[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Notices]
[Pages 66158-66165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31959]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
[Docket No. RM99-2-000]
Regional Transmission Organizations, Notice of Intent To Consult
Under Section 202(a)
November 24, 1998.
AGENCY: Federal Energy Regulatory Commission.
ACTION: Notice of Intent to Consult with State Commissions.
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SUMMARY: The Federal Energy Regulatory Commission (Commission) intends
to consult with State commissions for the purpose of affording them a
reasonable opportunity to present their views with respect to the
Commission's use of authority under section 202(a) of the Federal Power
Act.
SUPPLEMENTARY INFORMATION: In addition to publishing the full text of
this document in the Federal Register, the Commission also provides all
interested persons an opportunity to inspect or copy the contents of
this document during normal business hours in the Public Reference Room
at 888 First Street, N.E., Room 2A, Washington, D.C. 20426.
The Commission Issuance Posting System (CIPS) provides access to
the texts of formal documents issued by the Commission. CIPS can be
accessed via Internet through FERC's Homepage (http://www.ferc.fed.us)
using the CIPS Link or the Energy Information Online icon. The full
text of this document will be available on CIPS in ASCII and
WordPerfect 6.1 format. CIPS is also available through the Commission's
electronic bulletin board service at no charge to the user and may be
accessed using a personal computer with a modem by dialing 202-208-
1397, if dialing locally, or 1-800-856-3920, if dialing long distance.
To access CIPS, set your communications software to 19200, 14400,
12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex, no parity, 8
data bits and 1 stop bit. User assistance is available at 202-208-2474
or by E-mail to cipsmaster@ferc.fed.us.
This document is also available through the Commission's Records
and Information Management System (RIMS), an electronic storage and
retrieval system of documents submitted to and issued by the Commission
after November 16, 1981. Documents from November 1995 to the present
can be viewed and printed. RIMS is available in the Public Reference
Room or remotely via Internet through FERC's Homepage using the RIMS
link or the Energy Information Online icon. User assistance is
available at 202-208-2222, or by E-mail to rimsmaster@ferc.fed.us.
Finally, the complete text on diskette in WordPerfect format may be
purchased from the Commission's copy contractor, RVJ International,
Inc. RVJ International, Inc. is located in the Public Reference Room at
888 First Street, N.E., Washington, D.C. 20426.
As part of a broader inquiry concerning the Commission's policies
on independent system operators (ISOs) and other regional transmission
organizations (RTOs) in the electric utility industry,1 the
Commission is considering whether and how to use its authority under
section 202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a)
(1994), which was recently delegated to the Commission by the Secretary
of Energy.2 As a first step in that process, the Commission
gives notice of its intent to initiate a consultation process with
State commissions pursuant to section 202(a). The purpose of this
initial consultation is to afford State commissions a reasonable
opportunity to present their views and recommendations with respect to
dividing the country into regional districts for development of
independent regional transmission organizations.
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\1\ See Midwest Independent Transmission System Operator, Inc.,
84 FERC para. 61,231 at 62,142 (1998), reh'g pending (Midwest ISO).
\2\ A copy of section 202(a) is attached to this notice and will
also be published in the Federal Register.
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The Commission intends initially to seek the views and
recommendations of State commissions on the issues of what criteria
should be used to establish regional boundaries for RTOs, and what
should be the appropriate role of States in the formation and
governance of RTOs, in the event that the Commission decides to
exercise its authority. We will do so through one or more conferences
to be held in January or early February 1999. After these conferences,
there will be additional consultation, during which the Commission will
solicit and consider the views of the States, and others, in a
rulemaking or other generic proceeding on RTOs. Among the issues to be
examined then will be whether to exercise section 202(a) authority to
establish regional boundaries for RTOs.
[[Page 66159]]
Background
In Order Nos. 888 3 and 889,4 the Commission
required all public utilities that own, operate or control interstate
transmission facilities to provide open access transmission services
and to separate their transmission operations functions from their
wholesale power marketing functions. The Commission took this step to
``remedy undue discrimination in access to monopoly owned transmission
lines'' in order to ``remove impediments to competition in the
wholesale bulk power marketplace and to bring more efficient, lower
cost power to the Nation's electricity consumers.'' 5 During
the course of that proceeding, the Commission received comments urging
it to require generation divestiture or structural institutional
arrangements such as regional ISOs to better assure non-discrimination.
The Commission responded at that time that, while it believed that ISOs
had the potential to provide significant benefits, efforts to remedy
undue discrimination should begin by requiring the less intrusive
functional unbundling approach.6 Order No. 888 stated:
\3\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, 61 FR 21,540 (May 10, 1996), FERC Stats. & Regs.
para. 31,036 (1996), order on reh'g, Order No. 888-A, 62 FR 12,274
(Mar. 14, 1997), FERC Stats. & Regs. para. 31,048 at 30,278-79
(1997), order on reh'g, Order No. 888-B, 62 FR 64688 (Dec. 9, 1997)
81 FERC para. 61,248 (1997), order on reh'g, Order No. 888-C, 82
FERC para. 61,046 (1998).
