ratemaking purposes or through any service under the Commission's
jurisdiction any amount it or an affiliate pays as an operational
penalty. This will ensure that the transmission provider faces a true
financial consequence when it or an affiliate incurs an operational
penalty.
c. Applicability of Operational Penalties Proposal to RTOs and Other
Independent or Non-Profit Entities
    866. The Commission did not address the degree to which RTOs and
other independent entities would be subject to operational penalties in
section V.C.4 (Operational Penalties) of the NOPR. For the most part,
the discussion in that section of the final rule addressed how a
transmission provider should distribute operational penalties it incurs
when it takes transmission service under its own tariff. In the section
V.D.5 (Acquisition of Transmission Service) of the NOPR, the Commission
separately addressed whether RTOs should pay operational penalties for
failure to complete request studies on a timely basis.
Comments
    867. Several RTOs and RTO members asked that the Commission clarify
that RTOs are not subject to any operational penalties.\532\ Entergy
opposes the Commission's proposal to assess operational penalties
against non-RTO transmission providers, but not RTOs. However, if the
Commission maintains this distinction, Entergy asks that it clarify
that independent entities--such as Entergy's Independent Coordinator of
Transmission--and the transmission providers that allow independent
entities to process transmission service requests will have the same
protection from operational penalties as RTOs. PGP argues that, in the
case of non-profit transmission providers, requiring the transmission
provider to pay ``non-offending'' customers when the provider incurs
operational penalties is self-defeating, because there is no one other
than the customers to bear the cost of the penalty. PGP cites
Bonneville as an example and notes that Bonneville must recover all
costs from its customers.
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    \532\ E.g., ISO New England, PJM, MISO, SPP, and Ameren.
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Commission Determination
    868. This section of the Final Rule primarily addresses how
transmission providers should distribute operational penalties they
incur when taking transmission service under their own tariff. RTOs and
independent transmission coordinators do not take transmission service,
so most of the discussion in this section of the Final Rule is simply
not applicable to either RTOs or independent transmission coordinators.
RTOs and independent transmission coordinators are bound however by the
requirement to distribute revenues they receive when they assess
operational penalties. We address whether RTOs or independent
transmission coordinators are subject to operational penalties due to
processing transmission service request studies on an untimely basis in
section V.C.5.a of this Final Rule. We address whether RTOs are subject
to civil penalties in section 0 of this Final Rule.
    869. We do not agree with those arguing that a non-profit
transmission provider should be exempt from the requirement to
distribute unreserved use penalties it pays when taking service under
its own tariff. To the extent that a not-for-profit transmission
provider incurs an operational penalty as a result of its activities as
a transmission customer, it is still required to distribute penalties
to non-offending customers. A non-profit transmission provider would
only incur an operational penalty as the result of its wholesale
marketing operations. As such, a non-profit transmission provider would
pay for any operational penalty it incurs by using the profit it has
earned through its wholesale marketing operations.
6. ``Higher of'' Pricing Policy
    870. As noted in the NOPR, the Commission is concerned that some
transmission providers may not be applying our existing pricing
policies consistently and, as a result, customers may be quoted prices
that are not consistent with the ``higher of'' policy.\533\ The
practice of quoting customers an incremental rate as a lump sum payment
is inconsistent with our ratemaking policy and has the potential to
discourage customers from proceeding with service requests.\534\ Under
the Commission's ``higher of'' pricing policy, when the requested
transmission service requires network upgrades, the transmission
provider should calculate a monthly incremental cost transmission rate
using the revenue requirement associated with the required upgrades and
compare this to the monthly embedded cost transmission rate, including
the expansion costs.\535\ This incremental rate should be established
by amortizing the cost of the upgrades over the life of the
contract.\536\
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    \533\ In Order No. 888, the Commission stated that system
expansions should be priced at the higher of the embedded cost rate
(including the expansion costs) or the incremental cost rate,
consistent with the Transmission Pricing Policy Statement. See
Inquiry Concerning the Commission's Pricing Policy for Transmission
Services Provided by Public Utilities Under the Federal Power Act,
Policy Statement, 59 FR 55031 at 55037 (Nov. 3, 1994), FERC Stats. &
Regs. ] 31,005 at 31,146 (1994), order on reconsideration, 71 FERC ]
61,195 (1995) (Transmission Pricing Policy Statement).
    \534\ Southwest Power Pool, Inc., 100 FERC ] 61,096 (2002)
(designing a rate to include a balloon payment is not a substitute
for a properly designed rate).
    \535\ Southwest Power Pool, Inc., 112 FERC ] 61,319 at P 33
(2005).
    \536\ See Southwest Power Pool, Inc., 98 FERC ] 61,256 at
62,026, reh'g denied in pertinent part, 100 FERC ] 61,096 (2002)
(``We agree with SPP that the amortization period for upgrade costs
should match the contract period * * * As the customer is only
obligated to take service for the term of the contract, it is
reasonable that the costs only be amortized over the term of the
contract.'').

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NOPR Proposal
    871. As a result of the Commission's concerns regarding application
of the ``higher of'' pricing policy, the Commission sought comments in
the NOPR on whether changes to the pro forma OATT are necessary to
ensure that incremental cost transmission rates are presented as
monthly rates for service.
Comments
    872. Several commenters agree that incremental cost rates must be
expressed as monthly rates, but do not believe that imposing this
requirement requires changes to the pro forma OATT.\537\ To ensure
transparency, Bonneville recommends that transmission providers post on
their OASIS the methodology used to calculate incremental rates. APPA
suggests that the Commission simply state in the preamble to the Final
Rule that the transmission provider must include a proposed incremental
rate in its offer of service.
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    \537\ E.g., APPA, Bonneville, and Public Power Council.
---------------------------------------------------------------------------

    873. Other commenters see no need for clarification at this time.
Southern states that it is not aware of problems regarding the
calculation of incremental rates. Southern requests that the Commission
consider allowing deviations to the Commission's ``higher of'' pricing
policies and to allow all transmission providers, not just RTOs, to
utilize participant funding. MidAmerican suggests the Commission defer
consideration of possible changes to the pro forma OATT regarding this
issue until the Commission undertakes comprehensive transmission
pricing reform.
    874. Other commenters support changes to the pro forma OATT that
will ensure that incremental costs are presented as monthly rates for
service.\538\ EPSA suggests that the Final Rule include an example of
an appropriate monthly revenue requirement calculation and the upgrade
costs included in the monthly rate. Suez Energy NA supports this
proposed change but requests that the transmission provider be required
to provide in a clear format the existing transmission rate, the lump
sum cost of the upgrades, and the incremental rate.
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    \538\  E.g., ELCON, Constellation, FirstEnergy, NorthWestern,
PGP, TDU Systems.
---------------------------------------------------------------------------

    875. Some commenters ask the Commission to further clarify, or
establish additional requirements, regarding incremental rates. Entegra
states that the incremental rate should be stated as both a monthly
unit rate and a lump sum representing the net present value of the
upgrade costs with all inputs and assumptions in the calculation
disclosed. Entegra further contends that the customer should be allowed
to choose between paying the incremental rate, the lump sum, or some
combination of the two (e.g., to pay an incremental rate over some
period of time and then to pay the balance of the upgrade costs as a
lump sum). While Morgan Stanley supports the Commission's clarification
that the transmission provider may not demand a lump sum payment as a
condition of providing the requested service, it asks that transmission
providers not be precluded from offering a lump sum payment option, or
any other mutually agreeable approach, to customers.
    876. MidAmerican, EEI and Allegheny recommend that the Commission
clarify that the transmission provider is not currently limited to
charging the customer the rate per MW-month specified in the facilities
study for the entire term of service if the customer pays the
incremental cost of the network upgrades. These commenters explain that
the transmission provider's revenue requirement with respect to the
incremental cost of network upgrades will vary over the customer's term
of service in the same way as its embedded cost of service will vary,
including the cost of capital, operations and maintenance expense and
administrative and general expense. EEI argues that the transmission
provider should have the same right to modify a rate based on
incremental costs pursuant to section 205 that it has to modify
embedded cost rates and that the transmission provider should be
permitted to present an incremental cost rate as a formula rate.
    877. Seattle states that incremental costs may require more
rigorous treatment than simply stating a monthly rate, since the cost
of expansion is very path specific and often the expansion will affect
multiple beneficiaries. According to Seattle, the ``higher of'' pricing
policy will often hinge on contestable assumptions regarding the
beneficiaries of discrete expansion projects and the grey area that
separates reliability related aspects of new transmission projects from
projects intended to provide commercial benefits.
    878. Great Northern requests that the Commission clarify that a
transmission customer may adjust the term of its requested transmission
service contract to provide a longer period for amortizing the cost of
necessary system upgrades once the incremental cost of expansion is
disclosed by the transmission provider, as the Commission seems to
suggest in the NOPR.\539\ In contrast, Allegheny states that the
amortization period for the cost of an upgrade should not exceed the
requested term of the contract, even if exercise of the rollover option
by the customer is anticipated because transmission providers must have
assurances of cost recovery for upgrades necessitated by customer
decisions.
---------------------------------------------------------------------------

    \539\ See NOPR at P 285 (``Presenting the incremental charge in
the form of a monthly rate allows a customer seeking a lower rate to
choose to request a longer transaction term.'').
---------------------------------------------------------------------------

    879. TAPS and EEI recommend that the Commission modify sections
19.3 and 19.4 of the pro forma OATT to specify that the transmission
provider must present the incremental costs of transmission service on
a $/MW month basis contemporaneous with providing the facilities study
to the customer. TAPS further states that similar changes should be
made to sections 32.3 and 32.4 of the pro forma OATT, to ensure that
network customers are not scared off by inappropriate presentations of
network upgrade costs. TAPS explains that, while more complex, it
believes that ``higher of'' pricing can work in the context of network
service if applied in a comparable manner to the transmission
provider's treatment of the upgrades needed for service to its retail
native load.\540\
---------------------------------------------------------------------------

    \540\ Citing Midwest Indep. Transmission Sys. Operator, Inc.,
109 FERC ] 61,085, P 57 (2004) (applying Order 2003 crediting
mechanism to network customers).
---------------------------------------------------------------------------

    880. ISO New England and PJM state that the Commission's pricing
concerns are not present for their respective markets and, therefore,
any rule promulgated in this proceeding should not apply to these RTOs.
    881. TAPS argues that creditworthiness or security requirements
associated with network upgrades for a transmission customer (in
sections 19.4 and 32.4 of the pro forma OATT) must be distinguished
from the incremental cost or pricing of the upgrade. Otherwise, the
customer may mistake a demand for security for a request for upfront
payment of the entire cost of the upgrade.
    882. In reply comments, EEI states that it continues to support the
Commission's proposed modification to the way in which the transmission

provider presents information on the incremental cost of network
upgrades and asserts that nothing in the initial comments justifies a
change in the Commission's policies with respect to the pricing of
transmission service. EEI states that changes in transmission pricing
policy, such as NRECA's proposal to require rolled-in pricing for
network customers and TAPS's proposal to exempt network customers from
security for the payment of costs related to network upgrades, are
outside the scope of this proceeding.
Commission Determination
    883. In the NOPR, the Commission sought comments on the narrow
issue of whether changes to the pro forma OATT are necessary to ensure
that, consistent with our ``higher of'' policy, incremental cost
transmission rates are presented as monthly rates for service. The
Commission did not propose any changes to the underlying pricing
policy. Commenters' proposals to change or clarify the Commission's
transmission pricing policy are therefore outside the scope of this
proceeding.\541\ Other comments are directed toward the application of
our ``higher of'' policy in individual cases. These include the
comments of Seattle (on the need to accurately identify the
beneficiaries of the network upgrades), TAPS (on the use of ``higher
of'' pricing in the context of network service), and EPSA (asking the
Commission to present an example calculation of costs and rates). We
will not address those comments here because they involve issues that
are largely fact-specific that are best addressed on a case-by-case
basis.
---------------------------------------------------------------------------

