priority in long-term firm transmission right allocations.
Constellation claims that the preference for longer-term supply
resources would discriminate against competitive retail suppliers with
service obligations in two respects. First, vertically integrated
utilities with long-term resources could receive a priority with
respect to capacity, blocking smaller retail providers from gaining
access or entry to markets to compete effectively. Second, a preference
for longer-term

firm transmission rights would discriminate against the shorter-term
firm transmission rights that allow competitive retail providers with
service obligations to more closely match shifts in their load, which,
according to Constellation, can occur frequently, even daily.
---------------------------------------------------------------------------

    \105\ See, e.g., Allegheny, Cinergy, Constellation, Coral Power,
Midwest ISO, Exelon, NARUC, OMS, Suez Energy, NEPOOL, National Grid,
NU and NSTAR.
---------------------------------------------------------------------------

    303. Exelon notes that, in New Jersey and Illinois, the state
commissions have determined that the public utilities should procure
customers' requirements through a competitive auction procedure
approved by the Commission. Exelon states that the rules of the auction
preclude the utilities from entering into contracts of more than a few
years' duration.
    304. Regarding the effect of long-term firm transmission rights on
retail access, Redding, APPA and TAPS take a different view. APPA
states that the desire of retail suppliers like Constellation and the
members of EPSA for flexibility has to date prevented load serving
entities in retail choice regions that wish to hedge transmission
congestion associated with their long-term base load and renewable
resources from doing so. APPA asserts that, while suppliers in retail
choice areas may value flexibility, the associated short-term
arrangements do not support the substantial new investments in
generation needed to meet resource adequacy or fuel diversification
needs. Similarly, TAPS states that is bad policy to force all load
serving entities in all states to share that fate (i.e., denying all
consumers the benefits of low cost energy) simply because some states
may have concluded that is the right decision for those serving retail
load within their state.
Obtaining Long-Term Firm Transmission Rights through Capacity
Expansions
    305. Some commenters argue that the long-term needs of load serving
entities should be met through the transmission organization's planning
and expansion process, not by granting priority access to long-term
firm transmission rights supported by existing capacity.\106\
---------------------------------------------------------------------------

    \106\ See, e.g., E.ON, Constellation, EPSA, NYISO and Strategic
Energy.
---------------------------------------------------------------------------

    306. Constellation states that section 217(b)(4) requires the
Commission to be proactive in ensuring that the needs of all load
serving entities with a service obligation (regardless of the duration
of that service obligation) are met through planning and expansion of
transmission facilities and enabling load serving entities to secure
firm transmission rights on a long-term basis, not to extend an undue
preference for existing transmission capacity to load serving entities
with long-term supply arrangements at the expense of other load serving
entities with service obligations. NRECA agrees that the Commission
does have an obligation under section 217 to facilitate transmission
planning and expansion so as to support long-term power-supply and
transmission arrangements. However, NRECA asserts that the Commission
also has a specific duty to act in a manner that ``enables load serving
entities to secure firm transmission rights * * * on a long-term basis
for long-term power supply arrangements.''
Market, Efficiency and Gaming Issues
    307. A number of commenters argue that the proposed priority will
impede the development of competitive markets and create inefficient
economic incentives.\107\ For example, EEI states that long-term firm
transmission right holders will have the incentive to resist
infrastructure enhancements to the system that adversely affect the
value of their long-term firm transmission rights. Also, SDG&E contends
that, on transmission paths that are expected to have relatively higher
levels of congestion, e.g., where the transmission rights are expected
to be more valuable, an incentive is created to enter into long-term
commodity transactions in order to secure the priority. According to
SDG&E, such incentives are misplaced and could distort efficient
contracting decisions. NYISO believes that rather than having an
incentive to contract for the least cost resources to meet their load,
load serving entities would have an incentive to enter into contracts
on the ``wrong'' side of binding transmission constraints, because they
would receive valuable transmission rights as a reward for executing
such contracts.
---------------------------------------------------------------------------

    \107\ See, e.g., EEI, EPSA, Reliant, Exelon, Constellation,
SDG&E, NYISO and Midwest ISO.
---------------------------------------------------------------------------

    308. Other commenters take the opposite view, arguing that the
proposed priority would lead to more efficient investment decisions and
lower costs in the long run.\108\ FirstEnergy states that the
availability of long-term service is needed to facilitate investment in
new generation capacity and transmission infrastructure.
---------------------------------------------------------------------------

    \108\ See, e.g., APPA, NYAPP, NRECA, DWR, CMUA, FirstEnergy and
New England Public Systems.
---------------------------------------------------------------------------

    309. APPA argues that the primary role of long-term firm
transmission rights would be to support base load and renewable
generation resources needed to support load serving entity service
obligations. Those resources are not sited based on whether they are on
the ``right'' or ``wrong'' side of a constraint, but on a myriad of
factors, including proximity to fuel sources, access to rail
transportation and availability of renewable resources (e.g., wind or
geothermal). APPA states that the failure of RTOs to offer long-term
firm transmission rights is stifling investment in base load and
renewable generation resources, and in the associated transmission
facilities needed to bring these resources to loads.
    310. Several commenters express concern that the proposed priority
would create an incentive for load serving entities to acquire excess
long-term firm transmission rights in order to sell the excess at a
profit, and could lead parties to enter into ``sham'' contracts.\109\
---------------------------------------------------------------------------

    \109\ See, e.g., ISO-NE, Midwest ISO, NYISO, Coral Power, APPA
and CPUC.
---------------------------------------------------------------------------

    311. ISO-NE contends that a direct, costless allocation of LT-firm
transmission rights, or an auction in which only load serving entities
may purchase LT-firm transmission rights, would amount to a wealth
transfer to the load serving entities at the expense of other market
participants. According to ISO-NE, this is because the load serving
entities would acquire the LT-firm transmission rights at a price below
their value and have every incentive to resell them on the secondary
market for a profit. Midwest ISO states that this guideline may give
parties an incentive to enter into ``sham'' contracts intended to
accomplish nothing but establishing rights to valuable long-term firm
transmission rights.
    312. Ameren believes that the concern that load serving entities
will nominate excessive amounts of long-term firm transmission rights
is easily addressed by limiting the amount of long-term firm
transmission rights allocable to a load serving entity based on its
expected load, including load growth, during the upcoming year and
using state regulatory processes to police nominations. APPA states
that the RTO can take the matter up with the load serving entity on a
case-by-case basis if it believes that the long-term firm transmission
right allocation of the load serving entity does not appropriately
reflect load growth.
    313. PG&E notes that the EPAct 2005's focus on the ``long-term
service obligation,'' its predication of the threshold amount of
Transmission Rights on those ``power supply arrangements'' that
constitute ``reasonable needs,'' as well as the EPAct 2005's provisions
for shifting long-term Transmission Rights in

parallel with load migration, provides ample opportunity for protection
against ``sham contracts'' and the possibility of windfall to load
serving entities, so long as the statutory terms are well defined. APPA
states that it and its members are willing to agree to reasonable
limitations on long-term firm transmission rights, including
restrictions on resale and requirements that holders actually have
generation resource arrangements covering the specified sources and
sinks, to avoid creating such perverse financial incentives. Also, New
England Public Systems notes that TAPS has proposed dispatch-contingent
option long-term firm transmission rights that only generate a payment
to the load serving entity when the resource at issue is run and do not
require payment by the load serving entity when congestion is reversed.
Alternatively, New England Public Systems states that long-term firm
transmission right settlements could be subject to true up at year end
based on actual load levels.
Allowing for Load Growth in Long-Term Firm Transmission Rights and the
Need for Accurate Load Forecasts
    314. Some commenters argue that priority in the allocation of long-
term firm transmission rights should extend to provisions for load
growth and unforeseen changes in the need for long-term rights.\110\
Public Power Council argues that the preference should require RTOs and
ISOs to set aside future rights for the load growth of these entities
and the Commission should ensure that the transmission system is
planned and expanded to accommodate growth.
---------------------------------------------------------------------------

    \110\ See, e.g., Public Power Council, Allegheny, AEP,
Industrial Consumers, PJM Public Power Coalition, Alcoa and
FirstEnergy.
---------------------------------------------------------------------------

    315. Allegheny argues that incremental firm transmission rights to
cover increases in generation capacity resources, load growth or other
factors should also be granted as part of the long-term firm
transmission right allocation process, but only to the extent that the
underlying transmission system can support the feasibility of such
additional firm transmission rights. AEP believes it is inappropriate
for auction revenue right allocations to be locked into a configuration
that may bear no resemblance in year 10 to the simultaneous feasibility
tests run in year one. Industrial Consumers believes that the load
serving entity or a load that is serving itself should have access to
additional capacity rights for unforeseen load growth, and similarly,
the load serving entity or load serving itself should be required to
surrender that portion of its rights for the amount of any permanent
load reduction.
    316. PJM Public Power Coalition argues that if, during the roll-
over term of the long-term transmission rights, a load serving entity's
load is reduced below the level of its long-term transmission rights,
that entity's roll-over right should be reduced to its then current
load level, so that the entity does not have priority to transmission
capacity it will not use to serve its load.
Administrative Burden
    317. Midwest ISO states that the Commission's requirement that
transmission organizations provide load serving entities priority to
existing transmission capacity is problematic for several reasons.
First, transmission organizations will have to undertake extensive,
burdensome, and costly administrative processes in order to evaluate
contracts to determine whether they satisfy the criteria applicable and
ensure that the power supply contracts are in fact necessary to serve
load and are long-term. Midwest ISO argues that the transmission
organizations should not be placed in the position of evaluating long-
term contracts to ensure they legitimately qualify for priority of the
transmission capacity. In response, APPA notes that many Regional
Reliability Councils have long undertaken auditing of load serving
entity power supply portfolios to determine if their regions have
adequate generation resources. APPA claims that the term of power
supply agreements is usually relatively easy to ascertain, and annual
reporting by the load serving entities on their generation resource
portfolios, plus oversight and investigation by the RTO's Market
Monitor if gaming is suspected, should be sufficient to keep load
serving entities honest. APPA also notes that, under section 30 of the
Order No. 888 OATT, Network Customers have to designate new resources
by providing the required information to the Transmission Provider.
Hence, in APPA's view, Network Customers are accustomed to having to
verify their claimed generation resources.
Commission Conclusion
    318. We will adopt guideline (5) with revisions to eliminate the
preference for load serving entities with long-term power supply
arrangements and replace it with a general preference for load serving
entities vis-a-vis non-load serving entities. Also, as discussed below,
we will revise guideline (5) to allow the transmission organization to
place reasonable limits on the amount of existing transmission capacity
that it will make available for long-term firm transmission rights.
    319. Although we believe section 217(b)(4) of the FPA would support
a preference for load serving entities with long-term power supply
arrangements, we agree with those commenters, such as SDG&E, that claim
that EPAct 2005 should not be construed to require that a preference be
given to this class of load serving entities at the expense of load
serving entities that prefer short-term power supply arrangements. In
our view, a broader preference for load serving entities in general
vis-a-vis non-load serving entities is fully supported by the statute
and indeed better meets the needs of today's organized electricity
markets.
    320. The overall thrust of new section 217 of the FPA, read in its
entirety, is the protection of transmission rights used to satisfy
native load service obligations.\111\ Given the reality that
transmission capacity is limited, and that the amount that can
reasonably be made available for long-term transmission rights may be
lesser still, we believe that section 217 of the FPA provides a general
``due'' preference for load serving entities to obtain long-term firm
transmission service. Moreover, section 217(d), which provides that the
Commission may make transmission rights that are not used to meet a
load serving entity's service available to other entities, strongly
indicates that Congress intended for load serving entities to be
``first in line'' for long-term transmission rights that are made
available.
---------------------------------------------------------------------------