\4\ Open Access Same-Time Information System and Standards of
Conduct, Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. &
Regs. para. 31,035 (1996); order granting request for clarification,
62 FR 610 (Jan. 1, 1997), 77 FERC para. 61,335 (1996); order on
reh'g, Order No. 889-A, 62 FR 12484 (Mar. 14, 1997), FERC Stats. &
Regs. para. 31,049 (1997); and order denying reh'g, Order No. 889-B,
62 FR 64715 (Dec. 9, 1997), 81 FERC para. 61,253 (1997).
\5\ Order No. 888, FERC Stats. & Regs. at 31,634.
\6\ Functional unbundling requires the separation of
transmission system functions and wholesale generation marketing
functions, and a code of conduct to define impermissible contact
between generation and transmission personnel. Under functional
unbundling, a public utility must: (1) take transmission services
under the same tariff of general applicability as do others; (2)
state separate rates for wholesale generation, transmission, and
ancillary services; and (3) rely on the same electronic information
network that its transmission customers rely on to obtain
information about its transmission system when buying or selling
power. See Order No. 888, FERC Stats. & Regs. at 31,654-55.
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[W]e see many benefits in ISOs, and encourage utilities to
consider ISOs as a tool to meet the demands of the competitive
marketplace.
As a further precaution against discriminatory behavior, we will
continue to monitor electricity markets to ensure that functional
unbundling adequately protects transmission customers. At the same
time, we will analyze all alternative proposals, including formation
of ISOs, and, if it becomes apparent that functional unbundling is
inadequate or unworkable in assuring non-discriminatory open access
transmission, we will reevaluate our position and decide whether
other mechanisms, such as ISOs, should be required.\7\
\7\ Order No. 888, FERC Stats. & Regs. at 31,655.
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Order No. 888 also set forth eleven principles that would be used
to assess ISO proposals that may be submitted to the
Commission.8 Since Order No. 888 was issued, the Commission
conditionally approved proposals for the establishment of five ISOs.
These are the California ISO,9 the PJM ISO,10 ISO
New England,11 the New York ISO,12 and the
Midwest ISO.13 In addition, the Texas Commission has ordered
an ISO for the Electric Reliability Council of Texas
(ERCOT).14 These organizations, and others rumored to be in
development, vary widely with respect to their operational
responsibilities, geographic scope, governance, and structure.
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\8\ Id. at 31,730.
\9\ Pacific Gas & Electric Company, et al., 77 FERC para. 61,204
(1996), order on reh'g, 81 FERC para. 61,122 (1997).
\10\ Pennsylvania-New Jersey-Maryland Interconnection, et al.,
81 FERC para. 61,257 (1997), reh'g pending.
\11\ New England Power Pool, 79 FERC para. 61,374 (1997), order
on reh'g, 85 FERC para. 61,242 (1998) (order conditionally
authorizing ISO New England); New England Power Pool, 83 FERC para.
61,045 (1998), reh'g pending (order on NEPOOL tariff and
restructuring).
\12\ Central Hudson Gas & Electric Corporation, et al., 83 FERC
para. 61,352 (1998), reh'g pending.
\13\ Midwest ISO, 84 FERC para. 61,231 (1998).
\14\ See 16 Texas Administrative Code Sec. 23.67(p).
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On April 15-16, 1998, the Commission held a public conference in
Washington, D.C., in Docket No. PL98-5-000, to examine the future of
ISOs in administering the electric transmission grid on a regional
basis. The Washington conference highlighted the industry's change in
thinking about types of regional transmission organizations other than
ISOs that the Commission should consider. As a follow-up to the
Washington conference, the Commission held seven regional conferences
at locations around the country between May 28 and June 8, 1998. These
regional conferences focused on specific regional characteristics and
institutional factors that bear on the formation of regional
transmission organizations. As a result of these conferences, the
Commission received numerous oral and written comments on the
appropriate size, scope, organization and functions of regional
transmission organizations.
In our recent order conditionally approving the Midwest ISO, the
Commission noted that many issues had been raised in that proceeding
about the proper size and configuration of the ISO; the relative merits
of ISOs, transcos, and other possible forms of regional organization;
how much control the regional entity should have over various
facilities, and other issues. The Commission stated that it would not
attempt to resolve industry-wide issues in that proceeding, but that it
would address such issues in a rulemaking or other generic proceeding
in the future.15
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\15\ Midwest ISO, 84 FERC at 62,142. The Commission also stated
therein, among other things, that ``at this early stage in the
restructuring of the U.S. electric power industry'' it believes that
there is no ``single structural or operational arrangement that must
apply universally to all utilities seeking to form regional
transmission entities'' and that the better approach ``at this
time'' is ``to encourage and accommodate regional experimentation.''
Id. The Commission further stated that coordination in the public
interest is best served if a proposed transmission entity is as
large as possible. Id. at 62,145.
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On October 1, 1998, the Secretary of Energy delegated his authority
under section 202(a) of the FPA to the Commission. The Secretary stated
that section 202(a) ``provides DOE with sufficient authority to
establish boundaries for Independent System Operators (ISOs) or other
appropriate transmission entities.'' 16
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\16\ 63 FR 53889 (Oct. 7, 1998).
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Discussion
Under section 202(a) of the FPA, ``the Commission is empowered and
directed to divide the country into regional districts for the
voluntary interconnection and coordination of facilities for the
generation, transmission, and sale of electric energy.'' The purpose of
this division into regional districts is for ``assuring an abundant
supply of electric energy throughout the United States with the
greatest possible economy and with regard to the proper utilization and
conservation of natural resources.'' Section 202(a) states that it is
``the duty of the Commission to promote and encourage such
interconnection and coordination within each such district and between
such districts.''
