[Federal Register: November 27, 2006 (Volume 71, Number 227)]
[Rules and Regulations]
[Page 68440-68458]
[DOCID:fr27no06-6]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 42

[Docket No. RM06-8-001; Order No. 681-A]

Long-Term Firm Transmission Rights in Organized Electricity
Markets

November 16, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Order on Rehearing and Clarification.

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SUMMARY: The Federal Energy Regulatory Commission is issuing an order
on rehearing and clarification of Long-Term Firm Transmission Rights in
Organized Electricity Markets, Order No. 681, 71 FR 43564 (Aug. 1,
2006). The order on rehearing denies rehearing and upholds Order No.
681 in all respects, and grants certain limited clarifications.

DATES: Effective Date: Order No. 681 became effective on August 31,
2006.

FOR FURTHER INFORMATION CONTACT: Udi E. Helman (Technical Information),
Office of Energy Markets and Reliability, Federal Energy Regulatory
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8080.

Roland Wentworth (Technical Information), Office of Energy Markets and
Reliability, Federal Energy Regulatory Commission, 888 First Street,
NE., Washington, DC 20426,<PHONE_NUMBER>.
Harry Singh (Technical Information), Office of Enforcement, Division of
Energy Market Oversight, Federal Energy Regulatory Commission, 888
First Street, NE., Washington, DC 20426,<PHONE_NUMBER>.
Jeffery S. Dennis (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.
Heidi Werntz (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER>.

SUPPLEMENTARY INFORMATION:
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly,
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

    1. On July 20, 2006, the Commission issued a Final Rule in this
proceeding.\1\ In the Final Rule, the Commission amended its
regulations to require each transmission organization that is a public
utility with one or more organized electricity markets to make
available long-term firm transmission rights that satisfy each of the
guidelines established by the Commission in this Final Rule. We took
this action pursuant to section 1233 of the Energy Policy Act of 2005
(EPAct 2005), which added new section 217 to the Federal Power Act
(FPA).\2\ The Final Rule required each transmission organization
subject to its requirements to file with the Commission, no later than
January 29, 2007, either (1) tariff sheets and rate schedules that make
available long-term firm transmission rights that satisfy each of the
guidelines set forth in the final regulations, or (2) an explanation of
how its current tariff and rate schedules already provide for long-term
firm transmission rights that satisfy each of the guidelines. A
transmission organization approved by the Commission for operation
after January 29, 2007 will be required to satisfy the requirements of
the Final Rule.
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    \1\ Long-Term Firm Transmission Rights in Organized Electricity
Markets, Order No. 681, 71 FR 43564 (Aug. 1, 2006), FERC Stats. &
Regs. ] 31,226 (2006) (Final Rule).
    \2\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 957 (2005)
(to be codified at 16 U.S.C. Sec.  824q).
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    2. The guidelines adopted in the Final Rule give transmission
organizations the flexibility to propose designs for long-term firm
transmission rights that reflect regional preferences and accommodate
their regional market designs, while also ensuring that the objectives
of Congress expressed in new section 217(b)(4) of the FPA are met. The
Commission allowed regional flexibility in setting the terms of the
rights, but required that long-term firm transmission rights be made
available with terms (and/or rights to renewal) that are sufficient to
meet the reasonable needs of load serving entities to support long-term
power supply arrangements used to satisfy their service obligations.
    3. In this order, the Commission denies rehearing and upholds its
determinations in the Final Rule. We also offer certain clarifications.

I. Background

A. The Development of ISOs and RTOs

    4. In both our Notice of Proposed Rulemaking (NOPR) \3\ and the
Final Rule, we discussed the development of Independent System
Operators (ISOs) and Regional Transmission Organizations (RTOs). In
Order No. 888, the Commission found that undue discrimination and
anticompetitive practices existed in the provision of electric
transmission service in interstate commerce.\4\ Accordingly, the
Commission required all public utilities that own, control or operate
facilities used for transmitting electric energy in interstate commerce
to file open access transmission tariffs (OATTs) containing certain
non-price terms and conditions and to ``functionally unbundle''
wholesale power services from transmission services.\5\ In addition,
the Commission found in Order No. 888 that ISOs had the potential to
aid in remedying undue discrimination and accomplishing comparable
access.\6\
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    \3\ Long-Term Firm Transmission Rights in Organized Electricity
Markets, Notice of Proposed Rulemaking, 71 FR 6693 (Feb. 9, 2006),
FERC Stats. & Regs. ] 32,598 (2006) (NOPR).
    \4\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities,
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ]
31,036 at 31,682 (1996), order on reh'g, Order No. 888-A, 62 FR
12274 (March 14, 1997), FERC Stats & Regs. ] 31,048 (1997), order on
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g,
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1
(2002).
    \5\ Under functional unbundling, the public utility is required
to: (1) Take wholesale transmission services under the same tariff
of general applicability as it offers its customers; (2) state
separate rates for wholesale generation, transmission and ancillary
services; and (3) rely on the same electronic information network
that its transmission customers rely on to obtain information about
the utility's transmission system. Id. at 31,654.
    \6\ Order No. 888 at 31,655; Order No. 888-A at 30,184.
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    5. In light of the creation of ISOs and other changes in the
electric industry, the Commission issued Order No. 2000.\7\ In that
order, the Commission concluded that traditional management of the
transmission grid by vertically integrated electric utilities was
inadequate to support the efficient and reliable operation of
transmission facilities necessary for continued development of
competitive electricity

markets,\8\ and opportunities for undue discrimination continued to
exist.\9\ As a result, the Commission adopted rules to facilitate the
voluntary development of RTOs. The Commission concluded that RTOs would
provide several benefits, including regional transmission pricing,
improved congestion management, and more effective management of
parallel path flows.\10\
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    \7\ Regional Transmission Organizations, Order No. 2000, FERC
Stats. & Regs. ] 31,089 (1999), order on reh'g, Order No. 2000-A,
FERC Stats. & Regs. ] 31,092 (2000), aff'd sub nom. Public Utility
District No. 1 of Snohomish County, Washington v. FERC, 272 F.3d 607
(D.C. Cir. 2001).
    \8\ Order No. 2000 at 30,992-93 and 31,014-15.
    \9\ Id. at 31,015-17.
    \10\ Id. at 31,024.
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    6. Most of the RTOs and ISOs now operate organized markets for
energy and/or ancillary services in addition to providing transmission
service under a single transmission tariff. Under the definitions
adopted in the Final Rule, these RTOs and ISOs are transmission
organizations with organized electricity markets subject to the
regulations adopted in this proceeding.
    7. Most of the organized electricity markets operated by
transmission organizations utilize a congestion management system based
on Locational Marginal Pricing (LMP). Congestion is defined as the
inability to inject and withdraw additional energy at particular
locations in the network due to the fact that the injections and
withdrawals would cause power flows over a specific transmission
facility to violate the reliability limits for that facility. The
market operator manages congestion by scheduling and dispatching
generators that can meet load in the presence of congestion.
Financially, in LMP markets the price of congestion is measured as the
difference in the cost of energy at two different locations in the
network. When such price differences occur, a congestion charge is
assessed to transmission users based on their injections and
withdrawals at particular locations. These price differences can be
variable and difficult to predict. In order to manage the risk
associated with the variability in prices due to transmission
congestion, these markets use various forms of financial transmission
rights (FTRs),\11\ which enable market participants who hold the rights
to protect against such price risks. In most cases, these FTRs have
terms of one year or less.\12\ In general, load serving entities
receive FTRs through either direct allocation or through a two-step
process in which the load serving entity is first allocated auction
revenue rights (ARRs) and then either uses those rights to purchase
FTRs, or has the ability under the transmission organization tariff to
convert them to FTRs.\13\
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    \11\ While ``FTR'' is sometimes used to refer to ``firm
transmission rights,'' in this Final Rule we use this acronym to
refer to the various forms of financial transmission rights that
exist in organized electricity markets. In some markets, these are
referred to as congestion revenue rights or transmission congestion
contracts.
    \12\ In May 2005, the Commission released a Staff Paper that
provided background and solicited comments on whether long-term
transmission rights were needed in the ISO and RTO markets, and if
so, how to implement them. Notice Inviting Comments On Establishing
Long-Term Transmission Rights in Markets With Locational Pricing and
Staff Paper, Long-Term Transmission Rights Assessment, Docket No.
AD05-7-000 (May 11, 2005) (Staff Paper). There, the current FTR
situation was discussed. See id. at 1 (stating that, as of the date
of issuance ``the longest term FTR offered in any of the RTO or ISO
markets is one year'').
    \13\ For a more detailed discussion, see NOPR at P 27. As we
noted in the NOPR, ARRs confer the right to collect revenues from
the subsequent FTR auction.
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B. Interest in Long-Term Firm Transmission Rights

    8. We noted in the Final Rule that in recent years, interest in
long-term firm transmission rights in organized electricity markets has
increased, stemming in large part from a desire of some market
participants to obtain rights that replicate the transmission service
that was available to them prior to the formation of the organized
electricity markets and remains available today in regions without
organized electricity markets. The principal concern of these market
participants is the inability to obtain a fixed, long-term level of
service under pricing arrangements that hedge the congestion cost risk
that they face in the organized electricity markets.\14\
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    \14\ See Staff Paper at 1-2.
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    9. There are several important differences between transmission
service under the Order No. 888 pro forma OATT and transmission rights
in organized electricity markets that use LMP and FTRs.\15\ However,
the differences that are most relevant for purposes of the Final Rule
concern the management of congestion, the recovery of congestion costs,
and the availability of long-term service arrangements. These
differences are discussed in the Final Rule.\16\
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    \15\ A detailed discussion of transmission rights in traditional
and organized markets was presented in the NOPR at P 15-33.
    \16\ Final Rule at P 7-10.
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C. Energy Policy Act of 2005

    10. On August 8, 2005, EPAct 2005 \17\ became law. As noted above,
section 1233 of EPAct 2005 added a new section 217 to the FPA, which
provides:
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    \17\ Pub. L. No. 109-58, 119 Stat. 594.

    The Commission shall exercise the authority of the Commission
under this Act in a manner that facilitates the planning and
expansion of transmission facilities to meet the reasonable needs of
load-serving entities to satisfy the service obligations of the
load-serving entities, and enables load-serving entities to secure
firm transmission rights (or equivalent tradable or financial
rights) on a long-term basis for long-term power supply arrangements
made, or planned, to meet such needs.\18\
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    \18\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.

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    Section 1233(b) of EPAct 2005 requires:

    Within 1 year after the date of enactment of this section and
after notice and an opportunity for comment, the Commission shall by
rule or order, implement section 217(b)(4) of the Federal Power Act
in Transmission Organizations, as defined by that Act with organized
electricity markets.\19\
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    \19\ Id. at 960. Transmission organization is defined in EPAct
2005 as ``a Regional Transmission Organization, Independent System
Operator, independent transmission provider, or other transmission
organization finally approved by the Commission for the operation of
transmission facilities.'' Pub. L. No. 109-58, Sec.  1291, 119 Stat.
594, 985. In the Final Rule, we adopted this definition with slight
modifications for the purposes of the Final Rule.
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D. Notice of Proposed Rulemaking

    11. On February 2, 2006, the Commission issued a NOPR that proposed
to amend its regulations to require each transmission organization that
is a public utility with one or more organized electricity markets to
make available long-term firm transmission rights that satisfy
guidelines established by the Commission.\20\ The NOPR proposed eight
guidelines, and sought comments on various issues raised by the
introduction of long-term firm transmission rights in the organized
electricity markets.
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    \20\ See supra note 3.
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E. Final Rule: Order No. 681

    12. As noted above, in the Final Rule the Commission adopted
regulations requiring public utilities that are transmission
organizations with organized electricity markets (as defined in the
Final Rule) to make available long-term firm transmission rights that
satisfy each of the seven guidelines established by the Commission,
which are set forth in the regulations. By adopting guidelines for the
development of long-term firm transmission rights, the Commission gave
transmission organizations the flexibility to propose designs for long-
term firm transmission rights that reflect regional preferences and
accommodate regional market designs, while ensuring that the objectives
of Congress expressed in new section 217(b)(4) of the FPA are met.\21\
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    \21\ The Commission discussed the possibility that the flexible
regional approach adopted in the Final Rule could create seams
issues, and directed each transmission organization to explain in
its compliance filing how its proposal addresses potential seams
issues. Final Rule at P 107.