    \111\ As noted above, common principles of statutory
interpretation support reading section 217 as a whole to ascertain
its intent. See, e.g., United States v. Andrews, 441 F.3d 220, 223
(4th Cir. 2006) (noting that statutory phrases are not construed in
isolation, and are instead read as a whole).
---------------------------------------------------------------------------

    321. An important advantage of revising guideline (5) in this
manner is that, in most cases, the transmission organization will be
able to apply the same basic principles for allocating long-term firm
transmission rights that it currently uses for the initial allocation
of short-term firm transmission rights, or auction revenue rights. To
explain, we note that most transmission organizations now use
straightforward methods to allocate firm transmission rights (or
auction revenue rights) annually to all load serving entities that
support the embedded costs of the transmission system. Some of these
methods take explicit account of the load serving entity's current or
historical power supply arrangements in determining its allocation
priority. However, as revised, guideline (5)

neither requires nor prohibits the consideration of power supply
arrangements in determining this priority. Guideline (5), as revised,
only requires that load serving entities have priority over non-load
serving entities in the allocation of long-term firm transmission
rights. This means that, in most cases, load serving entities can
continue to receive the same allocation of firm transmission rights (or
auction revenue rights) that they have received in the past. In
addition, by eliminating from guideline (5) the priority for load
serving entities with long-term power supply arrangements, we are
making it possible for the transmission organization to propose an
allocation method that eliminates any obligation on the part of either
the transmission organization or the load serving entity to demonstrate
or verify that the load serving entity holds a qualifying long-term
power supply arrangement.
    322. In addition, revising the guideline in this manner effectively
addresses the objections of most commenters that oppose guideline (5)
as proposed in the NOPR. Importantly, it largely eliminates the
potential for load serving entities that prefer short-term power supply
arrangements, or are precluded from entering into long-term
arrangements, to be disadvantaged in the allocation of firm
transmission rights. In particular, load serving entities in retail
access states can continue to receive and use their allocated firm
transmission rights as short-term instruments, if that best suits their
business model. Also, load serving entities that prefer short-term firm
transmission rights (or are limited to them by law) will not feel
compelled to request long-term firm transmission rights (or enter into
sham contracts) out of fear that they might otherwise lose out in the
firm transmission right allocation process. We do not believe that
Congress intended these results when it enacted section 217 of the FPA,
particularly given the statute's overall focus on protecting the
transmission rights of load serving entities with service obligations.
Finally, the transmission organization will not face the administrative
burden of having to evaluate power supply contracts to determine if
they qualify for the preference.
    323. In the NOPR, we asked for comments on whether section 1233 of
EPAct 2005 and new section 217(b)(4) of the FPA support placing
reasonable limits on the award of long-term rights. Because of
uncertainty regarding load growth, changes in power flows and other
factors, the Commission expects that the transmission organization may
be reluctant to commit all of its existing capacity to long-term firm
transmission rights, especially in light of guideline (2)'s full
funding requirement. Also, commenters claim that the principal need for
long-term firm transmission rights is to support long-term power supply
arrangements only for base load generation, not peaking or intermediate
generation. Therefore, we conclude that the transmission organization
and its stakeholders should be given flexibility to determine the level
at which a load serving entity may nominate long-term firm transmission
rights as long as that level does not fall below the ``reasonable
needs'' of the load serving entity. This level can be expressed in a
variety of ways, for example as a straightforward measure of load, such
as minimum daily peak load or 50 percent of maximum daily peak load. In
this regard, we note that some commenters argue that the allocation of
long-term firm transmission rights should include provisions for load
growth, to include the loss of long-term firm transmission rights when
load declines. Rather than specify an approach here, we will provide
the transmission organization and its stakeholders with flexibility to
propose an approach for incorporating load growth in the allocation
process, if it is incorporated at all.
    324. The Commission emphasizes that revising guideline (5) in this
manner should not significantly reduce the access to long-term firm
transmission rights that a load serving entity with long-term power
supply arrangements would have had under guideline (5) as originally
proposed. Under that proposal, load serving entities with power supply
arrangements of more than one year (per our proposed definition of
long-term power supply arrangements) would have qualified for an
allocation preference; our revision only expands the preference to
include load serving entities that have power supply arrangements of
less than one year. Moreover, most supporters of proposed guideline (5)
agree that a transmission organization will have valid reasons to place
a limit on the amount of system capacity that it makes available to
support long-term firm transmission rights. Also, most of the
commenters that support guideline (5) as proposed do not include among
the reasons for their support the need to link the award of long-term
firm transmission rights to long-term power supply arrangements.
Rather, their comments are principally directed against any notion that
load serving entities with short-term firm transmission rights should
receive special consideration in the allocation process. Finally, the
other guidelines adopted here ensure that the long-term firm
transmission rights will support long-term power supply arrangements,
as Congress intended.
    325. Our decision to make explicit the transmission organization's
right to propose reasonable limits on the amount of capacity made
available for long-term firm transmission rights, as well as to provide
the more limited preference that we are adopting in the Final Rule,
requires that we revise guideline (5) to read as follows:

    Guideline (5): Load serving entities must have priority over
non-load serving entities in the allocation of long-term firm
transmission rights that are supported by existing transmission
capacity. The transmission organization may propose reasonable
limits on the amount of existing transmission capacity used to
support long-term firm transmission rights.

    326. Commenters such as Manitoba Hydro and ISO-NE argue that the
preference should extend to certain entities that do not meet the
strict definition of load serving entity, such as generators that have
a contractual obligation to a load serving entity.\112\ The Commission
disagrees. Extending the preference to entities that do not meet the
definition of load serving entity, as clarified in this Final Rule,
would likely defeat the purpose of providing the preference. Once load
serving entities have received their allocated firm transmission
rights, those firm transmission rights and any additional firm
transmission rights available from remaining system capacity can be
offered to non-load serving entities (as well as other load serving
entities) through a secondary auction, bilateral trades or another
method of allocation. This is consistent with section 217(d) of the
FPA. Also, as noted by New England Public Systems, a load serving
entity that has a contractual arrangement with a generator or other
entity that allocates congestion risk in a particular way can structure
its contract with that entity as necessary to achieve the desired risk
sharing.
---------------------------------------------------------------------------

    \112\ See also our discussion of the definition of load serving
entity in section II.A. above.
---------------------------------------------------------------------------

    327. Industrial Consumers, Alcoa and CMUA state that certain end
users should receive the preference provided by guideline (5). As we
stated above in our clarification of the definition of load serving
entity, any end user, such as an industrial consumer or a large water
agency, that is allowed under state law and regulation to participate
in wholesale markets as a power purchaser

should be construed as a load serving entity under the Final Rule and,
accordingly, should receive all of the rights and obligations of a load
serving entity.
    328. E.ON asks that a load serving entity outside of a transmission
organization's boundaries be given priority, under certain conditions,
to long-term firm transmission rights on the transmission
organization's transmission system. On this matter, the Commission
agrees with TANC that long-term firm transmission rights should be made
available first to those entities that have an obligation to serve load
within the transmission organization's service territory and are
required to contribute to the embedded cost of the transmission
organization's transmission system. Any entity that has neither an
obligation to serve load on the transmission organization's
transmission system, nor an obligation to pay the embedded costs of
that system, should not be given a preference to acquire long-term firm
transmission rights supported by the system's existing capacity.
    329. LIPA states that the proposed guidelines do not specifically
incorporate the standards of FPA section 217(b)(4), or make clear that
long-term firm transmission rights must be available to all market
participants, and therefore should be revised. We do not believe that
any revision is necessary. The guidelines, taken as a whole, are
designed to implement the relevant requirements of EPAct 2005,
including the provisions of FPA section 217(b)(4). We believe that the
guidelines as revised in this Final Rule provide the clarity that LIPA
seeks. Further, we have made clear both in the NOPR and in this Final
Rule that long-term firm transmission rights must be available to all
market participants; this guideline serves only as a ``tiebreaker''
between load serving entities and non-load serving entities when
existing transmission capacity is limited.
    330. Finally, we note that several commenters express concern that
the preference as proposed in guideline (5) will lead market
participants to resist infrastructure enhancements, enter into sham
contracts, or make inefficient investment decisions. We conclude that,
by eliminating the priority for load serving entities with long-term
power supply arrangements, and by allowing limits to be placed on the
amount of capacity available for long-term firm transmission rights,
the Final Rule should virtually eliminate any incentive that a load
serving entity might otherwise have to hoard long-term firm
transmission rights, enter into sham agreements or resort to other
types of gaming and inefficient decision-making. Indeed, the Commission
agrees with APPA that a likely greater source of inefficiency is the
unavailability of long-term firm transmission rights in organized
electricity markets, which may be impeding needed investments in
generation resources and transmission upgrades. Nevertheless, if a
transmission organization and its stakeholders conclude that additional
steps must be taken to avert such problems, the transmission
organization may propose appropriate measures as part of its compliance
filing.
Guideline (6)--Rights are Reassignable to Follow Load
    331. As proposed in the NOPR, guideline (6) stated that a long-term
transmission right held by a load serving entity to support a service
obligation should be re-assignable to another entity that acquires that
service obligation. The NOPR stated that a successor load serving
entity should assume any cost responsibility that holding the long-term
transmission right entails. We stated that this proposal is consistent
with section 217(b)(3)(A) of the FPA, which requires that transmission
rights held by a load serving entity as of the date of enactment of
EPAct 2005 for the purpose of delivering energy it has purchased or
generated to meet a service obligation be transferred to a successor
load serving entity. The NOPR noted that the short-term transmission
rights currently offered by transmission organizations are generally
reassignable to successor load serving entities. The NOPR also noted
that a transfer of a service obligation might occur pursuant to a state
commission order, or might occur in a state with retail competition if
load chooses a new supplier.
    332. The NOPR asked for comments regarding whether reassignability
should apply to all long-term firm transmission rights, regardless of
how those rights were obtained, and whether a holder of long-term
rights should receive compensation when its rights are reassigned.
    333. Also, the NOPR noted that section 217(b)(4) of the FPA does
not discuss whether long-term firm transmission rights should be fully
tradable among market participants. We stated that allowing such rights
to be fully tradable could raise issues of equity, since a load serving
entity that acquired the rights through a preference could then
possibly sell or trade the rights at a profit. This might give load
serving entities the incentive to acquire excess long-term firm
transmission rights in order to take advantage of profit opportunities.
However, the NOPR noted that full tradability may bring benefits to the
market, and allow those that could not obtain long-term rights in the
initial allocation to obtain such rights later. The NOPR asked for
comments on these issues.
Comments
General Support for Guideline (6)
    334. Many commenters express strong support for proposed guideline
(6).\113\ AEP states that a transmission right to support a service
obligation should stay with the load and, therefore, be re-assignable
to another entity that may acquire the service obligation. APPA
supports guideline (6) and states that such assignability should be
required regardless of how those rights were obtained.
---------------------------------------------------------------------------

    \113\ See, e.g., PJM, NRECA, CMUA, Santa Clara, Xcel, Allegheny,
Public Power Council, AEP, APPA, AF&PA, Minnesota Power, BPA,
Strategic Energy, Coral Power and PJM Public Power Coalition.
---------------------------------------------------------------------------

    335. Cinergy supports the adoption of guideline (6) in principle
because it believes that market liquidity provides for more efficient
economic outcomes and that the problems associated with other
guidelines may be mitigated to some degree by directing that long-term
transmission rights be re-assignable. BPA states that this policy
should accommodate other open access policies where the long-term
transmission rights of the original load serving entity would transfer
(1) to other load serving entities that successfully compete to serve
loads under state retail access programs, or (2) to wholesale power
suppliers that successfully compete to meet load serving entity service
obligations.
Need for Flexibility
    336. Some commenters urge the Commission to permit flexibility in
the way transmission organizations implement this guideline. Reliant
states that the Commission should permit organized electricity markets
and their stakeholders to best determine the reassignment of long-term
transmission rights. EEI states that flexibility is important in the
application of this guideline because it will present administrative
burdens with respect to tracking reassignments on a frequent basis.
CMUA states that, given the different retail choice regimes in
different regions, or the lack of retail choice in some, implementation
is best left to the relevant regions.

