[Federal Register: June 6, 2006 (Volume 71, Number 108)]
[Proposed Rules]
[Page 32635-32744]
[DOCID:fr06jn06-19]

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Part II

Department of Energy

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Federal Energy Regulatory Commission

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18 CFR Parts 35 and 37

Preventing Undue Discrimination and Preference in Transmission Service;
Proposed Rule

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 35 and 37

[Docket Nos. RM05-25-000 and RM05-17-000]

Preventing Undue Discrimination and Preference in Transmission
Service

May 19, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Energy Regulatory Commission is proposing
amendments to its regulations adopted in Order Nos. 888 and 889, and to
the pro forma open access transmission tariff, to ensure that
transmission services are provided on a basis that is just, reasonable
and not unduly discriminatory or preferential.

DATES: Comments are due August 7, 2006. Reply comments are due
September 5, 2006.

ADDRESSES: You may submit comments, identified by Docket Nos. RM05-25-
000 and RM05-17-000, by one of the following methods:
     Agency Web site: http://www.ferc.gov. Follow the

instructions for submitting comments via the eFiling link found in the
Comment Procedures section of the preamble.
     Mail: Commenters unable to file comments electronically
must mail or hand deliver an original and 14 copies of their comments
to: Federal Energy Regulatory Commission, Office of the Secretary, 888
First Street, NE., Washington, DC 20426. Please refer to the Comment
Procedures section of the preamble for additional information on how to
file paper comments.

FOR FURTHER INFORMATION CONTACT: Daniel Hedberg (Technical
Information), Office of Energy Markets and Reliability, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
(202) 502-6243.
    Kathleen Barron (Legal Information), Office of the General
Counsel--Energy Markets, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426,<PHONE_NUMBER>.
    David Withnell (Legal Information), Office of the General Counsel--
Energy Markets, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426.<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
II. Background
    A. Historical Antecedent
    B. Order No. 888 and Subsequent Reforms
    C. EPAct 2005 and Recent Developments
III. The Need for Reform of Order No. 888
    A. Opportunities for Undue Discrimination Continue To Exist
    B. A Lack Of Transparency Undermines Confidence in Open Access
and Impedes Enforcement of Open Access Requirements
    C. Congestion and Inadequate Infrastructure Development Impede
Customers' Use of the Grid
    D. A Consistent Method of Measuring ATC Has Not Been Established
    E. A Number of Transmission Pricing Policies May Impede the Use
of the Grid
    F. EPAct 2005 Emphasized Certain Policies and Priorities for the
Commission
IV. Summary, Scope and Applicability of the Proposed Rule
    A. Summary of Proposed Reforms .
    B. Core Elements of Order No. 888 That Are Retained
    1. Federal/State Jurisdiction
    2. Native Load Protection
    3. The Types of Transmission Services Offered
    4. Functional Unbundling
    C. Applicability of the Proposed Rule
    1. Public Utility Transmission Providers
    2. Non-Public Utility Transmission Providers/Reciprocity
V. Proposed Modifications of the OATT
    A. Consistency and Transparency of ATC Calculations
    B. Transmission Planning--Coordinated, Open and Transparent
Planning
    C. Transmission Pricing
    1. Imbalances
    2. Credits for Network Customers
    3. Capacity Reassignment
    4. ``Operational'' Penalties
    a. Unauthorized Use Penalties
    b. How Transmission Providers Should Pay Operational Penalties
    5. ``Higher of'' Pricing Policy
    D. Non-Rate Terms and Conditions
    1. Potential Modifications to Long-Term Firm Point-to-Point
Service
    2. Hourly Firm Service
    3. Rollover Rights
    4. Modification of Receipt or Delivery Points
    5. Acquisition of Transmission Service
    a. Processing of Service Requests
    b. Queue Processing Business Practices
    c. Reservation Priority
    6. Designation of Network Resources
    a. Qualification as a Network Resource
    b. Documentation for Network Resources
    c. Undesignation of Network Resources
    7. Clarifications Related to Network Service
    8. Transmission Curtailments
    9. Standardization of Rules and Practices
    10. OATT Definitions
    E. Enforcement
    1. General Policy
    a. Compliance Review Regime
    b. Use of Independent Third Party Audits
    2. Civil Penalties
    a. Background
    b. Whether Civil Penalties Should Be Specified in the OATT
    c. Whether Transmission Providers Should Be Subject to
Revocation of Their Market-Based Rates for OATT Violations.
    d. Whether Certain OATT Violations Should Be Considered Market
Manipulation Under the Market Behavior Rules and Section 1283 of
EPAct 2005
VI. Information Collection Statement
VII. Environmental Analysis
VIII. Regulatory Flexibility Act Analysis
IX. Comment Procedures
X. Document Availability
Appendix A: Commenter Acronyms
Appendix B: Pro Forma Open Access Transmission Tariff

I. Introduction

    1. Ten years have passed since the Commission issued its landmark
Order No. 888.\1\ Named after our new headquarters in Washington, DC,
Order No. 888 sought to eradicate undue discrimination in the provision
of transmission service in interstate commerce. It did so by requiring
that each public utility that owns, operates, or controls facilities
used for transmission in interstate commerce offer unbundled
transmission service pursuant to a standard Open Access Transmission
Tariff (pro forma OATT) and separate its transmission and merchant
generation functions pursuant to a companion order issued that same
day, Order No. 889.\2\ These remedies reduced barriers to entry, led to
greater competition in bulk power markets and provided the foundation
for subsequent regulatory reforms at both the federal and state level.
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    \1\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ]
31,036 (1996), order on reh'g, Order No. 888-A, 62 FR 12274 (Mar.
14, 1997), FERC Stats. & Regs. ] 31,048 (1997), order on reh'g,
Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, Order No.
888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub nom.
Transmission Access Policy Study Group v. FERC, 225 F.3d 667 (D.C.
Cir. 2000) (TAPS v. FERC), aff'd sub nom. New York v. FERC, 535 U.S.
1 (2002).
    \2\ Open Access Same-Time Information System (Formerly Real-Time
Information Networks) and Standards of Conduct, Order No. 889, 61 FR
21737 (May 10, 1996), FERC Stats. & Regs. ] 31,035 (1996), order on
reh'g, Order No. 889-A, FERC Stats. & Regs. ] 31,049 (1997), order
on reh'g, Order No. 889-B, 81 FERC ] 61,253 (1997).
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    2. Although Order No. 888 has been successful in many important
respects, the need for reform of the Order No. 888 pro forma OATT has
been apparent for some time. In 1999, the Commission held, in adopting
Order No. 2000,\3\ that

the pro forma OATT could not fully remedy undue discrimination because
transmission providers retained both the incentive and the ability to
discriminate against third parties, particularly in areas where the pro
forma OATT left the transmission provider with significant
discretion.\4\ The Commission in Order No. 2000 thus encouraged
utilities to voluntarily join independent regional transmission
organizations (RTOs) that would operate their transmission facilities
on a non-discriminatory basis and administer the OATT. The Commission
based Order No. 2003 on a similar finding, explaining that the
interconnection process includes opportunities for undue discrimination
that may lead to delays that benefit generation-owning transmission
utilities and undermine competition.\5\ While many regions of the
country now have independent grid operators, not all do, and changes to
the pro forma OATT are necessary to reduce the opportunity for
transmission providers to engage in undue discrimination. In the past
ten years new investment has faltered and many regions now experience
chronic transmission congestion and inadequate infrastructure.
Congress, through the Energy Policy Act of 2005 (EPAct 2005),\6\
recognized this problem and provided the Commission not only new tools
to encourage infrastructure but also made clear that the Commission
should use its existing authority to ensure an adequate infrastructure
to support a vibrant economy.
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    \3\ Regional Transmission Organizations, Order No. 2000, 65 FR
809 (Jan. 6, 2000), FERC Stats. & Regs. ] 31,089 (1999), order on
reh'g, Order No. 2000-A, 65 FR 12088 (Mar. 8, 2000), FERC Stats. &
Regs. ] 31,092 (2000), aff'd sub nom. Public Utility District No. 1
of Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir.
2001).
    \4\ Order No. 2000 at 31,015.
    \5\ See Order No. 2003 at P 11-12.
    \6\ Pub. L. 109-58, 119 Stat. 594 (to be codified in scattered
itles of the U.S.C.).
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    3. The reforms we propose today are intended to address
deficiencies in the pro forma OATT that have become apparent since 1996
and to facilitate improved planning and operation of transmission
facilities. We summarize these reforms in Part IV.A below, but note the
major focus of this reform effort here. As a general matter, the
purpose of this rulemaking is to strengthen the pro forma OATT to
ensure that it achieves its original purpose--remedying undue
discrimination--not to create new market structures. We propose to
achieve this goal by increasing the clarity and transparency of the
rules applicable to the planning and use of the transmission system and
by addressing ambiguities and the lack of sufficient detail in several
important areas of the pro forma OATT. The lack of specificity in the
pro forma OATT creates opportunities for undue discrimination as well
as making the undue discrimination that does occur more difficult to
detect. First, we propose to improve transparency and consistency in
several critical areas, such as the calculation of available transfer
capability (ATC).\7\ We propose to direct public utilities, under the
auspices of the North American Electric Reliability Council (NERC) and
the North American Energy Standards Board (NAESB), to provide for
greater consistency in ATC calculation. By reducing unnecessarily broad
discretion in this and other areas, we will reduce the ability of
transmission providers to unduly discriminate and provide them greater
certainty to facilitate compliance with our regulations. Second, we
propose to reform the transmission planning requirements of the pro
forma OATT to eliminate potential undue discrimination and support the
construction of adequate transmission facilities to meet the needs of
all load-serving entities. The pro forma OATT contains only minimal
requirements regarding transmission planning, which have proven to be
inadequate as the Nation faces inadequate transmission investment in
many areas. We propose to require public utilities to engage in an open
and transparent planning process at both the local and regional levels.
Third, we propose to remedy certain portions of the pro forma OATT that
may have permitted utilities to discriminate against new merchant
generation, including intermittent generation. For example, we propose
to modify the energy imbalance provisions of the pro forma OATT and
adopt certain other tariff modifications. Fourth, we provide for
greater transparency in the provision of transmission service to allow
transmission customers better access to information to make their
resource procurement and investment decisions, as well as to increase
our ability to detect any remaining incidents of undue discrimination.
Finally, we provide for reform and greater clarity in areas that have
generated recurring disputes over the past 10 years, such as rollover
rights, ``redirects,'' and generation redispatch.
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    \7\ We note that the Commission used the term ``Available
Transmission Capability'' in Order No. 888 to describe the amount of
additional capability available in the transmission network to
accommodate additional requests for transmission services. To be
consistent with the term generally accepted throughout the industry,
the Commission is proposing to revise the pro forma OATT to adopt
the term ``Available Transfer Capability.''
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    4. Although the reforms being proposed in these areas are
significant, we wish to underscore that we propose to maintain many of
the core elements of Order No. 888. For example, we are retaining the
comparability requirement under which each public utility must treat
third parties in a manner comparable to its service to bundled
customers. We are retaining the basic nature of the services being
offered--network service and point-to-point service. We are retaining
the protection of native load customers embodied in Order No. 888,
consistent with EPAct 2005's new requirement that load-serving entities
be provided transmission rights to meet their service obligations.\8\
We are retaining our decision to exercise jurisdiction over unbundled
transmission service, but not transmission service provided as part of
a bundled retail service. We are retaining the use of functional
unbundling to address undue discrimination, rather than requiring
corporate unbundling. We are retaining the use of an OATT to facilitate
the development of competitive wholesale markets by reducing barriers
to entry through the control of transmission assets, not imposing any
particular market structure on the industry.
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    \8\ EPAct 2005 sec. 1233 (to be codified at section 217(b)(4) of
the FPA, 16 U.S.C. 824q).
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    5. In proposing to reform Order No. 888, we have relied heavily on
the comments received in response to our notices of inquiry in the
above-captioned dockets.\9\ We appreciate the time and thoughtfulness
of all sectors of the industry in preparing comments on these notices
of inquiry. We have found them very informative and useful and this
Notice of Proposed Rulemaking (NOPR) incorporates many of the
commenters' suggestions. We invite further comments on this NOPR. We
also are scheduling technical conferences to more fully address the
topics of ATC calculation and transmission planning.
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    \9\ Preventing Undue Discrimination and Preference in
Transmission Services, Notice of Inquiry, 112 FERC ] 61,299 (2005)
(NOI); Information Requirements for Available Transfer Capability,
Notice of Inquiry, 111 FERC ] 61,274 (2005) (ATC NOI).
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II. Background