The Commission believes that an abundant supply of electric energy
throughout the United States with the greatest possible economy can be
best achieved with fully competitive wholesale power markets and open
and non-discriminatory access to interstate transmission facilities.
Order No. 888 has laid the necessary predicate for competition but,
after more than two years of experience, the requirements of Order Nos.
888 and 889 may not alone
[[Page 66160]]
be sufficient to accomplish a completely competitive market. The
Commission therefore is considering whether the goals of full
competition and non-discriminatory access can be achieved in the
absence of broad participation by transmission-owning electric
utilities in regional transmission organizations.
The Commission has identified in earlier orders several issues
inherent in the present system that may interfere with the development
of fully competitive markets. These include lack of sufficient
separation between transmission and merchant functions, multiple
pancaked transmission rates within a region, congestion management
issues, loop flow issues, the complexities of current transmission
planning, and generation market power that results when market size is
constricted by transmission constraints.17 As the Commission
has previously explained, the establishment of and participation in
properly structured regional transmission organizations can foster
fully competitive markets. To be effective, the Commission believes
that these regional transmission organizations must, at a minimum, have
adequate operational authority, ensure comparable treatment for all
transmission users, address loop flow issues, eliminate pancaked
transmission rates, manage short-term transmission reliability, manage
congestion, and plan transmission expansion.18
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\17\ See, e.g., Order No. 888, FERC Stats. & Regs. para. 31,036
at 31,730-32; Order No. 888-A, FERC Stats. & Regs. para. 31,048 at
30,247-51; Notice of Conference, Inquiry Concerning the Commission's
Policy on Independent System Operators, Docket No. PL98-5-000;
Louisville Gas and Electric Company, et al., 82 FERC para. 61,308 at
62,222 (1998); Midwest ISO at 62,142, 62,145, 62,153-165.
\18\ Id.
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The Commission does not have preconceived notions as to what types
of structures would be optimal for such regional transmission
organizations, and they may in fact vary from region to region. ISOs
are one type of regional institution, but there are other ways that
interests in generation and transmission can be separated. These may
include the creation of separate transmission companies.
Section 202(a) requires that before the Commission exercises its
authority to establish regional districts and to fix or modify their
boundaries:
The Commission shall give notice to the State commission of each
State situated wholly or in part within such district, and shall
afford each such State commission reasonable opportunity to present
its views and recommendations, and shall receive and consider such
views and recommendations.
Accordingly, the Commission intends to hold one or more conferences
during January or early February 1999 for the purpose of beginning the
consultative process with the State commissions. The Commission
currently envisions that one representative from each State commission
would attend and discuss questions that would include, but not
necessarily be limited to, the following:
(1) What criteria and policy considerations should be used to
establish the boundaries for effective RTOs if the Commission later
decides to do so?
(2) Are there factors that make it appropriate for the utilities in
your state to belong in a specific region?
(3) What is the appropriate role of the States in the formation of
RTOs?
(4) What is the appropriate role of the States in the governance of
RTOs?
This notice is being given at this early time to permit interested
State commissions sufficient time to consult with each other or with
the industry on these technical matters. Details about the specific
time, place, and format of this conference (or conferences) will be
announced in the future.
Finally, as noted above, the Commission views the consultation with
State commissions as an initial step in a broader inquiry on RTOs. If
the Commission determines there is a need to establish regional
boundaries for RTOs to further the goals of full competition and non-
discriminatory access, it will do so as part of a rulemaking or other
generic proceeding on RTOs. That proceeding will afford State
commissions and others an opportunity to comment on the broader policy
issues involved in creating RTOs, as well as specific regional
boundaries.
By direction of the Commission. Commissioner Bailey concurred in
part and dissented in part with a separate statement attached.
Commissioner Breathitt concurred with a separate statement attached.
David P. Boergers,
Secretary.
Section 202(a) of the Federal Power Act, 16 U.S.C. Sec. 824a(a)
(1994).
Interconnection and Coordination of Facilities; Emergencies;
Transmission to Foreign Countries
Sec. 202. (a) For the purpose of assuring an abundant supply of
electric energy throughout the United States with the greatest
possible economy and with regard to the proper utilization and
conservation of natural resources, the Commission is empowered and
directed to divide the country into regional districts for the
voluntary interconnection and coordination of facilities for the
generation, transmission, and sale of electric energy, and it may at
any time thereafter, upon its own motion or upon application, make
such modifications thereof as in its judgment will promote the
public interest. Each such district shall embrace an area which, in
the judgment of the Commission, can economically be served by such
interconnected and coordinated electric facilities. It shall be the
duty of the Commission to promote and encourage such interconnection
and coordination within each such district and between such
districts. Before establishing any such district and fixing or
modifying the boundaries thereof the Commission shall give notice to
the State commission of each State situated wholly or in part within
such district, and shall afford each such State commission
reasonable opportunity to present its views and recommendations, and
shall receive and consider such views and recommendations.
Regional Transmission Organizations
[Docket No. RM99-2-000]
Issued: November 24, 1998.