Should Reassignment be Optional or Mandatory?
    337. NYISO states that this proposal is reasonable provided that
the rights may be reassigned, not that they automatically be
reassigned, at least in the case of transmission organizations with
grandfathered auction based systems under FPA section 217(b) (3).
Similarly, Xcel states that reassignment itself must not be mandated;
the reassignment should be at the option of the holder of the right and
the entity to which the service obligation transfers. PJM Public Power
Coalition states that because these long-term rights can become a
liability under certain circumstances, entities should be able to
trade, transfer, or decline to exercise the rights.
    338. Suez Energy states that guideline (6) might be interpreted in
a way that destroys retail competition because incumbents might argue
that long-term firm transmission rights are merely re-assignable at the
choice of the incumbent supplier, and that the incumbent should be
allowed to retain valuable long-term firm transmission rights for
existing network service. Conversely, Suez Energy is concerned that an
incumbent supplier that invested badly could argue that the financial
burden of a now burdensome investment in transmission infrastructure is
reassignable to a new supplier.
    339. ISO-NE believes that the Commission should examine proposals
for mandatory re-assignment carefully where the load serving entity
picking up the service obligation has a different set of long-term
supply arrangements that may not correspond with the path for the
existing long-term firm transmission right, or if the successor load
serving entity may not wish to utilize a long-term supply strategy at
all.
Rules Governing Reassignment
    340. Several commenters offered proposals for rules that would
govern the reassignment of long-term firm transmission rights in
specific instances.\114\ The CAISO asks the Commission to clarify
guideline (6) to state that the transmission organization should adopt
provisions to require that either allocated long-term firm transmission
rights or their equivalent financial value be transferred from one load
serving entity to another to reflect transfers of load serving
obligation. The CAISO believes that by allowing load serving entities
to transfer the financial value of long-term firm transmission rights
when their load serving obligation migrates, instead of insisting on
the transfer of the actual long-term firm transmission rights, the
underlying principle that the allocated long-term firm transmission
rights are the property of the end-use customers can be maintained
without precluding the trading of allocated long-term firm transmission
rights by load serving entities.
---------------------------------------------------------------------------

    \114\ See, e.g., CAISO, SoCal Edison, PG&E, APPA, Redding, CMUA,
Strategic Energy, Midwest ISO, SDG&E, BPA, TAPS and Alcoa.
---------------------------------------------------------------------------

    341. SoCal Edison recommends that the only circumstances in which
long-term rights should be reassigned are if: (1) The original right
was allocated (i.e. any rights purchased bilaterally or in an auction
would not be transferred regardless of any load migration); and (2) the
load-gaining entity has the ability to utilize the same source/sink
pair that was used to allocate the long-term right to the load-losing
entity; and (3) the load losing entity can no longer use the entire
long-term transmission right for the output/load upon which the long-
term right was initially awarded to the load-losing entity. PG&E agrees
that no transfer should occur until such time as a load serving
entity's remaining service obligation is less than the megawatt
quantity of its long-term firm transmission rights. Also, PG&E believes
that the statutory intent to link long-term transmission rights to
long-term power supply arrangements would be realized if transmission
rights or equivalent payments are made only to those load serving
entities that gain long-term service obligations and that also obtain
commensurate long-term power supply arrangements. However, APPA claims
that SoCal Edison's condition (2) seems unnecessarily stringent and
asserts that, if the transmission organization can reconfigure the
long-term firm transmission rights at the time of transfer, then this
should be permitted.
    342. Redding contends that when the Commission raises the issue of
assignability it implicitly raises the question of portfolio strategy.
Redding argues that, if the load serving entity has long-term
transmission rights and long-term supply arrangements that were not
utilized to serve the customer with retail choice, then the customer's
decision to change providers should not result in the reassignment of a
long-term transmission right. Redding contends that there would be an
argument for transfer of the transmission right only if the customer
can demonstrate that it either directly or indirectly had a liability
that transferred to the new provider or remained with the customer.
    343. Midwest ISO states that the entity that acquires the service
obligation may not want the particular long-term firm transmission
right, but may prefer a different firm transmission right with a source
that matches the supply portfolio of the new load serving entity.
Moreover, the firm transmission right may have negative value and the
new load serving entity may not want it at all. To the extent the
Commission permits such re-assignment, Midwest ISO recommends that
reasonable restrictions be imposed. For example, Midwest ISO states
that the Final Rule should limit the impact of this issue by (1)
limiting the amount of long-term firm transmission rights to a small
proportion of load serving entity's load, and (2) limiting the term of
the firm transmission right. In response, APPA states that it prefers
its proposed suggestions of minimum hold times, minimum periods for any
resale, or a requirement that the new holders have generation resources
and loads for the points specified in the long-term firm transmission
rights, or the Commission's suggestion that long-term firm transmission
right holders only be able to return their long-term firm transmission
rights to the transmission organization.
    344. SDG&E states that any reassignment mechanism that links
specific long-term firm transmission rights to individual loads will
become administratively burdensome if the switching of load between
load serving entities is active, with the transmission organization
potentially forced to track thousands of long-term firm transmission
rights that are reduced to fractions of megawatts.
    345. Alcoa states that an end user that acts as its own load
serving entity must be afforded the same opportunity as a load serving
entity to reassign its long-term transmission rights to another entity
that acquires a service obligation for its load.
Compensation Issues
    346. Some commenters provided recommendations concerning what, if
any, compensation should be paid when a long-term firm transmission
right is reassigned to a successor load serving entity.\115\ APPA
states that compensation is a matter to be dealt with by the transferee
and transferor load serving entities. BPA states that all of the costs
and liabilities associated with the transferred rights should follow to
the new load serving entity. However, BPA recommends that limitations
on re-assignment, particularly issues relating

to compensation pricing policy, be left to the regions to resolve.
---------------------------------------------------------------------------

    \115\ See, e.g., APPA, Allegheny, BPA, CAISO, Ameren, AF&PA,
Santa Clara, Cinergy and OMS.
---------------------------------------------------------------------------

    347. The CAISO submits that the load serving entity that has lost a
portion of its service obligation should not be compensated for any
long-term firm transmission rights it transferred to another load
serving entity for that load. AF&PA states that, if long-term firm
transmission rights are paid for by the holder at fair market value,
they should be property of the holder, and should be assignable by the
holder for value or otherwise in its discretion. Ameren recommends that
there be no compensation for firm transmission rights returned to the
transmission organization by a load serving entity. Santa Clara states
that if the holder is carrying the risk that the congestion cost could
increase and create more value or decrease and make it less valuable,
the holder should not be forced to return the rights at the cost at
which they were allocated to them.
Trading
    348. A number of comments focused on the question of whether or not
long-term firm transmission rights should be tradable.\116\ AEP
supports the concept of trading long-term transmission rights as an
appropriate way to facilitate risk management by load serving entities.
TANC argues that, if after meeting its native load obligations an
entity has surplus transmission rights, the market is enhanced by the
availability of such surplus rights. Cinergy believes that long-term
transmission rights acquired under FPA section 217(b)(4) should be
fully tradable. Also, Cinergy encourages the Commission to allow market
participants that acquire long-term transmission rights by investing in
transmission upgrades to trade those rights for a profit, as that
provides even greater incentive to build transmission improvements.
---------------------------------------------------------------------------

    \116\ See, e.g., AEP, Midwest ISO, TANC, Cinergy, SMUD, NRECA,
OMS, Ameren, PG&E, Allegheny, IPL and Public Power Council.
---------------------------------------------------------------------------

    349. In SMUD's view, giving customers the right to assign their
unused physical transmission rights temporarily will reduce the
likelihood of hoarding and will serve as a congestion management tool.
In NRECA's view, allowing long-term rights to be tradable would allow
load serving entities a way to reconfigure their portfolios of long-
term firm transmission rights as their situations change.
    350. Ameren states that making long-term firm transmission rights
fully tradable among market participants would enhance the efficiency
of the congestion management program, as it would enable the firm
transmission rights to go to those parties that value them most highly.
It also would allow entities that are not load serving entities to
obtain long-term firm transmission rights, assuming they value them
highly enough to win them in the market.
    351. PG&E states that, because shifts in service obligations may be
temporary and may be reversed, reassignment of long-term firm
transmission rights with shifts in service obligations and power supply
arrangements should be conditioned on assurances that future shifts of
such service obligations and power supply arrangements are accompanied
by a return of the accompanying long-term firm transmission right. PG&E
argues that, while it would be appropriate to allow trading or transfer
of the long-term firm transmission right for interim periods, the long-
term firm transmission right itself should remain attached to the
service obligation and not be separately transferable.
    352. IPL argues that there should not be a requirement that long-
term rights are tradable, and recommends that the Commission allow the
transmission organizations flexibility to specify the general terms of
reassignments related to load shifts. Public Power Council claims that
making the rights fully tradable raises fairness questions if the
seller received a preference due to the use of the right to meet a
service obligation and the buyer did not. If the rights were sold to
another load serving entity for the purpose of meeting that other
entity's service obligations, however, Public Power Council believes
that the fairness issue would be avoided.
Gaming and Arbitrage
    353. A number of commenters express concern that, if the long-term
firm transmission rights are reassignable and tradable, a load serving
entity might have an incentive to acquire excess long-term firm
transmission rights for financial gain.\117\ EPSA states that it would
be inappropriate for the Commission to allow utilities to profit from
the sale of any long-term firm transmission rights that are obtained
via a preferential priority. EPSA claims that vertically-integrated
utilities with long-term contracts could hoard long-term firm
transmission rights, blocking smaller retail providers from gaining
access or entry to markets and competing effectively.
---------------------------------------------------------------------------

    \117\ See, e.g., EPSA, Santa Clara, OMS, Ameren, APPA, CMUA,
Minnesota Power, Cinergy and TAPS.
---------------------------------------------------------------------------