A. Historical Antecedent

    6. In the first few decades after enactment of the Federal Power
Act (FPA) in 1935, the industry was characterized mostly by self-
sufficient, vertically integrated electric utilities, in which
generation, transmission, and distribution facilities were owned by a
single entity and sold as part of a bundled service to wholesale and
retail customers. Most electric utilities built their own power plants
and transmission systems, entered into interconnection and coordination
arrangements with neighboring utilities,

and entered into long-term contracts to make wholesale requirements
sales (bundled sales of generation and transmission) to municipal,
cooperative, and other investor-owned utilities connected to each
utility's transmission system. Each system covered a limited service
area, which was defined by the retail franchise decisions of state
regulatory agencies. This structure of separate systems arose naturally
due primarily to the cost and technological limitations on the distance
over which electricity could be transmitted.
    7. A number of statutory, economic, and technological developments
in the 1970s led to an increase in coordinated operations and
competition. Among those was the passage of the Public Utility
Regulatory Policies Act of 1978 (PURPA),\10\ which was designed to
lessen dependence on foreign fossil fuels by encouraging the
development of alternative generation sources and imposing a mandatory
purchase obligation on utilities for generation from such sources.
PURPA also enabled the Commission to order wheeling of electricity
under limited circumstances.\11\ The rapid expansion and performance of
the independent power industry following the enactment of PURPA
demonstrated that traditional, vertically integrated public utilities
need not be the only sources of reliable power. During this period, the
profile of generation investment began to change, and a market for non-
traditional power supply beyond the purchases required by PURPA began
to emerge. The economic and technological changes in the transmission
and generation sectors helped encourage many new entrants in the
generating markets that could sell electric energy profitably with
smaller scale technology at a lower price than many utilities selling
from their existing generation facilities at rates reflecting cost.
However, it became increasingly clear that the potential consumer
benefits that could be derived from these technological advances could
be realized only if more efficient generating plants could obtain
access to the regional transmission grids. Because many traditional
vertically integrated utilities still did not provide open access to
third parties and favored their own generation if and when they
provided transmission access to third parties, access to cheaper, more
efficient generation sources remained limited.
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    \10\ Pub. L. 95-617, 92 Stat. 3117 (1978) (codified in U.S.C.
titles 15, 16, 26, 30, 42, and 43 (2000)).
    \11\ Section 211 of the FPA, 16 U.S.C. 824j (2000). In earlier
years, a few customers were able to obtain access as a result of
litigation, beginning with the U.S. Supreme Court's decision in
Otter Tail Power Company 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 Co., 6 NRC 887, 1036-
44 (1977); Toledo Edison Co., 10 NRC 265, 327-34 (1979); Florida
Municipal Power Agency v. Florida Power and Light Company, 839 F.
Supp. 1563 (M.D. Fla. 1993).
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    8. The Commission encouraged the development of independent power
producers (IPPs), as well as emerging power marketers, by authorizing
market-based rates for their power sales on a case-by-case basis and by
encouraging more widely available transmission access on a case-by-case
basis. Market-based rates helped to develop competitive bulk power
markets by allowing generating utilities to move more quickly and
flexibly to take advantage of short-term or even long-term market
opportunities than those utilities operating under traditional cost-of-
service tariffs. In approving these market-based rates, the Commission
required that the seller and its affiliates lack market power or
mitigate any market power that they may have possessed.\12\ The major
concern of the Commission was whether the seller or its affiliates
could limit competition and thereby drive up prices. A key inquiry
became whether the seller or its affiliates owned or controlled
transmission facilities in the relevant service area and therefore, by
denying access or imposing discriminatory terms or conditions on
transmission service, could foreclose other generators from competing.
Beginning in the late 1980s, in order to mitigate their market power to
meet the Commission's conditions, public utilities seeking Commission
authorization for blanket approval of market-based rates for generation
services under section 205 of the FPA filed ``open access''
transmission tariffs of general applicability.\13\ The Commission also
approved proposed mergers under section 203 of the FPA on the condition
that the merging companies remedy anticompetitive effects potentially
caused by the merger by filing ``open access'' tariffs. The early
tariffs submitted in market-based rate proceedings under section 205
and merger proceedings under section 203 did not, however, provide
access to the transmission system that was comparable to the service
the transmission providers used for their own purposes. Rather, they
typically made available only point-to-point transmission service,
i.e., service from a single point of receipt to a single point of
delivery. As these early tariffs were offered only by transmission
providers that volunteered to provide service to third parties, they
resulted in a patchwork of open access that was not sufficient to
facilitate wholesale generation markets.
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    \12\ See, e.g., Dartmouth Power Associates Limited Partnership,
53 FERC ] 61,117 (1990); Commonwealth Atlantic Limited Partnership,
51 FERC ] 61,368 (1990); Doswell Limited Partnership, 50 FERC ]
61,251 (1990); Citizens Power & Light Co., 48 FERC ] 61,210 (1989);
Ocean State Power, 44 FERC ] 61,261 (1988); and Orange and Rockland
Utilities, Inc., 42 FERC ] 61,012 (1988).
    \13\ See Order No. 888 at 31,644 n.52.
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    9. In response to the competitive developments following PURPA, and
the fact that limited transmission access and significant regulatory
barriers continued to constrain the development of generation by
independent power producers, Congress enacted Title VII of the Energy
Policy Act of 1992 (EPAct 1992).\14\ EPAct 1992 reduced regulatory
barriers to entry by creating a class of ``Exempt Wholesale
Generators'' that were exempt from the requirements of the Public
Utility Holding Company Act of 1935.\15\ EPAct 1992 also expanded the
Commission's authority to approve applications for transmission
services under sections 211 and 212 of the FPA. Though the Commission
aggressively implemented expanded section 211, it ultimately concluded
that the procedural limitations in section 211 thwarted the
Commission's ability to effectively eliminate undue discrimination in
the provision of transmission service.
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    \14\ Pub. L. 102-486, 106 Stat. 2776 (1992) (codified at, among
other places, 15 U.S.C. 79z-5a and 16 U.S.C. 796 (22-25), 824j-l
(2000)).
    \15\ 15 U.S.C. 79a (2000), repealed by EPAct 2005 sec. 1263; see
Repeal of the Public Utility Holding Company Act of 1935 and
Enactment of the Public Utility Holding Company Act of 2005, Order
No. 667, 70 FR 75592 (Dec. 20, 2005), FERC Stats. & Regs. ] 31,197
(2005).
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B. Order No. 888 and Subsequent Reforms

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

their own new wholesale sales and purchases of electric energy under
the open access tariffs, and to separately state their rates for
wholesale generation, transmission and ancillary services.\16\ Each
public utility was required to file the pro forma OATT included in
Order No. 888 without any deviation (except a limited number of terms
and conditions that reflect regional practices).\17\ After the
effectiveness of their OATTs, public utilities were allowed to file,
pursuant to section 205 of the FPA, deviations that were consistent
with or superior to the pro forma OATT's terms and conditions. Because
certain owners and controllers or operators of interstate transmission
facilities were not subject to the Commission's jurisdiction under
sections 205 and 206 and thus were not subject to Order No. 888, the
Commission adopted a reciprocity provision in the pro forma OATT which
conditions the use by non-public utilities of public utilities' open
access services on an agreement to offer open access services in
return.
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    \16\ This is known as ``functional unbundling'' because the
transmission element of a wholesale sale is separated or unbundled
from the generation element of that sale, although the public
utility may retain ownership over both functions. See infra Part
IV.B.4.
    \17\ See Order No. 888 at 31,769-70 (noting that the pro forma
OATT expressly identified certain non-rate terms and conditions,
such as the time deadlines for determining available capability in
section 18.4 or scheduling changes in sections 13.8 and 14.6, that
may be modified to account for regional practices if such practices
are reasonable, generally accepted in the region, and consistently
adhered to by the transmission provider).
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    11. In addition to imposing the functional unbundling requirement,
the Commission also encouraged broader reforms through the formation of
independent system operators (ISOs). The Commission stated that ISOs
``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.'' \18\ While the Commission
declined to mandate ISOs, it set forth eleven principles for assessing
ISO proposals submitted to the Commission.\19\
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    \18\ Order No. 888 at 31,655.
    \19\ Id. at 31,730-32.
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    12. Order No. 888 also clarified the Commission's interpretation of
the federal/state jurisdictional boundaries over transmission and local
distribution. While it reaffirmed that the Commission has exclusive
jurisdiction over the rates, terms, and conditions of unbundled retail
transmission in interstate commerce by public utilities, it
nevertheless recognized the legitimate concerns of state regulatory
authorities regarding the transmission component of bundled retail
sales. The Commission therefore declined to extend its unbundling
requirement to the transmission component of bundled retail sales. On
appeal, the U.S. Supreme Court affirmed this element of Order No. 888,
finding that the Commission made a statutorily permissible choice.\20\
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    \20\ New York v. FERC, 535 U.S. 1 (2002).
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    13. The same day it issued Order No. 888, the Commission issued a
companion order, Order No. 889, addressing both the separation of
vertically integrated utilities' transmission and merchant functions,
the information transmission providers were required to make public and
the electronic means they were required to use to do so. Order No. 889
imposed Standards of Conduct governing the separation of, and
communications between, the utility's transmission and wholesale power
functions, to prevent the utility from giving its merchant arm
preferential access to transmission information. All public utilities
that owned, controlled or operated facilities used in the transmission
of electric energy in interstate commerce were required to create or
participate in an Open Access Same-Time Information System (OASIS) that
was to provide existing and potential transmission customers the same
access to transmission information.
    14. Among the information required to be posted by Order No. 889
was the transmission provider's calculation of ATC. Though the
Commission acknowledged that before-the-fact measurement of the
availability of transmission service is ``difficult,'' it concluded
that it was important to give potential transmission customers ``an
easy-to-understand indicator of service availability.'' \21\ Because
formal methods did not then exist to calculate ATC and total transfer
capability (TTC), the Commission encouraged industry efforts to develop
consistent methods for calculating ATC and TTC.\22\ Order No. 889
ultimately required transmission providers to base their calculations
on ``current industry practices, standards and criteria'' and to
describe their methodology in their tariffs.\23\ The Commission noted
that the requirement that transmission providers purchase only ATC that
is posted as available ``should create an adequate incentive for them
to calculate ATC and TTC as accurately and as uniformly as possible.''
\24\
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    \21\ Order No. 889 at 31,605.
    \22\ Id. at 31,607.
    \23\ Id.
    \24\ Id.
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    15. The electric industry continued to undergo economic and
regulatory changes in the years following the issuance of Order No.
888. Retail access was adopted by approximately 25 states in the late
1990s.\25\ This state restructuring activity spurred significant
changes at the wholesale level as well by encouraging or requiring the
divestiture of generation plants by traditional electric utilities and
the development of ISOs that could manage short-term energy markets
necessary to support retail access. At the same time, there was a
significant increase in the number of mergers between traditional
electric utilities and between electric utilities and gas pipeline
companies, and large increases in the number of power marketers and
independent generation facility developers entering the marketplace.
Trade in bulk power markets increased significantly and the Nation's
transmission grid was used more heavily and in new ways as customers
took advantage of the pro forma OATT and purchased power from
competitive sellers.
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    \25\ See Energy Information Administration, Retail Unbundling--
U.S. Summary (2005), http://www.eia.doe.gov/oil_gas/natural_gas/restructure/state/us.html
.

