F e d e r a l E n e r g y R e g u l a t o r y C o m m i s s i o n 

A n n u a l R e p o r t 2 0 0 6

F E R C

A n n u a l R e p o r t

F e d e r a l E n e r g y R e g u l a t o r y C o m m i s s i o n

2 0 0 6
T a b l e o f C o n t e n t s
A n n u a l R e p o r t 2 0 0 6 

Message from the Chairman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Strategic Plan Framework FY 2007-FY 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Mission and Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Acronyms and Abbreviations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Section 1. Management’s Discussion and Analysis.............................. 9

 Regulatory Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

 Organizational Structure and Resources........................... 11

 Guiding Principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Section 2. Energy Infrastructure Serving the Nation’s Needs . . . . . . . . . . . . . . . . . . . . . 15

 Stimulate Appropriate Infrastructure Development . . . . . . . . . . . . . . . . . . 15

 Maintain a Reliable and Safe Infrastructure........................ 23

Section 3. Competitive Markets: Benefiting the Customer....................... 29

 Develop Rules that Encourage Fair and Efficient Competitive Markets . . 29

 Prevent Accumulation and Exercise of Market Power . . . . . . . . . . . . . . . . 33

Section 4. Enforcement: Guarding the Customer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

 Provide Vigilant Oversight..................................... 38

 Provide Firm but Fair Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Section 5. Energy Policy Act of 2005 Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Appendix A: Hydropower Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
 A n n u a l R e p o r t 2 0 0 6 

C h a i r m a n ’s M e s s a g e
A n n u a l R e p o r t 2 0 0 6 

I am pleased to submit to the Congress the Federal Energy Regulatory Commission’s annual report, covering the fiscal year from October 1, 2005, through September 30, 2006. For fiscal year 2006, Congress 

appropriated $220,400,000 to support Commission activities. Under the authority of the Omnibus Budget 

Reconciliation Act of 1986 and other laws, the Commission recovers all of its costs from regulated industries through fees and annual charges. Revenues generated from these sources completely offset congressional appropriations and results in a net cost of zero dollars to the treasury. Thus, the users and beneficiaries 

of the Commission’s services pay its operating costs—not the general taxpayers.

This is the 86th Annual Report issued by the Commission and its predecessor, the Federal Power Commission. The report demonstrates that the Commission’s overall duties remain the same: guarding electric and 

gas consumers from market power abuse, and promoting development of a robust energy infrastructure.

Those have been the same duties that have guided the Commission since 1935 and 1938, when the Federal 

Power Act and Natural Gas Act were enacted.

 

On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005) was enacted. EPAct 2005 marked the most 

significant increase in Commission regulatory authority in 70 years. Among the most important of these tools 

is new authority to establish rules to prevent manipulation of electric and gas markets, with significant new 

penalty authority. These new regulatory tools also include authority to establish and enforce electric reliability 

standards and discretionary authority to provide greater price transparency in electric and gas markets.

In FY 2006, the Commission worked diligently and met all of the deadlines set by Congress. During the 

first year since EPAct 2005 was signed into law, the Commission promulgated nine final rules, issued three 

additional notices of proposed rulemaking, authored and submitted seven reports to Congress, and entered 

into a memorandum of understanding with the Commodity Futures Trading Commission. With these new 

duties in place, we now have more authority to prevent unjust and unreasonable rates in wholesale power 

sales, to prevent undue discrimination or preference in wholesale power sales and transmission service, and 

to encourage the development of a stronger energy infrastructure.

To the Senate and House of Representatives:

Joseph T. Kelliher

Chairman

Sincerely,
  A n n u a l R e p o r t 2 0 0 6 

F E R C

F E D E R A L E N E R G Y R E G U L A T O R Y C O M M I S S I O N 

M i s s ion

Regulate and oversee energy industries in the economic, environmental, 

and safety interests of the American public.

Guiding Principles that Strengthen the Commission’s 

Overall Performance

To fulfill its Mission, the Federal Energy Regulatory 

Commission commits to...