    354. Ameren claims that concerns about possible arbitrage are
addressed by its proposal to place a limitation on firm transmission
right nominations based on a load serving entity's load. APPA
recommends that load serving entities holding long-term firm
transmission rights must have in their generation portfolios actual
resources (owned or contracted for) and loads corresponding to the
receipt and delivery points that the long-term firm transmission rights
cover. APPA also suggests restrictions on the resale of long-term firm
transmission rights in the form of minimum hold periods and minimum
periods for resale of any right. However, APPA states that any such
restrictions would have to be balanced against the need to ``recycle''
long-term firm transmission rights to ensure the most efficient use of
the transmission rights. APPA states that a reasonable approach would
be the Commission's suggestion that holders of long-term firm
transmission rights be permitted only to return their long-term firm
transmission rights to the RTO, and not to earn any profit on their
direct sale to another market participant. TAPS claims that its
recommended dispatch-contingent firm transmission rights would have
very limited appeal for market participants interested in firm
transmission right speculation.
    355. Minnesota Power urges the Commission not to allow creation of
a large secondary market in which market participants are able to
inflate the price of long-term transmission rights or to use the long-
term transmission rights as an economic position in the market.
Minnesota Power suggests that the long-term transmission rights should
be directly linked to, and tradable only with, the underlying
generation rights or long-term purchase rights.
Commission Conclusion
    356. The Commission will adopt guideline (6) as proposed in the
NOPR, but will provide transmission organizations and their
stakeholders with flexibility to determine specific rules for
reassignment of long-term firm transmission rights. We note that most,
if not all, transmission organizations now have rules governing the
reassignment of firm transmission rights when load migrates from one
load serving entity to another. The introduction of long-term firm
transmission rights should not in itself require a change in the basic
structure of these rules. In at least some transmission organizations,
reassignment is achieved through a

reallocation of auction revenue rights, with a provision to allow the
auction revenue rights to be converted into firm transmission rights.
    357. In general, the issue of reassignment should arise only in the
context of firm transmission rights (short-term or long-term) that are
allocated preferentially to a load serving entity in accordance with
guideline (5). If a load serving entity acquires firm transmission
rights through an auction or as a result of funding a transmission
upgrade, it should not be required to reassign such rights because any
entity is free to acquire firm transmission rights in this manner.
Also, a load serving entity that acquires long-term firm transmission
rights to support the financing of a new generating facility should
not, in general, be required to give up those rights simply because
some of its load migrates to another load serving entity. However, a
possible exception may arise if the original load serving entity were
to lose so much of its load that the total of its long-term firm
transmission rights exceeds its remaining load. In this case, as noted
by PG&E, some mandatory reassignment may be justified.
    358. The Commission believes that all long-term firm transmission
rights should be tradable. Allowing tradability provides the load
serving entity with flexibility to manage its transmission rights
portfolio and helps to ensure that long-term firm transmission rights
go to the market participants that value them most highly.
Reassignments may be temporary. However, long-term firm transmission
rights that the load serving entity obtains preferentially through an
allocation process should be tradable only with the proviso that any
trades may be subject to recall if load migrates to another load
serving entity. Making the long-term firm transmission rights subject
to recall ensures that they can be reassigned if necessary to follow
migrating load, consistent with section 217(b)(3)(A) of the FPA. We
note, however, in a transmission organization where reassignment is
accomplished through a reallocation of auction revenue rights, rather
than the firm transmission rights themselves, there may be no need for
such a proviso. In this case, reassignment would be accomplished
through a financial transfer, allowing the actual long-term firm
transmission rights to remain with the original load serving entity.
This should satisfy the CAISO's request that the Commission permit
either the allocated long-term firm transmission rights or their
equivalent financial value to be transferred from one load serving
entity to another to reflect a transfer of load serving obligation. In
addition, allocating auction revenue rights would also eliminate any
need to place restrictions on reassignments, such as requiring the
successor load serving entity to hold a supply contract that uses the
same source/sink pair used by the original load serving entity.
    359. Also, when reassignment of auction revenue rights or firm
transmission rights is mandated due to a shift in load serving
responsibility, any cost responsibilities associated with the holding
of such rights, such as payment of transmission access charges, should
shift from the original load serving entity to the successor load
serving entity. No other compensation should be required. Again, the
specific rules for accomplishing this should be left to the
transmission organization and its stakeholders. With regard to firm
transmission rights or long-term firm transmission rights that are
acquired by auction or as a result of funding a transmission upgrade,
the Commission believes (as noted above) that in general there should
be no restrictions on trading such rights. Transfers should be
permitted to occur at prices negotiated by the buyer and seller.
    360. In response to Alcoa, the Commission notes that an end user
that is permitted under state law to participate in wholesale markets
may acquire, trade and reassign long-term firm transmission rights in
accordance with guideline (6) in the same manner as other load serving
entities, as discussed above under guideline (5).
Guideline (7)--Auction Not Required
    361. As proposed in the NOPR, guideline (7) stated that the initial
allocation of the long-term firm transmission rights shall not require
recipients to participate in an auction. The Commission noted that,
currently, most transmission organizations either allocate transmission
rights directly to eligible parties, or allocate auction revenue rights
directly and then conduct a transmission rights auction in which
parties with and without allocated rights can participate. If an
auction model is adopted or continued by the transmission organization,
the Commission proposed to require that any long-term rights allocated
as auction revenue rights be capable of being directly converted to
transmission rights without participation in the auction. This was to
allow any party that feels uncertain about valuing its rights
commercially to have them allocated directly. This guideline did not
preclude interested parties with long-term rights from participating in
the auction if they choose.
Comments
General Support for Guideline (7)
    362. Many commenters express strong support for proposed guideline
(7).\118\ For example, APPA states that the long-term firm transmission
right allocation called for under guideline (7) is appropriate because
it comports with section 217(b)(4) of EPAct 2005. Also, APPA believes
that it at least partially restores the transmission rights that APPA
members in transmission organization regions lost when full LMP-based
markets were implemented.
---------------------------------------------------------------------------

    \118\ See, e.g., Xcel, PJM, TAPS, SoCal Edison, SMUD, Alcoa,
PJM-PPC Members, APPA, AEP, BPA, NRECA, PG&E, New England Public
Systems, Public Power Council, Ameren, TANC, CMUA and Central
Vermont.
---------------------------------------------------------------------------

    363. NRECA claims that, because load serving entities pay the
largest share of the existing and future transmission system costs,
they should not have to bid for the right to use a system that they
paid for and that was planned and built to serve their needs. However,
NRECA states that it is not opposed to the use of auctions for residual
or secondary rights and for voluntary dispositions of primary rights,
consistent with current practice. PG&E recommends that, if any
additional long-term firm transmission rights remain after the initial
allocation process, such firm transmission rights should be made
available for auction. PG&E states that, as experience with long-term
firm transmission rights in LMP environments shows them to be
functioning in an efficient and predictable manner, auctions could
increasingly be used for long-term firm transmission right issuance
without detracting from the goals of EPAct 2005. Public Power Council
states that it does not endorse the use of an auction, but if an
auction is used to allocate scarce rights, the Commission should permit
only entities with a preference to participate in the auction in order
to ensure that the price is not artificially inflated.
    364. Central Vermont states that guideline (7) must be modified to
provide parties with certainty concerning the value of their directly-
allocated long-term transmission rights. Specifically, parties will not
have certainty about the value of their long-term transmission rights
if the initial allocation of rights also includes exposure to negative
congestion charges between points, which are unavoidable and very
difficult to assess in value.
    365. In reply comments, APPA and New England Public Systems
disagree with the contention of some commenters that FPA section
217(b)(4)

permits the Commission to make a load serving entity's ability to
obtain a long-term firm transmission right, or the financial equivalent
thereof, turn on whether the load serving entity is willing to pay more
than other bidders. New England Public Systems states that transmission
customers were not required to outbid other potential customers for
firm transmission rights under the Order No. 888 regime in place prior
to the advent of LMP-based markets, and load serving entities with
service obligations met through long-term power supply arrangements
should not be required to do so now.
    366. TAPS notes that Midwest ISO argues that it would be difficult
for a transmission organization to value the congestion hedge provided
by a long-term right. TAPS argues that, by advocating allocation
through auction, a transmission organization essentially assigns this
same task to load serving entities that have far less information or
control over the planning and expansion process.
Support for the Use of an Auction
    367. Many commenters express strong support for the use of an
auction mechanism for allocating long-term firm transmission rights and
object to what they view as guideline (7)'s prohibition on using an
auction for that purpose.\119\ For example, IPL states that the
guidelines should not preclude rights allocated by auction because
transmission organizations and stakeholders should be allowed to
determine whether an auction mechanism is the most equitable and
efficient way to allocate rights. IPL contends that EPAct 2005 does not
preclude auctions, does not specify a particular allocation
methodology, and does not require that load serving entities receive
rights for free. IPL argues that EPAct 2005 merely requires that load
serving entities be able to acquire and use such rights and therefore
the guidelines should not eliminate this flexibility. Also, Cinergy
states that it strongly opposes guideline (7), claiming that there is
no support in FPA section 217 for the notion that auctions should be
foreclosed. Cinergy argues that auctions are the best available means
of determining the initial value of transmission rights and it makes no
sense for the Commission to exempt load serving entities from
participating in them when that is the mechanism other market
participants use. In Cinergy's view, guideline (7) ensures that no
market mechanism will be available to address the unduly discriminatory
free-rider problem caused when only some load serving entities obtain
long-term rights.
---------------------------------------------------------------------------

    \119\ See, e.g., Cinergy, DC Energy, Coral Power, Morgan
Stanley, EEI, IPL, DTE, National Grid, SDG&E, Midwest ISO, AF&PA,
EPSA and Reliant.
---------------------------------------------------------------------------

    368. DC Energy believes that, to the maximum extent possible,
market-based solutions should be used to allocate and to establish
prices for firm transmission rights. DC Energy asserts that robust
auctions will maximize the value of firm transmission rights and
increase overall market efficiency by allowing the parties that value
firm transmission rights the most to acquire them. It believes that
transmission users that acquire firm transmission rights outside of an
auction process may pay less for firm transmission rights than those
who would bid on them, resulting in a decrease in auction revenues
which translates into an increase in transmission costs. Furthermore,
DC Energy argues that transmission customers that hold firm
transmission rights without having to pay fair market value for them
will not utilize generation resources in the most efficient manner and
will cause a sub-optimal dispatch due to indifference over supply
options.
    369. In reply to APPA's argument that longer-term transactions
should be favored because they will send the proper economic signals
for transmission facilities construction based on long-term power
supply commitments, Coral Power argues that appropriate economic
signals cannot be established under a system that does not auction
rights on a non-discriminatory basis. It claims that transmission paths
that are valued highly in successive short-term auctions are candidates
for upgrades or for other solutions that might be more economic, such
as the siting of local generation. Coral Power argues that a system
that combines preferential allocations in long-term firm transmission
rights with short-term competitive auctions for available transmission
rights will only distort the market.
    370. Morgan Stanley states that the Final Rule must not allow for
the allocation of long-term firm transmission rights without the use of
an auction mechanism based on sound market principles and uniform
credit eligibility standards. Morgan Stanley argues that allocation of
long-term firm transmission rights through a non-discriminatory
auction, for terms that can be liquidly traded, will generate needed
price signals for market participants. Conversely, in Morgan Stanley's
view, preferential allocation of long-term firm transmission rights
likely would: (1) Reduce the amount of capacity available to the
market; (2) result in a barrier to competitive entry; (3) cause price
signals to be blunted; (4) facilitate hoarding, and (5) create an
increased bias in favor of regulatory outcomes as opposed to a market-
based solution.
    371. DTE recommends that, once auction revenue rights or long-term
firm transmission rights are allocated to market participants, the
regional stakeholder process should determine under what future
conditions, if any, long-term firm transmission rights may be auctioned
or traded. It states that this is a long-term market development issue
that will be unique to each region.
    372. National Grid states that, to the extent that there are
uncertainties as to a customer's ability to obtain such rights in an
auction, the regions can address that concern through consideration of
rights of first refusal or other auction rules. National Grid adds that
nothing prevents the holder of auction revenue rights from bidding for
the underlying transmission rights and/or trading the auction revenue
rights for transmission rights. National Grid states that, in keeping
with the Commission's general approach to allow regions the flexibility
to achieve consensus, the Commission should strike guideline (7) or
revise it to allow for the possibility of mandatory auctions and the
assignment of auction revenue rights if the regions deem these features
to be appropriate.
    373. EPSA states that in markets with allocation of auction revenue
rights or similar rights, regions may choose to continue to allocate
such rights without the use of an auction. However, EPSA states that
auction revenue rights are not the same as financial transmission
rights and stakeholders may or may not include them in long-term firm
transmission right programs. EPSA submits that the guidelines should be
clear on what they assume will be included as baseline requirements or
elements for the rules that will underpin all long-term firm
transmission right programs in organized markets, and should not
preclude a region from requiring an auction process to transparently
value all firm transmission rights, including long-term firm
transmission rights. AEP states that a load serving entity should
always have the right to directly convert auction revenue rights into
firm transmission rights through the auction process, and would be
comfortable with such a conversion taking place outside of the auction
process.
    374. SDG&E states that load serving entities that have both long-
term and short-term power supply agreements have ``reasonable needs,''
and the

