Preventing Undue Discrimination and Preference in Transmission Service

Federal RegisterMar 15, 2007

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 35 and 37

[Docket Nos. RM05-17-000 and RM05-25-000; Order No. 890]

Preventing Undue Discrimination and Preference in Transmission Service

Issued February 16, 2007.

AGENCY:

Federal Energy Regulatory Commission, DOE.

ACTION:

Final rule.

SUMMARY:

The Federal Energy Regulatory Commission is amending the regulations and the

pro forma

open access transmission tariff adopted in Order Nos. 888 and 889 to ensure that transmission services are provided on a basis that is just, reasonable and not unduly discriminatory or preferential. The final rule is designed to: Strengthen the

pro forma

open-access transmission tariff, or OATT, to ensure that it achieves its original purpose of remedying undue discrimination; provide greater specificity to reduce opportunities for undue discrimination and facilitate the Commission's enforcement; and increase transparency in the rules applicable to planning and use of the transmission system.

EFFECTIVE DATE:

This rule will become effective May 14, 2007.

FOR FURTHER INFORMATION CONTACT:

Daniel Hedberg (Technical Information), Office of Energy Markets and Reliability, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6243.

W. Mason Emnett (Legal Information), Office of the General Counsel—Energy Markets, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6540.

Kathleen Barrón (Legal Information), Office of the General Counsel—Energy Markets, Federal Energy Regulatory Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-6461.

SUPPLEMENTARY INFORMATION:

Table of Contents

Paragraph Nos.

I. Introduction

II. Background

A. Historical Antecedent

B. Order No. 888 and Subsequent Reforms

C. EPAct 2005 and Recent Developments

III. Need for Reform of Order No. 888

A. Opportunities for Undue Discrimination Continue to Exist

B. Lack of Transparency Undermines Confidence in Open Access and Impedes Enforcement of Open Access Requirements

C. Congestion and Inadequate Infrastructure Development Impede Customers' Use of the Grid

D. A Consistent Method of Measuring ATC Is Needed

E. Discriminatory Pricing of Imbalances

F. Redispatch/Conditional Firm

G. EPAct 2005 Emphasized Certain Policies and Priorities for the Commission

IV. Summary, Scope and Applicability of the Final Rule

A. Summary of Reforms

B. Core Elements of Order No. 888 That Are Retained

1. Federal/State Jurisdiction

2. Native Load Protection

3. The Types of Transmission Services Offered

110

4. Functional Unbundling

117

C. Applicability of the Final Rule

124

1. Non-ISO/RTO Public Utility Transmission Providers

124

2. ISO and RTO Public Utility Transmission Providers and Transmission Owner Members of ISOs and RTOs

143

3. Non-Public Utility Transmission Providers/Reciprocity

162

V. Reforms of the OATT

193

A. Consistency and Transparency of ATC Calculations

193

B. Coordinated, Open and Transparent Planning

418

C. Transmission Pricing

603

1. General

603

2. Energy and Generation Imbalances

627

3. Credits for Network Customers

729

4. Capacity Reassignment

778

5. “Operational” Penalties

826

a. Unreserved Use Penalties

826

b. Distribution of Operational Penalties

850

c. Applicability of Operational Penalties Proposal to RTOs and Other Independent or Non-Profit Entities

866

6. “Higher of” Pricing Policy

870

7. Other Ancillary Services

886

D. Non-Rate Terms and Conditions

901

1. Modifications to Long-Term Firm Point-to-Point Service

901

a. Planning Redispatch and Conditional Firm Options

901

b. Proposals for Transparent Redispatch

1095

c. Other Requested Service Modifications

1165

2. Hourly Firm Service

1177

3. Rollover Rights

1214

4. Modification of Receipt or Delivery Points

1268

5. Acquisition of Transmission Service

1296

a. Processing of Service Requests

1296

b. Reservation Priority

1394

6. Designation of Network Resources

1432

a. Qualification as a Network Resource

1432

b. Documentation for Network Resources

1507

c. Undesignation of Network Resources

1534

7. Clarifications Related to Network Service

1592

a. Secondary Network Service

1592

b. Behind the Meter Generation

1614

8. Transmission Curtailments

1620

9. Standardization of Rules and Practices

1633

a. Business Practices

1633

b. Liability and Indemnification

1662

10. OATT Definitions

1678

E. Enforcement

1714

1. General Policy

1715

2. Civil Penalties

1724

VI. Information Collection Statement

1752

VII. Environmental Analysis

1758

VIII. Regulatory Flexibility Act Analysis

1759

IX. Document Availability

1760

X. Effective Date and Congressional Notification

1763

Appendix A: Summary of Compliance Filing Requirements

Appendix B: Commenting Party Acronyms

Appendix C:

Pro Forma

Open Access Transmission Tariff

Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

I. Introduction

1. This Final Rule addresses and remedies opportunities for undue discrimination under the

pro forma

Open Access Transmission Tariff (OATT) adopted in 1996 by Order No. 888.

This landmark rulemaking fostered greater competition in wholesale power markets by reducing barriers to entry in the provision of transmission service. In the ten years since Order No. 888, however, the Commission has found that the OATT contains flaws that undermine realizing its core objective of remedying undue discrimination. In the Notice of Proposed Rulemaking (NOPR) issued on May 19, 2006, the Commission proposed to remedy those flaws.

After receiving approximately 6,500 pages of comments from close to 300 parties, we now take final action. We highlight below the most critical reforms being adopted today.

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 21540 (May 10, 1996), FERC Stats. & Regs. § 31,036 (1996),

order on reh'g,

Order No. 888-A, 62 FR 12274 (Mar. 14, 1997), FERC Stats. & Regs. § 31,048 (1997),

order on reh'g,

Order No. 888-B, 81 FERC § 61,248 (1997),

order on reh'g,

Order No. 888-C, 82 FERC § 61,046 (1998),

aff'd in relevant part sub nom. Transmission Access Policy Study Group

FERC,

225 F.3d 667 (D.C. Cir. 2000) (

TAPS

FERC

aff'd sub nom. New York

FERC,

535 U.S. 1 (2002).

Preventing Undue Discrimination and Preference in Transmission Service,

Notice of Proposed Rulemaking, 71 FR 32,636 (Jun. 6, 2006), FERC Stats. & Regs. § 32,603 (2006).

2. First, the Final Rule will increase nondiscriminatory access to the grid by eliminating the wide discretion that transmission providers currently have in calculating available transfer capability (ATC).

The calculation of ATC is one of the most critical functions under the OATT because it determines whether transmission customers can access alternative power supplies. Despite this, the existing OATT does not prescribe how ATC should be calculated because the Commission sought to rely on voluntary efforts by the industry to develop consistent methods of ATC calculation. This voluntary industry effort has not proven successful. The Commission therefore acts today to require public utilities, working through the North American Electric Reliability Corporation (NERC), to develop consistent methodologies for ATC calculation and to publish those methodologies to increase transparency. This important reform will eliminate the wide discretion that exists today in calculating ATC and ensure that customers are treated fairly in seeking alternative power supplies.

The Commission used the term “Available Transmission Capability” in Order No. 888 to describe the amount of additional capability available in the transmission network to accommodate additional requests for transmission services. To be consistent with the term generally accepted throughout the industry, the Commission revises the

pro forma

OATT to adopt the term “Available Transfer Capability.”

3. Second, the Final Rule will increase the ability of customers to access new generating resources and promote efficient utilization of transmission by requiring an open, transparent, and coordinated transmission planning process. Transmission planning is a critical function under the

pro forma

OATT because it is the means by which customers consider and access new sources of energy and have an opportunity to explore the feasibility of non-transmission alternatives. Despite this, the existing

pro forma

OATT provides limited guidance regarding how transmission customers are treated in the planning process and provides them very little information on how transmission plans are developed. These deficiencies are serious, given the substantial need for new infrastructure in this Nation.

We act today to remedy these deficiencies by requiring transmission providers to open their transmission planning process to customers, coordinate with customers regarding future system plans, and share necessary planning information with customers.

Congress placed special emphasis on the development of transmission infrastructure, including the consideration of advanced transmission technologies, in the Energy Policy Act of 2005 (EPAct 2005).

See

Pub. L. 109-58, 119 Stat. 594 (to be codified in scattered titles of the U.S.C.). The Commission has taken steps to implement that goal in numerous contexts, including recent rulemaking proceedings that address the promotion of transmission investment through pricing reform and the siting of certain transmission facilities.

See Promoting Transmission Investment through Pricing Reform,

Order No. 679, 71 FR 43294 (Jul. 31, 2006), FERC Stats. & Regs. § 31,222 (2006),

order on reh'g,

Order No. 679-A, 72 FR 1152 (Jan. 10, 2007), FERC Stats. & Regs. § 31,236 (2007),

reh'g pending; Regulations for Filing Applications for Permits to Site Interstate Electric Transmission Facilities,

Order No. 689, 71 FR 69440 (Dec. 1, 2006), FERC Stats. & Regs. § 31,234 (2006),

reh'g pending.

As discussed herein, several actions taken in this Final Rule also relate to the need for investments in transmission infrastructure and are consistent with the Commission's responsibilities under EPAct 2005.

4. Third, the Final Rule will also increase the efficient utilization of

transmission by eliminating artificial barriers to use of the grid. The existing

pro forma

OATT allows a transmission provider to deny a request for long-term point-to-point service if the request cannot be satisfied in only one hour of the requested term. This practice discourages the efficient use of the existing grid and precludes access to alternative power supplies. We reform this practice by requiring that a conditional firm option be offered to customers seeking long-term point-to-point service,

i.e.

, conditional firm service. We also modify the redispatch obligations of transmission providers to increase the efficient utilization of the grid, while also ensuring that reliability to native load customers is maintained.

5. Fourth, by adopting these and other reforms, the Final Rule facilitates the use of clean energy resources such as wind power. Conditional firm service is particularly important to wind resources that can provide significant economic and environmental value even if curtailed under limited circumstances. Open and coordinated transmission planning will enhance the ability of customers to access clean energy resources as part of their future resource portfolio. The Final Rule also benefits clean energy resources by reforming energy and generator imbalance charges. These reforms are particularly important to intermittent resources such as wind power because these resources have limited ability to control their output and, hence, must be assured that imbalance charges are no more than required to provide appropriate incentives for prudent behavior.

6. Fifth, the Final Rule will strengthen compliance and enforcement efforts. We are increasing the transparency of

pro forma

OATT administration, thereby increasing the ability of customers and our Office of Enforcement to detect undue discrimination. We are adopting operational penalties for clear violations of an OATT, thereby enhancing compliance while also reducing the burdens on our Office of Enforcement. We are also increasing the clarity of many other OATT requirements, thereby facilitating compliance by transmission providers with our regulations. This Final Rule thus reflects the close integration of our Office of Enforcement into policy development at the Commission. Several of the reforms we adopt today are informed by our experience with OATT administration through oversight, audits, and investigations performed by the Office of Enforcement.

7. Finally, we modify and improve several provisions of the

pro forma

OATT using our experience over the past ten years and clarify others that have proven ambiguous. For example, we reform our rollover rights policy to ensure that the rights and obligations of rollover customers are consistent with the resulting obligations of transmission providers to plan and upgrade the system to accommodate rollovers. We remove the price cap on reassigned capacity because it is not necessary to remedy market power and doing so will otherwise increase the efficient use of existing capacity. We increase the efficient use of existing capacity by providing a priority to certain “pre-confirmed” requests for service. We increase certainty by providing greater clarity regarding the wholesale contracts that qualify as network resources. We also adopt numerous clarifications that should assist transmission providers and customers in implementing and using the

pro forma

OATT

8. Our actions in this proceeding have been informed to a great extent by the comments received in response to our notices of inquiry in the above-captioned dockets and the subsequent NOPR.

We appreciate the time and thoughtfulness of all sectors of the industry in preparing comments. We have found them very informative and useful in reaching our decisions in this Final Rule.

Preventing Undue Discrimination and Preference in Transmission Services,

Notice of Inquiry, 112 FERC ¶ 61,299 (2005) (NOI);

Information Requirements for Available Transfer Capability,

Notice of Inquiry, 111 FERC ¶ 61,274 (2005) (ATC NOI).

II. Background

A. Historical Antecedent

9. In the NOPR, the Commission explained the historical background that led up to the issuance of Order No. 888, and the initiation of this rulemaking proceeding. We repeat that history here to place in context the actions we take today.

10. In the first few decades after enactment of the Federal Power Act (FPA) in 1935, the industry was characterized mostly by self-sufficient, vertically integrated electric utilities, in which generation, transmission, and distribution facilities were owned by a single entity and sold as part of a bundled service to wholesale and retail customers. Most electric utilities built their own power plants and transmission systems, entered into interconnection and coordination arrangements with neighboring utilities, and entered into long-term contracts to make wholesale requirements sales (bundled sales of generation and transmission) to municipal, cooperative, and investor-owned utilities connected to each utility's transmission system. Each system covered a limited service area, which was defined by the retail franchise decisions of State regulatory agencies. This structure of separate systems arose naturally primarily due to cost and the technological limitations on the distance over which electricity could be transmitted.

11. A number of statutory, economic, and technological developments in the 1970s led to an increase in coordinated operations and competition. Among those was the passage of the Public Utility Regulatory Policies Act of 1978 (PURPA),

which was designed to lessen dependence on foreign fossil fuels by encouraging the development of alternative generation sources and imposing a mandatory purchase obligation on utilities for generation from such sources. PURPA also enabled the Commission to order wheeling of electricity under limited circumstances.