    \541\ Comments that fall into this category include those of
Entegra, Suez Energy NA, Morgan Stanley, MidAmerican, EEI (regarding
the right to modify incremental rates) and Allegheny.
---------------------------------------------------------------------------

    884. Based on the remaining comments received, the Commission
concludes that changes to the language of the pro forma OATT to address
this matter are not needed at this time. We believe that the existing
pricing policy provides sufficient information for transmission
customers to make an informed decision regarding a request for
service.\542\ Transmission providers must continue to include a
proposed monthly incremental rate with their offer of service whenever
the transmission provider proposes to charge the customer an
incremental rate, as well as cost support indicating the derivation of
the rate calculation consistent with the cost support that the
transmission provider would provide to the Commission in a section 205
rate filing. Because transmission providers are required to explain the
calculation of their incremental rate, we conclude that the
transmission provider need not post on its OASIS the calculation
methodology, as recommended by Bonneville. Similarly, in response to
TAPS's concern about security payments, the transmission provider's
explanation should allow the customer to clearly distinguish between
any security requirements associated with the service and the
incremental cost of the service.
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    \542\ Because the Commission declines to adopt changes to the
pro forma OATT regarding the ``higher of'' pricing policy, the
requests of ISO New England and PJM to exempt ISOs and RTOs from
tariff changes related to that policy are moot. Procedures regarding
implementation of the Final Rule by ISOs and RTOs are otherwise
discussed in section IV.C.
---------------------------------------------------------------------------

    885. We will not adopt Great Northern's recommendation to require
the transmission provider to permit the customer to opt for a longer
contract term (to obtain a longer amortization period and a lower rate)
once the incremental cost of the upgrades has been determined. The
specific upgrades required to provide transmission service may depend
on the time period over which the service is provided; therefore,
allowing the customer to opt for a longer contract term may trigger a
need for additional, or different, upgrades.
7. Other Ancillary Services
    886. Other than the pricing of imbalances, the NOPR did not address
pricing issues related to ancillary services required under the pro
forma OATT. A few commenters nonetheless proposed revisions to the pro
forma OATT regarding the pricing and procurement of, and other issues
related to, ancillary services.
a. Demand Response
Comments
    887. Alcoa submits that load resources (i.e., demand response)
should be permitted to self-supply and, under certain circumstances,
sell ancillary services to third parties. Alcoa states that large
customers such as aluminum smelters are capable of providing, for
themselves and third parties, some ancillary services so long as they
are not required to subrogate their aluminum business functions to the
needs of the ancillary service markets. In Alcoa's view, demand
resources such as Alcoa's smelter loads should be appropriately
compensated as providers of ancillary services, recognizing their
ability to contribute significantly to the operational flexibility of
energy markets and the stability of the grid. Alcoa asserts that
industrial loads' contribution to the reliability of the grid was
demonstrated during the August 2003 Blackout, when Alcoa's smelters
remained in operation and facilitated the restoration of the system.
Accordingly, Alcoa asks the Commission to require transmission
providers to recognize that demand response resources can be a
substitute for ancillary services such as Energy Imbalance, Operating
Reserve and Spinning Reserve.
Commission Determination
    888. With respect to Alcoa's concern regarding a transmission
customer's own use of ancillary service, we note that the existing pro
forma OATT requires transmission providers to permit transmission
customers to purchase ancillary services from third parties or make
alternative comparable arrangements for the provision of all ancillary
services except for scheduling, system control and dispatch service and
reactive supply and voltage control service. Regarding the sale of
other ancillary services including energy imbalance, operating reserve
and spinning reserve by load resources, we agree that such sales should
be permitted where appropriate on a comparable basis to service
provided by generation resources. Comparable treatment of load
resources is consistent with Staff's August 2006 Assessment of Demand
Response & Advanced Metering Report \543\ as well as provisions of
EPAct 2005.\544\ We note that some RTOs and ISOs already allow demand
response resources to participate in certain ancillary services
markets, while participation of such resources in other ancillary
services markets is being studied. We therefore modify Schedules 2, 3,
4, 5, 6, and 9 of the pro forma OATT to indicate that Reactive Supply
and Voltage Control, Regulation and Frequency Response, Energy
Imbalance, Spinning Reserves, Supplemental Reserves and Generator
Imbalance Services, respectively, may be provided by generating units
as well

as other non-generation resources such as demand resources where
appropriate.
---------------------------------------------------------------------------

    \543\ In the Demand Response Report, staff recommended that
federal and state regulators consider whether to allow appropriately
designed demand response resources to provide all ancillary services
including spinning reserve, regulation, and any new frequency
responsive reserves. Demand Response Report at 97-100.
    \544\ Section 1252 (f) of EPAct 2005 states: ``It is the policy
of the United States that time-based pricing and other forms of
demand response, whereby electricity customers are provided with
electricity price signals and the ability to benefit by responding
to them, shall be encouraged, the deployment of such technology and
devices that enable electricity customers to participate in such
pricing and demand response systems shall be facilitated, and
unnecessary barriers to demand response participation in energy,
capacity and ancillary service markets shall be eliminated.''
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b. Procurement and Pricing of Ancillary Services Generally
Comments
    889. Steel Manufacturers Association contends that the pro forma
OATT's approach to other generation-based ancillary services should
recognize that regional ancillary services markets do a better job of
ensuring system reliability and holding down ancillary services costs
than ancillary services provided on a control area by control area
basis. Steel Manufacturers Association cites to MISO and SPP reports
that provide evidence that ancillary services provided across large
geographical regions are more effective and economical than when those
services are provided by single utilities. For example, Steel
Manufacturers Association notes that the SPP report concluded that, if
a single Area Control Error were used for SPP, energy used for
regulation service could be reduced by approximately 30 percent. Steel
Manufacturers Association contends that, although ancillary services
markets in the organized markets have proven successful at ensuring
reliability and at keeping ancillary services costs low and
predictable, utilities outside of the RTO and ISO markets continue to
provide ancillary services primarily from their own limited pools of
generation resources.
    890. Occidental and Steel Manufacturers Association propose that
transmission providers should be required, if feasible, to
competitively procure ancillary service products if there are suppliers
of such services other than the vertically integrated merchant
function. Occidental argues that such procurement will result in just
and reasonable rates for these generation-related ancillary services
that reflect their cost-effective market-based competitive supply. In
Occidental's view, competitive procurement of ancillary services will
also help assure non-discriminatory treatment of transmission customers
since transmission providers will have less incentive to favor their
merchant function in the provision of generation-related ancillary
services. Occidental notes that such procurement should be conducted in
a manner consistent with reliability.
    891. Alcoa argues that the transmission provider's costs of
providing ancillary services for the network as a whole should not be
socialized on a MWh basis without regard to the relative cost burden
that specific customers impose on the transmission system. Alcoa
contends that, while a particular consumer may use a considerable
quantity of energy, the cost of serving that customer beyond the per-
unit energy cost may be much less than it would be for other individual
customers or groups of customers.
Commission Determination
    892. The Commission recognizes that there can be possible economic
and reliability benefits to larger geographic markets for ancillary
services, as suggested by Steel Manufacturers Association. However, as
stated in the NOPR and repeated above the purpose of this rulemaking is
to strengthen the pro forma OATT to ensure that it achieves its
original purpose--remedying undue discrimination--not to create new
market structures or, as proposed here, to modify existing market
structures. We do not believe that altering the scope of the current
ancillary services markets is needed to remedy undue discrimination at
this time.
    893. Similarly, we conclude that a fundamental overhaul of the
current procurement and pricing of ancillary services, as proposed by
Occidental and Steel Manufacturers Association, is beyond the scope of
this proceeding.\545\ The pro forma OATT already permits transmission
customers to make alternative arrangements to satisfy certain of their
ancillary services obligations. Therefore, transmission customers are
free to seek out competitive providers for those ancillary services
other than scheduling, system control and dispatch service and reactive
supply and voltage control service from third party suppliers. We also
find Alcoa's contention that the transmission provider's costs of
providing ancillary services for the network as a whole should not be
socialized on a MWh basis without regard to the relative cost burden
that specific customers impose on the transmission system, to be beyond
the scope of this Final Rule.
---------------------------------------------------------------------------

    \545\ We note, however, that the rates charged for these
ancillary services must be just and reasonable under the Commissions
standard of review. Thus, if less expensive options to supply
ancillary services (including from demand side resources) are
available, we would expect the transmission provider to examine such
options.
---------------------------------------------------------------------------

c. Pricing and Procurement of Reactive Power
Comments
    894. Several commenters \546\ suggest that the Commission consider
the need for reform of the methods of compensation for the provision of
reactive power.
---------------------------------------------------------------------------

    \546\ E.g., SPP, Alcoa, and Occidental.
---------------------------------------------------------------------------

    895. Alcoa argues that ancillary services pricing should recognize
the efficiency contributions made by load as a result of their demand
response capabilities and the contribution that load located near
generators makes to the provision of reactive power in particular.
Alcoa states that the localized supply of reactive power near load
centers can alleviate transmission constraints and allow cheaper real
power to be delivered into a load center, as the provision of such
reactive power increases the available flow for real power between two
points. Alcoa argues that the pro forma OATT should recognize and
credit the manner in which certain loads' location and load profile
allows for the provision of reactive power and contributes to real
power transfer capability.
    896. Occidental objects to the existing requirement that
transmission customers purchase reactive power service from the
transmission provider, arguing that numerous independent generators
provide reactive supply and voltage control to support transmission
service in competitive wholesale markets. Occidental states that the
Commission should formalize the policy of compensating generators on a
comparable, non-discriminatory basis for several ancillary services,
particularly providing reactive power capability, by requiring changes
to the pro forma OATT to mirror the changes accepted by the Commission
to the PJM and MISO tariffs. Occidental contends that amending the pro
forma OATT to formalize this policy would be consistent with the FPA
and achieving non-discriminatory access to transmission. Occidental
notes that PJM and MISO amended their tariffs to provide equal
compensation to affiliated and non-affiliated generators based on the
generation owner's monthly revenue requirement for reactive supply and
voltage control as accepted by the Commission. Occidental also notes
that, when addressing generator interconnection agreements in Order No.
2003-A, the Commission stated that ``if the Transmission Provider pays
its own or its affiliated generators for reactive power within the
established [power factor] range, it must also pay [the
interconnecting, independent generator].'' \547\
---------------------------------------------------------------------------

    \547\ See Order No. 2003-A at P 416.
---------------------------------------------------------------------------

    897. SPP requests that the Commission reform its reactive power
pricing methodology, which has grown

out of AEP Serv. Corp.\548\ SPP contends that the Commission can reduce
uncertainty and litigation surrounding the pricing of reactive power by
acting generically in a rulemaking rather than causing the industry to
litigate reactive power pricing issues on a case-by-case basis. SPP
argues that, based on its studies, it does not expect to call upon IPPs
to provide reactive power; and therefore, it should not be required to
pay for reactive power. SPP questions whether paying all IPPs a
reservation charge, regardless of any determination of need or of the
location of the plant and the locational need for reactive power,
provides the appropriate siting incentives. SPP contends that the
Commission can reduce the uncertainty and litigation by acting
generically rather than causing the industry to fully litigate these
issues in numerous cases before various courts. In addition, SPP
challenges whether the AEP pricing method for reactive power continues
to be appropriate. SPP suggests the Commission consider alternative
pricing options, such as: Tying compensation to the actual provision of
reactive power; eliminating compensation for the ninety-five percent
leading/lagging band contained in most interconnection agreements, as
such costs may be considered as a cost of interconnection and included
in the power sales price; or, allowing compensation only outside of the
band or perhaps when a sale is displaced.
---------------------------------------------------------------------------