Organizational Excellence

Use resources efficiently and effectively to achieve strategic priorities

Due Process and Transparency

Complete regulatory proceedings in an open and fair manner, consistent with 

established regulations

Regulatory Certainty

Provide regulatory certainty through consistent Commission approaches and actions

Stakeholder Involvement

Ensure that interested parties are informed and provided an appropriate 

opportunity to participate in Commission proceedings

Timeliness

Act on regulatory matters in an expeditious manner
A n n u a l R e p o r t 2 0 0 6 

Objective A: Stimulate Appropriate Infrastructure Development

l Resolve regulatory and other challenges to needed development

l Encourage investment and effect timely cost recovery

Objective B: Maintain a Reliable and Safe Infrastructure

l Assure reliability of interstate transmission grid

l Protect safety at LNG and hydropower facilities

l Incorporate environmental considerations into Commission decisions

Goal 2: Competitive Markets

Support Competitive Markets

Objective A: Develop Rules that Encourage Fair and Efficient Competitive Markets

l Employ best practices in market rules

l Reduce barriers to trade between markets and among regions

Objective B: Prevent Accumulation and Exercise of Market Power

l Assure proposed mergers and acquisitions are in the public interest

l Address market power in jurisdictional wholesale markets

Goal 3: Enforcement

Prevent Market Manipulation

Objective A: Provide Vigilant Oversight

l Identify and remedy problems with structure and operations in energy markets

Objective B: Provide Firm but Fair Enforcement

l Establish clear and fair processes

l Conduct investigations promptly and impose penalties where appropriate

l Encourage self-policing and/or self-reporting of violations

V i s ion

Abundant, reliable energy in a fair competitive market.

Goal 1: Energy Infrastructure

Promote the Development of a Strong Energy Infrastructure

S T R A T E G I C P L A N F R A M E W O R K F Y 2 0 0 6 – F Y 2 0 11
 A n n u a l R e p o r t 2 0 0 6 

F E R C

ATC Available Transmission Capability 

Bcf Billion cubic feet 

CAISO California Independent System Operator Inc.

CFTC Commodity Futures Trading Commission 

Commission Federal Energy Regulatory Commission

DOE U.S. Department of Energy 

Dth dekatherm

EA Environmental Assessment

EIS Environmental Impact Statement

Entergy Entergy Services Inc.

EPAct 2005 Energy Policy Act of 2005 

EQR Electric Quarterly Report

ERO Electric Reliability Organization 

FERC Federal Energy Regulatory Commission

FPA Federal Power Act 

FPC Federal Power Commission 

ILP Integrated Licensing Process 

ISO Independent Transmission System Operator

A c r o n y m s a n d A b b r e v i a t i o n s 
A n n u a l R e p o r t 2 0 0 6 

kV kilovolt 

LG&E Louisville Gas & Electric Company

LNG Liquefied Natural Gas 

MAPP Mid-Continent Area Power Pool

Midwest ISO Midwest Independent Transmission System Operator Inc.

MMC Market Monitoring Center 

MOU Memorandum of Understanding

MW megawatts

NAESB North American Energy Standards Board

NERC North American Electric Reliability Corp.

NEPA National Environmental Policy Act of 1969 

NGA Natural Gas Act 

NGPA Natural Gas Policy Act of 1978 

NRC Nuclear Regulatory Commission

OASIS Open Access Same Time Information System 

OATT Open Access Transmission Tariff 

PJM PJM Interconnection 

PUHCA 1935 Public Utility Holding Company Act of 1935 

PUHCA 2005 Public Utility Holding Company Act of 2005

PURPA Public Utility Regulatory Policies Act of 1978 

RPM reliability pricing model 

RTO regional transmission organization

SPP Southwest Power Pool Inc.
S e c t i o n 1
A n n u a l R e p o r t 2 0 0 6 

Commission Overview

The Federal Energy Regulatory Commission (hereafter “FERC” or the “Commission”) is an independent agency that regulates the electric, natural gas and oil pipeline industries. FERC also reviews 

