Regional Transmission Organizations, Notice of Intent To Consult Under Section 202(a)

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. RM99-2-000]

Regional Transmission Organizations, Notice of Intent To Consult

Under Section 202(a)

November 24, 1998.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of Intent to Consult with State Commissions.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) intends

to consult with State commissions for the purpose of affording them a

reasonable opportunity to present their views with respect to the

Commission's use of authority under section 202(a) of the Federal Power

Act.

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., Room 2A, Washington, D.C. 20426.

The Commission Issuance Posting System (CIPS) provides access to

the texts of formal documents issued by the Commission. CIPS can be

accessed via Internet through FERC's Homepage (http://www.ferc.fed.us)

using the CIPS Link or the Energy Information Online icon. The full

text of this document will be available on CIPS in ASCII and

WordPerfect 6.1 format. CIPS is also available through the Commission's

electronic bulletin board service 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. User assistance is available at 202-208-2474

or by E-mail to [email protected].

This document is also available through the Commission's Records

and Information Management System (RIMS), an electronic storage and

retrieval system of documents submitted to and issued by the Commission

after November 16, 1981. Documents from November 1995 to the present

can be viewed and printed. RIMS is available in the Public Reference

Room or remotely via Internet through FERC's Homepage using the RIMS

link or the Energy Information Online icon. User assistance is

available at 202-208-2222, or by E-mail to [email protected].

Finally, the complete text on diskette in WordPerfect format may be

purchased from the Commission's copy contractor, RVJ International,

Inc. RVJ International, Inc. is located in the Public Reference Room at

888 First Street, N.E., Washington, D.C. 20426.

As part of a broader inquiry concerning the Commission's policies

on independent system operators (ISOs) and other regional transmission

organizations (RTOs) in the electric utility industry,1 the

Commission is considering whether and how to use its authority under

section 202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a)

(1994), which was recently delegated to the Commission by the Secretary

of Energy.2 As a first step in that process, the Commission

gives notice of its intent to initiate a consultation process with

State commissions pursuant to section 202(a). The purpose of this

initial consultation is to afford State commissions a reasonable

opportunity to present their views and recommendations with respect to

dividing the country into regional districts for development of

independent regional transmission organizations.

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\1\ See Midwest Independent Transmission System Operator, Inc.,

84 FERC para. 61,231 at 62,142 (1998), reh'g pending (Midwest ISO).

\2\ A copy of section 202(a) is attached to this notice and will

also be published in the Federal Register.

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The Commission intends initially to seek the views and

recommendations of State commissions on the issues of what criteria

should be used to establish regional boundaries for RTOs, and what

should be the appropriate role of States in the formation and

governance of RTOs, in the event that the Commission decides to

exercise its authority. We will do so through one or more conferences

to be held in January or early February 1999. After these conferences,

there will be additional consultation, during which the Commission will

solicit and consider the views of the States, and others, in a

rulemaking or other generic proceeding on RTOs. Among the issues to be

examined then will be whether to exercise section 202(a) authority to

establish regional boundaries for RTOs.

[[Page 66159]]

Background

In Order Nos. 888 3 and 889,4 the Commission

required all public utilities that own, operate or control interstate

transmission facilities to provide open access transmission services

and to separate their transmission operations functions from their

wholesale power marketing functions. The Commission took this step to

``remedy undue discrimination in access to monopoly owned transmission

lines'' in order 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.'' 5 During

the course of that proceeding, the Commission received comments urging

it to require generation divestiture or structural institutional

arrangements such as regional ISOs to better assure non-discrimination.

The Commission responded at that time that, while it believed that ISOs

had the potential to provide significant benefits, efforts to remedy

undue discrimination should begin by requiring the less intrusive

functional unbundling approach.6 Order No. 888 stated:

\3\ Promoting Wholesale Competition Through Open Access Non-

discriminatory Transmission Services by Public Utilities; 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 (1996), order on reh'g, Order No. 888-A, 62 FR 12,274

(Mar. 14, 1997), FERC Stats. & Regs. para. 31,048 at 30,278-79

(1997), order on reh'g, Order No. 888-B, 62 FR 64688 (Dec. 9, 1997)

81 FERC para. 61,248 (1997), order on reh'g, Order No. 888-C, 82

FERC para. 61,046 (1998).

\4\ Open Access Same-Time Information System and Standards of

Conduct, Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. &

Regs. para. 31,035 (1996); order granting request for clarification,

62 FR 610 (Jan. 1, 1997), 77 FERC para. 61,335 (1996); order on

reh'g, Order No. 889-A, 62 FR 12484 (Mar. 14, 1997), FERC Stats. &

Regs. para. 31,049 (1997); and order denying reh'g, Order No. 889-B,

62 FR 64715 (Dec. 9, 1997), 81 FERC para. 61,253 (1997).

\5\ Order No. 888, FERC Stats. & Regs. at 31,634.

\6\ Functional unbundling requires the separation of

transmission system functions and wholesale generation marketing

functions, and a code of conduct to define impermissible contact

between generation and transmission personnel. Under functional

unbundling, a public utility must: (1) take transmission services

under the same tariff of general applicability as do others; (2)

state separate rates for wholesale generation, transmission, and

ancillary services; and (3) rely on the same electronic information

network that its transmission customers rely on to obtain

information about its transmission system when buying or selling

power. See Order No. 888, FERC Stats. & Regs. at 31,654-55.