    \548\ Opinion No. 440, 88 FERC ] 61,141 (1999).
---------------------------------------------------------------------------

Commission Determination
    898. In Order No. 2003 et al., the Commission found that
interconnection customers must be treated comparably with the
transmission provider and its affiliates in terms of reactive power
compensation. The Commission required the transmission provider to pay
interconnecting generators for providing reactive power within the
specified range if the transmission provider so pays its own generators
or those of its affiliates.\549\ Commenters seeking reform of the
methods of compensation for the provision of reactive power have not
demonstrated that such reforms are needed at this time to remedy undue
discrimination or that the current compensation method does not provide
a comparable result. Accordingly, we do not believe that acting
generically on pricing reactive power is needed at this time and we
will continue to resolve compensation issues for reactive power to
qualifying generators on a case-by-case basis based on the
circumstances presented.
---------------------------------------------------------------------------

    \549\ See Order No. 2003-B at P 119.
---------------------------------------------------------------------------

    899. In response to SPP's specific proposals for the treatment of
reactive power, we note that the Commission recently found that it is
unduly discriminatory and non-comparable for SPP to apply a ``needs''
test to reactive power capability for independent power producers to
receive compensation that is not also applied to all other generating
plants in its vicinity.\550\ The Commission also found that parties may
make a separate FPA section 205 filing with the Commission with
criteria, applied comparably and prospectively, that would determine
which generators would receive reactive power compensation.
---------------------------------------------------------------------------

    \550\ See Calpine Oneta Power, L.P., 116 FERC ] 61,282 (2006).
---------------------------------------------------------------------------

    900. Finally, Alcoa's assertion that certain loads' location and
load profile allows for the provision of reactive power to the
transmission system is consistent with Staff's February 2005 report,
Principles for Efficient and Reliable Reactive Power Supply and
Consumption,\551\ as well as the above-cited provisions of EPAct 2005.
As previously discussed, we have modified Schedule 2 of the pro forma
OATT to allow for the provision of Reactive Supply and Voltage Control
from demand resources where appropriate.
---------------------------------------------------------------------------

    \551\ See Staff Report: Principles of Efficient and Reliable
Reactive Power Supply and Consumption (Docket No. AD05-1-000),
available at http://www.ferc.gov/EventCalendar/Files/20050310144430-02-04-05-reactive-power.pdf.
 Staff noted that in many cases load

response and load-side investment could reduce the need for reactive
power capability in the system and that increasing reactive power at
certain locations (usually near a load center) can sometimes
alleviate transmission constraints and allow cheaper real power to
be delivered into a load pocket. See id. at 4, 108. The report also
noted that distributed generators have the same reactive power
characteristics as large generators, with both producing dynamic
reactive power, and that the amount of reactive power does not
necessarily decrease when voltage decreases. Id. at 27.
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D. Non-Rate Terms and Conditions

 1. Modifications to Long-Term Firm Point-to-Point Service
a. Planning Redispatch and Conditional Firm Options
    901. The current pro forma OATT requires the transmission provider
to provide two types of redispatch service: Planning redispatch and
reliability redispatch.\552\ Planning redispatch is a product that
Order No. 888 required transmission providers to use, in certain
circumstances, to create additional transmission capacity to
accommodate a request for firm transmission service. Specifically, the
existing pro forma OATT requires the transmission provider to expand or
upgrade its transmission system or, if it is more economical, plan to
redispatch its resources to provide requested firm point-to-point
service, provided redispatch does not (1) degrade or impair the
reliability of service to native load customers, network customers and
other transmission customers taking firm point-to-point service or (2)
interfere with the transmission provider's ability to meet prior firm
contractual commitments to others.\553\ The transmission provider must
first identify planning redispatch options in the system impact study
in conjunction with identifying relevant system constraints that impact
the service request.\554\ When a system impact study and facilities
study identify planning redispatch as a more economical means of
relieving a transmission constraint than a transmission upgrade, the
customer is obligated to pay the costs of redispatch consistent with
Commission policy.
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    \552\ In Order No. 888, the Commission referred to planning
redispatch as economic redispatch. Here we avoid the term economic
redispatch because in the last ten years it has taken a different
meaning in the industry and because we will no longer require that
planning redispatch be capped at the cost of expansion.
    \553\ See pro forma OATT section 13.5.
    \554\ See pro forma OATT section 19.3.
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    902. Reliability redispatch is required, when feasible, to relieve
system constraints that would otherwise cause curtailment of the
network customer or transmission provider loads. To provide reliability
redispatch, the transmission provider redispatches all network
resources and transmission provider resources on a least-cost basis.
The transmission provider and network customers each pay a load ratio
share of these redispatch costs.\555\
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    \555\ See pro forma OATT sections 33.2-33.3.
---------------------------------------------------------------------------

NOPR Proposal
    903. In the NOPR, the Commission stated its belief that current
practices for evaluating long-term firm point-to-point service may not
be comparable to the manner in which transmission service is planned
for bundled retail native load and may no longer be just, reasonable
and not unduly discriminatory. The Commission described two potential
solutions: modifications to the planning redispatch provisions and
conditional firm point-to-point service.\556\ The Commission proposed
to modify the existing planning redispatch option by (1) accelerating
the study of planning

redispatch in the transmission request study process, (2) requiring an
estimate of the number of hours of redispatch that may be required to
accommodate the requested service, (3) requiring a preliminary estimate
of the cost of planning redispatch, and (4) pricing planning redispatch
services to facilitate increased availability of the service.\557\ The
Commission suggested that conditional firm service could also be used
to accommodate additional transactions, defining the service as a form
of firm point-to-point service that includes less-than-firm service in
a defined number of hours of the year when firm point-to-point service
is unavailable. The Commission sought comment on its preliminary view
that planning redispatch is the superior option because, in part, it is
comparable to the way the transmission provider plans for bundled
retail native load.
---------------------------------------------------------------------------

    \556\ Conditional firm point-to-point service (hereinafter
conditional firm service) and planning redispatch point-to-point
service (hereinafter planning redispatch service) are options
available under long-term firm point-to-point service.
    \557\ The Commission did not propose to modify the reliability
redispatch provisions that exist in the network integration
transmission sections of the pro forma OATT.
---------------------------------------------------------------------------

    904. The Commission's October 12 Technical Conference focused,
among other things, on issues related to the planning redispatch and
conditional firm proposals in the NOPR. On November 15, 2006, the
Commission issued a notice (November 15 Notice) requesting supplemental
comments on a transparent redispatch proposal submitted by Transparent
Dispatch Advocates (TDA proposal) and certain aspects of the
conditional firm option.\558\ The Commission also requested comments
regarding the conditional firm option, including whether it is a
complementary service to planning redispatch, whether it should be
available for all long-term requests or limited to a request where the
customer agrees to pay for upgrades, potential modeling problems, and
requirements for defining the conditions under which the service would
be curtailable.\559\
---------------------------------------------------------------------------

    \558\ The following summary reflects comments received as
initial and reply comments to the NOPR, as well as supplemental
comments received in response to the November 15 Notice. Some
commenters have changed their positions over time and these
summaries reflect the most recent position expressed by commenters.
    \559\ Questions relating to the TDA proposal are discussed later
in this section.
---------------------------------------------------------------------------

Comments
    905. Some commenters agree with the Commission's preference for
modifications to planning redispatch over development of conditional
firm service.\560\ They state that the attributes of conditional firm
service are not clearly defined and key implementation issues are
unresolved. They state that using planning redispatch to the maximum
degree feasible, while not interfering with reliability, is inherent in
maximizing the efficient use of the transmission system and should be
fully evaluated before undertaking expensive expansion of the
transmission system. Other commenters state that conditional firm
service will create significant complications for transmission
providers and disincentives to build transmission in exchange for
limited and questionable benefits for new point-to-point customers or
LSEs.\561\ EEI, Indianapolis Power and Ameren express doubt that
customers would agree to be curtailed during peak usage periods. In
response, AWEA contends that existing resources serving load would be
able to manage curtailment risks so long as they could reasonably
predict the curtailed hours.
---------------------------------------------------------------------------

    \560\ E.g., Exelon, FirstEnergy, ELCON, MidAmerican, Arkansas
Commission, MISO, and East Texas Cooperatives.
    \561\ E.g., EEI, Indianapolis Power, Ameren, and Northwest IOUs.
---------------------------------------------------------------------------

    906. Most independent power producers and a few other entities
support the inclusion of both services in the pro forma OATT, stating
that the services are required to remedy undue discrimination and
provide for comparable transmission service.\562\ Western Governors
believe that the planning redispatch and conditional firm options are
important to fully use the existing transmission grid and to enable new
intermittent generation resources to reach markets. To build the case
for transmission expansion, the Western Governors argue, it is
important to demonstrate that the existing grid is being effectively
utilized; approval of both options will help make this necessary
demonstration. EPSA and AWEA state that, while they believe
transmission providers should be required to offer both services,
conditional firm service may be simpler and less costly to implement
because it involves the transmission provider directing the customer to
turn off its resources during a contingency. Similarly, Bonneville
suggests that conditional firm service is a reasonable alternative to
planning redispatch where a transmission provider cannot provide both
options. Commenters state that the Commission should require
transmission providers to offer conditional firm service and planning
redispatch and allow customers to choose the option that best suits the
physical, commercial and economic circumstances of the request.\563\
---------------------------------------------------------------------------

    \562\ E.g., EPSA, AWEA, Entegra, BP Energy, Newmont Mining,
Sempra Global, Suez Energy NA, PPM, Utah Municipals, Williams,
Morgan Stanley, PPL, Project for Sustainable FERC Energy Policy,
California Commission, CREPC, TranServ, South Carolina E&G,
Constellation, Barrick Supplemental, Xcel Supplemental, and
Bonneville Supplemental.
    \563\ E.g., California Commission Supplemental, Williams
Supplemental, Constellation Supplemental, and Barrick Supplemental.
---------------------------------------------------------------------------

    907. On the other hand, many commenters argue that the Commission
should not require either option because the services are unnecessary,
operationally unworkable, and legally unjustified, or because they
would harm reliability and the quality of existing network service and
provide disincentives for transmission investment.\564\ Several
commenters state that these services would make curtailments of
existing firm service more likely and limit opportunities for use of
secondary network service, thereby harming native load protections and
reducing reliability, contrary to FPA sections 215 and 217
respectively.\565\ Others opposing both options put forth primarily
reliability, cost causation and comparability arguments. For example,
Duke states that the two options are antithetical to reliable grid
operation because they would require a transmission provider to grant a
long-term request with the prior knowledge that it cannot be
accommodated. International Transmission states that the grid is
already operating at capacity and that requiring the transmission
provider to accommodate additional megawatt-hours of service during
periods of system stress would increase the likelihood of system
failure. While it recognizes that conditional firm service has been
successful in parts of the Western Interconnection, NRECA contends a
mandate would undermine responsible planning and expansion of the
transmission grid by harnessing the transmission provider's planning
and dispatch functions to frame more and more elaborate service
conditions for conditional firm service. APPA, Southern and Progress
Energy argue that both services may require adoption of a form of
organized LMP market, an action that raises significant political
opposition and would be contrary to the Commission's commitment in the
NOPR to avoid such restructuring. Similarly, other commenters contend
that the planning redispatch option is only appropriate for
transmission providers who are members of an RTO, ISO or

who have an independent administrator of their transmission
system.\566\ Some of the commenters that urge rejection of both options
state that a properly structured conditional firm service is preferable
to the modified planning redispatch service should the Commission
implement one of the services.\567\
---------------------------------------------------------------------------