BAILEY, Commissioner, concurring in part and dissenting in part
I support the initiation of a consultation process with State
commissions. I do not support, however, at this time the exercise of
whatever authority we possess under section 202(a) of the Federal Power
Act, 16 U.S.C. Sec. 824a(a) (1998), to divide up the country and to
establish regional boundaries for the development of regional
transmission organizations (RTOs). For these reasons, I respectfully
concur in part and dissent in part with today's notice.
Today's notice does not decide the threshold question of whether
the Commission should do anything more at this time other than to
consult with State commissions. The notice is clear in its very first
sentence that the Commission has not decided whether and how to use its
authority under newly-delegated section 202(a) to establish regional
boundaries for RTOs. In addition, the notice does not limit the scope
of State consultation. While the notice articulates a number of
questions for State consideration, focusing on the criteria that the
Commission should employ in establishing regional boundaries for RTOS,
those questions are decidedly inclusive rather than exclusive.
I have not reached any conclusions as to the issue of whether the
Commission, acting pursuant to section 202(a), needs to establish
regional districts to further the goals of full competition and non-
discriminatory access. I am interested in hearing from the States as to
whether it is imperative for the Commission to take this aggressive and
immediate step. My own view is that after two years of operational
experience under the procedures of Order Nos. 888 and 889, less
aggressive steps could be pursued.
[[Page 66161]]
As the notice indicates, in Order Nos. 888 and 889, the Commission
purposefully favored functional unbundling of utility operations over
more dramatic structural separation. I understand that transmission
customers have challenged whether transmission providers are continuing
to offer their wholesale merchant function or affiliates with
preferential access to transmission and transmission information. But I
am not convinced that functional unbundling, backed by the Commission's
vigilance and commitment in responding to customer complaints, is
ineffectual in deterring and detecting preferential access and undue
discrimination.
However, as events in the last year have demonstrated, transmission
providers are increasingly reaching the conclusion that competitive
market forces--as opposed to Commission directive--favor some type of
structural disaggregation. The Commission has acted on a number of
recent filings that seek Commission authorization for the divestiture
of generation assets. The Commission also is aware of a number of
recent proposals to place transmission assets in the control and
operation of a separate regional transmission entity (going under
various names and forms).
I continue to encourage all of these undertakings, and I do not
want to see these efforts stymied awaiting the outcome of our process.
I am pleased to see that utilities are voluntarily agreeing to go
beyond the directions of Order Nos. 888 and 889. I expect these types
of voluntary undertakings to increase in the future, as utilities
increasingly come to the conclusion that they can best respond to
competitive market pressures by transforming themselves into
generation- or transmission-only entities, thus providing the type of
structural separation that better protects against undue discrimination
or preference in the provision of transmission services. I am wary of
Commission action that might act to undermine the initiative of
utilities to come forward with their own voluntary proposals.
Moreover, I am not convinced that the Commission, should it decide
to provide greater guidance and prescription as to regional or
unbundling filings, necessarily must proceed to an action pursuant to
this newly-delegated section 202(a) authority. I am willing to commit
to some type of generic proceeding, as I believe that it is in the
public interest to do more to encourage the filing of regional
transmission entities that enhance competition and offer improvements
with respect to pricing, reliability, and market monitoring. I
understand that voluntary efforts to promote and develop these type of
regional entities have stalled, or have failed to commence, in many
parts of the country. I am willing to provide Commission instruction on
the subject, beyond that already found in Order No. 888 and our ISO
orders, to jump start dormant or otherwise lagging discussions on the
subject.
But why must that instruction necessarily come in the form of a
generic initiative intended to result in the formation of regional
districts, encompassing all regions of the country? While today's
notice is drafted very carefully, I feel there is a strong bias in
favor of the Commission's exercising its section 202(a) authority--
whatever that entails--and establishing regional boundaries and
districts in which all public utilities will be urged, subtlely or more
overtly, to join. I am not endorsing such a process, especially when I
do not know where that process is heading. I want the States to answer
that threshold question for me.
At this juncture, I believe that the Commission is endorsing a
process that is among the most aggressive it could have chosen to
encourage the formation of RTOs. There are a number of alternatives to
consider, and I urge the States to consider and consult with us as to
whether less aggressive steps can be taken by the Commission to
encourage the formation of ISOs.
There are other options the Commission could consider in
encouraging the formation of RTOs. I enumerate them below, proceeding
from the most mild and passive to the most aggressive option. Of
course, there are numerous variations on these options for us all to
consider.
First, the Commission could issue nothing in this docket. It could
simply provide generic instruction in the context of its review of the
filings it receives proposing ISOs, transcos, and related structures.
In the Midwest ISO proceeding, for example, in an order issued only two
months ago, the Commission, noting the early stage of restructuring of
the U.S. electric power industry, proceeded very cautiously and
refrained from endorsing any particular ISO model or ideal.1
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\1\ See Midwest Independent Transmission System Operator, 84
FERC para. 61,231 at 62,142 (1998), reh'g pending.
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Second, the Commission could issue a non-binding statement of
Commission policy indicating more proactively what it is seeking when
it receives and reviews a voluntary utility-specific or region-specific
filing. This would provide badly-needed guidance to utilities which are
now uncertain as to the size and configuration, for example, of any
regional entity they propose.