statute does not value the ``needs'' of one more than the other. SDG&E
believes firm transmission right auctions are useful because they allow
all load serving entities to seek whatever mix of firm transmission
rights they believe would he most valuable in terms of hedging their
power supply portfolios, thereby enhancing the load serving entity's
attractiveness to potential loads. AF&PA recommends that, in the
absence of permitting auctions, the Commission should clearly provide
guidance as to the appropriate methodology for determining the value of
such long-term hedges.
    375. Reliant proposes that guideline (7) be modified to state:
``Guideline (7): The initial allocation of the long-term firm
transmission rights shall provide for a non-discriminatory and
transparent auction but not require recipients to sell their rights
into that auction.'' APPA, however, states that it opposes this
language because it is too vague.
ISO-NE's Auction Mechanism
    376. ISO-NE strongly urges the Commission to provide transmission
organizations and their stakeholders with the flexibility to consider
allocating long-term firm transmission rights by auction, consistent
with existing New England practices. ISO-NE argues that the economic
benefits of auction-based allocation are well understood and have been
accepted by the Commission in its orders on New England's current
market design and in other proceedings. According to ISO-NE, entities
such as PJM that initially allocated firm transmission rights directly
to load have shifted to an auction-based allocation for compelling
reasons. ISO-NE adds that, if the Commission were to preclude an
allocation by auction, it is unclear how the long-term firm
transmission right acquired by a load serving entity auction revenue
right holder would be valued.
    377. NEPOOL states that a requirement that long-term firm
transmission rights be directly allocated to load serving entities has
the potential to be especially disruptive to an organized market such
as in New England, where there is a mature auction mechanism in place
that allocates one hundred percent of the firm transmission rights.
According to NEPOOL, that same auction mechanism could be used to
allocate long-term firm transmission rights, along with all other firm
transmission rights, while still ensuring that load serving entities
are able to acquire the long-term firm transmission rights they need.
This protection of load serving entities could be assured, for example,
through a tie-breaker mechanism, under which, if a load serving entity
with a long-term commitment and another market participant are bidding
the same price for a long-term firm transmission right, the load
serving entity would have priority and would get the long-term firm
transmission right. NEPOOL states that, in New England, load serving
entities receive a direct allocation of auction revenue rights and
would be able to use their auction revenue right revenues to bid into
the auction for long-term firm transmission rights, thus providing them
the ability, combined with a tie-breaker mechanism, to acquire the
long-term firm transmission rights they need. Also, Morgan Stanley
states that it supports this direct allocation of auction revenue
rights so long as such direct allocation remains independent from the
allocation of long-term firm transmission rights.
    378. New England Public Systems counters that the auction revenue
right/firm transmission right structure in New England is inadequate to
hedge congestion risk and is not equivalent to firm transmission even
on a short-term basis; thus, simply extending the term of such products
cannot satisfy the statute's requirements. According to New England
Public Systems, most auction revenue rights in New England are
allocated among congestion-paying load serving entities on a zonal load
ratio share basis. In effect, each such load serving entity is paid the
auction clearing price of an average firm transmission right in the
zone times the ratio of its peak load to the zonal peak load. New
England Public Systems argues that there is no assurance that revenues
thus received will be sufficient to enable the load serving entity to
acquire a specific firm transmission right across a particularly
congested path. New England Public Systems asserts that auction revenue
rights that (a) do not necessarily cover the cost of transmission
congestion at a specific location, and (b) cannot be converted directly
to long-term firm transmission rights that do hedge the risk of
transmission congestion at a specific location are not the
``equivalent'' of the firm transmission rights that section 217(b)(4)
requires.
    379. Also, New England Public Systems states that an auction
revenue right in itself is not the financial equivalent of a firm
transmission right, because auction revenue right revenues generally
are socialized and distributed on the basis of zonal load ratio share.
According to New England Public Systems, if a load serving entity is
outbid for a valuable firm transmission right, it receives only a
fraction of the auction revenue generated by the winning bid yet
remains exposed to congestion along the associated path. New England
Public Systems states that, aside from the socialization issue, even
path-specific long-term auction revenue rights could leave their
holders exposed to significant congestion costs unless there is a right
to convert long-term auction revenue rights to long-term firm
transmission rights.
    380. Finally, in reply comments, New England Public Systems notes
that ISO New England argues that entities such as PJM that initially
allocated firm transmission rights directly to load have shifted to an
auction-based allocation for compelling reasons. However, New England
Public Systems contends that PJM's auction is not the exclusive means
of acquiring firm transmission rights in that region. It notes that PJM
permits self-scheduling of firm transmission rights (in essence,
allowing an auction revenue right holder to convert its auction revenue
right into an firm transmission right) under some circumstances, but
requires that the self-scheduled firm transmission right have exactly
the same source and sink points as the auction revenue right. According
to New England Public Systems, these aspects of PJM's existing system
for allocation of short-term transmission rights fatally undercut ISO
New England's attempt to rely on the PJM precedent as support for
extending the New England approach (which lacks direct conversion
rights) to long-term firm transmission rights.
NYISO's Auction Mechanism
    381. NYISO argues that the guideline (7) proposal does not apply to
it because it has already engaged in an allocation process that
assigned the rights to transmission congestion contract auction
revenues to the New York transmission owners. NYISO claims that the
same allocation would apply to any longer-term transmission congestion
contracts that are issued as a result of this proceeding. NYISO states
that its transmission congestion contract auction and allocation rules
have already been approved by the Commission and are grandfathered
under section 217(c) of the FPA. Therefore, according to NYISO, it does
not appear that Proposed guideline (7) is at odds with existing NYISO
rules. NYISO states that, in any event, the Commission should clarify
that Proposed guideline (7) is not intended to discourage auctions for
long-term

firm transmission rights beyond the initial allocation of revenue
rights.
    382. In response to NYISO, NYAPP states that section 217(c) of
EPAct 2005 does not serve to ``grandfather'' any RTO allocation
mechanisms under section 217(b)(4), only subsections (b)(1), (b)(2),
and (b)(3). The Commission's authority to modify a transmission
organization's current methods for allocation of transmission rights is
specifically preserved for the implementation of section 217(b)(4). In
NYAPP's view, NYISO should still have to comply with guideline (7).
PJM's Auction Mechanism
    383. Reliant states that any allocation of long-term rights should
include a transparent auction process that allows participants to
evaluate the value of such rights, and that the existing PJM auction
revenue rights process is a good market example that meets the varied
needs of all market participants.
    384. Strategic Energy argues that any allocation of transmission
hedges should be provided via auction revenue right, with the option,
but not the obligation, to convert the auction revenue right to a firm
transmission right on a concurrent source/sink path, as is the current
PJM practice. Strategic Energy claims that the auction revenue right
facilitates load migrations and the equitable migration of the value of
transmission hedges with the load. However, Strategic Energy states
that its support of the auction revenue right/firm transmission right
allocation and auction model is mitigated by concern that initial
allocation of auction revenue rights should not be provided to long-
term uses to the detriment of short-term uses, such as annual or
shorter-term hedging frequently employed by competitive retail
suppliers.
Commission Conclusion
    385. We will adopt guideline (7) as proposed in the NOPR. However,
as we explain below, we clarify that guideline (7) does not preclude a
transmission organization from using an auction to allocate long-term
firm transmission rights; it only precludes requiring a load serving
entity to submit a winning bid in an auction in order to acquire long-
term firm transmission rights.
    386. The Commission agrees with commenters such as APPA, NRECA and
CMUA that argue that load serving entities that are obligated to pay
the embedded costs of the transmission system should be able to receive
an equitable share of long-term firm transmission rights without having
to submit a competitive bid for those rights. As APPA points out,
guideline (7) provides the load serving entity with transmission rights
that are more akin to long-term network and point-to-point service
rights of Order No. 888 than to the short-term rights offered in
today's organized electricity markets. Also, the Commission does not
interpret EPAct 2005 as requiring the use of an auction to allocate
long-term firm transmission rights, or as preventing the Commission
from modifying the allocation method currently used by any transmission
organization. As we have noted elsewhere in this preamble, section
217(b)(4) of the FPA is not included in the list of subsections that
section 217(c) states shall not affect existing or future transmission
organization allocation methodologies.
    387. Nevertheless, the Commission agrees with those commenters that
point out the many benefits that auctions can bring to the allocation
process. As DC Energy notes, auctions can maximize the value of
transmission rights and increase overall market efficiency by allowing
the parties that value firm transmission rights the most to acquire
them. Also, as Coral Power notes, transmission paths that are valued
highly in successive short-term auctions are candidates for upgrades or
for other solutions that might be more economic, such as the siting of
local generation. We note, however, that some of these commenters
interpret guideline (7) as precluding the use of an auction to allocate
long-term firm transmission rights. For example, Cinergy asserts that
guideline (7) ensures that no market mechanism will be available.
Further, Cinergy states that there is no support in FPA section 217 for
the notion that auctions should be foreclosed and that it makes no
sense for the Commission to exempt load serving entities from
participating in them when that is the mechanism other market
participants use.
    388. The Commission clarifies that we do not intend for guideline
(7) to foreclose all transmission right auctions. Indeed, the
Commission believes that an auction can be an integral part of a
process for the fair and efficient allocation of long-term firm
transmission rights that also satisfies the fundamental requirement of
guideline (7). For example, one such allocation process is the method
now used by PJM to allocate annual firm transmission rights. As noted
by New England Public Systems, PJM uses a process that first allocates
auction revenue rights to load serving entities and then allows each
load serving entity the option to convert its auction revenue rights
directly into annual firm transmission rights with identical sources
and sinks. In effect, each load serving entity in PJM may, at its
option, bid the value of its auction revenue rights into the auction as
a ``price-taker'' knowing that it will win the bid for the firm
transmission rights that correspond to the sources and sinks of its
respective auction revenue rights. As a price-taker, the load serving
entity will not know in advance the price it must pay for the firm
transmission rights that it acquires, but it is secure in the knowledge
that the value of its auction revenue rights will cover exactly the
cost of the firm transmission rights. Such a process could be readily
adapted to the allocation of long-term firm transmission rights.
    389. The principal advantage of this approach is that, consistent
with guideline (7), it allows the load serving entity to obtain its
long-term firm transmission rights without having to submit an explicit
price bid in an auction, yet at the same time it exposes the load
serving entity to a competitive auction price signal that will promote
efficient-decision making. Of course, as long as the load serving
entity desires long-term firm transmission rights with the same source
and sink points as its allocated auction revenue rights, it may simply
bid the value of those auction revenue rights into the auction and
receive those rights. However, because it is exposed to the auction
price signal, the load serving entity acquires information that may
cause it to adopt a different bidding strategy in subsequent auctions.
For example, if the auction clearing price for the long-term firm
transmission rights that correspond to a load serving entity's auction
revenue rights is very high, while the clearing price for other long-
term firm transmission rights is low, the load serving entity may
determine that it would prefer to submit an explicit price bid for the
lower-priced rights and forego the opportunity to convert its auction
revenue rights into the corresponding long-term firm transmission
rights. In this way, the load serving entity obtains valuable, albeit
lower-priced, rights and also receives auction revenues equal to the
difference between the value of its auction revenue rights and the
total amount it must pay for the lower-priced rights. In addition, the
higher-priced rights that correspond to the load serving entity's
auction revenue rights are now made available to other auction
participants that value them more highly, thus achieving the goal
identified by DC Energy.
    390. In this regard, we note that DC Energy is concerned that
transmission customers that obtain firm transmission rights without
having to pay fair market