    \564\ E.g., Ameren, Duke, Entergy, Imperial, International
Transmission, LPPC, Progress Energy, Santee Cooper, Salt River,
Southern, Tacoma, TDU Systems, Community Power Alliance, Northwest
IOUs, NorthWestern, NPPD, NRECA, Public Power Council, TVA, SPP
Reply, South Carolina E&G Supplemental, E.ON Supplemental, MISO
Supplemental, and APPA Supplemental.
    \565\ E.g., Duke, EEI, LPPC, NRECA, NPPD, Progress Energy,
Southern, Utah Municipals Reply, and Duke Reply.
    \566\ E.g., CREPC, TVA, and East Texas Cooperatives.
    \567\ E.g., EEI, Entergy, Ameren, Progress Energy, Santee
Cooper, TAPS, E.ON Supplemental, TDU Systems Supplemental, LPPC
Supplemental, Tacoma Supplemental, and PNM-TNMP Supplemental.
---------------------------------------------------------------------------

    908. Several commenters prefer the development of conditional firm
service over the modifications to the planning redispatch service
because of the complexities surrounding redispatch costs and
protocols.\568\ For example, in supplemental comments, EEI and
Community Power Alliance state that, while not ideal, conditional firm
service would provide an opportunity to meet customers' transmission
needs and is preferable to Transparent Dispatch Advocates' redispatch
proposal.\569\ They also contend that the conditional firm option would
provide faster provision of service and relative certainty of timing
and costs for a new customer and its lenders, while ensuring
reliability and promoting infrastructure expansion, so long as
transmission providers are permitted to work with their customers to
devise appropriate service parameters. Entergy believes conditional
firm service can provide benefits to transmission customers without
unfairly socializing costs to native load and network customers of the
transmission provider. Overall, a majority of commenters express
support for some form of conditional firm service.\570\
---------------------------------------------------------------------------

    \568\ E.g., Manitoba Hydro, Nevada Companies, Sacramento,
Pinnacle, East Texas Cooperatives, Barrick Reply, APPA Supplemental,
Community Power Alliance Supplemental, Entergy Supplemental, and
TAPS Supplemental.
    \569\ Section V.D.1.b contains a summary and in-depth discussion
of the TDA proposal.
    \570\ The following entities expressed some level of support for
conditional firm service: EPSA, AWEA, Entegra, BP Energy, Newmont
Mining, Sempra Global, Suez Energy NA, PPM, Utah Municipals,
Williams, Morgan Stanley, PPL, Project for Sustainable FERC Energy
Policy, California Commission, Western Governors, CREPC, TranServ,
Constellation, Manitoba Hydro, Nevada Companies, Sacramento,
Pinnacle, PNM-TNMP, Bonneville, EEI, Entergy, Ameren, Progress
Energy, Southern, Santee Cooper, Seattle, LPPC, Salt River, and
TAPS.
---------------------------------------------------------------------------

    909. Several commenters argue that, if the services are required,
the Commission should add to the services the following requirements:
The services should not adversely affect reliability and service to
firm customers or provide unduly preferential service to point-to-point
customers; the services should be an interim option until transmission
upgrades are in place to provide firm service; and, planning redispatch
and conditional firm customers should bear the actual costs of the
services received, including costs associated with system operational
changes needed to accommodate the services.\571\
---------------------------------------------------------------------------

    \571\ E.g., EEI, Southern, TAPS, Seattle, APPA, LPPC
Supplemental, Tacoma Supplemental and E.ON Supplemental. Issues
related to pricing of planning redispatch service are addressed in
paragraphs V.D.1.a.3.c below.
---------------------------------------------------------------------------

    910. A few commenters believe that the Commission should allow for
regional differences in development of the new services.\572\
---------------------------------------------------------------------------

    \572\ E.g., California Commission, PGP, Pinnacle, and Imperial.
---------------------------------------------------------------------------

Commission Determination
    911. The Commission has determined that modifications to the
current planning redispatch requirement and creation of a conditional
firm option are both necessary for provision of reliable and non-
discriminatory point-to-point transmission service. The planning
redispatch and conditional firm options represent different ways of
addressing similar problems. They can be used to remedy a system
condition that occurs infrequently and prevents the granting of a long-
term firm point-to-point service. These options also can be used to
provide service until transmission upgrades are completed to provide
fully firm service. Planning redispatch involves an ex ante
determination of whether out-of-merit order generation resources can be
used to maintain firm service. Conditional firm involves an ex ante
determination of whether there are limited conditions or hours under
which firm service can be curtailed to allow firm service to be
provided in all other conditions or hours. As we explain below, both
techniques are currently used under certain conditions by transmission
providers to serve native load and, hence, it is necessary to make
comparable services available to transmission customers in order to
avoid undue discrimination.
    912. We therefore find these options are complementary services
that can remedy undue discrimination, facilitate the provision of long-
term transmission service and provide customers with greater
flexibility in choosing resources to meet their needs. There is support
in the comments for development of some type of conditional firm
service that would allow for a longer-term use of the grid when
transmission is projected to be unavailable for a small portion of the
year. Additionally, we note that both options could help integrate new
generation more quickly. For example, when there is a lag between the
time that a new generation resource becomes operational and the time
that transmission upgrades can be built to accommodate the resource,
these options allow power to reach customer loads at an earlier date.
This can be particularly beneficial to renewable resources, such as
wind, that can be constructed more quickly than the transmission
upgrades necessary to deliver their power on a firm basis over the
long-run.
    913. We recognize, however, that both options raise reliability
concerns. The proposal in the NOPR for planning redispatch service
would require the transmission provider to predict system conditions
for the term of the service request, a task that becomes more
difficult, and hence less accurate, with longer-term requests. This
poses several related problems. Because longer-term forecasts are
inherently uncertain and the further into the future the forecasts, the
less accurate they are, the provision of planning redispatch service
can threaten the reliability of service to native load unless very
conservative assumptions are used. This incentive to use conservative
assumptions to protect native load, in turn, increases the likelihood
that planning redispatch service will be denied. This, in turn, will
increase the number of disputes as to whether the denials were
discriminatory. Such disputes would pose enforcement problems because
they will turn on long-term projections regarding load growth,
generation resource additions, etc., that by definition involve some
degree of subjectivity. Moreover, as we discuss below, there is
evidence suggesting that, while transmission providers use planning
redispatch to serve native load, they do not use it as a long-term tool
to avoid future upgrades indefinitely.
    914. In balancing the foregoing considerations, the Commission will
modify the approach proposed in the NOPR in two principal respects.
First, given the ability of both services to address similar problems,
we have reconsidered the proposal that only one of the options should
be required. We find that availability of both planning redispatch and
conditional firm in the short-run is necessary to ensure that
competitive power suppliers have comparable access to the grid. As
discussed below, we will continue to require that transmission
providers offer to provide planning redispatch under certain
circumstances in which the transmission providers determine that there
is insufficient ATC. If customers

request study of planning redispatch, transmission providers have an
obligation to seriously evaluate the provision of planning redispatch
from their own resources and provide customers with information on the
capabilities of other generators to provide planning redispatch. If
planning redispatch is unavailable from the transmission provider's
resources or inadequate to meet customers' needs, transmission
providers have an independent obligation to offer conditional firm, if
available, as part of the firm point-to-point service.\573\ Customers
will have the choice of whether to request study of the planning
redispatch option, the conditional firm option or both.
---------------------------------------------------------------------------

    \573\ Application of planning redispatch and conditional firm
service obligations to RTO and ISO transmission providers is
discussed in section V.D.1.a.3.B.i below.
---------------------------------------------------------------------------

    915. Second, we will not impose a planning redispatch or
conditional firm obligation over the long run. Such an obligation is
not, as described below, necessary to remedy undue discrimination and
would otherwise pose reliability problems, put the transmission
provider at risk for estimating the costs of long-term redispatch, and
undermine incentives to upgrade the transmission grid. Therefore, we
will limit the availability of both service options so that their
duration is for a time period over which service can be reasonably
provided without impairing reliability.\574\ This limitation scales
back the existing planning redispatch requirement in section 13.5 of
the pro forma OATT that could, in practice, allow for an open-ended
obligation to provide planning redispatch in lieu of upgrading the
transmission system (e.g., involving forecasts up to 30 years).
---------------------------------------------------------------------------

    \574\ As explained in more detail below, we adopt limitations
that are tailored to the two types of customers that may request the
options. First, for customers that agree to support the construction
of new transmission facilities, redispatch and conditional firm
point-to-point service will be available as a bridge until such time
as those facilities are constructed and the relevant conditions must
be specified in the initial service agreement and are not subject to
change. Second, for customers that do not agree to support the
construction of new facilities, the transmission provider will be
able to re-evaluate the conditions under which services are provided
every two years.
---------------------------------------------------------------------------

    916. We discuss in detail the comparability and reliability
findings that support these decisions below.
(1) Comparability
NOPR Proposal
    917. In the NOPR, the Commission expressed its preliminary view
that current practices for evaluating long-term firm point-to-point
service may not be comparable to the manner in which transmission
service is planned for bundled retail native load and may no longer be
just, reasonable and not unduly discriminatory.\575\
---------------------------------------------------------------------------

    \575\ The Commission did not propose to modify the reliability
redispatch provisions that exist in the network integration
transmission sections of the pro forma OATT.
---------------------------------------------------------------------------

Comments
    918. Some commenters challenge the Commission's authority to order
planning redispatch or conditional firm service as a remedy for
potential undue discrimination. EEI and others argue that planning
redispatch is not necessary to eliminate actual or perceived undue
discrimination because many transmission providers do not rely on
redispatch in planning to serve native load.\576\ However, EEI also
states that when transmission providers do incorporate redispatch into
their system planning, they do so generally only when the cost of
redispatch is lower than the cost of network upgrades and system
reliability is not impacted. Some transmission providers state that
they do not currently use planning redispatch in lieu of transmission
construction in order to designate their network resources.\577\ On the
other hand, Entergy and Southern state that they currently use or have
used planning redispatch of their own resources on the same basis that
they allow any network customer to redispatch from the network
customer's resources. For example, Southern states that it has used the
redispatch potential of its generators during off-peak/shoulder periods
on an interim basis until completion of transmission upgrades to
designate network resources that otherwise might be undeliverable.\578\
Entergy disagrees that there is undue discrimination because this
service is not available to point-to-point customers, stating that
network and point-to-point service are not similarly situated services.
TDU Systems state that conditional firm service does not ensure
comparability among types of transmission service or between
transmission providers and transmission customers. NRECA and others
argue that the Commission requires a better understanding of the degree
to which comparability is a problem in providing point-to-point service
before the Commission makes changes to point-to-point service.\579\ In
supplemental comments, EEI contends that the record in this proceeding
does not demonstrate that conditional firm service is necessary to
remedy undue discrimination.
---------------------------------------------------------------------------

    \576\ E.g., EEI, TDU Systems, NRECA, Southern, and Duke Reply.
    \577\ E.g., Southern, Duke, and Progress. Duke suggests that the
Commission exempt transmission providers from the obligation to
provide redispatch if they commit not to use redispatch as a
planning tool for native load, network customers or merchant
functions.
    \578\ Southern states that it offered this service on a
comparable basis to a non-affiliated transmission customer.
    \579\ E.g., TDU Systems and EEI Reply.
---------------------------------------------------------------------------

    919. Others assert that it is not within the Commission's
jurisdiction to order planning redispatch for point-to-point customers
because this type of redispatch requires use of the transmission
provider's generation resources.\580\ LPPC states that the
comparability principle is wrongly applied to the use of generation by
a transmission provider. In Salt River's view, the Commission proposal
sets up its own form of discrimination by making redispatch of the
transmission provider's resources mandatory while making redispatch of
generation using firm point-to-point reservations and generation in
other control areas voluntary.
---------------------------------------------------------------------------

    \580\ E.g., LPPC, NPPD, Progress Energy, and Salt River.
---------------------------------------------------------------------------

    920. Those that support development of both services support the
Commission's statement in the NOPR that ``transmission owners may
evaluate transmission availability to serve long-term transmission
service requests in a manner that is not comparable with the method
they use to evaluate transmission needs for bundled retail native
load.'' \581\ They argue that this divergent treatment of internal
transmission needs versus external transmission requests is unduly
discriminatory and violates the FPA. EPSA states that the fact that
point-to-point service requests can be rejected due to a few hours of
predicted reliability problems in a year is ``evidence of a poor use of
existing transmission capacity and display clear discrimination against
non-affiliated generation and its customers.'' \582\ TransAlta states
that its actual experience with planning redispatch in the Pacific
Northwest demonstrates that planning redispatch is used
discriminatorily to the benefit of some customers and the detriment of
others.
---------------------------------------------------------------------------

    \581\ E.g., AWEA, Utah Municipals, Project for Sustainable FERC
Energy Policy, EPSA, and Barrick Reply citing NOPR at P 300.
    \582\ EPSA Reply.
---------------------------------------------------------------------------

    921. In support of conditional firm service, Manitoba Hydro and
Tacoma reiterate their experience that long-term transmission service
requests are being denied due to constraints occurring during a small
percentage of the time within the requested period of service.