The rapid expansion and performance of the independent power industry following the enactment of PURPA demonstrated that traditional, vertically integrated public utilities need not be the only sources of reliable power. During this period, the profile of generation investment began to change, and a market for non-traditional power supply beyond the purchases required by PURPA began to emerge. The economic and technological changes in the transmission and generation sectors helped encourage many new entrants in the generating markets that could sell electric energy profitably with smaller scale technology at a lower price than many utilities selling from their existing generation facilities at rates reflecting cost. However, it became increasingly clear that the potential consumer benefits that could be derived from these technological advances could be realized only if more efficient generating plants could obtain access to the regional transmission grids. Because many traditional vertically integrated utilities still did not provide open access to third parties and favored their own generation if and when they

provided transmission access to third parties, access to cheaper, more efficient generation sources remained limited.

Pub. L. 95-617, 92 Stat. 3117 (1978) (codified in U.S.C. titles 15, 16, 26, 30, 42, and 43).

Section 211 of the FPA, 16 U.S.C. 824j. In earlier years, a few customers were able to obtain access as a result of litigation, beginning with the U.S. Supreme Court's decision in

Otter Tail Power Company

United States,

410 U.S. 366 (1973). Additionally, some customers gained access by virtue of Nuclear Regulatory Commission license conditions and voluntary preference power transmission arrangements associated with Federal power marketing agencies.

See, e.g., Consumers Power Co.,

6 NRC 887, 1036-44 (1977);

Toledo Edison Co.,

10 NRC 265, 327-34 (1979);

Florida Municipal Power Agency

Florida Power and Light Co.,

839 F. Supp. 1563 (M.D. Fla. 1993).

12. The Commission encouraged the development of independent power producers (IPPs), as well as emerging power marketers, by authorizing market-based rates for their power sales on a case-by-case basis, and by encouraging more widely available transmission access on a case-by-case basis. Market-based rates helped to develop competitive bulk power markets by allowing generating utilities to move more quickly and flexibly to take advantage of short-term or even long-term market opportunities than those utilities operating under traditional cost-of-service tariffs. In approving these market-based rates, the Commission required that the seller and its affiliates lack market power or mitigate any market power that they may have had.

The major concern of the Commission was whether the seller or its affiliates could limit competition and thereby drive up prices. A key inquiry became whether the seller or its affiliates owned or controlled transmission facilities in the relevant service area and therefore, by denying access or imposing discriminatory terms or conditions on transmission service, could foreclose other generators from competing. Beginning in the late 1980s, in order to mitigate their market power to meet the Commission's conditions, public utilities seeking Commission authorization for blanket approval of market-based rates for generation services under section 205 of the FPA filed “open access” transmission tariffs of general applicability.

The Commission also approved proposed mergers under section 203 of the FPA on the condition that the merging companies remedy anticompetitive effects potentially caused by the merger by filing “open access” tariffs. The early tariffs submitted in market-based rate proceedings under section 205 and merger proceedings under section 203 did not, however, provide access to the transmission system that was comparable to the service the transmission providers used for their own purposes. Rather, they typically made available only point-to-point transmission service,

i.e.

, service from a single point of receipt to a single point of delivery. As these early tariffs were offered only by transmission providers that volunteered to provide service to third parties, they resulted in a patchwork of open access that was not sufficient to facilitate wholesale generation markets.

See, e.g., Dartmouth Power Associates Limited Partnership,

53 FERC ¶ 61,117 (1990);

Commonwealth Atlantic Limited Partnership,

51 FERC ¶ 61,368 (1990);

Doswell Limited Partnership,

50 FERC ¶ 61,251 (1990);

Citizens Power & Light Co.,

48 FERC ¶ 61,210 (1989);

Ocean State Power,

44 FERC ¶ 61,261 (1988); and

Orange and Rockland Utilities, Inc.,

42 FERC ¶ 61,012 (1988).

See

Order No. 888 at 31,644 n.52.

13. In response to the competitive developments following PURPA, and the fact that limited transmission access and significant regulatory barriers continued to constrain the development of generation by independent power producers, Congress enacted Title VII of the Energy Policy Act of 1992 (EPAct 1992).

EPAct 1992 reduced regulatory barriers to entry by creating a class of “Exempt Wholesale Generators” that were exempt from the requirements of the Public Utility Holding Company Act of 1935.

EPAct 1992 also expanded the Commission's authority to approve applications for transmission services under sections 211 and 212 of the FPA.

Though the Commission aggressively implemented expanded section 211, it ultimately concluded that the procedural limitations in section 211 thwarted the Commission's ability to effectively eliminate undue discrimination in the provision of transmission service.

Pub. L. 102-486, 106 Stat. 2776 (1992) (codified at, among other places, 15 U.S.C. 79z-5a and 16 U.S.C. 796 (22-25), 824j-l).

15 U.S.C. 79a,

repealed by

EPAct 2005 sec. 1263;

see Repeal of the Public Utility Holding Company Act of 1935 and Enactment of the Public Utility Holding Company Act of 2005,

Order No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ¶ 31,197 (2005),

order on reh'g,

Order No. 667-A, 71 FR 28446 (May 16, 2006), FERC Stats. & Regs. ¶ 31,213 (2006),

order on reh'g,

Order No. 667-B, 71 FERC 42750 (Jul. 28, 2006), FERC Stats. & Regs. ¶ 31,224 (2006),

reh'g pending.

16 U.S.C. 824j (authorizing the Commission to require transmission utilities to provide service in certain circumstances); 16 U.S.C. 824k (establishing rates for service provided pursuant to an order under section 211).

B. Order No. 888 and Subsequent Reforms

14. In April 1996, as part of its statutory obligation under sections 205 and 206 of the FPA to remedy undue discrimination, the Commission adopted Order No. 888 prohibiting public utilities from using their monopoly power over transmission to unduly discriminate against others. In that order, the Commission required all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to file open access non-discriminatory transmission tariffs that contained minimum terms and conditions of non-discriminatory service. It also obligated such public utilities to “functionally unbundle” their generation and transmission services. This meant public utilities had to take transmission service (including ancillary services) for their own new wholesale sales and purchases of electric energy under the open access tariffs, and to separately state their rates for wholesale generation, transmission and ancillary services.

Each public utility was required to file the

pro forma

OATT included in Order No. 888 without any deviation (except a limited number of terms and conditions that reflect regional practices).

After the effectiveness of their OATTs, public utilities were allowed to file, pursuant to section 205 of the FPA, deviations that were consistent with or superior to the

pro forma

OATT's terms and conditions. Because certain owners, controllers or operators of interstate transmission facilities were not subject to the Commission's jurisdiction under sections 205 and 206 and thus were not subject to Order No. 888, the Commission adopted a reciprocity provision in the

pro forma

OATT that conditions the use by a non-public utility of a public utility's open access services on an agreement to offer non-discriminatory transmission services in return.

This is known as “functional unbundling” because the transmission element of a wholesale sale is separated or unbundled from the generation element of that sale, although the public utility may provide both functions.

See infra

section IV.B.4 of this Final Rule.

See

Order No. 888 at 31,769-70 (noting that the

pro forma

OATT expressly identified certain non-rate terms and conditions, such as the time deadlines for determining available transfer capability in section 18.4 or scheduling changes in sections 13.8 and 14.6, that may be modified to account for regional practices if such practices are reasonable, generally accepted in the region, and consistently adhered to by the transmission provider).

15. In addition to imposing the functional unbundling requirement, the Commission also encouraged broader reforms through the formation of independent system operators (ISOs). The Commission stated that ISOs can provide significant benefits such as enhancing regional efficiencies and further remedying undue discrimination.

While the Commission declined to mandate ISOs, it set forth eleven principles for assessing ISO proposals submitted to the Commission.

Order No. 888 at 31,655.

Id.

at 31,730-32.

16. Order No. 888 also clarified the Commission's interpretation of the Federal and State jurisdictional boundaries over transmission and local distribution. While Order No. 888 reaffirmed that the Commission has exclusive jurisdiction over the rates,

terms, and conditions of unbundled retail transmission in interstate commerce by public utilities, it nevertheless recognized the legitimate concerns of State regulatory authorities regarding the transmission component of bundled retail sales. The Commission therefore declined to extend its unbundling requirement to the transmission component of bundled retail sales. On appeal, the U.S. Supreme Court affirmed this element of Order No. 888, finding that the Commission made a statutorily permissible choice.

New York

FERC,

535 U.S. 1 (2002).

17. The same day it issued Order No. 888, the Commission issued a companion order, Order No. 889,

addressing the separation of vertically integrated utilities' transmission and merchant functions, the information transmission providers were required to make public, and the electronic means they were required to use to do so. Order No. 889 imposed Standards of Conduct governing the separation of, and communications between, the utility's transmission and wholesale power functions, to prevent the utility from giving its merchant arm preferential access to transmission information. All public utilities that owned, controlled or operated facilities used in the transmission of electric energy in interstate commerce were required to create or participate in an Open Access Same-Time Information System (OASIS) that was to provide existing and potential transmission customers the same access to transmission information.

Open Access Same-Time Information System (Formerly Real-Time Information Networks) and Standards of Conduct,

Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. & Regs. ¶ 31,035 (1996),

order on reh'g,

Order No. 889-A, FERC Stats. & Regs. ¶ 31,049 (1997),

order on reh'g,

Order No. 889-B, 81 FERC ¶ 61,253 (1997).

18. Among the information public utilities were required to post on their OASIS was the transmission provider's calculation of ATC. Though the Commission acknowledged that before-the-fact measurement of the availability of transmission service is “difficult,” it concluded that it was important to give potential transmission customers “an easy-to-understand indicator of service availability.”

Because formal methods did not then exist to calculate ATC and total transfer capability (TTC), the Commission encouraged industry efforts to develop consistent methods for calculating ATC and TTC.

Order No. 889 ultimately required transmission providers to base their calculations on “current industry practices, standards and criteria” and to describe their methodology in their tariffs.

The Commission noted that the requirement that transmission providers purchase only ATC that is posted as available “should create an adequate incentive for them to calculate ATC and TTC as accurately and as uniformly as possible.”

Order No. 889 at 31,605.

Id.

at 31,607.

Id.

19. The electric industry continued to undergo economic and regulatory changes in the years following the issuance of Order No. 888. Retail access was adopted by approximately 25 states in the late 1990s.

This State restructuring activity spurred significant changes at the wholesale level as well by encouraging or requiring the divestiture of generation plants by traditional electric utilities and the development of ISOs that could manage short-term energy markets necessary to support retail access. At the same time, there was a significant increase in the number of mergers between traditional electric utilities and between electric utilities and gas pipeline companies, and large increases in the number of power marketers and independent generation facility developers entering the marketplace. Trade in bulk power markets increased significantly and the Nation's transmission grid was used more heavily and in new ways as customers took advantage of the

pro forma

OATT and purchased power from competitive sellers.

See

Energy Information Administration, Retail Unbundling—U.S. Summary (2005),

http://www.eia.doe.gov/oil_gas/natural_gas/restructure/state/us.html.

20. In the wake of these changes, in December 1999, the Commission adopted Order No. 2000.

That rulemaking recognized that Order No. 888 set the foundation upon which competitive electric markets could develop, but did not eliminate the potential to engage in undue discrimination and preference in the provision of transmission service.

The rulemaking also recognized that Order No. 888 did not address the regional nature of the grid, including the treatment of parallel flows, pancaked rates, and congestion management. Thus, the Commission encouraged the creation of RTOs to address important operational and reliability issues and eliminate any residual discrimination in transmission services that can occur when the operation of the transmission system remains in the control of a vertically integrated utility. The Commission found that RTOs would increase the efficiency of wholesale markets by eliminating pancaked rates, internalizing parallel flow, managing congestion efficiently, and operating markets for energy, capacity and ancillary services. The Commission established an open, collaborative process that relied on voluntary regional participation to design RTOs tailored to the specific needs of each region. The Commission noted, however, that “[i]f the industry fails to form RTOs under this approach, the Commission will reconsider what further regulatory steps are in the public interest.”

Regional Transmission Organizations,

Order No. 2000, 65 FR 809 (Jan. 6, 2000), FERC Stats. & Regs. ¶ 31,089 (1999),

order on reh'g,

Order No. 2000-A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. & Regs. ¶ 31,092 (2000),

aff'd sub nom. Public Utility District No. 1 of Snohomish County, Washington

FERC,

272 F.3d 607 (D.C. Cir. 2001).

Order No. 2000 at 31,015.

Id.

at 30,993.

21. Following Order No. 2000, RTOs were approved in several regions of the country including the Northeast (PJM; ISO New England),

the Midwest (MISO) and the South (SPP). In most cases, RTOs have assumed responsibility for calculating ATC across the footprint of the RTO, as well as the planning and expansion of the transmission grid, at least for facilities necessary for maintaining system reliability. However, large areas of the Nation have not developed RTOs using the voluntary structure adopted by the Commission in Order No. 2000. Moreover, transmission customers have complained that even in RTO markets there are instances when comparable transmission service is not provided, particularly in the area of transmission planning.

A list of commenter acronyms can be found in Appendix B.