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    13. In adopting the Final Rule, the Commission explained that it
sought to provide increased certainty regarding the congestion cost
risks of long-term firm transmission service in organized electricity
markets that will help load serving entities and other market
participants make new investments and other long-term power supply
arrangements. The Commission also stated that the guidelines adopted in
the Final Rule are designed and intended primarily to ensure that the
long-term firm transmission rights that are made available by
transmission organizations that are subject to the rule have
characteristics that will support long-term power supply
arrangements.\22\
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    \22\ Final Rule at P 16.
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    14. Additionally, the Final Rule made clear that, while it
unequivocally requires transmission organizations to offer long-term
firm transmission rights with characteristics that will support long-
term power supply arrangements, in most cases, offering such rights
should not require major changes in allocations or allocation
procedures.\23\ We noted that our intent with regard to the existing
transmission system is that load serving entities be able to request
and obtain transmission rights up to a reasonable amount on a long-term
firm basis, instead of being limited to obtaining exclusively annual
rights.\24\ Moreover, we emphasized that offering such rights should
not force transmission organizations to provide rights to the existing
system that are infeasible, and that the Final Rule does not
necessarily guarantee that a load serving entity will be able to obtain
long-term firm transmission rights to hedge its entire resource
portfolio or be able to obtain all the long-term firm transmission
rights it requests.
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    \23\ As we discuss in more detail below, while we do not believe
major changes to existing allocation procedures will be necessary,
Congress did not intend to protect existing or future allocation
methodologies from the implementation of section 217(b)(4) of the
FPA. See new section 217(c) of the FPA, Pub. L. No. 109-58, Sec.
1233, 119 Stat. 594, 958-959.
    \24\ Capacity available would be limited to that which is
generally available and excludes capacity that is the exclusive
right of a participant, e.g., a participant that paid for such
capacity and obtained FTRs for that payment.
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    15. The specific guidelines adopted by the Commission in the Final
Rule, which the long-term firm transmission rights offered by
transmission organizations must satisfy, are:

    (1) The long-term firm transmission right should specify a
source (injection node or nodes) and sink (withdrawal node or
nodes), and a quantity (MW).
    (2) The long-term firm transmission right must provide a hedge
against day-ahead locational marginal pricing congestion charges or
other direct assignment of congestion costs for the period covered
and quantity specified. Once allocated, the financial coverage
provided by a financial long-term right should not be modified
during its term (the ``full funding'' requirement) except in the
case of extraordinary circumstances or through voluntary agreement
of both the holder of the right and the transmission organization.
    (3) Long-term firm transmission rights made feasible by
transmission upgrades or expansions must be available upon request
to any party that pays for such upgrades or expansions in accordance
with the transmission organization's prevailing cost allocation
methods for upgrades or expansions.
    (4) Long-term firm transmission rights must be made available
with term lengths (and/or rights to renewal) that are sufficient to
meet the needs of load serving entities to hedge long-term power
supply arrangements made or planned to satisfy a service obligation.
The length of term of renewals may be different from the original
term. Transmission organizations may propose rules specifying the
length of terms and use of renewal rights to provide long-term
coverage, but must be able to offer firm coverage for at least a 10
year period.
    (5) Load serving entities must have priority over non-load
serving entities in the allocation of long-term firm transmission
rights that are supported by existing capacity. The transmission
organization may propose reasonable limits on the amount of existing
capacity used to support long-term firm transmission rights.
    (6) A long-term transmission right held by a load serving entity
to support a service obligation should be re-assignable to another
entity that acquires that service obligation.
    (7) The initial allocation of the long-term firm transmission
rights shall not require recipients to participate in an auction.

    In the preamble to the Final Rule, the Commission discussed each
guideline in detail.
    16. The Final Rule also required transmission organizations with
organized electricity markets to explain how their transmission system
planning and expansion policies will ensure that long-term firm
transmission rights, once allocated, remain feasible over their entire
term. Additionally, it required each transmission organization subject
to the rule to make its planning and expansion practices and procedures
publicly available, including both the actual plans and any underlying
information used to develop the plans.

II. Discussion

A. Procedural Matters

    17. Timely requests for rehearing and/or clarification were filed
by the following entities: American Public Power Association (APPA), BP
Energy Company (BP), Public Utilities Commission of the State of
California (CPUC), California Department of Water Resources--State
Water Project (DWR), Midwest ISO Transmission Owners (Midwest TOs),
Modesto Irrigation District (Modesto), New York Independent System
Operator, Inc. (NYISO), City of Santa Clara (Santa Clara), Sacramento
Municipal Utility District (SMUD), and Transmission Access Policy Study
Group (TAPS).
    18. On September 13, 2006, Electric Power Supply Association (EPSA)
filed supplemental comments, and PJM Interconnection, L.L.C. (PJM)
filed a motion for leave to answer, as well an answer. SMUD and Modesto
both moved to strike PJM's answer, while APPA and TAPS submitted a
joint reply to PJM's answer.
    19. Rule 213(a)(2) of the Commission's Rules of Practice and
Procedure \25\ prohibits an answer to a request for rehearing unless
otherwise ordered by the decisional authority. We are not persuaded to
accept PJM's answer, EPSA's supplemental comments (which are in the
form of an answer), or the responses to those answers, and will,
therefore, reject them.
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    \25\ 18 CFR 385.213(a)(2) (2006).
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B. Requests for Rehearing and Clarification and Commission Conclusions

1. Definition of Load Serving Entity and Service Obligation
    20. In the Final Rule, as proposed in the NOPR, the Commission
adopted the definitions of load serving entity and service obligation
exactly as Congress defined those terms in new section 217 of the FPA.
Specifically, the Final Rule defines load serving entity as ``a
distribution utility or electric utility that has a service
obligation.'' \26\ The term ``service obligation'' is defined as ``a
requirement applicable to, or the exercise of authority granted to, an
electric utility under Federal, State, or local law or under long-term
contracts to provide electric service to end-users or to a distribution
utility.'' \27\ The Commission reasoned that using the definitions
provided by Congress would most closely effectuate the intent of
Congress in enacting section 217(b)(4) of the FPA. The Commission did,
however, offer several clarifications. For example, the Commission
clarified that non-public utilities are within the definition of load
serving entity, provided they

have a service obligation.\28\ The Commission also clarified that
industrial customers who self-supply their own load are construed to be
load serving entities under the Final Rule, even though some of these
entities may not technically ``sell * * * electric energy.'' The
Commission stated that this would ensure that Congress' objectives
under the FPA are fulfilled.
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    \26\ Final Rule at P 44; 18 CFR 42.1(b)(2); section 217(a)(2) of
EPAct.
    \27\ Final Rule at P 44; 18 CFR 42.1(b)(3); section 217(a)(3) of
EPAct.
    \28\ Final Rule at P 45.
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Rehearing Requests

    21. DWR states that the Commission erred in assuming that a water
pumping entity under section 217(g) of the FPA necessarily has an
electric service obligation as defined in section 217(a)(3) of the FPA
and under 18 CFR 42.1. DWR asserts that the Final Rule misapprehends
the nature of water pumping entities, who, unlike load serving
entities, have no ``service obligation'' as defined in section
217(a)(3) of the FPA and the Final Rule. DWR asserts that new
regulatory language in 18 CFR 42.1 is necessary to ensure compliance
with section 217(g) of the FPA. Specifically, DWR argues that section
217(g) of the FPA expressly distinguishes water pumping entities from
load serving entities, stating:

    Water Pumping Facilities--The Commission shall ensure that any
entity described in section 201(f) that owns transmission facilities
used predominately to support its own water pumping facilities shall
have, with respect to the facilities, protections for transmission
service comparable to those provided to load-serving entities
pursuant to this section.

    Id. (emphasis added). DWR argues that, while the Final Rule clearly
intends to implement section 217(g), it does so in an erroneous
fashion, by conflating water pumping facilities--which have no electric
service obligation--with load serving entities. DWR asserts that the
Final Rule erroneously states that water pumping facilities, which are
non-public utilities, already appear to be captured by the definition
of load serving entity, ``provided of course, that they have a service
obligation.'' \29\ DWR points out that ``service obligation'' in the
Final Rule is defined as ``a requirement applicable to, or the exercise
of authority granted to, an electric utility under Federal, State or
local law or under long-term contracts to provide electric service to
end-users or to a distribution utility.\30\ DWR argues that this
regulatory language makes no mention of the water pumping facilities as
described by Congress in section 217(g) of the FPA.
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    \29\ Request for Rehearing/Clarification of DWR at 5 (quoting
Final Rule at P 48).
    \30\ Id. at 6 (citing 18 CFR 42.1(b)(3); section 217(a)(3) of
EPAct).
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    22. DWR explains that it has put into place long-term transmission
entitlements used ``to support its own water pumping facilities'' as
provided in section 217(g). DWR states that, while it self-provides
power to its own water pumping facilities, it does not provide electric
service to end-users or to a distribution utility, as it must to
qualify as a load serving entity under 18 CFR 42.1(b)(3). Rather, DWR
is a water agency whose pumping facilities provide flood management,
water deliveries, and other water related services to California.
Therefore, DWR asks the Commission to revise section 42.1 of the
regulations to ensure compliance with section 217(g) of the FPA.
    23. BP also requests clarification of the scope of the Final Rule's
definition of a load serving entity. BP states that it is concerned
that the Final Rule does not consistently apply its definition of a
load serving entity eligible for long-term firm transmission rights
allocation priority. BP argues that the Final Rule discriminates
against certain entities with binding contractual obligations to
provide power to load serving entities, by denying them load serving
entity status, while granting load serving entity status to other
similarly situated entities. BP points out that Manitoba Hydro had
argued that the priority allocation of long-term firm transmission
rights should extend to entities that, through agreement with a load
serving entity, have ``provided the transmission required by the load-
serving entity to satisfy its service obligation and agreed to assume
congestion risk.'' \31\ BP states that Manitoba Hydro cited the
Commission's assertion that it sought to help ``other market
participants'' as well as load serving entities make new investments
and other long-term power supply arrangements. BP reiterates Manitoba
Hydro's example of a load serving entity unable to obtain transmission
that utilizes another party's transmission rights in exchange for
assumption of the congestion risk.\32\ BP states that Manitoba Hydro
requested the Commission to ensure that if a market participant other
than a load serving entity has a contractual obligation to a load
serving entity to provide transmission rights and to assume associated
congestion risk, it too should have priority access to long term firm
transmission rights in the same manner as a load serving entity.\33\ In
the same vein, BP similarly requests the Commission to clarify that,
like those entities that self supply, entities that enter into long-
term obligations to sell electric energy to load serving entities that
have the option to self supply, be similarly construed as load serving
entities for purposes of the Final Rule.\34\
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    \31\ Request for Rehearing of BP at 7 (citing Manitoba Hydro
Comments at 1).
    \32\ Id. (citing Manitoba Hydro Comments at 3).
    \33\ Id. at 8 (citing Manitoba Hydro Comments at 3-4).
    \34\ Id.
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Commission Conclusion
    24. With respect to the issue raised by DWR concerning whether
water pumping entities fall under the definition of load serving
entities, we grant clarification. While water pumping entities do not
come under the definition of load serving entities, we clarify that, to
effectuate Congressional intent, water pumping entities as described in
section 217(g) of the FPA should be treated as load serving entities.
As DWR points out, section 217(g) of the FPA provides that the
``Commission shall ensure that any entity described in section 201(f)
[of the FPA] that owns transmission facilities used predominately to
support its own water pumping facilities shall have, with respect to
the facilities, protections for transmission service comparable to
those provided to load-serving entities pursuant to this section.''
\35\ From this provision, it is evident that Congress intended water
pumping entities, such as DWR, to be on par with load serving entities
with respect to protections for transmission services. Consequently, we
clarify that water pumping entities and their obligation to provide
water related services, as described in section 217(g), should be
construed as meeting the definition of ``service obligation'' in 18 CFR
42.1(b)(3), and should be treated as load serving entities with service
obligations for purposes of the Final Rule. This should effectuate
Congressional intent that water pumping entities receive protections
for transmission service comparable to those provided to load-serving
entities.
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    \35\ EPAct 2005, Pub. L. No. 109-58, Sec.  1233, 119 Stat. at
959.
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    25. Next, we deny BP's request to construe entities that enter into
long-term obligations to sell electric energy to load serving entities
that have the option to self supply as load serving entities. As we
stated in the Final Rule (in the discussion of guideline (5)), we
cannot allow certain entities that do not meet the strict definition of
load serving entity to come under the definition of load serving entity
and, consequently, receive priority in allocation of long-