Third, the Commission could do more to encourage the voluntary
filing of RTO initiatives. Specifically, it could issue a policy
statement or rulemaking that encourages voluntary regional filings that
satisfy certain minimum criteria. Or, in addition to such minimum
criteria (or ``lowest common denominators''), the Commission could
articulate various incentives encouraging utilities to participate
actively in RTOs--such as transmission pricing or rate of return
incentives.
Fourth, moving to the more aggressive of options, the Commission
could require utility participation in RTOs, establishing basic
criteria but leaving many or most of the details for the utility
participants themselves. In other words, the Commission could let the
participants decide for themselves, in consultation with appropriate
state officials, how best to comply with Commission criteria and
mandates.
Fifth, the Commission could issue a rulemaking that not only
requires participation in RTOs, but also involves the Commission in the
setting and review of regional boundaries. Such a process could involve
the invocation of section 202(a) authority in combination with the
Commission's obligation under sections 205 and 206 of the Federal Power
Act to act to ensure against undue discrimination and preference in the
provision of jurisdictional services.
Today's notice, according to my reading, places the Commission
solidly on steps 4 and 5. Since the Commission is initiating a
consultative process, I ask the States to offer their advice as to how
aggressive a posture the Commission should assume.
From a policy perspective, I personally much prefer providing
incentives to encourage utilities to voluntarily step forward in
promoting the development of regional entities. I am very wary of
sitting here in Washington, D.C., and acting as a central planner with
a large map of the utility grid on my wall, with a magic marker at my
disposal. The competitive evolution of the industry has been very
dramatic and is ongoing and quite fluid. I am exceedingly uncomfortable
dictating to utilities how best to configure the industry in order to
best take advantage of competitive opportunities, or how best to
alleviate concern for unfair competitive advantages. Despite the expert
advice of this Commission's staff, I believe that I am not situated in
as good a position as
[[Page 66162]]
the utilities we regulate in determining the map and boundaries of
utility companies, acting alone or in concert with other utilities,
operating in the future.
From a legal perspective, I have many questions as to the
legitimacy of any generic Commission action that forces utilities,
overtly or subtlely, into regional districts of our choosing. This is a
difficult matter. Neither the Department of Energy nor the Commission
has exercised section 202(a) authority to divide the country into
regional districts. Moreover, the case law and legislative history on
this point are obscure, and provide no definitive judgment as to the
extent of the Commission's authority to encourage or compel utility
participation in regional districts.
In a separate attachment, I lay out for the interested reader my
understanding of relevant legislative history and precedent. It is my
opinion that while the Commission can act affirmatively to encourage,
promote and supervise utility participation in regional districts, it
lacks the power to compel participation. Rather, Congress left it, in
the language of the legislative history of section 202(a), to the
``enlightened self-interest'' of utilities to work cooperatively in the
advancement of the cause of utility interconnection and coordination. I
think the Commission should work to better ``enlighten'' utilities why
it may be in their best economic self-interest to cooperate with their
neighbors in advancing regional solutions to lingering competitive
problems, rather than adopt a more heavy-handed approach.
While today's notice has compelled me to lay out my views in as
comprehensive a manner as possible, I do appreciate its provisions to
the extent the notice stops short of endorsing any one model of
regional cooperation. I certainly agree that there are a number of
types of structures that, depending on circumstances, might be optimal
for a particular RTO. I leave it to individual utilities to decide for
themselves whether, if they decide to proceed, a classic ISO structure
best suits their needs, or whether a separate transmission company or
other structure may be most appropriate.
For all of these reasons, I concur with today's notice to the
extent it initiates a process allowing for consultation with the States
as to how best to proceed to encourage utility participation in
regional groupings. I dissent with today's notice to the extent it can
be perceived as formally initiating a process intended to lead to the
creation of regional districts, and to the extent this process might
undermine the ability of utilities to determine for themselves how best
to respond to emerging competitive opportunities and challenges.
Vicky A. Bailey,
Commissioner.
Attachment to Commissioner Bailey's Concurrence in Part/Dissent in
Part
Presented below is the text and legislative history of section
202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a) (1994),
as well as a brief discussion as to how it has been administered by the
Department of Energy (DOE) and the Federal Energy Regulatory
Commission. Relevant case law and Commission precedent, adding context
to section 202(a), follows.
This analysis has been prepared entirely by the Office of
Commissioner Bailey. It is intended to further explain her
interpretation of the scope of section 202(a).
The Statute
Section 202(a) reads in its entirety as follows:
(a) Regional districts; establishment; notice to State commissions
For the purpose of assuring an abundant supply of electric
energy throughout the United States with the greatest possible
economy and with regard to the proper utilization and conservation
of natural resources, the Commission is empowered and directed to
divide the country into regional districts for the voluntary
interconnection and coordination of facilities for the generation,
transmission, and sale of electric energy, and it may at any time
thereafter, upon its own motion or upon application, make such
modifications thereof as in its judgment will promote the public
interest. Each such district shall embrace an area which, in the
judgment of the Commission, can economically be served by such
interconnected and coordinated electric facilities. It shall be the
duty of the Commission to promote and encourage such interconnection
and coordination within each such district and between such
districts. Before establishing any such district and fixing or
modifying the boundaries thereof the Commission shall give notice to
the State commission of each State situated wholly or in part within
such district, and shall afford each such State commission
reasonable opportunity to present its views and recommendations, and
shall receive and consider such views and recommendations.
