specifically focused on the Commission's authority under section 5 of
the NGA and upheld the Commission's authority to remedy undue
discrimination in the transportation of natural gas by requiring
pipelines transporting natural gas to do so on a non-discriminatory
basis.\79\ Similarly, the Commission in Order No. 888 found undue
discrimination in the transmission of electric energy and required,
pursuant to section 206 of the FPA (the FPA provision that parallels
section 5 of the NGA), that if public utilities transmit electric
energy in interstate commerce, they must do so on a non-discriminatory
basis (i.e., offer non-discriminatory open access transmission).
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\79\ For example, as the AGD court explained with regard to its
discussion of Maryland People's Counsel v. FERC, 761 F.2d 780 (D.C.
Cir. 1985), ``we made it clear that blanket-certificate
transportation, unconstrained by any nondiscriminatory access
provision, might well require remedial action under Sec. 5.'' 824
F.2d at 1000.
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Moreover, while the Commission may have imposed a ``condition'' on
pipelines obtaining blanket certificates or providing section 311
transportation in Order No. 436, this does not detract from the court's
core finding in AGD that the Commission had the authority under section
5 of the NGA to remedy undue discrimination by requiring open access
transportation.\80\ The Commission chose in Order No. 436 to impose its
open access remedy as a condition to pipelines obtaining a blanket
certificate to transport natural gas, but its authority was rooted in
the undue discrimination provisions of section 5. Additionally, the
practical result of the conditioning was that all jurisdictional
pipelines would have to provide open access transportation, a result
that was clearly anticipated by the AGD court.\81\ Thus, there is no
distinction in the result intended, or the result achieved, in either
industry; in both cases, the intent was to remedy undue discrimination
pursuant to the statutes governing each industry, and in both cases the
result was that all transporters/transmitters must agree to open access
non-discriminatory services if they seek to continue owning,
controlling or operating monopoly interstate transportation facilities.
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\80\ We disagree with Union Electric that anything in the
Commission's brief to the Supreme Court, opposing certiorari of AGD,
contradicts our conclusion. We recognize, as the Commission
explained in that brief, that there is no equivalent to section 7 of
the NGA in the FPA. While this puts Order No. 888 on a somewhat
different factual basis from AGD, it has no material effect on
whether we have the authority to remedy undue discrimination by
requiring non-discriminatory open access transmission.
\81\ See 824 F.2d at 993-94 (``The Order envisages a complete
restructuring of the natural gas industry. It may well come to rank
with the three great regulatory milestones of the industry. * *
*'').
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Legislative History Behind the FPA and EPAct Does Not Preclude Our
Action
We disagree with the arguments that the legislative history behind
Part II of the FPA establishes that the Commission cannot under any
circumstance order wheeling under FPA sections 205 and 206.82 We
examined the legislative history of sections 205 and 206 at length in
the NOPR and Order No. 888 and concluded that it supports our authority
to order open access transmission as a remedy for undue
discrimination.83 We also have examined the legislative history of
the EPAct amendments to sections 211 and 212 and conclude that Congress
in EPAct did not resolve the issue of our authority under sections 205
and 206 and left untouched whatever pre-existing authorities we had
under these sections. The parties have raised nothing new on rehearing
to persuade us that our interpretation is wrong. However, there are
several arguments that we believe warrant further discussion.
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\82\ Parties have raised the legislative history of sections 205
and 206, as well as the legislative history of the EPAct amendments
to sections 211 and 212.
\83\ FERC Stats. & Regs. at 31,676-78; mimeo at 120-27. Notice
of Proposed Rulemaking and Supplemental Notice of Proposed
Rulemaking, FERC Stats. & Regs. para. 32,514 at 33,053-56 (1995).
Union Electric points to a statement in the Commission's 1987 brief
to the U.S. Supreme Court, opposing certiorari of the AGD case; in
that brief the Commission pointed out that the Supreme Court had
noted, in Otter Tail, that the legislative histories of the FPA and
NGA are ``materially different.'' As we explained in Order No. 888,
we have thoroughly reexamined the legislative histories of the NGA
and FPA with respect to this issue and now conclude that there is no
material difference as to this issue in the legislative histories of
the two statutes. Further, such a difference, whether or not it
exists, was not crucial to the fundamental holdings of the AGD court
and does not preclude that decision from applying equally in the
electric industry. See FERC Stats. & Regs. at 31,676-78; mimeo at
121-26. We also note that in its brief to the Supreme Court the
Commission explicitly stated that neither Otter Tail nor any of the
other electric cases cited ``presented the question whether the
Commission could order wheeling to remedy undue discrimination or
anticompetitive behavior. * * *'' FERC Brief at 25 (footnote
omitted).
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Parties on rehearing argue that the existence of sections 211 and
212 limit the Commission's wheeling authority and, in effect, remove
our authority under section 206 to order any transmission as a remedy
for undue discrimination.84 We disagree. In enacting EPAct,
Congress did not resolve the extent of our wheeling authority outside
the context of sections 211 and 212.85 As we explained above,
while Congress in 1978 gave the Commission certain case-by-case
authority to order transmission access, it also specifically provided
in section 212(e) of the FPA that the case-by-case authorities were not
to be construed as limiting or impairing any authority of the
Commission under any other provision of law. Congress retained a
similar savings clause when it amended sections 211 and 212 in 1992.