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    16. In the wake of these changes, in December 1999, the Commission
adopted Order No. 2000.\26\ That rulemaking recognized that Order No.
888 set the foundation upon which competitive electric markets could
develop, but did not eliminate the potential to engage in undue
discrimination and preference in the provision of transmission
service.\27\ The rulemaking also recognized that Order No. 888 did not
address the regional nature of the grid, including the treatment of
parallel flows, pancaked rates, and congestion management. Thus, the
Commission encouraged the creation of RTOs to address important
operational and reliability issues and eliminate any residual
discrimination in transmission services that can occur when the
operation of the transmission system remains in the control of a
vertically integrated utility. The Commission found that RTOs would
increase the efficiency of wholesale markets by eliminating pancaked
rates, internalizing parallel flow, managing congestion efficiently and
operating markets for energy, capacity and ancillary services. The
Commission

established an open, collaborative process that relied on voluntary
regional participation to design RTOs tailored to the specific needs of
each region. The Commission noted, however, that ``[i]f the industry
fails to form RTOs under this approach, the Commission will reconsider
what further regulatory steps are in the public interest.'' \28\
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    \26\ See supra note 3.
    \27\ Order No. 2000 at 31,015.
    \28\ Id. at 30, 993.
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    17. Following Order No. 2000, RTOs were approved in several regions
of the country including the Northeast (PJM Interconnection, Inc.; ISO
New England), the Midwest (MISO) and the South (SPP). In most cases,
RTOs have assumed responsibility for calculating ATC across the
footprint of the RTO, as well as the planning and expansion of the
transmission grid, at least for facilities necessary for maintaining
system reliability. However, large areas of the Nation have not
developed RTOs using the voluntary structure adopted by the Commission
in Order No. 2000. Moreover, transmission customers have complained
that even in RTO markets there are instances when comparable
transmission service is not provided, particularly in the area of
transmission planning.

C. EPAct 2005 and Recent Developments

    18. EPAct 2005,\29\ enacted on August 8, 2005, added a number of
new authorities and priorities for the Commission and emphasized
certain of its existing obligations. Specifically, EPAct 2005
recognized the importance of adequate transmission infrastructure
development and its role in facilitating the development of competitive
wholesale markets. For example, Congress required the Commission to
adopt a rule establishing incentive ratemaking for transmission
infrastructure to help promote reliability and reduce congestion.\30\
Congress further directed the Commission to ``exercise its authority''
under EPAct 2005 ``in a manner that facilitates the planning and
expansion of transmission facilities to meet the reasonable needs of
load-serving entities.'' \31\ Congress also gave the Commission certain
``backstop'' transmission siting authority, and authorized the creation
of interstate compacts establishing transmission siting agencies.\32\
EPAct 2005 also authorized the Commission to require unregulated
transmitting utilities (except for certain small entities) to provide
access to their transmission facilities on a comparable basis.\33\
Congress further ordered the Department of Energy (DOE) to study the
benefits of economic dispatch and required the Commission to convene
regional joint boards to develop a report to Congress containing
recommendations for the use of security constrained economic dispatch
within each region.\34\ Congress also directed the Commission to
facilitate price transparency in markets for the sale and transmission
of electric energy in interstate commerce, having due regard for the
public interest, the integrity of those markets, fair competition, and
the protection of consumers, and it authorized the Commission to
prescribe rules to provide for the dissemination of information about
the availability and price of wholesale electric energy and
transmission service.\35\ Finally, Congress emphasized compliance with
the Commission's regulations, increasing the civil and criminal
penalties for violations of Commission-administered statutes and
regulations.\36\
---------------------------------------------------------------------------

    \29\ See supra note 6.
    \30\ EPAct 2005 sec. 1241 (to be codified at section 219 of the
FPA, 16 U.S.C. 824s).
    \31\ EPAct 2005 sec. 1233(a) (to be codified at section
217(b)(4) of the FPA, 16 U.S.C. 824q).
    \32\ EPAct 2005 sec. 1221(a) (to be codified at section 216 of
the FPA, 16 U.S.C. 824p).
    \33\ EPAct 2005 sec. 1231 (to be codified at section 211A of the
FPA, 16 U.S.C. 824j-1).
    \34\ EPAct 2005 sec. 1234 (to be codified at 42 U.S.C. 16432);
EPAct 2005 sec. 1298 (to be codified at section 223 of the FPA, 16
U.S.C. 824w). EPAct 2005 defined economic dispatch as ``the
operation of generation facilities to produce energy at the lowest
cost to reliably serve consumers, recognizing any operational limits
of generation and transmission facilities.'' EPAct 2005 sec. 1234
(b).
    \35\ EPAct 2005 sec. 1281 (to be codified at section 220 of the
FPA, 16 U.S.C. 824t).
    \36\ EPAct 2005 sec. 1284(d) (to be codified at section 316 of
the FPA, 16 U.S.C. 825o); EPAct 2005 sec. 1284(e) (to be codified at
section 316A of the FPA, 16 U.S.C. 825o-1).
---------------------------------------------------------------------------

    19. Recognizing the need for reform of Order No. 888 in light of
these developments and those described in the next section, the
Commission issued an NOI in September 2005 seeking comments on the
reforms needed to the Order No. 888 pro forma OATT to prevent undue
discrimination and preference in the provision of transmission
services. In the NOI, the Commission expressed its preliminary view
that reforms to the pro forma OATT and public utilities' OATTs are
necessary to avoid undue discrimination or preference in the provision
of transmission service. The NOI sought comments on how best to
accomplish the Commission's goals, specifically with respect to
enhancements that are needed to: (1) Remedy any unduly discriminatory
or preferential application of the pro forma OATT or (2) improve the
clarity of the Order No. 888 pro forma OATT and the individual public
utility tariffs in order to more readily identify violations and
facilitate compliance.
    20. The Commission received over 4,000 pages of initial and reply
comments on the NOI. Based on these comments, the comments submitted in
response to the ATC NOI, our experience in implementing Order No. 888,
and the changes in the industry since we adopted it, we conclude that
reform of the pro forma OATT is necessary, for the reasons we discuss
next.

III. The Need for Reform of Order No. 888

A. Opportunities for Undue Discrimination Continue To Exist

    21. In Order No. 2000, the Commission found that ``opportunities
for undue discrimination continue to exist that may not be remedied
adequately by [the] functional unbundling [remedy of Order No. 888].''
\37\ The Commission made a similar finding in Order No. 2003, holding
that opportunities for undue discrimination continue to exist in areas
where the pro forma OATT leaves transmission providers with substantial
discretion.\38\ The Commission has a responsibility under section 206
of the FPA to remedy undue discrimination.\39\ Our action today
proposes to fulfill that responsibility by proposing reforms to the pro
forma OATT that will address remaining opportunities for undue
discrimination.
---------------------------------------------------------------------------

    \37\ Order No. 2000 at 31,105.
    \38\ Order No. 2003 at P 11-12.
    \39\ In Associated Gas Distributors v. FERC, 824 F.2d 981 (D.C.
Cir. 1987), (AGD), the court concluded that, like the Natural Gas
Act, the FPA ``fairly bristles'' with concern over undue
discrimination. Based on AGD, the Commission determined in Order No.
888 that:
    The Commission has a mandate under sections 205 and 206 of the
FPA to ensure that, with respect to any transmission in interstate
commerce or any sale of electric energy for resale in interstate
commerce by a public utility, no person is subject to any undue
prejudice or disadvantage. We must determine whether any rule,
regulation, practice or contract affecting rates for such
transmission or sale for resale is unduly discriminatory or
preferential, and must prevent those contracts and practices that do
not meet this standard. * * * AGD demonstrates that our remedial
power is very broad and includes the ability to order industry-wide
non-discriminatory open access as a remedy for undue discrimination.
    Order No. 888 at 31,669.
---------------------------------------------------------------------------

    22. As the Commission noted in Order No. 888, it is in the economic
self-interest of transmission monopolists, particularly those with
high-cost generation assets, to deny transmission or to offer
transmission on a basis that is inferior to that which they provide
themselves.\40\ Such an incentive can lead to unduly discriminatory
behavior

against third parties, particularly if public utilities have
unnecessarily broad discretion in the application of their tariffs.
This discretion also can create problems for transmission providers
seeking to comply with our regulations in good faith because so many
issues are left for their interpretation, thereby increasing the
possibility of disputes with transmission customers and enforcement
actions by the Commission.\41\ Transmission customers also have found
ways to use the tariffs to their own advantage, particularly in the
scheduling and queuing processes.\42\ Finally, tariff provisions have
been modified in numerous ways on a company-by-company basis, leading
to uncertainties within the industry as to the proper interpretation of
those provisions and to unnecessarily inconsistent treatment of
transmission customers across public utilities.
---------------------------------------------------------------------------

    \40\ Id. at 31,682.
    \41\ See, e.g., Order No. 2003 at P 11-12.
    \42\ See, e.g., Potomac Economics, Ltd., 2004 State of the
Market Report: Midwest ISO at 30-31, 34-35 (Jun. 2005) (explaining
that the queuing process, by giving customers the opportunity to
submit multiple requests for service, provides a low or no-cost
option that restricts other customers' access to congested
interfaces, and the scheduling process, by allowing customers to
leave transmission requests unconfirmed, provides a free option that
may invite hoarding or result in underutilized capacity), http://www.midwestmarket.
 org/publish/Document/2b8a32-- 103ef711180---

7bf20a48324a /2004%20MISO%20SOM%20Report. pdf?action=download&--
property=Attachment.
---------------------------------------------------------------------------

    23. Commenters suggest that enhanced clarity and consistency in the
pro forma OATT would go a long way toward eliminating the opportunities
for undue discrimination and the perception that it is occurring.\43\
Calpine notes that undue discrimination is most likely to occur when
the transmission provider retains discretion to implement an OATT
provision in a manner that favors its affiliated generation. APPA
asserts that the success of the OATT regime depends on public
utilities' ability to faithfully implement the OATT's provisions. Large
transmission providers share this view to some degree. Entergy notes
that a lack of clarity is at the heart of many disputes involving the
OATT, and urges the Commission to improve the OATT in a manner that
will minimize the potential for future violations. Duke posits that
tariff terms and conditions that are susceptible to multiple
interpretations present opportunities for discrimination and/or the
perception thereof. Progress Energy agrees that several OATT provisions
can be interpreted differently, leaving room for disagreement as to
their meaning.
---------------------------------------------------------------------------

    \43\ E.g., Calpine, Duke, and MidAmerican. (A list of commenter
acronyms may be found in Appendix A). As the Commission noted in
Order No. 2000, ``[p]erceptions of discrimination are significant
impediments to competitive markets. Efficient and competitive
markets will develop only if market participants have confidence
that the system is administered fairly.'' Order No. 2000 at 31,017.
---------------------------------------------------------------------------

    24. Perhaps the most obvious deficiency in this regard is ATC
calculation. In Order Nos. 888 and 889, the Commission declined to
require a specific methodology for ATC calculation. As a result, there
are few clear rules respecting ATC calculation, and transmission
providers, therefore, retain unnecessarily broad discretion in this
area. On systems where transmission capacity is congested, this lack of
consistency, coupled with a lack of transparency, has led to recurring
disputes over whether the transmission provider is exercising its
discretion to discriminate against its competitors.
    25. There is a similar lack of clarity in the transmission
provider's planning obligations. Order No. 888 included a general
obligation on the part of the transmission providers to plan on a
comparable basis (i.e., comparable to the manner in which it would plan
for its own needs) to serve network loads and to construct new
facilities as necessary to respond to requests for firm service from
point-to-point customers. However, there were no clear guidelines with
respect to whether transmission customers should be included in the
planning process, what standards and criteria should be used in system
planning, and whether the planning process should identify potential
economic upgrades that could benefit a wide range of customers, as
opposed to responding only to customer-specific requests. Here too,
this lack of clarity has led to significant disputes over whether
transmission providers are planning on a nondiscriminatory basis or are
favoring service to their own loads.