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[W]e see many benefits in ISOs, and encourage utilities to

consider ISOs as a tool to meet the demands of the competitive

marketplace.

As a further precaution against discriminatory behavior, we will

continue to monitor electricity markets to ensure that functional

unbundling adequately protects transmission customers. At the same

time, we will analyze all alternative proposals, including formation

of ISOs, and, if it becomes apparent that functional unbundling is

inadequate or unworkable in assuring non-discriminatory open access

transmission, we will reevaluate our position and decide whether

other mechanisms, such as ISOs, should be required.\7\

\7\ Order No. 888, FERC Stats. & Regs. at 31,655.

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Order No. 888 also set forth eleven principles that would be used

to assess ISO proposals that may be submitted to the

Commission.8 Since Order No. 888 was issued, the Commission

conditionally approved proposals for the establishment of five ISOs.

These are the California ISO,9 the PJM ISO,10 ISO

New England,11 the New York ISO,12 and the

Midwest ISO.13 In addition, the Texas Commission has ordered

an ISO for the Electric Reliability Council of Texas

(ERCOT).14 These organizations, and others rumored to be in

development, vary widely with respect to their operational

responsibilities, geographic scope, governance, and structure.

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\8\ Id. at 31,730.

\9\ Pacific Gas & Electric Company, et al., 77 FERC para. 61,204

(1996), order on reh'g, 81 FERC para. 61,122 (1997).

\10\ Pennsylvania-New Jersey-Maryland Interconnection, et al.,

81 FERC para. 61,257 (1997), reh'g pending.

\11\ New England Power Pool, 79 FERC para. 61,374 (1997), order

on reh'g, 85 FERC para. 61,242 (1998) (order conditionally

authorizing ISO New England); New England Power Pool, 83 FERC para.

61,045 (1998), reh'g pending (order on NEPOOL tariff and

restructuring).

\12\ Central Hudson Gas & Electric Corporation, et al., 83 FERC

para. 61,352 (1998), reh'g pending.

\13\ Midwest ISO, 84 FERC para. 61,231 (1998).

\14\ See 16 Texas Administrative Code Sec. 23.67(p).

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On April 15-16, 1998, the Commission held a public conference in

Washington, D.C., in Docket No. PL98-5-000, to examine the future of

ISOs in administering the electric transmission grid on a regional

basis. The Washington conference highlighted the industry's change in

thinking about types of regional transmission organizations other than

ISOs that the Commission should consider. As a follow-up to the

Washington conference, the Commission held seven regional conferences

at locations around the country between May 28 and June 8, 1998. These

regional conferences focused on specific regional characteristics and

institutional factors that bear on the formation of regional

transmission organizations. As a result of these conferences, the

Commission received numerous oral and written comments on the

appropriate size, scope, organization and functions of regional

transmission organizations.

In our recent order conditionally approving the Midwest ISO, the

Commission noted that many issues had been raised in that proceeding

about the proper size and configuration of the ISO; the relative merits

of ISOs, transcos, and other possible forms of regional organization;

how much control the regional entity should have over various

facilities, and other issues. The Commission stated that it would not

attempt to resolve industry-wide issues in that proceeding, but that it

would address such issues in a rulemaking or other generic proceeding

in the future.15

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\15\ Midwest ISO, 84 FERC at 62,142. The Commission also stated

therein, among other things, that ``at this early stage in the

restructuring of the U.S. electric power industry'' it believes that

there is no ``single structural or operational arrangement that must

apply universally to all utilities seeking to form regional

transmission entities'' and that the better approach ``at this

time'' is ``to encourage and accommodate regional experimentation.''

Id. The Commission further stated that coordination in the public

interest is best served if a proposed transmission entity is as

large as possible. Id. at 62,145.

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On October 1, 1998, the Secretary of Energy delegated his authority

under section 202(a) of the FPA to the Commission. The Secretary stated

that section 202(a) ``provides DOE with sufficient authority to

establish boundaries for Independent System Operators (ISOs) or other

appropriate transmission entities.'' 16

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\16\ 63 FR 53889 (Oct. 7, 1998).

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Discussion

Under section 202(a) of the FPA, ``the Commission is empowered and

directed to divide the country into regional districts for the

voluntary interconnection and coordination of facilities for the

generation, transmission, and sale of electric energy.'' The purpose of

this division into regional districts is for ``assuring an abundant

supply of electric energy throughout the United States with the

greatest possible economy and with regard to the proper utilization and

conservation of natural resources.'' Section 202(a) states that it is

``the duty of the Commission to promote and encourage such

interconnection and coordination within each such district and between

such districts.''

The Commission believes that an abundant supply of electric energy

throughout the United States with the greatest possible economy can be

best achieved with fully competitive wholesale power markets and open

and non-discriminatory access to interstate transmission facilities.

Order No. 888 has laid the necessary predicate for competition but,

after more than two years of experience, the requirements of Order Nos.