term firm transmission rights.\36\ Extending the definition as BP
requests would likely defeat the purpose of the preference, which is to
ensure that load serving entities have sufficient protection for
transmission service. If, as BP requests, we were to construe a
supplier of a load serving entity, such as a generator, to be a load
serving entity, this could lead to a situation where multiple load
serving entities are counting the same load as part of their load
serving obligation.
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    \36\ See Final Rule at P 326.
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    26. Furthermore, we disagree with BP's contention that the Final
Rule does not consistently apply the definition of load serving entity.
In the Final Rule, we construed large industrial customers who self-
supply their own load to be load serving entities for purposes of the
Final Rule, in order to ensure fulfillment of Congress's objectives in
section 217 of the FPA.\37\ While a large industrial customer is not
technically a ``distribution utility'' or an ``electric utility,'' like
a traditional load serving entity it provides electricity to serve its
``load,'' i.e., its industrial facilities, on an ongoing basis from
either its own generation or through a direct purchase from another
generator. Contrary to BP's assertion, large industrial customers who
self-supply their own load are not similarly situated to entities, such
as generators, with contractual obligations to serve load serving
entities. Entities that enter into long-term obligations to supply load
serving entities are at least one step removed from load serving
entities, insofar as they have a contractual obligation to serve an
entity (the load serving entity) that subsequently has the service
obligation. Consequently, we deny BP's request to construe as load
serving entities those entities that enter into long-term obligations
to supply load serving entities.
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    \37\ See id.
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    27. While we reject BP's requested clarification, we nevertheless
emphasize that, even though suppliers of load serving entities are not
treated as load serving entities under the statute, this does not mean
that they will be deprived of long-term firm transmission rights. On
the contrary, consistent with section 217 of the FPA, once load serving
entities have received their allocated long-term firm transmission
rights, those rights and any additional long-term firm transmission
rights available from existing system capacity can be offered to such
non-load serving entities (as well as other load serving entities)
through a secondary auction, bilateral trades or another method of
allocation.\38\ The load serving entity could sell or otherwise
transfer its long-term firm transmission rights to its supplier. As
noted in the Final Rule, a generator or any other entity that has a
contract with a load serving entity can structure its contract with the
load serving entity as necessary to attain the desired congestion cost
risk sharing.\39\
---------------------------------------------------------------------------

    \38\ See id.
    \39\ Id.
---------------------------------------------------------------------------

2. Commission Interpretation of EPAct 2005
    28. In several places in the Final Rule, the Commission offered
interpretations of new section 217(b)(4) of the FPA and section 1233(b)
of EPAct 2005. In particular, the Commission interpreted these
provisions as containing two separate directives: (1) To exercise its
authority to facilitate planning and expansion of transmission
facilities; and (2) to enable load serving entities with long-term
power supply arrangements used to meet their load serving obligations
to obtain long-term firm transmission rights. We also interpreted these
statutes to require, when existing capacity is limited, giving a
preference to load serving entities vis-a-vis non-load serving entities
to obtain long-term firm transmission rights from existing capacity.
Further, we disagreed with interpretations of section 217(c) of the FPA
suggesting that it immunizes existing market designs and transmission
rights allocations from the effect of section 217(b)(4) of the FPA.
Also, we disagreed with contentions that transmission organizations
already provide long-term firm transmission rights consistent with
section 217(b)(4), or that this section contained no requirement to
offer transmission rights with longer terms than those that already
exist.
Rehearing Requests
    29. NYISO argues that the Commission misinterpreted section
217(b)(4) of the FPA and section 1233(b) of EPAct 2005. First, it
contends that the Commission read section 217(b)(4) too broadly to
establish that the existing financial transmission rights offered by
ISO/RTOs do not provide load serving entities with sufficient price
certainty and stability over a long enough term. NYISO asserts that
nothing in section 217(b)(4) or section 1233(b) states that the rules
for existing financial transmission rights are not sufficient or
explicitly requires changes to those rules, and notes section 217(b)(4)
in fact explicitly recognizes that ``tradable'' or ``financial'' rights
can be equivalent to firm transmission rights. NYISO argues that the
statute's express references to financial transmission rights
(particularly in section 217(c)), and the fact that Congress was
presumably aware of Commission orders finding such rights equivalent to
firm transmission rights under Order No. 888, imply that Congress
viewed these existing financial rights as acceptable in their current
form. NYISO also suggests that since section 217(b)(4) does not define
``long-term,'' it is reasonable to assume that Congress was aware of
the Commission's pre-existing definition of one-year or longer. NYISO
also claims that no legislative history exists to support the
Commission's interpretations. Further, NYISO describes as
``unreasonable'' the Commission's ``sweeping'' inference that section
1233(b)'s direction to implement section 217(b)(4) within one year
amounts to a statement by Congress that existing transmission
organizations do not meet the requirements.
    30. NYISO contends that ``[a] more natural reading'' of section
217(b)(4) is that it only requires the Commission to ensure that the
financial transmission rights offered by transmission organizations
provide load serving entities with a reasonable opportunity to meet
their long-term service obligations, and that the Commission ensure
that transmission organization planning procedures adequately enable
load serving entities to meet their reasonable needs. In short, NYISO
argues, section 217(b)(4) leaves open the possibility that transmission
organizations already satisfy its requirements. It contends that this
reading is more in line with the entirety of section 217 than the
Commission's reading.
    31. Further, NYISO asserts that the Commission's interpretation of
section 217(b)(4) of the FPA as requiring changes in existing
transmission organization market design is erroneous because it
nullifies section 217(c) of that statute. Section 217(c) provides, in
pertinent part:

    Allocation of Transmission Rights-Nothing in subsections (b)(1),
(b)(2), and (b)(3) of this section shall affect any existing or
future methodology employed by a Transmission Organization for
allocating or auctioning transmission rights if such Transmission
Organization was authorized by the Commission to allocate or auction
financial transmission rights on its system as of January 1, 2005,
and the Commission determines that any future allocation is just,
reasonable, and not unduly discriminatory or preferential. * * *

    32. NYISO contends that the Commission's interpretation of section
217(b)(4) effectively reads section 217(c) out of the FPA because it
nullifies the

protections that the latter provision provides for previously-approved
transmission organization rules concerning the auction and allocation
of transmission rights. As a result of this conflict, NYISO posits, the
Commission must abandon its premise that section 217(b)(4) requires
modifications to existing transmission organization auction and
allocation rules.\40\
---------------------------------------------------------------------------

    \40\ NYISO notes that abandoning this interpretation would not
nullify section 217(b)(4), as some have claimed, because that
section would still require the Commission to assess whether
transmission organizations were fulfilling their planning
obligations and adequately supporting long-term power supply
arrangements.
---------------------------------------------------------------------------

    33. Given what NYISO views as the Commission's incorrect
interpretation of section 217(b)(4), NYISO argues that the Commission
should revise the Final Rule to eliminate certain features, including:
(1) The requirement that existing transmission capacity be set aside to
create new long-term firm transmission rights different from existing
transmission rights; (2) the preference to existing capacity for load-
serving entities with service obligations; (3) the prohibition on
allocation of long-term firm transmission rights by auction; (4) the
requirement that long-term firm transmission rights ``follow load'' and
that tradable rights be ``recallable;'' and (5) any future requirement
under the Final Rule that conflicts with section 217(c). Finally, NYISO
argues that because the Commission lacked a statutory mandate to modify
existing transmission organization rules for financial transmission
rights, it could only require such modifications on the basis of
substantial evidence under section 206 of the FPA. The Commission
neither built a record to support its requirements nor invoked section
206, NYISO concludes.
Commission Conclusion
    34. We deny NYISO's rehearing request regarding our interpretation
of section 217(b)(4) of the FPA and section 1233(b) of EPAct 2005.
NYISO argues first that nothing in section 217(b)(4) or section 1233
states that existing transmission organizations' financial transmission
rights are deficient. While NYISO is correct that these sections do not
explicitly declare that existing transmission rights are insufficient,
Congress did direct explicitly that the Commission implement section
217(b)(4) within one year in transmission organizations with organized
electricity markets. As we reasoned in the Final Rule, this explicit
direction to a specific segment of the industry strongly suggests that
Congress believed the existing transmission rights offered by
transmission organizations with organized electricity markets may not
be of a sufficient length to be ``long-term'' and support long-term
power supply arrangements. Under this direction, we concluded that the
current one-year financial rights offered by transmission
organizations, which are subject to financial proration during their
term, did not meet the requirement of section 217(b)(4) that the
Commission enable load-serving entities to secure long-term firm
transmission rights to support long-term power supply arrangements. As
a result, we acted in the Final Rule as directed by Congress in section
1233(b) of EPAct 2005, and issued regulations requiring transmission
organizations with organized electricity markets to make available
long-term firm transmission rights.
    35. The references to ``equivalent tradable or financial rights''
in section 217(b)(4) and the references to financial transmission
rights in other parts of section 217 do not lead to the conclusion that
the existing financial transmission rights offered by transmission
organizations are sufficient. These references only suggest that
financial transmission rights can satisfy the requirements of the
statute if, in this instance, they are sufficiently long-term and
sufficiently firm to support long-term power supply arrangements. This
is particularly true under section 217(b)(4), where Congress referred
to financial rights in comparison to ``firm transmission rights.''
Moreover, we again reiterate that if Congress believed the existing
financial rights offered by transmission organizations were sufficient,
it is unclear why Congress would have made such an explicit direction
to the Commission to act within one year in transmission organizations
with organized electricity markets. Likewise, with regard to NYISO's
argument that Congress was surely aware of the Commission's existing
definition of ``long-term,'' we are unclear why Congress would have
acted in the manner it did and with specific direction to the
Commission if it believed all the current transmission organizations
offered sufficient transmission rights to meet the requirements of
section 217(b)(4).
    36. NYISO posits that a better reading of the statute at issue here
is that it ``requires the Commission to ensure that the rules governing
financial rights in [transmission organization] markets provide [load
serving entities] with a reasonable opportunity to meet their `long-
term' service obligation,'' and that it leaves open the possibility
that transmission organizations already comply.\41\ We disagree with
NYISO's reading that section 217(b)(4) only requires that we ensure
that the current financial transmission rights give load serving
entities a reasonable opportunity to meet their long-term service
obligations; the statute says directly that the Commission must
exercise its authority in a manner that ``enables load-serving entities
to secure firm transmission rights (or equivalent tradable or financial
rights) on a long-term basis for long-term power supply arrangements
made, or planned'' to meet service obligations.\42\ This language in
the statute does not comport with NYISO's reading. We agree with NYISO,
however, that section 217(b)(4) leaves open the possibility that the
transmission rights offered by an existing transmission organization
already comply. The regulations adopted in the Final Rule recognize
this, in fact, and provide that a transmission organization may submit
a compliance filing explaining ``how its current tariff and rate
schedules already provide for long-term firm transmission rights that
satisfy each of the guidelines'' set forth.\43\ As we have noted
elsewhere, the guidelines we adopted in the Final Rule are intended to
ensure that long-term firm transmission rights will support long-term
power supply arrangements used to satisfy native load service
obligations, as Congress directed. The guidelines and the discussion of
them in the Final Rule focus on the current short-term transmission
rights predominately offered by transmission organizations, but do not
rule out the possibility that an existing transmission organization
might currently offer rights that already satisfy the guidelines.
---------------------------------------------------------------------------