proposals to build liquefied natural gas (LNG) terminals, certificates interstate natural gas pipelines 

and licenses hydroelectric power projects. The Energy Policy Act of 2005 (EPAct 2005) gave FERC 

additional responsibilities. The Commission:

l Regulates the transmission and sale of natural gas for resale in interstate commerce; 

l Regulates the transportation services of interstate oil pipelines;

l Regulates the transmission and wholesale sales of electricity in interstate commerce; 

l Reviews mergers, acquisitions, asset sales and certain security transactions in the electric industry;

l Licenses and inspects private, municipal and state hydroelectric projects; 

l Approves the siting of and abandonment of interstate natural gas facilities, including pipelines, 

storage facilities and liquefied natural gas facilities; 

l Approves the siting of electric transmission facilities in national interest electric transmission 

corridors if certain conditions are met;

l Oversees the establishment and enforcement of reliability standards for the bulk power transmission system;

l Monitors wholesale energy markets and investigates violations of Commission orders, rules, and 

regulations;

l Enforces compliance with FERC rules, through audits, the use of civil penalties, and other 

means;

l Oversees environmental matters related to natural gas and hydroelectric projects; 

l Administers accounting and financial reporting regulations and conduct of regulated 

companies; and 

l Assures the safety of licensed hydroelectric projects and liquefied natural gas facilities.

The combination of the Commission’s vision, mission, organizational structure, resources, and 

goals, as described in this section, will help achieve its regulatory responsibilities, including those 

added by EPAct 2005.

Management’s Discussion and Analysis 
 10 A n n u a l R e p o r t 2 0 0 6 

F E R C

Regulatory Authority

The Commission is an independent regulatory 

agency within the U.S. Department of Energy 

(DOE) that oversees major aspects of the Nation’s 

electric, natural gas, hydroelectric and oil 

pipeline industries.

The Commission was created through the 

Department of Energy Organization Act on 

October 1, 1977. At that time, the Federal Power 

Commission (FPC), the Commission’s predecessor established in 1920, 

was abolished, and the 

Commission inherited 

most of the FPC’s regulatory mission.

The Commission 

has five members who 

are appointed by the 

President of the United 

States, with the advice 

and consent of the 

Senate, to five-year 

staggered terms. Each Commissioner has an equal 

vote on regulatory matters and no more than three 

Commissioners may belong to the same political 

party. One member is designated by the President 

to serve as Chair and is the Commission’s administrative head.

 Hydropower regulation, the oldest area of the 

Commission’s jurisdiction, began with the FPC’s 

regulation of non-federal hydroelectric generation 

in 1920, and includes authorizing the construction 

of projects in interstate commerce and overseeing 

their operation and safety.

Since 1935, the Commission regulated certain 

electric industry activities under the Federal Power 

Act (FPA). Under FPA sections 205 and 206, 

the Commission ensures that the rates, terms and 

conditions of sales for resale of electric energy and 

transmission service in interstate commerce by 

public utilities are just, reasonable, and not unduly 

discriminatory or preferential. Under FPA section 

203, as amended by EPAct 2005, the Commission 

reviews mergers and certain corporate transactions 

involving public utilities and public utility holding 

companies. Under FPA sections 203, 205 and 206 

the Commission primarily regulates investor-owned 

utilities. Government-owned utilities (e.g., Tennessee Valley Authority, federal power marketing 

agencies, and municipal utilities) and most cooperatively owned utilities are not, in large part, subject 

to Commission regulation (with certain exceptions).

Regulation of retail sales and local distribution 

of electricity are matters left to the states. In addition, the Commission has no role in authorizing the 

construction of new generation facilities (other than 

non-federal hydroelectric facilities), as regulation 

of such construction is the responsibility of state 

and local governments. EPAct 2005 authorized the 

Commission to permit the construction or modification of transmission facilities in national interest 

electric transmission corridors designated by the 

Secretary of Energy, if certain conditions are met.