888 and 889 may not alone

[[Page 66160]]

be sufficient to accomplish a completely competitive market. The

Commission therefore is considering whether the goals of full

competition and non-discriminatory access can be achieved in the

absence of broad participation by transmission-owning electric

utilities in regional transmission organizations.

The Commission has identified in earlier orders several issues

inherent in the present system that may interfere with the development

of fully competitive markets. These include lack of sufficient

separation between transmission and merchant functions, multiple

pancaked transmission rates within a region, congestion management

issues, loop flow issues, the complexities of current transmission

planning, and generation market power that results when market size is

constricted by transmission constraints.17 As the Commission

has previously explained, the establishment of and participation in

properly structured regional transmission organizations can foster

fully competitive markets. To be effective, the Commission believes

that these regional transmission organizations must, at a minimum, have

adequate operational authority, ensure comparable treatment for all

transmission users, address loop flow issues, eliminate pancaked

transmission rates, manage short-term transmission reliability, manage

congestion, and plan transmission expansion.18

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\17\ See, e.g., Order No. 888, FERC Stats. & Regs. para. 31,036

at 31,730-32; Order No. 888-A, FERC Stats. & Regs. para. 31,048 at

30,247-51; Notice of Conference, Inquiry Concerning the Commission's

Policy on Independent System Operators, Docket No. PL98-5-000;

Louisville Gas and Electric Company, et al., 82 FERC para. 61,308 at

62,222 (1998); Midwest ISO at 62,142, 62,145, 62,153-165.

\18\ Id.

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The Commission does not have preconceived notions as to what types

of structures would be optimal for such regional transmission

organizations, and they may in fact vary from region to region. ISOs

are one type of regional institution, but there are other ways that

interests in generation and transmission can be separated. These may

include the creation of separate transmission companies.

Section 202(a) requires that before the Commission exercises its

authority to establish regional districts and to fix or modify their

boundaries:

The Commission shall give notice to the State commission of each

State situated wholly or in part within such district, and shall

afford each such State commission reasonable opportunity to present

its views and recommendations, and shall receive and consider such

views and recommendations.

Accordingly, the Commission intends to hold one or more conferences

during January or early February 1999 for the purpose of beginning the

consultative process with the State commissions. The Commission

currently envisions that one representative from each State commission

would attend and discuss questions that would include, but not

necessarily be limited to, the following:

(1) What criteria and policy considerations should be used to

establish the boundaries for effective RTOs if the Commission later

decides to do so?

(2) Are there factors that make it appropriate for the utilities in

your state to belong in a specific region?

(3) What is the appropriate role of the States in the formation of

RTOs?

(4) What is the appropriate role of the States in the governance of

RTOs?

This notice is being given at this early time to permit interested

State commissions sufficient time to consult with each other or with

the industry on these technical matters. Details about the specific

time, place, and format of this conference (or conferences) will be

announced in the future.

Finally, as noted above, the Commission views the consultation with

State commissions as an initial step in a broader inquiry on RTOs. If

the Commission determines there is a need to establish regional

boundaries for RTOs to further the goals of full competition and non-

discriminatory access, it will do so as part of a rulemaking or other

generic proceeding on RTOs. That proceeding will afford State

commissions and others an opportunity to comment on the broader policy

issues involved in creating RTOs, as well as specific regional

boundaries.

By direction of the Commission. Commissioner Bailey concurred in

part and dissented in part with a separate statement attached.

Commissioner Breathitt concurred with a separate statement attached.

David P. Boergers,

Secretary.

Section 202(a) of the Federal Power Act, 16 U.S.C. Sec. 824a(a)

(1994).

Interconnection and Coordination of Facilities; Emergencies;

Transmission to Foreign Countries

Sec. 202. (a) For the purpose of assuring an abundant supply of

electric energy throughout the United States with the greatest

possible economy and with regard to the proper utilization and

conservation of natural resources, the Commission is empowered and

directed to divide the country into regional districts for the

voluntary interconnection and coordination of facilities for the

generation, transmission, and sale of electric energy, and it may at

any time thereafter, upon its own motion or upon application, make

such modifications thereof as in its judgment will promote the

public interest. Each such district shall embrace an area which, in

the judgment of the Commission, can economically be served by such

interconnected and coordinated electric facilities. It shall be the

duty of the Commission to promote and encourage such interconnection

and coordination within each such district and between such

districts. Before establishing any such district and fixing or

modifying the boundaries thereof the Commission shall give notice to

the State commission of each State situated wholly or in part within

such district, and shall afford each such State commission

reasonable opportunity to present its views and recommendations, and

shall receive and consider such views and recommendations.

Regional Transmission Organizations

[Docket No. RM99-2-000]

Issued: November 24, 1998.

BAILEY, Commissioner, concurring in part and dissenting in part

I support the initiation of a consultation process with State

commissions. I do not support, however, at this time the exercise of

whatever authority we possess under section 202(a) of the Federal Power

Act, 16 U.S.C. Sec. 824a(a) (1998), to divide up the country and to

establish regional boundaries for the development of regional

transmission organizations (RTOs). For these reasons, I respectfully

concur in part and dissent in part with today's notice.