    \41\ Request for Rehearing of NYISO at 7-8.
    \42\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.
    \43\ 18 CFR 42.1(c)(1)(ii) (2006).
---------------------------------------------------------------------------

    37. NYISO also asserts that our reading of section 217(b)(4)
nullifies section 217(c). We disagree. First, we must reiterate that
section 217(c) expressly, and quite starkly, omits reference to section
217(b)(4), while referencing all other provisions of section 217(b).
This express omission strongly suggests that Congress did not intend
for the protections of section 217(c) to trump implementation of
section 217(b)(4). Further, the Final Rule does not require that
transmission organizations ignore the protections of section 217(c) or
any other part of section 217 when implementing section 217(b)(4), and
repeatedly states the Commission's belief that section 217(b)(4) can be
implemented within

existing allocation and auction mechanisms. The Final Rule
appropriately recognizes, however, Congress's decision, in enacting
section 217, to omit reference to section 217(b)(4) when providing the
protections of section 217(c). As a result, we explained in the Final
Rule that if implementing long-term firm transmission rights cannot be
accomplished without changes to existing allocation or auction
methodologies, section 217(c) does not bar such changes.
    38. For all of these reasons, we believe our interpretation of
section 217(b)(4) of the FPA is reasonable and comports with Congress's
intent. Accordingly, we will not modify or eliminate the features
identified by NYISO as conflicting with its interpretation of the
statute. Moreover, we reject NYISO's claim that we have not acted in
accordance with the FPA in requiring transmission organizations to
comply with the Final Rule. Contrary to NYISO's claim, the Commission
is not overturning its existing precedents accepting transmission
organization allocation and auction rules. Instead, we are requiring,
consistent with the dictates of section 217(b)(4) of the FPA and
section 1233(b) of EPAct 2005, that transmission organizations offer
long-term firm transmission rights. The Final Rule explains why certain
existing transmission organization rules for allocating transmission
rights may not be compatible with long-term rights, but does not find
those rules (or the short-term rights that are currently available)
unjust and unreasonable. It simply explains what it will take to comply
with section 217(b)(4), now included in the FPA (which it was not when
the current rules were approved), and establishes guidelines to ensure
that long-term firm transmission rights have properties that will allow
them to support long-term power supply arrangements used to satisfy
service obligations, as section 217(b)(4) requires. Finally, we
reiterate, as noted above, that under the regulations adopted in the
Final Rule, a transmission organization may seek to support its current
allocation and auction rules as satisfying each of the guidelines in
the Final Rule. The regulations specifically allow a transmission
organization to explain ``how its current tariff and rate schedules
already provide for long-term firm transmission rights that satisfy
each of the guidelines'' set forth.\44\
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

3. Seams Issues
    39. In the Final Rule, the Commission addressed comments on the
NOPR that noted the potential for the flexible approach proposed by the
Commission to create seams issues both between transmission
organizations, as well as between transmission organization regions and
non-transmission organization regions. The Commission agreed with
commenters that transmission organizations should consider these issues
when complying with the Final Rule, and directed each transmission
organization to explain in its compliance filing how its proposal
addresses potential seams issues, particularly with regard to the term
of the long-term rights offered and the procedures and timelines for
obtaining such rights.\45\ Concerning potential seams between
transmission organizations, the Commission directed each transmission
organization to explain why it has or has not elected to revise any
seams agreement it has with another transmission organization.\46\
---------------------------------------------------------------------------

    \45\ Final Rule at P 107.
    \46\ Id.
---------------------------------------------------------------------------

Request for Rehearing
    40. APPA notes that the Commission, in requiring transmission
organizations to address potential seams issues in their compliance
filings, primarily discusses seams between transmission organizations,
within the context of existing seams agreements between transmission
organizations. It states that the Commission, in an apparent unintended
oversight, makes no mention of seams issues arising between
transmission organizations and non-transmission organizations. It asks
the Commission to explicitly require transmission organizations, in
their compliance filings, to address seams issues between transmission
organizations and non-transmission organizations on their borders, in
addition to addressing seams between neighboring transmission
organizations.
Commission Conclusion
    41. In response to APPA's seams concerns, we clarify that each
transmission organization should explain in its compliance filing how
its proposal addresses potential seams issues between itself and
neighboring non-transmission organization transmission providers, as
well as between itself and neighboring transmission organizations.
While our discussion in the Final Rule focused in particular on
existing seams agreements between transmission organizations, it was
our intent, consistent with the comments received, that transmission
organizations would consider both types of potential seams. As we
stated in the Final Rule, in both cases, transmission organizations
should, in particular, explain how their proposals address seams issues
with regard to the term of the long-term rights offered and the
procedures and timelines for obtaining such rights.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

4. Full Funding of Long-Term Firm Transmission Rights
    42. As adopted in the Final Rule, guideline (2) provides in part
that ``once allocated, the financial coverage provided by a financial
long-term transmission right should not be modified during its term
(the full funding requirement) except in the case of extraordinary
circumstances or through voluntary agreement of both the holder of the
right and the transmission organization.'' \48\ We determined that the
full funding requirement was necessary to satisfy Congress' directive
in section 217(b)(4) that load serving entities with service
obligations be able to obtain ``firm'' transmission rights or their
equivalent on a long-term basis.\49\ We explained that full funding
provided one aspect of such firmness, increased certainty in the
revenue stream from the rights over time. The Final Rule did not
require a particular method to provide for full funding, thus allowing
transmission organizations and their stakeholders discretion to
determine methods appropriate to regional circumstances.\50\ However,
we did note that certain approaches could lead to unreasonable
outcomes, and we discussed those approaches.\51\
---------------------------------------------------------------------------

    \48\ Id. at P 169.
    \49\ Id. at P 170.
    \50\ Id. at P 175.
    \51\ See id. at P 171, 176-77.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification
    43. Midwest TOs argue that the Commission erred first by
interpreting section 217(b)(4) to require that long-term firm
transmission rights be fully funded, and second by then suggesting that
allocation of uplift to support full funding could be done in ways
that, in their view, violate cost causation principles. On the first
issue, Midwest TOs make several arguments. First, Midwest TOs assert
that the Commission has not justified its interpretation of section
217(b)(4) as requiring full funding. Midwest TOs argue that the
statutory language does not provide ``absolute guarantees'' for long-
term firm transmission rights, but

provides instead for ``reasonable needs,'' which suggests no guarantee
of full funding.\52\ Second, the Commission concluded in the Final Rule
that full funding would assist in financing of generation
investments,\53\ but Midwest TOs argue that there are other means of
assisting in financing, such as consumers hedging risks. Also, Midwest
TOs posit, the Final Rule provides no evidence that full funding is
necessary to obtain financing. Third, Midwest TOs insist that the Final
Rule does not adequately address the potential negative incentives from
full funding. Nor, in their opinion, does the Final Rule adequately
reflect the difficulties in planning for full funding of the rights
over the long-term. Fourth, Midwest TOs argue that the full funding
requirement runs contrary to principles of hedging energy costs, which
are reflected in LMP-based congestion prices, and which require parties
to pay for a hedge. Midwest TOs state that the Final Rule did not
explain why holders of long-term rights should not, therefore, be
required to pay a premium for the rights.
---------------------------------------------------------------------------

    \52\ Request for Rehearing of Midwest TOs at 7.
    \53\ See Final Rule at P 171.
---------------------------------------------------------------------------

    44. The Midwest TOs' second general argument is that the Final Rule
violates principles of cost causation because it does not also require
full funding of short-term rights, and because it appears to endorse
the prospect that holders of long-term rights would not always be fully
responsible for all uplift charges associated with full funding. Hence,
holders of short-term rights could be required to pay uplift to support
full funding of long-term rights that they do not benefit from. This
creates a substantial potential future exposure, as it is difficult to
accurately project events over the long term.
    45. BP supports full funding of long-term firm transmission rights
and suggests that the methodology for such funding should be set by
stakeholder groups. It also supports extension of full funding to
short-term transmission rights. However, it seeks clarification that
the Commission's findings in the Final Rule--that full funding of both
durations of firm transmission rights is permissible under the law, and
that any shortfall should be uplifted to all firm transmission rights
holders--set a baseline for what is fair, equitable, and
nondiscriminatory, and that anything less is impermissible and will be
rejected by the Commission. BP is particularly concerned that, due to
biases in the stakeholder processes, any uplift rules for full funding
not result in outcomes that create subsidies, preferences or
competitive advantages. As a result, BP argues that the Commission
acted arbitrarily and capriciously and failed to engage in reasoned
decision-making by failing to mandate explicitly that stakeholders
follow the Commission's methodologies for full funding of firm
transmission rights. BP asserts that, in the event that the Commission
fails to grant its requested clarifications, the Commission erred in
its Final Rule.
Commission Conclusion
    46. We disagree with Midwest TOs' assertion that the Commission
incorrectly interpreted section 217(b)(4) to require full funding. As
we noted in the Final Rule, while section 217(b)(4) does not explicitly
use the term ``full funding,'' it does state that the long-term
transmission rights must be firm.\54\ We considered what the equivalent
of the term ``firm'' (in a physical rights context) would mean in the
context of the financial transmission rights found in organized
electricity markets, and found that it corresponded to (a) the
expectation that once allocated, the quantity of rights allocated would
remain constant for the term of the right, and (b) the expectation
that, once assigned or acquired, transmission rights do not experience
volatility in the actual financial coverage that they provide relative
to congestion charges associated with the same points of injection and
withdrawal (although there might be some volatility experienced in the
uplift charges that support full funding).\55\ Midwest TOs have not
offered an alternative interpretation of section 217(b)(4)'s
requirement that the rights be firm. Instead, they focus on section
217(b)(4)'s requirement of ``reasonable needs.'' We have interpreted
that requirement in the Final Rule as pertaining to the quantity of
long-term rights that a load-serving entity is entitled to receive,
rather than relating to their firmness.\56\ Hence, Midwest TOs have not
provided an alternative interpretation of section 217(b)(4) that
considers both statutory requirements--firmness and reasonable needs--
and we do not find their argument sufficiently persuasive to merit
granting rehearing and eliminating the full funding requirement.
---------------------------------------------------------------------------

    \54\ Id. at P 170.
    \55\ Id.
    \56\ See id. at P 323 (discussing guideline (5)); see also id.
at P 273 and 318.
---------------------------------------------------------------------------