C. EPAct 2005 and Recent Developments

22. Enacted on August 8, 2005, EPAct added a number of new authorities and priorities for the Commission and emphasized certain of its existing obligations. Among other things, EPAct 2005 recognized the importance of adequate transmission infrastructure development and its role in facilitating the development of competitive wholesale markets. The Congressional directives in EPAct 2005 are intended to reverse the decline in transmission infrastructure investment. For example, Congress required the Commission to adopt a rule establishing incentive ratemaking for transmission infrastructure to help promote reliability and reduce congestion.

Congress also

directed the Commission to encourage the deployment of advanced technologies.

Congress further directed the Commission to “exercise its authority” under EPAct 2005 “in a manner that facilitates the planning and expansion of transmission facilities to meet the reasonable needs of load-serving entities.”

Congress also gave the Commission certain “backstop” transmission siting authority, and authorized the creation of interstate compacts establishing transmission siting agencies.

EPAct 2005 also authorized the Commission to require unregulated transmitting utilities (except for certain small entities) to provide access to their transmission facilities on a comparable basis.

Congress further ordered the Department of Energy (DOE) to study the benefits of economic dispatch and required the Commission to convene regional joint boards to develop a report to Congress containing recommendations for the use of security constrained economic dispatch within each region.

Congress also directed the Commission to facilitate price transparency in markets for the sale and transmission of electric energy in interstate commerce, having due regard for the public interest, the integrity of those markets, fair competition, and the protection of consumers, and it authorized the Commission to prescribe rules to provide for the dissemination of information about the availability and price of wholesale electric energy and transmission service.

Finally, Congress emphasized compliance with the Commission's regulations, adopting and increasing the civil and criminal penalties for violations of Commission-administered statutes and regulations.

EPAct 2005 sec. 1241 (to be codified at section 219 of the FPA, 16 U.S.C. 824s).

EPAct 2005 sec. 1223 (to be codified at 42 U.S.C. 16422). Indeed, Congress provided specific guidance as to the types of advanced technologies that should be encouraged in infrastructure improvements to include, among others, optimized transmission line configurations (including multiple phased transmission lines), controllable load, distributed generation (including PV, fuel cells, and microturbines), and enhanced power device monitoring.

Id.

EPAct 2005 sec. 1233(a) (to be codified at section 217(b)(4) of the FPA, 16 U.S.C. 824q).

EPAct 2005 sec. 1221(a) (to be codified at section 216 of the FPA, 16 U.S.C. 824p).

EPAct 2005 sec. 1231 (to be codified at section 211A of the FPA, 16 U.S.C. 824j-1)

EPAct 2005 sec. 1234 (to be codified at 42 U.S.C. 16432); EPAct 2005 sec. 1298 (to be codified at section 223 of the FPA, 16 U.S.C. 824w). EPAct 2005 sec. 1234(b) defined economic dispatch as “the operation of generation facilities to produce energy at the lowest cost to reliably serve consumers, recognizing any operational limits of generation and transmission facilities.”

EPAct 2005 sec. 1281 (to be codified at section 220 of the FPA, 16 U.S.C. 824t).

EPAct 2005 sec. 1284(d) (to be codified at section 316 of the FPA, 16 U.S.C. 825o); EPAct 2005 sec. 1284(e) (to be codified at section 316A of the FPA, 16 U.S.C. 825o-1).

23. Recognizing the need for reform of Order No. 888 in light of the Commission's continuing concern regarding whether the

pro forma

OATT adequately remedies undue discrimination, the Commission issued an NOI on September 16, 2005

seeking comments on appropriate reforms of the Order No. 888

pro forma

OATT. In the NOI, the Commission expressed its preliminary view that reforms to the

pro forma

OATT and public utilities' OATTs are necessary to avoid undue discrimination or preference in the provision of transmission service. The NOI sought comments on how best to accomplish the Commission's goals, specifically with respect to enhancements that are needed to (1) Remedy any unduly discriminatory or preferential application of the

pro forma

OATT or (2) improve the clarity of the Order No. 888

pro forma

OATT and the individual public utility tariffs in order to more readily identify violations and facilitate compliance.

See supra

note 5.

24. The Commission received over 4,000 pages of initial and reply comments on the NOI. Based on these comments, the comments submitted in response to the ATC NOI,

our experience in implementing Order No. 888, and the changes in the industry since we adopted it, the Commission proposed to reform the

pro forma

OATT in a number of ways. The Commission issued the NOPR on May 19, 2006 proposing a number of reforms aimed at remedying undue discrimination in the provision of open access transmission service and improving the clarity of the

pro forma

OATT and the individual tariffs of transmission providers in order to more readily identify violations and facilitate compliance. The Commission received over 5,700 pages of initial and reply comments in response. In response to comments on the particular issue of redispatch and conditional firm service (discussed in more detail below), the Commission issued a Notice of Request for Supplemental Comments on November 15, 2006,

that resulted in receipt of an additional 750 pages of comments.

Id.

Preventing Undue Discrimination and Preference in Transmission Service

, 117 FERC ¶ 61,185 (2006).

25. Based on this voluminous record, the Commission concludes that reform of the

pro forma

OATT and associated amendments to its regulations are necessary to reduce the potential for undue discrimination and provide clarity in the obligations of transmission providers and customers alike. We turn next to a more complete explanation of this need for reform.

III. Need for Reform of Order No. 888

A. Opportunities for Undue Discrimination Continue To Exist

26. Although Order No. 888 has been successful in many important respects, the need for reform of the Order No. 888

pro forma

OATT has been apparent for some time. In 1999, the Commission held, in adopting Order No. 2000, that the

pro forma

OATT could not fully remedy undue discrimination because transmission providers retained both the incentive and the ability to discriminate against third parties, particularly in areas where the

pro forma

OATT left the transmission provider with significant discretion.

The Commission made a similar finding in Order No. 2003,

holding that opportunities for undue discrimination continue to exist in areas where the

pro forma

OATT leaves transmission providers with substantial discretion.

The NOPR reaffirmed these findings, preliminarily concluding that opportunities for undue discrimination continue to exist in the provision of open access transmission service. The Commission therefore proposed a number of reforms to the

pro forma

OATT to address the opportunities and incentives transmission providers have to unduly discriminate.

Order No. 2000 at 31,105.

See Standardization of Generator Interconnection Agreements and Procedures

, Order No. 2003, 68 FR 49845 (Aug. 19, 2003), FERC Stats. & Regs. ¶ 31,146 at P 11-12 (2003),

order on reh'g

, Order No. 2003-A, 69 FR 15932 (Mar. 26, 2004), FERC Stats. & Regs. ¶ 31,160 (2004),

order on reh'g

, Order No. 2003-B, 70 FR 265 (Jan. 4, 2005), FERC Stats. & Regs. ¶ 31,171 (2004),

order on reh'g

, Order No. 2003-C, 70 FR 37,661 (Jun. 30, 2005), FERC Stats. & Regs. ¶ 31,190 (2005),

aff'd sub nom. National Association of Regulatory Utility Commissioners

FERC

, No. 04-1148, 2007 U.S. App. LEXIS 626 (D.C. Cir. Jan. 12, 2007).

Order No. 2003 at P 11-12.

Comments

27. Many commenters agree with the Commission that reforms to the

pro forma

OATT are needed because there continue to be both the opportunity and incentive for transmission providers to engage in undue discrimination.

E.g.

, APPA, EPSA, East Texas Cooperatives, Fayetteville, NRG, Occidental, TAPS, TDU Systems, Williams, Entegra Reply, and NRECA Reply.

28. Several commenters offered examples of their experiences with transmission providers, where they believe transmission providers have acted in an unduly discriminatory

fashion.

Constellation claims that on multiple occasions it has been denied a transmission request when the transmission provider's OASIS indicates that ATC is available, but Constellation had no effective and timely way to challenge that determination because of the ATC “black box.” Constellation states that given that its needs for transmission service are often near-term or immediate—

e.g.

, to facilitate a load-serving obligation or wholesale transaction that must be consummated quickly—seeking redress at the Commission for improperly denied service generally is not time- or cost-effective. Instead, Constellation asserts, it is often forced to accept the determination of the transmission provider that ATC is not available (even though its OASIS may indicate otherwise) and seek alternate transmission paths and/or products to consummate its transaction.

See, e.g.

, Dow, Fayetteville, Occidental, and Williams.

29. Powerex also describes instances where a transmission provider has granted short-term firm point-to-point transmission service requests to transmission customers who have been allowed to remain in the queue, even when zero ATC is posted, in the hopes that a transmission provider's OASIS site wrongly indicates zero ATC or will soon be updated. Powerex asserts that such practices clog the short-term point-to-point transmission queue with multiple requests and result in duplicative requests for service that reflect customers' attempts to secure service, rather than the actual quantity of service needed. Moreover, Powerex argues, transmission provider discretion in this area and the lack of transparency raise customer concerns about preferential treatment.

30. Occidental claims that it has first-hand experience with a vertically integrated transmission provider that, despite having an OATT, appears to have persistently used its transmission system to preferentially benefit its merchant function. Similarly, Williams alleges that its interests have been consistently and significantly compromised by the discretion afforded transmission providers in the interpretation of the OATT and the lack of transparency in requesting, scheduling and interrupting of transmission service.

31. Other commenters, however, argue that the Commission's proposed reforms are based on unsupported allegations of undue discrimination. EEI maintains that any opportunities to engage in undue discrimination have been largely mitigated by current regulatory policies and changes in the industry. EEI explains that, unlike the situation that existed when the Commission enacted Order No. 888, much of the country's transmission facilities are now under the control of RTOs and ISOs. In addition, EEI states, other transmission providers have transferred (or are in the process of transferring) the administration of their OATTs and OASIS functions to independent transmission service coordinators. Even among the transmission providers who have taken neither of those steps, EEI argues that the open access requirements of Order No. 888 and the Standards of Conduct of Order Nos. 889 and 2004 have largely eliminated the ability of transmission providers to engage in undue discrimination in the provision of transmission service.

In addition, EEI states, the Commission's expanded civil penalty authority added to the FPA by EPAct 2005 gives the Commission a powerful tool that will further eliminate any remaining incentive of transmission providers to engage in undue discrimination in the provision of transmission service. Therefore, EEI asserts, any modifications to the OATT should be narrowly tailored to address the

perceptions

of residual undue discrimination. To the extent that such perceptions exist, however, Community Power Alliance states that, in the absence of concrete record evidence, they are just that—perceptions.

See also

Southern Reply.

32. Although Duke strongly supports, as a policy matter, OATT reforms that will eliminate the perception that undue discrimination is possible and/or likely, Duke argues that the FPA does not provide the Commission the authority to remedy mere “opportunities” to discriminate. Duke states that, in some cases, the Commission is attempting to remedy an opportunity for undue discrimination that does not exist or is proposing to impose a remedy that does not actually remedy the perceived opportunity. Duke notes, however, that some OATT terms and conditions are subject to multiple interpretations and argues that the Commission can, and should, justify the OATT reforms proposed in the NOPR as reforms needed to provide clarity to existing policies.

33. With regard to specific allegations made by commenters, several transmission providers respond that the examples given by transmission customers do not illustrate instances of undue discrimination. Rather, they assert, these examples demonstrate the transmission customers' lack of understanding of the OATT requirements, and the data available on OASIS.

See, e.g.

, Entergy Reply, Progress Energy Reply, and Southern Reply.

34. New Mexico Attorney General argues that the traditional State-regulated, vertically-integrated cost-of-service world is not in need of reform. Contrary to the “conspiracy theorists” who argue that utilities have an incentive to engage in undue discrimination and preference in transmission services, New Mexico Attorney General asserts that utilities have an incentive to maximize throughput and revenue between State-level rate cases because incremental transmission revenue is not deducted from the State-jurisdictional retail revenues between rate cases. Similarly, Southern, in its reply comments, asserts that broad claims of undue discrimination fail to take into consideration that vertically-integrated utilities have more of an incentive to act appropriately than do independent utilities because the former have more to lose (

e.g.

, loss of market-based rates, state prudence reviews of costs,

etc.

) if they are found to have engaged in wrong-doing. Southern states that any OATT revisions ultimately adopted by the Commission must be reasonably tailored to address an identified problem or to provide a specific improvement.

35. Other commenters argue that the Commission's focus should be on transmission providers in non-organized markets, arguing that remaining concerns about undue discrimination have already been addressed in the world of ISOs and RTOs.

According to ISO/RTO Council, this proceeding provides an opportunity for the Commission to harmonize the worlds of organized and non-organized markets in a manner that encourages competition, promotes non-discriminatory access, and maximizes the flow of electricity across various ISO/RTO and non-ISO/RTO regions. ISO/RTO Council states that, in the existing regulatory environment, a utility that is not a member of an ISO or RTO can sell into, or purchase from, an ISO or RTO market even though the non-ISO/RTO utility operates under tariff rules that are less open and transparent, particularly in terms of access to generation resources and pricing/system information, than their competitors that belong to an ISO or RTO. Such asymmetry, ISO/RTO Council argues, operates as an

impediment to fair and non-discriminatory transmission access and management of grid congestion.

E.g.

, Indicated New York Transmission Owners, ISO/RTO Council, and Northeast Utilities.