 A major new area of Commission regulation as 

a result of EPAct 2005 is oversight of the Electric 

Reliability Organization (ERO). This organization will develop and enforce mandatory reliability 

standards for the Nation’s bulk power system, 

subject to Commission approval. On July 20, 2006, 

the Commission conditionally certified the North 

American Electric Reliability Corp. (NERC) as the 

ERO. All owners, users and operators of the bulk 

power system will be subject to mandatory reliability standards approved by the Commission.

The Commission’s role in regulating the natural 

gas industry is largely defined by the Natural Gas 

Act (NGA). Under sections 3 and 7 of the NGA, 

the Commission regulates the construction of 

new on-shore liquefied natural gas (LNG) import 

terminals and natural gas pipelines and related facilities. Under sections 4 and 5 of the NGA, FERC 

oversees the rates, terms and conditions of sales for 

resale and transportation of natural gas in interstate 

commerce. The Commission’s jurisdiction over 

wholesale sales of natural gas, however, is limited 
A n n u a l R e p o r t 2 0 0 6 11

by the Natural Gas Policy Act of 1978 (NGPA) and 

the Wellhead Decontrol Act of 1989.

Pipeline siting and construction is authorized 

by the Commission if found required by public 

convenience and necessity. As with hydropower 

licensing, the Commission’s actions on LNG and 

pipeline projects typically require consideration of 

factors under the National Environmental Policy 

Act of 1969 (NEPA), the Endangered Species Act, 

the Coastal Zone Management Act and other statutes. Regulation of the production and gathering of 

natural gas, as well as retail sales and local distribution of natural gas, are matters left to the states.

Finally, the Interstate Commerce Act gives the 

Commission jurisdiction over the rates, terms and 

conditions of transportation services provided by 

interstate oil pipelines. The Commission has no 

authority over the construction of new oil pipelines, 

or over other aspects of the industry such as production, refining, or wholesale or retail sales of oil.

Organizational Structure and 

Resources

The Commission is an independent regulatory 

agency within DOE that oversees the Nation’s 

electric, natural gas, hydroelectric, and oil pipeline industries. It is comprised of a bi-partisan, 

five-member Commission, headed by the Chairman and four Commissioners who are appointed 

by the President and confirmed by the Senate.

The Chairman serves as the chief executive officer. In FY 2006, FERC was organized by eight 

functional offices (see table). The Commission’s 

headquarters are in Washington, D.C., and it has 

five regional offices throughout the country.

In FY 2006, Congress appropriated 

$220,400,000 to support Commission activities.

As of September 30, 2006, the Commission employed 1,337 staff, including 1,306 permanent staff 

and 31 temporary staff.

Commissioner Commissioner Chairman Commissioner Commissioner

Office of 

Administrative 

Law Judges

Office of 

the Executive 

Director

Office of 

Administrative 

Litigation

Office of 

External Affairs

Office of the 

General Counsel

Office of 

Enforcement

Office of Energy 

Projects

Offices of Energy 

Markets and 

Reliability

Federal Energy Regulatory Commission
 12 A n n u a l R e p o r t 2 0 0 6 

F E R C

Guiding Principles that Strengthen the Commission’s Overall 

Performance

Five principles guide the Commission as it exercises its jurisdiction under its governing statutes.

Whether the Commission is adjudicating a rate 

filing, ruling on a permit application, or developing a new policy, it strives to meet these criteria 

as a means of ensuring that each of its actions is 

consistent with the public interest.

l Organizational Excellence. Above all, the 

Commission strives to use its resources efficiently and effectively to achieve its strategic 

Offices/Organizations Descriptions

Office of Administrative Law Judges

Resolves contested cases as directed by the Commission effectively, efficiently and expeditiously, 

either through impartial hearing and decision or through negotiated settlement, ensuring that the 

rights of all parties are preserved.