    47. Next, we disagree with Midwest TOs' assertion that we did not
consider the prospect of having parties that are allocated long-term
rights pay more for such rights. Indeed, we expressly noted that such
rights may command a premium.\57\ Midwest TOs argue that we did not
explain why we did not require additional payment for long-term rights,
since, according to them, requiring such a premium would be consistent
with cost causation. We conclude, however, that requiring a premium may
or may not be consistent with cost causation, depending on the source
and scope of the revenue insufficiency. For example, it would not be
consistent with cost causation principles to require load serving
entities that hold long-term rights to pay a premium to cover revenue
insufficiency caused by another utility, such as by a transmission
owner that does not adequately maintain its transmission system. For
this reason, we chose not to simply impose a blanket premium payment
requirement, but rather pointed out that there could be justification
for imposing such a premium, based on stakeholder agreement and
consistency with regional preferences for transmission pricing.\58\
---------------------------------------------------------------------------

    \57\ See id. at P 172.
    \58\ Id.
---------------------------------------------------------------------------

    48. Finally, with regard to Midwest TOs' concern that parties
holding short-term rights could be unfairly exposed to uplift charges
that support full funding for long-term rights if both types of rights
are not put on equal footing with regard to full funding, we agree
that, under some conditions, such concerns may be justified. This is
one reason why in the Final Rule we encourage extension of full funding
to both types of rights, even though section 217(b)(4) does not require
it.\59\ Because section 217(b)(4) and this rulemaking concern long-term
transmission rights, however, we believe this issue falls outside the
scope of this proceeding. Moreover, Midwest TOs have failed to capture
in their argument the fact that the Final Rule explicitly recognizes
that the question of fair allocation of full funding uplift is a matter
of degree, and hence must be evaluated by the Commission on a case-by-
case basis.\60\ While we did state that if only a small group of load
serving entities holds long-term rights, assigning the full funding
uplift directly to them would largely undercut the requirement of full
funding,\61\ we also stated that ``if most load serving entities in a
region opted for long-term rights (up to their eligibility), then the
distribution of uplift charges over the set of rights holders would
have a lesser impact and

could be reasonable from all parties' perspective.'' \62\ Therefore, to
know whether the full funding requirement would lead to unreasonable
cost-shifts unrelated to cost causation, we would need to know, among
other factors, whether the organized market has opted to cover both
short- and long-term rights with full funding, and whether the size of
the set of load serving entities expected to request long-term rights
is sufficient to restrict full funding uplift to that set. For that
reason, we reject Midwest TOs argument that the provisions of the Final
Rule inherently violate cost causation principles and deny rehearing of
our determination that we must evaluate each compliance filing on a
case-by-case basis.
---------------------------------------------------------------------------

    \59\ Id. at P 179.
    \60\ See id. at P 171-173.
    \61\ See Final Rule at P 177.
    \62\ Id.
---------------------------------------------------------------------------

    49. With respect to BP's request, we disagree with its suggestion
that the Final Rule did not state that the allocation of uplift to
support full funding should be just and reasonable and
nondiscriminatory. First, transmission organizations are required to
make compliance filings to implement the guidelines set forth in the
Final Rule, and there are legal criteria--including, importantly the
just and reasonable standard--for approving any compliance filing that
comes before the Commission. Moreover, in the Final Rule, we mentioned
these requirements several times. For example, we noted that for the
allocation of uplift costs to support full funding, ``certain options
proposed by commenters could result in unreasonable outcomes'' and then
proceeded to evaluate some alternatives in light of those concerns.\63\
We also stated that applying the full funding requirement to short-term
rights as well as long-term rights would be a ``potentially reasonable
approach,'' with the implication that such a proposal could be approved
by the Commission as just and reasonable.\64\ Further, we concluded
that, with respect to allocation of such uplift to transmission owners,
``the Commission will allow regional discretion on these options and
will examine the reasonableness of such proposals on a case-by-case
basis.'' \65\ Hence, we believe that we provided sufficiently explicit
criteria short of enumerating every possible uplift allocation method
and considering how they might be adapted to the existing market
designs in the organized markets. Also, we believe that it is
sufficiently clear that a reasonableness standard is incorporated into
our criteria for evaluating possible uplift allocation methods.
Furthermore, our discussion of various options for allocating any
uplift necessary to support full funding was not intended to set a
baseline for what the Commission will find just and reasonable, as BP
suggests in its clarification request; our discussion was only intended
to be illustrative of some of the options and the issues associated
with those options.
---------------------------------------------------------------------------

    \63\ See Final Rule at P 175.
    \64\ Id. at P 177.
    \65\ Id. at P 178.
---------------------------------------------------------------------------

    50. Regarding concerns about biases in the stakeholder processes,
as we stated in the Final Rule, addressing any such alleged flaws in
these processes is outside the scope of this rule.\66\
---------------------------------------------------------------------------

    \66\ Id. at P 106.
---------------------------------------------------------------------------

5. Allocation Priority for Load Serving Entities With Long-Term Power
Supply Arrangements
    51. Guideline (5), as proposed in the NOPR, stated that load
serving entities with long-term power supply arrangements to meet a
service obligation must have priority over existing transmission
capacity that supports long-term firm transmission rights requested to
hedge such arrangements. However, in the Final Rule, we revised this
guideline to eliminate the preference for load serving entities with
long-term power supply arrangements and replaced it with a general
preference for load serving entities vis-[agrave]-vis non-load serving
entities. We also revised the guideline to allow the transmission
organization to place reasonable limits on the amount of existing
transmission capacity that it will make available for long-term firm
transmission rights.
    52. In the Final Rule, we concluded that, although section
217(b)(4) of the FPA would support a preference for load serving
entities with long-term power supply arrangements, it should not be
construed to require that a preference be given to this class of load
serving entities at the expense of load serving entities that prefer
short-term power supply arrangements, or are precluded from entering
into long-term arrangements. We stated that a broader preference for
load serving entities in general vis-[agrave]-vis non-load serving
entities is fully supported by the statute and better meets the needs
of today's organized electricity markets. Indeed, we stated that we did
not believe that Congress intended to disadvantage entities that prefer
short-term power supply arrangements when it enacted section 217 of the
FPA, particularly given the statute's overall focus on protecting the
transmission rights of load serving entities with service obligations.
    53. We noted that, as adopted, guideline (5) neither requires nor
prohibits the consideration of power supply arrangements in determining
the allocation priority for long-term firm transmission rights; it only
requires that load serving entities have priority over non-load serving
entities. In this regard, we noted that the transmission organizations
must make long-term firm transmission rights available to all market
participants; the priority established by guideline (5) serves only as
a ``tiebreaker'' between load serving entities and non-load serving
entities when existing transmission capacity is limited. We also noted
that eliminating the priority for load serving entities with long-term
power supply arrangements makes it possible for the transmission
organization to propose an allocation method that requires neither the
transmission organization nor the load serving entity to verify that
the load serving entity holds a qualifying long-term power supply
arrangement.
    54. We noted that, because of uncertainty regarding load growth,
changes in power flows and other factors, the transmission organization
may be reluctant to commit all of its existing capacity to long-term
firm transmission rights. Also, commenters suggested that the principal
need for long-term firm transmission rights is to support long-term
power supply arrangements for base load generation, not peaking or
intermediate generation. Therefore, we concluded that the transmission
organization and its stakeholders should have flexibility to determine
the level at which a load serving entity may nominate long-term firm
transmission rights, as long as that level does not fall below the
``reasonable needs'' of the load serving entity.
Rehearing Requests
    55. The CPUC, TAPS and APPA state that the Commission erred in
revising guideline (5) to eliminate the preference for load serving
entities with long-term power supply arrangements in the allocation of
long-term firm transmission rights and to replace it with a general
preference for load serving entities vis-[agrave]-vis non-load serving
entities. TAPS and APPA also state that the Commission erred in finding
that although section 217(b)(4) supports a preference for load serving
entities with long-term power supply arrangements in the allocation of
long-term firm transmission rights, ``a broader preference for load
serving entities in general vis-[agrave]-vis non-load serving entities
is fully supported by the statute and indeed better meets the

needs of today's organized electricity markets.'' \67\
---------------------------------------------------------------------------

    \67\ Final Rule at P 319.
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    56. The CPUC requests rehearing of the Final Rule's elimination of
priority for load serving entities with long-term power supply
arrangements because, in the CPUC's view, it is contrary to EPAct 2005
and violates the FPA. The CPUC claims that, by allowing load serving
entities that do not have any obligation or contract to serve load to
be allocated long-term firm transmission rights, the Final Rule
prevents load serving entities with contracts or statutory obligations
to serve load from being allocated those transmission rights. In the
CPUC's view, such a result directly contradicts the Commission's duties
under section 217(b)(4) of the FPA.
    57. TAPS asserts that guideline (5) and/or guideline (1) should be
modified to restore the connection between long-term firm transmission
rights allocated under the Final Rule and the specific resources and
loads of load serving entities that seek such rights. TAPS argues that,
if the Commission were correct that the change in priority will not
significantly affect load serving entities with long-term power supply
arrangements, then there would be no need for the Commission to
eliminate the NOPR's proposed priority. Instead, that priority could
simply be supplemented with a second-tier priority for load serving
entities that prefer to rely on short-term transactions vis-[agrave]-
vis non-load serving entities.
    58. TAPS adds that, in broadening the language of guideline (5),
the Commission has decoupled the guideline's priority from any specific
power supply arrangement, long-or short-term, and from the load serving
entity's obligation to serve load. TAPS states that, as adopted,
guideline (5) would allow load serving entities to nominate long-term
firm transmission rights completely unrelated to their loads and power
supply arrangements and to use a generic load serving entity priority
to obtain first preference to those long-term firm transmission rights.
TAPS claims that a load serving entity that is located in a load pocket
and needs long-term firm transmission rights to hedge the long-term
power supply arrangements it uses to meet its service obligation could
be crowded out by speculators attracted to the financial value of long-
term firm transmission rights over the constrained interface.
    59. TAPS states that there are several ways to remedy this problem.
First, TAPS' preferred solution is to modify the first sentence of
guideline (5) to give priority to load serving entities for long-term
firm transmission rights with sources and sinks related to the
resources and loads that are part of the load serving entity's long-
term power supply arrangements. As an alternative, TAPS states that the
same result could be achieved by modifying guideline (1) to clarify
that the sources and sinks of any long-term firm transmission rights
allocated under the Final Rule must be related to the resources and
loads of the long-term power supply arrangements of the requesting load
serving entity, whether in the transmission organization awarding the
long-term firm transmission right or its neighbor.
    60. Second, TAPS states that guideline (5) and/or guideline (1)
could be modified to restore the connection between long-term firm
transmission rights under the Final Rule and the specific resources and
loads of the load serving entity, but without requiring a long-term
power supply arrangement to qualify for a long-term firm transmission
right. At a minimum, TAPS states that guideline (5) must be modified to
limit the priority to load serving entities with load located at the
long-term firm transmission right sink (or, if the sink is a
transmission organization border, on the opposite side of the border).
TAPS argues that, although this solution does not satisfy the full
mandate of section 217(b)(4), it does tie long-term firm transmission
rights to the load serving entity service obligations that the statute
was designed to protect.
    61. APPA states that, with regard to requiring a preference for
load serving entities with long-term power supply arrangements, the
statute could not be clearer: the Commission is to exercise its
authority to enable load serving entities to secure long-term firm
transmission rights ``for long-term power supply arrangements.'' APPA
argues that the first two rationales that the Commission cites for its
decision to expand the class to all load serving entities (i.e.,
avoiding the disruption of current firm transmission right allocation
mechanisms and obviating the need for transmission organizations to
verify the long-term power supply arrangements of load serving
entities) both are arguments of administrative convenience. However,
APPA asserts that administrative convenience must give way to
implementation of Congressional intent. According to APPA, this leaves
the Commission with only its third rationale for revising guideline
(5): That granting a preference only to load serving entities with
long-term power supply arrangements would discriminate unduly against
other load serving entities that ``prefer short-term power supply
arrangements, or are precluded from entering into long-term
arrangements.'' \68\ However, APPA concludes that given the express
language of FPA section 217(b)(4), it is difficult to argue, as a legal
matter, that any such discrimination is undue.
---------------------------------------------------------------------------

