[Federal Register Volume 61, Number 92 (Friday, May 10, 1996)]
[Rules and Regulations]
[Pages 21540-21736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10694]
[[Page 21539]]
_______________________________________________________________________
Part II
Department of Energy
_______________________________________________________________________
Federal Energy Regulatory Commission
_______________________________________________________________________
18 CFR Parts 35, 37 and 385
Electric Utilities (Federal Power Act); Promoting Wholesale Competition
Through Open Access Non-Discriminatory Transmission Services by Public
Utilities; Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities; Final Rules and Proposed Rule
Federal Register / Vol. 61, No. 92 / Friday, May 10, 1996 / Rules and
Regulations
[[Page 21540]]
DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Parts 35 and 385
[Docket Nos. RM95-8-000 and RM94-7-001; Order No. 888]
Promoting Wholesale Competition Through Open Access Non-
Discriminatory Transmission Services by Public Utilities; Recovery of
Stranded Costs by Public Utilities and Transmitting Utilities
Issued April 24, 1996.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Final rule.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) is
issuing a Final Rule requiring all public utilities that own, control
or operate facilities used for transmitting electric energy in
interstate commerce to have on file open access non-discriminatory
transmission tariffs that contain minimum terms and conditions of non-
discriminatory service. The Final Rule also permits public utilities
and transmitting utilities to seek recovery of legitimate, prudent and
verifiable stranded costs associated with providing open access and
Federal Power Act section 211 transmission services. The Commission's
goal is to remove impediments to competition in the wholesale bulk
power marketplace and to bring more efficient, lower cost power to the
Nation's electricity consumers.
EFFECTIVE DATE: This Final Rule will become effective on July 9, 1996.
FOR FURTHER INFORMATION CONTACT:
David D. Withnell (Legal Information--Docket No. RM95-8-000), Office of
the General Counsel, Federal Energy Regulatory Commission, 888 First
Street NE., Washington, DC 20426, (202) 208-2063
Deborah B. Leahy (Legal Information--Docket No. RM94-7-001), Office of
the General Counsel, Federal Energy Regulatory Commission, 888 First
Street NE., Washington, DC 20426, (202) 208-2039
Michael A. Coleman (Technical Information), Office of Electric Power
Regulation, Federal Energy Regulatory Commission, 888 First Street NE.,
Washington, DC 20426, (202) 208-1236.
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission also provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in the Public Reference Room
at 888 First Street, NE., Washington, DC 20426.
The Commission Issuance Posting System (CIPS), an electronic
bulletin board service, provides access to the texts of formal
documents issued by the Commission. CIPS is available at no charge to
the user and may be accessed using a personal computer with a modem by
dialing 202-208-1397 if dialing locally, or 1-800-856-3920 if dialing
long distance. CIPS is also available through the Fed World system (by
modem or Internet). To access CIPS, set your communications software to
19200, 14400, 12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex,
no parity, 8 data bits and 1 stop bit. The full text of this order will
be available on CIPS indefinitely in ASCII and WordPerfect 5.1 format.
The complete text on diskette in Wordperfect format may also be
purchased from the Commission's copy contractor, La Dorn Systems
Corporation, also located in the Public Reference Room at 888 First
Street NE., Washington, DC 20426.
Table of Contents
I. Introduction/Summary
II. Public Reporting Burden
III. Background
IV. Discussion
A. Scope of the Rule
1. Introduction
2. Functional Unbundling
3. Market-based Rates
4. Merger Policy
5. Contract Reform
6. Flow-based Contracting and Pricing
B. Legal Authority
1. Bases for Legal Authority
2. Response to Commenters Opposing our Legal Authority
C. Comparability
1. Eligibility to Receive Non-discriminatory Open Access
Transmission
2. Service that Must be Provided by Transmission Provider
3. Who Must Provide Non-discriminatory Open Access Transmission
4. Reservation of Transmission Capacity by Transmission
Customers
5. Reservation of Transmission Capacity for Future Use by
Utility
6. Capacity Reassignment
7. Information Provided to Transmission Customers
8. Consequences of Functional Unbundling
D. Ancillary Services
1. Definitions and Descriptions
2. Obligations of Transmission Providers and Transmission
Customers with Respect to Ancillary Services
3. Unbundling and Bundling Ancillary Services
4. Reassignment of Ancillary Services
5. Pricing of Ancillary Services
6. Accounting for Ancillary Services
E. Real-Time Information Networks
F. Coordination Arrangements: Power Pools, Public Utility
Holding Companies, Bilateral Coordination Arrangements, and
Independent System Operators
1. Tight Power Pools
2. Loose Pools
3. Public Utility Holding Companies
4. Bilateral Coordination Arrangements
G. Pro Forma Tariff
1. Tariff Provisions That Affect The Pricing Mechanism
2. Priority for Obtaining Service
3. Curtailment Provisions
4. Specific Tariff Provisions
H. Implementation
I. Federal and State Jurisdiction: Transmission/Local
Distribution
J. Stranded Costs
1. Justification for Allowing Recovery of Stranded Costs
2. Cajun Electric Power Cooperative, Inc. v. FERC
3. Responsibility for Wholesale Stranded Costs (Whether to Adopt
Direct Assignment to Departing Customers)
4. Recovery of Stranded Costs Associated with New Wholesale
Requirements Contracts
5. Recovery of Stranded Costs Associated with Existing Wholesale
Requirements Contracts
6. Recovery of Stranded Costs Caused by Retail-Turned-Wholesale
Customers
7. Recovery of Stranded Costs Caused by Retail Wheeling
8. Evidentiary Demonstration Necessary--Reasonable Expectation
Standard
9. Calculation of Recoverable Stranded Costs
10. Stranded Costs in the Context of Voluntary Restructuring
11. Accounting Treatment for Stranded Costs
12. Definitions, Application, and Summary
K. Other
1. Information Reporting Requirements for Public Utilities
2. Small Utilities
3. Regional Transmission Groups
4. Pacific Northwest
5. Power Marketing Agencies
6. Tennessee Valley Authority
7. Hydroelectric Power
8. Residential Customers
V. Environmental Statement
VI. Regulatory Flexibility Act Certification
VII. Information Collection Statement
VIII. Effective Date
Regulatory Text
Appendices (These Appendices will not appear in the Code of
Federal Regulations)
A. List of Section 211 Applications
B. List of Commenters in Docket Nos. RM95-8-000 and RM94-7-001
C. Allegations of Public Utilities Exercising Transmission
Dominance
D. Pro Forma Open Access Transmission Tariff
E. List of Group 1 Public Utilities
F. List of Group 2 Public Utilities
G. Legal Analysis of Commission Jurisdiction Over the Rates,
Terms and Conditions of Unbundled Retail Transmission In Interstate
Commerce
H. U.S. NOX Emissions
[[Page 21541]]
Statement of Commissioner Hoecker
Statement of Commissioner Massey
I. Introduction/Summary
Today the Commission issues three final, interrelated rules
designed to remove impediments to competition in the wholesale bulk
power marketplace and to bring more efficient, lower cost power to the
Nation's electricity consumers.1 The legal and policy cornerstone
of these rules is to remedy undue discrimination in access to the
monopoly owned transmission wires that control whether and to whom
electricity can be transported in interstate commerce. A second
critical aspect of the rules is to address recovery of the transition
costs of moving from a monopoly-regulated regime to one in which all
sellers can compete on a fair basis and in which electricity is more
competitively priced.
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\1\ These rules are the rules on open access and stranded costs
in the above dockets (FERC Stats. & Regs. para. 31,036), and an
accompanying rule on Open Access Same-Time Information System and
Standards of Conduct (OASIS Final Rule) (FERC Stats. & Regs. para.
31,037) being issued contemporaneously. The Commission also is
issuing contemporaneously a notice of proposed rulemaking on
capacity reservation open access transmission tariffs in Docket No.
RM96-11-000, FERC Stats. & Regs. para. 32,517. These final rules and
proposed rule are being published concurrently in the Federal
Register.
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In the year since the proposed rules were issued,2 the pace of
competitive changes in the electric utility industry has accelerated.
By March of last year, 38 public utilities had filed wholesale open
access transmission tariffs with the Commission. Today, prodded by such
competitive changes and encouraged by our proposed rules, 106 of the
approximately 166 public utilities that own, control, or operate 3
transmission facilities used in interstate commerce have filed some
form of wholesale open access tariff. In addition, since the time the
proposed rules were issued, numerous state regulatory commissions have
adopted or are actively evaluating retail customer choice programs or
other utility restructuring alternatives. These events have been
spurred by continuing pressures in the marketplace for changes in the
way electricity is bought, sold, and transported. Increasingly,
customers are demanding the benefits of competition in the growing
electricity commodity market.
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\2\ On March 29, 1995, the Commission issued two notices of
proposed rulemaking concerning open access transmission and stranded
cost recovery. Promoting Wholesale Competition Through Open-Access
Non-Discriminatory Transmission Service by Public Utilities and
Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, Notice of Proposed Rulemaking and Supplemental Notice of
Proposed Rulemaking, 60 FR 17662 (April 7, 1995), FERC Stats. &
Regs. para. 32,514 (1995). On December 13, 1995, the Commission
issued a notice of proposed rulemaking on information systems. Real-
Time Information Networks and Standards of Conduct, Notice of
Proposed Rulemaking, 60 FR 66182 (December 21, 1995), FERC Stats. &
Regs. para. 32,516 (1995).
\3\ The Commission's notice of proposed rulemaking in the above
dockets proposed to apply the proposed requirements to public
utilities that own and/or control facilities used for the
transmission of electric energy in interstate commerce. ``Own and/or
control'' is intended to include public utilities that ``operate''
facilities used for the transmission of electric energy in
interstate commerce. However, we have modified the Final Rule
regulatory text to remove any ambiguity.
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The Commission estimates the potential quantitative benefits from
the Final Rule will be approximately $3.8 to $5.4 billion per year of
cost savings, in addition to the non-quantifiable benefits that include
better use of existing assets and institutions, new market mechanisms,
technical innovation, and less rate distortion. The continuing
competitive changes in the industry and the prospect of these benefits
to customers make it imperative that this Commission take the necessary
steps within its jurisdiction to ensure that all wholesale buyers and
sellers of electric energy can obtain non-discriminatory transmission
access, that the transition to competition is orderly and fair, and
that the integrity and reliability of our electricity infrastructure is
maintained.
In this Rule, the Commission seeks to remedy both existing and
future undue discrimination in the industry and realize the significant
customer benefits that will come with open access. Indeed, it is our
statutory obligation under sections 205 and 206 of the Federal Power
Act (FPA) to remedy undue discrimination.
To do so, we must eliminate the remaining patchwork of closed and
open jurisdictional transmission systems and ensure that all these
systems, including those that already provide some form of open access,
cannot use monopoly power over transmission to unduly discriminate
against others. If we do not take this step now, the result will be
benefits to some customers at the expense of others. We have learned
from our experience in the natural gas area the importance of
addressing competitive transition issues early and with as much
certainty to market participants as possible.
Accordingly, in this proceeding and in the accompanying proceeding
on OASIS, the Commission, pursuant to its authorities under sections
205 and 206 of the FPA:
Requires all public utilities that own, control or operate
facilities used for transmitting electric energy in interstate commerce
To file open access non-discriminatory transmission
tariffs that contain minimum terms and conditions of non-discriminatory
service;
To take transmission service (including ancillary
services) for their own new wholesale sales and purchases of electric
energy under the open access tariffs;
To develop and maintain a same-time information system
that will give existing and potential transmission users the same
access to transmission information that the public utility enjoys, and
further requires public utilities to separate transmission from
generation marketing functions and communications;
Clarifies Federal/state jurisdiction over transmission in
interstate commerce and local distribution and provides for deference
to certain state recommendations; and
Permits public utilities and transmitting utilities to
seek recovery of legitimate, prudent and verifiable stranded costs
associated with providing open access and FPA section 211 transmission
services.
Open Access
The Final Rule requires public utilities to file a single open
access tariff that offers both network, load-based service and point-
to-point, contract-based service. The Rule contains a pro forma tariff
that reflects modifications to the NOPR's proposed terms and conditions
and also permits variations for regional practices. All public
utilities subject to the Rule, including those that already have
tariffs on file, will be required to make section 206 compliance
filings to meet the new pro forma tariff non-price minimum terms and
conditions of non-discriminatory transmission. Utilities may propose
their own rates in a section 205 compliance filing.
The Rule provides that public utilities may seek a waiver of some
or all of the requirements of the Final Rule. In addition, non-public
utilities may seek a waiver of the tariff reciprocity provisions.
The Final Rule does not generically abrogate existing requirements
contracts, but will permit customers and public utilities to seek
modification, or termination, of certain existing requirements
contracts on a case-by-case basis. As to coordination arrangements and
contracts, the Rule finds that these arrangements and contracts may
need to be modified to remove unduly discriminatory transmission access
and/or pricing provisions. Such arrangements and agreements include
power pool agreements, public utility
[[Page 21542]]
holding company agreements, and certain bilateral coordination
agreements. The Rule provides guidance and timelines for modifying
unduly discriminatory coordination arrangements and contracts, and
specifies when the members of such arrangements must begin to conduct
trade with each other using the same open access tariff offered to
others. The Rule also provides guidance regarding the formation of
independent system operators (ISOs).
The Rule does not require any form of corporate restructuring, but
will accommodate voluntary restructuring that is consistent with the
Rule's open access and comparability policies.
As discussed in the NOPR, not all owners or controllers of
interstate transmission facilities are subject to the Commission's
jurisdiction under sections 205 and 206 of the FPA and therefore are
not subject to this Rule's open access requirements. Therefore, the
Final Rule retains the proposed reciprocity provision in the pro forma
tariff. Without such a provision, non-open access utilities could take
advantage of the competitive opportunities of open access, while at the
same time offering inferior access, or no access at all, over their own
facilities. Thus, open access utilities would be unfairly burdened. We
note that some non-jurisdictional utilities have expressed an interest
in a mechanism for obtaining a Commission determination that their
transmission tariffs satisfy the reciprocity provisions in the pro
forma tariffs, and we provide such a mechanism in the Rule.
The Final Rule does not generically provide for market-based
generation rates. Although the Rule codifies the Commission's prior
decision that there is no generation dominance in new generating
capacity, intervenors in cases may raise generation dominance issues
related to new capacity. In addition, to obtain market-based rates for
existing generation, we will continue to require public utilities to
show, on a case-by-case basis, that there is no generation dominance in
existing capacity. Further, in all market-based rate cases, we will
continue to look at whether an applicant and its affiliates could erect
other barriers to entry and whether there may be problems due to
affiliate abuse or reciprocal dealing.
Finally, contemporaneously with this Rule the Commission issues an
NOPR on capacity reservation tariffs as an alternative, and perhaps
superior, means of remedying undue discrimination.
Transmission/Local Distribution
The Rule clarifies the Commission's interpretation of the Federal/
state jurisdictional boundaries over transmission and local
distribution. While we reaffirm our conclusion that this Commission has
exclusive jurisdiction over the rates, terms, and conditions of
unbundled retail transmission in interstate commerce by public
utilities, we nevertheless recognize the very legitimate concerns of
state regulatory authorities as they contemplate direct retail access
or other state restructuring programs. Accordingly, we specify
circumstances under which we will give deference to state
recommendations. Although jurisdictional boundaries may shift as a
result of restructuring programs in wholesale and retail markets, we do
not believe this will change fundamental state regulatory authorities,
including authority to regulate the vast majority of generation asset
costs, the siting of generation and transmission facilities, and
decisions regarding retail service territories. We intend to be
respectful of state objectives so long as they do not balkanize
interstate transmission of power or conflict with our interstate open
access policies.
Stranded Costs
With regard to stranded costs, the Final Rule adopts the
Commission's supplemental proposal. It will permit utilities to seek
extra-contractual recovery of stranded costs associated with a limited
set of existing (executed on or before July 11, 1994) wholesale
requirements contracts and provides that the Commission will be the
primary forum for utilities to seek recovery of stranded costs
associated with retail-turned-wholesale transmission customers. It also
will allow utilities to seek recovery of stranded costs caused by
retail wheeling only in circumstances in which the state regulatory
authority does not have authority to address retail stranded costs at
the time the retail wheeling is required. The Rule retains the revenues
lost approach for calculating stranded costs and provides a formula for
calculating such costs.
Environmental Issues
The Commission has prepared a Final Environmental Impact Statement
(FEIS) evaluating the possible environmental consequences of changes in
the bulk power marketplace expected to occur as a result of the open
access requirements of this Final Rule. The FEIS focuses, as do most
commenters, on possible increases in emissions of nitrogen oxides
(NOX) from certain fossil-fuel fired generators, which could
affect air quality in the producing region and in areas to which these
emissions may be carried.
In response to comments on the Draft EIS, the Commission performed
numerous additional studies. The FEIS finds that the relative future
competitiveness of coal and natural gas generation is the key variable
affecting the impact of the Final Rule. If competitive conditions favor
natural gas, the Rule is likely to lead to environmental benefits. Both
EPA and the Commission staff believe this projected scenario is the
more likely one. If competitive conditions favor coal, the Rule may
lead to small negative environmental impacts. However, even using the
most extreme, unlikely assumptions about the future of the industry,
the negative consequences are not likely to occur until after the turn
of the century. Because the impacts will remain modest at least until
2010, there is no need for an interim mitigation program. In addition,
even if the data showed more significant negative consequences
requiring mitigation, the Commission does not have the statutory
authority under the Federal Power Act or the expertise to address this
possible far-term problem. The Commission believes, however, that there
is time for federal and state air quality authorities to address any
potential adverse impact as part of a comprehensive NOX regulatory
program under the Clean Air Act.4
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\4\ 42 U.S.C. 7401, et seq.
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Despite our conclusions regarding the lack of environmental impacts
expected to result from the Rule, the Commission has examined a wide
variety of proposals for mitigating possible adverse effects. We share
the view of most commenters that the preferred approach for mitigating
increased NOX emissions generally is a NOX cap and trading
regulatory program comparable to that developed by Congress to address
sulfur dioxide emissions in the Clean Air Act Amendments of 1990.5
The Commission has examined various means of establishing such a
program, including use of existing federal authorities under the Clean
Air Act, cooperative efforts by state and federal air quality
regulators, and development of a new emissions regulatory program
administered by the Commission under the Federal Power Act. The
Commission has concluded that a NOX regulatory program could best
be developed and administered under the Clean Air Act, in cooperation
with interested states, and offers to lend Commission support
[[Page 21543]]
to that effort should it become necessary.
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\5\ 42 U.S.C.A. 7651b-e.
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Conclusion
The Commission believes that the Final Rule will remedy undue
discrimination in transmission services in interstate commerce and
provide an orderly and fair transition to competitive bulk power
markets.
II. Public Reporting Burden
The Open Access Final Rule and the Stranded Cost Final Rule specify
filing requirements to be followed by public utilities that own,
control or operate transmission facilities in interstate commerce in
making non-discriminatory open access tariff filings and filings to
recover legitimate, prudent and verifiable stranded costs. The
information collection requirements of the final rules are attributable
to FERC-516 ``Electric Rate Filings.'' The current total annual
reporting burden for FERC-516 is 828,300 hours.
A. Docket No. RM95-8-000 (Open Access Final Rule)
The Open Access Final Rule requires public utilities filing non-
discriminatory open access tariffs to provide certain information to
the Commission. The Commission estimated that the public reporting
burden for the information collection would average 300 hours per
response. This estimate included time for reviewing the requirements of
the Commission's regulations, searching existing data sources,
gathering and maintaining the necessary data, completing and reviewing
the collection of information, and filing the revised information. No
comments on the burden estimate were received. Because the Final Rule
adopts essentially the same information requirements that are contained
in the proposed rule, we believe that the average filing burden is same
for the Final Rule.
In the proposed rule, the Commission noted that there are
approximately 328 public utilities, including marketers and wholesale
generation entities. We initially estimated that 137 public utilities
own, control or operate facilities used for the transmission of
electric energy in interstate commerce, and would be subject to the
filing requirements of the proposed rule. Upon further review, the
Commission believes that approximately 166 public utilities will
respond to the information collection. Accordingly, the public
reporting burden is estimated to be 49,800 hours.
B. Docket No. RM94-7-001 (Stranded Cost Final Rule)
In the supplemental notice of proposed rulemaking, the Commission
estimated that the information requirements of the proposed rule would
not differ substantially from those contained in the initial proposed
rule. In that notice, the Commission estimated that the public
reporting burden for the information requirements contained in the
proposed rule would be 50 hours per response with 10 responses
annually. No comments on this filing burden were received. The
information requirements adopted in the Stranded Cost Final Rule are
not substantially different from those in the proposed rule. Therefore,
the Commission concludes that there will be no additional public filing
burden associated with the Stranded Cost Final Rule.
III. Background
In the NOPR, we set out a detailed statement of the events leading
up to this rulemaking. We repeat that background here, updated to
reflect what has happened since March 1995, and discuss why it is
necessary to undertake regulatory reform in the electric industry at
this time. We do so to provide the necessary backdrop to our action in
adopting this Rule.
A. Structure of the Electric Industry at Enactment of Federal Power Act
The Federal Power Act was enacted in an age of mostly self-
sufficient, vertically integrated electric utilities, in which
generation, transmission, and distribution facilities were owned by a
single entity and sold as part of a bundled service (delivered electric
energy) to wholesale and retail customers. Most electric utilities
built their own power plants and transmission systems, entered into
interconnection and coordination arrangements with neighboring
utilities, and entered into long-term contracts to make wholesale
requirements sales (bundled sales of generation and transmission) to
municipal, cooperative, and other investor-owned utilities (IOUs)
connected to each utility's transmission system. Each system covered
limited service areas. This structure of separate systems arose
naturally due primarily to the cost and technological limitations on
the distance over which electricity could be transmitted.