Broken down into its most important constituent parts, section
202(a):
(1) ``empowers'' and ``directs'' the Commission ``to divide the
country into regional districts for the voluntary interconnection
and coordination of facilities;''
(2) obligates the Commission ``to promote and encourage such
interconnection and coordination within each such district and
between such districts;'' and
(3) obligates the Commission to work in concert with affected
states prior to ``establishing any such district and fixing or
modifying the boundaries thereof.''
Section 202(a) is part of a more comprehensive section of the
Federal Power Act--section 202, 16 U.S.C. Sec. 824a (1994)--entitled
``Interconnection and coordination of facilities; emergencies;
transmission to foreign countries.'' Other subsections of section 202
deal with: (1) Commission-directed interconnections in certain limited
circumstances (section 202(b)); (2) Commission-directed temporary
interconnections in emergency circumstances (sections 202 (c)-(d)); (3)
limitations on the transmission or sale of electricity to or from
foreign countries (Canada and Mexico) (sections 202 (e)-(f)); and (4)
utility reports to the Commission and contingency plans in times of
electricity shortages.
Legislative History
There is little legislative history that illuminates the precise
meaning of section 202(a). The single best piece of legislative history
that is particular to section 202(a) focuses on the ``enlightened self-
interest'' of utilities and Congress' preference for voluntary
coordination and interconnection:
Under this subsection the Commission would have authority to
work out the ideal utility map of the country and supervise the
development of the industry toward that ideal. The committee is
confident that enlightened self-interest will lead the utilities to
cooperate with the commission and with each other in bringing about
the economies which can alone be secured through the planned
coordination which has long been advocated by the most able and
progressive thinkers on the subject.
Senate Report No. 621 (Senate Committee on Interstate Commerce), 74th
Cong., 1st Sess. (1935) at p. 49.
Courts reviewing this piece of legislative history appear to have
reached the conclusion that Congress, in enacting section 202(a) (and
related subsections) in 1935, was motivated by a desire to leave the
coordination and joint planning of utility systems to the voluntary
judgment of individual utilities, ``and it was not willing to mandate
that they do so.'' Central Iowa Power Cooperative v. FERC, 606 F.2d
1156, 1167-68 (D.C. Cir. 1979); see also Municipalities of Groton v.
FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978).
Other passages from the legislative history amplify the
``voluntary'' nature of utility conduct under section 202(a) and the
absence of Commission
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mandates. Another section of the Senate Report provided as follows:
Section 202(a) of [the original Senate bill] imposed upon each
public utility the duty to furnish energy to, exchange energy with
and transmit energy for any person upon reasonable request. This
provision has been eliminated, and the other subsections of the old
section 202 which relate to rates have been removed to the general
rate sections (sec. 205). While imposition of these duties may
ultimately be found to be desirable, the committee does not think
that they should be included in this first exercise of Federal power
over electric companies. It relies upon the provision for the
voluntary coordination of electric facilities in regional districts
contained in the new section 202(a) * * * for the first Federal
effort in this direction * * * Furthermore, the provisions of the
old section 203(b) empowering the Federal Power Commission to
require one utility to permit the use of its facilities by another *
* * have been eliminated; these matters are left to the voluntary
action of the utilities.
Senate Report No. 621, 74th Cong., 1st Sess. (1935) at p.19. In
addition, the report of the House Committee on Interstate and Foreign
Commerce similarly emphasized the voluntary character of the
coordination of utility facilities:
This section authorizes the Commission to establish regional
districts and to encourage the voluntary interconnection and
coordination of facilities within and between such districts, but
the coordination of facilities is left to the voluntary action of
the utilities.
H.R. Report No. 1318, 74th Cong., 1st Sess. (1935) at p.27.
Taken together, the pieces of legislative history quoted above
focus on the voluntary conduct of utilities and the cautious, limited
exercise of federal authority in this area. There is no apparent
discussion of the extent of the Commission's authority to divide the
country up into regional districts--or what the Commission
affirmatively can do under section 202(a) if utilities are not
``voluntarily'' moving in the manner (or as quickly as that) favored by
the Commission.
Exercise of Section 202(a) Authority
Section 202(a) authority to ``divide the country into regional
districts for the voluntary interconnection and coordination of
facilities'' originally was vested in the Federal Power Commission
(FPC). This authority was transferred to DOE in 1977 when Congress
enacted the Department of Energy Organization Act. The DOE Act vested
in the newly-created FERC only specifically-enumerated statutory
authority. Because the DOE Act did not specifically vest in the FERC
the FPC's existing section 202(a) authority with respect to dividing
the country into regional districts, that authority remained with DOE.
The DOE did not exercise its section 202(a) authority during the 21
years in which it controlled that authority. On October 1, 1998, DOE
Secretary Richardson, in DOE Delegation Order No. 0204-166, ``delegated
and assigned to the [Commission] the authority to carry out such
functions as are vested in the Secretary under section 202(a) of the
Federal Power Act.''