EPSA and AWEA similarly state that a transmission provider will reject
a long-term firm service request unless it can satisfy every element of
the request. Manitoba Hydro and others state that, in an era of
transmission under-investment, optimizing the capacity usage is
paramount to system reliability.\583\ EPSA and AWEA further explain
that the concept of turning off a generator to avoid system upgrades is
not new; Maine Independence Station avoided expensive system upgrades
by installing automatic switching devices to take it offline during
certain system conditions. Seattle states that, according to the Seams
Steering Committee of the Western Interconnection, utilization on most
constrained paths is limited to only a few hundred hours per year and,
therefore, it is highly likely that service under a conditional firm
product could be offered for even a baseload plant without
significantly impacting the capacity factor. Santee Cooper states that,
unlike the planning redispatch option, conditional firm service is
presumptively within the subject matter jurisdiction of the Commission.
---------------------------------------------------------------------------

    \583\ E.g., EPSA, AWEA, and Project for Sustainable FERC Energy
Policy.
---------------------------------------------------------------------------

    922. Entergy states that the most comparable service for long-term
point-to-point transmission customers is not a requirement that a
transmission provider redispatch its own or network customers'
resources to grant long-term firm point-to-point transmission service.
The most comparable service instead is a service that allows the
transmission provider to curtail the service granted, while permitting
the point-to-point customer to obtain alternative, deliverable
resources if and when such curtailments occur in real-time.
Commission Determination
    923. We reject arguments that planning redispatch service is
unnecessary to remedy undue discrimination as a collateral attack on
Order No. 888. The obligation to provide planning redispatch was
established in Order No. 888. The modifications proposed in the NOPR
did not increase the obligation placed on transmission providers to use
their generation resources to provide planning redispatch to point-to-
point customers. Rather, the proposed modifications merely added
specificity to the redispatch information already required in a system
impact study and adjusted the timing of when the transmission provider
must study planning redispatch options.\584\ Therefore, many of the
arguments raised, including arguments pertaining to the Commission's
jurisdiction over transmission provider generation resources, are
impermissible collateral attacks on the current planning redispatch
obligation in Order No. 888. Entergy's argument that planning
redispatch should not be available to point-to-point customers because
they are not similarly situated to be able to provide redispatch from
their own units thus ignores the current obligation for each
transmission provider to provide redispatch from the transmission
provider's resources, if available, in evaluating a request for long-
term point-to-point service.\585\
---------------------------------------------------------------------------

    \584\ See pro forma OATT section 19.3.
    \585\ See pro forma OATT section 13.5.
---------------------------------------------------------------------------

    924. Additionally, information in the comments counters the
assertion that transmission providers do not use planning redispatch or
service analogous to the conditional firm option for their own loads.
Entergy and Southern volunteer that they have planned for redispatch of
their own resources in order to designate network resources when ATC
was unavailable.\586\ As a caveat, Southern states that it has planned
for the use of redispatch only for an interim period until upgrades
could be constructed to make the transmission service from the
designated resource fully firm. Entergy states that it offers planning
redispatch service to network customers that plan to use their own
resources to provide redispatch in real time. Contrary to EEI's
assertion about the record in this proceeding, commenters, such as EPSA
and AWEA, explain that some transmission providers already employ
automatic devices, such as special protection systems (SPS), to take
resources offline during certain system conditions. In a way that is
analogous to the proposed conditional firm service, these protection
schemes are used to increase native loads' firm uses of the
transmission system until a contingency occurs that reduces available
transmission.\587\ This information, taken together, provides ample
evidence to support our finding that transmission providers currently
evaluate transmission availability to serve long-term firm point-to-
point transmission service requests in a manner that is not comparable
with the method they use to evaluate their own transmission needs and
to integrate their resources to serve bundled retail native load.
---------------------------------------------------------------------------

    \586\ Entergy and Southern. EEI's comments also indicate that at
least a few transmission providers do rely on redispatch in planning
to serve their native loads.
    \587\ SPS, also known as remedial action schemes, are used to
varying degrees in every NERC reliability region. For example, there
are about 65 SPS in the Western Interconnection. See Western
Electricity Coordinating Council Operating Procedures, Index, V-1 to
V-5 (revised July 2, 2002). There are 8 SPS used by Florida Power
and Light in FRCC. See Florida Power and Light Control Area
Readiness Audit Report, 19 (March 10-11, 2004). Two SPS are used in
the Southern Subregion of SERC. Reliability Coordinator Readiness
Audit Report Southern Subregion Reliability Coordinator, 19 (March
27-30, 2006).
---------------------------------------------------------------------------

    925. Furthermore, we wish to emphasize that, in making these
findings in support of a conditional firm option, we are not relying on
the findings to create a new service. This Final Rule retains the two
services adopted in Order No. 888--point-to-point service and network
service. Conditional firm service is not a third service, but rather
represents a modification to the existing procedures for granting long-
term point-to-point service and the curtailment priorities for that
service. The primary purpose of conditional firm is to address the
``all or nothing'' problem associated with the current procedures for
requesting long-term point-to-point service. Currently, a request can
be denied because firm service is unavailable in a very few hours of
the year. For a customer who needs long-term point-to-point service to
support a long-term transaction, this leaves the customer in the
position of trying to cobble together a collection of shorter-term
requests to effectuate its transaction, e.g., arranging firm service in
the periods when it is available and non-firm service in the other
periods. Such a customer also risks interruption of the non-firm
portion of its service for economic reasons, e.g., a day of non-firm
service for the customer combining firm and non-firm service could be
interrupted for another customer seeking one month of non-firm service.
We do not believe such an approach is just and reasonable. It makes
little sense to ask the customer to cobble together a collection of
firm and non-firm requests when the transmission provider has better
information about when the service may be available or unavailable. It
is therefore appropriate to require the transmission provider to grant
the service on a conditional basis, as we explain further below.
    926. We are however modifying the planning redispatch obligation,
and similarly limiting the conditional firm option, to better reflect
the manner in which redispatch or special protections schemes are used
by transmission providers, in recognition of certain legitimate
reliability concerns and the inherent difficulty of long-term
projections in this area. This Final Rule limits transmission
providers' planning redispatch obligations by removing the current
obligation to provide planning redispatch for an indefinite period as

long as the redispatch is cheaper than the relevant transmission
upgrades. We also limit the conditional firm option by linking it to
the transmission upgrades or a biennial assessment of the conditions.
    927. We find such an open-ended obligation to provide this service
is not necessary to remedy undue discrimination, nor is it consistent
with the need to maintain system reliability. As indicated above,
transmission providers temporally limit their use of planning
redispatch and curtailment of resources and there is no evidence that
transmission providers use these options on a prolonged basis, e.g.,
for more than a few years, without upgrading their transmission
systems. Rather, over the long run, transmission providers generally
will construct sufficient transmission to integrate their resources on
a firm basis. This is consistent with transmission planning
requirements and the emphasis placed upon transmission expansion in
this Final Rule. The modifications to long-term point-to-point service
we adopt are consistent and comparable to the existing use of these
options by transmission providers' bundled retail native loads. Thus,
the planning redispatch and conditional firm options will be available
primarily as interim measures until transmission systems are upgraded
to meet the transmission service request. We believe this limitation
will have the added benefit of lessening disincentives to provide the
service so that more planning redispatch is offered to transmission
customers by transmission providers.
    928. We disagree with TDU Systems' statement that conditional firm
service does not ensure comparability among types of transmission
service or between transmission providers and transmission customers.
TDU Systems' assertion is unsupported by any explanation or examples of
how the conditional firm service would degrade comparability.
Nevertheless, we believe the argument is essentially a collateral
attack on Order No. 888. Order No. 888, not this rulemaking, created
the distinction between point-to-point transmission service and network
integration service. We did so to recognize the different ways in which
transmission providers typically use their system. The two services are
not precisely the same, nor were they intend to be identical. Nothing
in this Final Rule changes these distinctions. Indeed, we are not
changing the relative priorities applicable to firm point-to-point
service, network integration service and service to bundled native
load.\588\ These services do, and will continue to, share the same
priority--the highest priority of firm service on the transmission
provider's system. The only change, as it relates to the conditional
firm option, is to allow the customer to elect to have its long-term
firm transmission service interrupted under certain defined
circumstances. This does not harm other firm customers. Indeed, it has
precisely the opposite effect: it permits an interruption to maintain
firm service to other customers. Moreover, we find, as indicated above,
that conditional firm service is necessary to remedy undue
discrimination.
---------------------------------------------------------------------------

    \588\ See supra section V.D.5.b.
---------------------------------------------------------------------------

    929. The addition of conditional firm service therefore does not
significantly alter the existing balance between the point-to-point and
network service. Customers of network service retain flexibility that
is not enjoyed by point-to-point customers. Moreover, conditional firm
does not reduce the availability of secondary network service or the
ability of network customers to temporarily undesignate network
resources any more than short-term firm point-to-point service already
reduces the availability of these network customer options. We
therefore reject TDU Systems' arguments and find that the addition of
conditional firm service is necessary to remedy undue discrimination
and will otherwise increase utilization of the grid without impairing
system reliability.
(2) Reliability
(A) Ability to Predict Redispatch Opportunities and System Conditions
in the Long Run
Comments
    930. Some commenters state that redispatch, used as a planning tool
rather than as a short-term operational tool, is overly complex, prone
to causing disputes, reduces reliability and thus should not be
included in the pro forma OATT.\589\ Southern asserts that planning
redispatch should not be required where it reduces reliability by
reducing a utility's reserve margin, shifting the operational,
reliability and economic risks from the new customer to native load, or
causing a single contingency to overload the system. Additionally, Xcel
states that pledging a network resource to support planning redispatch
carries a risk of penalties for inadequate resources in some areas.
MISO states that contingency conditions must be considered and
respected when evaluating planning redispatch options so that there is
no reliance on curtailment of service. MidAmerican and Progress Energy
conclude that the customer must accept the risk of selecting planning
redispatch service over transmission construction.
---------------------------------------------------------------------------

    \589\ E.g., Duke, Entergy, WAPA, NRECA, NPPD, LPPC, and
Southern.
---------------------------------------------------------------------------