Through much of the 1960s, utilities were able to avoid price
increases, but still achieve increased profits, because of substantial
increases in scale economies, technological improvements, and only
moderate increases in input prices.6 Thus, there was no pressure
on regulatory commissions to use regulation to affect the structure of
the industry.7
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\6\ Paul L. Joskow, Inflation and Environmental Concern:
Structural Change in the Process of Public Utility Regulation, 17 J.
Law & Econ. 291, 312 (1974); see also Charles F. Phillips, Jr., The
Regulation of Public Utilities 11 (1988).
\7\ See Joskow, supra at 312; see also Phillips, supra at 12.
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B. Significant Changes in the Electric Industry
In the late 1960s and throughout the 1970s, a number of significant
events occurred in the electric industry that changed the perceptions
of utilities and began a shift to a more competitive marketplace for
wholesale power.8 This was the beginning of periods of rapid
inflation, higher nominal interest rates, and higher electricity
rates.9 During this time, consumers became concerned about higher
electricity rates and questioned any price increases filed by
utilities.10
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\8\ See Joskow, supra at 312; see also Phillips, supra at 12-13.
\9\ See Joskow, supra at 312-13; see also Phillips, supra at 13.
The Arab oil embargo resulted in significantly higher oil prices
through the 1970s. See Richard J. Pierce, Jr., The Regulatory
Treatment of Mistakes in Retrospect: Canceled Plants and Excess
Capacity, 132 U. Pa. L. Rev. 497, 501 (1984).
\10\ See Joskow, supra at 313; see also Phillips, supra at 13.
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During this same time frame, the construction of nuclear and other
capital-intensive baseload facilities--actively encouraged by federal
and some state governments--contributed to the continuing cost
increases and uncertainties in the industry.11 These investments
were made based on the assumptions that there would be steady increases
in the demand for electricity and continued large increases in the
price of oil.12 However, due to conservation and economic
downturns, the expected demand increases did not materialize. Load
growth virtually disappeared in some areas, and many utilities
unexpectedly found themselves with excess capacity.13 In addition,
by the 1980s, the oil cartel collapsed, with a resulting glut of low-
priced oil.14 At the same time, inflation substantially increased
the costs of these large
[[Page 21544]]
baseload generating plants.15 Surging interest rates further
increased the cost of the capital needed to finance and capitalize
these projects and completion schedules were significantly extended by,
in part, more stringent safety and environmental requirements.16
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\11\ See generally Jersey Central Power & Light Company v. FERC,
810 F.2d 1168, 1171 (D.C. Cir. 1987).
\12\ Id.
\13\ See Pierce, supra at 503. By 1983, the Department of Energy
had estimated that the sunk costs for canceled nuclear plants alone
amounted to $10 billion. Id. at 498.
\14\ Id.
\15\ See Bernard S. Black & Richard J. Pierce, Jr., The Choice
Between Markets and Central Planning in Regulating the U.S.
Electricity Industry, 93 Col. L. Rev. 1339, 1346 (1993) (``Actual
costs of nuclear power plants vastly exceeded estimates, sometimes
by as much as 1000%.'').
\16\ See Phillips, supra at 13. Fossil fuel-fired plants became
subject to increased regulation as a result of the Clean Air Act of
1970, and its 1977 amendments. 42 U.S.C. 7401-7642. In 1971, nuclear
plant licensing became subject to the environmental impact statement
requirements of the National Environmental Policy Act of 1969. 42
U.S.C. 4332. Following the 1979 accident at the Three Mile Island
nuclear plant, nuclear plants also became subject to additional
safety regulations, resulting in higher costs. See Energy
Information Administration, The Changing Structure of the Electric
Power Industry 1970-1991 (March 1993) 35. Between 1976 and 1980,
most states and many localities instituted laws governing power
plant siting.
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As a result, expensive large baseload plants for which there was
little or no demand, came onto the market or were in the process of
being constructed. Accordingly, between 1970 and 1985, average
residential electricity prices more than tripled in nominal terms, and
increased by 25% after adjusting for general inflation.17
Moreover, average electricity prices for industrial customers more than
quadrupled in nominal terms over the same period and increased 86%
after adjusting for inflation.18 The rapidly increasing rates for
electric power during this period, together with the opportunities
provided by the Public Utility Regulatory Policies Act of 1978 (PURPA)
(discussed infra), also prompted some industrial customers to bypass
utilities by constructing their own generation facilities. This further
exacerbated rate increases for remaining customers--primarily
residential and commercial customers.
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\17\ Based on retail prices reported in Energy Information
Administration (EIA), Monthly Energy Review, January 1995, Table 9.9
(Prices adjusted for inflation using the GDP Deflator (1987 = 100)).
\18\ Id.
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Consumers responded to these ``rate shocks'' by exerting pressure
on regulatory bodies to investigate the prudence of management
decisions to build generating plants, especially when construction
resulted in cost overruns, excess capacity, or both. Between 1985 and
1992, writeoffs of nuclear power plants totalled $22.4 billion.19
These writeoffs significantly reduced the earnings of the affected
utilities.20 Delays in obtaining rate increases to reflect the
effects of inflation further reduced investor returns. Thus, many
utilities became reluctant to commit capital to long-term construction
decisions involving large scale generating plants.21
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\19\ See Black & Pierce, supra at 1346 (These writeoffs were
``about 17% of the book value of total 1992 utility investment.'').
\20\ Id.
\21\ Id. (``The high perceived risk of future disallowances
reversed utilities' incentives to overinvest, and made utilities
extremely reluctant to build new power plants.'').
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In addition to economic changes in the industry, significant
technological changes in both generation and transmission have occurred
since 1935. Through the 1960s, bigger was cheaper in the generation
sector and the industry was able to capitalize on economies of scale to
produce power at lower per-unit costs from larger and larger
plants.22 As a result, large utility companies that could finance
and manage construction projects of larger scale had a price advantage
over smaller utility companies and customers who might otherwise have
considered building their own generating units. Scale economies
encouraged power generation by large vertically-integrated utility
companies that also transmitted and distributed power. Beginning in the
1970s, however, additional economies of scale in generation were no
longer being achieved.23 A significant factor was that larger
generation units were found to need relatively greater maintenance and
experience longer downtimes.24 The electric industry faced the
situation ``where the price of each incremental unit of electric power
exceeded the average cost.'' 25 Bigger was no longer better.
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\22\ See Preston Michie, Billing Credits for Conservation,
Renewable, and Other Electric Power Resources: an Alternative to
Marginal-Cost-Based Power Rates in the Pacific Northwest, 13
Environmental Law 963, 964-65 (1983).
\23\ Id. at 965.
\24\ Energy Information Administration, The Changing Structure
of the Electric Power Industry 1970-1991 (March 1993) 37 (``As
larger units were constructed, however, utilities discovered that
downtime was as much as 5 times greater for units larger than 600
megawatts than for units in the 100-megawatt range.'')
\25\ Id.; see also George A. Perrault, Downsizing Generation:
Utility Plans for the 1990s, Pub. Util. Fort. 15-16 (Sept. 27, 1990)
(``The large base-load generating units that form the backbone of
utility systems are almost totally absent from capacity plans for
the 1990s.'').
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Further dictating against larger generation units were advances in
technologies that allowed scale economies to be exploited by smaller
size units, thereby allowing smaller new plants to be brought on line
at costs below those of the large plants of the 1970s and earlier. Such
new technologies include combined cycle units and conventional steam
units that use circulating fluidized bed boilers.26
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\26\ ``From 1982 through 1991, the average capacity of
fluidized-bed units increased rapidly to 72 megawatts for 4 units in
1991. The average capacity for the 19 units planned to begin
operating in 1992 through 1995 increases to 83 megawatts.'' Energy
Information Administration, The Changing Structure of the Electric
Power Industry 1970-1991 (March 1993) 38.
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The combined cycle generating plants generally use natural gas as
their primary fuel. This technology has been made possible by the
development of more efficient gas turbines, shorter construction lead
times, lower capital costs, increased reliability, and relatively
minimal environmental impacts.27 Similarly, the circulating
fluidized bed combustion boilers, fueled by coal and other conventional
fuels, provide a more efficient and less polluting resource.
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\27\ See Charles E. Bayless, Less is More: Why Gas Turbines Will
Transform Electric Utilities, Pub. Util. Fort. (Dec. 1, 1994) 21.
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Today, ``the optimum size (of generation plants) has shifted from
(more than 500 MW) (10-year lead time) to smaller units (one-year lead
time) (in the 50- to 150-MW range).'' 28 Indeed, smaller and more
efficient gas-fired combined-cycle generation facilities can produce
power on the grid at a cost ranging from 5 cents per kWh to less than 3
cents per kWh.29 This is significantly less than the costs for
large plants constructed and installed by utilities over the last
decade, which were typically in the range of 4 to 7 cents per kWh for
coal plants and 9 to 15 cents for nuclear plants.30 Significant
changes have also occurred in the transmission sector of the industry.
Technological advances in transmission have made possible the economic
transmission of electric power over long distances at higher
voltages.31 This has
[[Page 21545]]
made it technically feasible for utilities with lower cost generation
sources to reach previously isolated systems where customers had been
captive to higher cost generation. In addition, the nature and
magnitude of coordination transactions 32 have changed
dramatically since enactment of the FPA, allowing increased coordinated
operations and reduced reserve margins. Substantial amounts of
electricity now move between regions, as well as between utilities in
the same region. Physically isolated systems have become a thing of the
past.
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\28\ Id. at 24. See also Wallace E. Brand, Is Bigger Better?
Market Power in Bulk Power Supply: From FDR to NOPR, Pub. Util.
Fort. (Feb. 15, 1996) 23 at 25 (while the optimal baseload unit size
is about 500 MW for coal-fired steam turbines, the optimal size for
gas fired combined-cycle units is about 150 to 200 MW).
\29\ FERC staff calculations based in part on combined-cycle
plant cost data reported in 1994 FERC Form No. 1 for a sample of
units placed in service during 1990-94. Costs vary with regional
fuel and construction costs, among other reasons.
\30\ Coal and Nuclear plant cost data reported in 1994 FERC Form
No. 1 and the EIA report, Electric Plant Cost and Power Production
Expenses 1991, 1993 DOE/EIA-0455(91), for plants placed in service
during 1986-94; see also The 1994 Electric Executives' Forum, Bakke
(President and CEO of the AES Corporation), Pub. Util. Fort. (June
1, 1994) 45 (``New generation can be built at about 3 cents per
kilowatt-hour (U.S. average). Old generation costs about twice that
* * *'').
\31\ See Black & Pierce, supra at 1345 (In the late 1960s and
1970s, improved transmission efficiency and development of regional
transmission networks ``made it possible to build power plants up to
1000 miles from power users.'').
\32\ Coordination transactions are voluntary sales or exchanges
of specialized electricity services that allow buyers to realize
cost savings or reliability gains that are not attainable if they
rely solely on their own resources. For sellers, these transactions
provide opportunities to earn additional revenue, and to lower
customer rates, from capacity that is temporarily excess to native
load capacity requirements.
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C. The Public Utility Regulatory Policies Act and the Growth of
Competition
In enacting PURPA,33 Congress recognized that the rising costs
and decreasing efficiencies of utility-owned generating facilities were
increasing rates and harming the economy as a whole.34 To lessen
dependence on expensive foreign oil, avoid repetition of the 1977
natural gas shortage, and control consumer costs, Congress sought to
encourage electric utilities to conserve oil and natural gas.35 In
particular, Congress sanctioned the development of alternative
generation sources designated as ``qualifying facilities'' (QFs) as a
means of reducing the demand for traditional fossil fuels.36 PURPA
required utilities to purchase power from QFs at a price not to exceed
the utility's avoided costs and to sell backup power to QFs.37
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\33\ Pub. L. No. 95-617, 92 Stat. 3117 (codified in U.S.C.
sections 15, 16, 26, 30, 42, and 43).
\34\ See generally FERC v. Mississippi, 456 U.S. 742, 745-46
(1982).
\35\ The Power Plant and Industrial Fuel Use Act of 1978. Pub.
L. No. 95-617, 92 Stat. 3117 (codified in U.S.C. sections 15, 16,
26, 30, 42, and 43).
\36\ QFs include certain cogenerators and small power producers.
PURPA also added sections 210, 211, and 212 to the FPA, providing
the Commission with authority to approve applications for
interconnections and, in limited circumstances, wheeling. However,
under section 211, as enacted in PURPA, the Commission could approve
an application for wheeling only if it found, inter alia, that the
order ``would reasonably preserve existing competitive
relationships.'' Because of this and other limitations in sections
211 and 212 as originally enacted, the provision was virtually
ineffective. Only one section 211 order was ever issued pursuant to
the original provision, and it was pursuant to a settlement. See
Public Service Company of Oklahoma, 38 FERC para. 61,050 (1987). As
discussed infra, section 211 was subsequently revised by the Energy
Policy Act of 1992.
\37\ 456 U.S. at 750. Congress recognized that encouragement was
needed in part because utilities had been reluctant to purchase
electric power from, and sell power to, nonutility generators. Id.
at 750-51.
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PURPA specifically set forth limitations on who, and what, could
qualify as QFs. In addition to technological and size criteria, PURPA
set limits on who could own QFs.38 Notwithstanding these
limitations, QFs proliferated. In 1989, there were 576 QF facilities.
By 1993, there were more than 1,200 such facilities.39 For the
same time period, installed QF capacity increased from 27,429 megawatts
to 47,774 megawatts.40 The rapid expansion and performance of the
QF industry demonstrated that traditional, vertically integrated public
utilities need not be the only sources of reliable power.
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\38\ For example, PURPA provided that a cogeneration facility or
small power production facility could not be owned by a person
primarily engaged in the generation or sale of electric power (other
than from cogeneration or small power production facilities). See 16
U.S.C.
\39\ Energy Information Administration, Electric Power Annual
1993 (December 1994) 124 (Table 77).
\40\ Id. EIA data for 1989 through 1991 was for facilities of 5
megawatts or more and for 1992 and 1993 was for facilities of 1
megawatt or more. A comparison with Table 74 on page 121 for the
years 1992 and 1993 reveals that this mixing of data bases is likely
of minimal effect.
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During this period, the profile of generation investment began to
change, and a market for non-traditional power supply beyond the
purchases required by PURPA began to emerge. QFs were limited to
cogenerators and small power producers.41
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\41\ Generally, the law has imposed an 80 MW cap on small power
producers. A limited exception enacted in 1990 permitted small power
facilities that could exceed 80 MW and still qualify as QFs under
PURPA. This exception was limited to certain solar, wind, waste, and
geothermal small power production facilities and only covered
applications for certification of facilities as qualifying small
power production facilities that were submitted no later than
December 31, 1994 and for which construction commences no later than
December 31, 1999. See Solar, Wind, Waste, and Geothermal Power
Production Incentives Act of 1990, Pub. L. No. 101-575, 104 Stat.
2834 (1990), amended, Pub. L. No. 102-46, 105 Stat. 249 (1991).
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However, other non-traditional power producers who could not meet
the QF criteria began to build new capacity to compete in bulk power
markets, without such PURPA benefits as the mandatory purchase
requirements. These producers, known as independent power producers
(IPPs), were predominantly single-asset generation companies that did
not own any transmission or distribution facilities. While traditional
utilities were generally reluctant at that time to invest in new
generating facilities under cost of service regulation, utilities
increasingly became interested in participating in this new generation
sector. They organized affiliated power producers (APPs), with assets
not included in utility rate base, and sought to sell power in their
own service territories and the territories of other utilities. At the
same time, power marketers arose. These entities--owning no
transmission or generation--buy and sell power.42
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\42\ The first power marketer in the electric industry was
Citizens Energy Corporation. See Citizens Energy Corporation, 35
FERC para. 61,198 (1986). Power marketers take title to electric
energy. Power brokers, on the other hand, do not take title and are
limited to a matchmaking role.
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There were two major impediments to the development of IPPs and
APPs. First, the ownership restrictions of the Public Utility Holding
Company Act (PUHCA) 43 severely inhibited these new entities from
entering the generation business.44 Second, these entities needed
transmission service in order to compete in electricity markets.
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\43\ 15 U.S.C. 79 et seq.
\44\ As discussed infra, Congress eventually provided a means to
avoid the PUHCA restrictions by creating exempt wholesale generators
(EWGs) in the Energy Policy Act.
---------------------------------------------------------------------------
While the Commission had no authority to remove PUHCA
restrictions,45 it encouraged the development of IPPs and APPs, as
well as emerging power marketers, by authorizing market-based rates for
their power sales on a case-by-case basis and by encouraging more
widely available transmission access. From 1989 through 1993,
facilities owned by IPPs and other non-traditional generators (other
than QFs) increased from 249 to 634 and their installed capacity
increased from 9,216 megawatts to 13,004 megawatts.46 Indeed,
``[i]n 1992, for the first time, generating capacity added by
independent producers exceeded capacity added by utilities.'' 47
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\45\ The industry was successful to some extent in developing
ownership structures that permitted such investment. See, e.g.,
Commonwealth Atlantic Limited Partnership, 51 FERC para. 61,368 at
62,240 and n.20 (1990).
\46\ Energy Information Administration, Electric Power Annual
1993 (December 1994) 124 (Table 77).
\47\ Black & Pierce, supra at 1349 n.25.
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Market-based rates helped to develop competitive bulk power
markets. A generating utility allowed to sell its power at market-based
rates could move more quickly to take advantage of short-term or even
long-term market opportunities than those laboring under traditional
cost-of-service tariffs, which entail procedural delays in achieving
tariff approvals and changes.
In approving these market-based rates, the Commission required,
inter alia, that the seller and any of its affiliates lack market power
or mitigate any market
[[Page 21546]]
power that they may have possessed.48 The major concern of the
Commission was whether the seller or its affiliates could limit
competition and thereby drive up prices. A key inquiry became whether
the seller or its affiliates owned or controlled transmission
facilities in the relevant service area and therefore, by denying
access or imposing discriminatory terms or conditions on transmission
service, could foreclose other generators from competing.49 As we
have previously explained:
\48\ See, e.g., Ocean State Power, 44 FERC para. 61,261 (1988);
Commonwealth Atlantic Limited Partnership, 51 FERC para. 61,368
(1990); Citizens Power & Light Company, 48 FERC para. 61,210 (1989);
Orange and Rockland Utilities, Inc., 42 FERC para. 61,012 (1988);
Doswell Limited Partnership, 50 FERC para. 61,251 (1990) (Doswel);
and Dartmouth Power Associates Limited Partnership, 53 FERC para.
61,117 (1990).
\49\ See, e.g., Doswell, 50 FERC at 61,757.
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The most likely route to market power in today's electric
utility industry lies through ownership or control of transmission
facilities. Usually, the source of market power is dominant or
exclusive ownership of the facilities. However, market power also
may be gained without ownership. Contracts can confer the same
rights of control. Entities with contractual control over
transmission facilities can withhold supply and extract monopoly
prices just as effectively as those who control facilities through
ownership.50
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\50\ Citizens Power & Light Corporation, 48 FERC para. 61,210 at
61,777 (1989) (emphasis in original); see also Utah Power & Light
Company, PacifiCorp and PC/UP&L Merging Corporation, 45 FERC para.
61,095 at 61,287-89 (1988), order on reh'g, 47 FERC para. 61,209,
order on reh'g, 48 FERC para. 61,035 (1989), remanded in part sub
nom. Environmental Action, Inc. v. FERC, 939 F.2d 1057 (D.C. Cir.
1991), order on remand, 57 FERC para. 61,363 (1991).
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As entry into wholesale power generation markets increased, the
ability of customers to gain access to the transmission services
necessary to reach competing suppliers became increasingly
important.51 In addition, beginning in the late 1980s, in order to
mitigate their market power to meet Commission conditions, public
utilities seeking Commission approval of mergers or consolidations
under section 203 of the FPA or Commission authorization for blanket
approval of market-based rates for generation services under section
205 of the FPA, filed ``open access'' transmission tariffs of general
applicability.52 The Commission applied its market rate analysis
to IOUs, as well as IPPs, APPs, and marketers, and allowed IOUs to sell
at market-based rates only if they opened their transmission systems to
competitors.53 The Commission also approved proposed mergers on
the condition that the merging companies remedy anticompetitive effects
potentially caused by the merger by filing ``open access'' tariffs.
These early ``open access'' tariffs required only that the companies
provide point-to-point transmission services, which is a much narrower
requirement than that being imposed in this Rule and did not require
transmission owners to provide to others the same quality of service
that they themselves enjoyed.
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\51\ In earlier years, a few customers were able to obtain
access as a result of litigation, beginning with the Supreme Court's
decision in Otter Tail Power Company v. United States, 410 U.S. 366
(1973). Additionally, some customers gained access by virtue of
Nuclear Regulatory Commission license conditions and voluntary
preference power transmission arrangements associated with federal
power marketing agencies. See, e.g., Consumers Power Company, 6 NRC
887, 1036-44 (1977) and The Toledo Edison Company and Cleveland
Electric Illuminating Company, 10 NRC 265, 327-34 (1979). See
Florida Municipal Power Agency v. Florida Power and Light Company,
839 F. Supp. 1563 (M.D. Fla. 1993). See also Electricity
Transmission: Realities, Theory and Policy Alternatives, The
Transmission Task Force Report to the Commission, October 1989, 197.