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

    26. A major focus of comments on the NOI is that increased
transparency would aid transmission customers in their participation in
the wholesale market.\44\ Constellation explains that the transmission
provider's unique position as the owner and operator of the
transmission system and often the majority of the generation assets in
its control area gives it better information than its transmission
customers. Moreover, the transmission provider, Constellation argues,
has financial incentives to use the system differently, and more
efficiently, to serve its own loads than to serve its other customers
under the pro forma OATT. TDU Systems urges the Commission to ensure
that transmission providers make their actions under the OATT
completely transparent on a timely basis to all transmission customers.
NARUC posits that enhanced reporting requirements, if sufficiently
targeted, would facilitate greater transparency in transmission
activities. Alberta Intervenors states that the current pro forma OATT
provides transmission customers with only a narrow glimpse of how the
system is being operated. For example, Bonneville notes that many terms
and conditions of native load service are not transparent to OATT
transmission customers.\45\ EEI also states that greater transparency,
such as with respect to ATC calculation, can increase confidence in
open access and potentially reduce claims of undue discrimination.
---------------------------------------------------------------------------

    \44\ E.g., LG&E, MidAmerican, Midwest SATs, TDU Systems, and
Williams.
    \45\ Bonneville urges the Commission to require load-serving
transmission providers to post the same information for bundled
retail load that they must post for service to network customers.
---------------------------------------------------------------------------

    27. Calpine argues that undue discrimination is difficult to detect
given the lack of access to data, analytical assumptions, and processes
used by transmission providers to determine transmission access and
service. It recommends that the Commission increase reporting
requirements for denials of transmission service, for congestion
management mitigation events, including curtailments and redispatch,
and for transmission expansion planning decisions. Powerex notes that
the Commission already has posting standards, and urges the Commission
to enforce them and to increase requirements to provide more meaningful
posting of reliable ATC data, curtailment methodology and results,
details relating to denials of service, and congestion information.
Constellation agrees, urging the Commission to require OASIS posting of
service metrics, such as all transmission requests approved, rejected,
confirmed and curtailed.
    28. A common theme in the comments is that the lack of transparency
can lead to claims of undue discrimination and can make such claims
more difficult to resolve.\46\ As such, National Grid asserts that
greater transparency will allow the Commission and transmission system
users to understand when a transmission access decision is

motivated by a legitimate reason rather than an intent to discriminate.
If transmission customers have more accurate information about the
transmission service request process, National Grid contends, they also
will have more accurate expectations and a better understanding of how
to expedite the implementation of service. Though NRECA agrees that
increased transparency will allow the Commission to deter undue
discrimination and facilitate accountability, it urges the Commission
to require not just raw data but meaningful, clear and understandable
data, in a format that facilitates understanding.
---------------------------------------------------------------------------

    \46\ E.g., Ameren, National Grid, and NRECA.
---------------------------------------------------------------------------

    29. Commenters urge the Commission to improve the transparency of
transmission service in a number of areas, particularly the evaluation
of ATC and the planning of the transmission system.\47\ Another area
often cited as lacking sufficient transparency is the processing of
transmission service requests and studies. For example, several
commenters note that system impact studies are often not completed
within the tariff-prescribed time limits, and that information about
that process is not available to transmission customers.\48\ TDU
Systems suggests that one way to address the difficulty of determining
acceptable delays is to require transmission providers to post
statistics on their OASIS sites providing information as to the length
of time it might take to process requests for transmission service.
Cinergy proposes that adopting such reporting metrics could result in
an improved quality of service.
---------------------------------------------------------------------------

    \47\ We discuss these specific aspects of the pro forma OATT
below in Parts V.A. and V.B.
    \48\ E.g., Constellation, EPSA, Powerex, and Williams.
---------------------------------------------------------------------------

    30. We agree that a lack of transparency both increases the
potential for undue discrimination and makes it more difficult to
detect. We believe this lack of sufficient transparency is caused in
part by inadequate compliance with our existing OASIS regulations, and
in part by inadequate transparency requirements. Our reforms address
both elements of the problem in an effort to increase confidence in
open access tariffs and to facilitate compliance with our regulations
and our enforcement of them.

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

    31. The ability and incentive to discriminate increases as the
transmission system becomes more congested. Vertically integrated
utilities do not have an incentive to expand the grid to accommodate
new entry or to facilitate the dispatch of more efficient competitors.
Even with the advent of RTOs, transmission infrastructure development
has not kept pace with the increase in demand for electricity.
Transmission capacity is being constructed at a much slower rate than
the rate of increase in customer demand. Indeed, transmission capacity
per MW of peak demand declined at an average rate of 2.1 percent per
year during the period 1992 to 2002.\49\ Investment for the most recent
year available, 2003, was below 1975 levels,\50\ and projections
suggest that this trend will continue through 2012.\51\ As a result,
there has been a significant decrease in transmission capacity relative
to load in every NERC region.\52\ EEI estimates that capital spending
must increase by 25 percent, from $4 billion annually to $5 billion
annually, to ensure system reliability and to accommodate wholesale
electric markets.\53\ The legacy systems constructed by vertically
integrated utilities prior to the adoption of Order No. 888 support
``only limited amounts of inter-regional power flows and transactions.
Thus, existing systems cannot fully support all of society's goals for
a modern electric-power system.'' \54\ These systems were built to meet
the vertically integrated utilities' retail native load obligations,
not to support the development of a bulk power market.
---------------------------------------------------------------------------

    \49\ Eric Hirst, U.S. Transmission Capacity: Present Status and
Future Prospects (Aug. 2004), available at http://www.eei.org/industry_issues/energy_infrastructure/transmission/USTransCapacity10-18-04.pdf
 (Present Status and Future Prospects).

    \50\ EEI, EEI Survey of Transmission Investment: Historical and
Planned Capital Expenditures (1999-2008) at 3 (May 2005), available
at http://www.eei.org/industry_issues/energy_infrastructure/transmission/Trans_Survey_Web.pdf
.

    \51\ Present Status and Future Prospects at v.
    \52\ Brendan Kirby (Oak Ridge National Laboratory, U.S.
Department of Energy, Barriers to Transmission Investment, Technical
Conference Presentation, (Docket No. AD05-5-000) (April 22, 2005)
Transmission Independence and Investment.
    \53\ Energy Policy Act of 2005: Hearings before the House
Subcommittee on Energy and Commerce, 109th Congress, First Sess.
(2005) (Prepared statement of Thomas R. Kuhn, President of EEI).
    \54\ Present Status and Future Prospects at v.
---------------------------------------------------------------------------

    32. Inadequate expansion of the transmission grid has contributed
to increasing transmission congestion in most regions of the country.
Transmission congestion has created fairly small local load pockets in
primarily urban areas, e.g., New York City, Long Island, Boston, parts
of Connecticut, and the San Francisco Bay Area. Other load pocket
concerns have arisen in parts of northern Virginia, and various load
centers in SPP. Still other constraints are more regional in scope: (1)
From the Midwest to the Mid-Atlantic, (2) from the Midwest to the
Tennessee Valley Authority (TVA), (3) into and within California, (4)
from TVA and Southern into Entergy, (5) from Mid-America Interconnected
Network into Wisconsin-Upper Michigan Systems, and (6) into Florida.
The existence of these and other constraints affecting transmission
systems can result in an increase in the frequency of denials of
requests for transmission service, and an increase in the frequency of
transmission service interruptions and/or curtailments of transmission
service. While not all congestion needs to be remedied (i.e., if the
cost of the congestion is less than the cost to relieve it), it is also
true that undue discrimination and preferential treatment also are much
more difficult to detect when the transmission grid is constrained,
given the lack of transparency in ATC calculations and transmission
system planning. Increased congestion also presents additional
opportunities for undue discrimination. As a result, it is more
difficult for the Commission to carry out its statutory responsibility
to ensure that transmission providers provide nondiscriminatory open
access transmission service.
    33. In recognition of the lack of adequate infrastructure, a broad
cross-section of the industry supports greater coordination in the
planning and investment in transmission infrastructure between
transmission providers, transmission customers and state regulatory
agencies. A major focus of comments on our NOI was the need to plan and
build infrastructure to facilitate regional electricity markets. For
example, AEP argues that the most important issue faced by public
utilities and their customers is not day-to-day OATT administration but
the planning and expansion of the transmission grid. EEI likewise
asserts that the focus should be on the need to develop energy
infrastructure necessary to facilitate growth in wholesale electric
market transactions. Santa Clara acknowledges that lack of needed
infrastructure causes the grid to become constrained and less reliable,
which sometimes provides even stronger incentives for owners to
restrict access by others. The Nevada Companies urge the Commission to
focus on ways Order No. 888 and the pro forma OATT can be revised to
eliminate disincentives to the construction of additional transmission
facilities. Xcel suggests that the

Commission focus its efforts on ways to encourage investment in new
energy infrastructure as a way of easing congestion and enabling growth
in market transactions. Salt River contends that the Commission should
increase incentives to participate in long-term regional planning
processes. Midwest SATs argue that increased access for all
transmission system users through policies that promote investment in
transmission will do more to reduce undue discrimination than policies
that seek to uncover and penalize such discrimination.
    34. Customers also complain that there is often a lack of
transparency in utility transmission planning processes, which the
customers claim typically do not include economic system upgrades that
would benefit non-affiliate users of the system. Customers also note
the lack of clarity in the existing planning obligations required of
transmission providers. They assert that these failures have
contributed to the inadequate development of the transmission grid.
    35. Order No. 888 contemplated that ISOs would enhance
infrastructure development through open and regional planning
processes, but these efforts have stalled in many regions of the
country. Even where RTOs have been established, there have been
concerns that the planning process has not always been sufficiently
robust, inclusive or transparent to ensure that transmission investment
occurs where it is reasonably needed for all users of the grid. For
example, in its reply comments, TDU Systems urges the Commission to
include RTOs in its planning reforms, contending that many RTO planning
processes are not open to all stakeholders, nor are they collaborative
and inclusive. Many commenters argue that RTO transmission planning
regimes have failed to get needed transmission facilities built.\55\
---------------------------------------------------------------------------

    \55\ E.g., APPA, TDU Systems Reply Comments, and Williams Reply
Comments.
---------------------------------------------------------------------------

    36. We conclude that the inadequacy of the existing obligation to
conduct joint and regional transmission system planning, coupled with
the lack of transparency surrounding system planning generally, require
reform of the pro forma OATT to ensure that transmission infrastructure
is constructed on a nondiscriminatory basis and is otherwise sufficient
to support reliable and economic service to all eligible customers.

D. A Consistent Method of Measuring ATC Has Not Been Established

    37. Under Order No. 888, each public utility calculates the amount
of transfer capability on its system that is available for sale to
third parties.\56\ However, Order No. 888 did not require that the
methodology for ATC calculation be standardized across the industry,
nor did it impose any specific requirements regarding the disclosure of
the methodologies used by each transmission provider. As a result,
there are a variety of ATC calculation methodologies in use today.
Moreover, there is often very little transparency regarding the nature
of these calculations, given that many transmission providers have
filed only summary explanations of their ATC methodologies in
Attachment C to the OATT. As a result, transmission providers retain
unnecessarily broad discretion in calculating ATC. The resulting
discretion is a significant problem because calculation of ATC, which
varies greatly depending on the criteria and assumptions used, may
allow the transmission provider to discriminate in subtle ways against
its competitors. This discretion, coupled with the lack of
transparency, also hampers the detection of undue discrimination and,
thereby, undermines the Commission's ability to enforce the general
requirement in Order No. 888 that transmission service be provided on a
not unduly discriminatory basis.\57\
---------------------------------------------------------------------------

    \56\ Order No. 888 at 31,794 n.610.
    \57\ APPA submitted comments in Docket No. RM05-17-000 arguing
that the calculation and posting of ATC ``sits at the pivot point
among reliability, economic regulation and wholesale electric
commerce.'' APPA at 5.
---------------------------------------------------------------------------

    38. The comments on the NOI and the ATC NOI reflect these
underlying problems. Many market participants complain that there is
widespread misinformation regarding the actual ATC, which results in
missed opportunities for transactions. ATC calculation errors often
occur. A lack of transparency leaves transmission customers unaware of
why some transmission requests are granted and others are denied.\58\
Several ATC inputs, such as the capacity benefit margin (CBM) or the
transmission reliability margin (TRM), can be calculated using overly
conservative or otherwise faulty assumptions. Transmission customers
often complain that transmission providers designate unreasonably high
CBM or TRM levels, which limits the amount of remaining transfer
capability available for other users of the system.
---------------------------------------------------------------------------

    \58\ See, e.g., EEI at 18 (agreeing that the Commission should
require transmission providers to make their ATC calculations more
transparent).
---------------------------------------------------------------------------

    39. As a result of these uncertainties, the Commission issued the
ATC NOI to address the lack of clear and consistent methodologies for
calculating ATC. In the ATC NOI, the Commission acknowledged that NERC
has been working on specific recommendations for calculating and
coordinating ATC and available flowgate capability (AFC).\59\ That NERC
effort culminated in a report and a number of recommendations. The
Commission asked for comments on those recommendations, as well as
comments on whether there should be common transmission calculation
methodologies among regions. The Commission has reviewed those comments
as part of this proceeding.\60\
---------------------------------------------------------------------------

    \59\ See NERC, Long-Term AFC/ATC Task Force Final Report (2005)
(NERC Report) at 2, available at ftp://www.nerc.com/pub/sys/all_updl/mc/ltatf/LTATF_Final_Report_Revised.pdf
.