36. ISO/RTO Council states that its members do not seek to impose their market designs on the rest of the nation. At the same time, ISO/RTO Council argues that meaningful reform should ensure a level of transparency (of both price and the dispatch utilized by non-ISO/RTO vertically-integrated entities) in regions without an ISO or RTO that can assist the flow of electricity and enhance reliability and planning in both ISO/RTO and non-ISO/RTO regions.

37. Exelon urges the Commission to hold the transmission providers outside ISOs or RTOs to the same standard of non-discrimination that exists within those organizations. Further, MISO/PJM States argue that in order to achieve some level of independence in non-RTO regions, non-independent transmission providers should be encouraged to turn over operational control of their transmission systems to an independent coordinator of transmission whose functions would include security coordination, determination of ATC, granting of transmission service and oversight for transmission planning.

38. Finally, EPSA suggests that the Commission establish a one-year review period for the reformed

pro forma

OATT. EPSA urges the Commission to revisit this Final Rule after one year of operation under the reformed

pro forma

OATT to ensure that the revisions adopted here do, in fact, protect against non-discriminatory or preferential behavior by transmission providers. NRECA responds that, after this comprehensive rulemaking process, there is simply no need for another major look at the OATT in one year. Moreover, NRECA states, one year is likely too short a period for the Commission and industry participants to fully appreciate all of the consequences of those elements of OATT reform resulting from this proceeding. At the same time, NRECA agrees that the Commission should carefully monitor implementation of the reformed OATT. This monitoring, NRECA states, must be an ongoing process and cannot wait a year to begin.

Commission Determination

39. The Commission concludes that reforms are needed to address deficiencies in the

pro forma

OATT that have become apparent since 1996, by limiting remaining opportunities for undue discrimination. As the Commission found in Order No. 888, it is in the economic self-interest of transmission monopolists, particularly those with high-cost generation assets, to deny transmission or to offer transmission on a basis that is inferior to that which they provide to themselves.

Such an incentive can lead to unduly discriminatory behavior against third parties, particularly if public utilities have unnecessarily broad discretion in the application of their tariffs. This discretion also can create problems for transmission providers seeking to comply with our regulations in good faith because so many issues are left for their interpretation, thereby increasing the possibility of disputes with transmission customers and enforcement actions by the Commission.

Transmission customers also have found ways to use the tariffs to their own advantage, particularly in the scheduling and queuing processes.

Order No. 888 at 31,682.

See, e.g.

, Order No. 2003 at P 11-12.

See, e.g.

, Potomac Economics, Ltd.,

2004 State of the Market Report: Midwest ISO

at 30-31, 34-35 (Jun. 2005),

http://www.midwestmarket.org/publish/Document/2b8a32_103ef711180_-7bf20a48324a/2004%20MISO%20SOM%20Report.pdf?action=download&_property=Attachment

(explaining that the queuing process, by giving customers the opportunity to submit multiple requests for service, provides a low- or no-cost option that restricts other customers' access to congested interfaces, and the scheduling process, by allowing customers to leave transmission requests unconfirmed, provides a free option that may invite hoarding or result in underutilized capacity).

40. As some commenters note, opportunities for undue discrimination persist, particularly in areas where the

pro forma OATT

leaves the transmission provider with substantial discretion. The Commission has a responsibility under section 206 of the FPA to remedy undue discrimination. Indeed, the court concluded in

Associated Gas Distributors

FERC,

that, like the Natural Gas Act,

the FPA “fairly bristles” with concern over undue discrimination. Based on

AGD

, the Commission determined in Order No. 888 that:

824 F.2d 981 (D.C. Cir. 1987) (

AGD

15 U.S.C. 717.

The Commission has a mandate under sections 205 and 206 of the FPA to ensure that, with respect to any transmission in interstate commerce or any sale of electric energy for resale in interstate commerce by a public utility, no person is subject to any undue prejudice or disadvantage. We must determine whether any rule, regulation, practice or contract affecting rates for such transmission or sale for resale is unduly discriminatory or preferential, and must prevent those contracts and practices that do not meet this standard. * * *

AGD

demonstrates that our remedial power is very broad and includes the ability to order industry-wide non-discriminatory open access as a remedy for undue discrimination.

Order No. 888 at 31,669. Through this Final Rule, the Commission exercises that remedial authority again to limit further opportunities for undue discrimination, by minimizing areas of discretion, addressing ambiguities and clarifying various aspects of the

pro forma OATT

41. We disagree with commenters who assert that the Commission is relying on unsubstantiated allegations of discriminatory conduct to justify OATT reform. The courts have made clear that the Commission need not make specific factual findings of discrimination in order to promulgate a generic rule to eliminate undue discrimination.

AGD

, the court explained that the promulgation of generic rate criteria involves the determination of policy goals and the selection of the means to achieve them and that courts do not insist on empirical data for every proposition upon which the selection depends: “[a]gencies do not need to conduct experiments in order to rely on the prediction that an unsupported stone will fall.”

During this multi-year proceeding, the Commission has received many comments arguing that commenters have either experienced or perceived that they have experienced unduly discriminatory conduct by transmission providers. Even transmission providers have acknowledged that there is a continuing perception that there is the opportunity for them to unduly discriminate against their competitors and, accordingly, they state their support for our reform effort.

Moreover, it is undisputed that the existing

pro forma

OATT provides wide discretion in implementing some of its basic requirements, such as the assessment of whether sufficient ATC exists to grant third party access to the grid and the manner in which new facilities are planned to satisfy third party needs. This wide discretion, when coupled with a transmission provider's incentive to discriminate, creates opportunities for discrimination under the

pro forma

OATT. We have an obligation under section 206 to remedy that discrimination.

TAPS

FERC

, 225 F.3d at 667, 688;

National Fuel Gas Supply Corp.

FERC

, 468 F.3d 831 (D.C. Cir. 2006) (

National Fuel

824 F.2d at 1008.

See, e.g.

, Duke and EEI.

42. It is thus clear to us that, notwithstanding the Commission's efforts in Order No. 888, opportunities to engage in undue discrimination can and will persist unless the existing

pro forma

OATT is reformed. We therefore exercise our broad remedial authority today to limit these remaining

opportunities for undue discrimination. The Commission concludes that any additional costs incurred by transmission providers to implement the reforms required in this Final Rule are fully justified by the need to ensure open, transparent and non-discriminatory access to transmission service. We also believe it is appropriate to adopt these reforms by rulemaking, rather than rely on complaints filed by transmission customers or other parties. Case-by-case application of the reforms adopted in this Final Rule would be inappropriate since the most fundamental problems addressed here arise from deficiencies in the

pro forma

OATT itself, not simply the implementation of the

pro forma

OATT by a few transmission providers. Also, we decline to establish a one-year review period for the reformed

pro forma

OATT, as EPSA recommends. The Commission will continue to actively monitor compliance with its orders and, as necessary, institute further proceedings to meet its statutory obligation to remedy undue discrimination.

43. The Commission will not catalog each and every basis for its reform of the

pro forma

OATT in this section. Rather, we identify the bases for some of the most fundamental reforms herein and, in addition, we explain in each individual section of the Final Rule the inadequacies of the existing

pro forma

OATT provisions being addressed there and the reasons why our reforms are necessary to remedy undue discrimination or otherwise provide for rates, terms and conditions of service under the

pro forma

OATT that are just and reasonable.

B. Lack of Transparency Undermines Confidence in Open Access and Impedes Enforcement of Open Access Requirements

44. Following the issuance of the NOI, the Commission received a number of comments asserting that increased transparency would aid transmission customers in their participation in the wholesale market. A common theme in the comments was that a lack of transparency could lead to claims of discrimination and could make such claims more difficult to resolve. Commenters urged the Commission to improve transparency in a number of areas, particularly the evaluation of ATC and the planning of the transmission system, as well as the processing of transmission service requests and studies.

45. In the NOPR, the Commission agreed that a lack of transparency both increases the potential for undue discrimination and makes it more difficult to detect. The Commission reasoned that this lack of sufficient transparency was caused in part by inadequate compliance with the existing OASIS regulations and in part by inadequate transparency requirements. The Commission stated that the proposed reforms were intended to address both elements of the problem in an effort to increase confidence in open access tariffs and to facilitate compliance with the Commission's regulations and its enforcement of them.

Comments

46. Williams states that its interests have been consistently and significantly compromised by the discretion afforded transmission providers in the interpretation of the OATT and the lack of transparency in requesting, scheduling and interrupting of transmission service. According to Williams, simply being told that service is being curtailed for reliability purposes under opaque local procedures, in the absence of a NERC Transmission Loading Relief (TLR) event, leaves market participants suffering the consequences without knowing on what basis the decision was reached, and without assurance that the decision was made in a non-discriminatory manner. Ultimately, Williams adds, the lack of transparency and latitude taken by the transmission provider to determine which requests for service are confirmed or denied and which are curtailed or interrupted in real time frustrates the Commission's goal of preventing undue discrimination and preference in the provision of transmission service. Furthermore, Williams states, the same lack of transparency exists around the opaque processes utilized, assumptions made, and basis on which the results of transmission planning studies are conducted to grant or deny requests for service.

47. APPA agrees that additional transparency in the administration of public utility transmission providers' OATTs will be of material assistance to both the Commission and transmission customers. However, APPA argues that the Commission must go beyond increasing transparency in the administration of public utility transmission providers' OATTs. According to APPA, more transparency will not change the basic industry paradigm with transmission customers depending on monopoly transmission providers for service. In APPA's view, customers are often reluctant to file complaints or bring problems to the Commission's attention because they depend on their transmission providers' systems for the vital services they need to serve their loads. APPA argues that the Commission not only has an obligation to act to remedy undue discrimination when it sees it, but also has an affirmative duty to look for it. According to APPA, the Commission must continue to actively regulate the transmission services that public utility transmission providers offer, even if full transparency is achieved through the revisions to the OATT implemented in the instant docket.

48. EPSA agrees that greater transparency will help enable market participants and the Commission to monitor and audit the behavior of transmission providers. EPSA states that the several “black boxes” shielding discriminatory transmission service over the past ten years must be opened. However, EPSA argues, there must be meaningful clarity and obligations set out in the rules and OATT requirements—transparency simply for the sake of knowing why transmission service has been denied only illuminates a “bridge to nowhere” and fails to satisfy the Federal Power Act.

49. Entergy also supports the Commission's efforts to provide greater clarity in the rights and obligations of transmission providers and transmission customers under the OATT. According to Entergy, many of the improvements proposed by the Commission will reduce the likelihood of disputes and promote greater confidence on the part of customers that they are being treated fairly. Entergy states that, while it recognizes that the lack of clarity makes it difficult for the Commission to detect instances of non-compliance by transmission providers, Entergy also believes that this lack of clarity often makes it easier for transmission customers to convert every practice or policy into a claim of discrimination or other misconduct.

50. Although not convinced that there is a compelling need for increased transparency since transmission providers are already required to disclose voluminous amounts of information, Southern states that it recognizes that some reforms in the availability of information may be advantageous. However, Southern asserts, providing additional transparency must not simply impose additional reporting requirements; any such transparency-related reforms should be made after taking into consideration the extent and type of data and information that is already provided.

Commission Determination

51. The Commission concludes that inadequate transparency requirements, combined with inadequate compliance with existing OASIS regulations, increases the opportunities for undue discrimination under the

pro forma

OATT and makes instances of undue discrimination more difficult to detect. We find that the reforms we adopt in this Final Rule will improve transparency in the OATT, reduce opportunities for undue discrimination, and increase our ability to detect undue discrimination.

C. Congestion and Inadequate Infrastructure Development Impede Customers' Use of the Grid

52. The Commission noted in the NOPR that the ability and incentive to discriminate increases as the transmission system becomes more congested. The Commission observed that the

pro forma

OATT contained only minimal requirements regarding transmission planning, which have proven to be inadequate as the Nation faces insufficient transmission investment in many areas. The Commission preliminarily concluded that the inadequacy of the existing obligation to conduct transmission system planning, coupled with the lack of transparency surrounding system planning generally, required reform of the

pro forma

OATT to ensure that transmission infrastructure is constructed on a nondiscriminatory basis and is otherwise sufficient to support reliable and economic service to all eligible customers. The Commission therefore proposed to require public utilities to engage in an open and transparent planning process at both the local and regional levels.

Comments

53. APPA agrees that the lack of adequate transmission infrastructure is one of the core problems facing the electric utility industry. APPA supports revisions to the

pro forma

OATT to enhance and improve transmission planning on both an individual system and regional basis. Several commenters go further, arguing that the proposed reforms are insufficient and urging the Commission to more strongly encourage infrastructure development. EPSA asserts that successful implementation of the Congressional policy in favor of wholesale competition and State policies in favor of competitive procurement is frustrated by the lack of sufficient open access to the transmission grid. According to EPSA, new power plant investment is highly unlikely to occur, except by the transmission provider or its affiliate on a “sole source” or “no bid” basis (despite Federal and State policies to the contrary), if unaffiliated suppliers cannot effectively and efficiently obtain transmission service. EPSA argues that failure to boldly reform the Commission's open access transmission rules at this critical juncture would effectively hand an undeserved victory to the very transmission providers who, by the Commission's own findings, have the motive and the opportunity to discriminate. International Transmission argues that tariff reform is no substitute for prudent investment in the transmission infrastructure needed to increase the underlying physical capability of the transmission system.