\52\ See, e.g., Public Service Company of Colorado, 59 FERC
para. 61,311 (1992), reh'g denied, 62 FERC para. 61,013 (1993); Utah
Power & Light Company, et al., Opinion No. 318, 45 FERC para. 61,095
(1988), order on reh'g, Opinion No. 318-A, 47 FERC para. 61,209
(1989), order on reh'g, Opinion No. 318-B, 48 FERC para. 61,035
(1989), aff'd in relevant part sub nom. Environmental Action Inc. v.
FERC, 939 F.2d 1057 (D.C. Cir. 1991); Northeast Utilities Service
Company (Public Service Company of New Hampshire), Opinion No. 364-
A, 58 FERC para. 61,070, reh'g denied, Opinion No. 364-B, 59 FERC
para. 61,042, order granting motion to vacate and dismissing request
for rehearing, 59 FERC para. 61,089 (1992), affirmed in relevant
part sub nom. Northeast Utilities Service Company v. FERC, 993 F.2d
937 (1st Cir. 1993).
\53\ See, e.g., Public Service of Indiana, Inc., 51 FERC para.
61,367 (1990), reh'g denied, 52 FERC para. 61,260 (1990), appeal
dismissed sub nom. Northern Indiana Public Service Company v. FERC,
954 F.2d 736 (D.C.Cir. 1992).
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Following PURPA, the economic and technological changes in the
transmission and generation sectors helped give impetus to the many new
entrants in the generating markets who could sell electric energy
profitably with smaller scale technology at a lower price than many
utilities selling from their existing generation facilities at rates
reflecting cost. However, it became increasingly clear that the
potential consumer benefits that could be derived from these
technological advances could be realized only if more efficient
generating plants could obtain access to the regional transmission
grids. Because many traditional vertically integrated utilities still
did not provide open access to third parties and still favored their
own generation if and when they provided transmission access to third
parties, barriers continued to exist to cheaper, more efficient
generation sources.
D. The Energy Policy Act
In response to the competitive developments following PURPA, and
the fact that PUHCA and lack of transmission access remained major
barriers to new generators, Congress enacted Title VII of the Energy
Policy Act of 1992 (Energy Policy Act).54 A goal of the Energy
Policy Act was to promote greater competition in bulk power markets by
encouraging new generation entrants, known as exempt wholesale
generators (EWGs), and by expanding the Commission's authority under
sections 211 and 212 of the FPA to approve applications for
transmission services.55
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\54\ Pub. L. No. 102-486, 106 Stat. 2776 (1992), codified at,
among other places, 15 U.S.C. 79z-5a and 16 U.S.C. 796 (22-25),
824j-l.
\55\ See El Paso Electric Company and Central and South West
Services Inc., 68 FERC para. 61,181 at 61,914 (1994) (CSW); see also
Paul Kemezis, FERC's Competitive Muscle: The Comparability Standard,
Electrical World 45 (Jan. 1995) (``In EPAct, Congress made it clear
that the electric-power industry was to move toward a fully
competitive market system, but left most of the implementation to
FERC.'').
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An EWG is defined as
Any person determined by the Federal Energy Regulatory
Commission to be engaged directly, or indirectly through one or more
affiliates as defined in [PUHCA] section 2(a)(11)(B), and
exclusively in the business of owning or operating, or both owning
and operating, all or part of one or more eligible facilities and
selling electric energy at wholesale.56
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\56\ 15 U.S.C. 79z-5a.
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If the Commission, upon an application, determines that a person is
an EWG, that person will be exempt from PUHCA.57 This provision
removed a significant impediment to the development of IPPs and APPs by
allowing them to develop projects as EWGs free from the strictures of
PUHCA or the QF PURPA limitations.
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\57\ 15 U.S.C. 79z-5a(e).
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While sections 211 and 212, as enacted by PURPA, were intended to
provide greater access to the transmission grid, the limitations placed
on these sections made them unusable in virtually all
circumstances.58 However, as amended by the Energy Policy Act,
these sections now give the Commission broader authority to order
transmitting utilities to provide wholesale transmission services, upon
application, to any electric utility, Federal power marketing agency,
or any other person generating electric energy for sale for resale.
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\58\ See supra note 36.
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The Energy Policy Act also added section 213 to the FPA. Section
213(a) requires a transmitting utility that does not agree to provide
wholesale transmission service in accordance with a good faith request
to provide a written explanation of its proposed rates, terms, and
conditions and its analysis of any
[[Page 21547]]
physical or other constraints.59 Section 213(b) required the
Commission to enact a rule requiring transmitting utilities to submit
annual information concerning potentially available transmission
capacity and known constraints.60
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\59\ See Policy Statement Regarding Good Faith Requests for
Transmission Services and Responses by Transmitting Utilities Under
Sections 211(a) and 213(a) of the Federal Power Act, as Amended and
Added by the Energy Policy Act of 1992, 58 FR 38964 (July 21, 1993),
FERC Stats. & Regs., Regulations Preambles para. 30,975 (1993)
(Policy Statement Regarding Good Faith Requests for Transmission
Services).
\60\ See New Reporting Requirements Implementing Section 213(b)
of the Federal Power Act and Supporting Expanded Regulatory
Responsibilities Under the Energy Policy Act of 1992, and Conforming
and Other Changes to Form No. FERC-714, 58 FR 52420 (October 8,
1993), FERC Stats. & Regs., Regulations Preambles para. 30,980
(Order No. 558), reh'g denied, Order No. 558-A, 65 FERC para. 61,324
(1993), regulations modified, 59 FR 15333 (April 1, 1994), FERC
Stats. & Regs., Regulations Preambles para. 30,993.
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E. The Present Competitive Environment
Following the Energy Policy Act, the Commission established rules:
(1) For certain generators to obtain EWG status and thus an exemption
from PUHCA; 61 and (2) that required transmission information
availability. The Commission also pursued a number of initiatives aimed
at fostering the development of more competitive bulk power markets,
including aggressive implementation of section 211, a new look at undue
discrimination under the FPA, easing of market entry for sellers of
generation from new facilities, and initiation of a number of industry-
wide reforms. As stated by the Commission, in recognition of the
Congressional goal in the Energy Policy Act of creating competitive
bulk power markets:
\61\ See Order No. 550, Filing Requirements and Ministerial
Procedures for Persons Seeking Exempt Wholesale Generator Status, 58
FR 8897 (February 18, 1993), FERC Stats. & Regs., Regulations
Preambles para. 30,964, order on reh'g, Order No. 550-A, 58 FR 21250
(April 20, 1993), FERC Stats. & Regs., Regulations Preambles para.
30,969 (1993). As recognized by Congress and the Commission,
availability of transmission information is critical in developing
competitive markets. See supra notes 59 and 60. This opened the
``black box'' of information that previously was available only to
transmission owners.
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Our goal is to facilitate the development of competitively priced
generation supply options, and to ensure that wholesale purchasers of
electric energy can reach alternative power suppliers and vice versa.
62
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\62\ See Recovery of Stranded Costs by Public Utilities and
Transmitting Utilities, Notice of Proposed Rulemaking, 59 FR 35274
(July 11, 1994), FERC Stats. & Regs., Proposed Regulations para.
32,507 at 32,866 (Stranded Cost NOPR); American Electric Power
Service Corporation, 67 FERC para. 61,168, clarified, 67 FERC para.
61,317 (1994).
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1. Use of Sections 211 and 212 to Obtain Transmission Access
The Commission has aggressively implemented sections 211 and 212 of
the FPA, as amended by the Energy Policy Act, in order to promote
competitive markets.63 When wheeling requests under sections 211
and 212 have been made, the Commission has required wheeling in almost
all of the requests it has processed. To date, the Commission has
issued orders (proposed or final) requiring wheeling in 12 of the 14
cases it has acted on.64
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\63\ 16 U.S.C.A. 824j-824k (West 1985 and Supp. 1994).
\64\ See, e.g., final orders issued in City of Bedford, 68 FERC
para. 61,003 (1994), reh'g denied, 73 FERC para. 61,322 (1995);
Florida Municipal Power Agency v. Florida Power & Light Company, 67
FERC para. 61,167 (1994), order on reh'g, 74 FERC para. 61,006
(1996); Minnesota Municipal Power Agency, 68 FERC para. 61,060
(1994); and Tex-La Electric Cooperative of Texas, 69 FERC para.
61,269 (1994); see also Appendix A.
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As a general matter, section 211 has permitted some inroads to be
made by customers in obtaining transmission service from public
utilities that historically have declined to provide access to their
systems, or have offered service only on a discriminatory basis. Under
section 211, the Commission has granted requests for the broader type
of service that most utilities historically have refused to provide--
network service. Although transmission owners have provided limited
amounts of unbundled point-to-point transmission service, third-party
customers have not been able to obtain the flexibility of service that
transmission owners enjoy.
In Florida Municipal, a section 211 case, the Commission ordered
``network,'' rather than the narrower ``point-to-point,''
service.65 Network service permits the applicant to fully
integrate load and resources on an instantaneous basis in a manner
similar to the transmission owner's integration of its own load and
resources. At the same time, the Commission made the generic finding
that the availability of transmission service will enhance competition
in the market for power supplies and lead to lower costs for consumers.
The Commission explained that as long as the transmitting utility is
fully and fairly compensated and there is no unreasonable impairment of
reliability, transmission service is in the public interest.66
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\65\ See Florida Municipal Power Agency v. Florida Power & Light
Company, 65 FERC para. 61,125, reh'g dismissed, 65 FERC para. 61,372
(1993), final order, 67 FERC para. 61,167 (1994), order on reh'g, 74
FERC para. 61,006 (1996). The Commission has ``characterized point-
to-point service as involving designated points of entry into and
exit from the transmitting utility's system, with a designated
amount of transfer capability at each point.'' El Paso Electric
Company v. Southwestern Public Service Company, 68 FERC para. 61,182
at 61,926 n.9 (1994) (citing Entergy Services, Inc., 58 FERC para.
61,234 at 61,768 (1993), reh'g dismissed, 68 FERC para. 61,399
(1994)). Network service allows more flexibility by allowing a
transmission customer to use the entire transmission network to
provide generation service for specified resources and specified
loads without having to pay multiple charges for each resource-load
pairing.
\66\ Florida Municipal, 67 FERC at 61,477.
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As discussed infra, based on the mounting competitive pressures in
the industry and rapidly evolving markets, we have concluded that
section 211 alone is not enough to eliminate undue discrimination. The
comments received on the proposed rules, discussed in detail infra,
confirm this conclusion. The significant time delays involved in filing
an individual service request for bilateral service under section 211
place the customer at a severe disadvantage compared to the
transmission owner and can result in discriminatory treatment in the
use of the transmission system. It is an inadequate procedural
substitute for readily available service under a filed non-
discriminatory open access tariff. As the Commission noted in Hermiston
Generating Company, ``[t]he ability to spend time and resources
litigating the rates, terms and conditions of transmission access is
not equivalent to an enforceable voluntary offer to provide comparable
service under known rates, terms and conditions.'' 67
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\67\ 69 FERC para. 61,035 at 61,165 (1994), reh'g denied, 72
FERC para. 61,071 (1995); see also Southwest Regional Transmission
Association, 69 FERC para. 61,100 at 61,398 (1994), order on
compliance filing, 73 FERC para. 61,147 (1995) (SWRTA).
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2. Commission's Comparability Standard
In the Spring of 1994, the Commission began to address the problem
of the disparity in transmission service that utilities provided to
third parties in comparison to their own uses of the transmission
system. In the seminal case in this area, American Electric Power
Service Corporation (AEP), the company voluntarily proposed a tariff of
general applicability that would offer firm, point-to-point
transmission service for a minimum of one month.68 The Commission
accepted the proposed transmission tariff for filing and suspended its
effectiveness for one day, subject to refund.69 Rehearing requests
challenged the Commission's summary approval of the restriction of
service to point-to-point as being discriminatory and
anticompetitive.70 The rehearing
[[Page 21548]]
requests argued that the tariff should be expanded to include network
services such as those used by the transmission owner. On rehearing,
the Commission announced a new standard for evaluating claims of undue
discrimination.
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\68\ 64 FERC para. 61,279 (1993), reh'g granted, 67 FERC para.
61,168, clarified, 67 FERC para. 61,317 (1994).
\69\ The Commission explained that AEP could limit the service
it was offering because it was ``providing the service voluntarily
under a tariff of general applicability.'' 64 FERC at 62,978.
\70\ AEP, 67 FERC at 61,489.
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The Commission found that a voluntarily offered, new open access
transmission tariff that did not provide for services comparable to
those that the transmission owner provided itself was unduly
discriminatory and anticompetitive.71 In reaching that conclusion,
the Commission broadened its undue discrimination analysis (which
traditionally had focused on the rates, terms, and conditions faced by
similarly situated third-party customers) to include a focus on the
rates, terms, and conditions of a utility's own uses of the
transmission system:
\71\ With respect to anticompetitive effects, the Commission
explained that it has ``adhered to the Supreme Court's determination
that the Commission's 'important and broad regulatory power * * *
carries with it the responsibility to consider, in appropriate
circumstances, the anticompetitive effects of regulated aspects of
interstate utility operations pursuant to sections 202 and 203, and
under like directives contained in sections 205, 206 and 207.' Gulf
States Utilities Company v. FPC, 411 U.S. 747, 758-59 (1972).'' Id.
at 61,490 (footnote omitted). The Commission reaffirmed that it
would examine how best to fulfill this responsibility, as well as
its responsibility to prevent undue discrimination, in light of the
changing conditions in the electric utility industry. Id.
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(A)n open access tariff that is not unduly discriminatory or
anticompetitive should offer third parties access on the same or
comparable basis, and under the same or comparable terms and
conditions, as the transmission provider's uses of its
system.72
\72\ Id. at 61,490.
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Refocusing the analysis was necessitated by the changing conditions
in the electric utility industry, including the emergence of non-
traditional suppliers and greater competition in bulk power markets.
Because a transmission provider may use its system in different ways
(e.g., to integrate load and resources when serving retail native load,
to make off-system sales or purchases, or to serve wholesale
requirements customers), the Commission set for hearing the factual
issues associated with identifying those uses, as well as any potential
impediments or consequences to providing comparable services to third
parties.73
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\73\ Id. at 61,490-91.
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After AEP, the Commission applied this comparability standard to a
proposed open access transmission tariff that was filed by Kansas City
Power & Light Company (KCP&L) in support of a proposal to sell
generation at market-based rates.74 The Commission explained that,
in light of AEP, the utility's proposed open access transmission tariff
(which provided only for point-to-point service) did not adequately
mitigate its transmission market power so as to justify allowing the
requested market-based rates. KCP&L could charge market-based rates for
sales only if it modified its proposed transmission tariff to reflect
the AEP comparability standard.
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\74\ See Kansas City Power & Light Company, 67 FERC para. 61,183
(1994), reh'g pending.
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Since then, the Commission has required comparable service in a
variety of contexts, and has set for hearing the factual issues
associated with comparable service. For example, the Commission found
that market power can be adequately mitigated only if a merged company
offers transmission services in accordance with the AEP comparability
standard.75 The Commission further held that, even if a merger
does not result in an increase in market power, the merger would not be
consistent with the public interest under section 203 of the FPA unless
the merged company offers comparable transmission services, as defined
in AEP.76 The Commission therefore announced a transmission
comparability requirement for all new mergers:
\75\ E.g., CSW, supra, 68 FERC at 61,914.
\76\ Id.
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Given the transition of the electric utility industry as a
whole, we conclude that, absent other compelling public interest
considerations, coordination in the public interest can best be
secured only if merging utilities offer comparable transmission
services.77
\77\ Id. at 61,915 (footnote omitted).
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In Heartland Energy Services, Inc.,78 the Commission applied
its comparability standard to an affiliated electric power marketer
seeking blanket authorization to sell electricity at market-based
rates. The Commission explained that
\78\ 68 FERC para. 61,223 (1994).
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For all future cases involving blanket approval of market-based
rates an offer of comparable transmission services will be required
before the Commission will be able to find that transmission market
power has been adequately mitigated. In the context of an affiliated
power marketer, this means that all of its affiliated utilities must
have a comparable transmission tariff on file.79
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\79\ Id. at 62,060. In InterCoast Power Marketing Company, 68
FERC para. 61,248, clarified, 68 FERC para. 61,324 (1994), the
Commission rejected an affiliated marketer's proposal to sell at
market rates without its affiliate utility offering comparable
transmission services. The Commission stated that the only way to
ensure that InterCoast does not have transmission market power is to
require its affiliated public utility to offer comparable
transmission services. See also LG&E Power Marketing Inc., 68 FERC
para. 61,247 at 62,120-21 (1994). The Commission added that this is
consistent with encouraging competitive bulk power markets as
envisioned by the Energy Policy Act of 1992. Id. at 62,132.
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The Commission also denied a request by a company affiliated with a
transmission-owning utility seeking permission to sell power at market-
based rates to a particular customer. The denial was without prejudice
to refiling such a request in a new section 205 proceeding, but only
after the affiliated transmission-owning utility filed a comparable
transmission service tariff.80 The Commission added that it
\80\ See Hermiston Generating Company, 69 FERC para. 61,035 at
61,164 (1994), reh'g pending. The Commission subsequently accepted
the rates on a cost basis. See Letter Order dated November 10, 1994.
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Will require comparability in any situation in which a seller
seeking market-based rates is affiliated with an owner or controller
of transmission facilities.81
\81\ Id. at 61,165.
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The Commission has also stated that ``it will henceforth apply the
transmission comparability standard announced in the AEP case to all
transmitting utility members of an RTG.'' 82
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\82\ See SWRTA, 69 FERC at 61,397; see also PacifiCorp, the
California Municipal Utilities Association, and the Independent
Energy Producers (on behalf of Western Regional Transmission
Association), 69 FERC para. 61,099, order on reh'g, 69 FERC para.
61,352 (1994), order on compliance filing, 71 FERC para. 61,158
(1995) (WRTA). An RTG is a regional transmission group. It is
defined as ``a voluntary organization of transmission owners,
transmission users, and other entities interested in coordinating
transmission planning (and expansion), operation and use on a
regional (and inter-regional.'' Policy Statement Regarding Regional
Transmission Groups, 58 FR 41626 (August 5, 1993), FERC Stats. &
Regs., Regulations Preambles para. 30,976 at 30,870 n. 4 (RTG Policy
Statement).
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The Commission further declared that comparable services must be
provided through ``open access'' tariffs rather than only on a
contract-by-contract basis:
(T)ariffs are essential to the provision of comparable services.
Tariffs set out the services that are available and the terms and
conditions under which those services will be made available * * *.
(In contrast), a negotiation process creates uncertainty and imposes
on customers delay and other transaction costs that the transmitting
utility members of an RTG do not incur when using the transmission
for their own benefit. Moreover, the ability to execute separate
transmission agreements with different but similarly situated
customers is the ability to unduly discriminate among them. A tariff
ensures against such discrimination in the RTG.83
\83\ SWRTA, 69 FERC at 61,398.
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[[Page 21549]]
Thus, the Commission required the RTGs to amend their bylaws to
commit all transmitting utility members to offer comparable
transmission services to other RTG members pursuant to a transmission
tariff or tariffs.
As discussed below, since the AEP comparability standard was
announced, the Commission has set for hearing 44 open access tariffs to
determine what constitutes comparable service. This number includes
tariffs filed subsequent to the Open Access NOPR. All tariffs have now
been made subject to the outcome of the Final Rule.
3. Lack of Market Power in New Generation
In 1994 in the KCP&L case, discussed in the prior section, the
Commission continued to recognize that transmission remains a natural
monopoly. However, it found that, in light of the industry and
statutory changes that now allow ease of market entry, no wholesale
seller of generation has market power in generation from new
facilities.84 In particular, the Commission explained that it had
previously noted in Entergy Services, Inc. that
\84\ KCP&L, 67 FERC para. 61,183 (1994).
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There was significant evidence that non-traditional power
project developers, including qualifying facilities and independent
power projects, are becoming viable competitors in long-run
markets.85
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\85\ Id. at 61,557 (citing Entergy Services, Inc., 58 FERC para.
61,234 at 61,756 and nn. 63 and 65 (Entergy)).
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The Commission further explained that since Entergy, Congress had
enacted the Energy Policy Act, which had lowered barriers to the entry
of new suppliers by creating a new class of power suppliers--EWGs--that
are exempt from the provisions of PUHCA.86 The Commission
concluded that, in considering market-based rate proposals for
generation sales, it need only focus on market power in transmission,
generation market power in short-run markets, and other barriers to
entry.87
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\86\ Id. The Commission added that ``after examining generation
dominance in many different cases over the years, we have yet to
find an instance of generation dominance in long-run bulk power
markets.'' Id.
\87\ Id.
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4. Further Commission Action Addressing a More Competitive Electric
Industry
To address the fact that the electric industry is becoming more
competitive, and to remove barriers that might inhibit a more
competitive industry, the Commission has initiated a number of
proceedings: (1) Stranded Cost NOPR,88 (2) Transmission Pricing
Policy Statement,89 (3) Pooling Notice of Inquiry,90 (4)
Regional Transmission Group (RTG) Policy Statement,91 and (5)
Notice of Inquiry on Merger Policy.92
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\88\ FERC Stats. & Regs. para. 32,507 (1994).
\89\ Inquiry Concerning the Commission's Pricing Policy for
Transmission Services Provided by Public Utilities Under the Federal
Power Act, 59 FR 55031 (November 3, 1994), FERC Stats. & Regs.,
Regulations Preambles para. 31,005 (Transmission Pricing Policy
Statement).
\90\ Inquiry Concerning Alternative Power Pooling Institutions
Under the Federal Power Act, 59 FR 54851 (October 26, 1994), FERC
Stats. & Regs., Notices para. 35,529 (1995) (Pooling Notice of
Inquiry).