    \68\ Final Rule at P 322.
---------------------------------------------------------------------------

    62. APPA argues that, if load serving entities that wish to enter
into new long-term power supply arrangements cannot fully hedge with
long-term firm transmission rights the substantial risks of
transmission congestion costs associated with their new long-term base
load and renewable generation resources, many of them will not be able
to obtain the financing and bond ratings required to support such
projects. APPA adds that, if the Commission is concerned about the
ability of load serving entities to obtain long-term firm transmission
rights vis-[agrave]-vis non-load serving entities, it could specify on
rehearing that if there are insufficient long-term firm transmission
rights to meet all requests, transmission organizations could
distribute long-term firm transmission rights first to load serving
entities that show such long-term firm transmission rights would be
used to support existing and new long-term power supply obligations
needed to meet their service obligations, then to other load serving
entities, and finally to non-load serving entities.
    63. APPA also states that, because the Commission has expanded the
universe of load serving entities eligible for long-term firm
transmission rights on a preferred basis, its corollary decision to
allow a transmission organization and its stakeholders to place
``reasonable limits on the amount of existing transmission capacity
that it will make available'' for long-term firm transmission rights
could unduly discriminate against load serving entities with long-term
power supply arrangements, and endanger their ability to obtain
sufficient long-term firm transmission right allocations to support
those arrangements. In addition, APPA is concerned that, given the
strategic nomination and gaming activity that it claims now occurs in
the current distributions of firm transmission rights, the same
problems will appear in the distributions of long-term firm
transmission rights.
    64. APPA concludes that the Commission must reinstate in guideline
(5) the preference for load serving entities with long-term power
supply arrangements needed to support their service obligations, or at
least take concrete steps to assure that load serving entities with
such arrangements get the long-term firm transmission

rights they need. According to APPA, among the possible ways the
Commission could do this would be to require load serving entities
seeking long-term firm transmission rights to demonstrate that they:
(1) will indeed serve load at the delivery points covered by their
long-term firm transmission rights and have power supplies committed to
them at the requested receipt points; and (2) have an obligation to pay
the embedded costs of their transmission provider's system, thus
signaling their commitment to pay their allocated share of the
transmission system's fixed costs.
Commission Conclusion
    65. We deny the rehearing requests of the CPUC, TAPS and APPA to
reinstate in guideline (5) a preference for load serving entities with
long-term power supply arrangements in the allocation of long-term firm
transmission rights. We retain the preference for load serving entities
vis-[agrave]-vis non-load serving entities as adopted in the Final
Rule. We reiterate that, in our view, a broader preference for load
serving entities in general vis-[agrave]-vis non-load serving entities
is fully supported by the statute and will achieve the statute's
purposes. This feature of guideline (5), taken together with the other
guidelines in the Final Rule, will enable load serving entities to
obtain long-term firm transmission rights for long-term power supply
arrangements to meet their service obligations, as section 217(b)(4)
requires. However, as explained below, we clarify that, in cases where
the transmission organization must limit the amount of existing
capacity available for long-term firm transmission rights to a level
that cannot support the ``reasonable needs'' of all load serving
entities, guideline (5) allows the transmission organization to give
priority to load serving entities with long-term power supply
arrangements in allocating the scarce capacity.
    66. First, in response to TAPS' and APPA's argument that the Final
Rule does not satisfy the mandate of section 217(b)(4) of the FPA, as
we stated in the Final Rule, while this section can be read to support
a preference for load serving entities with long-term power supply
arrangements, it does not require that a preference be given to this
class of load serving entities at the expense of those that prefer
short-term power supply arrangements. New section 217(b)(4) of the FPA
requires the Commission to exercise its authority under the FPA ``in a
manner that * * * enables load-serving entities to secure firm
transmission rights (or equivalent tradable or financial rights) on a
long-term basis for long-term power supply arrangements made, or
planned, to meet'' service obligations.\69\ This language requires the
Commission to enable load serving entities to secure a reasonable
amount of long-term firm transmission rights that will support long-
term power supply arrangements to meet their service obligations. We
satisfied this directive by adopting guidelines in the Final Rule that
require each transmission organization with an organized electricity
market to design and offer to customers long-term firm transmission
rights with basic properties that will support specific long-term power
supply arrangements. These basic properties include, but are not
limited to, the specification of source, sink and MW quantity
(guideline 1), full funding (guideline 2), and sufficient term length
(guideline 4). Guideline (5) is a measure to ensure that where existing
transmission capacity is scarce, load serving entities will have
priority over non-load serving entities to secure long-term firm
transmission rights to satisfy their service obligations, as Congress
intended. The language in new section 217(b)(4) \70\ is sufficiently
broad that it does not require, and does not prohibit, a narrower
preference (like that proposed in the NOPR) for load serving entities
with specific long-term power supply arrangements, either made or
planned.
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    \69\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.
    \70\ E.g., id. (``* * * and enables load-serving entities to
secure firm transmission rights * * * on a long-term basis for long-
term power supply arrangements made, or planned, to meet such
needs'') (emphasis added).
---------------------------------------------------------------------------

    67. We believe that, as compared to the narrower preference
proposed in the NOPR, the broader preference will equally enable load
serving entities to obtain long-term firm transmission rights to
support long-term power supply arrangements, while also taking into
account the countervailing considerations discussed in the Final Rule.
These considerations include the burden on transmission providers to
verify long-term power supply arrangements, the potential for
discrimination against load serving entities that are prohibited from
entering into long-term power supply arrangements, and the need to
accommodate load serving entities in retail access jurisdictions.
Consequently, given new section 217(b)(4)'s relatively flexible
statutory language, the countervailing considerations noted above, and
the broader mandate of the FPA (under which we are required to
implement section 217(b)(4)) to ensure that jurisdictional rates and
services are just, reasonable and not unduly discriminatory,\71\ the
Commission chose in the Final Rule to adopt a broader preference in
guideline (5). We conclude that this approach will ensure just and
reasonable outcomes for all users of the grid.
---------------------------------------------------------------------------

    \71\ 16 U.S.C. 824d and 824e (2000).
---------------------------------------------------------------------------

    68. Second, we note that, historically, the cost of constructing
and maintaining the grid has largely been borne by load serving
entities on an equitable basis without regard to the term of their
power supply arrangements. It is primarily for this reason that we
believe each load serving entity is entitled to an equitable allocation
of the firm transmission rights, whether short-term or long-term, that
are supported by existing capacity.
    69. We agree with APPA that the issue of priority takes on greater
significance if the transmission organization determines that, because
of load growth uncertainty and other factors, it must limit the amount
of existing transmission capacity that is committed to long-term firm
transmission rights, as guideline (5) permits it to do. However, the
fact that a transmission organization must limit the availability of
long-term firm transmission rights in this manner does not undermine
our decision to provide a broader preference for load serving entities
vis-[agrave]-vis non-load serving entities. Indeed, as long as each
load serving entity receives a ``reasonable'' allocation of long-term
firm transmission rights (for example, a quantity sufficient to hedge
the load serving entity's needs at its base load level), it arguably is
receiving its fair share of long-term firm transmission rights, based
on its historical cost responsibility.
    70. While the Commission expects that, in general, the transmission
organization will be able to allocate sufficient long-term firm
transmission rights to hedge power supply arrangements used to meet
base load, a transmission system may temporarily not have enough
capacity to provide simultaneously feasible, long-term firm
transmission rights to all load serving entities at this level. In such
instances, a procedure is needed to allocate the scarce long-term firm
transmission rights among load serving entities. We clarify that, in
these circumstances, guideline (5) allows the transmission organization
to propose an allocation rule that gives priority to load serving
entities with longer-term power supply arrangements to meet a service
obligation.\72\ In this regard, we note the methods currently used by
some

transmission organizations for the initial allocation of short-term
firm transmission rights take explicit account of a load serving
entity's current or historical loads and power supply arrangements. We
believe that such methods offer a reasonable and appropriate solution
to the problem of allocating scarce long-term firm transmission rights
when the base load needs of all load serving entities cannot otherwise
be met. Indeed, although we are providing flexibility to each
transmission organization to propose allocation rules that are
appropriate for its region, we expect that such rules will include
adequate protections for load serving entities with long-term power
supply arrangements.
---------------------------------------------------------------------------

    \72\ See Final Rule at P 321.
---------------------------------------------------------------------------

    71. In response to APPA's argument that guideline (5) would permit
the same gaming activity that allegedly occurs in the distribution of
firm transmission rights, the Commission noted in the Final Rule that
tying the allocation of long-term firm transmission rights to long-term
power supply arrangements could itself influence market behavior
inappropriately. In particular, such a priority may induce load serving
entities to bias their supply portfolio unduly in favor of long-term
power supply contracts (or, perhaps, enter into sham contracts) simply
because they are advantageous in the FTR allocation.
    72. In response to TAPS' argument that guideline (5) would allow
load serving entities to nominate long-term firm transmission rights
unrelated to their loads and that speculators will crowd out others
over constrained paths, we note that most transmission organizations
now limit the flexibility that a load serving entity has to nominate
firm transmission rights on valuable transmission paths when those
paths do not include historical resources and loads of the load serving
entity. We expect that similar rules will be developed for long-term
firm transmission rights. Also, the Commission expects that the
entities that are most likely to be speculators will be those that do
not have a service obligation and, therefore, will not be entitled to a
preference under guideline (5).
    If it becomes apparent that load serving entities with long-term
power supply arrangements are being crowded out of the allocation of
long-term firm transmission rights, or if a compliance filing reveals
the potential for such an outcome, the Commission will take appropriate
steps to address the issue.
6. Allocation Priority for Load Serving Entities With Loads Outside the
Transmission Organization's Boundaries
    73. In the Final Rule, we stated that long-term firm transmission
rights should be made available first to those entities that have an
obligation to serve load within the transmission organization's service
territory and are required to contribute to the embedded cost of the
transmission organization's transmission system. We concluded that any
entity that has neither an obligation to serve load on the transmission
organization's transmission system, nor an obligation to pay the
embedded costs of that system, should not be given a preference to
acquire long-term firm transmission rights supported by the system's
existing capacity.
Rehearing Requests
    74. APPA and TAPS state that the Commission erred in holding that
load serving entities with long-term power supply arrangements, but
with loads that sink outside a transmission organization's boundaries,
should not be given any preference in the allocation of long-term firm
transmission rights supported by the transmission organization's
existing transmission capacity. In APPA's view, it would be unduly
discriminatory to favor, in the distribution of long-term firm
transmission rights, load serving entities with loads sinking on the
transmission organization's transmission system over load serving
entities serving loads elsewhere. APPA asserts that FPA section
217(b)(4) says nothing about where the loads of a particular load
serving entity must be located, so long as the load serving entity has
long-term power supply arrangements to meet a service obligation to
those loads. APPA states that if a load serving entity is obligated to
pay the embedded transmission system fixed costs of the transmission
organization from which it obtains a long-term firm transmission right
under that transmission organization's Commission-approved rate design,
and uses that long-term firm transmission right to support a long-term
power supply agreement needed to meet its service obligation to its own
loads, then that should be sufficient to qualify for the preference.
    75. TAPS asserts that priority should not be limited to load
serving entities within the transmission organization's footprint. In
TAPS' view, transmission dependent utilities, many of whom have loads
and resources split between transmission organizations and between
transmission organization and non-transmission organization regions,
are especially at risk from this decision. TAPS argues that restricting
priority access to long-term firm transmission rights based on the
transmission organization's footprint is unfair, given that it is the
host transmission organization, not the transmission dependent utility,
that makes decisions about whether to join a transmission organization
or whether to withdraw. TAPS states that it will also exacerbate
problems created by present and future transmission organization seams,
undermining, for example, the Commission's efforts to foster a joint
and common market between PJM and MISO. TAPS concludes that the
Commission's decision to exclude load serving entities located outside
the transmission organization from the priority of guideline (5) should
be reversed, and that an exception to the obligation to support the
fixed cost of the transmission organization issuing the long-term firm
transmission right should be made where the Commission has authorized
elimination of pancaked rates between transmission organizations (or
transmission organizations and adjacent utility control areas), as in
the case of PJM and MISO.
    76. Modesto also requests that the Commission clarify that load-
serving entities will receive priority over long-term firm transmission
rights if such entities contribute to the embedded cost of the
transmission organization's transmission rates or have an obligation to
serve load within the control area of the transmission organization.
Modesto argues that the language of the EPAct 2005 does not limit
allocation of long-term firm transmission rights to load-serving
entities located within the control area of a transmission
organization. In Modesto's view, the extension of the logic in the
language of EPAct 2005 would not support distinctions among load-
serving entities along the lines indicated in the Final Rule.
    77. SMUD asserts that the Final Rule properly concluded that
transmission organizations must offer long-term service to ``all load
serving entities that support the embedded costs of the transmission
system.'' \73\ SMUD asks the Commission to clarify that long-term firm
transmission service must be made available whether or not the customer
agrees to turn control of its transmission facilities over to the
transmission organization.
---------------------------------------------------------------------------