Today's notice does not decide the threshold question of whether

the Commission should do anything more at this time other than to

consult with State commissions. The notice is clear in its very first

sentence that the Commission has not decided whether and how to use its

authority under newly-delegated section 202(a) to establish regional

boundaries for RTOs. In addition, the notice does not limit the scope

of State consultation. While the notice articulates a number of

questions for State consideration, focusing on the criteria that the

Commission should employ in establishing regional boundaries for RTOS,

those questions are decidedly inclusive rather than exclusive.

I have not reached any conclusions as to the issue of whether the

Commission, acting pursuant to section 202(a), needs to establish

regional districts to further the goals of full competition and non-

discriminatory access. I am interested in hearing from the States as to

whether it is imperative for the Commission to take this aggressive and

immediate step. My own view is that after two years of operational

experience under the procedures of Order Nos. 888 and 889, less

aggressive steps could be pursued.

[[Page 66161]]

As the notice indicates, in Order Nos. 888 and 889, the Commission

purposefully favored functional unbundling of utility operations over

more dramatic structural separation. I understand that transmission

customers have challenged whether transmission providers are continuing

to offer their wholesale merchant function or affiliates with

preferential access to transmission and transmission information. But I

am not convinced that functional unbundling, backed by the Commission's

vigilance and commitment in responding to customer complaints, is

ineffectual in deterring and detecting preferential access and undue

discrimination.

However, as events in the last year have demonstrated, transmission

providers are increasingly reaching the conclusion that competitive

market forces--as opposed to Commission directive--favor some type of

structural disaggregation. The Commission has acted on a number of

recent filings that seek Commission authorization for the divestiture

of generation assets. The Commission also is aware of a number of

recent proposals to place transmission assets in the control and

operation of a separate regional transmission entity (going under

various names and forms).

I continue to encourage all of these undertakings, and I do not

want to see these efforts stymied awaiting the outcome of our process.

I am pleased to see that utilities are voluntarily agreeing to go

beyond the directions of Order Nos. 888 and 889. I expect these types

of voluntary undertakings to increase in the future, as utilities

increasingly come to the conclusion that they can best respond to

competitive market pressures by transforming themselves into

generation- or transmission-only entities, thus providing the type of

structural separation that better protects against undue discrimination

or preference in the provision of transmission services. I am wary of

Commission action that might act to undermine the initiative of

utilities to come forward with their own voluntary proposals.

Moreover, I am not convinced that the Commission, should it decide

to provide greater guidance and prescription as to regional or

unbundling filings, necessarily must proceed to an action pursuant to

this newly-delegated section 202(a) authority. I am willing to commit

to some type of generic proceeding, as I believe that it is in the

public interest to do more to encourage the filing of regional

transmission entities that enhance competition and offer improvements

with respect to pricing, reliability, and market monitoring. I

understand that voluntary efforts to promote and develop these type of

regional entities have stalled, or have failed to commence, in many

parts of the country. I am willing to provide Commission instruction on

the subject, beyond that already found in Order No. 888 and our ISO

orders, to jump start dormant or otherwise lagging discussions on the

subject.

But why must that instruction necessarily come in the form of a

generic initiative intended to result in the formation of regional

districts, encompassing all regions of the country? While today's

notice is drafted very carefully, I feel there is a strong bias in

favor of the Commission's exercising its section 202(a) authority--

whatever that entails--and establishing regional boundaries and

districts in which all public utilities will be urged, subtlely or more

overtly, to join. I am not endorsing such a process, especially when I

do not know where that process is heading. I want the States to answer

that threshold question for me.

At this juncture, I believe that the Commission is endorsing a

process that is among the most aggressive it could have chosen to

encourage the formation of RTOs. There are a number of alternatives to

consider, and I urge the States to consider and consult with us as to

whether less aggressive steps can be taken by the Commission to

encourage the formation of ISOs.

There are other options the Commission could consider in

encouraging the formation of RTOs. I enumerate them below, proceeding

from the most mild and passive to the most aggressive option. Of

course, there are numerous variations on these options for us all to

consider.

First, the Commission could issue nothing in this docket. It could

simply provide generic instruction in the context of its review of the

filings it receives proposing ISOs, transcos, and related structures.

In the Midwest ISO proceeding, for example, in an order issued only two

months ago, the Commission, noting the early stage of restructuring of

the U.S. electric power industry, proceeded very cautiously and

refrained from endorsing any particular ISO model or ideal.1

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\1\ See Midwest Independent Transmission System Operator, 84

FERC para. 61,231 at 62,142 (1998), reh'g pending.

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Second, the Commission could issue a non-binding statement of

Commission policy indicating more proactively what it is seeking when

it receives and reviews a voluntary utility-specific or region-specific

filing. This would provide badly-needed guidance to utilities which are

now uncertain as to the size and configuration, for example, of any

regional entity they propose.

Third, the Commission could do more to encourage the voluntary

filing of RTO initiatives. Specifically, it could issue a policy

statement or rulemaking that encourages voluntary regional filings that

satisfy certain minimum criteria. Or, in addition to such minimum

criteria (or ``lowest common denominators''), the Commission could

articulate various incentives encouraging utilities to participate

actively in RTOs--such as transmission pricing or rate of return

incentives.