\91\ FERC Stats. & Regs. para. 30,976 (RTG Policy Statement).
\92\ FERC Stats. & Regs. para. 35,531 (1996).
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In the Stranded Cost NOPR the Commission recognized that the trend
toward greater transmission access and the transition to a fully
competitive bulk power market could cause some utilities to incur
stranded costs as wholesale requirements customers (or retail
customers) use their supplier's transmission to purchase power
elsewhere. As the Commission noted, a utility may have built facilities
or entered into long-term fuel or purchased power supply contracts with
the reasonable expectation that its customers would renew their
contracts and would pay their share of long-term investments and other
incurred costs. If the customer obtains another power supplier, the
utility may have stranded costs. If the utility cannot locate an
alternative buyer or somehow mitigate the stranded costs, the
Commission explained that ``the costs must be recovered from either the
departing customer or the remaining customers or borne by the utility's
shareholders.'' 93 Accordingly, the Commission proposed to
establish provisions concerning the recovery of wholesale and retail
stranded costs by public utilities and transmitting utilities.
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\93\ FERC Stats. & Regs. para. 32,507 at 32,864.
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In the Transmission Pricing Policy Statement, the Commission
announced a new policy providing greater flexibility in the pricing of
transmission services provided by public utilities and transmitting
utilities. The Commission traditionally had allowed only postage-stamp,
contract-path pricing.94 Under the new policy, we will permit a
variety of proposals, including distance sensitive and flow-based
pricing, which may be more suitable for competitive wholesale power
markets.95 The Commission explained that this ``(g)reater pricing
flexibility is appropriate in light of the significant competitive
changes occurring in wholesale generation markets, and in light of our
expanded wheeling authority under the Energy Policy Act of 1992.''
96 However, the Commission explained that any new transmission
pricing proposal must meet the Commission's AEP comparability standard.
The Commission further explained that comparability of service applies
to price as well as to terms and conditions.97
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\94\ Most transmission contracts set a single price for energy
flow over a utility's transmission system. This single-price policy
is called ``postage stamp'' pricing because the rate does not depend
on how far the power moves within a company's transmission system.
If power flows through several companies, traditional industry
practice is to specify that power flows along a ``contract path''
consisting of the transmission-owning utilities between the ultimate
receipt and delivery points. See Indiana Michigan Power Company, 64
FERC para. 61,184 at 62,545 (1993).
\95\ Unlike with postage stamp pricing, with distance-sensitive
pricing the cost of moving power through a company depends on how
far the power moves within the company. In contrast to contract path
pricing, flow-based pricing establishes a price based on the costs
of the various parallel paths actually used when the power flows.
Because flow-based pricing can account for all parallel paths used
by the transaction, all transmission owners with facilities on any
of the parallel paths could be compensated for the transaction.
\96\ FERC Stats. & Regs. para. 31,005 at 31,136.
\97\ Id. at 31,142.
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The Commission issued the Pooling Notice of Inquiry to receive
comments on traditional power pools and on alternative power pooling
institutions that are being explored in today's more competitive
environment. The Commission expressed concern that
(G)iven the ongoing changes in the competitive environment of
the electric utility industry--in particular, the potential for
substantially increased access to transmission--we must consider
whether we are appropriately balancing our dual objectives of
promoting coordination and competition.98
\98\ FERC Stats. & Regs. para. 35,529 at 35,715.
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Accordingly, the Commission explained that it wished to look at
alternative power pooling institutions and to re-examine the role of
more traditional power pools in today's environment of increased
competition. In particular the Commission expressed its intent to
ensure that its policies ``are consistent with the development of a
competitive bulk power market.'' 99
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\99\ Id. at 35,714. As explained below, the Commission held
technical conferences on issues surrounding power pools and
competition.
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In the RTG Policy Statement, the Commission announced a policy
encouraging the development of RTGs. The Commission explained that a
primary purpose of RTGs is to facilitate transmission access for
potential users and voluntarily resolve disputes over such service. The
Commission has approved the formation of three
[[Page 21550]]
RTGs.100 One of the conditions is that each RTG member must offer
comparable transmission services by tariff to other RTG members.
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\100\ See WRTA and SWRTA, supra, and Northwest Regional
Transmission Association, 71 FERC para. 61,397 (1995).
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In the merger NOI, the Commission indicated that it will review
whether its criteria and policy for evaluating mergers need to be
modified in light of the changing circumstances occurring in the
electric industry.
In addition to the Commission's actions, a number of states have
initiated proceedings concerning retail wheeling or proposed
legislation for retail wheeling, that is, for ultimate consumers to
choose their supplier of power, or other restructuring
proposals.101
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\101\ At least 12 states have retail wheeling proposals,
legislation, or pilot programs underway--Alabama, California,
Connecticut, Illinois, Massachusetts, Michigan, New Hampshire, New
York, Ohio, Rhode Island, Vermont, and Wisconsin. At least 14 other
states are investigating retail wheeling. Currently, according
to a report of the NARUC-affiliated National Council on
competition and the Electric Industry, 41 States are actively
involved in investigating whether and how to restructure their
respective electric power markets. Of this total, 29 State
regulatory authorities * * * have initiated investigations. In
addition, five State legislatures are involved in similar
investigations, while seven other States have joint regulatory/
legislative proceedings underway.
Testimony of the Honorable Cheryl L. Parrino, Chair of the
Wisconsin Public Service Commission, on behalf of the National
Association of Regulatory Utility Commissioners, before the United
States Senate Committee on Energy and Natural Resources (March 6,
1996).
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5. Events Since Issuance of Open Access NOPR
Since issuance of the Open Access NOPR, public utilities have
filed, in some form or another, 47 open access tariffs. In acting on
those filings, the Commission has made all of the non-rate terms and
conditions of those proposed tariffs subject to the outcome of this
Final Rule.102
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\102\ See American Electric Power Service Corporation, et al.,
72 FERC para. 61,287 at 61,238 (1995).
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Over the last year, the Commission also has received and analyzed
more than 20,000 pages of comments that were received from over 400
commenters, as well as additional information provided by industry
participants at a number of Commission-initiated technical
conferences.103 Those technical conferences addressed several
issues--ancillary services, pro forma tariffs, power pools, and ISOs--
and provided significant input to the Commission's formulation of this
Final Rule.
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\103\ Attached to this Final Rule as Appendix B is a list of
commenters and the abbreviations used to designate them, including
those commenters that filed late.
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F. Need for Reform
The many changes discussed above have converged to create a
situation in which new generating capacity can be built and operated at
prices substantially lower than many utilities' embedded costs of
generation. As discussed above, new generation facilities can produce
power on the grid at a cost of less than 3 cents per kWh to 5 cents per
kWh, yet the costs for large plants constructed and installed over the
last decade were typically in the range of 4 to 7 cents per kWh for
coal plants and 9 to 15 cents for nuclear plants.
Non-traditional generators are taking advantage of this opportunity
to compete. Indeed, the non-traditional generators' share of total U.S.
electricity generation increased from 4 percent in 1985 to 10 percent
in 1993.104 Much of this increased share of generation is the
result of competitive bidding for new generation resources that has
occurred in 37 states. Since 1984, almost 4,000 projects, representing
over 400,000 MW, have been offered in response to requests. Over 350
projects have been selected to supply 20,000 MW, and, of these, 126 are
now online producing almost 7,800 MW of power.105
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\104\ Energy Information Administration, Performance Issues for
a Changing Electric Power Industry (January 1995) 10 and (Figure 5).
\105\ Current Competition, November 1994, Vol. 5, No. 8, at 8.
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In addition, the cost of utility-generated electricity differs
widely across the major regions of the United States. Average utility
rates range from 3 to 5 cents in the Northwest to 9 to 11 cents in
California. Electricity consumers are demanding access to lower cost
supplies available in other regions of the United States, and access to
the newer, lower cost generation resources. Therefore, it is important
that the non-traditional generators of cheaper power be able to gain
access to the transmission grid on a non-discriminatory open access
basis.
The Commission's goal is to ensure that customers have the benefits
of competitively priced generation. However, we must do so without
abandoning our traditional obligation to ensure that utilities have a
fair opportunity to recover prudently incurred costs and that they
maintain power supply reliability. As well, the benefits of competition
should not come at the expense of other customers. The Commission
believes that requiring utilities to provide non-discriminatory open
access transmission tariffs, while simultaneously resolving the
extremely difficult issue of recovery of transition costs (discussed
infra), is the key to reconciling these competing demands.
Non-discriminatory open access to transmission services is critical
to the full development of competitive wholesale generation markets and
the lower consumer prices achievable through such competition.106
Transmitting utilities own the transportation system over which bulk
power competition occurs and transmission service continues to be a
natural monopoly. Denials of access (whether they are blatant or
subtle), and the potential for future denials of access, require the
Commission to revisit and reform its regulation of transmission in
interstate commerce. As discussed in detail in Section IV.B., such
action is required by the FPA's mandate that the Commission remedy
undue discrimination.
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\106\ As discussed above, a significant number of public
utilities still do not have any form of an ``open access'' tariff on
file with the Commission and no public utility has on file a non-
discriminatory open access tariff as defined by this Rule.
---------------------------------------------------------------------------
Since the time the NOPR issued, the Commission staff has completed
an FEIS that provides a quantitative estimate of some of the cost
savings expected from this Rule: approximately $3.8 to $5.4 billion per
year. Other non-quantifiable benefits are also expected from this Rule
and include: (1) Better use of existing assets and institutions; (2)
new market mechanisms; (3) technical innovation; and (4) less rate
distortion. These potential benefits to the Nation's electricity
consumers and the economy as a whole confirm the need to take generic
action to remove barriers to competition. In what follows, we set out
the changes necessary to remedy undue discrimination and to ensure a
fair transition to a more competitive regulatory regime.
IV. Discussion
A. Scope of the Rule
1. Introduction
The Commission has determined that non-discriminatory open access
transmission services (including access to transmission information)
and stranded cost recovery are the most critical components of a
successful transition to competitive wholesale electricity markets.
These issues are the focal point of this Rule, the accompanying rule on
open access same-time information systems, and the accompanying
proposed rule on capacity reservation tariffs.
[[Page 21551]]
In undertaking these initiatives, however, we are mindful that they
are part of a broader picture of evolving issues affecting the electric
industry and that other Commission policies will play an important role
in ensuring the full development of competitive markets. Among the many
issues that are important to competitive bulk power markets are:
independent system operators (ISOs); regional transmission groups;
generation market power; utility merger policy; and the development of
innovative transmission pricing alternatives, such as flow-based,
distance-sensitive transmission pricing methodologies that reflect
incremental costs. In particular, we believe that ISOs have great
potential to assist us and the industry to help provide regional
efficiencies, to facilitate economically efficient pricing, and,
especially in the context of power pools, to remedy undue
discrimination and mitigate market power. Although we discuss some of
these issues in this Rule, we will further develop our policies in
other proceedings as well to accommodate and encourage more efficient
market structures.
We now address the comments received on the scope of the proposed
rulemaking.
2. Functional Unbundling
In the NOPR, the Commission preliminarily found that functional
unbundling of wholesale generation and transmission services is
necessary to implement non-discriminatory open access
transmission.107 At the same time, the Commission explained that
the proposed rule would accommodate, but not require, corporate
unbundling (which could include selling generation or transmission
assets to a non-affiliate (divestiture) or the less aggressive step of
establishing separate corporate affiliates to manage a utility's
transmission and generation assets). However, we invited comments on
functional unbundling and asked whether it is a strong enough measure
to ensure non-discriminatory open access transmission without some form
of corporate restructuring.
---------------------------------------------------------------------------
\107\ FERC Stats. & Regs. para.32,514 at 33,080.
---------------------------------------------------------------------------
Comments
Commenters take both sides on whether functional unbundling is
sufficient to assure non-discriminatory open access transmission or
whether a stronger measure, such as corporate unbundling, is needed.
Supporting Functional Unbundling
Various commenters, including utilities and state commissions,
generally support functional unbundling as sufficient to assure non-
discriminatory open access transmission and oppose requiring corporate
unbundling or divestiture.108 Several commenters state that
functional unbundling will remedy discrimination without creating the
inefficiencies and additional costs that corporate restructuring would
create.109
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\108\ E.g., Ohio Edison, UtiliCorp, Pennsylvania P&L, Atlantic
City, Montana Power, IL Com, Seattle, OK Com, TX Industrials,
MidAmerican, Southwestern, Southern, DOD, Public Service Co of CO,
SC Public Service Authority, Florida Power Corp, DOE, WP&L, Com Ed,
SBA, Consumers Power, CA Com, UT Com, Houston L&P, KCPL, EEI.
\109\ E.g., Florida Power Corp, El Paso, PSNM, and SC Public
Service Authority.
---------------------------------------------------------------------------
A number of other commenters argue that the Commission has no
authority under the FPA to require divestiture of transmission
assets.110 Several of these commenters assert that, even if the
Commission has the authority, the electric industry, unlike the natural
gas industry, is not ready for mandated corporate unbundling because
electric utilities still serve a high percentage of retail customers
and own large amounts of the generating capacity. They assert that
transmission system operation requires the operator to have control
over much of the generating capacity.
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\110\ E.g., Southwestern, PECO, El Paso, Florida Power Corp,
NSP, Public Service E&G, MidAmerican.
---------------------------------------------------------------------------
Various other commenters also support functional unbundling, but
believe that safeguards are needed to make it work.111 Power
Marketing Association, for example, suggests a number of safeguards:
adoption of cost allocation mechanisms to ensure that utilities do not
shift costs from generation to transmission; random audits of utility
books; a requirement that each utility file a code of conduct that
provides for maximum separation of generation and transmission
functions; and active oversight and complaint procedures with strong
penalties for abuse. OK Com and GA Com believe that functional
unbundling along with the safeguard of the Commission's complaint
process will provide sufficient incentive for non-discriminatory open
access transmission.
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\111\ E.g., NRECA, IN Com, Power Marketing Association, TDU
Systems, NorAm, Turlock, Texaco, Utility Shareholders, NSP, El Paso,
Utility Investors Analysts, PECO, Florida Power Corp, UT Com,
Sierra, Carolina P&L, SoCal Gas, OK Com, FL Com, Southern.
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Supporting Corporate Unbundling
A number of commenters see weaknesses in functional unbundling and
argue that some form of corporate unbundling is necessary to assure
non-discriminatory open access transmission.112 American Forest &
Paper says that there is affiliate abuse in the gas industry and argues
that the electric industry presents even more serious potential for
abuse because it is still dominated by vertically integrated
utilities.113 UAMPS asserts that functional unbundling is
insufficient because the utility will still favor itself on issues
related to transmission planning, capital investment, and operation and
maintenance and replacement costs.
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\112\ E.g., American Forest & Power, American National Power, ND
Com, IL Com, UAMPS, NIEP, APPA, Public Power Council, Municipal
Energy Agency Nebraska, Missouri Basin MPA, Texaco, Direct Services
Industries, Calpine, CCEM, Wisconsin Coalition, VT DPS.
\113\ See also American National Power, ND Com, Calpine.
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NIEP argues that divestiture of generation assets from transmission
and distribution is the preferred mechanism for mitigating market
power. It further suggests that if corporate divestiture is not
feasible the Commission should
Seek to achieve ``virtual divestiture'' by requiring that the
utility generation function be separated from transmission and
distribution functions in a separate corporate affiliate, or
business unit, and that affiliate transaction rules be established
to guard against possible abuses. 114
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\114\ NIEP Initial Comments at 4.
It maintains that the Commission has broad authority to protect
against undue discrimination and anticompetitive behavior and can order
divestiture if such action is required to remedy such behavior.115
---------------------------------------------------------------------------
\115\ See also Municipal Energy Agency Nebraska, Direct Services
Industries.
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FTC and DOJ argue that operational unbundling, an example of which
is the formation of an independent system operator (ISO), likely would
be more effective than functional unbundling and less costly than
industry-wide divestiture.116 FTC describes operational unbundling
as ``structural institutional arrangements, short of divestiture, that
would separate operation of the transmission grid and access to it from
economic interests in generation.'' It gives as an example the
California proposal under which utilities would continue to own
transmission lines, but an independent system operator would have
operational control. DOJ also suggests ``a separate authority'' to
[[Page 21552]]
manage the grid and access to the grid, joint ventures, and voluntary
pooling arrangements. These commenters argue that operational
unbundling would be easier to enforce than functional unbundling.
---------------------------------------------------------------------------
\116\ Others oppose operational unbundling. See, e.g., Carolina
P&L, Salt River.
---------------------------------------------------------------------------
DOE states that separation of the control of transmission from
vertically-integrated companies does not necessarily require a poolco
or any particular market mechanism. It suggests the possibility of an
ISO that is functionally separate from any buyer or seller of
generation, but would not perform all the functions of a poolco.
United Illuminating supports ``operational unbundling'' that would
either (1) eliminate vertical integration and divestiture of
transmission assets, leading to the formation of a regional
transmission company, or (2) develop a regional contractual approach to
transmission services that eliminates the transmission owner's market
power and fairly allocates support of the transmission facilities
between native load and third-party users of the system.
Commission Conclusion
We conclude that functional unbundling of wholesale services is
necessary to implement non-discriminatory open access transmission and
that corporate unbundling should not now be required. As we explained
in the NOPR, functional unbundling means three things:
(1) A public utility must take transmission services (including
ancillary services) for all of its new wholesale sales and purchases of
energy under the same tariff of general applicability as do others;
(2) A public utility must state separate rates for wholesale
generation, transmission, and ancillary services;
(3) A public utility must rely on the same electronic information
network that its transmission customers rely on to obtain information
about its transmission system when buying or selling power.
We believe that these requirements are necessary to ensure that
public utilities provide non-discriminatory service.117 These
requirements also will give public utilities an incentive to file fair
and efficient rates, terms, and conditions, since they will be subject
to those same rates, terms, and conditions.
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\117\ When and how functional unbundling is to be achieved for
requirements transactions and for various types of coordination
arrangements, including power pools, is discussed at Sections IV.A.5
and IV.F. Functional unbundling of ancillary services is discussed
in Section IV.D.
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However, we recognize that additional safeguards are necessary to
protect against market power abuses. Functional unbundling will work
only if a strong code of conduct (including a requirement to separate
employees involved in transmission functions from those involved in
wholesale power merchant functions) is in place. In the RINs NOPR, the
Commission proposed a code of conduct that would apply to all public
utility transmission providers. As the Commission explained,
[T]his code of conduct would require, among other matters, a
separation of the utilities' transmission system operations and
wholesale marketing functions, and would define permissible and
impermissible contacts between employees that conduct wholesale
generation marketing functions and employees that handle
transmission system operations and reliability in the system control
center or at other facilities or locations.118
\118\ Real-Time Information Networks and Standards of Conduct,
Notice of Proposed Rulemaking, 60 FR 66182 (December 21, 1995), FERC
Stats. & Regs., Proposed Regulations para. 32,516 at 33,170 (1995).
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Adoption of this code of conduct, discussed in detail in the
accompanying final rule on OASIS,119 is needed to ensure that the
transmission owner's wholesale marketing personnel and the transmission
customer's marketing personnel have comparable access to information
about the transmission system.
---------------------------------------------------------------------------
\119\ The final rule on information systems no longer uses the
terminology RINs. The new terminology used is OASIS--Open Access
Same-time Information System--which we will use in this Final Rule.
---------------------------------------------------------------------------
As noted by OK Com and GA Com, a further safeguard--section 206--is
available if a public utility seeks to circumvent the functional
unbundling requirements. Under section 206, any person is free to file
a complaint with the Commission detailing any alleged misbehavior on
the part of the public utility or its affiliates concerning matters
subject to our jurisdiction under the FPA. Similarly, the Commission
may, on its own motion, initiate a proceeding to investigate the
practices of the public utility and its affiliates.
We believe that functional unbundling, coupled with these
safeguards, is a reasonable and workable means of assuring that non-
discriminatory open access transmission occurs. In the absence of
evidence that functional unbundling will not work, we are not prepared
to adopt a more intrusive and potentially more costly mechanism--
corporate unbundling--at this time.
Several commenters discuss the need to encourage or even to require
ISOs in the context of functional unbundling. We believe that ISOs have
the potential to provide significant benefits (e.g., to help provide
regional efficiencies, to facilitate economically efficient pricing,
and, especially in the context of power pools, to remedy undue
discrimination and mitigate market power) and will further our goal of
achieving a workably competitive market. As we learned at our technical
conference on power pools, many utilities are examining ISOs and
corporate unbundling in various shapes and forms, particularly in the
context of power pools. We discuss ISOs extensively in our section on
power pools where we believe they will have an important role to play.
However, in the context of individual utility transactions, we believe
that the less intrusive functional unbundling approach outlined above
is all that we must require at this time. Nevertheless, we see many
benefits in ISOs, and encourage utilities to consider ISOs as a tool to
meet the demands of the competitive marketplace.
As a further precaution against discriminatory behavior, we will
continue to monitor electricity markets to ensure that functional
unbundling adequately protects transmission customers. At the same
time, we will analyze all alternative proposals, including formation of
ISOs, and, if it becomes apparent that functional unbundling is
inadequate or unworkable in assuring non-discriminatory open access
transmission, we will reevaluate our position and decide whether other
mechanisms, such as ISOs, should be required.
Finally, while we are not now requiring any form of corporate
unbundling, we again encourage utilities to explore whether corporate
unbundling or other restructuring mechanisms may be appropriate in
particular circumstances. Thus, we intend to accommodate other
mechanisms that public utilities may submit, including voluntary
corporate restructurings (e.g., ISOs, separate corporate divisions,
divestiture, poolcos), to ensure that open access transmission occurs
on a non-discriminatory basis. We also will continue to monitor--and
stand ready to work with parties engaging in--innovative restructuring
proposals occurring around the country.