    \60\ Accordingly, we consolidate Docket No. RM05-17-000 with
this proceeding. We will distinguish the comments received in the
ATC NOI proceeding by the designation ``ATC NOI Comments.'' In
addition, we also revise the name of the proceeding in Docket No.
RM05-17-000 to ``Preventing Undue Discrimination and Preference in
Transmission Service.''
---------------------------------------------------------------------------

    40. Many commenters support the development of a consistent,
industry-wide methodology for calculating ATC.\61\ These commenters
maintain that a requirement that all transmission providers use the
same methodology to determine ATC would not only remedy the lack of
clarity that surrounds these calculations and reservations, but would
provide regulatory certainty and assist transmission customers in
predicting the outcome of transmission service requests.
---------------------------------------------------------------------------

    \61\ E.g., Alcoa, AWEA, Constellation, Exelon, Occidental, and
Renewable Energy.
---------------------------------------------------------------------------

    41. We agree. Although the industry has sought to pursue greater
consistency in ATC calculations through existing NERC processes, those
efforts to date have been largely unsuccessful. The lack of a
consistent, industry-wide methodology for calculating ATC gives
transmission providers the ability and the opportunity to unduly
discriminate against third parties. We therefore propose below a number
of reforms to the process of calculating ATC to provide clarity and
transparency to users of the grid.

E. A Number of Transmission Pricing Policies May Impede the Use of the
Grid

    42. Transmission customers often complain about the level and scope
of imbalance charges that are levied under the pro forma OATT and under
individual interconnection agreements.

Energy imbalance charges, including penalties on some systems, are
imposed on a transmission customer when the amount of energy scheduled
for delivery to the transmission grid does not equal the amount of
energy withdrawn by that customer. Customers complain that these
charges are excessive and not related to the actual costs incurred by
transmission providers. They also argue that the inconsistency between
these charges in different control areas is unnecessary, and that other
means of compensating the transmission provider, such as return-in-
kind, should be considered. Generator imbalance charges are levied on
generators for deviations between the amount of energy they schedule
and the amount they actually deliver to the grid. Generators likewise
complain that these charges are excessive, that transmission providers
refuse to credit generators with the revenues resulting from imbalance
penalties that are collected, and that transmission providers prevent
unaffiliated generators from purchasing or self-supplying generator
imbalance services. In addition, owners of intermittent resources
complain that generator imbalance penalties, which are imposed to
provide an incentive for generators to schedule accurately, are
inappropriate given their lack of control and ability to cure
deviations.
    43. Transmission providers and customers raise a number of concerns
related to the pricing of transmission service under Order No. 888,
contending that the Commission's pricing policies are in need of
reform. For example, under the pro forma OATT, network customers can
receive a credit toward their transmission charges for new facilities
that they jointly plan with the transmission provider. Customers
contend that this provision actually acts as a disincentive for joint
planning because transmission providers can avoid granting credits if
they fail to jointly plan with their transmission customers.
    44. Finally, there is also concern about the appropriate rate for
transmission capacity that has been resold by the original transmission
customer. Under Order No. 888, such capacity may be priced at the
higher of the original rate, the transmission provider's maximum stated
firm rate, or the assignor's opportunity costs capped at the cost of
expansion. Customers complain that this policy does not work when
opportunity costs exceed the embedded cost rate, because the assignor
must make a FPA section 205 filing with the Commission that estimates
its opportunity cost over the term of the reassignment as well as the
cost of system expansion. The time and effort required to complete the
regulatory process appears to inhibit such reassignments.
    45. Although Order No. 888 was primarily directed at establishing
the non-rate terms and conditions of open access, the rule did adopt
certain pricing policies that were associated with the form of open
access being ordered. After reviewing the comments, we believe certain
reforms are appropriate because some of the pricing policies associated
with the pro forma OATT are no longer just and reasonable or are
otherwise unduly discriminatory. However, we do not intend to pursue
generic reform of other pricing policies that are better addressed on a
region-or case-specific basis, such as the pricing of new transmission
facilities.

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

    46. The reforms we propose today also are consistent with the
policies and priorities embodied in EPAct 2005, in which Congress
emphasized many of the principles reflected in this NOPR.
    47. First, Congress in EPAct 2005 placed special emphasis on the
development of transmission infrastructure. Congress required the
Commission to adopt a rule establishing incentive-based rates for new
transmission infrastructure investment. The stated purpose of new FPA
section 219 is to benefit ``consumers by ensuring reliability and
reducing the cost of delivered power by reducing transmission
congestion.'' \62\ FPA section 219 requires the Commission to
``promot[e] capital investment in the enlargement, improvement,
maintenance, and operation of all facilities for the transmission of
electric energy in interstate commerce, regardless of the ownership of
the facilities.'' \63\ Congress also gave the Commission certain
``backstop'' transmission siting authority, and authorized the creation
of interstate compacts establishing transmission siting agencies.\64\
Finally, the Commission was directed to ``exercise its authority''
under EPAct 2005 ``in a manner that facilitates the planning and
expansion of transmission facilities to meet the reasonable needs of
load-serving entities to satisfy the service obligations of the load-
serving entities, and enables load-serving entities to secure firm
transmission rights* * * on a long-term basis for long-term power
supply arrangements made, or planned, to meet such needs.'' \65\
Although these provisions are, or will be, addressed primarily in other
proceedings, our NOPR is consistent with these provisions because it
supports new infrastructure by reforming the transmission planning
process to ensure that it is open, transparent and
nondiscriminatory.\66\
---------------------------------------------------------------------------

    \62\ EPAct 2005 sec. 1241 (to be codified at section 219 of the
FPA, 16 U.S.C. 824s). The Commission issued a NOPR implementing such
an incentive rate program in November 2005. See Promoting
Transmission Investment through Pricing Reform, 70 FR 71409 (Nov.
29, 2005), FERC Stats. & Regs. ] 32,593 (2005).
    \63\ FPA Sec. 219(b)(1).
    \64\ EPAct 2005 sec. 1221(a) (to be codified at section 216 of
the FPA, 16 U.S.C. 824p).
    \65\ EPAct 2005 sec. 1233(a) (to be codified at section.
217(b)(4) of the FPA, 16 U.S.C. 824q).
    \66\ We note that we also have proposed to implement FPA section
217(b)(4) in a separate rulemaking in Docket No. RM06-8-000.
---------------------------------------------------------------------------

    48. Second, Congress emphasized the need for greater transparency
in electricity markets, including transmission service. EPAct 2005
added section 220 to the FPA, which requires the Commission to
facilitate ``price transparency in markets for the sale and
transmission of electric energy in interstate commerce, having due
regard for the public interest, the integrity of [that market], fair
competition, and the protection of consumers.'' \67\ The Commission was
authorized to ``prescribe such rules as the Commission determines
necessary and appropriate to carry out the purposes of'' FPA section
220. Those rules ``shall provide for the dissemination, on a timely
basis, of information about the availability and prices of wholesale
electric energy and transmission service to the Commission, State
commissions, buyers and sellers of wholesale electric energy, users of
transmission services, and the public.'' Our NOPR similarly seeks to
promote greater transparency in the provision of transmission service
in many important areas, including ATC calculation and transmission
planning.
---------------------------------------------------------------------------

    \67\ EPAct 2005 sec. 1281 (to be codified at 16 U.S.C. 824t).
---------------------------------------------------------------------------

    49. Finally, Congress emphasized compliance with the Commission's
regulations, increasing the civil and criminal penalties for violations
of Commission-administered statutes and regulations.\68\ This new
authority buttresses the Commission's efforts to enforce public utility
OATTs and the regulations requiring transmission information to be
posted on OASIS. As we explained in the Enforcement Policy Statement,
however, this new authority carries with it the responsibility to
ensure that enforcement is firm but fair and that our rules are as
clear as

practicable to facilitate compliance.\69\ The NOPR is fully consistent
with these principles because it seeks, in many areas, to clarify our
rules to facilitate compliance by transmission providers.
---------------------------------------------------------------------------

    \68\ EPAct 2005 sec. 1284(e)(1) (to be codified at section
316(A) of the FPA, 16 U.S.C. 825o-1 (2000).
    \69\ Enforcement of Statutes, Orders, Rules and Regulations,
Policy Statement on Enforcement, 113 FERC ] 61,068 (2005)
(Enforcement Policy Statement).
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IV. Summary, Scope and Applicability of the Proposed Rule

    50. This section provides: (1) A summary of the major components of
the NOPR, (2) a description of the core elements of Order No. 888 that
we propose to retain, and (3) a discussion of the applicability of the
proposed rule to various entities.