Fourth, moving to the more aggressive of options, the Commission

could require utility participation in RTOs, establishing basic

criteria but leaving many or most of the details for the utility

participants themselves. In other words, the Commission could let the

participants decide for themselves, in consultation with appropriate

state officials, how best to comply with Commission criteria and

mandates.

Fifth, the Commission could issue a rulemaking that not only

requires participation in RTOs, but also involves the Commission in the

setting and review of regional boundaries. Such a process could involve

the invocation of section 202(a) authority in combination with the

Commission's obligation under sections 205 and 206 of the Federal Power

Act to act to ensure against undue discrimination and preference in the

provision of jurisdictional services.

Today's notice, according to my reading, places the Commission

solidly on steps 4 and 5. Since the Commission is initiating a

consultative process, I ask the States to offer their advice as to how

aggressive a posture the Commission should assume.

From a policy perspective, I personally much prefer providing

incentives to encourage utilities to voluntarily step forward in

promoting the development of regional entities. I am very wary of

sitting here in Washington, D.C., and acting as a central planner with

a large map of the utility grid on my wall, with a magic marker at my

disposal. The competitive evolution of the industry has been very

dramatic and is ongoing and quite fluid. I am exceedingly uncomfortable

dictating to utilities how best to configure the industry in order to

best take advantage of competitive opportunities, or how best to

alleviate concern for unfair competitive advantages. Despite the expert

advice of this Commission's staff, I believe that I am not situated in

as good a position as

[[Page 66162]]

the utilities we regulate in determining the map and boundaries of

utility companies, acting alone or in concert with other utilities,

operating in the future.

From a legal perspective, I have many questions as to the

legitimacy of any generic Commission action that forces utilities,

overtly or subtlely, into regional districts of our choosing. This is a

difficult matter. Neither the Department of Energy nor the Commission

has exercised section 202(a) authority to divide the country into

regional districts. Moreover, the case law and legislative history on

this point are obscure, and provide no definitive judgment as to the

extent of the Commission's authority to encourage or compel utility

participation in regional districts.

In a separate attachment, I lay out for the interested reader my

understanding of relevant legislative history and precedent. It is my

opinion that while the Commission can act affirmatively to encourage,

promote and supervise utility participation in regional districts, it

lacks the power to compel participation. Rather, Congress left it, in

the language of the legislative history of section 202(a), to the

``enlightened self-interest'' of utilities to work cooperatively in the

advancement of the cause of utility interconnection and coordination. I

think the Commission should work to better ``enlighten'' utilities why

it may be in their best economic self-interest to cooperate with their

neighbors in advancing regional solutions to lingering competitive

problems, rather than adopt a more heavy-handed approach.

While today's notice has compelled me to lay out my views in as

comprehensive a manner as possible, I do appreciate its provisions to

the extent the notice stops short of endorsing any one model of

regional cooperation. I certainly agree that there are a number of

types of structures that, depending on circumstances, might be optimal

for a particular RTO. I leave it to individual utilities to decide for

themselves whether, if they decide to proceed, a classic ISO structure

best suits their needs, or whether a separate transmission company or

other structure may be most appropriate.

For all of these reasons, I concur with today's notice to the

extent it initiates a process allowing for consultation with the States

as to how best to proceed to encourage utility participation in

regional groupings. I dissent with today's notice to the extent it can

be perceived as formally initiating a process intended to lead to the

creation of regional districts, and to the extent this process might

undermine the ability of utilities to determine for themselves how best

to respond to emerging competitive opportunities and challenges.

Vicky A. Bailey,

Commissioner.

Attachment to Commissioner Bailey's Concurrence in Part/Dissent in

Part

Presented below is the text and legislative history of section

202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a) (1994),

as well as a brief discussion as to how it has been administered by the

Department of Energy (DOE) and the Federal Energy Regulatory

Commission. Relevant case law and Commission precedent, adding context

to section 202(a), follows.

This analysis has been prepared entirely by the Office of

Commissioner Bailey. It is intended to further explain her

interpretation of the scope of section 202(a).

The Statute

Section 202(a) reads in its entirety as follows:

(a) Regional districts; establishment; notice to State commissions

For the purpose of assuring an abundant supply of electric

energy throughout the United States with the greatest possible

economy and with regard to the proper utilization and conservation

of natural resources, the Commission is empowered and directed to

divide the country into regional districts for the voluntary

interconnection and coordination of facilities for the generation,

transmission, and sale of electric energy, and it may at any time

thereafter, upon its own motion or upon application, make such

modifications thereof as in its judgment will promote the public

interest. Each such district shall embrace an area which, in the

judgment of the Commission, can economically be served by such

interconnected and coordinated electric facilities. It shall be the

duty of the Commission to promote and encourage such interconnection

and coordination within each such district and between such

districts. Before establishing any such district and fixing or

modifying the boundaries thereof the Commission shall give notice to

the State commission of each State situated wholly or in part within

such district, and shall afford each such State commission

reasonable opportunity to present its views and recommendations, and

shall receive and consider such views and recommendations.