54. On the other hand, some commenters dispute the Commission's assertion in the NOPR that vertically-integrated utilities operating in non-RTO regions have an incentive to discriminate and, therefore, are not adequately expanding the transmission grid to accommodate new entry by more efficient competitors. New Mexico Attorney General argues that vertically-integrated utilities operating under the traditional rate-base, rate-of-return model of regulation in fact have been historically criticized for having incentives to

overbuild

. New Mexico Attorney General asserts that most transmission projects are in reality derailed by strong “NIMBY” opposition to the actual siting of transmission lines. Another countervailing factor to the utility's incentive to overbuild, in New Mexico Attorney General's view, is the fact that State regulators attempt to limit capacity investment to reasonable levels only necessary to serve native load.

55. Southern states that the Commission's assertion in the NOPR that vertically-integrated utilities do not have an incentive to expand the grid overlooks the fact that many such utilities are under State legal duties to procure generation supplies through open, non-discriminatory requests for proposals, with the winners of those requests for proposals often being competitors of the vertically-integrated utility. Southern maintains that the winning competitive generation is then integrated into the host utility's transmission system and dispatch, and the transmission system is expanded to ensure the deliverability of this competitive generation. Furthermore, Southern states, a competitive generator can also have the output of its generator planned into the transmission provider's system if it takes long-term firm service under the OATT, with the transmission provider then being under a legal duty to expand its transmission system accordingly. Southern notes that it alone has invested $3.2 billion in transmission over the past decade and plans to invest another $2.8 billion over the next five years (2006-2010).

56. Community Power Alliance also argues that the Commission's own June 2005 “State of the Markets Report” contradicts the Commission's assertion that vertically-integrated utilities do not have the proper incentives to expand the grid. Community Power Alliance contends that this report shows that the amount of transmission investments made in the non-RTO regions, where vertically-integrated utilities typically operate, substantially exceeds the amount of transmission investments made in RTO regions.

Commission Determination

57. The Commission concludes that reforms are needed to ensure that transmission infrastructure is evaluated, and if needed, constructed on a nondiscriminatory basis and is otherwise sufficient to support reliable and economic service to all eligible customers. As noted above, vertically-integrated utilities do not have an incentive to expand the grid to accommodate new entries or to facilitate the dispatch of more efficient competitors. Despite this, the existing

pro forma

OATT contains very few requirements regarding how transmission planning should be conducted to ensure that undue discrimination does not occur.

58. Our concern over this flaw is heightened by the critical need for new transmission infrastructure in this Nation. As the Commission explained in the NOPR, transmission capacity is being constructed at a much slower rate than the rate of increase in customer demand, with transmission capacity per MW of peak demand declining at an average rate of 2.1 percent per year during the period 1992 to 2002.

The projections suggest that this trend will continue through 2012.

As a result, there has been a significant decrease in transmission capacity relative to load in every NERC region.

In light of this trend, there is a compelling need to build new transmission and respond to increasing demand through other

means. EEI estimates that capital spending must increase by 25 percent, from $4 billion annually to $5 billion annually, to ensure system reliability and to accommodate wholesale electric markets.

The legacy systems constructed by vertically-integrated utilities prior to the adoption of Order No. 888 support “only limited amounts of inter-regional power flows and transactions. Thus, existing systems cannot fully support all of society's goals for a modern electric-power system.”

Eric Hirst,

U.S. Transmission Capacity: Present Status and Future Prospects

(Aug. 2004),

http://www.eei.org/industry_issues/energy_infrastructure/transmission/USTransCapacity10-18-04.pdf

(Present Status and Future Prospects).

Present Status and Future Prospects at v.

Brendan Kirby (Oak Ridge National Laboratory, U.S. Department of Energy),

Barriers to Transmission Investment

, Technical Conference Presentation, (Docket No. AD05-5-000) (April 22, 2005).

Energy Policy Act of 2005: Hearings before the Subcommittee on Energy and Air Quality of the House Committee on Energy and Commerce

, 109th Congress, First Sess. (2005) (Prepared statement of Thomas R. Kuhn, President of EEI).

Present Status and Future Prospects at v.

59. Expansion of the transmission system, as well as more efficient use of the grid, will alleviate the growth of congestion in most regions of the country. Transmission congestion has created fairly small local load pockets in primarily urban areas,

e.g.

, New York City, Long Island, Boston, parts of Connecticut, and the San Francisco Bay Area. Other load pocket concerns have arisen in parts of northern Virginia, and various load centers in SPP. Still other constraints are more regional in scope: from the Midwest to the Mid-Atlantic, from the Midwest to TVA, into and within California, from TVA and Southern into Entergy, from Mid-America Interconnected Network into Wisconsin-Upper Michigan Systems, and into Florida.

60. Transmission congestion can have significant cost impacts on consumers. In 2002, DOE issued a study estimating the costs of congestion in four U.S. regions: California, PJM, New York and New England.

DOE found that, despite the overall savings of wholesale electricity markets that lowered consumers' electricity bills by nearly $13 billion annually, interregional transmission congestion cost consumers hundreds of millions of dollars annually. DOE concluded that relieving bottlenecks in these four regions alone could save consumers about $500 million annually.

In 2006, DOE released another study identifying two areas of the country with severe existing or growing congestion problems: the Atlantic coastal area from metropolitan New York southward through Northern Virginia, and Southern California.

U.S. Department of Energy,

National Transmission Grid Study

at 11, 16-17 (May 2002),

available at http://www.ferc.gov/industries/electric/indus-act/transmission-grid.pdf

. To conduct this study, DOE estimated the benefits of interregional wholesale power markets using the Policy Office Electricity Modeling System (POEMS). POEMS is a national energy model designed specifically to examine the impacts of electricity restructuring. The model includes economic, regional, and temporal detail that is needed to analyze the economics of interregional trade. In the first step of the study, DOE used POEMS to examine the cost reductions that would occur if increased electricity transfers across congested paths were allowed in these four regions, assuming generators bid their marginal costs. Under this assumption, consumer costs declined by $157 million per year. In the second step, DOE calculated the increase in congestion costs under the assumption that generators bid above their marginal operating costs when supplies are tight and additional electricity cannot be imported. The price spikes were assumed to occur during hours when at least one transmission link into a sub-region was congested and demand was greater than 90 percent of peak demand. When prices spike an additional $50 per MWh (above the price predicted when generators bid their marginal operating cost) during these periods, congestion costs nearly double to $300 million.

Id.

at xi and ii.

U.S. Department of Energy,

National Electric Transmission Congestion Study

, Executive Summary at 2 (August 2006),

available at http://www.ferc.gov/industries/electric/indus-act/doe-congestion-study-2006.pdf

61. The decline in transmission investment and increase in transmission congestion underscore our concerns over inadequate planning provisions of the existing

pro forma

OATT. The existing

pro forma

OATT, as indicated above, contains very little specificity regarding how transmission planning should be conducted, how customers' needs are incorporated into that process, and what information is publicly available regarding the transmission providers' assumptions, criteria and data used in the planning process. These inadequacies are sufficiently severe, standing alone, to merit reform of the OATT. However, they are of even greater concern given the current state of the transmission grid. With inadequate levels of investment in the grid and increasing transmission congestion, customers' ability to access alternatives to the transmission provider's resources is limited. It is therefore imperative for the Commission to ensure that the planning process under each transmission provider's OATT is sufficient to prevent undue discrimination and transparent enough to detect any remaining instances of undue discrimination. We have done so in the reforms adopted and explained in section V.B.

D. A Consistent Method of Measuring ATC Is Needed

62. Another area in which transmission providers have significant discretion under the

pro forma

OATT is the calculation of ATC. While Order No. 888 obligated each public utility to calculate the amount of transfer capability on its system available for sale to third parties, the Commission did not standardize the methodology for calculating ATC, nor did it impose any specific requirements regarding the disclosure of the methodologies used by each transmission provider.

As a result, there are a variety of ATC calculation methodologies in use today and very few clear rules governing their use. Moreover, there is often very little transparency about the nature of these calculations, given that many transmission providers have filed only summary explanations of their ATC methodologies in Attachment C to their OATTs.

Order No. 888 at 31,794 n.610.

63. In the NOPR, the Commission noted that, although the industry has sought to pursue greater consistency in ATC calculations through existing NERC processes, these efforts to date have been largely unsuccessful. The Commission expressed its preliminary determination that the lack of a consistent, industry-wide methodology for calculating ATC gives transmission providers the ability and the opportunity to unduly discriminate against third parties. The Commission therefore proposed a number of reforms to the process of calculating ATC to provide clarity and transparency to users of the grid.

Comments

64. As discussed further in section V.A below, most commenters support the Commission's goal of requiring greater consistency in the manner in which ATC is calculated and additional transparency of ATC calculations. Commenters generally favor the Commission's proposal to increase consistency in the calculation of ATC, including consistent definitions of its components, data inputs, modeling assumptions, and data exchange and coordination protocols. For example, Exelon argues that each ATC component should be used in the same manner for all purposes (

e.g.

, granting transmission service to third parties or for the transmission provider's own network load). Some commenters assert that industry-wide standardization of ATC calculation might not be possible and that the Commission should consider interconnection-wide, regional or even sub-regional standardization. Others suggest allowing flexibility in order to capture differences in system operation, usage, market operations and topology.

65. At the technical conference organized in this proceeding on October 12, 2006 (October 12 Technical Conference), the entire panel agreed that definitions must be consistent and a panelist representing Constellation

asserted that broad differences in the core definitions of the ATC calculation are neither rational nor explainable.

NERC, however, recognized that the goal of achieving consistency may not mean that a single ATC methodology is required.

NERC explained that consistency can be achieved with a limited number of methodologies if the requirements of those methodologies are properly coordinated and communicated.

Transcript of October 12 Technical Conference at 149-50,

available at

Preventing Undue Discrimination and Preference in Transmission Service, Technical Conference (Docket No. RM05-25-000).

Id.

at 125-50.

66. Numerous commenters support the Commission's proposals to increase transparency in the manner in which transmission providers derive ATC, including greater OASIS posting. Commenters opposing the transparency-related reforms focus on the Commission's proposal to require the posting of narratives on OASIS explaining reasons for changes in monthly and yearly ATC values on constrained paths. They argue that such a requirement would be too burdensome and would not provide customers with any significant new information.

67. Several commenters believe that making substantial ATC calculation and modeling data transparent will compromise Critical Energy Infrastructure Information (CEII) but provide suggestions for resolving the issue. Others express concern that the data required for posting on OASIS is not CEII but commercially sensitive. Finally, commenters provide suggestions regarding the requirement to post metrics on OASIS related to the provision of transmission service under the

pro forma

OATT, including various additional metrics the Commission should consider. Others state that this information is already available on OASIS.

Commission Determination

68. We find that the lack of a consistent and transparent methodology for calculating ATC gives transmission providers the ability and opportunity to unduly discriminate in the provision of open access transmission service. There are few clear rules respecting ATC calculation, and transmission providers retain unnecessarily broad discretion in this area. This resulting discretion is a significant problem because calculation of ATC, which varies greatly depending on the criteria and assumptions used, may allow the transmission provider to discriminate in subtle ways against its competitors. On systems where transmission capacity is congested, this lack of consistency, coupled with a lack of transparency, is of heightened importance and has led to recurring disputes over whether the transmission provider is exercising its discretion to discriminate against its competitors. This discretion also hampers the detection of undue discrimination and, thereby, undermines the Commission's ability to enforce the general requirement in Order No. 888 that transmission service be provided on a not unduly discriminatory basis.

69. As discussed more fully below in section V.AIII.D, this Final Rule adopts a number of reforms that address the potential for remaining undue discrimination in the determination of ATC by requiring consistency in how ATC is evaluated, as well as providing greater transparency about how a transmission provider calculates and allocates ATC.

E. Discriminatory Pricing of Imbalances

70. Order No. 888 focused primarily on the adoption of non-rate terms and conditions of service, rather than instituting broad reform of the Commission's transmission pricing policies. Consistent with this focus, the Commission did not propose broad transmission pricing reform in the NOPR, but rather focused on instances where current pricing practices under the

pro forma

OATT may no longer be sufficient to remedy undue discrimination or ensure just and reasonable rates. One significant reform proposed in the NOPR related to charges for imbalance energy. The Commission preliminarily found that the existing policies provide wide discretion in the development of these charges and hence the potential for undue discrimination. The Commission therefore proposed certain principles to remedy that potential and sought comment on whether a specific imbalance pricing method would be appropriate.

Comments

71. In general, transmission customers complain about the level and scope of energy and generator imbalance charges that are levied under the

pro forma

OATT and under individual interconnection agreements.

Customers complain that energy imbalance charges are excessive and not related to the actual costs incurred by transmission providers. They also argue that the inconsistency between these charges in different control areas is unnecessary, and that other means of compensating the transmission provider, such as return-in-kind, should be considered. Generators likewise complain that generator imbalance charges are excessive, that transmission providers refuse to credit generators with the revenues resulting from imbalance penalties that are collected, and that transmission providers prevent unaffiliated generators from purchasing or self-supplying generator imbalance services. In addition, owners of intermittent resources complain that generator imbalance charges, which are imposed to provide an incentive for generators to schedule accurately, are inappropriate given their lack of control and ability to cure deviations.

Energy imbalance charges, including penalties on some systems, are imposed on a transmission customer when the amount of energy scheduled for delivery to the transmission grid does not equal the amount of energy withdrawn by that customer. Generator imbalance charges are levied on generators for deviations between the amount of energy they schedule and the amount they actually deliver to the grid.