A. Summary of Proposed Reforms

    51. Consistency and transparency of ATC calculations. The
Commission finds that the lack of a consistent, industry-wide
methodology for calculating ATC, and the lack of adequate transparency
in ATC calculations, increases the potential for undue discrimination
and also makes undue discrimination more difficult to detect. The lack
of consistent standards can facilitate undue discrimination by giving a
transmission provider the discretion, and hence the ability and
opportunity, to favor itself and its affiliates over third parties in
how it calculates and allocates ATC and, therefore, may be unjust,
unreasonable, unduly discriminatory and preferential. As a result, we
propose to give the industry specific guidance and a firm deadline to
develop certain requirements to make the process of calculating ATC and
the process of exchanging data between transmission providers about ATC
more consistent. In addition, we propose to amend pro forma OATT
requirements as well as our OASIS regulations to increase the
transparency in how ATC is calculated.
    52. Requirement for coordinated, open and transparent transmission
planning. The Commission finds that Order No. 888 does not contain
sufficient protections to guard against undue discrimination in
transmission system planning. This, in turn, can affect a customer's
ability to obtain transmission service and the price it pays for
transmission. Specifically, Order No. 888 does not require sufficient
coordination, openness, and transparency in transmission planning to
ensure that new infrastructure is constructed to meet the needs of all
eligible customers on a not unduly discriminatory basis. Without
adequate coordination and open participation, market participants have
minimal input or insight into whether a particular transmission plan
treats all loads and generators comparably. To ensure that truly
comparable transmission service is provided by all public utility
transmission providers, including RTOs and ISOs, we propose to amend
the pro forma OATT to require coordinated, open, and transparent
transmission planning on both a sub-regional and regional level. To
implement this remedy, we propose eight planning principles that each
public utility transmission provider will be required to follow. We
recognize that many regions have made significant progress in recent
years in creating greater openness and transparency in transmission
planning and believe our proposed reforms will build upon, strengthen,
and improve this progress to reform transmission planning.
    53. Transmission Pricing Reforms. Consistent with the focus of
Order No. 888 on the non-rate terms and conditions of open access, the
Commission does not intend to initiate broad reform of transmission
pricing policy through this NOPR. However, we have identified several
pricing rules that are part and parcel of OATT service that merit
reform.
     Energy and Generator Imbalance Charges. We find that
existing energy and generator imbalance charges may be excessive and
otherwise unrelated to the cost of providing the service and,
therefore, propose to reform energy and generator imbalance pricing. We
propose to require that all such imbalance charges meet the following
criteria: The charges must (1) be related to the cost of correcting the
imbalance, (2) be tailored to encourage accurate scheduling behavior,
such as by increasing the percentage of the adder as the deviations
become larger, and (3) account for the special circumstances presented
by intermittent generators, such as by waiving the higher ends of the
deviation penalties.
     Capacity Reassignment Pricing. We find that the existing
cap on the reassignment of point-to-point service may no longer be just
and reasonable and, therefore, propose to eliminate the cap. We believe
that removing the cap will eliminate an unnecessary impediment to the
resale of capacity, which in turn should increase utilization of the
grid and otherwise ensure that point-to-point service is just,
reasonable and not unduly discriminatory. We seek comment on this
proposal and, in particular, the nature of the reporting obligations
that should be imposed as part of lifting the cap on reassignment.
     Crediting of Customer-Owned Facilities. We propose to
retain most elements of our existing policy respecting the crediting of
customer-owned facilities, including the requirement that such
facilities meet the integration standard. However, we propose to
eliminate the requirement that new facilities can receive credits only
if they are ``jointly planned'' because this requirement may provide a
disincentive to coordinated planning. Rather, we propose that such new
facilities be eligible for credits if: (1) Such facilities are
integrated into the operations of the transmission provider's
facilities, and (2) such facilities would be eligible for inclusion in
the transmission provider's annual transmission revenue requirement if
owned by the transmission provider.
    54. Improvements to Point-to-Point Service. The Commission
concludes that the existing methods for evaluating requests for long-
term firm point-to-point service may no longer be just, reasonable and
not unduly discriminatory. When a transmission provider considers a new
resource to serve native load, the transmission provider does not
eliminate an otherwise economic option because the resource may not be
deliverable in a few hours of the year. For transmission customers,
however, the transmission provider evaluates whether service can be
granted in every hour of the year that is modeled and, if not, it
informs the customer that service cannot be provided out of existing
transfer capability. Only if the transmission customer agrees to pay
for time-consuming and costly facilities studies does the transmission
provider evaluate redispatch options, including whether they are less
expensive than the upgrade options. The Commission proposes to address
this problem by clarifying that a transmission provider must use all of
its available redispatch options to satisfy a request for firm point-
to-point service and, at the transmission customer's option, these
redispatch options must be studied before the customer is obligated to
incur the costs and time delays associated with a facilities study. The
Commission also seeks comment on whether this remedy is adequate or,
alternatively, whether the Commission should modify the nature of
point-to-point service to require that transmission providers offer a
``conditional firm'' service that would be subject to curtailment prior
to firm service only a limited number of hours of the year.
    55. Reform of rollover rights. The Commission concludes that
section 2.2 of the pro forma OATT, which grants an

ongoing right to transmission customers to renew or ``rollover'' their
contracts, is in need of reform. The Commission proposes to revise that
provision to apply to contracts that have a minimum term of five years,
rather than the current minimum term of one year. We conclude that this
reform will ensure that the rollover right is enjoyed by transmission
customers that have made a significant commitment to (and investment
in) the transmission grid. In addition, the Commission proposes that a
transmission customer eligible for rollover rights must provide notice
of whether or not it will exercise its right of first refusal to renew
the contract no less than one year prior to the expiration date of the
transmission service agreement, rather than within the current 60-day
period.
    56. Increases in transparency to lessen the opportunities to
discriminate and reduce transaction costs. In addition to the increased
transparency we propose to require regarding the calculation of ATC and
transmission planning, we propose to increase the transparency of
transmission service provided under the pro forma OATT in several other
respects. For example, we propose to require transmission providers and
their network customers to use the transmission provider's OASIS to
request designation of a new network resource and to terminate the
designation of an existing network resource. In addition, we propose to
require the transmission provider to modify its OASIS so that requests
to designate and terminate a network resource can be queried. We also
propose to require the transmission provider to post on its OASIS a
list of its current designated network resources and all network
customers' current designated network resources. Finally, we propose to
require transmission providers to post on OASIS all their business
rules, practices and standards that relate to transmission services
provided under the pro forma OATT.
    57. Strengthening enforcement of the pro forma OATT. Our proposed
reforms include several clarifications of the terms and conditions of
the pro forma OATT that have made undue discrimination difficult to
detect and otherwise frustrated enforcement of the obligation to
provide open access, non-discriminatory transmission service. Our new
civil penalty authority under EPAct 2005 gives us ample power to remedy
tariff violations, but it also places upon us an increased
responsibility to make the rules as clear as possible. In addition, we
propose a number of posting and reporting requirements that will
provide the Commission and market participants with information about
each transmission provider's performance of pro forma OATT obligations.
For example, we propose to require transmission providers to post
specific performance metrics related to their completion of studies
required under the pro forma OATT. We note that the Commission will
continue to audit compliance with the pro forma OATT, and toward that
end propose to require transmission information kept on OASIS to be
retained for audit purposes for five years. Finally, we make a number
of proposals relating to operational penalties assessed under the pro
forma OATT, including so-called ``over-use'' penalties, and the
treatment of operational penalty revenues collected from transmission
providers and their affiliates.
    58. Miscellaneous OATT improvements. We propose a number of
improvements to the terms and conditions of the pro forma OATT to
incorporate the lessons learned over the past ten years. We briefly
note these below:
    Hourly Firm. We propose to require transmission providers to offer
hourly firm service under the pro forma OATT.
    Designation of network resources. We propose to make a number of
clarifications related to the types of agreements that may be
designated as network resources, the process for verifying whether
agreements meet the requirements in the pro forma OATT, and the
requirement for transmission providers to designate and undesignate
network resources. We also propose to require customers to submit an
attestation with each application to designate a new network resource.
    Reservation priorities. We propose to change the priority rules to
give priority to pre-confirmed transmission service requests submitted
in the same time period. We also propose to add price as a tie-breaker
in determining reservation queue priority when the transmission
provider is willing to discount transmission service.
    Clarifications related to network service. We propose to clarify
that a network customer may not use secondary network service to bring
energy onto its system to support an off-system sale if the purchased
power does not displace the customer's own higher cost generation. We
also propose clarifications related to use of network service on an
``as available basis'' and to ``redirects'' of network service.
    Definitions. In addition to some minor revisions, we propose to add
a definition of ``non-firm sales'' to the pro forma OATT and propose to
amend the definition of Good Utility Practice to reference the
definition of ``reliable operation'' adopted in EPAct 2005.

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

    59. Although we are proposing many important reforms to Order No.
888 and the pro forma OATT, we also wish to emphasize that we propose
to retain many of the core elements of Order No. 888. We note that many
of these core elements enjoy broad support across many sectors of the
industry. In their comments, APPA, EEI, and NARUC urge the Commission
to proceed carefully in reforming Order No. 888, focusing on
incremental reforms not industry restructuring. We share the view that
Order No. 888 can be strengthened without discarding its fundamental
structure. We discuss below the core elements that are being retained
and, where appropriate, respond to the comments on these points that
were received in the NOI.
1. Federal/State Jurisdiction
    60. In Order No. 888, the Commission stated that it has exclusive
jurisdiction over the rates, terms and conditions of unbundled retail
transmission in interstate commerce.\70\ Though the Commission adopted
a test for determining which facilities were used for retail
transmission, as opposed to local distribution to end-users,\71\ the
Commission stated that it generally would defer to determinations by
state regulatory authorities concerning where to draw the
jurisdictional line under that test.\72\ The Commission declined to
assert jurisdiction over bundled retail transmission, reasoning that
``when transmission is sold at retail as part and parcel of the
delivered product called electric energy, the transaction is a sale of
electric energy at retail.'' \73\ The U.S. Supreme Court affirmed the
Commission's decision to assert jurisdiction over unbundled but not
bundled retail transmission, finding that the Commission made a
statutorily permissible choice.\74\
---------------------------------------------------------------------------

    \70\ Order No. 888 at 31,781.
    \71\ Id. at 31,771 (setting forth the seven-factor test).
    \72\ Id. at 31,781.
    \73\ Id.
    \74\ See New York v. FERC, 535 U.S. 1, 28 (2002).
---------------------------------------------------------------------------

    61. We propose to retain the jurisdictional divide we established
in Order No. 888. We also are mindful of the need for heightened
cooperation between federal and state regulators in areas where there
are overlapping federal and state policy concerns. Moreover, our
jurisdictional determination was sustained by the U.S.

Supreme Court and has been accepted by industry and state regulatory
authorities. We see no reason to disturb that determination now.
2. Native Load Protection
    62. Order No. 888 did not require transmission providers to
unbundle transmission service to their retail native load nor did it
require that bundled retail service be taken under the terms of the pro
forma OATT.\75\ Moreover, the Commission allowed a transmission
provider to reserve, in its calculation of ATC, transmission capacity
necessary to accommodate native load growth reasonably forecasted in
its planning horizon.\76\ As noted above, Order No. 888 granted a
rollover right to existing firm service customers,\77\ but allowed
transmission providers to restrict that rollover right if the capacity
was reasonably forecasted to be needed to serve native load customers,
as long as that restriction was specified in the customer's service
contract.\78\
---------------------------------------------------------------------------

    \75\ Order No. 888 at 31,745.
    \76\ Id. at 31,694.
    \77\ Id.; pro forma OATT section 2.2.
    \78\ Order No. 888-A at 30,198.
---------------------------------------------------------------------------

    63. Congress in section 1233 of EPAct 2005 added section 217 to the
FPA, entitled ``Native Load Service Obligation,'' which addresses
transmission rights held by load-serving entities. It allows load-
serving entities to use their own and contracted-for transmission
capacity to the extent required to meet their service obligations,
without being subject to charges of unlawful discrimination. Among
other things, FPA section 217 states that it does not require the
abrogation of any contract or service agreement for firm transmission
service or rights in effect as of the date of enactment.\79\
---------------------------------------------------------------------------

    \79\ 16 U.S.C. 217(f).
---------------------------------------------------------------------------

    64. In the NOI, the Commission stated that it was not proposing to
change the protection of native load embodied in Order No. 888.\80\ The
Commission sought comment on whether the approach the Commission took
in Order No. 888 is the same as that set forth in FPA section 217.
---------------------------------------------------------------------------

    \80\ NOI at P 9.
---------------------------------------------------------------------------

Comments
    65. Several commenters argue that the approach the Commission took
in Order No. 888 is largely consistent with the treatment of native
load preference in FPA section 217.\81\ They state that Order No. 888
makes clear that native load has a priority right to a transmission
providers' capacity and that transmission providers may reserve a
portion of their capacity for native load growth.
---------------------------------------------------------------------------

    \81\ E.g., Memphis Light, Newmont Mining Reply Comments,
Progress Energy, and TDU Systems.
---------------------------------------------------------------------------

    66. Other commenters perceive varying degrees of difference between
Order No. 888 and FPA section 217.\82\ EEI states that FPA section 217
extends native load protection to all load-serving entities that have
direct or indirect service obligations to end-users for terms of one
year or more, while Order No. 888 does not. Nevada Companies and TAPS
argue that the FPA section 217 requirement that the Commission exercise
its authority to facilitate the planning and expansion of transmission
facilities to satisfy the service obligations of load-serving entities
necessitates changes to Order No. 888.
---------------------------------------------------------------------------

    \82\ E.g., Duke, EEI, Metropolitan Water District, and Southern.
---------------------------------------------------------------------------

    67. Several commenters argue that FPA section 217 requires the
Commission to revisit its rollover rights policy.\83\ Duke maintains
that the current Commission approach is not the same as set forth in
either Order No. 888 or FPA section 217 because the Commission's
current approach to rollover rights does not meaningfully recognize the
native load preference. Commission decisions since Order No. 888,
according to Duke, have weakened the native load preference envisioned
in Order No. 888 to the point where the Commission's treatment of the
native load preference is not what Congress provides in FPA section
217. LPPC argues that FPA section 217 reverses Commission precedent
that makes it impossible to recall capacity for native load once it is
subject to a rollover right.
---------------------------------------------------------------------------