    931. Several commenters request modification of the existing
planning redispatch provisions of the pro forma OATT.\590\ They state
that the Commission should clarify that the current section 13.5 does
not require planning redispatch when it would adversely affect system
reliability or service to native load, network customers and other firm
point-to-point customers or impair other contractual obligations.
Indianapolis Power states that the Commission should modify section
13.5 to require all reasonable redispatch options be examined by the
transmission provider.
---------------------------------------------------------------------------

    \590\ E.g., EEI, Indianapolis Power, Public Power Council,
Southern, Seattle, Sacramento, and LPPC.
---------------------------------------------------------------------------

    932. In its reply comments, Southern explains that transmission
providers fail to provide the currently required planning redispatch
service to point-to-point customers because the service is impractical
and would harm reliability. Southern contends that a redispatch
scenario identified in a transmission plan may not be available in real
time due to outages or loop flow. Southern is also concerned about the
complications in planning and modeling that would occur if the
transmission provider is required to redispatch multiple resources in
order to accommodate multiple planning redispatch customers.
    933. Similar to their arguments in favor of conditional firm, EPSA
and AWEA state that planning redispatch is necessary because a
transmission provider will reject a long-term firm service request
unless it can satisfy every element of the request, even if reliability
violations occur in only a few hours of the year. In its reply
comments, EEI responds that there is no evidence to support the
assertion that a transmission provider will reject a long-term firm
service request unless it can meet every element of that request. EEI
states that in such a situation the transmission provider must offer
partial service, offer to perform a system impact study, and exercise
due diligence in constructing needed upgrades to accommodate the
request. EEI adds that the potential customer can also request short-
term service. Finally, EEI states that there is no evidence that
transmission providers are refusing to redispatch in response to
customer request when redispatching resources would have no impact on
reliability. In

its reply comments, MISO states that denial of service complained of by
EPSA and AWEA is a consequence of the customer's economic decision not
to build upgrades.
    934. Many transmission providers assert that the costs and
inequities of achieving the proposed planning redispatch outweigh any
new benefits for point-to-point customers.\591\ They state that the
Commission's proposal is based on an erroneous assumption that
redispatch is nearly always feasible; instead when redispatch is most
desirable, generators operating at peak would not be available for
redispatch.\592\ Southern also explains that problems of insufficient
transmission capacity cannot be avoided by redispatching generation
because there is no guarantee that a redispatch solution will be
available during real-time operations. Imperial argues that the
personnel and modeling costs to transmission providers of calculating
planning redispatch costs prior to a facilities study are too
excessive. Xcel concludes from a NERC experiment on market redispatch
that redispatch involving non-market-based or bilateral coordination
with third parties to protect a delivery path is cumbersome,
inefficient, and does not promote reliability.
---------------------------------------------------------------------------

    \591\ E.g., Duke, Entergy, Imperial, International Transmission,
Salt River, Seattle, Southern, Tacoma, Northwest IOUs, Sacramento,
Progress Energy, E.ON, Xcel, TVA, and EEI Reply.
    \592\ E.g., Sacramento and TVA.
---------------------------------------------------------------------------

    935. Xcel states that its estimate of hours of planning redispatch
is unlikely to be accurate given that it uses a static power flow that
is created for a specific peak hour and a specific off-peak hour in a
given year. Commenters state that planning redispatch service should
not be a guaranteed service because generation or transmission
availability, system loads, loop flows from adjoining systems, weather,
and fuel availability all entail a component of risk that should not be
pushed back on the transmission provider or its native load.\593\
---------------------------------------------------------------------------

    \593\ E.g., Progress Energy, E.ON, WAPA, Entergy, and
MidAmerican.
---------------------------------------------------------------------------

    936. Operators of systems that rely primarily on hydroelectric
resources argue that planning redispatch should not be considered a
viable option for their systems and they should be exempt from OATT
planning redispatch obligations because hydroelectric operators are
unable to make long-term commitments that a resource will be available
to relieve transmission constraints.\594\ Bonneville states that the
variability in water flows and the interdependence of the generating
units contribute to the inability to predict future redispatch ability.
Bonneville, WAPA and Bureau of Reclamation state that planning
redispatch can conflict with federal obligations to operate federal
dams and reservoirs in a manner that does not impact project purposes
and provide preference in the sale of hydropower to its preference
customers. Tacoma states that planning redispatch must be linked to
market price indexes to work in a hydro-based system. Seattle states
that in hydro-dominant systems fuel availability and fuel price risk
undermine the feasibility of providing long-run redispatch cost
estimates that reasonably reflect future costs. Seattle adds on reply
that planning redispatch fails to address costs pertaining to fish
species preservation, recreation and flood control impacts, increased
risk of spill, or replacement power that are associated with
hydroelectricity.
---------------------------------------------------------------------------

    \594\ E.g., Bonneville, Seattle, Public Power Council, and WAPA.
---------------------------------------------------------------------------

    937. Morgan Stanley argues on reply that the Commission should not
exempt hydroelectric system operators from providing planning
redispatch; instead, factors unique to hydroelectric systems should be
taken into account in determining how much planning redispatch a
transmission provider can provide. In supplemental comments, PPM agrees
with Morgan Stanley and adds that hydro-based systems, such as
Bonneville's, are flexible enough for a transmission provider to use
planning redispatch to create additional firm capacity.
    938. In their reply comments, Utah Municipals and EPSA state that
planning redispatch would not impair reliability because the OATT
provisions do not require transmission providers to permit intentional
overloading of lines. Since transmission providers are already required
to provide planning redispatch now, Utah Municipals contend that any
change in the sequence for studying the option cannot have an impact on
reliability. EPSA argues that claims of adverse reliability impacts
should be dismissed because transmission providers do not make these
same claims when they redispatch to enable transmission service to meet
their own load obligations. Utah Municipals state that reliability
would be most enhanced by completely restricting access to the grid, a
policy that Utah Municipals do not recommend because it would be
extraordinarily costly and promote discrimination. In its reply
comments, Entegra states that customers seeking planning redispatch are
not seeking to shift a disproportionate share of the risks or costs to
native load or other users of the system.
    939. In its reply comments, EPSA further argues that the Commission
should place the burden of showing unreliability in a particular
instance on the transmission provider. EPSA also argues that
transmission providers should not be allowed to delay service through
feasibility studies. EPSA contends that planning redispatch will not
delay needed system upgrades and, instead, will ensure optimized use of
the existing system that will provide additional information about the
system's capabilities to regional planning initiatives. In its reply
comments, Morgan Stanley states that the Commission should establish
clear standards as to the degree of expected reliability that appends
to a firm transmission sale and allow transmission providers to sell as
much of the system as can be sold on a firm basis, consistent with
maintaining the reasonable standard.
    940. EEI and some transmission providers add that the conditional
firm product could result in an oversubscription of a transmission
system in violation of NERC reliability standards that require the
transmission system to be planned to meet all firm needs.\595\ ELCON
states that conditional firm service may not truly support long-term
contracts for firm power but may lead to a greater volume of short-term
trading.
---------------------------------------------------------------------------

    \595\ E.g., Ameren, Southern, and EEI.
---------------------------------------------------------------------------

Commission Determination
    941. Many commenters are concerned that the options described in
the NOPR will impair system reliability. We have taken these comments
into account and have tailored the modifications to long-term point-to-
point service so as to not impair system reliability. There are two
important limitations that provide such protections. First, we make
clear that transmission providers are not required to offer planning
redispatch or conditional firm service if doing so would impair system
reliability.\596\ Second, as explained above and discussed in further
detail below, we are limiting the time period under which either option
is offered. We do so because forecasts of potential redispatch or
interruption options become more

speculative over time and to require a transmission provider to commit
for a substantial period of time, subject to the uncertainty inherent
in such long-term projecting, has the potential to degrade reliability.
With these two limiting conditions, we find that neither the planning
redispatch nor conditional firm option will degrade reliability and, as
discussed above, that both are necessary to remedy undue
discrimination.
---------------------------------------------------------------------------

    \596\ A transmission provider may not be able to provide
conditional firm service without impairing the reliability of its
system if it is required, for example, to manage many conditional
firm point-to-point reservations across the same path. The ability
of system operators to track, tag and manage curtailment of multiple
conditional firm reservations is necessarily limited by time, human
resources and other reliability-related duties of the operators.
---------------------------------------------------------------------------

    942. We agree with a majority of commenters that over the long
term, new resources should be supported by sufficient transmission
capacity to deliver their output reliably. Imposing a planning
redispatch or conditional firm obligation over the long-run would not
be consistent with the need to increase the reliability of the grid or
otherwise necessary to remedy undue discrimination. Rather, it would
tend to degrade reliability over time, contrary to the public interest
and the underlying goals of EPAct 2005. Projections of planning
redispatch options and conditional firm conditions are more accurate in
the near term and, hence, should facilitate the efficient use of
existing resources without impairing reliability.
    943. We therefore impose limits on the transmission provider's
current planning redispatch obligations. We do so by removing the
obligation to provide planning redispatch for an indefinite period as
long as the redispatch is less expensive than the relevant transmission
upgrades. Section 13.5 of the pro forma OATT could, in conjunction with
rollover rights, allow for an extremely long-term obligation to provide
planning redispatch in lieu of upgrading the transmission system. We
find that this existing obligation may unreasonably harm reliability
and provides incorrect incentives to delay necessary grid expansion. We
emphasize that the obligation to provide planning redispatch applies
only when the service can be provided reliably.
    944. We also limit the time period over which a transmission
provider must predict the system conditions or conditional hours that
would apply to customers using the conditional firm option. We do so in
recognition of the difficulty in attempting to forecast curtailment
options over the long-term and the fact that there is no evidence that
transmission providers perform similar forecasts for their native load
customers. We do not, however, eliminate entirely the risk of
predicting future system conditions or shift it in whole to the
requesting transmission customer as requested by certain commenters. We
believe that the transmission provider should retain responsibility for
incorporating reasonable assumptions into its transmission models so
that it can manage this risk, just as it currently manages the
prediction risk in its ATC models.
    945. We will now turn to certain clarifications and other issues
raised by the commenters. We acknowledge that planning redispatch to
support annual service may require redispatch of generation during the
peak month or months. Since transmission providers plan their
generation to meet their peak native load plus reserves, the
transmission provider's resources may, in some cases, be fully employed
to meet the needs of bundled retail native load and thus may not be
available to provide redispatch during the peak period.\597\ In such an
instance, the unavailability of such resources to provide redispatch
service will constitute a legitimate basis for denying planning
redispatch service. However, we will not excuse the existing obligation
that requires transmission providers to study any available planning
redispatch, including redispatch that might provide some but not all of
the service requested. Given that some transmission providers have
acknowledged their own use of planning redispatch for their network
resources,\598\ the service must continue to be available to those
seeking point-to-point service to ensure comparability.
---------------------------------------------------------------------------

    \597\ See, e.g., Arizona Public Service Co. v. Idaho Power Co.,
95 FERC ] 61,081 at 61,241 (2001) (resources projected to be
unavailable during system peak month to provide planning
redispatch).
    \598\ E.g., Entergy.
---------------------------------------------------------------------------

    946. We reiterate that the transmission provider remains obligated
to provide planning redispatch from its resources as long as the
planning redispatch does not (1) degrade or impair the reliability of
service to native load customers, network customers and other
transmission customers taking firm point-to-point service or (2)
interfere with the transmission provider's ability to meet prior firm
contractual commitments to others.\599\ We continue to believe these
are the appropriate exceptions and will not adopt a broad and undefined
reasonableness standard as suggested by Indianapolis Power. We agree
with Southern that the transmission provider may consider the impact of
the planning redispatch service in reducing its reserve margin below
that necessary to maintain reliability or causing a single contingency
to overload the system in determining whether the service can be
reliably provided.
---------------------------------------------------------------------------