    \73\ SMUD Rehearing Request at 2 (citing Final Rule at P 321)
(emphasis added by SMUD).

---------------------------------------------------------------------------

Commission Conclusion
    78. The Commission denies rehearing on this issue. A load serving
entity is entitled to a preference in the allocation of long-term firm
transmission rights within a transmission organization's region only to
the extent that the transmission organization plans and constructs its
transmission system to support the load of the load serving entity, and
the load serving entity contributes to the cost that the transmission
organization incurs for that purpose. It would be unreasonable to
require a transmission organization to provide a load serving entity
with a preference in the allocation of firm transmission rights for
specific loads, either long-term or short-term, when the transmission
organization has not planned and constructed its system to accommodate
those loads, and when the loads have not contributed to the system's
embedded costs.
    79. We clarify, however, that in cases where a load serving entity
has an existing agreement with the transmission organization to pay a
share of the embedded costs of the transmission system on a long-term
basis to support load outside the region, that load serving entity
should be given a preference in the allocation of long-term firm
transmission rights for the external load equal to the preference given
to load serving entities with loads that lie within the transmission
organization's region. Furthermore, in response to TAPS, the preference
should apply in cases where pancaked rates between the transmission
organization and the other transmission provider have been eliminated,
as long as the agreement with the load serving entity provides for cost
sharing in accordance with the non-pancaked rates currently in effect.
    80. We further clarify that, in cases where no such agreement
exists, a load serving entity with load that sinks outside the
transmission organization's region is entitled to receive long-term
firm transmission rights from existing system capacity to support that
load to the extent that capacity is available after the needs of the
load serving entities whose loads are within the region have been met.
However, in such cases, we expect that the load serving entity would be
required to contribute, on a long-term basis, toward the embedded cost
of the transmission system, by paying either pancaked or non-pancaked
rates, as applicable.
    81. We deny SMUD's requested clarification to prohibit a
transmission organization from allocating long-term firm transmission
rights based on whether a customer is located in the transmission
organization's control area or has agreed to cede control of its
transmission facilities to that organization. Indeed, we have found in
prior orders that, in allocating firm transmission rights, it is not
discriminatory for a transmission organization to impose additional
requirements on customers external to the transmission organization's
control area (external load) as a precondition to receiving such
rights.\74\ We decline, in this rulemaking of general applicability, to
draw a broad conclusion that it may never be reasonable to treat
external load differently from internal load for purposes of allocation
of long-term firm transmission rights.
---------------------------------------------------------------------------

    \74\ See, e.g., New England Power Pool, 100 FERC ] 61,287, at P
85 (2002) (requiring external load to pre-pay its transmission
access charge in order to receive FTRs); see also California
Independent System Operator Corporation, 116 FERC ] 61,274 at P 766
(2006) (stating that external load and internal load are not
similarly situated with respect to their reliance on the
transmission organization's grid) (MRTU Order).
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7. Miscellaneous Issues Regarding the Allocation of Long-Term Firm
Transmission Rights
    82. In the Final Rule, we noted that specifying and allocating
long-term firm transmission rights supported by existing transfer
capability will likely raise difficult issues that must be addressed by
transmission organizations and their stakeholders. However, rather than
attempting to resolve in the Final Rule all of these potential issues,
we adopted a non-prescriptive approach that gives each transmission
organization and its stakeholders flexibility to design long-term firm
transmission rights that fit the prevailing market design while also
ensuring that the rights have certain fundamental properties necessary
to achieve Congress's objectives in section 217(b)(4) of the FPA.
Rehearing Requests
    83. First, NYISO states that the Commission should clarify that
load serving entities' entitlement to receive new long-term firm
transmission rights should be reduced to the extent that they already
hold grandfathered transmission rights. NYISO explains that, under its
system, load serving entities that have grandfathered rights already
receive transmission service that confers the same level of price
certainty and stability, and in many cases do so for a longer time,
than the Final Rule requires. NYISO argues that, to the extent that a
load serving entity's needs are already satisfied by these
grandfathered rights, giving it preferential access to additional long-
term firm transmission rights would give it a windfall without serving
any useful policy purpose. NYISO states that, if the Commission denies
the requested clarification, it should grant rehearing because granting
additional long-term firm transmission right preferences would go
beyond the Final Rule's stated goals.
    84. Second, NYISO states that the Commission should clarify that
transmission organizations may consider both the need to support state
retail access programs and market participants' desire for access to
shorter-term transmission rights when deciding what constitutes a
``reasonable'' amount of existing transmission capacity to set aside
for long-term firm transmission rights. In the alternative, NYISO asks
the Commission to grant rehearing because it has not offered a reasoned
explanation of its reasons for prohibiting the consideration of these
factors, and because such a prohibition would be inconsistent with
other statements in the Final Rule. NYISO states that the Final Rule is
not clear on the question of whether transmission organizations may
account for the needs of state retail access programs when determining
how much capacity to set aside for long-term firm transmission rights.
NYISO believes that, as a general matter, many load serving entities in
retail access states should be expected to prefer shorter-term rights
since the amount of load that they serve may be subject to frequent
change. NYISO asserts that reserving too much capacity for long-term
firm transmission rights could become a serious barrier to market entry
if it prevented new load serving entities from securing reasonable
transmission rights.
    85. Third, NYISO states that the Commission should clarify that the
transmission organization need not allocate, or allow as many
opportunities to reconfigure, long-term firm transmission rights as it
does for shorter-term transmission rights. In the alternative, NYISO
asks the Commission to grant rehearing because it has not offered a
reasoned explanation why long-term firm transmission rights and
shorter-term rights must be treated the same in this regard. NYISO
states that it currently auctions transmission congestion contracts
twice a year and holds monthly reconfiguration auctions. To avoid
uncertainty and facilitate stakeholder compliance discussions, NYISO
requests clarification that long-term and short-term rights may be
allocated, and adjusted, on different timetables.

    86. Finally, NYISO states that the Commission should clarify that
load serving entities that obtain long-term firm transmission rights
must pay a fair share of transmission system costs. If this was not the
Commission's intent, NYISO asks that the Commission reverse its
position on rehearing. NYISO argues that making long-term firm
transmission rights available for free would be arbitrary and
capricious because it would be inconsistent with relevant precedent and
the Final Rule's stated goals. NYISO explains that granting this
clarification will facilitate the NYISO stakeholder process by cutting
off the possibility of a distracting debate over an issue that the
Commission appears to view as unambiguously settled.
Commission Conclusion
    87. With regard to NYISO's question concerning the treatment of
grandfathered transmission rights, we note that, if such rights satisfy
the requirements of section 217(b)(4) of the FPA and satisfy each of
the guidelines in the Final Rule, they can be treated as the equivalent
of the long-term firm transmission rights that the transmission
organization must make available under this rule, and may substitute
for such rights in the transmission organization's allocation process.
That is, they must qualify as long-term firm transmission rights (or
equivalent tradable or financial rights) that, for the load serving
entities that hold them, meet their reasonable needs to satisfy their
service obligations. However, we do not decide here whether the
grandfathered rights held by NYISO's load serving entities satisfy
these requirements. Should a transmission organization believe that its
grandfathered rights satisfy each of the guidelines in the Final Rule,
it should provide an explanation in its compliance filing, pursuant to
18 CFR 42.1(c)(1)(ii).
    88. NYISO asks the Commission to clarify that transmission
organizations may consider the needs of state retail access programs
and market participants' preference for shorter-term transmission
rights in determining how much existing transmission capacity to set
aside for long-term firm transmission rights. As stated above, we
expect the transmission organization to make available from existing
transmission system capacity sufficient long-term firm transmission
rights to meet the ``reasonable'' needs of all of its load serving
entities. In most cases, we believe that the reasonable needs of load
serving entities will be met if each load serving entity is able to
request and obtain, at its option, a quantity of long-term firm
transmission rights sufficient to hedge its long-term power supply
arrangements at a base load level. We emphasize that a load serving
entity is under no obligation to request its full entitlement to long-
term firm transmission rights. If the transmission capacity that is set
aside for long-term firm transmission rights remains unsubscribed at
the conclusion of the long-term firm transmission rights allocation
process, the extra capacity must be made available to support the
requests of load serving entities that prefer to hold short-term
rights. The Commission is confident that setting aside capacity for
long-term rights in this manner will achieve the result that NYISO
seeks; that is, it will meet the requirements of EPAct 2005 to make
available long-term firm transmission rights to meet the reasonable
needs of load serving entities that prefer such rights, while
effectively reserving a large portion of existing capacity for those
entities that prefer shorter-term rights.
    89. NYISO asks the Commission to clarify that the transmission
organization need not provide as many opportunities to allocate or
reconfigure long-term firm transmission rights as it does for shorter-
term transmission rights. We clarify that the transmission organization
need not allow for the allocation or reconfiguration of long-term firm
transmission rights more frequently than once per year. Because most
transmission organizations can now readily accommodate annual
allocations of short-term rights, the Commission believes that a
process that provides for the annual allocation and reconfiguration of
long-term firm transmission rights would be reasonable and appropriate.
However, if the transmission organization proposes to allow allocations
or reconfigurations less frequently than once per year, we clarify that
it must fully support such a request in its compliance filing.
    90. Finally, NYISO asks the Commission to clarify that load serving
entities that obtain long-term firm transmission rights must pay a fair
share of transmission system costs. We clarify that, although the Final
Rule does not permit the use of an allocation process that requires
load serving entities to purchase long-term firm transmission rights by
bidding in an auction (see discussion below), we believe that load
serving entities that are awarded such rights incur an obligation to
contribute, directly or indirectly, to the embedded costs of the
transmission system that supports those rights. Each transmission
organization has in place a process for allocating short-term firm
transmission rights and for recovering the embedded costs of the
transmission system from those entities that receive, or are eligible
to receive, the rights. We expect that, in most cases, the transmission
organization will revise its current process as necessary to
accommodate the introduction of long-term firm transmission rights.
8. Use of an Auction to Allocate Long-Term Firm Transmission Rights
    91. As adopted in the Final Rule, guideline (7) states that the
initial allocation of the long-term firm transmission rights shall not
require recipients of such rights to participate (i.e., bid or offer)
in an auction to obtain the rights. We further explained that guideline
(7) does not preclude a transmission organization from using an auction
subsequently to re-allocate long-term firm transmission rights.
Rehearing Requests
    92. TAPS states that the language of guideline (7) is limited to
the initial allocation of the long-term firm transmission rights. TAPS
therefore requests clarification, or in the alternative rehearing, that
the same restrictions on the use of mandatory auctions for initial
allocations will apply when long-term firm transmission rights are
renewed.
Commission Conclusion
    93. In response to TAPS' request, we clarify that the word
``initial'' is meant to distinguish the award of long-term firm
transmission rights by the transmission organization to a load serving
entity from any subsequent resale of those rights by the load serving
entity. Thus, guideline (7) precludes a transmission organization from
requiring a load serving entity to submit a winning bid in an auction
in order to: (a) Acquire long-term firm transmission rights in the
first instance; or (b) renew those rights at a later date. However,
guideline (7) does not preclude a holder of long-term firm transmission
rights from reselling those rights in an auction process that may
require the buyer, which may be another load serving entity, to submit
a winning bid to acquire them.
9. Transmission Planning and Expansion
    94. In the Final Rule, we required that each transmission
organization with an organized electricity market implement a
transmission system planning process that will accommodate the long-
term transmission rights that are awarded by ensuring that they remain
feasible over their entire term. We noted that FPA