Broken down into its most important constituent parts, section

202(a):

(1) ``empowers'' and ``directs'' the Commission ``to divide the

country into regional districts for the voluntary interconnection

and coordination of facilities;''

(2) obligates the Commission ``to promote and encourage such

interconnection and coordination within each such district and

between such districts;'' and

(3) obligates the Commission to work in concert with affected

states prior to ``establishing any such district and fixing or

modifying the boundaries thereof.''

Section 202(a) is part of a more comprehensive section of the

Federal Power Act--section 202, 16 U.S.C. Sec. 824a (1994)--entitled

``Interconnection and coordination of facilities; emergencies;

transmission to foreign countries.'' Other subsections of section 202

deal with: (1) Commission-directed interconnections in certain limited

circumstances (section 202(b)); (2) Commission-directed temporary

interconnections in emergency circumstances (sections 202 (c)-(d)); (3)

limitations on the transmission or sale of electricity to or from

foreign countries (Canada and Mexico) (sections 202 (e)-(f)); and (4)

utility reports to the Commission and contingency plans in times of

electricity shortages.

Legislative History

There is little legislative history that illuminates the precise

meaning of section 202(a). The single best piece of legislative history

that is particular to section 202(a) focuses on the ``enlightened self-

interest'' of utilities and Congress' preference for voluntary

coordination and interconnection:

Under this subsection the Commission would have authority to

work out the ideal utility map of the country and supervise the

development of the industry toward that ideal. The committee is

confident that enlightened self-interest will lead the utilities to

cooperate with the commission and with each other in bringing about

the economies which can alone be secured through the planned

coordination which has long been advocated by the most able and

progressive thinkers on the subject.

Senate Report No. 621 (Senate Committee on Interstate Commerce), 74th

Cong., 1st Sess. (1935) at p. 49.

Courts reviewing this piece of legislative history appear to have

reached the conclusion that Congress, in enacting section 202(a) (and

related subsections) in 1935, was motivated by a desire to leave the

coordination and joint planning of utility systems to the voluntary

judgment of individual utilities, ``and it was not willing to mandate

that they do so.'' Central Iowa Power Cooperative v. FERC, 606 F.2d

1156, 1167-68 (D.C. Cir. 1979); see also Municipalities of Groton v.

FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978).

Other passages from the legislative history amplify the

``voluntary'' nature of utility conduct under section 202(a) and the

absence of Commission

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mandates. Another section of the Senate Report provided as follows:

Section 202(a) of [the original Senate bill] imposed upon each

public utility the duty to furnish energy to, exchange energy with

and transmit energy for any person upon reasonable request. This

provision has been eliminated, and the other subsections of the old

section 202 which relate to rates have been removed to the general

rate sections (sec. 205). While imposition of these duties may

ultimately be found to be desirable, the committee does not think

that they should be included in this first exercise of Federal power

over electric companies. It relies upon the provision for the

voluntary coordination of electric facilities in regional districts

contained in the new section 202(a) * * * for the first Federal

effort in this direction * * * Furthermore, the provisions of the

old section 203(b) empowering the Federal Power Commission to

require one utility to permit the use of its facilities by another *

* * have been eliminated; these matters are left to the voluntary

action of the utilities.

Senate Report No. 621, 74th Cong., 1st Sess. (1935) at p.19. In

addition, the report of the House Committee on Interstate and Foreign

Commerce similarly emphasized the voluntary character of the

coordination of utility facilities:

This section authorizes the Commission to establish regional

districts and to encourage the voluntary interconnection and

coordination of facilities within and between such districts, but

the coordination of facilities is left to the voluntary action of

the utilities.

H.R. Report No. 1318, 74th Cong., 1st Sess. (1935) at p.27.

Taken together, the pieces of legislative history quoted above

focus on the voluntary conduct of utilities and the cautious, limited

exercise of federal authority in this area. There is no apparent

discussion of the extent of the Commission's authority to divide the

country up into regional districts--or what the Commission

affirmatively can do under section 202(a) if utilities are not

``voluntarily'' moving in the manner (or as quickly as that) favored by

the Commission.

Exercise of Section 202(a) Authority

Section 202(a) authority to ``divide the country into regional

districts for the voluntary interconnection and coordination of

facilities'' originally was vested in the Federal Power Commission

(FPC). This authority was transferred to DOE in 1977 when Congress

enacted the Department of Energy Organization Act. The DOE Act vested

in the newly-created FERC only specifically-enumerated statutory

authority. Because the DOE Act did not specifically vest in the FERC

the FPC's existing section 202(a) authority with respect to dividing

the country into regional districts, that authority remained with DOE.

The DOE did not exercise its section 202(a) authority during the 21

years in which it controlled that authority. On October 1, 1998, DOE

Secretary Richardson, in DOE Delegation Order No. 0204-166, ``delegated

and assigned to the [Commission] the authority to carry out such

functions as are vested in the Secretary under section 202(a) of the

Federal Power Act.''

In delegating section 202(a) authority, Secretary Richardson

concluded that the Commission is the ``most appropriate agency'' to

exercise this authority. In support, Secretary Richardson explained,

without citation to any legal authority, that section 202(a) affords

the Commission ``sufficient authority to establish boundaries for

Independent System Operators (ISOs) or other appropriate transmission

entities.'' He added that ``[p]roviding FERC with the authority to

establish boundaries for ISOs or other appropriate transmission

entities could aid in the orderly formation of properly-sized

transmission institutions and in addressing reliability-related issues,

thereby increasing the reliability of the transmission system.'' The

press release accompanying the delegation order added that the DOE

delegation of section 202(a) authority ``gives FERC much-needed

authority it now lacks.''