value for them will not utilize generation resources in the most
efficient manner, and Coral Power argues that this could result in a
highly inefficient generation siting decision. Similarly, Morgan
Stanley is concerned that guideline (7) will lead to competitive entry
barriers, hoarding and blunted price signals. We disagree. Even when a
load serving entity holds auction revenue rights with a direct
conversion right, it can be expected to behave in an economically
rational manner because it always has an incentive to forego its
conversion right if it stands to gain financially from submitting a
price bid for alternative rights in the long-term firm transmission
rights auction.
    391. EPSA notes that in markets with allocation of auction revenue
rights, regions may choose to continue to allocate such rights without
the use of an auction. However, EPSA states that auction revenue rights
are not the same as firm transmission rights and wants the guidelines
to be clear on what elements must be included in all long-term firm
transmission rights programs. Also, Strategic Energy states that
initial allocation of auction revenue rights should not be provided to
long-term uses to the detriment of short-term uses. Although the
Commission believes that allocation methods that combine a direct
allocation of auction revenue rights with a transmission rights auction
offer many advantages, we will not prescribe here the process by which
a transmission organization must allocate auction revenue rights, or
ultimately long-term firm transmission rights, to a load serving entity
or other market participant. We recognize that, today, transmission
organizations use a variety of allocation methods, but no one method
has emerged as being clearly superior to all others. We, therefore,
will provide each transmission organization and its stakeholders with
the flexibility to propose an approach that meets regional needs and
satisfies each of the guidelines in this Final Rule, subject to
Commission approval.
    392. A number of comments were directed specifically at the auction
mechanisms currently used by ISO-NE and NYISO. Based on the comments of
New England Public Systems, it appears that the allocation process now
used by ISO-NE does not permit a direct conversion of auction revenue
rights into corresponding firm transmission rights. If so, the process
does not meet the requirements of guideline (7) for allocating long-
term firm transmission rights and must be modified. Also, with respect
to NYISO's auction mechanism, NYAPP is correct in noting that section
217(c) of EPAct 2005 does not prevent the Commission from modifying the
allocation processes of any transmission organization under section
217(b)(4). Therefore, contrary to the view of NYISO, guideline (7)
applies to its allocation process in the same way that it applies to
the allocation processes of all other transmission organizations.
    393. Finally, Central Vermont states that guideline (7) must be
modified to provide market participants with certainty concerning the
value of their long-term transmission rights if the initial allocation
of rights includes exposure to negative congestion charges. We will not
modify guideline (7) to address this concern. However, we will provide
the transmission organization and its stakeholders with flexibility to
include, within the proposed allocation process, specific rules to
address such matters should they arise.
Guideline (8)--Balance Adverse Economic Impacts
    394. As proposed in the NOPR, guideline (8) stated that the
allocation of long-term firm transmission rights should balance any
adverse economic impact between participants receiving and not
receiving the right. The NOPR noted that, to the extent that the
capacity of the transmission system is encumbered by entities holding
long-term firm transmission rights, entities that prefer short-term
transmission rights, such as load serving entities operating in retail
states, will have fewer rights available to them than they have under
current annual allocation schemes. In addition, to the extent awarded
long-term rights become infeasible due to unforeseen changes in the
physical properties of the transmission system, the payment obligations
to holders of long-term firm transmission rights would have to be
funded by others.
    395. The NOPR stated that, in general, it should be possible for
the transmission organization to introduce long-term firm transmission
rights in a way that balances economic impacts, for example, by placing
a limit on the amount of system capacity that is available to support
long-term rights. Also, the NOPR stated that if the long-term right is
an ``option'' right that encumbers more system capacity than an
``obligation'' right, the holder of such a right could be required to
assume greater cost responsibility.
    396. The NOPR noted that the transmission organization might
provide for a secondary market or auction that would provide an
opportunity for transmission customers to obtain long-term rights on
either a long-term or short-term basis from those holding long-term
rights. The NOPR proposed to allow the transmission organization
flexibility to propose methods for pricing transmission rights and
related services that are appropriate for its region and are the
product of a stakeholder process.
    397. The NOPR asked for comments on any measures that should be
adopted to protect against the impacts of a decision by a holder of an
``obligation'' right to leave the transmission organization when the
feasibility of other transmission rights depend on that holder's
counterflows.
Comments
General Comments on the Need for Guideline (8)
    398. Several commenters argue that the principles embodied in
guideline (8) are important, and some believe that they should be the
primary focus in the allocation of long-term firm transmission
rights.\120\ AF&PA states that principles embodied in guideline (8)
should be seen as controlling the application of all the other
guidelines. AF&PA states that the Commission must not return to a pre-
OATT world where certain entities claim the exclusive right to use the
transmission system for their benefit, and all competing usage is
viewed as incremental or marginal.
---------------------------------------------------------------------------

    \120\ See, e.g., AF&PA, EPSA, Midwest ISO, IPL, NYISO, CMUA and
National Grid.
---------------------------------------------------------------------------

    399. Midwest ISO states that the nature and scope of financial
hedging instruments for users of long-term transmission ultimately
should be defined in well-functioning markets. Midwest ISO argues that
any mandate that transmission organizations provide such instruments
must carefully balance the potential benefits to some market
participants against the potential costs to other market participants.
IPL states that, as proposed, the guidelines are not balanced and do
not meet this standard.
    400. NYISO believes that it is possible that long-term firm
transmission rights can be introduced without inequities, particularly
if transmission organizations are permitted to retain existing systems
without major changes. CMUA also believes the equity concerns raised in
guideline (8) may in practice not prove difficult to reconcile.
Nevertheless, CMUA is concerned that transmission organizations and
certain stakeholders might attempt to use guideline (8) to effectively
eviscerate long-term firm transmission rights, in violation of FPA
section 217(b)(4).

Comments Suggesting That Guideline (8) Is Not Needed
    401. Some commenters argue that guideline (8) is not needed or
requires clarification.\121\ For example, BPA suggests that this
guideline be deleted from the Final Rule, as the issues it raises can
be addressed under other guidelines. Furthermore, BPA states that it is
not appropriate to require transmission organizations to balance the
adverse economic impacts between those receiving the right and those
that do not.
---------------------------------------------------------------------------

    \121\ See, e.g., BPA, TAPS, Industrial Consumers and Alcoa.
---------------------------------------------------------------------------

    402. TAPS states that guideline (8) should be removed. However, if
some ``reasonableness'' guideline is retained, it should be reworded as
``avoidance of undue impacts,'' to recognize that some impacts are
``due'' and reasonable. In addition, TAPS is concerned that guideline
(8) establishes criteria that are not called for by section 217(b)(4)
and could be used to undermine Congress's clear directive. In response,
Midwest ISO agrees with TAPS that section 217(b)(4) does not expressly
require that a balance be struck between those that receive long-term
firm transmission rights and those that do not. However, Midwest ISO
claims that section 217(b)(4) also does not expressly require the
Commission to provide load serving entities unlimited and fully-funded
long-term firm transmission rights to hedge congestion costs associated
with long-term power supply arrangements.
    403. In addition, TAPS notes that the NOPR describes as an adverse
impact the potential that the long-term rights will result in the
availability of fewer rights for entities that prefer short-term
rights. TAPS states that this has always been the case under the Order
888 OATT. TAPS claims that a transmission provider is not entitled to
turn down a long-term firm request to keep capacity available for those
who wish to make short-term or non-firm use of the system.
    404. Industrial Consumers argues that, if the total available
rights (short- and long-term) are insufficient to meet the needs of
end-use customers (an indication that the owners of the transmission
system are mismanaging the maintenance and planning of their assets) it
may be necessary to ration the rights, but still preserve the
preference to holders of long-term rights. In Industrial Consumers'
view, the real issue here is not that economic interests are not
appropriately balanced, but that transmission owners have abrogated
their responsibilities.
    405. Alcoa states that it is not clear whether the Commission
intends that there will be a redistribution of costs and benefits
between those entities holding firm transmission rights and those that
do not.
Conflicts Between Guideline (8) and Other Guidelines
    406. Cinergy states that it completely agrees with guideline (8),
but claims that this guideline is not achievable in light of the other
guidelines proposed by the Commission. Midwest ISO maintains that,
while the implementation of this guideline is essential, the
implementation would be difficult because it is in direct conflict with
the requirement for full funding of long-term firm transmission rights
(guideline (2)) and the priority extended to long-term firm
transmission right holders (guideline (5)). NYISO states that the same
problem applies to proposed guideline (4) to the extent that the
Commission interprets it to require non-market based renewal rights for
long-term transmission rights. National Grid recommends that the
Commission treat these conflicting guidelines more as goals rather than
minimum requirements.
Need for Regional Flexibility in the Application of Guideline (8)
    407. SoCal Edison states that, because issues of balance are
intricate and require both judgment and familiarity with the local
market and system issues, the Commission should leave the specifics of
such a balance to the transmission organizations. Similarly, IPL urges
the Commission to allow the transmission organization the flexibility
to develop certain long-term transmission rights parameters such as
pricing and availability.
Importance of Protecting the Status Quo
    408. Some commenters recommend that guideline (8) be implemented in
a way that protects existing short-term rights holders and market
rules.\122\ For example, Constellation states that the Commission
should not adopt policies that harm the existing competitive wholesale
and retail markets. Constellation asserts that a policy that
articulates a preference for long-term supply arrangements is such a
policy. Constellation states that, if the Commission decides to unwind
the current, competitive market structure by setting aside existing
transmission capability for long-term uses, then guideline (8) must be
a critical factor in the Commission's approval of any long-term firm
transmission right proposal so that the Commission can ensure that
there are no adverse impacts on other market participants. In
Constellation's view, any long-term firm transmission right proposal
must identify harm that will be caused by its implementation, such as
the reduction of hedging opportunities for shorter-term uses, and
propose mitigation for such adverse consequences.
---------------------------------------------------------------------------

    \122\ See, e.g., Coral Power, Constellation, Strategic Energy,
and EEI.
---------------------------------------------------------------------------

    409. EEI argues that since load serving entities and other
transmission customers in PJM, Midwest ISO, NYISO and ISO-NE have made
supply and investment decisions in reliance on Commission-approved
allocations, the Commission should not reverse its prior decisions by
changing these allocations and market structures. EEI argues that it
would be disruptive and unfair to require any changes to the underlying
agreements and understandings that formed the design of these four
transmission organizations. In response, APPA argues that the equities
cut both ways. APPA claims that during the transition to ``Day Two''
transmission organization markets, many public power load serving
entities lost valuable Order No. 888 OATT and grandfathered
transmission rights, leaving their power supply arrangements subject to
unanticipated transmission congestion charges. According to APPA, these
entities have since been attempting to conduct business under a
construct of locational marginal pricing and firm transmission rights
that is essentially hostile to their business model. In addition, APPA
argues that Congress contemplated that making long-term firm
transmission rights available to load serving entities under section
217(b)(4) might indeed require revisiting the prior allocation of firm
transmission rights in RTO regions. Further, NRECA claims that Congress
has already issued the mandate and determined the appropriate balance
of costs and benefits; it has not authorized the Commission or
transmission organizations to undertake a cost/benefit analysis of
whether the statutory mandate is justified or the balance struck by
statute appropriate.
Issues Regarding Cost Shifting
    410. Several commenters express concern that requiring transmission
organizations to make available long-term firm transmission rights
could harm market performance and shift costs unnecessarily or unfairly
among

market participants.\123\ For example, Strategic Energy submits that
introduction of multi-year rights will cause cost shifts if holders of
such rights are allocated congestion risk coverage greater than that
accorded to other parties.
---------------------------------------------------------------------------

    \123\ See, e.g., EEI, Strategic Energy, Suez Energy, BP Energy,
ISO-NE and Midwest ISO.
---------------------------------------------------------------------------

