{"id":36834,"date":"2008-03-26T16:35:41","date_gmt":"2008-03-26T21:35:41","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-legal\/uncategorized\/ferc-reaffirms-and-clarifies-groundbreaking-rules-on-open-access.html"},"modified":"2008-03-26T16:35:41","modified_gmt":"2008-03-26T21:35:41","slug":"ferc-reaffirms-and-clarifies-groundbreaking-rules-on-open-access","status":"publish","type":"corporate","link":"https:\/\/corporate.findlaw.com\/litigation-disputes\/ferc-reaffirms-and-clarifies-groundbreaking-rules-on-open-access.html","title":{"rendered":"FERC Reaffirms and Clarifies Groundbreaking Rules on Open Access Transmission, Recovery of Stranded Investment and Operation of Open Access Same Time Information Systems"},"content":{"rendered":"
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In an order largely reaffirming its landmark final rules on open access transmission and recovery of stranded investment, the Federal Energy Regulatory Commission ("FERC") issued Order No. 888-A to confirm its commitment to spur competition in the wholesale market for electric power (FERC Stats. & Regs., ¶ 31,048 (1997)). All jurisdictional public utilities must offer to all eligible users non-discriminatory open access to their electric transmission facilities (see § I). Utilities can, however, recover from the departing customers all verifiable, prudently incurred costs that may be stranded as a result of the customers' use of the utility's transmission system to access other suppliers (see § II).

Although FERC clarified its earlier Order No. 888 (FERC Stats. & Regs. ¶ 61,036 (1996)), and made several changes in response to comments, FERC held fast in Order No. 888-A to the central precepts of Order No. 888.<\/p>

FERC similarly reaffirmed the foundations of Order No. 889, "Open Access Same-Time Information Systems and Related Standards of Conduct." III FERC Stats. and Regs. ¶ 61,037 (1996). Under Order No. 889-A (FERC Stats. & Regs., ¶ 31,049 (1997)), all generation suppliers and customers will be able to obtain the same access to information on available transmission capacity as the transmitting utility (see § III).<\/p>

I.) OPEN ACCESS TRANSMISSION<\/i><\/b><\/p>

  • Scope of Coverage.<\/i><\/b> In Order No. 888, FERC required all "public utilities" (those utilities subject to FERC rate regulation under Sections 205 and 206 of the Federal Power Act ("FPA")), that own or control facilities used to transmit electric energy in interstate commerce to file open access transmission tariffs. As part of the rules, FERC issued a single form tariff setting forth non-price terms and conditions for both network and point-to-point services and for providing ancillary services.

    In the 10 months since Order No. 888 was issued, all 166 public utilities directly subject to FERC's jurisdiction filed pro forma tariffs or requested a waiver of the requirement. FERC has permitted only a few minor variations from the pro forma tariff.<\/p>

    FERC acknowledged that it could not require non-jurisdictional utilities — principally electric cooperatives that are borrowers of funds from the Rural Utilities Service, municipal utilities and public power agencies — to file open access tariffs. FERC, however, noted that some of these entities own or operate facilities used or capable of being used for transmission in interstate commerce, and therefore are "transmitting utilities" under Section 211 of the FPA, and could be the subject of Section 211 wheeling requests. FERC required that municipals, electric cooperatives and federal power marketers that take transmission service under a public utility's open access tariff must provide the public utility comparable service pursuant to the tariff's reciprocity provisions.<\/p>

    As of the date FERC issued its rehearing order, five non-public utilities had submitted reciprocal transmission tariffs and 20 had requested a waiver of the reciprocity provision.<\/p><\/li>

  • Functional Unbundling.<\/i><\/b> FERC confirmed in Order No. 888-A that while corporate<\/i> unbundling is not now required, functional<\/i> unbundling of wholesale services, coupled with certain safeguards, is required to implement non-discriminatory open access transmission. Functional unbundling requires utilities to use the same transmission and ancillary services for all of their own new wholesale sales and purchases under the same open access tariffs applicable to others. Utilities must state separate rates for wholesale generation, transmission and ancillary services. In addition, public utilities must use the same electronic information network as their customers to obtain information about available transmission capacity.

    FERC recognized that additional safeguards will be necessary to protect against market power abuse, and (as discussed more fully below) adopted standards of conduct to prevent market abuse. The standards of conduct require separating employees involved in transmission services from those involved in wholesale power marketing functions.<\/p><\/li>

  • Retaining Existing Contracts.<\/i><\/b> FERC confirmed its earlier conclusion in Order No. 888 that it would not be appropriate to order generic abrogation of existing requirements and transmission contracts.