3. Market-Based Rates
a. Market-Based Rates for New Generation
In the NOPR, the Commission proposed to codify its determination in
Kansas City Power & Light Company 120
[[Page 21553]]
that the generation dominance standard for market-based sales from new
capacity be dropped.121 The proposed new section 35.27 would
provide:
\120\ 67 FERC para. 61,183 at 61,557 (1994), reh'g pending
(KCP&L).
\121\ FERC Stats. & Regs. para. 32,514 at 33,050.
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Notwithstanding any other requirements, any public utility
seeking authorization to engage in sales for resale of electric
energy at market-based rates shall not be required to demonstrate
any lack of market power in generation with respect to sales from
capacity first placed in service on or after June 10, 1996.122
\122\ Id. at 33,154.
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However, this proposal would not affect the Commission's continuing
authority to look at whether an applicant and its affiliates could
erect other barriers to entry and whether there may be affiliate abuse
or reciprocal dealing.123
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\123\ 67 FERC at 61,557.
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Comments
A number of commenters support the Commission's determination in
KCP&L 124 and several of them explicitly support the Commission's
proposed codification.125 EEI asserts that more than 50 percent of
new generation is from non-utility sources and that recent competitive
solicitations for new capacity have been greatly over-subscribed.
Entergy argues that there is no evidence in any proceeding thus far of
a market power problem in long-run markets.
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\124\ E.g., Entergy, EEI, Atlantic City, Duke Centerior, Houston
L&P, Montana-Dakota Utilities, Canadian Petroleum Producers, DOE,
Florida Power Corp, PSNM.
\125\ E.g., EEI, Centerior, Houston L&P, NYSEG.
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Other commenters, however, oppose codifying KCP&L.126 They
believe that market power in long-run markets exists for both new and
old generation due to, for example, constraints on interface
capabilities and unduly long notice periods for replacement of
purchases. They argue that there is not enough of a distinction between
new and old generation to treat them differently. TDU Systems also
notes that the Commission in KCP&L did not take into account the
differences between firm and non-firm bulk power. NIEP and ELCON
conclude that the Commission erroneously found in KCP&L that no
wholesale seller of generation has market power in generation from new
facilities. NIEP asserts that in each service area there is usually
only one wholesale buyer--the utility--who also is virtually always a
wholesale seller of generation. Under these circumstances, NIEP argues
that there cannot be arm's-length bargaining. Environmental Action
complains that the Commission's proposal to codify KCP&L ignores
significant factors that impede entry to generation markets, such as
utility resistance to purchased power, state government-created
barriers to non-utility generation, pancaking of rates under the
contract path approach, sunk investment, and scale economies.
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\126\ E.g., TDU Systems, ELCON, NRECA, Environmental Action,
NIEP, APPA, Power Marketing Association, EGA.
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Commission Conclusion
In reviewing applications to sell at market-based rates, whether
from new (unbuilt) capacity or existing capacity, we require that the
seller (and each of its affiliates) must not have, or must have
mitigated, market power in generation and transmission and not control
other barriers to entry. In order to demonstrate the requisite absence
or mitigation of transmission market power, a transmission-owning
public utility seeking to sell at market-based rates must have on file
with the Commission an open access transmission tariff for the
provision of comparable service. In addition, the Commission considers
whether there is evidence of affiliate abuse or reciprocal
dealing.127
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\127\ See, e.g., MidAmerican Energy Company, 74 FERC para.
61,211 (1996).
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In KCP&L, we stated that ``in light of industry and statutory
changes which allow ease of market entry, we therefore will no longer
require rate applicants to submit evidence of generation dominance in
long-run bulk power markets.'' 128 We further explained that we
had examined ``generation dominance in many different cases over the
years'' and had ``yet to find an instance of generation dominance in
long-run bulk power markets.'' 129 Commenters have criticized our
findings in KCP&L, but no commenter has provided any evidence of
generation dominance in long-run bulk power markets. Moreover, we have
seen no such evidence in any of the market-based rate cases we have
considered since KCP&L. Based on the comments received, we will codify
the Commission's determination in KCP&L that the generation dominance
standard for market-based sales from new capacity should be dropped.
Because the Commission's findings in KCP&L applied to long-run markets,
we will revise proposed Sec. 35.27 to apply to sales from capacity for
which construction has commenced on or after the effective date of this
Rule.130
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\128\ KCP&L, 67 FERC at 61,557. See also discussion in proposed
rule, FERC Stats. & Regs. at 33,067-68.
\129\ Id.
\130\ The NOPR's proposed language that a public utility would
not have to demonstrate a lack of market power in generation for
sales from capacity first placed in service on or after the date 30
days after the final rule is published in the Federal Register does
not properly reflect the finding in KCP&L. Because KCP&L addressed
new or unbuilt generation, the proposed language is being revised as
indicated above and as set forth in the regulatory text included
with this Final Rule.
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The Commission wishes to clarify that dropping the generation
dominance standard for new capacity does not affect the demonstration
that an applicant must make in order to qualify for market-based rates
for sales from its existing generating capacity. In other words, the
fact that an applicant need not demonstrate its lack of generation
dominance with respect to new capacity cannot be used to ``bootstrap''
the authorization of market-based rates for its existing capacity.
Moreover, our evaluation of market-based rates for existing capacity
will include consideration of new capacity.
In addition, the fact that we are codifying KCP&L does not mean
that we will ignore specific evidence presented by an intervenor that a
seller requesting market-based rates for sales from new generation
nevertheless possesses generation dominance. For example, if the
evidence indicated that the new generator, due to its proximity to an
existing transmission constraint, could significantly influence the
ability to move power across the constraint, we would consider such
evidence in determining whether to grant the applicant's
request.131 If such evidence is presented, the Commission will
evaluate whether the evidence disproves the premise that the seller
lacks generation dominance with respect to its new capacity.
---------------------------------------------------------------------------
\131\ Cf. Wisconsin Electric Power Company, et al., 74 FERC
para. 61,069 at 61,193 (1996).
---------------------------------------------------------------------------
If the applicant has existing generation, the sales from which are
authorized to be made on a market basis, the Commission would consider
whether the new generation (when added to the existing generation with
market-based authority) results in the applicant having generation
dominance. On the other hand, if the applicant has existing generation,
the sales from which are subject to cost-of-service regulation, the
Commission would not include this generation in its analysis of the
applicant's request for market-based rates for its new generation. The
question of whether or not the applicant lacks generation dominance
with respect to its existing capacity is relevant only if, and when,
the seller applies to the Commission for authority to make wholesale
sales for its existing capacity at market-based rates.
If evidence regarding an applicant's generation dominance with
respect to
[[Page 21554]]
its new capacity is submitted, the applicant would be required to
provide a satisfactory rebuttal.
b. Market-Based Rates for Existing Generation
In the NOPR, the Commission explained that increased competition
resulting from open access transmission may reduce or even eliminate
generation-related market power in the short-run market (sales from
existing capacity).132 Because market power has been the primary
concern of the Commission in analyzing requests for market-based rates
for such sales, we sought comments on the effect of industry-wide non-
discriminatory open access on our criteria for authorizing power sales
at market-based rates. The Commission also sought comments on whether
the generation dominance standard should be dropped for market-based
sales from existing capacity.
---------------------------------------------------------------------------
\132\ FERC Stats. & Regs. para. 32,514 at 33,093-94.
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Comments
Many commenters support, but many also oppose, market-based rates
for existing generation without a case-specific analysis of generation
dominance.
Supporting Market-Based Rates for Existing Generation
Many commenters (primarily IOUs and a number of state commissions)
assert that existing generators will not possess market power after
implementation of non-discriminatory open access transmission and that
market-based rates should be permitted generically for sales from
existing generation.133
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\133\ E.g., EEI, CINergy, Central Illinois Public Service,
Citizens Utilities, Com Ed, Ohio Edison, Allegheny, Southern,
Portland, NRRI, Pennsylvania P&L, PECO, Dayton P&L, Utilities For
Improved Transition, Centerior, Houston L&P, Duke, ConEd, IPALCO,
Salt River, PJM, NU, NYSEG, Oklahoma G&E, PA Com, OK Com, CT DPUC,
CA Com, MT Com.
---------------------------------------------------------------------------
EEI asserts that market power concerns generally would be
transitory, limited to the time needed to build new facilities. Thus,
it recommends that all markets be declared competitive by a date
certain and that market-based rates then be allowed, with customers
permitted to file complaints. Florida Power Corp believes that existing
procedures under sections 205 and 206 will adequately protect
consumers. Other commenters also urge the Commission to eliminate its
generation dominance standard, but assert that the Commission should
allow a showing of market dominance in a complaint or show cause
proceeding.134 CT DPUC notes that the Commission should be able to
rely on rules of conduct, market mechanisms, and monitoring to curb any
market power that may exist.
---------------------------------------------------------------------------
\134\ E.g., Consumers Power, Portland, Dayton P&L, CSW.
---------------------------------------------------------------------------
Utilities For Improved Transition argues that if utilities cannot
get market-based rates, the new players in the market will have an
unfair advantage, since they do not have to carry the traditional
utilities' burden of older, less efficient plants.
Entergy proposes a screening test that would permit the Commission
to ``deregulate'' wholesale sales to certain short-run markets. CINergy
recommends that after industry-wide open access tariffs become
effective, the Commission adopt a rebuttable presumption that all
markets are workably competitive; that presumption could be rebutted in
a section 206 proceeding.135
---------------------------------------------------------------------------
\135\ See also Citizens Utilities.
---------------------------------------------------------------------------
UtiliCorp, while it believes that market power will probably be
fully mitigated by open access, also argues that the Commission should
examine generation dominance on a region-by-region basis.136
Montana-Dakota Utilities argues that the Commission should allow all
suppliers in a power pool or RTG to have market-based rates after a
Commission finding that there is sufficient generation competition
within the region.
---------------------------------------------------------------------------
\136\ See also CSW, Industrial Energy Applications, Public
Service Co of CO, Coalition for Economic Competition.
---------------------------------------------------------------------------
Duke states that it would be highly inconsistent for the Commission
to require open access, but not allow utilities to compete in the
market. It further states that the relevant market should be determined
using standard antitrust techniques; the Commission should examine the
options available to customers and determine whether the utility
possesses monopoly power in a relevant market.
Opposing Market-Based Rates for Existing Generation
Many commenters are concerned that even with open access tariffs
certain generators will be able to exercise market dominance.137
For example, NARUC argues that utilities retain market power through
their ownership of existing generation and transmission facilities,
favorable long-term contracts for fuel and other inputs, and access to
superior generation sites.138 NRECA believes that the universe of
generation providers is still too narrow to assume a competitive market
and that other factors, such as transmission constraints and pancaking
of rates, will inhibit the development of competitive markets.139
FTC says that, although comparable transmission access could broaden
the relevant geographic market for generation, the Commission should
not assume that there will be no market power. It says that the
Commission must continue to evaluate each case.140 TDU Systems
argues that the Commission cannot move to market-based rates without a
Congressional determination that deregulation of wholesale electric
rates should be implemented. It further asserts that the Commission
does not have a factual basis for a reasoned conclusion that regulated
utilities do not have market dominance--full open access is only a goal
at this time, and the success of open access will depend upon the
transmission rate structures the Commission approves.
---------------------------------------------------------------------------
\137\ E.g., NRECA, TDU Systems, MT Com, SMUD, NEPCO, Orange &
Rockland, El Paso, American Forest & Paper, NIPSCO, AEC & SMEPA, OH
Com, IL Com, IN Com, Legal Environmental Assistance, LG&E, Cajun,
Industrial Energy Applications, LEPA, MA DPU, MI Com, FTC, Minnesota
P&L, SC Public Service Authority, WP&L, NARUC, Canadian Petroleum
Producers, DOD, CCEM, Environmental Action, American Wind, Cajun,
NIEP, EGA, TAPS, ELCON, Consolidated Natural Gas.
\138\ See also NIEP, Pacificorp, CA Energy Com.
\139\ See also MT Com, TDU Systems, Soyland.
\140\ See also AEC & SMEPA, NIPSCO, El Paso (discusses a
particular transmission constraint that it states limits its access
to suppliers).
NRECA is also concerned that mergers may create a handful of
``mega-public utilities'' that may affect a regional generation
market and that the Commission should apply more traditional
antitrust principles in analyzing the impacts of mergers.
---------------------------------------------------------------------------
LEPA raises concerns that the small bulk power suppliers, QFs, co-
generators, EWGs, IPPs, and marketers (who provide non-requirements
power) may not be able to bring competition to the wholesale market.
LEPA concludes that ``barriers will exist unless buyers have full
access to requirements power itself, rather than just to the chance to
acquire the individual components of requirements power.'' 141 TDU
Systems raises concerns about the limited number of generation
providers and the effect of possible future mergers. It also argues
that pancaked rates raise the cost of transmission to third parties,
thereby restricting the geographic scope of markets. As a result, TDU
Systems asserts that individual generators in highly concentrated
regions will still be able to exert market power. OH Com expresses
concerns that restrictions on siting of generation and transmission
will favor nearby generators. SC Public Service Authority argues that
if the Commission allows utilities to recover stranded costs their
market power will not be mitigated, since customers will
[[Page 21555]]
have to pay exit fees to switch suppliers.142
---------------------------------------------------------------------------
\141\ LEPA Initial Comments Affidavit of William G. Shepherd at
4.
\142\ See also DOD and WP&L. IL Com suggests that the Commission
allow market-based rates to a utility on the condition that the
utility forego stranded cost recovery.
---------------------------------------------------------------------------
CCEM notes that in Order No. 636 gas pipelines were not allowed
market-based rates for merchant sales until after transmission had been
completely unbundled and non-discriminatory open access had been fully
implemented.
DOE and DOJ assert that open access should not be assumed to
mitigate market power sufficiently to justify deregulation of existing
generation--structural changes, such as control of the regional grid by
an independent entity, are required. DOE requests that the Commission
continue to look for affiliate abuse when reviewing market-based rates
for new generation. Similarly, EPA is concerned that even with open
access, individual generators may still exert market power by their
domination of a particular geographic market. It is also concerned that
low-cost plants that are subject to weaker environmental standards
could have a market advantage. NEPOOL Review Committee requests that
the Commission not approve any market prices ``where the market into
which the seller proposes to sell is not effectively competitive due to
the absence of regional transmission products and prices.''143
---------------------------------------------------------------------------
\143\ NEPOOL Review Committee Initial Comments at 28.
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Commission Conclusion
While the Commission expects this Rule to facilitate the
development of competitive bulk power markets, we find that there is
not enough evidence on the record to make a generic determination about
whether market power may exist for sales from existing generation. We
continue to have concerns about how to define the relevant markets and
believe that a more rigorous analysis is needed than can be achieved
with the limited market data that is now available. We will continue
our case-by-case approach that allows market-based rates based on an
analysis of generation market power in first tier and second tier
markets.144 In particular cases, however, the effect of the
mandatory open access prescribed by this Final Rule may lead to the
consideration of geographic markets for the applicant's generation
products that are broader in scope than the first-tier and second-tier
markets currently considered.145 By the same token, in some cases,
evidence of the effects of transmission constraints may circumscribe
the scope of the relevant geographic market for the applicant's
generation products.
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\144\ See, e.g., Southwestern Public Service Company, 72 FERC
para. 61,208 at 61,996 (1995).
\145\ The Commission's practice is to define the relevant
markets as those utilities directly interconnected to the applicant
(first-tier markets). For each first-tier market, we consider all
utilities interconnected to the first-tier utility and all utilities
interconnected to the applicant as competitors in that relevant
market. Thus, the competitors include the second-tier utilities
directly interconnected to the relevant market and those other
first-tier utilities that can reach the market by virtue of the
applicant's open access transmission tariff. See, e.g., Kansas City
Power & Light Company, 67 FERC para. 61,183 at 61,556; and Heartland
Energy Services, Inc., 68 FERC para. 61,223 at 62,061.
---------------------------------------------------------------------------
While we will continue to apply the first-tier/second-tier
analysis, we will allow applicants and intervenors to challenge the
presumption implicit in the Commission's practice that the relevant
geographic market is bounded by the second-tier utilities. Thus, for
instance, applicants may present evidence that the relevant market is
in fact broader than the first or second tier. In support of such a
contention, an applicant would need to show more than the existence of
open access. For example, an applicant might attempt to demonstrate the
lack of significant transmission constraints in the more broadly
defined market and that cumulative transmission rates would not
significantly affect the ability of more distant suppliers to compete
in the relevant market. Similarly, an intervenor may present evidence
that, due to the existence of significant transmission constraints
within the first- and second-tier markets, the relevant market is in
fact more limited in scope.146
---------------------------------------------------------------------------
\146\ See Wisconsin Public Service Corporation, 75 FERC para.
61, ______, slip op. at 6-7 (1996).
---------------------------------------------------------------------------
Finally, we will maintain our current practice of allowing market-
based rates for existing generation to go into effect subject to
refund. To the extent that either the applicant or intervenors in
individual cases offer specific evidence that the relevant geographic
market ought to be defined differently than under the existing test, we
will examine such arguments through formal or paper hearings.
Because our goal is to develop more competitive bulk power markets,
we will continue to monitor markets to assess the competitiveness of
the market in existing generation, and we will modify our market rate
criteria if and when appropriate. However, any changes we might make to
our analysis for authorizing market-based rates in the future will not
upset transactions entered into pursuant to existing market-based rate
authority. The policies we put in place today to develop a smoothly
functioning transmission access regime will provide useful experience
and information for assessing the effects of generation concentration.
4. Merger Policy
In the NOPR, the Commission did not address possible ramifications
of the NOPR with regard to its existing merger policy.
Comments
A number of commenters suggest that the Commission should
reevaluate its merger policy in light of the NOPR.147 They further
suggest a number of changes that they believe need to be made to the
Commission's existing merger policy.
---------------------------------------------------------------------------
\147\ E.g., NRECA, TAPS, Wisconsin Coalition, APPA.
---------------------------------------------------------------------------
Most commenters raising this issue express concerns that mergers
will lessen competition and hinder achievement of competitive bulk
power markets.148 For example, NRECA indicates that the
Commission's merger policy is at a crossroads. It believes that it is
essential for the Commission to reevaluate its merger policy in concert
with the proposed rulemakings.149 Similarly, TAPS recommends that
the Commission reevaluate its merger criteria to ensure that in a more
competitive era, mergers are found to be consistent with the public
interest only if they are pro-competitive. Several commenters argue
that the Commission should continue to conduct a case-by-case
investigation of the product and geographic markets that will be
affected by a proposed merger.150
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\148\ E.g., Wisconsin, Rosebud, NRECA, IN Com, Wisconsin
Coalition, NIEP, Minnesota P&L, APPA.
\149\ See also APPA.
\150\ E.g., Wisconsin Coalition, MMWEC.
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A number of commenters also suggest certain changes that they would
like to see in the Commission's merger policy.151 APPA recommends
that, at a minimum, all merger approvals considered by the Commission
should be conditioned on: (1) Filing an open access transmission
tariff, (2) demonstrating no market power in generation or ancillary
services, and (3) granting all existing requirements customers of the
merged entity the right to convert existing contracts to rights to
equivalent transmission capacity. Several commenters suggest adopting
the U.S. Department of Justice Merger
[[Page 21556]]
Guidelines in analyzing merger proposals.152
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\151\ E.g., APPA, Wisconsin Coalition, Minnesota P&L, IN Com.
\152\ E.g., Wisconsin Coalition.
---------------------------------------------------------------------------
Environmental Action and others contend that merging utilities must
be required to demonstrate real net benefits to retail and wholesale
customers that could not otherwise be achieved but for the proposed
merger.153
---------------------------------------------------------------------------
\153\ E.g., TAPS, Wisconsin Coalition.
---------------------------------------------------------------------------
Commenters also argue that the Commission should use its merger
conditioning authority to order divestiture of transmission and
generation when required to ensure competition.154 Environmental
Action and NEPOOL Review Committee suggest conditioning merger
applications on the existence of regional transmission pricing
arrangements to mitigate any generation market power gained by the
merging entities.
---------------------------------------------------------------------------
\154\ E.g., NIEP, Wisconsin Coalition, TAPS, Environmental
Action.
---------------------------------------------------------------------------
Commission Conclusion
The Commission appreciates the concerns and suggestions raised with
respect to our merger policy. However, since the time the NOPR was
issued (and comments received thereon), we issued a Notice of Inquiry
on the Commission's merger policy in Docket No. RM96-6-000.155
There we indicated that we will review whether our criteria and
policies for evaluating mergers need to be modified in light of the
changing circumstances, including this final rule, that are occurring
in the electric industry. The NOI proceeding will permit us to consider
comments from all interested participants and, at the same time, allow
us to review our merger criteria and policies in light of this final
rule. We are committed to reviewing our merger policy in a timely
manner in the ongoing NOI proceeding.156
---------------------------------------------------------------------------
\155\ FERC Stats. & Regs. para. 35,531 (1996).
\156\ Our decision to review our merger policy in a separate NOI
proceeding is not intended to affect a utility's business decision
of whether a merger may be in the economic interest of its
ratepayers and stockholders. The NOI proceeding will not prevent us
from reviewing merger applications in as timely a manner as
possible.