    \83\ E.g., Duke, Energy, LPPC, Progress Energy, Salt River,
Santee Cooper, and Southern.
---------------------------------------------------------------------------

    68. EEI states that in order to harmonize Order No. 888 rollover
rights with the native load protections contained in FPA section 217,
the Commission should revise the pro forma OATT to require a notice
period for rollover rights that is consistent with the time needed to
plan for and construct transmission facilities to serve native load
customers and the rollover customer. EEI and Salt River argue that FPA
section 217 requires that the Commission permit load-serving entities
to implement curtailment procedures that recognize native load service
priorities.
    69. Metropolitan Water District argues that the mandate to preserve
native load preference is complicated further when a transmission owner
has transferred operational control to an ISO or RTO. In such a
scenario, to honor the native load preference in FPA section 217,
Metropolitan Water District contends that the Commission either should
reconsider its prior rulings rejecting the allocation of physical
rights to serve native load or should require ISOs and RTOs to issue
financial rights options, in addition to financial right obligations,
so that load-serving entities have a greater ability to avoid
congestion costs in serving their native load.
Discussion
    70. The Commission concludes that the protection of native load
embodied in Order No. 888 is consistent with FPA section 217, and we
reaffirm our commitment to the protection of native load. Order No. 888
gave public utilities the right to reserve existing transmission
capacity needed for native load growth reasonably forecasted within the
utility's current planning horizon. It also allowed transmission
providers to restrict rollover rights based on a reasonably forecasted
need at the time the contract is executed. This approach is consistent
with FPA section 217, which protects the transmission rights of
entities with service obligations to end-users or a distribution
utility, to the extent required to meet their service obligations.
Though commenters appear to believe FPA section 217 would support the
cancellation of contracts that include rollover rights, FPA section 217
by its terms does not contemplate abrogation of existing transmission
service contracts.\84\ However, to the extent commenters argue that the
terms of service and notice periods associated with the OATT rollover
rights are too short to protect native load adequately, we note that we
are proposing to extend them in this NOPR.
---------------------------------------------------------------------------

    \84\ See FPA section 217(f) (explaining that section 217 does
not abrogate any firm service agreements or rights in effect as of
the date of enactment).
---------------------------------------------------------------------------

    71. In response to Metropolitan Water District, the Commission
finds that the issue of firm transmission rights in organized markets
is best addressed as part of the long-term firm transmission rights
rulemaking in Docket Nos. RM06-8-000 and AD05-7-000. We further note,
in response to the comments of Nevada Companies and TAPS, that we are
proposing a coordinated and regional planning process to facilitate the
planning and expansion of transmission facilities pursuant to FPA
section 217.
3. The Types of Transmission Services Offered
    72. In Order No. 888, the Commission required all public utilities
to offer on a non-discriminatory, open-access basis firm network
service and firm and non-

firm point-to-point service. In the NOI, the Commission sought comments
on whether the Commission should require transmission providers to
offer transmission services in addition to, or in place of, the point-
to-point and network services prescribed in the OATT.
    73. Among other questions, the Commission asked whether network
service alone or both network and point-to-point services should be
converted into a single contract demand service.\85\ Generally
speaking, contract demand service is a hybrid of point-to-point and
network services that is reservation-based and allows transmission
customers to receive a firm entitlement to integrate multiple resources
and deliver energy to multiple points, without paying a separate charge
for each point of receipt or delivery. Contract demand service would
allow current point-to-point customers to avoid having to arrange and
pay for separate reservations for each point of receipt. And current
network customers would be allowed to pay for transmission based on the
amount of their reservation rather than customer loads at a delivery
point.
---------------------------------------------------------------------------

    \85\ For examples of contract demand service, the Commission
cited Florida Power Corp., FERC ] 61,248 (1995); Wisconsin Electric
Power Co., 72 FERC ] 61,033 (1995); and Florida Power Corp., 81 FERC
] 61,247 (1997).
---------------------------------------------------------------------------

Comments
    74. Most commenters argue against requiring that network service
alone or in combination with point-to-point service be converted into
contract demand service.\86\ Some warn that the imposition of this
service would interfere with efficient transmission system planning and
operation due to increased capacity reservations that would go
unused.\87\ They also argue that it would result in significant cost
shifts among transmission customers if not priced correctly. FP&L
argues that the current services are a better match for the actual use
of the transmission system and thereby permit more ATC to be available.
---------------------------------------------------------------------------

    \86\ E.g., Ameren, APPA, Bonneville, Calpine, EEI, EPSA, Fallon
Reply Comments, FP&L, NRECA, PacifiCorp, Southern, Suez Energy NA,
TVA, TAPS, and TDU Systems.
    \87\ E.g., EEI, FP&L, KCP&L, and TVA.
---------------------------------------------------------------------------

    75. Some commenters ask that the Commission require transmission
providers to offer contract demand service as an additional
transmission service option in the pro forma OATT.\88\ AMP-Ohio argues
that, as long as Commission policy requires network customers to pay
load-ratio network transmission charges for load served with behind-
the-meter generation, contract demand network service is essential to
avoid unduly discriminatory transmission charges. Midwest Municipals
and FMPA argue that the Commission should order contract demand service
where the transmission provider does not plan and operate its system to
meet total customer load because, as the Commission stated in Order No.
888, full network service is essential for achieving comparability and
efficient integration of power supply and load. FMPA contends that
where a customer needs network service from another system for only
part of its load, it would benefit from being able to buy system power
from multiple designated resources for part of its load. In this way,
FMPA continues, the transmission provider would not have the planning
obligation for the customer's entire load, perhaps avoiding or delaying
expensive transmission additions. FMPA claims that such service would
tend to benefit all transmission users because it would allow a more
efficient use of the grid and provide additional transmission revenues.
---------------------------------------------------------------------------

    \88\ E.g., AMP-Ohio, APPA, Cogeneration Association of
California Reply Comments, Constellation, EPSA, FMPA Reply Comments,
Midwest Municipals, PacifiCorp, and Public Power Council.
---------------------------------------------------------------------------

    76. Other commenters state that transmission providers should have
the option whether to offer contract demand or other customized
transmission services.\89\ LPPC argues that the Commission should allow
a transmission provider to voluntarily provide alternative forms of
transmission service where circumstances support their implementation,
with the caveat that such service must not place any market participant
at a disadvantage or increase transmission rates for network or point-
to-point customers. Southern proposes that the pro forma OATT be
modified to include a process through which a transmission provider may
propose to adopt new services that customers specifically request.
---------------------------------------------------------------------------

    \89\ E.g., LPPC, NRECA, and Southern.
---------------------------------------------------------------------------

    77. Commenters also raise general concerns regarding the use and
potential abuse of network contract demand service. For example,
MidAmerican argues that contract demand service should not be used as a
means for transmission customers with behind-the-meter generation to
avoid paying for a load-ratio share of a system that was built to
support their entire load and on which they rely for service. Rather,
MidAmerican continues, network contract demand service should be
limited to situations in which deliverability is physically limited,
such as where the integrated transmission system does not have the
capacity to serve all the load at a designated point of delivery. EEI
argues that the Commission should not convert network service to
network contract demand service because conversion would result in a
substantial reduction in ATC as it would provide contract rights on the
transmission system on an around-the-clock basis that are equal to
network load's monthly or annual peak loads.
Discussion
    78. We propose to retain the services we ordered in Order No. 888:
firm and non-firm point-to-point service and firm network service. We
do not propose requiring transmission providers to adopt a network
contract demand service, either as a replacement for network or point-
to-point service or as a third category of service under the OATT. The
Commission continues to believe that network and point-to-point
services are the appropriate base-line service offerings in the OATT.
Although forms of contract demand service have been approved by the
Commission, and the service may provide benefits to certain customers,
sufficient potential drawbacks exist that prevent us from concluding
that it is a necessary transmission service that should be included in
the pro forma OATT. For example, the service would require a departure
from full load-ratio pricing for network customers, which may not be
warranted to the extent the transmission provider plans its system to
serve all native load. While the Commission concludes that it will not
require all transmission providers to offer this service, we
acknowledge that the introduction of this service on a voluntary basis
may be appropriate in certain circumstances.
    79. Although we are not proposing to require that transmission
providers adopt contract demand service, we note that the commenters
who support this service appear concerned principally with inequities
in the pricing of network integration service. The Commission is
addressing certain of these concerns elsewhere in the NOPR. For
example, in this NOPR, we propose to modify our treatment of
transmission credits for new transmission facilities and clarify that
the transmission provider must satisfy the comparability requirement
when including transmission facilities in its rate base for pro forma
OATT purposes. We also address concerns regarding the linkage between
how the transmission provider plans and

operates its system through proposed revisions to planning and ATC.
4. Functional Unbundling
    80. When the Commission proposed the open access policy that
culminated in Order No. 888, there was considerable debate about
whether corporate unbundling (in which a public utility's transmission
and generation assets would be placed in separate corporate entities)
was necessary to ensure non-discriminatory open access transmission
service. The Commission decided to mandate functional, rather than
corporate, unbundling of transmission and generation services. In Order
No. 888, the Commission explained that functional unbundling has three
components:

    1. A public utility must take transmission services (including
ancillary services) for all of its new wholesale sales and purchases
of energy under the same tariff of general applicability as do
others;
    2. A public utility must state separate rates for wholesale
generation, transmission, and ancillary services;
    3. A public utility must rely on the same electronic information
network that its transmission customers rely on to obtain
information about its transmission system when buying or selling
power.\90\
---------------------------------------------------------------------------

    \90\ Order No. 888 at 31,654.