Office of Administrative Litigation Represents the public interest and seeks to litigate or settle cases set for hearing in a timely, 

efficient and equitable manner while ensuring the outcomes are consistent with Commission policy.

Office of External Affairs Handles all external communications with the public, press, Congress, and the states for the 

Commission.

Office of the Executive Director Provides administrative support services to the Commission including human resources, 

procurement, information technology, organizational management, financial, logistics and others.

Office of Energy Projects

Strengthens our energy infrastructure through the approval and oversight of hydroelectric and 

natural gas energy projects that are in the public interest and assures the safety of hydroelectric 

and LNG facilities.

Office of the General Counsel Provides legal services to the Commission. OGC represents the Commission before the courts and 

Congress, and is responsible for the legal phases of the Commission’s activities.

Office of Enforcement

Ensures effective regulation and protection of consumers by monitoring the operation of energy 

markets, identifying and remedying market problems in a timely manner, and enforcing Commission 

orders, rules, and regulation.

Office of Energy Markets and Reliability

Establishes and maintains rules for fair and competitive wholesale energy markets and prevents 

the exercise of market power and undue discrimination and preference. This includes establishing 

the rates, terms and conditions for open access to electric transmission and gas transportation 

facilities in interstate commerce. In addition, the office oversees the development and enforcement 

of reliability standards for the Nation’s bulk electric power system.

priorities. This includes its human resources.

The Commission performs targeted recruiting and hiring and has developed a marketsoriented training curriculum for entry-level 

as well as experienced staff. The Commission 

also makes efficient use of its information 

technology to receive filings, produce reports 

and orders, and maintain data repositories. The 

Commission tracks the activities of its staff to 

ensure that they are directed at meeting the 

Commission’s strategic goals and objectives.

l Due Process and Transparency. Paramount in 

all proceedings is the Commission’s determination to be open and fair to all participants.
A n n u a l R e p o r t 2 0 0 6 13

response and advanced metering, reliability, 

electronic tariff and rate-case filing, proposed 

cost allocation policies in the markets of 

Midwest Independent Transmission System 

Operator, Inc., PUHCA 2005 reporting requirements, Open Access Transmission Tariff 

(OATT) reform and market transparency 

issues. The outreach further informed the 

Commission on the effects of railroad delivery 

matters on reliability in electric markets and 

explored opportunities for coordination with 

the Nuclear Regulatory Commission (NRC).

The Commission also held regional conferences to identify infrastructure conditions, 

needs and investment, as well as environmental and landowner concerns. Finally, in 

processing hydropower and gas-related permit 

applications, the Commission conducts extensive collaborative pre-filing processes, during 

which input is received from a multitude of 

stakeholders, including citizen groups, environmental organizations, tribal interests, and 

local, state and federal resource agencies. The 

Commission has proposed to use the same 

pre-filing process for resolution of transmission siting applications.

l Timeliness. The Commission’s goal is to reach 

an appropriate resolution of each proceeding 

in an expeditious manner. The Commission 

has steadily decreased the time it takes to act 

on projects, such as LNG import terminals, 

gas storage facilities, and interstate natural 

gas pipelines. It has done so without compromising environmental protection and public 

participation responsibilities. The Commission sets and tracks compliance for timely 

resolution of filings for cost recovery, new 

services or changes to existing services, as 

well as on opinions resolving initial decisions, 

complaints and FPA section 203 applications.

All significant initial filings submitted to the 

Commission are announced by public notice 

published in the Federal Register. Material 

issues of fact are litigated in public hearings 

governed by due-process rules. Finally, many 

of the Commission’s major decisions are discussed and announced at open meetings that 

are webcast at no charge on its website.

l Regulatory Certainty. In each of the thousands of orders, opinions and reports issued by 

the Commission each year, the Commission 

strives to provide regulatory certainty through 

consistent approaches and actions. Without an 

assurance that the Commission’s policies will 

be internally consistent and applied reliably, 

investors may be unwilling to bear the risks 

associated with investing in critical energy 

infrastructure. Where it is appropriate, the 

Commission provides generic direction to 

industry participants in the form of guidance 

orders, policy statements or rulemakings to 

avoid uncertainty. The Commission also has 

adopted market-power rules designed to prevent the exercise of market-power and market 

abuse, to provide a more stable marketplace 

and to create an environment that will attract 

needed investment capital.