Commission Determination

72. The Commission agrees that imbalance charges should provide appropriate incentives to keep schedules accurate without being excessive. We also find that consistency in imbalance charges, both between and among energy and generator imbalances, is preferable to the wide variety of imbalance provisions in place today. All imbalances have the same net effect on the transmission system in that they require other generation to be ramped up or down to compensate for the imbalance. As such, the Commission adopts two

pro forma

OATT provisions (Schedule 4 for energy imbalances and Schedule 9 for generator imbalances) based on a tiered structure similar to the imbalance provision used by Bonneville, as described further below. Such an approach recognizes the link between escalating deviations and potential reliability impacts on the system while keeping imbalance charges closely related to incremental costs. The Commission finds, however, that intermittent resources should be exempt from the highest-tier deviation band. We also require transmission providers to credit to all non-offending transmission customers the revenues they collect in excess of incremental costs.

F. Redispatch/Conditional Firm

73. In the NOPR, the Commission examined whether existing methods for evaluating requests for long-term firm point-to-point service continue to be just and reasonable. When a transmission provider considers a new resource to serve native load, the transmission provider does not eliminate an otherwise economic option because the resource may not be

deliverable during a few hours of the year. For transmission customers, however, the transmission provider evaluates whether service can be granted in every hour of the year that is modeled and, if not, it informs the customer that service cannot be provided out of existing transfer capability. Only if the transmission customer agrees to pay for facilities studies does the transmission provider evaluate redispatch options, including whether they are less expensive than the upgrade costs. The Commission therefore proposed to reform the existing

pro forma

OATT planning redispatch

obligation, or, in the alternative, to add a conditional firm service to the

pro forma

OATT. As proposed by the Commission, conditional firm would have been a long-term service allowing the transmission provider to give a lower curtailment priority than firm to the transmission customer during a pre-specified number of hours.

Although

pro forma

OATT section 13.5 refers to “redispatch,” we refer to it here as “planning redispatch” to distinguish it from the reliability redispatch provisions in the network integration transmission service sections of the

pro forma

OATT.

See infra

notes 552 and 557.

Comments

74. Some commenters support the inclusion of both a modified planning redispatch obligation and a conditional firm service in the

pro forma

OATT, stating that both are required to remedy undue discrimination and provide for comparable transmission service. These commenters urge the Commission to require transmission providers to offer planning redispatch and conditional firm service and allow customers to choose the option that best suits their physical, commercial and economic circumstances.

75. Others opine that conditional firm service may be simpler and less costly to implement. These commenters prefer the development of conditional firm service over the modifications to the planning redispatch service because of the complexities surrounding redispatch costs and protocols. For example, Entergy believes conditional firm service can provide benefits to transmission customers without unfairly socializing costs to native load and network customers of the transmission provider.

76. On the other hand, many commenters argue that the Commission should not require either option because the services are unnecessary, operationally unworkable, and legally unjustified, or because they would harm reliability and the quality of existing network service and provide disincentives for transmission investment. Several commenters state that these services would make curtailments of existing firm service more likely and limit opportunities for use of secondary network service, thereby harming native load protections and reducing reliability, contrary to FPA sections 215 and 217 respectively. While it recognizes that conditional firm service has been successful in parts of the Western Interconnection, NRECA contends that a mandate would undermine responsible planning and expansion of the transmission grid by harnessing the transmission provider's planning and dispatch functions to frame elaborate service conditions for conditional firm service.

77. Several commenters argue that, if the services are required, the Commission should ensure that reliability is not adversely affected. Others urge the Commission to make the new services an interim option until transmission upgrades are in place to provide firm service. Some commenters believe planning redispatch and conditional firm customers should bear the actual costs of the services received, including costs associated with system operational changes needed to accommodate the services. A few commenters believe that the Commission should allow for regional differences in development of the new services.

Commission Determination

78. The Commission believes it is necessary to modify the manner in which transmission providers assess point-to-point service requests to eliminate the potential for undue discrimination in transmission service. We find that both techniques—planning redispatch and conditional firm service—are currently used under certain circumstances by transmission providers to serve native load and, therefore, that transmission customers should have comparable services in order to avoid undue discrimination, facilitate the provision of long-term transmission service and provide customers with greater flexibility in choosing resources to meet their needs. We expect that both options will help integrate new generation more quickly. This can be particularly beneficial to renewable generation resources, such as wind, that can be constructed more quickly than the transmission upgrades necessary to deliver their power on a firm basis over the long-run.

G. EPAct 2005 Emphasized Certain Policies and Priorities for the Commission

79. Finally, we note that the reforms adopted in this proceeding are consistent with the policies and priorities embodied in EPAct 2005, in which Congress emphasized many of the same principles reflected in this Final Rule. First, in EPAct 2005, Congress placed special emphasis on the development of transmission infrastructure. Congress required the Commission to adopt a rule establishing incentive-based rates for new transmission infrastructure investment. The stated purpose of new FPA section 219 is to benefit “consumers by ensuring reliability and reducing the cost of delivered power by reducing transmission congestion.”

Among other steps, FPA section 219 requires the Commission to “(1) Promote reliable and economically efficient transmission and generation of electricity by promoting capital investment in the enlargement, improvement, maintenance, and operation of all facilities for the transmission of electric energy in interstate commerce, regardless of the ownership of the facilities; (2) provide a return on equity that attracts new investment in transmission facilities (including related transmission technologies); [and] (3) encourage deployment of transmission technologies and other measures to increase the capacity and efficiency of existing transmission facilities and improve the operation of the facilities.”

In addition, Congress directed the Commission to encourage the deployment of advanced transmission technologies.

Congress also gave the Commission certain “backstop” transmission siting authority, and authorized the creation of interstate compacts establishing transmission siting agencies.

Finally, the Commission was directed to exercise its authority under EPAct 2005 “in a manner that facilitates the planning and expansion of transmission facilities to meet the reasonable needs of load-serving entities to satisfy the

service obligations of the load-serving entities, and enables load-serving entities to secure firm transmission rights * * * on a long-term basis for long-term power supply arrangements made, or planned, to meet such needs.”

Although these provisions have been, or will be, addressed primarily in other proceedings, we conclude that the Final Rule is consistent with these provisions because it supports improvements in infrastructure by reforming the transmission planning process to ensure that it is open, transparent and nondiscriminatory.

EPAct 2005 sec. 1241 (to be codified at section 219 of the FPA, 16 U.S.C. 824s). The Commission has issued a Final Rule implementing such an incentive rate program.

See

Order Nos. 679 and 679-A.

FPA Sec. 219(b)(1).

EPAct 2005 sec. 1223 (to be codified at 42 U.S.C. 16442).

EPAct 2005 sec. 1221(a) (to be codified at section 216 of the FPA, 16 U.S.C. 824p). The Commission implemented new regulations in accordance with this section to establish filing requirements and procedures for entities seeking to construct electric transmission facilities in Order No. 689.

EPAct 2005 sec. 1233(a) (to be codified at section 217(b)(4) of the FPA, 16 U.S.C. 824q). The Commission implemented FPA section 217(b)(4) in

Long-Term Firm Transmission Rights in Organized Electricity Markets

, Order No. 681, 71 FR 43564 (Aug. 1, 2006), FERC Stats. & Regs. ¶ 31,226 (2006),

order on reh'g

, Order No. 681-A, 117 FERC ¶ 61,201 (2006),

reh'g pending

80. Second, Congress emphasized the need for greater transparency in electricity markets, including transmission service. EPAct 2005 added section 220 to the FPA, which requires the Commission to facilitate “price transparency in markets for the sale and transmission of electric energy in interstate commerce, having due regard for the public interest, the integrity of [that market], fair competition, and the protection of consumers.”

The Commission was authorized to “prescribe such rules as the Commission determines necessary and appropriate to carry out the purposes of” FPA section 220. Those rules “shall provide for the dissemination, on a timely basis, of information about the availability and prices of wholesale electric energy and transmission service to the Commission, State commissions, buyers and sellers of wholesale electric energy, users of transmission services, and the public.” This Final Rule similarly will promote greater transparency in the provision of transmission service in many important areas, including ATC calculation and transmission planning.

EPAct 2005 sec. 1281 (to be codified at 16 U.S.C. 824t).

81. Finally, Congress emphasized compliance with the Commission's regulations, increasing the civil and criminal penalties for violations of Commission-administered statutes and regulations.

This new authority buttresses the Commission's efforts to enforce public utility OATTs and the regulations requiring transmission information to be posted on OASIS. As we explained in the Policy Statement on Enforcement, however, this new authority carries with it the responsibility to ensure that enforcement is firm but fair and that our rules are as clear as practicable to facilitate compliance.

We conclude that this Final Rule is fully consistent with these principles because it clarifies our rules, in many areas, which will facilitate compliance by transmission providers.

EPAct 2005 sec. 1284(e)(1) (to be codified at section 316(A) of the FPA, 16 U.S.C. 825o-1).

Enforcement of Statutes, Orders, Rules and Regulations,

Policy Statement on Enforcement, 113 FERC ¶ 61,068 (2005) (Policy Statement on Enforcement).

IV. Summary, Scope and Applicability of the Final Rule

82. This section provides a summary of the major components of the Final Rule, a description of the core elements of Order No. 888 that we retain, and a discussion of the applicability of the proposed rule to various entities.

A. Summary of Reforms

83.

Consistency and transparency of ATC calculations

. The Commission affirms the finding in the NOPR that the lack of a consistent, industry-wide methodology for calculating ATC, and the lack of adequate transparency in ATC calculations, increases the potential for undue discrimination and also makes undue discrimination more difficult to detect. The lack of consistent standards can facilitate undue discrimination by giving a transmission provider the discretion, and hence the ability and opportunity, to favor itself and its affiliates over third parties in how it calculates and allocates ATC. In this Final Rule, we give the industry specific guidance regarding the calculation of ATC and establish a firm deadline to develop certain requirements to make more consistent the ATC calculation process and the process of exchanging data between transmission providers about ATC. In addition, we amend

pro forma

OATT requirements as well as our OASIS regulations to increase the transparency in how ATC is calculated.

84.

Requirement for coordinated, open and transparent transmission planning.

The Commission also affirms the finding in the NOPR that Order No. 888 does not contain sufficient protections to guard against undue discrimination in transmission system planning. Without adequate coordination and open participation, market participants have minimal input or insight into whether a particular transmission plan treats all loads and generators comparably. To ensure that truly comparable transmission service is provided by all public utility transmission providers, including RTOs and ISOs, we amend the

pro forma

OATT to require coordinated, open, and transparent transmission planning on both a sub-regional and regional level. To implement this remedy, we adopt the eight planning principles proposed in the NOPR, as well as one additional principle, that each public utility transmission provider will be required to follow. We recognize that many regions have made significant progress in recent years in creating greater openness and transparency in transmission planning and believe our proposed reforms will build upon, strengthen, and improve this progress to reform transmission planning.

85.

Transmission Pricing Reforms

. Consistent with the focus of Order No. 888 on the non-rate terms and conditions of open access, the Commission does not initiate broad reform of transmission pricing policy through this Final Rule. However, we have identified several pricing rules that are part and parcel of OATT service that merit reform.

•

Energy and Generator Imbalance Charges

. We find that energy and generator imbalance charges we have previously accepted are excessive, too varied, and otherwise unrelated to the cost of providing the service and, therefore, we reform energy and generator imbalance pricing. We adopt tiered

pro forma

OATT energy and generator imbalance provisions similar to those in use by Bonneville and exempt intermittent resources from the highest deviation band. In these new provisions, imbalance charges are based on incremental cost and escalate as the imbalance increases. Any deviations from these provisions must be consistent with or superior to the

pro forma

OATT as modified by this Final Rule and must meet the following criteria: the charges must (1) Be related to the cost of correcting the imbalance, (2) be tailored to encourage accurate scheduling behavior, such as by increasing the percentage of the adder as the deviations become larger, and (3) account for the special circumstances presented by intermittent generators, such as by waiving the higher ends of the deviation penalties.

•

Capacity Reassignment Pricing

. We find that the existing cap on the reassignment of point-to-point service is no longer just and reasonable and, therefore, we eliminate the cap. We believe that removing the cap will eliminate an unnecessary impediment to the resale of capacity, which in turn should increase utilization of the grid and otherwise ensure that point-to-point service is just, reasonable, and not unduly discriminatory.

•

Crediting of Customer-Owned Facilities

. We retain most elements of our existing policy respecting the crediting of customer-owned facilities, including the requirement that such facilities meet the integration standard. However, we eliminate the requirement that new facilities can receive credits only if they are “jointly planned” because this requirement provides a disincentive to coordinated planning. Rather, we provide that such new facilities are eligible for credits if such facilities are integrated into the operations of the transmission provider's facilities. Customer-owned facilities shall be presumed to be integrated if those facilities, if owned by the transmission provider, would be eligible for inclusion in the transmission provider's annual transmission revenue requirement.

86.

