# Promoting Wholesale Competition Through Open Access Non- Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A97-5767 ## Record - **Collection:** Federal Register - **Document type:** Rule - **Published:** March 14, 1997 - **Citation:** 62 FR 12274 ## Text 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 bulletin board service, provides access to the texts of formal documents issued by the Commission. CIPS is available at no charge to the user and may be accessed using a personal computer with a modem by dialing 202-208-1397 if dialing locally or 1-800-856-3920 if dialing long distance. To access CIPS, set your communications software to 19200, 14400, 12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex, no parity, 8 data bits and 1 stop bit. The full text of this order will be available on CIPS 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 software is required. To access CIPS via the Internet, point your browser to the URL address: http://www.fedworld.gov and select the ``Go to the FedWorld Telnet Site'' button. When your Telnet software connects you, log onto the FedWorld system, scroll down and select FedWorld by typing: 1 and at the command line then typing: /go FERC. 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \20\ FERC Stats. & Regs. at 31,663-66; mimeo at 84-92. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \28\ See also PSE&G. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \29\ See also Carolina P&L. --------------------------------------------------------------------------- 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] --------------------------------------------------------------------------- \30\ Blue Ridge at 16. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \48\ See also AEC & SMEPA. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \53\ As Order No. 888 indicates, they may be required to pay the transmission provider's maximum transmission rate. --------------------------------------------------------------------------- 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 --------------------------------------------------------------------------- \54\ FERC Stats. & Regs. at 31,665-66; mimeo at 89-90. --------------------------------------------------------------------------- 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 transactio [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A97-5767. Public record. Not legal advice.