l Stakeholder Involvement. The Commission 

conducts outreach on a regular basis to ensure 

that interested parties have an appropriate 

opportunity to contribute to the performance 

of the Commission’s responsibilities. The 

Commission also organizes technical conferences and workshops designed to explain and 

explore issues related to the development and 

implementation of its policies. Throughout 

FY 2006, the Commission met with state and 

federal regulators, industry officials and the 

public to discuss electric market and reliability 

issues. For example, the outreach resulted 

in collaboration on issues concerning security constrained economic dispatch, demand 
S e c t i o n 2
A n n u a l R e p o r t 2 0 0 6 15

Goal 1: Energy Infrastructure: Serving the 

Nation’s Needs

A strong energy infrastructure is critical to the health of the U.S. economy. Competitive and reliable energy markets also require a strong infrastructure. A strong infrastructure helps make competitive markets work by:

l improving reliability;

l improving customer access to low-cost resources; and 

l allowing customers to choose between multiple supply sources.

The Commission has an important role in the development of a strong energy infrastructure 

that operates effectively and reliably. The Commission authorizes development of LNG facilities, 

certificates natural gas pipeline, natural gas and storage projects, and can issue permits for electric 

transmission facilities in certain instances, as well as license hydropower projects. FERC directly 

affects the reliability of the interstate bulk power transmission grid through approval and enforcement of reliability standards. In addition, the Commission provides opportunity for the recovery of 

infrastructure costs, including pipelines, by which nearly two-thirds of the energy consumed by the 

United States is transported and regulated by the Commission.

Effective Commission regulation can help ensure the development of a strong energy infrastructure. Commission rules on pricing and operations influence the level of infrastructure 

investment. They affect the amount and efficiency of infrastructure siting and the smoothness of 

the decisional process.

Objective A: Stimulate Appropriate Infrastructure 

Development

The Commission’s timely identification and resolution of regulatory and other challenges stimulate appropriate infrastructure development. As mentioned above, the Commission is responsible for 

authorizing LNG facilities, certificating interstate natural gas pipelines and storage projects, permitting electric transmission facilities in interstate commerce (under certain circumstances) and licensing 

non-federal hydropower projects. Throughout all of these application processes, the Commission’s goal 

is to reduce the time it takes to act on projects without compromising environmental protection and 

public participation responsibilities. The Commission also promotes, and sometimes requires, the use 

of the pre-filing process, which involves completing a substantial portion of the environmental review 

and identifying significant non-environmental issues prior to the filing of an application. The pre-filing process addresses issues early in the application process and involves stakeholders from the beginning. This process has been validated by Congress in the EPAct 2005, and the Commission continues 

to pursue this method as a way to stimulate infrastructure development.
 16 A n n u a l R e p o r t 2 0 0 6 

F E R C

The Commission promotes infrastructure development by applying pricing policies encouraging investment, and establishing and consistently 

applying policies that permit timely cost recovery.

The Commission’s rate policies, consistently applied to infrastructure projects, give investors 

confidence that they have an opportunity to recover their investments. Without such assurances, 

investors will face greater risks, jurisdictional 

facilities will face difficulty 

when obtaining financing 

and fewer energy projects 

will be constructed than the 

Nation needs. That in turn 

will undermine the provision of adequate and reliable 

energy service.

The Commission promotes 

rate designs that support competitive wholesale markets for 

electric power and natural gas 

and gives companies incentives to build and efficiently 

operate key new projects.

The Commission has undertaken measures to provide 

timely cost recovery for infrastructure investors 

and reasonable rates and greater rate certainty for 

customers. Wholesale electric utility customers 

and gas and oil pipeline ratepayers need reasonable 

assurance: (1) of the transportation costs they can 

expect to face, (2) that these costs will be fair, and 

(3) that they will continue to have nondiscriminatory access to transportation services.