Improvements to Point-to-Point Service

. The Commission concludes that the existing methods for evaluating requests for long-term firm point-to-point service are no longer just, reasonable, and not unduly discriminatory. The existing

pro forma

OATT allows the transmission provider to deny a request for long-term point-to-point service if that service is not available in a single hour of the period studied. We find that this approach is not comparable because, when a transmission provider considers a new resource to serve native load, the transmission provider does not eliminate an otherwise economic option because the resource may not be deliverable in a few hours of the year. To remedy this problem, the Commission adopts a “conditional firm” component to long-term point-to-point service that addresses the situation where firm service can be provided for most, but not all, hours of the period requested. We also reform the existing requirements for the provision of redispatch service to ensure that they are of greater use to transmission customers and more consistent with reliability planning and operation of the system.

87.

Reform of rollover rights

. The Commission concludes that section 2.2 of the

pro forma

OATT, which grants an ongoing right to transmission customers to renew or “roll over” their contracts, should be reformed. The current rollover rights do not provide consistency between the rights of rollover customers and the resulting obligations of transmission providers to plan and upgrade the system to accommodate rollovers. The Commission therefore amends section 2.2 to ensure greater consistency with transmission planning and construction timelines and modifies the minimum term of the rollover rights to five years, rather than the current minimum term of one year. The Commission also requires that a transmission customer eligible for rollover rights provide notice of whether or not it will exercise its right of first refusal to renew the contract no less than one year before the expiration date of the transmission service agreement, rather than within the current 60-day period.

88.

Increases in transparency to lessen the opportunities to discriminate and reduce transaction costs

. In addition to the increased transparency we require regarding the calculation of ATC and transmission planning, we increase the transparency of transmission service provided under the

pro forma

OATT in several other respects. For example, we require transmission providers and their network customers to use the transmission providers' OASIS to request designation of a new network resource and to terminate the designation of an existing network resource. In addition, we require transmission providers to modify their OASIS so that requests to designate and terminate a network resource can be queried, allowing all parties access to such information. We also require transmission providers to post a list of their current designated network resources and all network customers' current designated network resources on their OASIS. Finally, we require transmission providers to post on OASIS all their business rules, practices and standards that relate to transmission services provided under the

pro forma

OATT.

89.

Strengthening enforcement of the pro forma OATT

. The reforms adopted in this Final Rule provide greater clarity in the terms and conditions of the

pro forma

OATT, resolving ambiguities in the existing

pro forma

OATT that have made undue discrimination easier to accomplish and more difficult to detect. Our new civil penalty authority under EPAct 2005 gives us ample power to remedy tariff violations, but it also places upon us an increased responsibility to make the rules as clear as possible. We fulfill that responsibility in the Final Rule by providing greater clarity where appropriate to several critical OATT provisions. We also adopt a number of posting and reporting requirements that will provide the Commission and market participants with information about each transmission provider's performance of

pro forma

OATT obligations. For example, we require transmission providers to post specific performance metrics related to their completion of studies required under the

pro forma

OATT. We note that the Commission will continue to audit compliance with the

pro forma

OATT, and toward that end require transmission information kept on OASIS to be retained for audit purposes for five years. Finally, we adopt a number of reforms to operational penalties assessed under the

pro forma

OATT, including so-called “over-use” penalties and the treatment of operational penalty revenues collected from transmission providers and their affiliates.

90.

Miscellaneous OATT improvements

. Finally, we implement a number of improvements to the terms and conditions of the

pro forma

OATT to incorporate the lessons learned over the past ten years. We briefly note these below:

•

Designation of network resources

. We provide clarification regarding the types of agreements that may be designated as network resources, the process for verifying whether agreements meet the requirements in the

pro forma

OATT, and the requirement for transmission providers to designate and undesignate network resources. We also require customers to submit an attestation with each application to designate a new network resource.

•

Reservation priorities

. We change the priority rules to give certain priority to pre-confirmed transmission service requests submitted in the same time period. We also add price as a tie-breaker in determining reservation queue priority when the transmission provider is willing to discount transmission service.

•

Clarifications related to network service

. We provide clarification related to use of network service on an “as available basis” and to “redirects” of network service.

B. Core Elements of Order No. 888 That Are Retained

91. Although we are adopting many important reforms to Order No. 888 and the

pro forma

OATT in this Final Rule, we emphasize that many of the core elements of Order No. 888 are retained. As the Commission noted in the NOPR, many of these core elements enjoy broad support from many sectors of the industry. A variety of commenters—in response to the NOI issued earlier in this proceeding and again in response to the NOPR—have urged the Commission to focus on meaningful incremental reforms to the

pro forma

OATT, rather than on industry restructuring. We share the view that Order No. 888 can be strengthened without discarding its fundamental structure. We discuss

below the core elements that are being retained and the comments received on these points.

1. Federal/State Jurisdiction

92. In Order No. 888, the Commission stated that it has exclusive jurisdiction over the rates, terms, and conditions of unbundled retail transmission in interstate commerce.

Though the Commission adopted a test for determining what constitute Commission-jurisdictional transmission facilities and what constitute State-jurisdictional local distribution facilities in situations involving unbundled wholesale wheeling and unbundled retail wheeling,

the Commission stated that it generally would defer to determinations by State regulatory authorities concerning where to draw the jurisdictional line under that test.

The Commission declined to assert jurisdiction over bundled retail transmission, reasoning that “when transmission is sold at retail as part and parcel of the delivered product called electric energy, the transaction is a sale of electric energy at retail.”

The U.S. Supreme Court affirmed the Commission's decision to assert jurisdiction over unbundled but not bundled retail transmission, finding that the Commission made a statutorily permissible choice.

In the NOPR, the Commission proposed to retain the jurisdictional divide established in Order No. 888.

Order No. 888 at 31,781.

Id.

at 31,771 (setting forth the seven-factor test).

. at 31,781.

See New York

FERC

, 535 U.S. at 28.

Comments

93. Several commenters support the Commission's proposal to retain the existing jurisdictional divide.

Though APPA concludes that the most politic course at this juncture is to leave the current jurisdictional boundaries in place and develop cooperative mechanisms in each region to coordinate Federal policy implementation with the relevant State regulators, APPA notes that there is disagreement among its members about whether the current jurisdictional lines are properly drawn. APPA explains that a substantial number of its members believe that all interstate transmission services (both retail and wholesale) should be provided under one consistent set of tariff terms and conditions. Other APPA members, however, believe that the Commission made the proper jurisdictional call in Order No. 888. NARUC urges the Commission to clarify that its planning proposals will not reopen or attempt to change the jurisdictional split over transmission facilities delineated in Order No. 888.

E.g.

, Ameren, APPA, North Carolina Commission Reply, PNM-TNMP, and Southern.

Commission Determination

94. The Commission will retain the existing jurisdictional divide that was established in Order No. 888, which has been affirmed by the U.S. Supreme Court and accepted by the industry and State regulatory authorities.

We also reiterate our recognition of the need for heightened cooperation between Federal and State regulators in areas where there are overlapping Federal and State policy concerns. As explained in greater detail in the planning section below, and in response to NARUC's concern, the planning reforms adopted in the Final Rule contemplate coordinated and open transmission planning, but do not reopen or otherwise change the existing jurisdictional divide for transmission facilities.

See New York

FERC

, 535 U.S. at 28.

2. Native Load Protection

95. In Order No. 888, the Commission did not require transmission providers to unbundle transmission service to their retail native load. The Commission also did not require that bundled retail service be taken under the terms of the

pro forma

OATT.

Moreover, the Commission allowed a transmission provider to reserve, in its calculation of ATC, transmission capacity necessary to accommodate native load growth reasonably forecasted in its planning horizon.

Order No. 888 also granted a rollover right to existing firm service customers,

but allowed transmission providers to restrict that rollover right if the capacity was reasonably forecasted as needed to serve native load customers, as long as that restriction was set forth in the customer's initial service contract.

Order No. 888 at 31,745.

Id.

at 31,694.

Id.; see pro forma

OATT section 2.2.

Order No. 888-A at 30,198.

96. Congress, in section 1233 of EPAct 2005, added section 217 to the FPA, entitled “Native Load Service Obligation,” which addresses transmission rights held by load-serving entities (LSEs). FPA section 217 allows LSEs to use their own and contracted-for transmission capacity to deliver energy as required to meet their service obligations, without being subject to charges of unlawful discrimination. The provision makes clear, however, that this requirement does not abrogate any contract or service agreement for firm transmission service or rights in effect as of the date of enactment of EPAct 2005.

In the NOPR, the Commission concluded that the protection of native load embodied in Order No. 888 is consistent with FPA section 217, and reaffirmed its commitment to the protection of native load.

16 U.S.C. 217(f).

Comments

97. Several commenters agree with the Commission's preliminary conclusion that the protection of native load embodied in Order No. 888 is consistent with FPA section 217 and support the Commission's continued commitment to the protection of native load.

While APPA

and TAPS generally agree with the Commission that the overall OATT regime is consistent with section 217, they urge the Commission to maintain and reinforce the comparability requirement. APPA urges the Commission to broaden its preliminary conclusion in the NOPR and conclude instead that the protection of native load

and

the provision of fully comparable transmission service to other LSEs with long-term service obligations, as embodied in Order No. 888, are consistent with FPA section 217. TAPS also supports the Commission's reading of FPA section 217 as consistent with the Order No. 888

pro forma

OATT's “native load” priority, recognizing that FPA section 217 reinforces the OATT's commitment to comparable treatment of all LSEs—

e.g.

, transmission providers and network customers.

E.g.

, Ameren, E.ON, Tacoma, Arkansas Commission, EPSA, Southern, and TAPS.

APPA argues that the proposed definition of native load customers in section 1.21 is not technically consistent with FPA section 217 because FPA section 217 does not distinguish among the types of power supply arrangements that an LSE must have to enjoy the protection of FPA section 217. Nevertheless, APPA states that it would not be fruitful to reopen the entire OATT framework to address this technical (but very important) definitional difference.

98. Other commenters dispute the Commission's preliminary conclusion that the native load protection embodied in Order No. 888 is consistent with FPA section 217.

Many commenters argue that FPA section 217 protects all load, not just native load.

Constellation states that the Commission must recognize that there are other market participants besides the transmission providers themselves that are LSEs under FPA section 217. Under the definition of LSEs in FPA section

217, EPSA argues that many entities other than traditional, vertically-integrated utilities are in the business of serving load. The statute, EPSA asserts, applies to any native load service obligation, whether that obligation is served by a competitive supplier, an affiliate of the transmission provider, or by the transmission provider itself. Salt River contends that FPA section 217 is self-implementing, though it urges the Commission to act to remove impediments to the full exercise of rights granted to LSEs.

E.g.

, Arkansas Municipal, Constellation, Duke, Salt River, and South Carolina E&G.

E.g.

, Constellation, EPSA, and South Carolina E&G.

99. Constellation argues that the Commission should require native load and OATT customers to take service under the same terms and conditions because experience has proven that discrimination has occurred as a result of having two different sets of rules applicable to transmission customers. EPSA urges the Commission to further clarify that the transmission provider has an affirmative obligation to serve native load in a non-discriminatory manner. According to EPSA, section 217 supports the Commission's paramount statutory mission of ensuring non-discrimination and makes clear that a transmission provider, when utilizing transmission capacity or rights reserved to serve native load, must “put its blinders on” to ensure that the load's needs are being met in the most economical way available, whether that decision means the deployment of its own affiliated generation, or the deployment of available non-utility alternatives.

100. Arkansas Municipal asserts that FPA section 217 recognizes the need to give priority to LSEs in certain situations, such as when the transmission grid may be constrained and one group of customers may be denied service at the expense of other customers. Arkansas Municipal states that a priority list could be instituted in this reform proceeding that places LSEs at the top of the list in competing requests for transmission service when not all requests could be granted or honored by the transmission provider.

101. New Mexico Attorney General argues that native load is fundamentally different than merchant load and therefore, in the planning process, the needs of merchants should not be treated comparably with the needs of New Mexico utilities' native loads. New Mexico Attorney General asserts that New Mexico utilities have a statutory obligation to serve retail load while merchants are free to come and go with cycles inherent in wholesale markets. According to New Mexico Attorney General, the transmission requirements of the utilities' native loads amount to an ongoing long-term firm contract, while the transmission needs of merchants are, by comparison, short-term and speculative.

102. Several commenters urge the Commission to revisit various aspects of the reforms proposed in the NOPR in order to enhance the protection of native load. For example, some commenters urge the Commission to modify the rollover proposal in the NOPR. Salt River argues that the Commission's regulations must include a clear provision for a transmission owner anticipating, or unexpectedly facing, load growth to recapture capacity temporarily made available to the wholesale market. Arkansas Commission disagrees with the Commission's proposal to require a transmission provider to compete for transmission capacity rather than reclaim it through its rights to reserve capacity for future load growth. The proposal is inequitable, Arkansas Commission argues, because native load customers have historically paid for most of the transmission providers' assets and will continue to do so in the future. Because of this, Arkansas Commission asserts, native load customers should be given preference in the reservation of transmission capacity. In response to Arkansas Commission's position, MDEA urges the Commission to make clear, consistent with the comparability principle adopted in Order No. 888 and reaffirmed in the NOPR, and with FPA section 217, that any reservation of rights or preference available to a transmission provider's native load customers must be available to network customer loads as well. South Carolina E&G argues that the Commission's interpretation of “reasonably forecasted” capacity under section 2.2 of the

pro forma

OATT has been effectively impossible to meet and, therefore, the Commission should now provide clear standards for evaluation of native load protecting rollover restrictions. A clear standard, South Carolina E&G states, would have the Commission consider rollover restrictions in light of a utility's transmission planning process. On reply, Progress Energy supports South Carolina E&G's comments. Progress Energy urges the Commission to revisit the rollover rights policy to develop a policy by which an LSE may be assured of future transmission service for reasonably forecasted native load growth.