In delegating section 202(a) authority, Secretary Richardson
concluded that the Commission is the ``most appropriate agency'' to
exercise this authority. In support, Secretary Richardson explained,
without citation to any legal authority, that section 202(a) affords
the Commission ``sufficient authority to establish boundaries for
Independent System Operators (ISOs) or other appropriate transmission
entities.'' He added that ``[p]roviding FERC with the authority to
establish boundaries for ISOs or other appropriate transmission
entities could aid in the orderly formation of properly-sized
transmission institutions and in addressing reliability-related issues,
thereby increasing the reliability of the transmission system.'' The
press release accompanying the delegation order added that the DOE
delegation of section 202(a) authority ``gives FERC much-needed
authority it now lacks.''
Judicial Precedent
Not surprisingly, given the dormant nature of this section for its
63-year history, the United States Supreme Court has never ruled
directly on the precise meaning of section 202(a). It has, however,
addressed more generally the ``voluntary'' scheme of utility action
running throughout the Federal Power Act.
In the landmark case of Otter Tail Power Company v. United States,
410 U.S. 366 (1973), the Supreme Court ruled that Commission regulation
of electric utility rates and practices under the FPA does not immunize
electric utilities from antitrust scrutiny and liability. In so ruling,
the Supreme Court rejected the utility argument that its refusal to
deal with certain municipal customers was immune from antitrust
prosecution because the Commission has the authority to compel
involuntary electrical interconnections pursuant to section 202(b) of
the FPA. The Court responded that ``[t]he essential thrust of Sec. 202,
however, is to encourage voluntary interconnections of power.'' Id. at
373 (citing legislative history).
The Court continued with an analysis of the overall scheme of Part
II the FPA (which includes section 202) and its legislative history:
As originally conceived, Part II would have included a ``common
carrier'' provision making it ``the duty of every public utility to
* * * transmit energy for any person upon reasonable request. * * *
'' In addition, it would have empowered the Federal Power Commission
to order wheeling if it found such action to be ``necessary or
desirable in the public interest.'' These provisions were eliminated
to preserve ``the voluntary action of the utilities.''
It is clear, then, that Congress rejected a pervasive regulatory
scheme for controlling the interstate distribution of power in favor
of voluntary commercial relationships.
Id. at 374 (citations to legislative history omitted).
In an earlier Supreme Court citing section 202, the Court ruled in
Penn Water & Power Company v. FPC, 343 U.S. 414 (1952), that the
statutory language of sections 202(a), 202(b), and 206(b) of the FPA
justified a bilateral, existing contractual ``practice'' of two
utilities integrating their power output. In relevant part, the Court
found that the regional coordination of power facilities ``ready made
by prior contractual arrangements'' was precisely the type of
coordinated action authorized under section 202(a) of the FPA. Id. at
423.
The few lower court decisions to address section 202(a), like the
Penn Water case, address situations in which utilities voluntarily
banded together to coordinate their activities in such a manner as to
achieve efficiencies and economies unachievable by unilateral, utility-
specific conduct. Two cases in particular--involving voluntary pooling
arrangements by utilities--are instructive as to the reach of section
202(a) and the Commission's historical hesitation to invoke that
statutory authority to compel utilities to do more than what they
voluntarily had committed to do.
In Central Iowa Power Cooperative v. FERC, 606 F.2d 1156 (D.C. Cir.
1979), the D.C. Circuit affirmed the Commission's approval of the Mid-
Continent Area Power Pool (MAPP), a tight power pool among Midwestern
utilities, as modified in only one respect (membership). In so doing,
the court affirmed the Commission's judgment not to accede to the
request of intervenors to try to turn the power pool--which provided
for the coordinated operation of generating facilities and short-term
exchanges of power (reserve sharing)--into a better power pool.
Specifically, the court upheld the Commission's judgment to decline
to expand the scope of pool services, as requested by intervenors, to
require
[[Page 66164]]
MAPP utilities to construct larger generating units and to engage in
single-system planning with central dispatch. The Commission had
reasoned that section 202(a) of the FPA does not compel the Commission,
against the wishes of the pool utilities, to transform MAPP from its
limited scope to one offering a wider array of pool services:
While Section 202(a) of the Federal Power Act speaks in terms of
``voluntary interconnection and coordination'' and to ``promote and
encourage'' the same, the pooling agreement is an FPC tariff which
must pass muster under Sections 205 and 206 of the Federal Power
Act. For example, we have already found the membership provisions
unacceptable. Nevertheless, the scope of a power pool is in the
first instance a matter for the utilities involved. The mere fact
that a particular pool does not offer the same range of services as
another pool does not permit the Commission to direct expansion of
the narrower pools' scope. Unless the limited scope of the MAPP
Agreement is for some other reason unjust, unreasonable or unduly
discriminatory, we are not authorized under Part II of the Federal
Power Act to direct the pool to offer more services. While we can
and do ``encourage and promote'' greater use of pooling, the
peculiarities of each region necessitate that the member utilities
determine the services to be offered. One cannot automatically apply
the broader scope of NEPOOL, based upon very different geography,
industry history and make-up in New England, to the mid-continent
region with its tremendous area, sparse load and different industry
make-up.
Id. at 1167 (quoting underlying Commission order).