    Nevertheless, FERC found it in the public interest to permit parties to existing agreements the opportunity to seek modifications on a case-by-case basis under FERC's just and reasonable standard, even if the contracts include a "Mobile-Sierra<\/i>" clause, which only permits modifications to contracts if the higher "public interest" standard is satisfied.<\/p>

    FERC also retained its requirement in Order No. 888 that charges in existing economy energy coordination agreements be unbundled. These contracts provide for trading of electric energy on an "as if and when available" basis, but do not require either the seller or buyer to engage in particular transactions. FERC believed it necessary to address these contracts because many do not expire under their own terms in a reasonable time. A number of utilities made filings in 1996 to achieve unbundling of these rates.<\/p><\/li>

  • Comparability.<\/i><\/b> FERC confirmed that the open access tariffs and standards are based upon the comparability principles it has applied in individual cases since its decision in American Electric Power Service Corp.<\/i>, 64 FERC ¶ 61,279 (1993), reh'g granted<\/i>, 67 FERC ¶ 61,168, clarified<\/i>, 67 FERC ¶ 61,317 (1994). Comparability requires that utilities offer third parties access on the same or comparable basis, and under the same or comparable terms and conditions, as the transmission provider's use of its system. The utilities must use these same tariffs for their own wholesale transactions. Order No. 888-A clarifies, however, that transmission providers need not take service under their own tariffs for bundled transmission service to retail customers.

    Order No. 888-A also alters Order No. 888's requirements concerning discounts. Under No. 888-A, any offer of, or request for, a discount may be made only over the Open Access Same Time Information System ("OASIS"). Moreover, all information concerning the discount, including the price, points of receipt and delivery, and the length of service must immediately be posted on the OASIS so that others may take advantage of the same discount on the same transmission path.<\/p><\/li>

  • Eligible Customers.<\/i><\/b> FERC broadens the definition of "eligible customer" to include entities engaged in wholesale purchases or sales, not just those generating electric power. Any person eligible under Section 211 also would be eligible under the open access tariffs. However, entities that violate Section 212(h) of the FPA are not eligible for service under the tariffs (this section prohibits FERC-mandated wheeling directly to end-user customers as well as wheeling for "sham" wholesale transactions). FERC clarified in Order No. 888-A that retail customers, including sham customers, may only obtain service under open-access tariffs pursuant to a state requirement or a voluntary offer of service by the transmission provider.

    FERC also reiterated its policy, adopted in prior cases, that entities that engage solely in brokering will not be eligible for service under the open access tariffs. Brokers do not take title to electricity and therefore do not engage in sale of electric energy, nor do they generate electric energy for sale for resale. However, FERC notes that brokers should be able to arrange deals because they will have access to the OASIS of all public utilities.<\/p><\/li>

  • Reservation and Utilization of Transmission Capacity.<\/i><\/b> In response to concerns that transmission customers could "hoard" firm transmission capacity, FERC confirmed in Order No. 888-A that it will consider in a Section 206 complaint action any substantial allegations that a transmission customer is withholding scarce capacity in a way that has anticompetitive effects. If FERC confirms the allegations, it could order the customer to return the capacity to the transmission operator.

    While not explicitly stated, presumably if the transmission customer is not otherwise a public utility or transmitting utility subject to FERC jurisdiction, FERC could assert jurisdiction over the dispute given its jurisdiction over the transmission owner and its open access tariff. FERC also clarified in Order No. 888-A that a transmission provider may sell on a non-firm basis any capacity reserved but not scheduled.<\/p>

    FERC also made clear that public utilities may reserve existing transmission capacity needed for native load growth and network transmission customer load growth reasonably forecasted within the utility's current planning horizon. However, any capacity reserved for future growth, but not presently needed, must be posted on the OASIS and make available for other's use, until the time the transmission owner needs the capacity.<\/p>

    FERC also stated that existing requirements customers should have future rights to existing capacity beyond the terms of their contract because of their historic use. Consequently, FERC determined that existing customers and all existing and future long-term firm customers should have a right of first refusal to capacity they previously used if they are willing 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 the contract term at least as long as the term offered by another potential customer.<\/p>