    \599\ See also Order No. 888 at 31,739.
---------------------------------------------------------------------------

    947. Further we will not excuse transmission providers from the
obligation to manage multiple planning redispatch or conditional
curtailment obligations simply because some commenters express concerns
about planning and modeling impacts. While we do not take these
concerns lightly, we believe they can be managed by transmission
providers. The planning redispatch obligation has existed for ten
years, and with it the potential for multiple planning redispatch
requests. We have no evidence that transmission providers have been
unable to manage the process. Moreover, by scaling back the time period
for which transmission providers must plan for provision of redispatch,
we have greatly reduced any planning and modeling impacts. We believe
that whatever additional work the options cause with regard to planning
and modeling, it is small and more than offset by the considerable
value of the options which allow for more efficient use of the
transmission system, expansion of long-term uses of the grid and
remedying of undue discrimination.
    948. Finally, we recognize the difficulty of predicting, over
prolonged periods, whether hydroelectric resources will be available to
provide redispatch. We agree with Morgan Stanley that factors unique to
hydroelectric systems should be taken into account in determining how
much planning redispatch a transmission provider can provide. For
example, transmission providers operating hydro-based systems must
predict both system load growth and water availability in order to
determine whether resources will be available in the next few years to
provide redispatch. We acknowledge that certain circumstances may in
fact limit long-term redispatch on these systems due to increased
prediction risks. We reiterate, however, that all transmission
providers, including those operating hydro-based systems, are required
to make a determination, regarding whether planning redispatch service
can be provided consistent with system reliability based on the
specific facts of a particular request for service. The fact that
hydro-based systems may not be able to provide planning redispatch
service under many circumstances should not necessarily limit the
availability of conditional firm service on these systems. We expect
that transmission providers with hydro-based systems will focus on
provision of the conditional firm option in a manner consistent with
their system conditions.

    949. We also repeat that planning redispatch service does not need
to be provided if doing so would impair the firmness of service to
existing transmission customers. For example, pre-existing federal
obligations, such as those described by Bonneville, WAPA and Bureau of
Reclamation, would qualify as the type of firm commitments to others
that would excuse transmission providers from the planning redispatch
obligation to the extent that redispatch impaired service to these
customers.
(B) Impact on Network Customers and Native Load
    950. Several commenters argue that the use of planning redispatch
may remove the ability to use reliability redispatch in real-time
operations to respond to system contingencies, resulting in more
curtailment of network and native load.\600\ In addition to reducing
availability of redispatch as an operational tool, NRECA contends that
planning redispatch will reduce ATC for network service and the
incentive to build new transmission. Several commenters state that
planning redispatch may unfairly shift costs to network and native load
customers.\601\ Progress Energy argues that such a mandate places the
power grid in serious jeopardy because the system has not been designed
to handle the redispatch planning model. Progress Energy and Nevada
Companies state that the planning redispatch option could conflict with
transmission providers' state resource planning obligations to reliably
serve load at least cost. Exelon replies, however, that planning
redispatch could increase flexibility for network customers by
increasing the availability of point-to-point service across adjacent
transmission systems to bring generation to network loads.
---------------------------------------------------------------------------

    \600\ E.g., EEI, Duke, Imperial, LPPC, PNM-TNMP, Public Power
Council, NRECA, NPPD, Southern, and Progress Energy.
    \601\ E.g., EEI, TAPS, LDWP, MidAmerican, Southern, Community
Power Alliance, and MISO Reply.
---------------------------------------------------------------------------

    951. Some commenters argue that the conditional firm option would
adversely impact system reliability by subjecting firm customers to
additional curtailments once conditional curtailment hours are
exceeded.\602\ NRECA and Utah Municipals state that the conditional
firm service will reduce the flexibility of network customers by
preventing network customers from using secondary network service, a
right that NRECA argues is protected by FPA section 217.
---------------------------------------------------------------------------

    \602\ E.g., Duke, LPPC, NRECA, NPPD, Progress Energy, Southern,
APPA, and South Carolina E&G.
---------------------------------------------------------------------------

Commission Determination
    952. We reiterate that transmission providers are not required to
offer planning redispatch and conditional firm point-to-point service
if doing so would impair the reliable service to firm customers,
including native load and network customers. The concerns of the
commenters regarding the impacts on native load, network and other
existing firm uses are therefore misplaced.
    953. Transmission providers are already obligated to provide
planning redispatch service pursuant to Order No. 888 and thus
arguments that the planning redispatch option will harm existing
customers is equally misplaced. Indeed, under the limitation on the
duration of planning redispatch service imposed in this Final Rule,
transmission providers will be able to better manage the risks of
curtailment for current users of the transmission grid. This is because
the obligation to redispatch will no longer be an open-ended
obligation. Customers will need to commit to upgrade the system or to
have their service reassessed periodically. Both of these allow the
transmission provider to better plan to serve needs reliably because it
reduces the unknowns. With regard to NRECA's argument that planning
redispatch will cause less flexibility in real-time and more potential
for curtailments of network customers and bundled retail native load,
all sales of point-to-point service could to some extent cause more
curtailments of network customers and bundled retail native load. Our
decision today limits the existing planning redispatch obligation for
point-to-point service, rather than expanding it.
    954. Similarly, the conditional firm option does not reduce the
availability of secondary network service or the ability of network
customers to temporarily undesignate network resources any more than
short-term firm point-to-point service already reduces the availability
of these network customer options. We see no reason to reject the
conditional firm option so that transmission providers avoid offering
higher-quality service such as conditional firm point-to-point service
in order to retain the ability to offer lower-quality service such as
secondary network service.
    955. Finally, we believe that network customers can benefit from
the use of the planning redispatch and conditional firm options
available in a point-to-point transmission service request. As
described below, long-term point-to-point service that employs the
planning redispatch or conditional firm option would qualify as a
network resource on any adjoining system importing that resource.
(3) Implementation of Planning Redispatch and Conditional Firm Options
    956. Commenters raise various concerns regarding specific
implementation issues associated with the planning redispatch and
conditional firm options. We address those concerns below, but first
provide an overview of the planning redispatch and conditional firm
service required in this Final Rule in order to outline the new rights
and obligations of transmission providers and customers. Following this
overview, we address specific comments relating to the service.
    957. Pursuant to the modified obligations adopted in this Final
Rule, where a request for long-term point-to-point firm transmission
service is made and cannot be satisfied out of existing capacity, the
transmission provider shall, at the request of the customer and in the
system impact study, identify (1) the transmission upgrades necessary
to provide the service, and (2) the options for providing service
during the period prior to completion of those transmission upgrades.
Additionally, if upgrades cannot be completed prior to expiration of
the requested service term, the transmission provider shall, at the
request of the customer and in the system impact study, identify
options for providing the service during the requested term. The
options studied by the transmission provider must include planning
redispatch and conditional firm options.\603\ The transmission
provider, at its discretion, may study and offer a mix of planning
redispatch and conditional firm options for a single service request.
We provide further detail on each required option below.
---------------------------------------------------------------------------

    \603\ Although partial interim service is not addressed in this
rulemaking, we note that the OATT continues to require this service,
on an as available basis, if a multi-year service request is denied.
---------------------------------------------------------------------------

    958. If the transmission provider determines that planning
redispatch is available, it shall provide the customer with non-binding
estimates of the incremental costs of redispatch and identify the
relevant constrained flowgates for which redispatch will be provided.
For the conditional firm option, the transmission provider shall
identify the conditions and hours pursuant to which the service may be
curtailed, using a secondary network curtailment priority, to maintain
reliability. Specifically, the transmission provider shall identify (1)
the specific

system condition(s) when conditional curtailment may apply and (2) the
annual number of hours when conditional curtailment may apply.
Customers agreeing to take conditional firm service must choose one of
these options, conditions or hours.
    959. Where the customer requests firm service for more than two
years, but is unwilling to commit to a facilities study or the payment
of network upgrade costs, the transmission provider shall identify and
provide the planning redispatch or conditional firm options subject to
the following limitation. The transmission provider shall have a
periodic right to reassess (1) the planning redispatch required to keep
the service firm or (2) the conditions or hours under which the
transmission provider may conditionally curtail the service. This
reassessment may occur every two years during the term of the service,
i.e., at the end of year two, year four, year six, and year eight of a
ten-year service. The transmission provider may not implement
reassessments during intervening periods nor may it reassess the
conditions in order to amend the service agreement in an intervening
year should it forego any biennial reassessment.\604\
---------------------------------------------------------------------------

    \604\ For example, if a transmission provider opts to forego the
reassessment at the end of year two, the transmission provider may
not reassess the conditions of the service again until the end of
year four of service for imposition of new conditions starting in
year five.
---------------------------------------------------------------------------

    960. The service agreement shall specify the relevant congested
transmission facilities and whether the transmission provider will
provide planning redispatch, a mix of planning redispatch and
conditional firm, or conditional firm in order to provide the point-to-
point transmission service. For the conditional firm option, customers
must choose among and the service agreement must specify either (1)
specific system condition(s) during which conditional curtailment may
occur or (2) annual number of conditional curtailment hours during
which conditional curtailment may occur. We deem that any service
agreement that incorporates planning redispatch or conditional firm
options is a non-conforming agreement and must be filed by the
transmission provider pursuant to section 205 of the FPA. Additionally,
transmission providers must file with the Commission any amendments to
these service agreements that result from reassessments. If a
transmission provider proposes to change the redispatch or conditional
curtailment conditions due to a reassessment, the transmission provider
must provide the reassessment study to the customer along with a
narrative statement describing the study and reasons for changes to the
curtailment conditions or redispatch requirements no later than 90 days
prior to the date for imposition of these new conditions or
requirements. The transmission provider shall assess the conditions
based on two years of service or the continuation of the term of
service, whichever is less.
    961. In situations in which the customer commits to paying the
costs associated with upgrades necessary to provide the service on a
fully firm basis, the conditions or hours identified by the
transmission provider shall remain in effect until such time as the
upgrades have been completed. Also, for such customers, the service
agreement shall specify the upgrade costs as determined through the
facilities study.
(A) Eligibility for and Timing of Planning Redispatch and Conditional
Firm Options
NOPR Proposal
    962. In the NOPR, the Commission proposed that customers who
request long-term firm point-to-point transmission service and have the
service denied because of lack of ATC would be eligible to receive
planning redispatch service or, if the Commission chose to adopt the
conditional firm service option, conditional firm service. The
Commission also proposed earlier evaluation of the planning redispatch
option in the system impact study rather than in the facilities study.
The Commission proposed that, if it were to adopt conditional firm
service, the evaluation of conditional firm availability should occur
prior to a system impact study or facilities study.
Comments
    963. If the conditional firm option is required by the Commission,
many commenters believe it should be a bridge product to span the gap
between when the relevant transmission service request is being studied
and when the relevant upgrades become operational.\605\ These
commenters state that a bridge product is appropriate because it would
not depress funding for new transmission infrastructure and would
better meet the NOPR's and Congress' grid expansion objectives. In
their view, use of a bridge product would avoid equity and free rider
problems that may occur if a conditional firm customer is taking long-
term service and the transmission system is upgraded during that
service. They also argue that the bridge product would better allow for
transmission providers to judge the likelihood of curtailment and avoid
complicated system modeling and planning issues; as well as protect
existing long-term transmission customers. Duke and Ameren state that
an annual re-determination of the conditional period is necessary for a
bridge product. If the upgrade has not been completed within a three
year period, NRECA suggests that the customer be required to make a new
long-term firm service request so the provider can update to reflect
system conditions at that time.
---------------------------------------------------------------------------