The reviewing court found the Commission's reluctance to direct the
pooling utilities to do more than what they had voluntarily committed
to do to represent an ``informed and reasoned decision consistent with
congressional purposes.'' Id. In support, the court reviewed the
language and legislative history of section 202(a) and concluded that
Congress intended to leave the coordination of electric systems to the
voluntary decisions of utilities acting in their ``enlightened self-
interest.'' For this reason,
Given the expressly voluntary nature of coordination under
section 202(a), the Commission could not have mandated adoption of
the Agreement, and failure of the MAPP participants to establish a
fully-integrated electric system could not justify rejection of the
[MAPP] Agreement filed.
Id. at 1168. The court recognized that, pursuant to section 202(a),
regional coordination of electric power systems is in the public
interest. Nevertheless,
This does not mean, however, that a pooling plan is unlawful * *
* merely because a more comprehensive arrangement might better
achieve the purposes of section 202(a). To so conclude would
undermine Congress' determination that coordination under section
202(a) be voluntary. Moreover, we cannot agree with South Dakota
that in approving the [MAPP] Agreement the Commission abdicated its
duty under section 202(a) to promote and encourage regional
interconnection and coordination of electric facilities.
Id.
The findings and rationale of the D.C. Circuit, in upholding the
Commission's limited exercise of its section 202(a) authority, mimic
its conclusions in an earlier case, also involving the voluntary
actions of utilities to create a coordinated power pool in another
region of the country. In Municipalities of Groton v. FERC, 587 F.2d
1296 (D.C. Cir. 1978), the court affirmed the Commission's approval,
with one modification (as to a deficiency charge), of the New England
Power Pool (NEPOOL), a tight power pool among New England utilities.
In so doing, the court affirmed the Commission's judgment to reject
the argument of certain municipal electric systems that the NEPOOL
Agreement was necessarily discriminatory and anticompetitive because it
omits certain services (including firm power sales). The court
explained that section 202(a) of the FPA ``sanctions and encourages
these voluntary pooling agreements,'' and that the Commission's
conclusions that the NEPOOL Agreement is not unduly discriminatory or
anticompetitive, despite its limited size and scope, ``is reasonable in
light of the voluntary nature of this agreement.'' Id. at 1298-99. See
also Duke Power Company v. FPC, 401 F.2d 930, 943-44 (D.C. Cir. 1968)
(emphasizing that section 202(a) encourages voluntary interconnection
and coordination of facilities, that the Commission's responsibility
under that section is only to promote and encourage such
interconnection and coordination, and that the Commission is not
authorized to ``compel any particular interconnection or technique of
coordination.'').2
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\2\ In Duke Power Company, the court reviewed the language and
legislative history of section 202(a), and other subsections of
section 202 ((b)-(d)) dealing with interconnections and emergency
authorizations, as part of its interpretation of the statutory reach
of section 203 of the FPA, dealing with the sale, lease,
disposition, merger or consolidation of jurisdictional facilities.
The court found that the Commission does not have jurisdiction under
section 203 to review the utility acquisition of limited local
distribution facilities.
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BREATHITT, Commissioner, concurring
I view today's Notice of Intent to Consult Under Section 202(a) as
the initiation of important discussions between the FERC and state
commissions and others on whether and how the Commission will use its
authority under Section 202(a) of the Federal Power Act. These initial
discussions will begin to shape the debate of how and under what time
frame the Commission intends to proceed with a broader inquiry into the
formation of regional transmission organizations. The direction we take
in this endeavor is of utmost importance to me. It is for this reason
that I respectfully concur with today's Notice of Intent to Consult. As
I will explain, the Notice does not adequately frame our initial
discussion with state commissioners.
I believe it is crucial that we conduct thorough and meaningful
discussions with our state colleagues. Efforts by this Commission to
draw regional boundaries for transmission organizations will have a
tremendous impact on state commissions and on the utilities and their
customers that conduct business and reside in those states. We must
acknowledge that states are at varying points in the development of
retail open access plans and that actions by this Commission will have
different impacts on states depending on the level of functional
unbundling and retail competition that has occurred in those states.
Furthermore, we must consider the significant regional differences that
exist in this country and the degree to which transmission planning and
pricing issues will affect a state's analysis and consideration of
RTOs. Obviously, this consultation process is not a simple exercise.
Indeed it is one that requires a great deal of consideration. That is
why the Commission must ensure that every pertinent question, even the
most fundamental ones, are asked and answered.
The Notice we are voting on today asks important and relevant
questions and invites comments from state commissioners on issues
pertaining to the formation of regional transmission organizations and
the establishment of boundaries for these RTOs. However, the Notice
does not invite state commissioners, in this initial discussion, to
comment on, what I believe to be, the fundamental, threshold question.
That is, whether there is a need to establish regional boundaries in
order to further the goals of full competition and non-discriminatory
access or whether there are other means that can be equally as
effective. This should be the first question we ask ourselves and state
commissioners. Furthermore, I believe it
[[Page 66165]]
is crucial that we define the scope of our authority under Section
202(a).
I fully support the Notice of Intent to Consult and look forward to
our discussions with state commissioners and, later on, with other
parties. This dialogue is important and necessary. However, I do not
want the Commission to lose sight of fundamental, threshold issues
pertaining to the establishment of regional boundaries and the
formation of RTOs. I therefore respectfully concur with this decision.
Linda K. Breathitt,
Commissioner.
[FR Doc. 98-31959 Filed 11-30-98; 8:45 am]
BILLING CODE 6717-01-P