Moreover, the legislative history of EPAct shows that when Congress
amended sections 211 and 212, it was well aware of arguments regarding
the scope of the Commission's remedial authority under section
206.86 Whereas Congress added an amendment prohibiting the
Commission from ordering direct retail wheeling under any provision of
the FPA, it chose not to add a prohibition on the Commission ordering
wholesale wheeling as a remedy for undue
[[Page 12293]]
discrimination under sections 205 and 206.87
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\84\ See discussion supra concerning AGD court's understanding
that Order No. 436 was not a simple order that relied on voluntary
actions of affected pipelines.
\85\ Contrary to certain assertions, in Order No. 888 we viewed
the statute as a whole and determined that section 211 in no way
limited the broad authority Congress gave us to eradicate undue
discrimination in the electric power industry.
\86\ See note 71 and related discussion, supra.
\87\ In response to Carolina P&L's argument that Congress gave
the Commission a specific remedy under section 211 and the
Commission should not presume that it has additional remedies in
such a circumstance, we do not believe that section 211 can credibly
be viewed either as a partial substitute for, or as superseding, the
sections 205-206 undue discrimination remedial authority that is
fundamental to the Federal Power Act. Indeed, section 211 is not
written in terms of providing remedial authority to address undue
discrimination but rather provides for case-by-case transmission
service on request if the service is in the public interest and
meets the other criteria in sections 211 and 212.
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We are not persuaded that this conclusion is wrong based on
rehearing arguments that we ignored other legislative history of EPAct.
Carolina P&L argues that we ignored various statements of Senator
Wallop following the enactment of EPAct, which it alleges are counter
to our claim of authority to order open access transmission as a remedy
for undue discrimination. The utility is simply in error that we
ignored these statements. We explicitly mentioned Senator Wallop's
statements in Order No. 888 and gave our rationale for why section 211
does not limit our authority to remedy undue discrimination.88
However, we believe it is important to elaborate on the context in
which those statements were made and our interpretation of those
statements.
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\88\ FERC Stat. & Regs. at 31,686-87; mimeo at 148-51.
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The primary focus of Senator Wallop's statements is on the
transmission authority given by the EPAct amendments to sections 211
and 212. These statements emphasize restrictions on our section 211
wheeling authority, including the fact that section 211 does not give
the Commission authority to order transmission access on its own motion
or to order open access transmission.89 We do not quarrel with
these statements because sections 211 and 212 clearly do place
restrictions on our authority to order access under those provisions.
The statements also discuss the differences between the House
introduced amendments to sections 211 and 212 (which would have
provided broader and in some instances mandatory access authority) and
the amendments that finally passed (which were more limited). We also
do not disagree that changes were made to the bill that originally was
introduced. At issue here, however, is not whether there are
restrictions on our section 211 authority, but rather whether we have
authority outside the context of section 211 to order transmission as a
remedy for undue discrimination. The only statement among Senator
Wallop's remarks that addresses this specific issue is one in which he
says, ``In my opinion, neither the amendments made by this Act nor
existing law give the FERC any authority to mandate open access
transmission tariffs for electrical utilities.'' (emphasis added). We
do not view one senator's opinion as in any way dispositive of the
issue. As discussed supra, when Congress enacted the 1992 section 211
amendments it was well aware of the outstanding legal issue of the
Commission's authority to order access as a remedy for undue
discrimination under section 206. It chose not to clarify this issue by
prohibiting the Commission from ordering access, but instead retained
the savings clause in section 212(e).
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\89\ Most of the statements talk in terms of ``The Conference
Report provides. . . .'' and thus are referring only to the section
211 and 212 provisions. See, e.g., 138 Cong. Rec. 517616 (Oct. 8,
1992).
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The issue of our legal authority thus turns on the undue
discrimination authority given to us in 1935, and the legislative
history of sections 205 and 206. We discussed this at length in Order
No. 888.90 On rehearing, several entities emphasize the Otter Tail
case and the legislative history referred to in that case. In
particular, Union Electric recites Justice Stewart's discussion of the
legislative history in his partial dissent in Otter Tail. We do not
interpret that discussion to suggest that we do not have the authority
to remedy undue discrimination by requiring open access transmission
under any circumstance. As we explained in Order No. 888:
\90\ FERC Stats. & Regs. at 31,676-78; mimeo at 120-27.
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In the FPA, while Congress elected not to impose common carrier
status on the electric power industry, it tempered that
determination by explicitly providing the Commission with the
authority to eradicate undue discrimination--one of the goals of
common carriage regulation. By providing this broad authority to the
Commission, it assured itself that in preserving ``the voluntary
action of the utilities'' it was not allowing this voluntary action
to be unfettered. It would be far-reaching indeed to conclude that
Otter Tail, which was a civil antitrust suit that raised issues
entirely unrelated to our authority under section 206, is an
impediment to achieving one of the primary goals of the FPA--
eradicating undue discrimination in transmission in interstate
commerce in the electric power industry. [91]
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\91\ FERC Stats. & Regs. at 31,670; mimeo at 103.
In response to Union Electric's arguments that Congress explicitly
rejected common carrier provisions in 1935, we do not disagree with
Union Electric's statement that ``the mandatory wheeling language was
not dropped inadvertently.'' 92 The point that we made in Order
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No. 888 (quoting AGD) in this regard was that
\92\ Union Electric at 26.
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