section 217(b)(4) requires the Commission to exercise its authority
under the FPA in a manner that facilitates the planning and expansion
of transmission facilities, and to enable load serving entities to
obtain long-term firm transmission rights. To implement that section in
a transmission organization with an organized electricity market, as
required by section 1233(b) of EPAct 2005, we concluded that the
transmission organization must plan its system to ensure that allocated
or awarded long-term firm transmission rights are feasible. We stated
that FPA section 217(b)(4) itself, by including both the requirement to
facilitate planning and expansion and the requirement to provide long-
term transmission rights, supports the Commission's authority to impose
this requirement.
    95. The Commission stated that FPA section 217(b)(4) does not
merely require the provision of long-term firm transmission rights; it
requires the Commission to facilitate the planning and expansion of
transmission facilities. However, we noted that we were not requiring
in the Final Rule any ``obligation to build'' or other obligation that
does not already exist under Order No. 888. We noted that we are
considering issues concerning our broader mandate to exercise our FPA
authority to facilitate planning and expansion (which applies to all
regions) in Docket No. RM05-25-000, the Order No. 888 OATT reform
rulemaking.
Rehearing Requests
    96. APPA asks the Commission to clarify that, while the Final Rule
imposes no ``obligation to build'' transmission facilities that does
not already exist in Order No. 888, this does not mean there is no
obligation for transmission organizations to ensure that the
transmission facilities necessary to support long-term firm
transmission rights are constructed. In this regard, APPA notes that
the OATT imposes an equivalent obligation on individual transmission
providers, and transmission organization transmission providers must
meet the ``consistent with or superior to'' requirement for their own
OATTs. APPA states that it presumes this requirement will include a
showing that transmission organizations under their OATTs will have
obligations ``consistent with or superior to'' the obligations set out
in the OATT (as revised in Docket No. RM05-25) to ensure the
construction of new transmission facilities needed to support ongoing
firm transmission service (including, in the transmission organization
context, long-term firm transmission rights). APPA asks the Commission
to clarify this point.
Commission Conclusion
    97. The Commission stated in the Final Rule that it was not,
through the long-term firm transmission rights regulations, imposing a
new ``obligation to build'' that does not already exist under Order No.
888.\75\ The Commission also noted that it was considering issues
concerning its broader mandate to exercise its FPA authority to
facilitate planning and expansion in both transmission organization and
non-transmission organization regions in Docket No. RM05-25-000, the
Order No. 888 reform rulemaking.\76\ The nature of the general planning
obligation in the OATT referred to by APPA here is under consideration
in that docket. As a result, APPA's request for clarification is
outside of the scope of this rulemaking proceeding, which concerns only
the obligation to plan and expand the system as it relates to the
provision of long-term firm transmission rights.
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    \75\ See Final Rule at P 21, n. 22 and P 453, n. 138.
    \76\ Id. at P 457.
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10. Properties of Physical Versus Financial Rights
    98. In the Final Rule, we interpreted section 217(b)(4) of the FPA
to require that load serving entities be able to obtain long-term firm
transmission rights, whether as physical rights or financial rights.
While we left the choice of specifying long-term rights as physical or
financial rights to transmission organizations and their stakeholders,
we did not require that transmission organizations with existing or
approved designs for financial transmission rights create a new long-
term physical right, such as an Order No. 888 network service right,
upon request of a load serving entity.\77\ In addition, in our
discussion of guideline (2), we explained our interpretation of the
firmness requirement in a financial rights context as the right to hold
a fixed (MW) quantity of long-term firm transmission rights over the
life of the rights and stability in the revenue stream from the right
through full funding.\78\ We observed that this interpretation roughly
parallels the features of quantity and financial stability of long-term
physical transmission contracts.\79\ We further noted that organized
markets with locational marginal pricing generally improve the firmness
of physical transmission scheduling, by reducing the incidence of
transmission loading relief, or TLRs.\80\
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    \77\ See Final Rule at P 120 and 474.
    \78\ See id. at P 170 and 473-74.
    \79\ Id. at P 473.
    \80\ Id.
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Rehearing Requests
    99. Santa Clara seeks clarification or, in the alternative,
rehearing on the ``physical attributes'' of long-term firm transmission
rights. Santa Clara asserts this is necessary so that transmission
organizations can meet what Santa Clara interprets to be section
217(b)(4)'s mandate ``that financial rights be `equivalent to' physical
rights.'' \81\ Santa Clara recognizes that the Final Rule proposes
several measures to support the financial ``firmness'' of the long-term
firm transmission rights, including full funding of the rights and
fixing the quantity of the rights over time. However, Santa Clara
argues that additional attributes are needed, including ``physical
scheduling attributes that enable LSEs to deliver energy to native
load.'' \82\ Santa Clara states that ``financial rights do nothing for
situations where service is denied to a transmission-dependent user,''
including, in Santa Clara's view, physical curtailment of transmission
service.\83\ Hence, Santa Clara requests that holders of long-term firm
transmission rights receive scheduling priority over other transmission
users in the event of curtailment. In addition, Santa Clara argues that
financial rights do not support building new transmission capacity.
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    \81\ Request for Clarification/Rehearing of Santa Clara at 3.
    \82\ Id. at 6.
    \83\ Id. at 7.
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Commission Conclusion
    100. We reject Santa Clara's request for clarification or, in the
alternative, rehearing. First, we do not agree with Santa Clara that
existing physical transmission rights have physical scheduling
attributes that are superior to the scheduling rights that are
available in organized electricity markets with financial transmission
rights. Currently, in organized markets with LMP, all physical
transmission schedules are honored subject to congestion charges and
physical feasibility. In general, physical feasibility has not been a
problem in such markets, as reflected in the very infrequent need to
undertake physical curtailment of transmission through transmission
loading relief. Outside the organized markets, the frequency of
transmission loading relief can be much higher.
    101. Moreover, we do not agree that long-term firm transmission
rights

warrant any additional physical scheduling priority in the event of
transmission curtailment. Under guideline (5), we have already accorded
load serving entities priority in the allocation of long-term firm
transmission rights. Granting physical scheduling priority to holders
of long-term rights would provide load serving entities that hold such
rights with greater claim over physical scheduling than load serving
entities that do not hold such rights. We are concerned that
distinguishing between long-term and short-term transmission rights
holders in this manner may not be just and reasonable and could be
unduly discriminatory. In fact, in our conclusion on guideline (5) in
the Final Rule, we determined that EPAct 2005 should not be construed
to require transmission organizations to give a preference to load
serving entities with long-term rights at the expense of load serving
entities that prefer short-term power supply arrangements.\84\ Santa
Clara has failed to persuade us that changing this determination would
yield a just and reasonable and non-discriminatory outcome.
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    \84\ Final Rule at P 319.
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    102. Second, we disagree with Santa Clara's assertion that we have
provided insufficient support for transmission expansion to support
long-term firm transmission rights. The Final Rule requires that
transmission organizations with organized electricity markets establish
a transmission system planning process that will accommodate the long-
term transmission rights that are awarded by ensuring that they remain
feasible over their entire term.\85\ Santa Clara has not specifically
addressed that requirement or explained why it is insufficient.
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    \85\ See id. at P 453.
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11. Exemption From Marginal Loss Charges
    103. We stated in the Final Rule that we do not interpret section
217(b)(4) as addressing marginal loss charges.\86\ In addition, we
noted that the transmission organizations with organized electricity
markets currently refund any marginal loss surplus that they collect,
and that those refund methods have been approved by the Commission on a
case-by-case basis, reflecting regional preferences. Accordingly, we
concluded that we would not overturn those decisions in the Final
Rule.\87\
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    \86\ Id. at P 478.
    \87\ Id.
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Requests for Rehearing and/or Clarification
    104. SMUD argues that the Commission properly concluded that under
section 217(b)(4), a financial rights-based long-term firm transmission
service should provide a hedge to customers that allows them
``equivalent'' protection to physical rights service, one that is
``sufficient to meet the needs of load serving entities to hedge long-
term power supply arrangements.'' \88\ But, according to SMUD, the
Commission arbitrarily and illogically failed to require transmission
organizations employing marginal loss charges to either: (1) offer
long-term firm service customers a hedge against those charges; or (2)
exempt such customers from those charges.
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    \88\ SMUD Rehearing Request at 2 (citing Final Rule at P 495).
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Commission Conclusion
    105. We stated in the Final Rule that we do not interpret section
217(b)(4) as addressing marginal loss charges.\89\ The issue of hedging
long-term marginal loss charges is distinct from that of hedging
marginal congestion charges. Congestion charges arise in part due to
transmission grid constraints (or bottlenecks). For congestion charges,
transmission organizations allocate transmission rights to provide a
hedge. Marginal losses are similar to congestion costs in that they are
a function of locational energy prices and line loadings. However, the
development of a financial instrument or other means for hedging of
marginal losses has not been accomplished to date in any of the
organized electricity markets.
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    \89\ Id. at P 478.
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    106. Section 217(b)(4) of the FPA requires the Commission to act in
a manner that ``* * * enables load-serving entities to secure firm
transmission rights (or equivalent tradable or financial rights) on a
long-term basis. The terms ``firm transmission rights,'' and
``equivalent tradable or financial rights'' are consistent with
terminology traditionally used to discuss hedging of congestion, rather
than marginal losses. Furthermore, we do not interpret EPAct 2005 as
requiring transmission organizations to provide long-term firm
transmission rights with properties that are fundamentally different
from those of the short-term rights that they now offer. Consequently,
we do not interpret the statute as requiring hedging of marginal
losses.\90\ In addition, we note that, while we do not interpret EPAct
as requiring hedging of marginal losses, this does not preclude future
market design changes that allow hedging of losses. Indeed, we
encourage transmission organizations to explore methods by which they
can assist load serving entities and others to obtain a hedge for
marginal losses.
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    \90\ Transmission rights holders are nevertheless free, of
course, to contract with generators to hedge losses.
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12. Compliance Procedures
    107. In the Final Rule, the Commission required transmission
organizations subject to its requirements to file compliance proposals
within 180 days of the publication of the Final Rule in the Federal
Register.\91\ The Commission specified that transmission organizations
must file proposed tariff sheets and rate schedules that would make
available long-term firm transmission rights that satisfy each of the