103. South Carolina E&G also asks the Commission to revise section 13.6 of the

pro forma

OATT, regarding curtailment of firm point-to-point transmission service. South Carolina E&G urges the Commission to comply with the mandate of

Northern States Power Co.

FERC

which South Carolina E&G asserts held that the Commission had exceeded its authority in rejecting a vertically-integrated transmission provider's proposal to modify section 13.6 of the OATT to give a higher curtailment priority to native load. According to South Carolina E&G, the Commission has responded by applying the court's decision narrowly, but FPA section 217 requires the Commission to change that position and recognize the primacy of service to native load in section 13.6 of the OATT. In its reply comments, Progress Energy supports the comments of South Carolina E&G and states that the Commission must affirmatively recognize the priority of service to LSEs in the application of the curtailment priorities in section 13.6 of the OATT.

176 F.3d 1090, 1096 (8th Cir. 1999),

cert. denied sub nom. Enron Power Marketing, Inc.

Northern States Power Co.

, 528 U.S. 1182 (2000).

104. Duke argues that several of the Commission's proposed reforms—such as hourly firm service, redispatch, and conditional firm service—actually reduce the protection afforded native/network load. Salt River suggests that the Commission should modify its ATC proposal to bring the Commission's native load priority policies in line with FPA section 217. Salt River asserts that, in calculating ATC, the transmission provider must be able to exercise reasonable professional judgment as to the amount of transmission that must be reserved to meet native load service obligations; the Commission should not get into the business of dictating forecasting methodology. Salt River proposes that a native load forecast that is used by an LSE as the basis for committing capital for generation expansion or procurement should be presumed to be valid for purposes of establishing available capacity. EPSA, however, argues that, unless and until the Commission mandates a hard and enforceable definition of ATC, transmission-owning utilities that also own affiliated generation will continue to hide behind the native load service obligation as an excuse for being unable to find ATC for any but self-serving purposes.

105. EPSA also argues that the Commission must ensure that transmission owners' planning accommodates all supply options. EPSA urges the Commission to clarify that transmission capacity reserved for native load is to be made available (including for study and other purposes) to competitive suppliers who wish to

serve native load as allowed by State law. According to EPSA, all generation assets ultimately serve load and the

pro forma

OATT should be clarified to ensure that the transmission system is available on a non-discriminatory basis now and in the future to ensure that load is optimally served—regardless of which generation resources are serving that load. In its reply comments, EPSA also challenges the initial comments of New Mexico Attorney General, which EPSA argues incorrectly interpret FPA section 217 as drawing a distinction between the types of generation that serve load. EPSA argues that the statute protects the customer load that all suppliers would seek to serve regardless of the source.

106. APPA agrees with the Commission's response in the NOPR to Metropolitan Water District that the specific issues related to an RTO's provision of long-term transmission rights are better left to the rulemaking in Docket Nos. RM06-8-000 and AD05-7-000, and the proceedings in each RTO region to implement the Final Rule issued in those dockets on July 20, 2006. APPA notes, however, that the Commission has not proposed in this docket to exempt RTOs from the provisions of the NOPR. Rather, APPA notes, departures from the

pro forma

OATT, including departures in RTO OATTs, must be justified under the “consistent with or superior to” standard. APPA argues that the Commission should apply this standard to long-term transmission rights, as well as to the other terms and conditions of OATT transmission service that RTOs provide.

Commission Determination

107. In Order No. 888, the Commission gave public utilities the right to reserve existing transmission capacity needed for native load growth reasonably forecasted within the utility's current planning horizon. The Commission also allowed transmission providers to restrict rollover rights based on reasonably forecasted need at the time the contract is executed. We continue to believe these protections for native load are appropriate and do not eliminate them in this Final Rule, as suggested by some commenters. We also believe that the protection of native load embodied in Order No. 888, as enhanced by the reforms adopted in this Final Rule, is consistent with FPA section 217, which protects the transmission rights of entities with service obligations to end-users or a distribution utility, to the extent required to meet their service obligations. The additional reforms proposed by commenters are not necessary at this time to remedy undue discrimination. We conclude that the native load priority established in Order No. 888 continues to strike the appropriate balance between the transmission provider's need to meet its native load obligations and the need of other entities to obtain service from the transmission provider to meet their own obligations.

108. In response to comments regarding reforms needed to ATC calculation and transmission planning to bring the native load priority policies in line with FPA section 217, we believe that the Commission's reforms in this Final Rule appropriately reflect the transmission provider's obligation to serve native load. As discussed more fully in the ATC and planning sections below, the processes we adopt herein are open, transparent and non-discriminatory and assume that the transmission provider is meeting its obligations, including its native load service obligation. We disagree with Duke's assertion that the reforms proposed in the NOPR will result in a reduction of the protection afforded native or network load. Not only have we reaffirmed the fundamental protections for native load contained in Order No. 888, but we have modified, where appropriate, the

pro forma

OATT to ensure that a transmission provider's obligations can be met consistent with maintaining the reliability to existing customers, including native load. For example, we are eliminating the current requirement to provide planning redispatch over long periods of time (

e.g.

, 10-30 years) because it is unnecessary to remedy undue discrimination and can create problems in forecasting system conditions consistent with maintaining reliability to native load customers.

Proposals related to other reforms, such as curtailments and rollovers, are discussed in the sections below dealing with each of those issues.

109. With regard to APPA's comments regarding long-term transmission rights in organized markets, we note that the Commission has issued its Final Rule in Docket Nos. RM06-8-000 and AD05-7-000.

As discussed more fully in the applicability section of this rulemaking, and in response to APPA's comments, we reiterate that any departures from the

pro forma

OATT proposed by an ISO or an RTO must be “consistent with or superior to” the

pro forma

OATT in this Final Rule.

See supra

note 72.

3. The Types of Transmission Services Offered

110. In Order No. 888, the Commission required all public utilities to offer, on a non-discriminatory, open-access basis, firm network service and firm and non-firm point-to-point service. In the NOPR, the Commission proposed to retain these services and did not propose to require transmission providers to adopt a network contract demand service, either as a replacement for network or point-to-point service or as a third category of service under the OATT.

Comments

111. Several commenters support the Commission's proposal to retain the current services in the

pro forma

OATT and to not adopt contract demand service.

While APPA supports the Commission's proposal, it states that the Commission should remain open to individual public utility transmission provider's proposals to add “hybrid” service to the base network and point-to-point services.

E.g.

, MISO/PJM States, TVA, and Southern.

112. Other commenters, such as AMP-Ohio and Nevada Companies, argue that the Commission should require all transmission providers to offer network contract demand service. Nevada Companies argue that the Commission's network designation process can substantially interfere with State jurisdiction over resource acquisition, especially for transmission providers that are required to purchase substantial amounts of power to serve their retail customers instead of relying primarily on their own generation. Nevada Companies reason that allowing transmission providers to move to a contract demand-based network service would remove them from the dilemma of being forced to make resource procurement decisions that are inconsistent with State requirements. On reply, MidAmerican, Newmont Mining, and Utah Municipals oppose the suggestion that the contract demand service should be made a mandatory service offering in the

pro forma

OATT. In its reply comments, Newmont Mining states that, if the Commission is inclined to provide some relief to allow Nevada Companies to comply with both the

pro forma

OATT and their State-approved resource plans, that relief should come only after an investigation of how similar problems are handled on other systems and should be a narrowly and carefully monitored exception to the resource designation requirements.

113. Alberta Intervenors argue that undue discrimination is most likely to occur in situations where there is a single or dominant network customer and that customer either has a dual mandate for serving the network customers or that customer has a “free option” for procuring transmission.

Alberta Intervenors recommend that the Commission implement standardized rules with respect to the “free option” concept while offering regional flexibility to ensure the objectives of open access and the absence of undue discrimination continue to be advanced. Alberta Intervenors also argue that, despite the Commission's proposal to address undue discrimination against transmission customers in attempting to redirect to new receipt and delivery points, undue discrimination remains a concern since network customers retain a flexibility of receipt and delivery points that is not granted to third party point-to-point customers. This flexibility provided to the network customer allows the use of the system for activities known as “parking”

and “hubbing.”

Alberta Intervenors urge the Commission to eliminate this unfair competitive advantage under the OATT by making a common service available to all participants rather than differing service for network customers, or alternatively, by restricting the use of point-to-point services by the network customer to exclude its use for “parking” and “hubbing.”

Alberta Intervenors assert that the purchase of point-to-point service by dominant network customers results in an equal and offsetting reduction to the network customer's network charges, resulting in a net cost of zero. They state that point-to-point service is a net cost to all competitors except the dominant network customer. Thus, they argue, a dominant network customer can buy point-to-point service for an extended period and use this service for a limited number of hours at little (or no) net cost compared to not purchasing point-to-point service for an extended period. In Alberta Intervenors' view, this “free option” provides network customers with a competitive advantage when reserving point-to-point service because it enables the network customers to over-consume or buy excess point-to-point service than they would if the true net cost were reflected. Alberta Intervenors contend that such over-consumption reduces access to point-to-point service for other customers.

Alberta Intervenors define “parking” as a network customer reserving point-to-point service using a network load point of delivery to purchase energy that it intends to sell but where no buyer has been identified at the time of the reservation. The energy notionally reduces network load. Once a buyer is found, the network customer completes the sale by delivering the energy from freed-up generation at a generation point of receipt to a buyer's point of delivery.

Alberta Intervenors define “hubbing” as a practice very similar to “parking,” but involving multiple buyers and sellers. The network customer can reserve point-to-point transmission to purchase energy from multiple sellers and to sell energy to multiple buyers by creating a hub within its network load. Alberta Intervenors explain that this allows the network customer to organize purchases and sales by physically matching the requirements of multiple buyers and sellers.

114. MidAmerican states that in the Western Interconnection, a utility's loads are not necessarily located within a confined geographical boundary served by a single transmission owner. In these cases, MidAmerican argues, neither network nor point-to-point service under the current

pro forma

OATT is suitable to serve those loads. To remedy these shortcomings in standard OATT service, MidAmerican states that the Commission should require the incorporation of dynamic scheduling and long-term, seasonally-shaped, firm point-to-point as new service offerings under the

pro forma

OATT.

Commission Determination

115. The Commission will not alter the types of services that we required in Order No. 888. We continue to believe that network and point-to-point services are the appropriate base-line service offerings in the OATT, and we will not mandate that transmission providers adopt new service offerings such as network contract demand service. Although the Commission has accepted forms of network contract demand service proposed by individual transmission providers, and the service may provide benefits to certain customers, we do not believe the service is necessary to remedy undue discrimination. For example, the service would require a departure from full load-ratio pricing for network customers, which may not be warranted to the extent the transmission provider plans its system to serve all native load. However, while the Commission concludes that it will not require all transmission providers to offer this service, in response to the arguments raised by commenters such as AMP-Ohio and Nevada Companies, we reiterate that the Commission already has accepted forms of network contract demand service and will continue to entertain such proposals on a voluntary basis from transmission providers.

116. The Commission also is not persuaded by Alberta Intervenors' and MidAmerican's arguments in support of further alternative services under the

pro forma

OATT. As with network contract demand service, transmission providers may propose such services if appropriate for their region. We do not believe mandating that such services be provided by all transmission providers is necessary at this time to prevent undue discrimination.

4. Functional Unbundling

117. In Order No. 888, the Commission chose to mandate functional, rather than corporate (in which a public utility's transmission and generation assets would be placed in separate corporate entities), unbundling of transmission and generation services. The Commission explained that functional unbundling has three components:

1. A public utility must take transmission services (including ancillary services) for all of its new wholesale sales and purchases of energy under the same tariff of general applicability as do others;

2. A public utility must state separate rates for wholesale generation, transmission, and ancillary services;

3. A public utility must rely on the same electronic information network that its transmission customers rely on to obtain information about its transmission system when buying or selling power.

Order No. 888 at 31,654.

118. In the years following Order No. 888, a number of public utilities nonetheless underwent corporate unbundling. Many of these entities did so as a result of State-mandated restructuring laws. Others did so for corporate or tax reasons. Some entities divested all of their generation assets to a non-affiliate, while others simply restructured internally to place the generation assets in a different corporate subsidiary than the transmission assets. There remain, however, a significant number of vertically-integrated public utilities that operate under the functional unbundling approach.

119. In the NOPR, we proposed to preserve the functional unbundling approach adopted in Order No. 888, rather than impose a corporate or structural unbundling requirement. While the Commission expressed its continued support for voluntary efforts to adopt structural changes (such as transmission-only companies, RTOs, or other reforms), the Commission found that the more intrusive and costly corporate unbundling was not necessary at this time. The Commission also declined to mandate an independent transmission coordinator for all transmission providers. Though the Commission has previously found that such entities may be appropriate in certain circumstances and we support voluntary efforts to rely on them,

100

the

Commission concluded that there was not a sufficient basis for requiring them as a generic remedy for undue discrimination.

100

See Duke Power

, 113 FERC ¶ 61,288 (2005);

MidAmerican Energy Co.

, 113 FERC ¶ 61,274 (2005);