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5. Contract Reform
In the NOPR, the Commission explained that it believed that it
could remedy unduly discriminatory practices and achieve more
competitive bulk power markets without abrogating existing wholesale
power supply contracts that bundle generation and transmission services
and existing wholesale transmission contracts.157 Thus, we
proposed to apply the functional unbundling requirement only to
transmission services under new requirements contracts, new
coordination contracts, and new transactions under existing
coordination contracts. However, the Commission did invite comment on
whether it would be contrary to the public interest to allow all or
some of the above types of existing contracts to remain in effect.
---------------------------------------------------------------------------
\157\ FERC Stats. & Regs. para. 32,514 at 33,093.
---------------------------------------------------------------------------
Comments
Requirements and Transmission Contracts
Many of the commenters (including utility customers and third-party
power suppliers) addressing this issue oppose abrogating existing
contracts on a generic basis.158 A number of the commenters
contend that existing contracts should be retained because they are the
result of mutually beneficial bargaining.159 SMUD and TANC are
concerned that existing contracts providing for transmission service
that is superior to the pro forma tariffs not be abrogated.160
Ohio Edison argues that existing contracts have contributed to the
emergence of competition, meet the specific needs of the parties, have
been approved by the Commission, and have not been found to be unduly
discriminatory or violative of the public interest, and that their
preservation is consistent with the Energy Policy Act, most notably
amended section 211 of the FPA. PacifiCorp and AEP express concern that
contract abrogation would create competitive instability. American
Forest & Paper argues that the Commission cannot refuse to honor
existing contracts if it expects a competitive bulk power market to
emerge.
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\158\ E.g., Dayton P&L, NSP, Montaup, Southwestern, Ohio Edison,
Consumers Power, Allegheny, Public Generating Pool, NEPCO,
Pennsylvania P&L, Southwest TDU Group, Arizona, DOD, El Paso,
Florida Power Corp, AEC & SMEPA, Atlantic City, Texaco, Tampa, CSW,
Central Illinois Public Service, CA Cogen, ConEd, GA Com,
Consolidated Natural Gas, Ohio Valley, Pacific Northwest Coop, Salt
River, Oglethorpe, Minnesota P&L, NYSEG, Brazos, Southern,
Washington Water Power, CINergy, SoCal Edison, Hoosier EC.
\159\ E.g., AEC & SMEPA, Cajun, Carolina P&L, NSP, Pennsylvania
P&L, UNITIL, Southwestern, CSW.
\160\ See also Dairyland, DE Muni, Arkansas Cities, Ohio Valley.
---------------------------------------------------------------------------
Numerous commenters further argue that contract abrogation requires
a fact-based, contract-specific evaluation, and they oppose any generic
declaration that existing contracts are contrary to the public
interest.161 Some suggest that generic contract abrogation cannot
be justified under the public interest standard.162
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\161\ E.g., AEP, Associated EC, DOD, El Paso, NEPCO, Ohio
Edison, PSNM, Southwest TDU Group, Utilities For Improved
Transition, NYSEG, Citizens Utilities, NM Com, EGA. See also NRECA,
TDU Systems, Blue Ridge, CCEM, Industrial Energy Applications, APPA,
Cajun, Springfield, DE Muni, Missouri Basin MPA, TANC, Wolverine
Coop Members, FL Com, Citizens Utilities, Soyland (support contract
abrogation on a case-by-case basis).
\162\ E.g., Utilities For Improved Transition, NSP,
Southwestern, DE Muni.
---------------------------------------------------------------------------
Missouri Basin MPA argues that the Commission should allow
abrogation of existing wholesale power and transmission arrangements if
the customer can demonstrate the undue competitive disadvantage caused
by the arrangement.
A few commenters support some form of generic contract
abrogation.163 CCEM asserts that existing wholesale requirements
customers must be given the right to convert to transmission service
under non-discriminatory open access tariffs.164 CCEM notes that
this is the same relief from undue discrimination that the Commission
afforded to pipeline customers in Order Nos. 436 and 500.165 CCEM
emphasizes that here, in contrast to what occurred in the gas industry,
``[c]onversion rights should be understood as the logical quid pro quo
for introducing extra-contractual stranded-cost recovery rights into
the wholesale requirements contracts of electric utilities.'' 166
NRECA asserts that it would be unduly discriminatory to allow new
transmission customers to use the open access transmission tariffs, but
not allow existing customers the same access.167
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\163\ E.g., NRECA, CCEM, ELCON, DE Muni, Oglethorpe. Portland
maintains that it would be in the public interest to abrogate
existing contracts completely, but recommends that such action be
taken only on a case-by-case basis.
\164\ See also VT DPS, NYMEX.
\165\ See also VT DPS, Portland.
\166\ CCEM Initial Comments at 26. See also ELCON, VT DPS, Blue
Ridge, NYMEX, OK Com, Missouri Basin MPA, Texas-New Mexico, TDU
Systems.
\167\ See also TDU Systems, Texas-New Mexico, TAPS, Wisconsin
Municipals.
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TAPS says that if those who now have discriminatory contracts are
forced to live with those contracts, a fully competitive market will be
delayed considerably.168 Moreover, TAPS argues, the Commission has
a statutory duty to remedy the undue discrimination that it is only now
recognizing. Even if the Commission will not abrogate these contracts
across the board, TAPS asserts that we should use our section 206
authority to do so on a contract-by-contract basis.
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\168\ See also NorAm. UtiliCorp argues that existing contracts
should not be allowed to extend indefinitely (as through
``evergreen'' clauses) without adopting comparability. See also
Texaco, Wisconsin Municipals, Phelps Dodge.
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San Francisco requests that the Commission clarify that a holder of
capacity rights under an existing
[[Page 21557]]
contract can extend contractual rights to transmission access at least
coterminous with the life of the project and under a roll-over or
renewal contract on the same basis as provided in the existing
contract. Anoka EC proposes that when a wholesale purchaser's contract
expires, it should have a right of first refusal to contract for the
transmission capacity to which it previously had a right. Knoxville
urges the Commission to require renegotiation of the notice and/or term
of all existing contracts for which the voluntary termination period
exceeds the time frame for implementation of the final rule.
NEPCO suggests that we require existing power contracts that allow
rate changes to be separated into their generation and transmission
components, without otherwise disturbing their terms; this would allow
comparisons between the transmission service the utility provides to
its power customers and the service it offers to others.169
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\169\ See also Industrial Energy Applications.
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Coordination Agreements
CINergy argues that coordination agreements should not be excluded
from the comparability standard and that the Commission should use its
authority under section 206 to require amendments to such agreements,
just as it did in Order 636 in requiring unbundling of pipeline supply
contracts. CINergy suggests that public utilities should be given up to
three years to file the amendments to avoid hardship on the industry
and the Commission's staff. CINergy further asserts that future
transactions conducted under coordination agreements should be
unbundled and the transmission component subjected to the comparable
transmission service requirement.
Others argue that purchases under existing coordination agreements
made on behalf of retail native load should not be unbundled.170
NY Com and IL Com recommend that proposed Sec. 35.28(c) be modified to
state that the functional unbundling requirement ``exclude(s) those
wholesale purchases made by the utility to serve existing or expected
native retail load.''
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\170\ E.g., Con Ed, Detroit Edison, IL Com.
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Utilities For Improved Transition disagrees with the idea that new
transactions under existing coordination agreements should be subject
to the rule.171 It argues that the sanctity of coordination
contracts should be the same as for other contracts. Coordination
contracts are not simply agreements to agree in the future, according
to Utilities For Improved Transition; they set forth terms and rates
and merely leave the timing of transactions to be resolved in the
future. Moreover, it argues that the Commission has given no reason to
abandon its practice of encouraging coordination sales by allowing
price flexibility.
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\171\ See also Utility Workers Union, VEPCO.
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Commission Conclusion
Requirements and Transmission Contracts
We do not believe it is appropriate to order generic abrogation of
existing requirements and transmission contracts. While the Commission
did generically find it appropriate to modify natural gas contracts to
complete the move to a competitive commodity market in natural gas, we
face a different situation here. At the time the Commission addressed
this situation in the natural gas industry, it was faced with shrinking
natural gas markets, statutory escalations in natural gas ceiling
prices under the Natural Gas Policy Act, and increased production of
gas.172 In other words, there was a market failure in the industry
that required the extraordinary measure of generically allowing all
customers to break their contracts with pipelines.
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\172\ See Pierce, Richard J., Reconstituting the Natural Gas
Industry from Wellhead to Burnertip, 9 Energy L.J. 1 (1988).
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In contrast, there is no such market failure in the electric
industry. Although changes in the industry have been and continue to be
dramatic, we do not believe they compel generic abrogation of
requirements and transmission contracts.173
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\173\ In addition, we do not believe that unfavorable
requirements contracts will derail the attainment of competitive
wholesale power markets. Indeed, many of the commenters support this
position and seek to retain their existing requirements contracts.
---------------------------------------------------------------------------
While we have concluded that current conditions in the wholesale
power market do not warrant the generic modification of requirements
contracts, we conclude nonetheless that the modification of certain
requirements contracts on a case-by-case basis may be appropriate. We
conclude further that, even if customers under such contracts are bound
by so-called Mobile-Sierra clauses, they nonetheless ought to have the
opportunity to demonstrate that their contracts no longer are just and
reasonable.
The Commission finds that it would be against the public interest
to permit a Mobile-Sierra clause in an existing wholesale requirements
contract to preclude the parties to such a contract from the
opportunity to realize the benefits of the competitive wholesale power
markets. For purposes of this finding, the Commission defines existing
requirements contracts as contracts executed on or before July 11,
1994.174 By operation of this finding, a party to a requirements
contract containing a Mobile-Sierra clause no longer will have the
burden of establishing independently that it is in the public interest
to permit the modification of such contract. The party, however, still
will have the burden of establishing that such contract no longer is
just and reasonable and therefore ought to be modified.
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\174\ This is consistent with the definition of existing
requirements contracts we have used for purposes of stranded cost
recovery.
---------------------------------------------------------------------------
This finding complements the Commission's finding that,
notwithstanding a Mobile-Sierra clause in an existing requirements
contract, it is in the public interest to permit amendments to add
stranded cost provisions to such contracts if the public utility
proposing the amendment can meet the evidentiary requirements of this
Rule.175 The Commission's complementary Mobile-Sierra findings are
not mutually exclusive. Any contract modification approved under this
Section shall provide for the utility's recovery of any costs stranded
consistent with the contract modification. The stranded costs must be
prudently incurred, legitimate and verifiable, as provided in Section
IV.J. Further, the Commission has concluded that if a customer is
permitted to argue for modification of existing contracts that are less
favorable to it than other generation alternatives, then the utility
should be able to seek modification of contracts that may be beneficial
to the customer.
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\175\ See Section IV.J.5.
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The Commission believes that the most productive way to analyze
contract modification issues is to consider simultaneously both the
selling public utility's claims, if any, that it had a reasonable
expectation of continuing to serve the customer beyond the term of the
contract and the customer's claim, if any, that the contract no longer
is just and reasonable and therefore ought to be modified. Thus, if the
selling public utility intends to claim stranded costs, it must present
that claim in any section 206 proceeding brought by the customer to
shorten or terminate the contract. Similarly, if the customer intends
to claim that the notice or termination provision of its existing
requirements contract is unjust and unreasonable, it must present that
claim in any proceeding brought by the selling public utility to seek
recovery of stranded
[[Page 21558]]
costs. This will promote administrative efficiency and will permit the
Commission to consider how the contracting parties' claims bear on one
another.
The Commission does not take contract modification lightly. Whether
a utility is seeking a contract amendment to permit stranded cost
recovery based on expectations beyond the stated term of the contract,
or a customer is seeking to shorten or eliminate the term of an
existing contract, we believe that each has a heavy burden in
demonstrating that the contract ought to be modified. Still, we believe
that given the industry circumstances now facing us, both selling
utilities and their customers ought to have an opportunity to make the
case that their existing requirements contracts ought to be modified.
By providing both buyers and sellers this opportunity, the Commission
attempts to strike a reasonable balance of the interests of all market
participants. The Commission expects that many of the arguments
presented by buyers and sellers in such proceedings will be fact
specific.
We note that because we are not abrogating existing requirements
and transmission contracts generically and because the functional
unbundling requirement of the Final Rule applies only to new wholesale
services, the terms and conditions of the Final Rule pro forma tariff
do not apply to service under existing requirements contracts. However,
if a customer's existing bundled service (transmission and generation)
contract or transmission-only contract expires, and the customer takes
any new transmission service from its former supplier, the terms and
conditions of the Final Rule tariff would then apply to the
transmission service that the customer receives.
A further issue concerning firm contract customers is their right
to transmission capacity (and the rate for such capacity) when their
contracts expire by their own terms or become subject to renewal or
rollover. We have concluded that all firm transmission customers
(requirements and transmission-only), upon the expiration of their
contracts or at the time their contracts become subject to renewal or
rollover, should have the right to continue to take transmission
service from their existing transmission provider. The limitations are
that the underlying contract must have been for a term of one-year or
more and the existing customer must agree to match the rate offered by
another potential customer, up to the transmission provider's maximum
filed transmission rate at that time, and to accept a contract term at
least as long as that offered by the potential customer.176 This
means that there is no right to grandfather the historical price of the
transmission service. Thus, if not enough capacity is available to meet
all requests for service, the right of first refusal gives the capacity
to the existing customer who had contractually been using the capacity
on a long-term, firm basis, assuming that it meets the conditions set
forth above. Moreover, this limited right of first refusal is not a
one-time right of first refusal for contracts existing as of the date
of the final rule, but is an ongoing right that may be exercised at the
end of all firm contract (including all future unbundled transmission
contracts) terms. A customer converting existing bundled service to the
Final Rule pro forma tariff would not have a reservation priority for
capacity expansions, unless the existing contract provides for future
transmission to the customer that requires capacity expansion.177
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\176\ This right of first refusal exists whether or not the
customer buys power from the historical utility supplier or another
power supplier. If the customer chooses a new power supplier and
this substantially changes the location or direction of its power
flows, the customer's right to continue taking transmission service
from its existing transmission provider may be affected by
transmission constraints associated with the change.
\177\ The above discussion on a right of first refusal addresses
firm contract customers. However, the same logic applies to retail
customers.
---------------------------------------------------------------------------
Finally, with respect to all existing requirements contracts and
tariffs that provide for bundled rates, we will require all public
utilities to make informational filings setting forth the unbundled
power and transmission rates reflected in those contracts and tariffs.
These informational rates must be submitted to the Commission within 60
days of publication of the Final Rule in the Federal Register and must
also be included as a line item on all bills submitted to wholesale
customers in the third month following the effective date of this final
rule. The unbundled informational rates will permit wholesale customers
to compare rates in anticipation of their contracts expiring so that
they can evaluate alternative contracts.
Coordination Agreements
The situation as to coordination agreements requires a slightly
different approach.178 While we also believe that as a general
matter it is important not to generically abrogate any coordination
agreements, this is particularly true for non-economy energy
coordination agreements that may reflect complementary long-term
obligations among the parties. This type of agreement presents special
problems and, as discussed below, we will not generically require this
type of coordination agreement to be modified.179
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\178\ For purposes of this discussion, we define coordination
agreements as all power sales agreements, except requirements
service agreements. In addition, for purposes of implementing the
non-discriminatory, open access requirements of the Final Rule, we
are dividing bilateral coordination agreements into two general
categories: (1) Economy energy coordination agreements are contracts
and service schedules thereunder that provide for trading of
electric energy on an ``if, as, and when available'' basis, but do
not require either the seller or buyer to engage in a particular
transaction; and (2) non-economy energy coordination agreements are
any non-requirements service agreements, except economy energy
coordination agreements.
\179\ The requirements for power pools and other multilateral
arrangements are discussed in detail in Section IV.F.
---------------------------------------------------------------------------
Hundreds of coordination agreements exist in the industry today.
Many are open-ended agreements that permit new transactions to occur
well into the future. Because these contracts may not expire of their
own terms in a reasonable time, they may present a larger and more
enduring obstacle to non-discriminatory open access and more
competitive bulk power markets. Thus, to assure that non-discriminatory
open access becomes a reality in the relatively near future, we will
partially modify existing economy energy coordination agreements. We
will condition future sales and purchase transactions under existing
economy energy coordination agreements 180 to require that the
transmission service associated with those transactions be provided
pursuant to this Rule's requirements of non-discriminatory open access,
no later than December 31, 1996.181 We also will require that for
new economy energy coordination agreements 182 where the
transmission owner uses its transmission system to make economy energy
sales or purchases, the transmission owner must take such service under
its own transmission tariff as of the date trading begins under the
agreement.183
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\180\ Those executed prior to 60 days after publication of the
Open Access Rule in the Federal Register.
\181\ The requirement to unbundle future transactions under
existing economy energy coordination agreements means that if the
transmission owner uses its transmission system to make economy
energy coordination sales or purchases, it must take service for
these transactions under its own transmission tariff after December
31, 1996.
\182\ Those executed 60 days after publication of the Open
Access Rule in the Federal Register.
\183\ Accordingly, transmission service needed for sales or
purchases under all new economy energy coordination agreements will
be pursuant to the Final Rule pro forma tariff.
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[[Page 21559]]
Finally, we will treat non-economy energy coordination agreements
differently. We will not require their modification. However, this does
not insulate such agreements from complaints that transmission service
provided under such agreements be provided pursuant to the Final Rule
pro forma tariff.
With respect to coordination pricing practices, we conclude that
non-discriminatory open access consistent with the requirements of this
Rule is necessary if we are to allow utilities to continue to use
market-driven pricing, such as split-the-savings pricing, for
coordination sales. Absent such non-discriminatory open access, a
utility would be able to deny access to others so as to obtain a higher
price for its own power sales.
6. Flow-Based Contracting and Pricing
In the NOPR, the Commission discussed the procedures to be used in
establishing Stage One rates. These Stage One rates were proposed as an
administrative convenience. The proposal merely followed the long-
established practice of establishing rates on the basis of contract
path pricing.184 The Commission made no determination with respect
to the appropriateness of flow-based pricing or contracting for other
purposes.185
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\184\ A contract path is simply a path that can be designated to
form a single continuous electrical path between the parties to an
agreement. Because of the laws of physics, it is unlikely that the
actual power flow will follow that contract path.
\185\ Flow-based pricing or contracting would be designed to
account for the actual power flows on a transmission system. It
would take into account the ``unscheduled flows'' that occur under a
contract path regime.
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Comments
Most of the commenters addressing this issue recommend that
industry or the Commission--either in this rule or ultimately--dispense
with the traditional contract path basis for pricing and contracting.
Most commenters also recommend that the Commission adopt or encourage a
regional approach to the solution of transmission pricing problems,
though they differ markedly in how to account for flows.186
---------------------------------------------------------------------------
\186\ E.g., APPA, TAPS, NY Energy Buyers, Arcadia, Brownsville,
Detroit Edison Customers, AMP-Ohio, Michigan Systems.
---------------------------------------------------------------------------
Transmission customers generally seek to rid themselves of
``pancaked'' transmission rates that are associated with the
traditional approach to transmission pricing.187 They propose the
development of regionwide transmission rates, perhaps determined on a
pool or RTG basis. Most, however, do not discuss how to account for
unscheduled flows.188
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\187\ E.g., AMP-Ohio, NRECA, APPA, Detroit Edison Wholesale
Customers, MMWEC, Missouri Basin MPA, Air Liquide, American Wind
Energy, Associated Power, CCEM.
\188\ Some commenters propose the development of a regional rate
on a postage stamp basis, without regard to distance travelled or
the actual path of power flows. E.g., Air Liquide, American National
Power, CA Energy Co. Several commenters do, however, propose ways to
account for unscheduled flows. E.g., American Forest & Paper, DE
Muni, Lower Colorado River Authority.
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Many transmission providers, some regulatory authorities, and some
individuals strongly support flow-based pricing. Most of these
commenters recognize a need for a regional approach to resolve
transmission pricing concerns.189 However, many of them also
appear to accept contract pricing in the near term because of the need
to implement open access quickly.190 NERC recommends that the
Commission maintain an open position on the transfer scheduling process
and supports changes in the process to reflect actual power flows. EEI
suggests that the Commission should be willing to deviate from a
contract path approach, since competition may be accompanied by greater
unscheduled flows and contract pricing is not well equipped to deal
with such flows. However, EEI concludes that a single approach to
pricing will not be appropriate for all systems.
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\189\ E.g., CSW, EDS Utilities, Dominion, CINergy, KS Com, CT
DPUC, Com Ed, Hogan.
\190\ NYMEX favors contract path pricing because of its
familiarity and believes that the issue should primarily be resolved
by the transmitting utilities. AEP believes that the primary
responsibility lies with industry to develop alternative pricing
structures.
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Other commenters, however, do raise concerns with respect to flow-
based pricing. AEC & SMEPA considers flow-based pricing to be flawed
because that method makes an individual customer responsible for load
flow effects caused by a third party's development of the third-party's
transmission system over which the customer and its transmission
provider had no control. Dayton P&L fears that competition would be
lessened under flow-based pricing because utilities with large
transmission systems would dominate the market.
Several commenters oppose Southern's and United Illuminating's
flow-based proposals, arguing that the methodologies are based on
estimates of actual flows or a set of conditions with limited
applicability. Various commenters also believe that a single rate is
flawed and could cause just as many problems as contract path
pricing.191
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\191\ E.g., NU, NEPCO, BECO, Florida Power Corp.
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Most commenters appear to believe that the Commission endorsed
contract path pricing in the NOPR. Hogan expresses concern that many
industry participants' understanding of the pro forma tariffs is based
on the fiction of the contract path. The MT Dept of Environmental
Quality believes that despite the Commission's pledge to consider
innovative pricing proposals,192 such proposals will receive heavy
scrutiny, while conventional contract path pricing proposals will
receive nearly automatic approval. Dominion is concerned that relying
on the initiative of individual transmission owners to develop flow-
based pricing will yield slow and patchy results.