Judicial Precedent

Not surprisingly, given the dormant nature of this section for its

63-year history, the United States Supreme Court has never ruled

directly on the precise meaning of section 202(a). It has, however,

addressed more generally the ``voluntary'' scheme of utility action

running throughout the Federal Power Act.

In the landmark case of Otter Tail Power Company v. United States,

410 U.S. 366 (1973), the Supreme Court ruled that Commission regulation

of electric utility rates and practices under the FPA does not immunize

electric utilities from antitrust scrutiny and liability. In so ruling,

the Supreme Court rejected the utility argument that its refusal to

deal with certain municipal customers was immune from antitrust

prosecution because the Commission has the authority to compel

involuntary electrical interconnections pursuant to section 202(b) of

the FPA. The Court responded that ``[t]he essential thrust of Sec. 202,

however, is to encourage voluntary interconnections of power.'' Id. at

373 (citing legislative history).

The Court continued with an analysis of the overall scheme of Part

II the FPA (which includes section 202) and its legislative history:

As originally conceived, Part II would have included a ``common

carrier'' provision making it ``the duty of every public utility to

* * * transmit energy for any person upon reasonable request. * * *

'' In addition, it would have empowered the Federal Power Commission

to order wheeling if it found such action to be ``necessary or

desirable in the public interest.'' These provisions were eliminated

to preserve ``the voluntary action of the utilities.''

It is clear, then, that Congress rejected a pervasive regulatory

scheme for controlling the interstate distribution of power in favor

of voluntary commercial relationships.

Id. at 374 (citations to legislative history omitted).

In an earlier Supreme Court citing section 202, the Court ruled in

Penn Water & Power Company v. FPC, 343 U.S. 414 (1952), that the

statutory language of sections 202(a), 202(b), and 206(b) of the FPA

justified a bilateral, existing contractual ``practice'' of two

utilities integrating their power output. In relevant part, the Court

found that the regional coordination of power facilities ``ready made

by prior contractual arrangements'' was precisely the type of

coordinated action authorized under section 202(a) of the FPA. Id. at

423.

The few lower court decisions to address section 202(a), like the

Penn Water case, address situations in which utilities voluntarily

banded together to coordinate their activities in such a manner as to

achieve efficiencies and economies unachievable by unilateral, utility-

specific conduct. Two cases in particular--involving voluntary pooling

arrangements by utilities--are instructive as to the reach of section

202(a) and the Commission's historical hesitation to invoke that

statutory authority to compel utilities to do more than what they

voluntarily had committed to do.

In Central Iowa Power Cooperative v. FERC, 606 F.2d 1156 (D.C. Cir.

1979), the D.C. Circuit affirmed the Commission's approval of the Mid-

Continent Area Power Pool (MAPP), a tight power pool among Midwestern

utilities, as modified in only one respect (membership). In so doing,

the court affirmed the Commission's judgment not to accede to the

request of intervenors to try to turn the power pool--which provided

for the coordinated operation of generating facilities and short-term

exchanges of power (reserve sharing)--into a better power pool.

Specifically, the court upheld the Commission's judgment to decline

to expand the scope of pool services, as requested by intervenors, to

require

[[Page 66164]]

MAPP utilities to construct larger generating units and to engage in

single-system planning with central dispatch. The Commission had

reasoned that section 202(a) of the FPA does not compel the Commission,

against the wishes of the pool utilities, to transform MAPP from its

limited scope to one offering a wider array of pool services:

While Section 202(a) of the Federal Power Act speaks in terms of

``voluntary interconnection and coordination'' and to ``promote and

encourage'' the same, the pooling agreement is an FPC tariff which

must pass muster under Sections 205 and 206 of the Federal Power

Act. For example, we have already found the membership provisions

unacceptable. Nevertheless, the scope of a power pool is in the

first instance a matter for the utilities involved. The mere fact

that a particular pool does not offer the same range of services as

another pool does not permit the Commission to direct expansion of

the narrower pools' scope. Unless the limited scope of the MAPP

Agreement is for some other reason unjust, unreasonable or unduly

discriminatory, we are not authorized under Part II of the Federal

Power Act to direct the pool to offer more services. While we can

and do ``encourage and promote'' greater use of pooling, the

peculiarities of each region necessitate that the member utilities

determine the services to be offered. One cannot automatically apply

the broader scope of NEPOOL, based upon very different geography,

industry history and make-up in New England, to the mid-continent

region with its tremendous area, sparse load and different industry

make-up.

Id. at 1167 (quoting underlying Commission order).

The reviewing court found the Commission's reluctance to direct the

pooling utilities to do more than what they had voluntarily committed

to do to represent an ``informed and reasoned decision consistent with

congressional purposes.'' Id. In support, the court reviewed the

language and legislative history of section 202(a) and concluded that

Congress intended to leave the coordination of electric systems to the

voluntary decisions of utilities acting in their ``enlightened self-

interest.'' For this reason,

Given the expressly voluntary nature of coordination under

section 202(a), the Commission could not have mandated adoption of

the Agreement, and failure of the MAPP participants to establish a

fully-integrated electric system could not justify rejection of the

[MAPP] Agreement filed.