    There will be no right to "grandfather" the historical price of the transmission service. Therefore, if insufficient capacity is available to meet all requests for transmission service, the existing customer will have the right of first refusal, which will be an ongoing right that may be exercised at the end of all firm contract terms. The right of first refusal would not supersede the utility's use of its system for native load (provided the service agreement states that the capacity will be required for native load on termination) (see above).<\/p><\/li>

  • Reassignment.<\/i><\/b> Order Nos. 888 and 888-A require open access tariffs to permit voluntary reassignment of firm point-to-point capacity. The transmission assignor may deal directly with the assignee without involving the transmission provider. However, the assignee must satisfy the eligibility standards established under FERC's final rules and must adhere to a transmission provider's requirements for reliability standards. The assignor will remain obligated to the transmission provider even though it can deal directly with the assignee. Network transmission service is not reassignable.

    In Order No. 888-A, FERC affirmed its decision in Order No. 888 to lift somewhat its previous price cap on reassigned transmission capacity. FERC had previously required that capacity be assigned at a rate no higher than the rate paid by the customer initially. It eased this requirement in Order No. 888 by capping the rate for capacity reassignment at the highest of: (1) the original transmission rate charged to the purchaser (assignor), (2) the transmission provider's maximum stated firm transmission rate in effect at the time of the reassignment, or (3) the assignor's own opportunity cost capped at the cost of expansion. FERC declined to eliminate the price cap and permit reassignments at market based rates because it remains unconvinced that the market for reassigned capacity is sufficiently competitive such that assignors will not be able to exert market power.<\/p><\/li>

  • Ancillary Services.<\/i><\/b> Transmission providers must include the following six ancillary services in their tariff: (1) scheduling, system control and dispatch; (2) reactive supply and voltage control from generation sources; (3) regulation and frequency response; (4) energy imbalance; (5) operating reserve — spit-ting reserve; and (6) operating reserve — supplemental reserve. These services must be offered to all the transmission provider's basic transmission customers. FERC will review ancillary service prices on a case-by-case basis, in accordance with certain pricing principles set forth in the final rules. In Order No. 888, FERC required that all customers take the first two services from the transmission provider. In Order No. 888-A, however, FERC concluded that transmission customers should be permitted to self-supply at least part of the reactive power service if the units providing reactive power are in the control of the control area operator. To address concerns of smaller utilities, FERC also amended the Energy Imbalance service provisions to set a larger minimum deviation of 2 MWH per hour.

    FERC has not required that loss compensation service be included in the open access tariff. FERC instead believes that service can be provided by the transmission provider or a third party to facilitate particular transactions or service agreements. The ancillary service rates must be unbundled from basic transmission service, even if they are a necessary adjunct to the basic transmission service. FERC also cautions that authorizing a utility to sell wholesale power at market-based rates does not mean a utility may sell ancillary services at market-based rates. A seller will have to demonstrate it does not have market power in the ancillary service market before it can charge market rates. Otherwise, the rates must be cost based and established as price caps, enabling the transmission providers to offer discounts to reflect cost variations or to match rates available from third parties. Rate discounts utilized by the transmission owner or an affiliate must be offered to non-affiliates as well. All such discounts must be posted on the provider's OASIS. The providers must take ancillary services for their own wholesale transmission under their own tariff. Variations in ancillary service prices to reflect location and characteristics of specific customer's loads and generation resources will be permissible.<\/p><\/li>

  • Independent System Operator.<\/i><\/b> Order No. 888 did not require that transmission systems establish independent system operators ("ISOs"). However, if ISOs are established, they must be structured in a fair and non-discriminatory manner, and the ISO and its employees must have no financial interest in the economic performance of any market power participant. The ISO should have the primary responsibility for ensuring short term reliability of grid operation, and it must provide open access to the transmission system and all services under its control at non- pancaked rates pursuant to a single unbundled grid-wide tariff. The ISO must also identify and take steps to relieve constraints on the system pursuant to appropriate rules established by the governing body. In Order No. 888-A, FERC stated that the first two of eleven "ISO principles" enunciated in Order No. 888 are fundamental. These principles require that the ISO be independent with respect to governance and financial interests from any market participants. <\/li>
  • "Safe Harbor" Provisions for Non-Public Utilities.<\/i><\/b> FERC has also formalized procedures for allowing non-public utilities to submit voluntarily open access transmission tariffs and request a declaratory order that the tariff satisfies FERC's comparability standards. If FERC determines that the voluntary tariff conforms to its final open access tariff, FERC will determine the tariff to be of general applicability. In that case, public utilities could not assert the filing non-public utilities lacked "reciprocal" transmission obligations, and deny service. Non-public utilities must meet FERC's comparability standards to obtain membership in a regional transmission group or power pool. FERC clarifies in Order No. 888-A that non-public utilities need only offer service under their reciprocal tariff to transmission providers from which they obtain open access service. <\/li>
  • Federal\/State Jurisdictional Issues.<\/i><\/b> In another closely watched area, FERC reaffirmed its earlier guidance in Order No. 888 on federal\/state jurisdictional lines. Specifically, FERC confirmed it has jurisdiction over the rates, terms and conditions of unbundled retail transmission in interstate commerce by public utilities. However, FERC is not asserting jurisdiction to order retail transmission directly to an ultimate customer, nor is it interfering with state laws that govern exclusive franchises or territories. FERC in fact makes clear that states have authority over local distribution and over the service of delivering electric energy to end users.