---------------------------------------------------------------------------
\192\ See FERC Stats. & Regs. para. 31,005.
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Commission Conclusion
We will not, at this time, require that flow-based pricing and
contracting be used in the electric industry. In reaching this
conclusion, we recognize that there may be difficulties in using a
traditional contract path approach in a non-discriminatory open access
transmission environment, as described by Hogan and others. At the same
time, however, contract path pricing and contracting is the
longstanding approach used in the electric industry and it is the
approach familiar to all participants in the industry. To require now a
dramatic overhaul of the traditional approach--such as a shift to some
form of flow-based pricing and contracting--could severely slow, if not
derailed for some time, the move to open access and more competitive
wholesale bulk power markets. In addition, we believe it is premature
for the Commission to impose generically a new pricing regime without
the benefit of any experience with such pricing. We welcome new and
innovative proposals, but we will not impose them in this Rule.
While we are not requiring the use of any form of flow-based
pricing, we recognize that some versions of flow-based pricing could
have benefits. For example, some versions of flow-based pricing could
more accurately reflect and price the actual power flows on
transmission systems and thus could produce efficiency gains, better
generation siting decisions, and benefits for customers and utilities
alike. Other versions could more accurately assign capacity rights in
accordance with a party's contribution to capacity costs.
These potential benefits, however, will not simply come about in
the abstract. Flow-based pricing methodologies that will achieve the
benefits sought by most of the
[[Page 21560]]
participants in the industry are in a development stage and require
further work and refinement to address some of the difficulties
associated with flow-based approaches. Concurrent work on OASIS and
resolving available transmission capability issues may help resolve
flow-based issues. However, as demonstrated by the paucity of possible
methodologies presented in the comments, developing workable
methodologies will be difficult. As we explained in our Transmission
Pricing Policy Statement, we are receptive to proposals for alternative
rate methodologies, such as distance-sensitive and flow-based pricing,
as long as the proposals are well supported. However, we have yet to
receive a formal rate application for a flow-based pricing methodology
that has been tested enough that it can be required on a generic basis.
Thus, we have decided to go forward to achieve open access and more
competitive wholesale bulk power markets without waiting for the
development of a generic flow-based pricing methodology.
We wish to emphasize further that in taking this approach we are
not endorsing the traditional contract path approach as the only
available approach. We continue to approve contract path pricing
because it is the long-established pricing method that comes to us in
rate filings by the electric industry, is administratively convenient
and feasible, and thus is a practical way to move forward now. We
remain open to alternative methodologies, but need to see better
developed approaches from the industry before we can consider generic
adoption of alternative pricing.
We also believe the adoption of flow-based pricing will be more
practical on a regional, instead of individual utility, basis. Some
forms of flow-based pricing may even require a regional approach. To
this extent, regional ISOs could be a valuable mechanism for
implementing such pricing reforms.
B. Legal Authority
The Commission reaffirms its conclusion in the NOPR that we have
the authority under the FPA to order wholesale transmission services in
interstate commerce to remedy undue discrimination by public utilities.
We analyze below the relevant cases examining our wheeling authority,
then discuss and respond to the legal arguments raised by the
commenters.
1. Bases for Legal Authority
a. Undue Discrimination/Anticompetitive Effects
In upholding the Commission's order requiring non-discriminatory
open access in the natural gas industry, the court in Associated Gas
Distributors v. FERC stated that the Natural Gas Act ``fairly
bristles'' with concern for undue discrimination.193 The same is
true of the FPA. 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.
As discussed below, AGD demonstrates that our remedial power is very
broad and includes the ability to order industry-wide non-
discriminatory open access 194 as a remedy for undue
discrimination. The AGD court reached this decision even in the face of
prior cases that acknowledged that Congress did not mandate common
carriage or explicitly empower the Commission to order direct access
for either gas transporters or electric utilities. Moreover, the
Commission's power under the FPA ``clearly carries with it the
responsibility to consider, in appropriate circumstances, the
anticompetitive effects of regulated aspects of interstate utility
operations pursuant to (FPA) sections 202 and 203, and under like
directives contained in sections 205, 206, and 207.'' 195
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\193\ Associated Gas Distributors v. FERC, 824 F.2d 981, 998
(D.C. Cir. 1987), cert. denied, 485 U.S. 1006 (1988) (AGD).
\194\ We use the term ``open access'' to refer to a public
utility's obligation to put a tariff on file offering service to
eligible customers. Access is not open to all. Specifically, the
tariff is not an offer to serve retail customers if state law does
not permit retail wheeling.
\195\ Gulf States Utilities Company v. FPC, 411 U.S. 747, 758-59
(1973).
---------------------------------------------------------------------------
Therefore, based on the mandates of sections 205 and 206 of the FPA
and the case law interpreting the Commission's authority over
transmission in interstate commerce, we conclude that we have ample
legal authority--indeed, a responsibility--under section 206 of the FPA
to order the filing of non-discriminatory open access transmission
tariffs if we find such order necessary as a remedy for undue
discrimination or anticompetitive effects.196 We discuss below the
primary court decisions that touch on our wheeling authority under
sections 205 and 206.
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\196\ In most situations, discrimination that precludes
transmission access or gives inferior access will have at least
potential anticompetitive effects because it limits access to
generation markets and thereby limits competition in generation.
Similarly, it is probable that any transmission provision that has
anticompetitive effects would also be found to be unduly
discriminatory or preferential because the anticompetitive provision
would most likely favor the transmission owner vis-a-vis others.
---------------------------------------------------------------------------
The Commission's authority to order access as a remedy for undue
discrimination under the Natural Gas Act (NGA) was upheld and discussed
in detail in AGD. In AGD, the court upheld in relevant part the
Commission's Order No. 436.197 That order found the prevailing
natural gas company practices to be ``unduly discriminatory'' within
the meaning of section 5 of the NGA (the parallel to section 206 of the
FPA) and held that if pipelines wanted blanket certification for their
transportation services, they must commit to transport gas for others
on a non-discriminatory basis; in other words, they must provide non-
discriminatory open access.
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\197\ Order No. 436, Regulation of Natural Gas Pipelines After
Partial Wellhead Decontrol, FERC Stats. & Regs., Regulations
Preambles para. 30,665 (1985).
---------------------------------------------------------------------------
In upholding the Commission's authority to require open access, the
court first noted that the opponents' arguments against such authority
must proceed ``uphill.'' The statute contains no language forbidding
the Commission to impose common carrier status on pipelines, let alone
forbidding the Commission to impose ``a specific duty that happens to
be a typical or even core component of such status.'' The court found
that the legislative history cited by the opponents came nowhere near
overcoming this statutory silence. Rather, the legislative history
supported only the proposition that Congress itself declined to impose
common carrier status.198 Emphasizing Congress' deep concern with
undue discrimination, the court found that the Commission had ample
authority to ``stamp out'' such discrimination:
\198\ AGD, supra, 824 F.2d at 997.
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The issue seems to come down to this: Although Congress
explicitly gave the Commission the power and the duty to achieve one
of the prime goals of common carriage regulation (the eradication of
undue discrimination), the Commission's attempted exercise of that
power is invalid because Congress in 1906 and 1914 and 1935 and 1938
itself refrained from affixing common carrier status directly onto
the pipelines and from authorizing the Commission to do so.
[[Page 21561]]
And this proposition is said to control no matter how sound the
Order may be as a response to the facts before the Commission. We
think this turns statutory construction upside down, letting the
failure to grant a general power prevail over the affirmative grant
of a specific one.199
---------------------------------------------------------------------------
\199\ Id. at 998.
The AGD court found that court decisions under the FPA did not support
the view that the Commission's authority to ``stamp out'' undue
discrimination is hamstrung by an inability to require non-
discriminatory open access as a remedy. These decisions are discussed
below.
One of the earliest cases on wheeling is Otter Tail Power Company
v. United States (Otter Tail).200 In that case, the Supreme Court
rejected the argument that the District Court, in a civil antitrust
suit, could not order wheeling because to do so would conflict with the
FPC's purported wheeling authority.201 The Court explained that
Congress had decided not to impose a common carrier obligation on the
electric power industry and noted that the Commission was not at that
time expressly granted power to order wheeling.202 In effect, it
concluded that because Congress did not include common carrier
provisions in the FPA, the Commission must not have any express
authority to order wheeling that would preclude the District Court from
imposing a wheeling remedy. Nowhere, however, did the Court say that
the Commission lacked authority under section 206 to remedy undue
discrimination. Indeed, that was simply not a matter before the Court
or of any consequence to its decision.
---------------------------------------------------------------------------
\200\ 410 U.S. 366 (1974).
\201\ 410 U.S. at 375-76.
\202\ Id. at 374-76.
---------------------------------------------------------------------------
In the FPA, while Congress elected not to impose common carrier
status on the electric power industry, it tempered that determination
by explicitly providing the Commission with the authority to eradicate
undue discrimination--one of the goals of common carriage
regulation.203 By providing this broad authority to the
Commission, it assured itself that in preserving ``the voluntary action
of the utilities'' it was not allowing this voluntary action to be
unfettered. It would be far-reaching indeed to conclude that Otter
Tail, which was a civil antitrust suit that raised issues entirely
unrelated to our authority under section 206, is an impediment to our
achieving one of the primary goals of the FPA--eradicating undue
discrimination in transmission in interstate commerce in the electric
power industry.
---------------------------------------------------------------------------
\203\ See AGD, 824 F.2d at 998.
---------------------------------------------------------------------------
In Richmond Power & Light Company v. FERC (Richmond),204 the
FPC, in reaction to the 1973 oil embargo, was attempting to reduce
dependence on oil. The FPC requested that utilities with excess
capacity wheel power to the New England Power Pool (NEPOOL). In
response, several suppliers and transmission owners filed rate
schedules with the FPC that provided for voluntary wheeling. Richmond
Power & Light Company (Richmond) objected to these filings, claiming
that they were unreasonable because they did not guarantee transmission
access. The FPC refused to compel the utilities to wheel Richmond's
power, stating that it did not have the authority to order a public
utility to act as a common carrier.
---------------------------------------------------------------------------
\204\ 574 F.2d 610 (D.C. Cir. 1978).
---------------------------------------------------------------------------
The D.C. Circuit upheld the Commission. It acknowledged that
Richmond's argument was persuasive in some respects, but stated that
any conditions the Commission might impose could not contravene the
FPA. The court examined the legislative history of the FPA and stated
that ``[i]f Congress had intended that utilities could inadvertently
bootstrap themselves into common-carrier status by filing rates for
voluntary service, it would not have bothered to reject mandatory
wheeling * * *.'' 205
---------------------------------------------------------------------------
\205\ Id. at 620.
---------------------------------------------------------------------------
However, the D.C. Circuit in no way indicated that the Commission
was foreclosed from ordering transmission as a remedy for undue
discrimination. Richmond also had argued that the alleged refusal of
the American Electric Power Company (AEP) and its affiliate, Indiana &
Michigan Electric Company (Indiana), to wheel Richmond's excess energy
was unlawful discrimination because AEP and Indiana wheeled higher-
priced electricity from other AEP affiliates. The court acknowledged
that Richmond's claim of unlawful discrimination was theoretically
valid, but found that Richmond had failed to prove its case. It noted
that if Richmond had argued that the rates were unjustifiably
discriminatory, or that Indiana's failure to use its transmission
capability fully or to purchase less expensive electricity for wheeling
resulted in unnecessarily high rates, a different case would be before
the court.206 The case thus does not in any way limit the
Commission's authority to remedy undue discrimination.
---------------------------------------------------------------------------
\206\ Id. at 623, nn.53 and 57.
---------------------------------------------------------------------------
In Central Iowa Power Cooperative v. FERC,207 the FPC 208
reviewed the terms of the Mid-Continent Area Power Pool (MAPP)
Agreement under its section 205 and 206 authority. The agreement
contained two membership limitations. First, the agreement established
two classes of membership, with one class being entitled to more
privileges than the other. Second, the agreement excluded non-
generating distribution systems from pool services. The FPC found the
first limitation on membership--the two-class system--to be unduly
discriminatory and not reasonably related to MAPP's objectives. The FPC
conditioned approval of the agreement under section 206 on the removal
of the unduly discriminatory provision. The FPC found that the second
limitation, the exclusion of non-generating distribution systems, was
not anticompetitive and did not render the agreement inconsistent with
the public interest.
---------------------------------------------------------------------------
\207\ 606 F.2d 1156 (D.C. Cir. 1979).
\208\ While Central Iowa was pending, certain of the functions
of the FPC were transferred to the FERC under the DOE Organization
Act. Accordingly, the FERC was substituted for the FPC as the
respondent in the case.
---------------------------------------------------------------------------
On appeal, the D.C. Circuit affirmed the FPC's decision. The court
found that the FPC did have authority to order changes in the scope of
the MAPP agreement, if the agreement was unjust, unreasonable, unduly
discriminatory or preferential under section 206 of the FPA. The court
stated:
The Commission had authority, * * * under section 206 of the
Act, * * * to order changes in the limited scope of the Agreement,
including the addition of pool services, if, in the absence of such
modifications, the Agreement presented ``any rule, regulation,
practice or contract (that was) unjust, unreasonable, unduly
discriminatory or preferential.'' 209
---------------------------------------------------------------------------
\209\ 606 F.2d at 1168.
However, the court agreed with the FPC's conclusion that the limited
scope of MAPP was not unjust, unreasonable, or unduly discriminatory.
The court recognized that a pool was not invalid under section 206
merely because a more comprehensive arrangement was possible.
The D.C. Circuit upheld the Commission's refusal to eliminate the
second limitation on membership by ordering MAPP participants to wheel
to non-generating electric systems.210 However, neither the
Commission nor the court was presented with the argument that wheeling
was necessary as a remedy for undue discrimination.
---------------------------------------------------------------------------
\210\ Id. at 1169; see also Municipalities of Groton v. FERC,
587 F.2d 1296 (D.C. Cir. 1978).
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[[Page 21562]]
In Florida Power & Light Company v. FERC (Florida),211 the
Commission ordered Florida Power & Light Company (FP&L) to file a
tariff setting forth FP&L's policy relating to the availability of
transmission service.212 FP&L objected to including such a policy
statement in its tariff and argued that the filing of such a policy
would convert FP&L into a common carrier by obligating it to offer
service to all customers.213 There was no finding that the action
ordered was necessary to remedy undue discrimination.
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\211\ 660 F.2d 668 (5th Cir. 1981), cert. denied sub nom. Fort
Pierce Utilities Authority v. FERC, 459 U.S. 1156 (1983).
\212\ FP&L provided transmission service when four conditions
were met: (1) The specific potential seller and buyer were
contractually identified; (2) the magnitude, time and duration of
the transaction were specified prior to the commencement of the
transmission; (3) it could be determined that the transmission
capacity would be available for the term of the contract; and (4)
the rate was sufficient to cover FP&L's costs.
\213\ All utilities requesting wheeling services, subject to
availability, would be entitled to receive transmission service
under the filed terms. Any changes to a filed rate must be filed
with the Commission. This is the so-called ``filed rate doctrine.''
See Northwestern Public Service Company v. Montana-Dakota Utilities
Company, 181 F.2d 19, 22 (8th Cir. 1980), aff'd, 341 U.S. 246
(1951).
---------------------------------------------------------------------------
The Fifth Circuit Court of Appeals agreed with FP&L that the
mandatory filing of the policy statement would require FP&L to provide
transmission service beyond its voluntary commitment because such a
requirement would change its duties and liabilities.214 The
Commission order would impose common carrier status on FP&L, the court
found.215 The court noted that the Commission did not rely on a
finding of anticompetitive behavior and therefore the court did not
address the Commission's power to remedy antitrust violations.216
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\214\ Under the filed rate doctrine, a refusal to wheel would be
unduly discriminatory under section 206 of the FPA. As the court
acknowledged, a customer refused service could petition the
Commission to find that FP&L's policy of availability was unduly
discriminatory under section 206(a) of the FPA. The court said that
in the absence of a tariff on file, a utility refused wheeling
services would be unable to claim discrimination under section
206(a) of the FPA. 660 F.2d at 675 (expressing ``serious doubts that
such a petition would be successful in the absence of a tariff'').
\215\ Id. at 676.
\216\ Id. at 678.
---------------------------------------------------------------------------
The AGD court explicitly rejected the claim that the above line of
cases establishes that the Commission lacks authority to require non-
discriminatory open access.217 Opponents of the Commission's order
argued in AGD that Richmond and Florida, supra, stand for the
proposition that the Commission cannot indirectly do what it allegedly
cannot do directly, that is, impose common carriage. The AGD court
rejected these arguments, stating that the petitioners read the
electric cases far too broadly:
\217\ The AGD court did not address New York State Electric &
Gas Corporation v. FERC, 638 F.2d 388 (2d Cir. 1980), cert. denied,
454 U.S. 821 (1981) (NYSEG), presumably because that case did not
concern whether the Commission could order wheeling as a remedy for
undue discrimination.
---------------------------------------------------------------------------
(n)either Richmond nor Florida comes anywhere near stating that the
Commission is barred from imposing an open-access condition in all
circumstances.218
---------------------------------------------------------------------------
\218\ 824 F.2d at 999.
The court noted that the Florida case had expressly left open the
question of whether the Commission would be entitled to use an open
access condition as a remedy for anticompetitive conduct, and that in
Richmond the D.C. Circuit had said little more than that unwillingness
to transmit for all could not be automatically deemed undue
discrimination. The court also noted the Central Iowa case, supra, in
which it had upheld a Commission order that found a power pooling
agreement discriminatory on its face because the agreement gave one
class of membership privileged status over another. The court stated
that the Central Iowa case ``upholds the power of the Commission to
subject approval of a set of voluntary transactions to a condition that
providers open up the class of permissible users.'' 219 The court
added that it refused to ``turn statutory construction upside down'' by
letting Congress' failure to grant a general power of common carriage
prevail over the affirmative grant of the specific power to eradicate
undue discrimination.220
---------------------------------------------------------------------------
\219\ Id. at 999.
\220\ Id. at 1006.
---------------------------------------------------------------------------
We conclude that AGD's analysis of undue discrimination under
sections 4 and 5 of the Natural Gas Act is equally applicable to an
undue discrimination analysis under sections 205 and 206 of the FPA.
The Commission and courts have long recognized that the NGA was
patterned after the FPA and that the two statutes should be interpreted
in the same manner.221 Thus, we conclude that we have the
authority to remedy undue discrimination and anticompetitive effects by
requiring all public utilities that own, control or operate
transmission facilities to file non-discriminatory open access
transmission tariffs.
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\221\ See, e.g., FPC v. Sierra Pacific Power Company, 350 U.S.
348, 353 (1956); Arkansas Louisiana Gas Company v. Hall, 453 U.S.
571, 577 n.7 (1981); and Kentucky Utilities Company v. FERC, 760
F.2d 1321, 1325 n.6 (D.C. Cir. 1985). Section 206 of the FPA was
recently revised and now differs from section 5 of the NGA, but not
in a manner significant to our discussion here. See 16 U.S.C. 824e
(b) and (c).
---------------------------------------------------------------------------
b. Section 211 of the Federal Power Act
In concluding that we must invoke our section 206 authority to
remedy undue discrimination and anticompetitive effects in the electric
industry, we have carefully considered the goals of Title VII of the
Energy Policy Act, and whether section 211 of the FPA, by itself, is
sufficient to remedy undue discrimination in public utility
transmission services. Title VII of the Energy Policy Act, which
amended section 211 of the FPA to give the Commission broader authority
to order wheeling in the public interest on a case-by-case basis,
reflects the intent of Congress to encourage competitive wholesale
electric markets. Section 211 provides a means for wholesale power
sellers and buyers to obtain transmission services necessary to compete
in, or to reach, competitive markets, and is a valuable tool to
encourage competitive markets. However, in amending section 211,
Congress left unaltered the authorities and obligations of the
Commission under sections 205 and 206 (similar to our authorities and
obligations under sections 4 and 5 of the NGA) to remedy undue
discrimination. In addition, as discussed below, reliance on section
211 alone in some circumstances can result in the perpetuation of,
rather than the elimination of, undue discrimination and
anticompetitive effects.
First, there are inherent delays in the procedures for obtaining
service under section 211. However, for competitive reasons, many
transactions must be negotiated relatively quickly. Many competitive
opportunities will be lost by the time the Commission can issue a final
order under section 211. Case-by-case section 211 proceedings are not a
substitute for tariffs of general applicability that permit timely,
non-discriminatory access on request.
Second, discrimination is inherent in the current industry
environment in which some customers and sellers are served by open
access systems, and others have to rely on negotiated bilateral
arrangements or the mandatory section 211 process. The end result is
discrimination in the ability to obtain transmission services, as well
as in the quality and prices of the services. This national patchwork
of open and closed transmission systems, with disparate terms and
conditions of service, cannot be cured effectively through section 211.
The Commission believes that its actions under sections 205 and 206
will complement the section 211 procedures
[[Page 21563]]
to achieve both the Energy Policy Act's goals of creating more
competitive bulk power markets and lower rates for consumers and the
Federal Power Act's explicit direction in section 205(b) that no public
utility shall, with respect to any transmission in interstate commerce,
grant any undue preference or advantage to any person or subject any
person to any undue prejudice or disadvantage.