    81. In the years following Order No. 888, a number of public
utilities nonetheless underwent corporate unbundling. Many of these
entities did so as a result of state-mandated restructuring laws.
Others did so for corporate or tax reasons. Some entities divested all
of their generation assets to a non-affiliate, while others simply
restructured internally to place the generation assets in a different
corporate subsidiary than the transmission assets. There remain,
however, a significant number of vertically-integrated public utilities
that have operated under the functional unbundling approach.
Comments
    82. Retention of Order No. 888's functional unbundling approach is
supported by a number of commenters. For example, the LPPC states that
vertical integration remains a viable business model for serving
customers reliably and at economic rates. LG&E posits that, absent a
proven and real level of abuse, major structural changes are
unwarranted. NARUC argues that the issue of whether there should be
structural separation of generation from transmission is best left to
the states. NPPD alleges that mandatory vertical unbundling would do
more harm than good by threatening the continued economic operation of
those utilities that continue to provide bundled service to their
retail native load customers. The North Carolina Commission does not
believe the evidence in that state supports the imposition of
structural remedies.
    83. Some commenters, however, continue to urge the Commission to
impose structural separation. National Grid contends that the best way
to eliminate the possibility of undue discrimination is to separate the
ownership and operation of the transmission system from interests in
the market. Calpine urges the Commission to structurally separate the
merchant function that is engaged in selling power for resale from
those who control access to transfer capability and service, not just
those who operate the transmission system. TAPS argues that structural
solutions are preferable to behavioral rules.
    84. Many commenters favoring structural separation urge the
Commission to impose an independent transmission coordinator
requirement. These commenters would have transmission providers employ
an independent entity to administer their OATTs, performing such
functions as maintaining the utility's OASIS, granting or denying
service requests, reviewing system impact and facilities study results,
and overseeing decisions with respect to line ratings, transmission
outages and generation dispatch.\91\ Other commenters oppose the
imposition of a potentially costly new layer of bureaucracy, at least
on a generic basis.\92\
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    \91\ E.g., Arkansas Commission, Calpine, Constellation, EPSA,
and PPL.
    \92\ E.g., APPA, NRECA, and TAPS.
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Discussion
    85. We propose to preserve the functional unbundling approach
adopted by Order No. 888. For public utilities that kept transmission
and generation assets in the same corporate entity, the Commission
imposed strict Standards of Conduct that required separation of the
utilities' transmission system operations and wholesale marketing
functions.\93\ These Standards of Conduct were replaced by a broader
set of rules adopted in Order No. 2004.\94\ These rules require that
employees engaged in transmission functions operate separately from
employees of energy affiliates and marketing affiliates. A number of
information sharing restrictions also apply, which prohibit
transmission providers from allowing employees of their energy and
marketing affiliates to obtain access to transmission or customer
information, except via OASIS.
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    \93\ Order No. 889 at 31,595.
    \94\ See Standards of Conduct for Transmission Providers, Order
No. 2004, 68 FR 69134 (Dec. 11, 2003), FERC Stats. & Regs. ] 31,155
(2003), order on reh'g, Order No. 2004-A, 69 FR 23562 (Apr. 29,
2004), FERC Stats. & Regs. ] 31,161 (2004), order on reh'g, Order
No. 2004-B, 69 FR 28371 (Aug. 10, 2004), FERC Stats. & Regs. ]31,166
(2004), order on reh'g, Order No. 2004-C, 70 FR 284 (Jan. 4, 2005),
FERC Stats. & Regs. ] 31,172 (2005), order on reh'g, Order No. 2004-
D, 110 FERC ] 61,320 (2005), appeal docketed sub nom. National Gas
Fuel Supply Corporation v. FERC, No. 04-1183 (D.C. Cir. June 9,
2004), codified at 18 CFR Part 358 (2005).
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    86. The Commission aggressively enforces the Standards of Conduct.
The Commission's Office of Enforcement is well-suited to investigate
potential violations of the Standards of Conduct and to propose
remedies, including structural remedies if necessary, to ensure that
the separation of function and information restrictions in Order No.
2004 are implemented.
    87. The Commission has resolved a number of complaints related to
the Standards of Conduct and the accompanying OASIS posting
requirements.\95\ In Order No. 888, the Commission noted that the
possibility of filing a complaint under FPA section 206 is an
additional safeguard if a public utility seeks to circumvent the
functional unbundling requirement. The Commission's Enforcement Hotline
likewise is available to customers that do not wish to file a formal
complaint.
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    \95\ See Aquila Energy Marketing Corp. v. Niagara Mohawk Power
Corp., 87 FERC ] 61,328 (1999)(finding that off-OASIS communicagtion
between utilty and its marketing affiliate led to preferential
treatment of the affiliate).
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    88. In addition, one of the criticisms of the functional unbundling
requirement is that Order No. 888 leaves vertically integrated
utilities with too much discretion in applying the OATT and gives them
an incentive to use this discretion to their advantage. We agree that
the existing pro forma OATT provides too much discretion in certain
important areas. It is for this reason--as explained elsewhere in the
NOPR--that we are proposing to require greater clarity and transparency
in several areas of OATT administration. We believe these reforms will
limit the discretion of transmission providers and make any remaining
attempts to discriminate much easier to detect.
    89. We believe that this increased clarity and transparency, when
coupled with the Standards of Conduct and a rigorous enforcement
program, will ensure that the functional unbundling requirement will
serve its original purpose. As a result, just as the Commission
concluded in Order No.

888 that more intrusive and costly corporate unbundling was not
necessary, the Commission again concludes that there is no need to
impose a corporate or structural unbundling requirement at this time.
We believe that the pro forma OATT, if properly clarified and enforced,
will enable us to eliminate the opportunity for undue discrimination in
the provision of transmission service.
    90. For the same reasons, we also decline to mandate an independent
transmission coordinator for all transmission providers. We have
concluded that such entities may be appropriate in certain
circumstances and we support voluntary efforts to rely on them.\96\ We
do not agree, however, that there is sufficient basis for requiring
them as a generic remedy for undue discrimination.
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    \96\ See Duke Power, 113 FERC ] 61,288 (2005); MidAmerican
Energy Co., 113 FERC ] 61,274 (2005); see also Entergy Services,
Inc., 110 FERC ] 61,295 (2005), order clarificaiton, 111 FERC ]
61,222 (2005), order conditionally approving filing, 115 FERC ]
61,095 (2006).
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    91. Our proposal to retain the functional unbundling approach of
Order No. 888 does not suggest, however, a lack of support for
structural changes that may be undertaken on a voluntary basis by each
region, such as transmission-only companies, RTOs, or other reforms. We
continue to support such efforts as potentially providing significant
benefits in several areas, including, but not limited to, increased
infrastructure investment and addressing regional issues such as cost
recovery, pancaked rates, loop flow, and congestion management. At this
time, we believe such efforts are best developed on a voluntary basis.

C. Applicability of the Proposed Rule

1. Public Utility Transmission Providers
    92. Pursuant to its authority under FPA sections 205 and 206, the
Commission in Order No. 888 required all public utilities that owned,
controlled, or operated facilities used for transmitting electric
energy in interstate commerce to file open access transmission tariffs
that contained minimum terms and conditions of non-discriminatory
service. The Commission recognized, however, that there may be
circumstances in which a public utility believes that the pro forma
OATT does not provide sufficient flexibility.\97\ In addition, the
Commission acknowledged that a public utility might be willing to offer
superior non-rate terms and conditions. As a result, the Commission
allowed a transmission provider to justify variations from the non-
price terms and conditions of the pro forma OATT under two
circumstances. First, certain provisions of Order No. 888 specifically
allowed public utilities to use alternatives that were justified by
``regional differences.'' When submitting those provisions, public
utilities were permitted to follow regional practices when doing so was
``reasonable, generally accepted in the region, and consistently
adhered to by the transmission provider,''\98\ as long as the utilities
identified the regional practices in their compliance filings. Second,
in subsequent FPA section 205 proceedings, public utilities were
permitted to propose changes to any pro forma OATT provision that were
``consistent with or superior to'' the terms of the pro forma OATT.
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    \97\ Order No. 888 at 31,770.
    \98\ Id.
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    93. In the NOI, the Commission expressed the preliminary view that
reforms to the pro forma OATT and public utilities' OATTs appear
necessary and sought comment on how best to accomplish that. In
particular, the Commission sought comment on whether reforms to Order
No. 888 should be applied to all public utility transmission providers,
including those that are approved ISOs, RTOs, or independent
transmission coordinators.
Comments
    94. Independent system operators such as MISO, CAISO, and ISO New
England submit that many of the concerns raised by the Commission in
the NOI already have successfully been addressed by the operation of
ISOs and RTOs. Similarly, EEI argues that many of the issues addressed
in the NOI are not applicable to RTOs and ISOs because RTOs and ISOs
are independent of all market participants and therefore are presumed
to not engage in undue discrimination or preferential treatment. PJM
argues that, because of its independence, the transparency of its
procedures, and the progress achieved in developing effective financial
and non-financial congestion management tools, PJM structurally
addresses the continuing concerns of the Commission regarding
persistent undue discrimination and preference in the industry.
    95. EPSA states that it may not be necessary to apply all aspects
of the new OATT to ISOs or RTOs. However, rather than delineating
either each term that would not apply to an RTO or how such terms might
be modified in an RTO tariff, EPSA recommends that the Commission
require RTOs, ISOs, and independent transmission coordinators to submit
compliance filings upon issuance of the new pro forma OATT but allow
them to propose waivers of the new requirements based upon appropriate
justification.
    96. EEI argues that, to the extent that the Commission requires
RTOs and ISOs to amend their open access transmission tariffs, the
Commission should establish flexible procedures that provide the RTOs
and ISOs the right to customize their OATTs consistent with their
independent status.
    97. Other commenters argue that reforms to existing OATTs should be
applied to all market entities, including ISOs, RTOs and independent
transmission coordinators.\99\ LPPC states that there is little reason
for the Commission to be more deferential in considering deviations
from the pro forma OATT proposed by RTOs or ISOs than it is with
respect to investor-owned utilities.
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    \99\E.g., Calpine, LPPC, NRECA, and Santa Clara.
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Discussion
    98. The Commission proposes to apply the final rule to all public
utility transmission providers. The Commission proposes to require all
such transmission providers to submit FPA section 206 compliance
filings, within 60 days following publication of the final rule in the
Federal Register, that contain the non-rate terms and conditions set
forth in the final rule. We note that certain non-rate terms and
conditions, such as Attachment C relating to the transmission
provider's ATC calculation methodology and Attachment K relating to the
transmission provider's transmission planning process, may require more
than 60 days to prepare. We seek comment on an appropriate time period
in which to require the submission of these attachments.
    99. As we did in Order No. 888, after making their FPA section 206
compliance filings, we propose to allow transmission providers to
submit filings under FPA section 205 proposing rates for the services
provided for in the tariff as well as non-rate terms and conditions
that differ from those set forth in the final rule if those provisions
are ``consistent with or superior to'' the pro forma OATT.
    100. With respect to an RTO or ISO, we recognize that such an
entity may already have tariff terms and conditions that are superior
to the pro forma OATT. Thus, we propose to require RTO and ISO
transmission providers to submit FPA section 206 compliance filings,
within 90 days following publication of the final rule in the

Federal Register, that contain the non-rate terms and conditions set
forth in the final rule or that demonstrate that their existing tariff
provisions are consistent with or superior to the revised provisions to
the pro forma OATT. Similarly, after making their FPA section 206
compliance filings, we propose to allow RTOs and ISOs to submit filings
under FPA section 205 proposing rates for the services provided for in
their tariffs as well as non-rate terms and conditions that differ from
their existing tariffs and those set forth in the final rule if those
provisions are ``consistent with or superior to'' the pro forma OATT.
    101. We generally note that the purpose of this NOPR is not to
redesign approved, fully-functional RTO or ISO markets. We do not
expect that substantial changes to those markets would be required as a
result of this NOPR. For example, some RTOs or ISOs have eliminated
point-to-point service for internal transactions in favor of a form of
more flexible network service. Thus, we would not expect our reforms to
ATC to require changes to the way in which such RTOs or ISOs assess
whether capacity for traditional network or point-to-point service is
available within their footprints. However, there may be elements of
the proposed reforms that are superior to what currently exists in some
RTOs or ISOs, e.g., transparency, data exchange or planning, which
would require the RTO or ISO to conform to the pro forma OATT.
2. Non-Public Utility Transmission Providers/Reciprocity
    102. In Order No. 888, the Commission conditioned non-public
utilities' use of public utility open access services on an agreement
to offer comparable transmission services in return.\100\ The
Commission found that while it did not have the authority to require
non-public utilities to make their systems generally available, it did
have the ability and the obligation to ensure that open access
transmission is as widely available as possible and that Order No. 888
did not result in a competitive disadvantage to public utilities.
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    \100\ These entities are not FPA public utilities and therefore
are not subject to the Commission's jurisdiction under sections 205
and 206 of the FPA.
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    103. Under the reciprocity provision in section 6 of the pro forma
OATT, if a public utility seeks transmission service from a non-public
utility to which it provides open access transmission service, the non-
public utility that owns, controls, or operates transmission facilities
must provide comparable transmission service that it is capable of
providing on its own system. Under the OATT, a public utility may
refuse to provide open access transmission service to a non-public
utility if the non-public utility refuses to reciprocate. A non-public
utility may satisfy the reciprocity condition in one of three ways:
first, it may provide service under a tariff that has been approved by
the Commission under the voluntary ``safe harbor'' provision. A non-
public utility using this alternative submits a reciprocity tariff to
the Commission seeking a declaratory order that the proposed
reciprocity tariff substantially conforms to, or is superior to, the
pro forma OATT. The non-public utility then must offer service under
its reciprocity tariff to any public utility whose transmission service
the non-public utility seeks to use. Second, the non-public utility may
provide service to a public utility under a bilateral agreement that
satisfies its reciprocity obligation. Finally, the non-public utility
may seek a waiver of the reciprocity condition from the public
utility.\101\
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    \101\ See Order No. 888-A at 30,285-86.
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    104. In EPAct 2005, Congress authorized, but did not require, the
Commission to order non-public utilities (or ``unregulated transmitting
utilities'') to provide transmission services. Section 1231 of EPAct
2005 establishes a new section 211A in Part II of the FPA, which states
in part that the Commission ``may, by rule or order, require an