    \605\ E.g., Progress Energy Supplemental, PNM-TNMP Supplemental,
LPPC Supplemental, APPA Supplemental, TAPS Supplemental, TDU Systems
Supplemental, NRECA Supplemental, EEI Supplemental, Entergy
Supplemental, Ameren Supplemental, Powerex Supplemental, and MISO
Supplemental.
---------------------------------------------------------------------------

    964. Several commenters suggest that transmission providers should
offer conditional firm service as both a bridge product and as a stand-
alone long-term firm service.\606\ Where not used as a bridge service,
several commenters state that it should be limited to reservations that
do not have rollover rights.\607\ Duke argues that the service duration
for non-bridge service should be one year, but with renewal rights that
give the conditional firm customer a priority over other non-bridge
conditional firm service customers seeking capacity. APPA supports one
to two-year service offers.
---------------------------------------------------------------------------

    \606\ E.g., Bonneville Supplemental, PPL Supplemental, EPSA and
AWEA Supplemental, EEI Supplemental, Barrick Supplemental, and
Constellation Supplemental.
    \607\ E.g., Xcel Supplemental, Duke Supplemental, and EEI
Supplemental.
---------------------------------------------------------------------------

    965. In supplemental comments, EEI supports a voluntary conditional
firm product with three types of service: A one-year product with no
rollover rights; a bridge product for a term of more than one year that
is provided until upgrades necessary to accommodate a firm service
request are completed; and a non-bridge product of more than one year,
with no rollover rights or transmission provider obligation to
construct upgrades and subject to the transmission provider's periodic
review of its system capability to provide such service. EEI contends
that the Commission should encourage transmission providers to offer
conditional firm service for more than one year without rollover rights
to a customer that is not willing to take service of sufficient length
to allow recovery of upgrades costs, if such service can be provided
without affecting the reliability and quality of service to firm
transmission customers.
    966. In support of limitations on the term of conditional firm
service, many

commenters state that analyzing and modeling system conditions will
always be more accurate in the near term than in the long term.\608\
EEI and Community Power Alliance believe that limitations on system
modeling prevent many transmission providers from accurately evaluating
their ability to provide conditional firm service over long periods.
According to EEI, system conditions change on both the transmission
provider's and neighboring systems substantially affecting the ability
of the transmission provider to provide conditional firm service and
the periods such service is subject to curtailment. While system loads
can be predicted with a reasonable degree of accuracy for more than one
year, other components of the prediction model, such as transmission
and generator outages, typically are not determined more than a year in
advance. For example, EEI states that members in the SERC region
coordinate transmission and generation outages in a 13-month planning
horizon. Duke states that the ability to model the system varies
significantly by region. Entergy and MidAmerican believe that system
modeling limitations would present serious reliability problems if
transmission providers were required to offer a multi-year conditional
firm transmission product because even the most advanced modeling
software cannot predict long-term conditions that may affect service.
Entergy and MidAmerican propose that the Commission allow transmission
providers to update the curtailment criteria for a reservation, to
reflect, among other things, changing load assumptions and forecasts
over time. MidAmerican argues that without annual reevaluation there
would be cost shifts to other firm customers. In its reply comments,
MidAmerican explains that this reevaluation can only occur when the
actual data becomes available for projecting potential curtailment
hours.
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    \608\ E.g., Nevada Companies Supplemental, TDU Systems
Supplemental, LPPC Supplemental, Ameren Supplemental, Community
Power Alliance Supplemental, MISO Supplemental, PNM-TNMP
Supplemental, NRECA Supplemental, and Xcel Supplemental.
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    967. If a transmission provider offers conditional firm service
based on specified system conditions, Bonneville states in supplemental
comments that limitations on modeling do not present a problem. If,
however, the service is based on a maximum number of conditional
curtailment hours per year, Bonneville believes that modeling presents
problems in offering longer-term service. Bonneville states that
forecasting the number of hours of conditional firm service requires
great analysis. To remedy this, Bonneville suggests allowing the
transmission provider to make conditional firm offers under which the
transmission provider could periodically adjust the number of
conditional curtailment hours.
    968. In supplemental comments, Constellation proposes that the
Commission require transmission providers to offer two types of
conditional firm service: service for less than the service term
eligible for rollover rights (e.g., five years) if customers do not
agree to pay for transmission upgrades; and service for five years or
longer with a rebuttable presumption that the customer is obligated to
pay for upgrades that are both economic and necessary to relieve the
constraint that prevents its service from being fully firm.\609\ EPSA
and AWEA maintain that it is critical that the conditions be defined,
and remain unchanged, for the term of the service agreement in order to
obtain financing of new projects. EPSA and AWEA also propose that, if
the contingency is removed during the life of the customer's
conditional firm service, the service should convert to traditional
firm service. Williams, EPSA and AWEA argue that up-front commitment to
continue the conditions for the entirety of a long-term service
agreement would take no greater risk than transmission providers take
today in committing to other long-term firm transmission service. EPSA
and AWEA state that limited term conditional firm service should pose
no problems based on system modeling.
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    \609\ EPSA and AWEA endorse Constellation's approach in defining
and delineating the two forms of conditional firm service.
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    969. Several commenters believe that there is no need for any type
of special rules for conditional firm customers taking bridge service
and required to pay extremely expensive upgrades.\610\ If the
Commission abandons the ``higher of'' pricing principle for upgrades,
these commenters suggest that any new pricing policies should be
consistent with cost-causation principles and not result in any
improper socialization.\611\ Other commenters argue for special rules
when upgrades are extremely expensive.\612\ Xcel states that customers
should have the option to take short-term conditional firm service that
would remain subject to limitation and curtailment if upgrades are too
expensive. Constellation proposes that customers taking the longer-term
service should have the opportunity to show that upgrades would not be
just and reasonable given the relevant circumstances, e.g., the cost of
upgrades for a single service request is $300 million. If the
Commission determines that the bridge requirement in a particular
circumstance is unjust and unreasonable, Constellation proposes that
the transmission provider would provide the service for the requested
term, but there would be no obligation for the transmission customer to
pay for such upgrades, and the service would not be eligible for
rollover. NRECA contends that instances in which special rules apply
should be extremely rare and are best addressed by the transmission
provider and customers on an ad hoc basis.
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    \610\ E.g., Nevada Companies Supplemental, Duke Supplemental,
Bonneville Supplemental, Powerex Supplemental, BP Energy
Supplemental, MISO Supplemental, PNM-TNMP Supplemental, Entergy
Supplemental, Community Power Alliance Supplemental, and Southern
Supplemental.
    \611\ Proposals regarding the ``higher of'' pricing policy are
discussed below.
    \612\ E.g., Xcel Supplemental, Constellation Supplemental, and
NRECA Supplemental.
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    970. Commenters recognize that upgrades required under a bridge
conditional firm option could create lumpiness problems,\613\ but most
commenters suggest that this problem is not unique to the conditional
firm option, nor can it be resolved through use of the option.\614\
These commenters support continuation of the Commission's existing
policies with regard to lumpiness issues, and some suggest the need to
address the issue as it pertains to all upgrades in a future
proceeding.\615\ In contrast, a few commenters suggest that the
Commission should address the lumpiness issue with regard to
conditional firm service. PPL, EPSA and AWEA state that the
transmission provider should be required to pay the costs of any
incremental lumpiness associated with upgrades and the service request.
BP Energy contends that any lumpy capacity needs to be resolved on a
bilateral contractual basis. Powerex suggests using an ``open season''
process to finance expensive and lumpy upgrades. California Commission
supports prorating large lumpy

upgrades over a large base of new customers, to the extent that it is
non-discriminatory and fiscally sound.
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    \613\ In the November 15 Notice, the Commission described an
example of lumpy capacity as upgrades to provide a requested 100 MW
of point-to-point service that results in 1,000 MW of additional
transmission capacity.
    \614\ E.g., EEI Supplemental, Xcel Supplemental, APPA
Supplemental, Bonneville Supplemental, LPPC Supplemental, NRECA
Supplemental, Progress Energy Supplemental, Duke Supplemental,
Ameren Supplemental, Entergy Supplemental, Community Power Alliance
Supplemental, MISO Supplemental, Williams Supplemental, and PNM-TNMP
Supplemental.
    \615\ E.g., LPPC Supplemental, Bonneville Supplemental, and EEI
Supplemental.
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    971. In supplemental comments, Nevada Companies urge that the time
period of a conditional firm bridge product should be left up to the
discretion of each transmission provider. They suggest that most, if
not all, transmission providers should be able to offer a conditional
firm service for a one-year period and most should be able to offer it
for longer periods. Nevada Companies state that they should be able to
provide conditional firm service in their control areas for longer
periods, possibly for up to five years in some circumstances and in
certain locations.
    972. BP Energy and Williams disagree that conditional firm service
should be a bridge product. They state that such a limitation would
provide additional opportunities for undue discrimination and limit
competitive alternatives used to serve customer load. According to
California Commission, conditional firm service needs to be available
for long-term requests unless there exists a valid, proven reason why
conditions make it physically or economically impossible to guarantee
such service. California Commission states that some limitations on
modeling should be accepted as justification for not providing
conditional firm or related services only if such provisions for load
growth are nondiscriminatory, justified and contractually sound.
    973. Commenters take both sides on whether planning redispatch
should be evaluated before the customer is obligated to incur the costs
and delays of a facilities study. EPSA argues that evaluation prior to
a facility study meets nondiscrimination requirements given the methods
used by transmission owners to evaluate planning redispatch for their
own needs. In its reply comments, Exelon supports the minor changes to
planning redispatch proposed by the Commission, including the earlier
study of planning redispatch options in the system impact study, and
states that these changes will expand choices for customers. EEI states
that requiring an offer of planning redispatch prior to completion of a
facilities study would be unduly preferential to point-to-point
customers because transmission providers consider the costs of network
upgrades and the impacts on system reliability before choosing planning
redispatch for their native load. Southern points to the internal
inconsistencies of the NOPR that on one hand seek to expedite the study
process and on the other hand would require a planning redispatch study
provision that would slow the study process.
    974. EEI states that the vast majority of facilities studies show
that the embedded cost of transmission service is higher than the
incremental amortized cost of upgrades. Thus, EEI argues that the
Commission's proposal to reform planning redispatch could lead to
uneconomic decisions by the customer as well as provide disincentives
to upgrade and expand transmission infrastructure.\616\ In their reply
comments, Utah Municipals respond that most of the time the embedded
cost of transmission is higher than the costs of upgrades, adding that
customers find requests for a transmission upgrades to be a time
consuming and costly impediment to transmission access. Further, Utah
Municipals add that limited and occasional redispatch or curtailment,
would be more economically efficient than the construction of
transmission facilities most of the time.
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    \616\ E.g., Xcel, PPM, and BP Energy.
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    975. Several commenters state that it would be extremely burdensome
to develop, at the system impact study stage, a reliable estimate of
the number of hours of redispatch and the cost of the planning
redispatch.\617\ These commenters state that this would require
substantial investment in probabilistic studies of equipment
availability and extensive training of personnel and expansion of data
collection, yet still would not provide reliable estimates of the
number of hours or costs of the service. MISO states that at a minimum,
this would require two years to implement.
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    \617\ E.g., EEI, Southern, TVA, SPP, E.ON, and MISO.
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    976. EEI asserts that conditional firm service should be determined
based on system impact studies and facilities studies so that the
customer can evaluate the costs of upgrades versus the lack of
reliability of the conditional firm service. EEI and others also
propose that conditional firm service only be available when upgrades
cannot be completed during the term of service or during the period
prior to completion of transmission upgrades.\618\ In its reply
comments, Bonneville disagrees that conditional firm service should be
an interim service available only when the customer has agreed to pay
for upgrades, stating that such a requirement would undercut the value
of conditional firm service. Bonneville adds that, for example, the