The Commission works to ensure that terms and 

conditions of service provide reliable open access 

service for all customers.

Long-Term Transmission Rights

In July 2006, the Commission finalized 

guidelines for regional transmission organizations 

(RTOs) operating organized electric markets to 

develop proposals providing long-term firm transmission rights. These guidelines will increase longterm transmission price certainty in the organized 

electricity markets and encourage new investments 

and other long-term power supply arrangements.

Specifically, these guidelines provide increased 

certainty about the congestion cost risks of longterm service in organized electricity markets, and 

assist load-serving entities and other market participants in supporting new investments and other 

long-term power supply arrangements.

LNG Facilities 

LNG is key to offsetting declining domestic 

natural gas production and reducing energy price 

volatility during peak demand periods. The demand 

for natural gas in the United States has been 

exceeding domestic supply for most of the decade.

In fact, natural gas usage is increasing while United 

States production is falling. LNG is considered 

a supplemental supply source to offset near-term 

demand for natural gas. LNG is economically viable at today’s market price. In October 2005, the 

Commission took an important step to facilitate 

the development of LNG facilities by adopting a 

final rule requiring potential developers of new 

LNG terminals to initiate pre-filing procedures at 

least six months prior to filing a formal application 

with the Commission. The rule also encourages 

prospective applicants to cooperate and coordinate 

with state and local government officials to address 

safety and security considerations.

In FY 2006, following a thorough safety review, 

the Commission authorized with conditions the 

construction and operation of the following three 

new LNG import terminals:

l Creole Trail LNG to site, construct and operate a new LNG import terminal in Cameron 

Parish, Louisiana. The terminal would include 

four LNG storage tanks that would have the 

capability to store up to 13 billion cubic feet 
A n n u a l R e p o r t 2 0 0 6 17

(Bcf) of natural gas and have a send-out capability of an average of 3.3 Bcf per day;

l Port Arthur LNG to site, construct and operate a new terminal and related facilities near 

Port Arthur, Texas. The facilities include six 

LNG storage tanks with a nominal capacity 

of 3.3 Bcf each. The project would ultimately 

provide an average of 3 Bcf per day to existing 

interstate pipeline systems in Texas and Louisiana, connecting to markets in the Midwest 

and Northeast; and 

l Crown Landing LLC to construct and operate 

a new onshore LNG import terminal in Logan 

Township, New Jersey. The proposed terminal would store up to the LNG equivalent of 

9.2 Bcf of gas, vaporize LNG and send it out 

through a connecting pipeline at a base load 

rate of 1.2 Bcf per day.

In FY 2006, the Commission also conditionally 

authorized several expansions, including the following three major expansions at previously authorized 

LNG facilities:

l Sabine Pass LNG project, which was authorized in December 2004 to be constructed and 

operated in Cameron Parish, Louisiana. The 

expansion included three additional 3.3 Bcf 

storage tanks and related facilities that would 

provide an average send-out capacity ranging 

from 2.6 Bcf per day to 4 Bcf per day;

l Cove Point LNG import facility near Lusby, 

Calvert County, Maryland. The Commission 

authorized the company to expand its LNG 

terminal facilities by adding two new storage 

tanks, each capable of storing 3.3 Bcf along 

with other related facilities. The expansion will 

enable it to increase the send-out capability by 

0.8 Bcf per day and increase storage capacity 

by approximately 6.8 Bcf per day; and 

l Freeport LNG import terminal which is 

under construction on Quintana Island, Brazoria County, Texas. The approved facilities 

constitute Phase II of the original Freeport 

LNG Project which was authorized on June 

18, 2004. The expansion will increase the 

terminal’s send-out capacity from 1.5 Bcf per 

day to 4.0 Bcf per day.