    411. BP Energy states that to ensure the balancing of any adverse
economic impacts, guideline (8) should be modified to state explicitly
that the allocation of incremental long-term firm transmission rights
to one party can not result in subsidization of those rights by other
parties, i.e., there can be no significant shifting of generation
redispatch costs or fixed transmission costs as the result of new
supply arrangements entered into by load serving entities receiving
long-term rights to parties not subject to those agreements.
    412. BP Energy also argues that, if parties seeking long-term
rights are able to shift congestion costs to others, they will have no
disincentive to enter into supply arrangements that reduce (because of
their relative location on the grid) the absolute amount of
transmission rights that an organized market can allocate while
maintaining revenue sufficiency. Similarly, in ISO-NE's view,
allocation of free long-term firm transmission rights to load serving
entities versus an auction of long-term firm transmission rights to
generators, traders and other entities creates equity and distortion
issues.
    413. Some commenters address the problem of balancing adverse
impacts in light of the NOPR's proposed requirement for full funding of
long-term firm transmission rights.\124\ For example, IPL argues that
the adverse economic impact of a long-term financial transmission
rights allocation stems in large part from the shortfall funding
obligation. IPL urges the Commission not to require entities to share
this obligation to the extent those entities do not receive benefits
from the allocation and do not bear direct responsibility for
congestion costs. According to Midwest ISO, the Commission's proposal
to guarantee load serving entities priority of existing transmission
capacity with fully-funded long-term firm transmission rights for the
entire capacity of their supply contracts may result in significant
costs on other market participants, increase the costs of transmission
organization membership, and significantly reduce the availability of
firm transmission rights to meet short-term firm transmission right
holders' requests.
---------------------------------------------------------------------------

    \124\ See, e.g., IPL, PJM, PJM Public Power Coalition and BP
Energy.
---------------------------------------------------------------------------

Pricing and Cost Responsibility for Long-Term Firm Transmission Rights
    414. Some commenters state that they agree with the NOPR's
statement that ``to the extent that the long-term right relieves the
holder of the obligation to pay congestion costs, the value of that
congestion hedge should be reflected in the price of the long-term
right, insofar as possible.'' \125\ In this regard, BP Energy argues
that two scenarios are apparent. First, where the same or electrically
similar (mutually exclusive) rights are sought by multiple parties, the
party willing to pay the most might acquire them through a competitive
process, such as an auction. Alternatively, the party seeking such
long-term rights can, consistent with guideline (3), pay for the
necessary ``transmission upgrades and expansions'' to receive the
``rights made feasible'' by that expenditure. In the case where
existing capacity is sought by multiple parties, and auctions are not
available, BP Energy argues that the only equitable and reasonable
method of capacity allocation, consistent with the Commission's holding
that ``the value of that congestion hedge should be reflected in the
price of the long-term right'' is to honor existing rights allocations,
while expediting capacity upgrades and expansions to meet needs
exceeding available transmission capacity.
---------------------------------------------------------------------------

    \125\ See, e.g., Midwest TOs and BP Energy.
---------------------------------------------------------------------------

    415. Midwest ISO states that the notion that the price of the long-
term right should reflect the value of the congestion hedge is
problematic because it is unclear how transmission organizations would
reflect the value of the congestion hedge in the price of the long-term
firm transmission right. Midwest ISO argues that the best way to
determine the value of such a congestion hedge would be through a
market mechanism such as an auction, which would be inconsistent with
guideline (7).
    416. Some commenters argue that long-term firm transmission rights
holders should not, in general, be allocated a cost differential.\126\
Ameren states that load serving entities that are allocated long-term
firm transmission rights are providing the steady, long-term revenue
stream to transmission owners that allows them to invest in upgrades
and expansions to the system, and thus, should not be assessed a
premium charge. TAPS states that if long-term rights are limited to
base load and renewable resources for which the grid should be planned
in any event, it is unreasonable to impose an additional cost burden on
long-term right holders. TAPS states that the Commission should make
clear that it will not accept proposals that would defeat the purpose
of long-term rights by pricing them out of the reach of load serving
entities. Also, TAPS supports the Commission's proposal to leave the
pricing associated with long-term rights to RTO compliance filings.
However, TAPS believes that the transmission organization compliance
process will go more smoothly if the Final Rule includes a new
guideline providing that the pricing of long-term rights should support
and not frustrate section 217(b)(4)'s directive to enable load serving
entities to secure such rights.
---------------------------------------------------------------------------

    \126\ See, e.g., TANC, NRECA, TAPS, Ameren, CMUA, NCPA and APPA.
---------------------------------------------------------------------------

    417. With respect to firm transmission right options, Strategic
Energy states that to the extent that firm transmission right options
can be accommodated, they should be offered, subject to the recognition
that such products encumber substantially more system capacity than
obligations, and therefore should be valued accordingly. Also, TAPS and
OMS agree that those wanting long-term firm transmission right options
should be willing to pay for the additional cost of providing such an
instrument. OMS submits that one possible way of doing this is to first
allocate long-term firm transmission right obligations, and then allow
those receiving long-term firm transmission right obligations the
option of converting the firm transmission right obligation to a firm
transmission right option.
Proposals to Limit the Adverse Impact of Long-Term Firm Transmission
Rights
    418. NSTAR and CAISO argue that some of the concerns the Commission
raises under guideline (8) can be addressed by making long-term firm
transmmission rights identical to short-term rights in every way but
duration. In NSTAR's view, section 217(b)(4) does not require
differences between long-term firm transmission right characteristics
and firm transmission right/auction revenue right characteristics
except for duration. NSTAR argues that failure to harmonize any future
long-term firm transmission rights with the current market and
transmission tariff would be disruptive of existing arrangements and
destabilize power supply planning.
    419. Some commenters argue that the balance that the Commission
seeks under guideline (8) can be achieved with the aid of secondary
auctions and

other market mechanisms.\127\ For example, NRECA recommends using a
voluntary secondary auction in order to allow reconfiguration of long-
term firm transmission rights. NRECA states that this would allow
shorter term rights that are unused to be auctioned to load serving
entities without longer term service obligations, which could mitigate
any potential adverse effect experienced by those that do not receive
long-term firm transmission rights.
---------------------------------------------------------------------------

    \127\  See, e.g., NRECA, SMUD, Midwest ISO, Reliant, AF&PA,
Strategic Energy and BPA.
---------------------------------------------------------------------------

    420. Several commenters suggest that adverse impacts associated
with the introduction of long-term firm transmission rights can be
reduced by limiting the amount of transmission capacity that is made
available for those rights.\128 \For example, Reliant supports placing
a limit on the amount of system capacity available to support long-term
rights as this would reduce the likelihood that the rights may become
infeasible, which in turn would reduce the possibility that the burden
of funding the allocated rights would eventually fall onto other market
participants.
---------------------------------------------------------------------------

    \128\ See, e.g., Reliant, Kentucky PSC, PJM, Santa Clara, SoCal
Edison, AEP, CAISO, ISO-NE, Midwest ISO, OMS, NU, PG&E, APPA, TAPS
and Wisconsin Electric.
---------------------------------------------------------------------------

    421. APPA states that it is amenable to discussion of mechanisms
that transmission organizations could use to minimize to the extent
possible the adverse impacts of long-term firm transmission right
allocations on the firm transmission rights available to other
transmission customers. APPA proposes therefore that the Commission
reformulate guideline (8) to reflect this approach: ``Long-term firm
transmission rights should be allocated in a manner that minimizes, to
the extent possible, adverse impacts on participants not receiving such
rights.'' APPA states that any such mechanisms would have to be
specific to each transmission organization and could include some
combination of: (1) Restrictions on the overall portion of the existing
transmission system that could be allocated to support long-term firm
transmission rights and (2) limits on each load serving entity's own
long-term firm transmission right holdings, based on some percentage of
the load serving entity's own loads.
    422. In response, PJM states that the APPA rewrite of guideline (8)
may go too far and potentially eliminate the ability of transmission
organizations to preserve their existing priorities for short-term firm
transmission rights with the new long-term firm transmission rights. As
a result, PJM asks that guideline (8) not be amended. Rather, PJM urges
the Commission to examine whether the appropriate balance called for in
guideline (8) has been addressed in individual transmission
organization filings.
Rules for Withdrawing From Membership in an RTO
    423. With regard to whether measures are needed to address events
such as the departure of long-term firm transmission right holders from
the transmission organization, APPA states that the transmission
organization will likely have to handle such events on a case-by-case
basis. Ameren states that covering the impact of exit on long-term firm
transmission rights may require additional language in transmission
organization tariffs and/or members' agreements.
    424. TAPS argues that transmission dependent utilities have no
control over whether their host transmission owner seeks to withdraw
from an RTO or switch RTOs. In TAPS's view, transmission dependent
utilities therefore should be held harmless from such decisions. If,
upon withdrawal, the host transmission owner reverts to a physical
rights regime, TAPS states that the transmission dependent utility's
long-term right should be adapted to that regimen. If the host
transmission owner switches transmission organizations, TAPS states
that the new transmission organization should be required to honor the
transmission dependent utilities' long-term rights.
Commission Conclusion
    425. The Commission will delete guideline (8) in the Final Rule.
Commenters make a strong case that guideline (8) is not needed. Our
principal purpose in including guideline (8) was to ensure that the
requirements of section 217(b)(4) of the FPA are implemented in a
manner that is just and reasonable and not unduly discriminatory, which
is our legal duty under the FPA. Neither we nor, in our view, Congress
intended to require long-term firm transmission right proposals to meet
a different or higher standard. Indeed, as noted by APPA, TAPS, CMUA
and others, opponents of long-term firm transmission rights could
attempt to interpret guideline (8) in a way that would effectively
eviscerate long-term firm transmission right proposals. Also, we agree
with BPA's statement that the issues raised by guideline (8) can be
effectively addressed through the application of other guidelines.
Nevertheless, while we are deleting guideline (8), we believe that
meeting our obligation under the FPA to ensure that rates are just and
reasonable and not unduly discriminatory will still require that we
assess the impact of long-term rights proposals on those not receiving
the rights.
    426. We note that several commenters overstate the adverse effects
of introducing long-term firm transmission rights, particularly in
light of the revised guidelines that we are adopting herein. For
example, Midwest ISO states that providing load serving entities with
priority to receive, from existing transmission capacity, fully-funded
long-term firm transmission rights to support the full amount of their
supply contracts may place significant costs on other market
participants, increase the costs of transmission organization
membership, and significantly reduce the availability of firm
transmission rights to meet short-term firm transmission right holders'
requests. However, by (1) expanding the priority of guideline (5) to
all load serving entities and (2) allowing limits to be placed on the
amount of existing transmission system capacity that is made available
for long-term firm transmission rights, the Commission is taking
important steps in this Final Rule to reduce, if not eliminate,
problems associated with cost shifting and the reduced availability of
short-term transmission rights to load serving entities that prefer
them. As we explained in the discussion of guideline (5) above, as a
result of these changes, the transmission organization should be able
to design a comprehensive allocation process for short-term and long-
term transmission rights that largely replicates the equitable
distribution of short-term rights that occurred in the past for those
entities that still want them. Indeed, to the extent that long-term
rights and short-term rights have the same properties except for
duration, as suggested by NSTAR and CAISO, even the full-funding
requirement should not lead to significant cost shifting among classes
of rights holders if all rights holders are given similar full-funding
protections.\129 \In any event, as noted by Reliant, placing a limit on
the amount of system capacity available to support long-term rights
will reduce the likelihood that the rights may become infeasible, which
in turn will reduce the possibility that the funding burden will
eventually fall onto other market participants.
---------------------------------------------------------------------------

    \129\ See the discussion of these issues under guideline (2),
above.
---------------------------------------------------------------------------

    427. Also, BP Energy states that if long-term rights holders are
able to shift

generation redispatch and other congestion costs to others, they will
have no incentive to enter into supply arrangements that maximize the
number of transmission rights that can be allocated while maintaining
revenue sufficiency. Similarly, ISO-NE argues that allocation of free
long-term firm transmission rights to load serving entities versus an
auction of such rights to all entities creates equity and distortion
issues. We disagree. Well designed long-term firm transmission rights
should result in no significant equity issues or economic distortions.
As noted, cost shifting and equity issues are largely addressed by our
revisions to guideline (5). As to economic distortions, these largely
can be avoided by making firm transmission rights available through a
process that combines a direct allocation of auction revenue rights
with an auction of firm transmission rights, as explained in our
discussion of guideline (7). Also, as NRECA notes, the availability of
a voluntary secondary auction would allow reconfiguration of long-term
firm transmission rights and make available shorter-term rights to
entities that were not able to obtain long-term firm transmission
rights.
    428. Finally, with regard to whether measures need to be adopted to
address events such as the departure of long-term firm transmission
right holders from the transmission organization, the Commission agrees
with APPA and Ameren that issues related to the withdrawal of an entity
from a transmission organization are best addressed in the transmission
organization's members' agreement's terms for exit and should be
reviewed on a case-by-case basis. As Ameren notes, the addition of
long-term firm transmission rights may require additional language in
transmission organization tariffs or members' agreements. The
Commission encourages transmission organizations and their stakeholders
to consider the need for such language and to include any proposed
revisions in their compliance filings.