    FERC asserts it is not encroaching upon state authority in such traditional areas as generation and transmission facilities siting; integrated resource planning, including demand side management programs; authority over utility generation and resource portfolio; and authority to impose non-bypassable distribution or retail stranded cost charges.<\/p>

    FERC will engage in a case-specific determination to draw the jurisdictional line for facilities used in unbundled retail wheeling transactions, using seven indicators. These indicators include, among other things, the extent to which the local distribution facilities are primarily radial in character and normally close in proximity to retail customers; whether power flows into local distribution and does not flow out; whether power enters a local distribution system; whether the power entering a local distribution system is consumed in a comparatively restricted geographic area; and where the meters are located that measure flows into the local distribution system.<\/p>

    FERC stressed in Order No. 888-A that it will defer in the first instance to state jurisdictional determinations, even where the state considers different factors.<\/p><\/li><\/ul>

    II.) STRANDED COSTS<\/i><\/b><\/p>

    FERC recognizes that its open access rules will lead to stranded costs as wholesale customers become free to shop for the least expensive energy, and as existing retail customers form new wholesale entities, such as municipal utilities, to gain the same freedom. FERC also concluded that public utilities are entitled to recover those legitimate, prudent and verifiable stranded costs that are attributable to the final open access rule. Utilities will not be permitted to recover stranded costs attributable to the normal risks of competition, including self-generation, cogeneration and industrial plant closure.<\/p>

    Recoverable stranded costs will be directly assigned to the departing wholesale customers through either an exit fee or a surcharge on transmission.<\/p>

    • Authority to Require Recovery of Stranded Costs.<\/i><\/b> Some commentors had argued that FERC was barred from requiring stranded cost recovery by the D.C. Circuit Court of Appeals decision in Cajun Electric Power Coop., Inc. v. FERC<\/i>, 28 F.3d 173 (D.C. Cir. 1994). There, the court faulted FERC's failure to hold an evidentiary hearing to determine whether the recovery of stranded investment costs by Entergy was anticompetitive and would preclude mitigation of market power. FERC argued in Order No. 888 that it addressed all of the Cajun<\/i> court's concerns in the Stranded Cost NOPR, the Supplemental Stranded Cost NOPR, the Open Access NOPR and the final rule. FERC also cited in support of the final rule the D.C. Circuit's recent decision in Western Resources, Inc. v. FERC<\/i>, 72 F.3d 147 (D.C. Cir. 1995), in which the court affirmed FERC's order allowing recovery of costs stranded in the natural gas market. FERC affirmed this approach concerning the D.C. Circuit's remand in Order No. 888-A. <\/li>
    • Implementation.<\/i><\/b> In Order No. 888-A, FERC distinguishes between new wholesale requirements contracts (those executed after July 11, 1994 — the date of the initial stranded cost NOPR), and existing contracts (those executed on or before that date). For new wholesale requirements contracts, no<\/i> stranded recovery is allowed unless the contract itself includes an express exit fee or other explicit stranded cost provision. Moreover, no recovery of stranded investment costs associated with new requirements contracts is allowed through transmission rates under Sections 205, 206 or 211 of the FPA.

