David T. Doot, Day Berry & Howard

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On July 31, 2002 the Federal Energy Regulatory Commission (FERC) continued its restructuring epic with the issuance of a third proposed rule, this one seeking to standardize wholesale power markets across the nation. If the rule reflected in the newest notice of proposed rulemaking (NOPR)—"Remedying Undue Discrimination through Open Access Transmission Service and Standard Electricity Market Design"—becomes effective without change, all transmission owners regulated by FERC would be required to become, or to surrender control of their transmission facilities to, an independent transmission provider (ITP). The ITP would be required to implement and administer spot markets for energy and supporting services that produce locational marginal prices through a standardized auction.

FERC's electric restructuring epic began in 1996 with the issuance of Order 888, under which all new transmission service was required to be furnished pursuant to the terms and conditions of a pro forma open access transmission tariff. Three years later, FERC issued Order 2000, encouraging the formation of regional transmission organizations (RTOs), independent of the markets and regional in scope, to replace the individual transmission providers for the furnishing of transmission service. FERC clarified in July 2001, that it wanted only four RTOs to blanket the country's electric grid outside of Texas (for historic reasons, most of Texas is not subject to FERC jurisdiction).

FERC's evolutionary thinking about transmission service and markets now continues in the wake of strenuous objection from many states concerning FERC's proposed RTO scope. In addition, since Order 888, FERC has been confronted with the California markets fiasco and other problems with existing markets, including market design flaws, allegations of preferential transmission access, impediments to interregional power transfers and the mechanics for scheduling such transfers resulting from rate pancaking, and market power allegations. Reflecting on these circumstances, FERC concluded that, until all preferential features of transmission service are eliminated and markets are standardized across the nation, there would continue to be unjust, unreasonable, or unduly discriminatory FERC-regulated service. The NOPR is FERC's proposed response to that conclusion.

If the draft rule in the NOPR is finalized as proposed, ITPs will become the only entities selling transmission service. Network access service (NAS) will be the only form of new transmission service; point-to-point and network integration services will no longer be available. Generally, each customer's charges for NAS would be based on its energy withdrawal from the transmission system (i.e., its load), plus a charge for any congestion caused by its transmission usage. Charges for congestion and services ancillary to transmission service (i.e., energy balancing, operating reserve and frequency response) would be established through standardized markets with the following features:

• Locational marginal energy prices in the spot market determined pursuant to a bid-based auction;
• Financial hedges against transmission congestion in the form of freely-tradable congestion revenue rights (CRRs);
• Operating reserve and frequency response markets priced through an ITP-administered bid-based auction;
• A forward-looking resource adequacy requirement to replace existing reliability assurance mechanisms (such as the capacity requirements now imposed in the northeast), with yet-to-be-defined details for how to establish and satisfy those requirements and ensure that market participants meet their requirements; and
• A regional planning for transmission upgrades produced at least every three years.

The NOPR proposed formalized mechanisms for regional governmental representatives to participate actively in the planning process and to advise ITPs and FERC on issues such as rate design and revenue requirements, market monitoring and mitigation, demand response and load management, distributed generation interconnection policies, energy efficiency, environmental issues, and ITP management and budgets. The NOPR also proposes a market monitoring unit that would assess the markets and mitigate market power as appropriate.

The NOPR does not supplant, but supplements, the FERC's Order 2000 initiatives. An RTO is an ITP that meets the Commission's requirements for regional scope. In addition, existing independent system operators (ISOs) established under Order 888 and wires-only companies that do not meet the RTOs' scope requirements also could qualify as ITPs if they render service under their own tariff and administer standard markets.

Comments are due on the NOPR on November 15, with a final order expected early next year. State regulators have been divided in their reaction to the NOPR, with commissioners from 22 states and DC indicating preliminary support for the NOPR, and officials from 15 or 16 states publicly stating opposition to the proposal. While comments will assist FERC in finalizing details, fundamental changes in FERC's direction appear unlikely. Thus, all entities should be planning now how to address the potential impacts of locational marginal pricing with associated CRRs that, if FERC has its way, would be implemented on or before Sept. 30, 2004 across the country. elp

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Doot is a partner in the Hartford office of Day Berry & Howard LLP. He practices in the area of public utility and energy law, assisting generation developers, transmission owners, power markets and customers in addressing electric restructuring issues. He can be reached at dtdoot@dbh.com or 860-275-0100.

Day, Berry & Howard has more than 225 lawyers in five Northeastern cities representing clients in a wide variety of sophisticated legal matters. Day Berry & Howard's energy law group has been at the forefront of restructuring and has helped clients navigate critical issues that define their evolution in the changing world of energy purchase and supply. The firm counsels clients in the creation of regional transmission organizations (RTOs) and wholesale market design and operation. Representing sellers of, and bidders for, generating units, Day Berry & Howard is involved in the development and financing of new generation across the country and around the world.