F. Transmission Planning and Expansion

    429. In the NOPR, the Commission noted that section 217(b)(4) of
the FPA requires the Commission to exercise its authority ``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.'' Accordingly, the
Commission proposed to require that transmission organizations ensure
that the long-term firm transmission rights they offer remain viable
and are not modified or curtailed over their entire term. The
Commission noted that, because the proposed guidelines would require
that transmission organizations guarantee the financial coverage of the
long-term firm transmission rights, transmission organizations would
need to have an effective planning regime in place, and might need to
expand the system to ensure that the long-term firm transmission rights
can be accommodated over their entire term.
    430. The Commission stated that it would not propose specific
planning and expansion procedures in the NOPR, but rather each
transmission organization and its stakeholders should develop
appropriate methods for ensuring that long-term firm transmission
rights are supported by adequate planning and expansion procedures. The
Commission encouraged transmission organizations to propose such
procedures as part of their filings in compliance with the Final Rule,
and stated that it will consider them in light of the direction in
section 217(b)(4) of the FPA that the Commission exercise its FPA
authority to facilitate the planning and expansion of transmission
facilities. The Commission asked for comments on whether it should
require that transmission organizations file their transmission
planning and expansion procedures and specific plans. It also sought
comment on whether, alternatively, the Commission should require that
transmission organizations file the plans and procedures for
informational purposes to allow the Commission to monitor their
adequacy for ensuring the viability of the long-term firm transmission
rights.
    431. The Commission noted that the pro forma OATT adopted by the
Commission in Order No. 888 requires transmission providers to expand
capacity, if necessary, to satisfy the needs of network and point-to-
point transmission service customers. The Commission also noted that
its Notice of Inquiry concerning the pro forma OATT sought responses
from interested parties on specific questions relating to this
requirement, including: (1) whether this provision has met transmission
customers' needs, and (2) whether public utility transmission providers
have fulfilled these obligations.\130 \In the NOPR, the Commission
asked for comments addressing these questions in the specific context
of the transmission organizations with organized electricity markets
that are the subject of this rulemaking.
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    \130\ Since the issuance of the NOPR in this proceeding, the
Commission has issued a NOPR concerning revisions of the Order No.
888 OATT in Docket Nos. RM05-25-000 and RM05-17-000.
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    432. Finally, in the NOPR, the Commission asked for comments on
whether the definition of native load service obligation in section
1233 of EPAct 2005 is the same as the approach the Commission took in
Order No. 888, with particular emphasis on how the native load
preference has been applied in the organized electricity markets that
are the subject of this rulemaking.
Comments
Need for Transmission Planning--General
    433. A number of commenters assert that the need for long-term
transmission planning and expansion goes well beyond the need to
provide for long-term firm transmission rights.\131\ AEP states that
proper planning of a robust transmission system is imperative to
meeting long-term economic and reliability needs, which is a much
bigger issue than hedging long-term transmission risks.
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    \131\ See, e.g., AEP, Constellation, Redding and MSATs.
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    434. NCPA recommends that all transmission planning processes
include the following: (1) Needs defined on a comparable basis, based
on analysis of all projected load serving entity loads and resources,
and published, consistently-applied standards; (2) opportunities for
all TDUs to participate in the joint planning process, and to validate
and gain confidence in transmission planning models; (3) colorblind
selection of plans to be implemented; (4) a dispute resolution process;
and (5) plans and inputs that are transparent.
Transmission Organization's Responsibility for Transmission Planning
    435. A number of comments address the role of the transmission
organization in the transmission planning process.\132\ AEP believes
that the transmission organization should conduct regional transmission
planning and be the primary driver of providing long-term connections
between economic power sources and load centers. AEP argues that the
transmission organization should provide for a mechanism that links the
granting of any long-term transmission rights and the construction of
transmission to make those rights feasible. Constellation asserts that
this will provide a mechanism to ensure that

the system is not overbuilt to ensure long-term firm transmission
rights.
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    \132\ See, e.g., AEP, Constellation, TAPS, Midwest, TDUs and
NCPA.
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    436. TAPS believes that transmission organizations must be held
accountable for planning and expanding the grid to ensure load-specific
deliverability sufficient to support the continued simultaneous
feasibility of all long-term rights issued, taking into account other
rights that require preservation. TAPS states that RTOs (and
transmission owners, if RTOs aggregate the transmission plans of their
member transmission owners) should be required to have an inclusive
joint planning process that meets the needs of TDUs on the same basis
that TOs' similar needs are met. In TAPS's view, to meet the needs of
new organized electricity markets, RTOs must be able to deliver crucial
transmission upgrades, not just assemble consolidated lists of
projects.
Transmission Planning To Accommodate Long-Term Firm Transmission Rights
    437. A number of commenters stress that the transmission
organization's planning and expansion protocols must take into
consideration the long-term firm transmission rights that are
issued.\133\ For example, Ameren submits that the parameters of long-
term firm transmission right elections must be embedded in the RTO's
planning process. Ameren states that this will require the RTO to
identify for its transmission owners the term of each long-term power
supply arrangement associated with each firm transmission right on each
transmission owner's system, so that the expansion plans the
transmission owners submit to the RTO incorporate any expansions
necessitated by the long-term supply arrangements. Ameren asserts that
ensuring load serving entities' priority access to long-term firm
transmission rights will give load serving entities the same rights and
ability to ``lock in'' long-term firm transmission to support their
long-term power supply arrangements that they enjoyed under Order No.
888 before RTOs and RTOs' organized electricity markets. MSATs states
that it agrees with such observations but also believes that long-term
firm transmission rights should not become the principal driver of the
transmission planning and expansion process.
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    \133\ See, e.g., OMS, Ameren, SMUD, EPSA, IPL, PJM, MSATs,
Midwest ISO, NRECA and TAPS.
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    438. MSATs argues that distinguishing between reliability and
economic projects in the context of transmission planning is
inconsistent with the concept of long-term firm transmission rights.
MSATs asserts that firm transmission rights are economic rights that
are intended to insulate holders from the economic consequences of
congestion, and building and maintaining the transmission capacity
needed to honor multi-year firm transmission rights may or may not be
necessary to meet applicable reliability criteria. MSATs adds that,
conversely, planning and constructing transmission facilities based
solely on reliability criteria may not ensure the transmission capacity
needed to honor long-term firm transmission rights. Thus, MSATs states
that the distinction between economic and reliability projects is
directly at odds with the type of transmission planning that is needed
to honor long-term firm transmission rights.
    439. Similarly, IPL states that the Commission should separately
address physical delivery risk and financial risks stemming from
congestion charges because the two risks are substantially different
and efforts to address these risks that do not distinguish between them
are likely to be counterproductive. IPL states that the Commission
should not attempt to use financial transmission rights to provide an
incentive toward investment by transmission owners because the
Commission's goal of ensuring that necessary upgrades are performed is
better addressed separately from congestion charge hedging. In IPL's
view, congestion charge hedging is the singular legitimate purpose of a
financial transmission rights mechanism.
    440. IPL states that the Commission and the transmission
organizations are undertaking a number of efforts to ensure that
delivery risk is mitigated through proper transmission planning and
expansion. IPL states that these efforts, which have no direct
connection with allocations of long-term financial transmission rights,
are the appropriate fora in which to address mitigating delivery risk
by making sure adequate transmission infrastructure is available to
meet the reasonable delivery needs of load serving entities and others.
    441. Midwest ISO states that transmission upgrades and expansion
should be dictated by the transmission planning studies that ensure
deliverability of generation to serve load, not participants' firm
transmission right nominations. However, in response, APPA states that
long-term firm transmission rights are intended to ensure exactly that:
deliverability of generation to serve load on a specific resource-to-
load basis, and at a reasonably ascertainable transmission cost that is
not subject to volatile transmission congestion. According to APPA,
since transmission planning and long-term firm transmission rights are
both intended to ensure deliverability of generation to load, it is
absolutely appropriate to take account of long-term firm transmission
rights in an RTO's transmission planning process. In addition, NRECA
states that it is impossible to square Midwest ISO's comment with the
terms of FPA section 217(b)(4). According to NRECA, if that section
means anything, it is that public utility transmission providers must
plan and expand the transmission grid so as to enable load serving
entities to obtain long-term firm transmission rights.

EPAct 2005 Requirements for Transmission Planning and Expansion

    442. Some commenters argue that EPAct 2005 requires the Commission
to adopt specific transmission planning procedures as part of this
rulemaking or another proceeding.\134\ For example, National Grid
claims that EPAct 2005 section 1233(b) requires the Commission to
address how it intends to implement section FPA 217(b)(4) and not just
the portions of FPA section 217 (b)(4) that speak to long-term
transmission rights. To fulfill its statutory obligation, National Grid
submits that the Commission should adopt a set of clear guidelines for
transmission planning and expansion along with its proposed guidelines
for long-term transmission rights. If the Commission does not adopt
planning guidelines in its Final Rule in this proceeding, National Grid
recommends that the Commission state how it intends to discharge its
obligations under the first sentence of FPA section 217(b)(4) and EPAct
2005 section 1233(b) to assure adequate planning. According to NRECA,
FPA section 217(b)(4) does not merely require the provision of long-
term firm transmission rights; it requires the Commission to facilitate
the planning and expansion of transmission facilities. In this regard,
NRECA states that public utility transmission providers should be
required to conduct open joint transmission planning processes that
allow all load serving entities to participate on a comparable basis to
public utility transmission providers. NRECA adds that these planning
processes should accommodate both reliability and economic needs.
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    \134\ See, e.g., National Grid, NRECA, MSATs, TANC and Reliant.
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    443. In its reply comments, MSATs states that the Commission should
identify key attributes that should be

incorporated into the RTO's planning process.
    444. Reliant recommends that the Commission undertake a parallel
rulemaking to address the long-term needs of customers outside of
organized markets. If the Commission chooses not to proceed with such a
separate rulemaking, Reliant urges the Commission to utilize Docket No.
RM05-25-000, Preventing Undue Discrimination and Preference in
Transmission Services.
    445. Taking a contrary view, NYISO states that section 217(b)(4)
should not be interpreted as mandating the overhaul of existing ISO/RTO
transmission planning and expansion processes. NYISO notes that, with
respect to New York, the Commission has approved a robust and
transparent planning process that calls for stakeholder participation
and input, and the NYISO's Comprehensive Reliability Planning Process
is undertaking its first comprehensive review of the reliability needs
of the New York bulk power system. NYISO asserts that making wholesale
changes to this process would be premature and unnecessary.
Requirement for Filing Transmission Plans
    446. Some commenters state that the Commission should require
transmission organizations to file their transmission planning
protocols and their most recent transmission plans as part of their
compliance filings in this proceeding.\135\ APPA states that they
should be required to explain in their long-term firm transmission
right filings how those protocols and plans will take into account the
need to accommodate the allocated long-term firm transmission rights