2. Response to Commenters Opposing Our Legal Authority
a. Authority to Order Open Access Tariffs
Comments
Initial Comments Supporting Commission Authority
A number of commenters support or state that they do not oppose the
Commission's authority to order open access tariffs.222 NIEP and
CCEM explain that the AGD decision supports the Commission's action in
this proceeding. ELCON asserts that the Commission's ``extensive
treatment of the relevant case law demonstrating FERC's authority to
remedy this discrimination is legally sound.'' UtiliCorp argues that
section 211 supports, rather than undermines, the Commission's
authority for the NOPR because it reflects Congress's intention to
encourage more competitive bulk power markets.
---------------------------------------------------------------------------
\222\ NIEP, ELCON, CINergy, UtiliCorp, TAPS, SBA, Entergy, NY
Energy Buyers, Sierra.
---------------------------------------------------------------------------
Initial Comments Opposing Commission Authority
Other commenters assert that the Commission has improperly relied
on sections 205 and 206 of the FPA to require open access.223 They
argue, for instance, that Otter Tail should be read as a broad
constraint on the Commission's authority to order wheeling for any
purpose and that the AGD decision does not undermine that holding or
the cases following Otter Tail.224 In support, some of these
commenters discuss Richmond Power & Light, New York State Electric &
Gas Corporation, and Florida Power & Light Company, the same cases
discussed by the Commission in the NOPR.225
---------------------------------------------------------------------------
\223\ E.g., EEI, Atlantic City, Allegheny, VA Com, PA Com, Ohio
Edison, Southern, Utilities For Improved Transition, Dayton P&L,
SCE&G, Centerior, BG&E, Central Hudson, NY Com, Salt River, Carolina
P&L, Union Electric, VEPCO, Utility Workers Union.
\224\ EEI, VA Com, Union Electric.
\225\ E.g., EEI, VA Com, NY Com, PA Com, Salt River, Southern,
Dayton P&L, Detroit Edison, BG&E.
---------------------------------------------------------------------------
For example, EEI highlights the AGD court's discussion noting the
difference between the legislative history of the NGA and that of the
FPA, which the court stated was not as strong as that of the NGA.
Moreover, EEI argues that the court found that section 7 of the NGA
provided support for the Commission's actions in Order No. 436 and that
such section 7 conditioning authority is lacking under the FPA.
Allegheny notes that AGD did not overrule Otter Tail. Dayton P&L states
that, in the gas case, the Commission was responding to voluntary
filings by pipelines. It also says that before the NOPR, the Commission
itself saw its authority as more limited. SCE&G points to differences
between Commission jurisdiction over public utilities and gas pipelines
and criticizes the Commission's alleged assumption that the
circumstances involved in the gas and electric industries are virtually
identical.
PA Com argues that the attempt to analogize to the NGA and the
cases that refer to that Act is inconsistent with the technical and
engineering realities of the electric transmission grid and that
extensive comparisons between the natural gas industry and the electric
industry are misleading.226
---------------------------------------------------------------------------
\226\ See also NY Com (NGA has no parallel provision to section
211 of the FPA), Salt River.
---------------------------------------------------------------------------
FL Com argues that, in relying on sections 205 and 206 to establish
generic open access transmission tariffs for all public utilities, the
Commission violates the court's decision in Cajun Electric Power
Cooperative v. FERC, 28 F.3d 173 at 179 (D.C. Cir. 1994), where, FL Com
argues, the court refused to allow the Commission to use a non-
evidentiary ruling when there were material facts at issue.
Reply Comments
CCEM responds that EEI and others confuse the obligations of a
common carrier with the duty of public utilities not to unduly
discriminate. It says that AGD supports the Commission's authority
because the legislative history of the FPA and the NGA are similar with
respect to common carriage. According to CCEM, early versions of both
statutes would have made the regulated industries operate as common
carriers (citing Otter Tail, the legislative history of the FPA, the
legislative history of the Public Utility Holding Company Act, and the
legislative history of the Mineral Leasing Act), but that Congress
chose not to impose the common carrier obligations.
CCEM also says that the duties the Commission imposed on the gas
industry and those in the NOPR are not common carriage in any event.
According to CCEM, a common carrier must carry all goods offered
(citing Am. Trucking Assoc. v. Atchison, T. & S.F. Ry. Co., 387 U.S.
397, 406 (1967)). Finally, CCEM cites Stephenson v. Binford, 287 U.S.
251, 265-66 (1932), where the Supreme Court held that obligations that
are typical of common carriers can be imposed on contract motor
carriers.
CCEM further disagrees with EEI's argument that the enactment of
section 211 was a disavowal of any other Commission authority to order
transmission.
ELCON also disagrees with EEI's claim that the Energy Policy Act
undermines the Commission's pre-existing section 205 and 206 authority.
It states that the savings clause in section 212(e) of the FPA, as
amended, explicitly expresses Congress' intention not to undermine the
Commission's pre-existing authority and that the legislative history
contains nothing to suggest otherwise.
Similarly, in response to those who argue that section 211 is the
only source of authority for the Commission to order transmission, NIEP
argues that sections 211 and 212 serve purposes different from section
206. It says that the Commission's authority to order transmission in
the ``public interest'' under sections 211 and 212 is not synonymous
with its authority to order transmission as a remedy for undue
discrimination under section 206; the two standards are complementary
but distinct:
Although broadly applicable, the Commission's ability to order
wheeling under sections 211 and 212 is carefully limited by a number
of procedural provisions. Foremost among these is the requirement
that the wheeling may be ordered only upon a specific application
for transmission services. FERC's authority to act in the public
interest is thus confined to the individual case.
By contrast, FERC's remedial powers under Section 206 can be
exercised upon a finding of unjust, unreasonable or unduly
discriminatory or preferential practices. Once that finding has been
made, however, the form and substance of the remedy is left entirely
to the FERC's discretion. If FERC deems it necessary, FERC may adopt
generally applicable rules or practices as a countermeasure to
discriminatory acts, including ordering utilities to file generally
applicable transmission tariffs.\227\
---------------------------------------------------------------------------
\227\ NIEP Reply Comments at 8.
NIEP also points out that the legislative history does not address
the Commission's authority to order transmission as a remedy for undue
discrimination. It challenges the
[[Page 21564]]
interpretation of the legislative history advanced by some
commenters.228
---------------------------------------------------------------------------
\228\ NIEP explains that
(W)hile much has been made of the Senate report accompanying
S.2114, which subsequently became part of PURPA in 1978, that report
does not illustrate an intent to limit FERC's authority to remedy
undue discrimination under section 206. That report characterizes
the Supreme Court's decision in Otter Tail as holding that ``the
Federal Power Act leaves open a gap in its failure to assign the FPC
general authority to order wheeling in this situation * * *.'' The
``situation'' to which the Report refers is not discrimination,
however. Instead, the statement appears to make reference to
circumstances in which general public interest concerns, such as
reliability, efficiency and competition, are at stake. Thus, Senate
Report 2114 is simply not a limitation on the Commission's remedial
powers under Sections 206.
NIEP Reply Comments at 8-9 (citations omitted).
---------------------------------------------------------------------------
Next, NIEP defends the Commission's proposed findings that there is
generally undue discrimination in the provision of transmission
service. It notes that when an agency acts on an industry-wide basis,
the agency does not have to make a finding as to each particular case.
Finally, NIEP responds to those who argue that AGD is not on point.
It notes that the AGD court discussed electric cases and emphasizes the
court's statement that the NGA ``fairly bristles with concern for undue
discrimination''--a statement that is equally true of the FPA.
TDU Systems responds to the argument that Otter Tail is a broad
constraint on the Commission's authority to order transmission.229
At issue in that case, it argues, was the reach of the Sherman Act, not
of FPA sections 205 and 206. Similarly, it argues, the Florida Power
case is not on point, and the court there specifically said that it was
not deciding whether the Commission could have ordered wheeling as a
remedy for anticompetitive activities. Moreover, TDU Systems asserts
that EEI's use of a quote from a single Senator should carry no weight,
since it is a well-established principle of statutory construction that
such statements have little value. Finally, it points out that the AGD
court itself did not view Otter Tail or other electric precedent as
forbidding the Commission to order wheeling as a remedy for undue
discrimination.
---------------------------------------------------------------------------
\229\ See also Entergy.
---------------------------------------------------------------------------
Entergy asserts that Congress's refusal to require utilities to
provide transmission as common carriers or whenever it is in the public
interest was merely a decision not to give the Commission general
authority to order wheeling, without regard to undue discrimination.
Thus, the Otter Tail language concerning the absence of a common
carrier requirement does not demonstrate that Congress meant to limit
the Commission's authority to remedy undue discrimination.
ELCON disputes EEI's reading of NYSEG, noting that the NYSEG court
explicitly stated:
Nor do we suggest that the Commission is powerless to review a
wheeling agreement under section 206 without following the
requirements of sections 211 and 212.\230\)
---------------------------------------------------------------------------
\230\ ELCON Initial Comments at 7 (quoting NYSEG at 403).
TAPS discusses numerous cases, including the primary cases relied
upon by the Commission, and disposes of NYSEG by stating that it is no
longer good law, if it ever was.
Commission Conclusion
There can be no question that the Commission has the authority to
remedy undue discrimination. Sections 205 and 206 of the FPA mandate
that we 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. Under these sections, 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 we must disapprove those contracts and practices that
do not meet this standard. Our discretion is at its zenith in
fashioning remedies for undue discrimination.231
---------------------------------------------------------------------------
\231\ See, e.g.,- Niagara Mohawk Power Corporation v. FPC, 379
F.2d 153, 159 (D.C. Cir. 1967).
---------------------------------------------------------------------------
Some commenters, however, challenge our authority to order
industry-wide non-discriminatory open access as a remedy for the undue
discrimination we have found in the industry. As summarized above, they
essentially assert that we are prohibited by court precedent, the
legislative history of the FPA, and sections 211 and 212 of the FPA
from ordering wheeling as a remedy for undue discrimination. We
disagree and conclude that we have the authority--indeed, a
responsibility--to require non-discriminatory open access transmission
as a remedy for undue discrimination.
AGD and Legislative History
The court decision in Associated Gas Distributors v. FERC provides
powerful support for our ability to order industry-wide non-
discriminatory open access transmission in the electric industry as a
remedy for undue discrimination. As discussed in detail above, AGD,
which is the only decision to have addressed the Commission's authority
to remedy undue discrimination by requiring open access, upheld our
authority under section 5 of the NGA (the parallel to section 206 of
the FPA) to require open access in the natural gas industry. The
rationale supplied by the AGD court applies equally to the FPA and our
responsibility to eliminate undue discrimination in the electric
industry.
Those who challenge the Commission's legal authority to remedy
undue discrimination face the same difficulty that parties faced in
seeking to overturn open access in the natural gas industry--they ``can
point to no language in the (FPA) barring the Commission from imposing
common carrier status on (public utilities), and certainly none barring
it from imposing upon the (public utilities) a specific duty that
happens to be a typical or even core component of such status.'' \232\
Instead, as was unsuccessfully attempted in the AGD proceeding, they
seek to overcome the statutory silence primarily by means of
legislative history. However, as the AGD court explained, legislative
history is not even relevant, because
\232\ AGD, 824 F.2d at 997.
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courts have no authority to enforce principles gleaned solely from
legislative history that has no statutory reference point.\233\
\233\ Id. (quoting IBEW, Local No. 474 v. NLRB, 814 F.2d 697,
712 (D.C. Cir. 1987) (emphasis deleted by court from original)).
---------------------------------------------------------------------------
Here, as the court found with respect to the NGA, the legislative
history of the FPA ``provides strong support only for the point that
Congress declined itself to impose common carrier status on (public
utilities) * * * It affords weak--almost invisible--support for the
idea that the Commission could under no circumstances whatsoever impose
obligations encompassing the core of a common carriage duty.'' \234\
---------------------------------------------------------------------------
\234\ Id. (emphasis added).
---------------------------------------------------------------------------
Commenters focus on the following statement in the AGD decision to
support the argument that, because Congress did not expressly reject
common carriage under the NGA, but did reject it under the FPA, a
different outcome in this proceeding is required:
we note that the legislative history of the two acts is, on this
point, materially different. In its deliberations on the bill that
ultimately emerged as the Federal Power Act, Congress considered and
rejected a provision that would have ``empowered the Federal Power
Commission to order wheeling if it found such action to be
`necessary or desirable in the public interest.' '' (citing Otter
Tail) (quoting S. 1725, 74th Cong., 1st Sess.). The evidence as to
the NGA (surveyed above) is less direct: it consists exclusively of
various occasions on which Congress did not adopt proposals actually
making the natural gas pipelines into common carriers.\235\
---------------------------------------------------------------------------
\235\ Id. at 998-99.
[[Page 21565]]
---------------------------------------------------------------------------
The above statement, however, does not preclude the AGD court's
decision on our broad authority to remedy undue discrimination in the
gas industry from applying equally in the electric industry. Clearly,
the court did not say that. As discussed below, we believe the
statement focuses on a distinction in the legislative histories that is
not meaningful.
First, whether or not a material difference exists in the
respective legislative histories of the NGA and FPA, the fact remains
that the crucial findings of the AGD court were that: (1) ``Congress
declined itself to impose common carrier status'' (emphasis added) and
(2) there is no ``support for the idea that the Commission could under
no circumstances whatsoever impose obligations encompassing the core of
a common carriage duty.'' \236\ These findings apply equally to the
FPA. Simply stated, statutory silence cannot be overcome by means of
legislative history--even if the legislative history in fact indicated
that Congress ``rejected'' legislative imposition of common carrier
status under the FPA, but ``did not adopt'' it under the NGA. In either
event, nothing in the statute or legislative history suggests that
Congress concluded that the Commission could under no circumstances
impose open access as a remedy to undue discrimination.
---------------------------------------------------------------------------
\236\ Id. at 997. We also note that the contract carriage
obligation we are imposing is easily distinguished from the common
carrier obligation Congress chose not to adopt. As discussed infra,
the common carrier provisions rejected by Congress would have
required transmission for ``any person'' upon reasonable request.
This would have included retail purchasers.
---------------------------------------------------------------------------
Moreover, the legislative history of the bills containing the FPA
and the NGA, taken as a whole, suggests that the distinction drawn in
AGD between the legislative histories of the NGA and the FPA is not
meaningful. The legislation that was to become the FPA originally
included provisions regulating both electric power and natural gas. As
originally proposed, the legislation contained identical common
carriage language for both public utilities and natural gas pipelines.
With respect to the FPA, the Supreme Court explained in Otter Tail
that
(a)s originally conceived, Part II would have included a ``common
carrier'' provision making it ``the duty of every public utility to
* * * transmit energy for any person upon reasonable request * *
*.'' In addition, it would have empowered the Federal Power
Commission to order wheeling if it found such action to be
``necessary or desirable in the public interest.'' H.R. 5423, 74th
Cong., 1st Sess.; S. 1725, 74th Cong. 1st Sess. These provisions
were eliminated to preserve ``the voluntary action of the
utilities.'' S.Rep. No. 621, 74th Cong., 1st Sess., 19.\237\
\237\ Otter Tail, 410 U.S. at 374.
---------------------------------------------------------------------------
The language paraphrased by the Supreme Court was from Title II of the
initial bill proposing the Public Utility Holding Company Act. The
entire sections from which the paraphrased language came are as
follows:
SEC. 202. (a) It shall be the duty of every public utility to
furnish energy to, exchange energy with, and transmit energy for any
person upon reasonable request therefor; and to furnish and maintain
such services and facilities as shall promote the safety, comfort,
and convenience of all its customers, employees, and the public, and
shall be in all respects adequate, efficient, and reasonable.
* * *
SEC. 203. (b) Whenever the Commission after notice and
opportunity for hearing finds such action necessary or desirable in
the public interest, it may by order direct a public utility to make
additions, extensions, repairs, or improvements to or changes in its
facilities, to establish physical connection with the facilities of
one or more other persons, to permit the use of its facilities by
one or more other persons, or to utilize the facilities of, sell
energy to, purchase energy from, transmit energy for, or exchange
energy with, one or more other persons. Where any such order affects
two or more persons, the Commission may prescribe the terms and
conditions of the arrangement to be made between such persons,
including the apportionment of cost between them and the
compensation or reimbursement reasonably due to any of them.\238\
\238\ H.R. 5423, 74th Cong., 1st Sess., 32 (emphasis added).
---------------------------------------------------------------------------
This initial bill proposing the Public Utility Holding Company Act
also included a Title III that was intended to regulate the
transmission and sale of natural gas. Sections 303(a) and 304 of Title
III included the identical common carrier language paraphrased by the
Supreme Court and included in sections 202(a) and 203(b) of Title
II.\239\ After further deliberations, Congress rejected the above-
quoted language in Title II and eventually adopted a Title II that did
not include any common carrier language. On the other hand, Title III
(addressing regulation of natural gas) was not reported out of
committee, but reemerged in the next year.\240\ The bill that reemerged
did not contain the common carrier language that was in the original
Title III. However, as Congress had just debated the common carrier
issue in enacting electric power regulation, it is not surprising that
Congress did not engage in debating the very same issue in enacting
natural gas regulation.
---------------------------------------------------------------------------
\239\ Id. at 44.
\240\ In the debate on the subsequent bill to regulate natural
gas, Congressman Cole explained:
Mr. Chairman, the House should realize that the measure we are
dealing with today is of extreme importance, more so than the
attendance and the time taken in the discussion would seem to
indicate. It is the culmination of one of the most far-reaching,
intensive studies of the Federal Trade Commission I assume that that
Commission ever conducted, and last year found a place in not
identical language but very similar in the Rayburn bill, the famous
holding-company bill, as part 3 thereof. Our committee eliminated
part 3, as members will recall, and saved it for a separate measure
reported out as it was last year, which was not considered by the
House, but is here today in improved form.
81 Cong. Rec. H6724 (daily ed. July 1, 1937).
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Because of the timing of the legislation involving the FPA and the
NGA and the logical nexus between the two acts, we conclude that there
is in fact no material difference as to this issue in the legislative
histories of the two acts. Both initially included identical common
carrier language, and the language was removed from both. As to both
acts, Congress chose not to impose common carrier obligations on the
electric or natural gas industries, but gave the Commission the
authority and responsibility to eliminate undue discrimination in both
industries. Consequently, as open access was found to be a proper
remedy for undue discrimination in the natural gas industry, it is also
a proper remedy for undue discrimination in the electric industry.
As the AGD court noted with respect to the Commission's powers and
duties under the NGA, Congress explicitly gave the Commission the
authority to eradicate undue discrimination under the FPA. That
explicit power and duty provided by Congress cannot be invalidated
solely on the ground that Congress chose not to impose statutory common
carrier status on public utilities or did not explicitly authorize the
Commission to do so.241 As the AGD court explained, this would
``turn [] statutory construction upside down, letting the failure to
grant a general power prevail over the affirmative grant of a specific
one.'' 242
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\241\ AGD, 824 F.2d at 998.
\242\ Id.
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Other Case Law
A number of commenters argue that the Commission misinterpreted the
other cases discussed in the NOPR with respect to our authority to
order non-discriminatory open access transmission. We disagree. As
demonstrated above, not one of the cases put forth by commenters holds
that we cannot remedy undue discrimination by requiring public
[[Page 21566]]
utilities to provide non-discriminatory open access
transmission.243
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\243\ See FERC Stats. & Regs. at 33,053-56. We further note that
the AGD court did not discuss the NYSEG decision at all. Indeed, the
NYSEG case did not involve any allegations of undue discrimination
and any discussion of section 206 by the court was dictum.
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AGD is the only case in which a court specifically addressed our
authority to order open access transmission as a remedy for undue
discrimination. Its favorable finding with respect to our action under
section 5 of the NGA directly supports our ordering non-discriminatory
open access transmission under section 206 of the FPA.
Authority to Act by Rule
We disagree with those commenters that assert that we may find and
remedy undue discrimination only through case-by-case adjudications and
are prohibited from making a generic determination of undue
discrimination through a rulemaking. First, there is no question that
it is within our discretion whether we act through rule or through
case-by-case adjudications.244 The AGD court specifically rejected
a similar argument that the Commission erred in requiring open access
transportation tariffs without first finding that each individual
pipeline's rates were unlawful. The AGD court held that ``(t)he
Commission is not required to make individual findings if it exercises
its Sec. 5 authority by means of a generic rule.'' 245
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\244\ See, e.g., NLRB v. Bell Aerospace Company, 416 U.S. 267,
293 (1974) (citing SEC v. Chenery Corporation, 332 U.S. 194, 202-03
(1947). See also Heckler v. Campbell, 461 U.S. 458, 467 (1983) (even
where enabling statute requires a hearing to be held, agency may
rely on its rulemaking authority); Panhandle Eastern Pipeline
Company v. FERC, 907 F.2d 185, 187-88 (D.C. Cir. 1990). Under
section 403 of the DOE Act, 42 U.S.C. 7173, the Commission is
authorized at its discretion to initiate rulemaking proceedings.
\245\ AGD, 824 F.2d at 1008.
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We have identified a fundamental generic problem in the electric
industry: owners, controllers and operators of monopoly transmission
facilities that also own power generation facilities have the incentive
to engage, and have engaged, in unduly discriminatory practices in the
provision of transmission services by denying to third parties
transmission services that are comparable to the transmission services
that they are providing, or are capable of providing, for their own
power sales and purchases. These practices drive up the price of
electricity and hurt consumers. Furthermore, the incentive to engage in
such practices is increasing significantly as competitive pressures
grow in the industry. It is within our discretion to conclude that a
generic rulemaking, not case-by-case adjudications, is the most
efficient approach to take to resolve the industry-wide problem facing
us.
b. Undue Discrimination/Anticompetitive Effects
Initial Comments
A number of commenters allege that the Commission has failed to
meet its burden of proving industry-wide discrimination.