      For existing contracts that are not renewed and that do not contain exit fees or other stranded cost provisions, stranded cost recovery is allowed if the selling utility can demonstrate a reasonable expectation that the contract would be renewed or that service would be continued. The utility must also prove that reasonable stranded costs were actually incurred. FERC prefers that the parties resolve disputes through negotiation or arbitration. Where negotiation fails, selling utilities can file a proposed stranded cost amendment to the contract or seek to recover stranded costs through a transmission rate for the departing customer.<\/p>

      There is no limit on the time within which a utility must file to recover stranded costs from its wholesale customers. Thus, if it becomes necessary, utilities with existing contracts may seek to recover stranded costs at any time during the term of those contracts.<\/p>

      FERC also understands that some wholesale customers with existing long term contracts are concerned that their contracts will unreasonably prevent them from obtaining the benefits of open transmission access. The final rule permits them to file a proposed contract amendment to terminate the contract before the conclusion of its term. The customers' existing electric generation supplier will then have the opportunity to recover its legitimate, prudent and verifiable stranded costs.<\/p><\/li>

    • Jurisdiction Over Stranded Costs Caused By Retail-Turned-Wholesale and Retail Customers.<\/i><\/b> FERC states that it and the State commissions share jurisdiction regarding recovery of costs stranded by retail-turned-wholesale customers and by retail customers who take advantage of state retail-wheeling regimes to change generation suppliers. FERC will assert primary jurisdiction only over recovery of costs stranded by retail-turned-wholesale customers who use a utility's open access tariff to access new suppliers. FERC decided in Order No. 888-A that it would assert jurisdiction over costs stranded both by initial municipalizations and through expansions of existing municipal utilities. Recovery of those costs will be considered under the same rules as for wholesale customers. FERC will also consider on a case-by-case basis situations in which customers or utilities attempt to circumvent the ability of any regulator to address recovery of stranded costs.

      FERC will only assert its jurisdiction over costs stranded by retail wheeling if, at the time the costs are stranded, the jurisdictional state commission does not have the authority to require the recovery of stranded costs. FERC clarifies in Order No. 888-A that it will not interfere if the state has the authority to require recovery of stranded costs but chooses not to do so. However, FERC will address on a case-by-case basis State decisions to deny recovery to jurisdictional subsidiaries of multi-state utilities where the denial could shift costs to customers in other states.<\/p>

      FERC asserts that States will be able to address both stranded costs and stranded benefits (such as conservation and demand side management) through surcharges on state-jurisdictional rates for local distribution. States will not be permitted to impose charges on the interstate transmission grid.<\/p><\/li><\/ul>

      III.) OASIS RULES<\/i><\/b><\/p>

      Pursuant to Order No. 889, all public utilities (or their agents) that own, control, or operate facilities used for interstate electric transmission have already created or joined in OASIS, formerly called real-time information networks. Public transmitting utilities (or their agents) must post specified information concerning the utility's transmission system, including total transmission capacity, available transmission capacity and capacity available for resale by third parties on an internet node that meets FERC defined standards.<\/p>

      Public transmitting utilities (or their agents) have also been required to implement standards of conduct that will functionally separate transmission and wholesale power merchant functions. Employees involved in merchant functions may obtain information concerning the utility's transmission only from the utility's OASIS.<\/p>

      In Order No. 889-A, FERC affirmed its conclusion that the OASIS rule is necessary to remedy undue discrimination in interstate transmission services. The OASIS standards of conduct are intended to ensure that a public utility's employees engaged in wholesale purchases and sales of power do not obtain any information about the utility's transmission system and operations that is not available on an equal basis to everyone else on the OASIS. FERC also believes that its requirement that each public utility set up an OASIS according to uniform standards will ensure that customers and competing utilities can obtain timely access to complete information concerning the availability of transmission capacity. That access will permit them to engage in efficient trades and will ensure that the transmission system is operated in a fair and non-preferential manner.<\/p>

      Non-public utilities are not directly regulated by the final rule. However, FERC applies the reciprocity provision of the Open Access final rule to require all non-public utilities taking service under a public utility's open access tariff to comply with the OASIS rule and standards of conduct.<\/p>

      Since promulgation of Order No. 889, FERC has waived OASIS requirements for several small public utilities, and non-public utilities subject to reciprocity requirements, under the same waiver standards established in the Open Access final rule.<\/p>

      Only a few changes have been made in Order No. 889-A to the details of FERC's OASIS rule and Standards of Conduct. The most significant change was necessitated by FERC's new discount rule in Order No. 888-A, requiring all discount offers and requests, and the details of discounts, to be posted on the OASIS.<\/p><\/div>","protected":false},"excerpt":{"rendered":"

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