Id. at 1168. The court recognized that, pursuant to section 202(a),

regional coordination of electric power systems is in the public

interest. Nevertheless,

This does not mean, however, that a pooling plan is unlawful * *

* merely because a more comprehensive arrangement might better

achieve the purposes of section 202(a). To so conclude would

undermine Congress' determination that coordination under section

202(a) be voluntary. Moreover, we cannot agree with South Dakota

that in approving the [MAPP] Agreement the Commission abdicated its

duty under section 202(a) to promote and encourage regional

interconnection and coordination of electric facilities.

Id.

The findings and rationale of the D.C. Circuit, in upholding the

Commission's limited exercise of its section 202(a) authority, mimic

its conclusions in an earlier case, also involving the voluntary

actions of utilities to create a coordinated power pool in another

region of the country. In Municipalities of Groton v. FERC, 587 F.2d

1296 (D.C. Cir. 1978), the court affirmed the Commission's approval,

with one modification (as to a deficiency charge), of the New England

Power Pool (NEPOOL), a tight power pool among New England utilities.

In so doing, the court affirmed the Commission's judgment to reject

the argument of certain municipal electric systems that the NEPOOL

Agreement was necessarily discriminatory and anticompetitive because it

omits certain services (including firm power sales). The court

explained that section 202(a) of the FPA ``sanctions and encourages

these voluntary pooling agreements,'' and that the Commission's

conclusions that the NEPOOL Agreement is not unduly discriminatory or

anticompetitive, despite its limited size and scope, ``is reasonable in

light of the voluntary nature of this agreement.'' Id. at 1298-99. See

also Duke Power Company v. FPC, 401 F.2d 930, 943-44 (D.C. Cir. 1968)

(emphasizing that section 202(a) encourages voluntary interconnection

and coordination of facilities, that the Commission's responsibility

under that section is only to promote and encourage such

interconnection and coordination, and that the Commission is not

authorized to ``compel any particular interconnection or technique of

coordination.'').2

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\2\ In Duke Power Company, the court reviewed the language and

legislative history of section 202(a), and other subsections of

section 202 ((b)-(d)) dealing with interconnections and emergency

authorizations, as part of its interpretation of the statutory reach

of section 203 of the FPA, dealing with the sale, lease,

disposition, merger or consolidation of jurisdictional facilities.

The court found that the Commission does not have jurisdiction under

section 203 to review the utility acquisition of limited local

distribution facilities.

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BREATHITT, Commissioner, concurring

I view today's Notice of Intent to Consult Under Section 202(a) as

the initiation of important discussions between the FERC and state

commissions and others on whether and how the Commission will use its

authority under Section 202(a) of the Federal Power Act. These initial

discussions will begin to shape the debate of how and under what time

frame the Commission intends to proceed with a broader inquiry into the

formation of regional transmission organizations. The direction we take

in this endeavor is of utmost importance to me. It is for this reason

that I respectfully concur with today's Notice of Intent to Consult. As

I will explain, the Notice does not adequately frame our initial

discussion with state commissioners.

I believe it is crucial that we conduct thorough and meaningful

discussions with our state colleagues. Efforts by this Commission to

draw regional boundaries for transmission organizations will have a

tremendous impact on state commissions and on the utilities and their

customers that conduct business and reside in those states. We must

acknowledge that states are at varying points in the development of

retail open access plans and that actions by this Commission will have

different impacts on states depending on the level of functional

unbundling and retail competition that has occurred in those states.

Furthermore, we must consider the significant regional differences that

exist in this country and the degree to which transmission planning and

pricing issues will affect a state's analysis and consideration of

RTOs. Obviously, this consultation process is not a simple exercise.

Indeed it is one that requires a great deal of consideration. That is

why the Commission must ensure that every pertinent question, even the

most fundamental ones, are asked and answered.

The Notice we are voting on today asks important and relevant

questions and invites comments from state commissioners on issues

pertaining to the formation of regional transmission organizations and

the establishment of boundaries for these RTOs. However, the Notice

does not invite state commissioners, in this initial discussion, to

comment on, what I believe to be, the fundamental, threshold question.

That is, whether there is a need to establish regional boundaries in

order to further the goals of full competition and non-discriminatory

access or whether there are other means that can be equally as

effective. This should be the first question we ask ourselves and state

commissioners. Furthermore, I believe it

[[Page 66165]]

is crucial that we define the scope of our authority under Section

202(a).

I fully support the Notice of Intent to Consult and look forward to

our discussions with state commissioners and, later on, with other

parties. This dialogue is important and necessary. However, I do not

want the Commission to lose sight of fundamental, threshold issues

pertaining to the establishment of regional boundaries and the

formation of RTOs. I therefore respectfully concur with this decision.

Linda K. Breathitt,

Commissioner.

[FR Doc. 98-31959 Filed 11-30-98; 8:45 am]

BILLING CODE 6717-01-P