Natural Gas Pipelines 

To meet the growing demand for natural gas, 

the Commission must continue to respond quickly 

when companies propose to expand and construct needed pipelines and related facilities. In 

October 2005, the Commission held a technical 

conference on issues related to the development of 

natural gas pipeline infrastructure. The discussions included changes in the industry that affect 

infrastructure development, regulatory impediments, financial risks involved, and suggestions 

for regulatory improvements.

In FY 2006, the Commission took several steps 

to expedite the certification of natural gas pipelines.

For example, Commission staff actively participated 

in over 30 projects that were using the pre-filing 

process to engage stakeholders in the identification 

and resolution of stakeholder concerns prior to the 

filing of a certificate application with the Commission. The staff’s participation and initiative in these 

efforts will allow for the filing of better certificate 

applications, enabling more efficient and expeditious licensing actions by the Commission.

In August 2006, the Commission issued a 

newly updated brochure, An Interstate Natural Gas 

Facility on My Land; What Do I Need to Know? 

This brochure assists the public in understanding 

the natural gas pipeline pre-filing, application and 

construction processes, as well as citizens’ rights 

and responsibilities.

In FY 2006, the Commission took the following four industry-wide actions to facilitate the 

expansion and construction of needed pipelines 

and related facilities:

l In May 2006, the Commission issued 

proposed rules to implement EPAct 2005 

provisions that granted the Commission 

authority to coordinate the processing of 
 18 A n n u a l R e p o r t 2 0 0 6 

F E R C

interstate natural gas infrastructure proposals among federal and state authorities and to 

maintain a consolidated record of decisions for 

judicial review;

l In June 2006, the Commission adopted a 

policy statement on natural gas quality and 

interchangeability that delineates five principles the Commission will use as it continues to address disputes over gas quality and 

interchangeability on a case-by-case basis. This 

policy statement should provide guidance for 

the timely resolution of disputes over gas quality and interchangeability; 

l In June 2006, the Commission proposed to 

extend blanket certificate authority to interstate natural gas facilities previously ineligible 

for such consideration. The Commission also 

proposed raising project cost limits for a selfimplementing project to $9.6 million and for a 

prior-notice project to $27.4 million; and

l In August 2006, the Commission revised its 

rules to better monitor and assess the physical 

state of the interstate natural gas pipeline grid 

and gas storage infrastructure when service is 

disrupted due to damage caused by a hurricane, 

other natural disasters or acts of terrorism.

Overall in FY 2006, the Commission approved 

772 miles of new natural gas pipelines in the United 

States. Specifically, the Commission authorized the 

following major natural gas pipeline projects:

l In December 2005, the Commission authorized ANR Pipeline Co. to construct and operate various pipeline and compression facilities in Wisconsin as part of its Wisconsin 2006 

Expansion Project. The proposed facilities, 

together with an agreement with Great Lakes 

Transmission Co. will enable ANR to ensure 

delivery of an additional 168,241 dekatherms 

(Dth) per day of natural gas to meet increased 

demand by local distribution companies and 

other customers in Wisconsin;

l In March 2006, the Commission authorized Midwestern Gas Transmission Co. to 

construct and operate approximately 30 miles 

of pipeline and related facilities, known as the 

Eastern Extension Project, in Sumner and 

Trousdale Counties, Tennessee to transport 

120,000 Dth per day of natural gas to Piedmont Natural Gas; 

l In May 2006, the Commission issued a certificate to Transcontinental Gas Pipe Line Corp.

to construct and operate its Leidy to Long 

Island Expansion Project. The Long Island 

Expansion Project is an expansion of Transco’s 

existing pipeline system, under which Transco 

will provide 100,000 Dth per day of incremental firm transportation service to KeySpan 

Gas East Corp;

l In June 2006, the Commission conditionally 

authorized the construction and operation 

of approximately 177 miles of 24-inch and 

30-inch diameter pipe, 31,050 horsepower 

of compression, and appurtenant facilities as 

part of Southern Natural Gas Co.’s proposed 

Cypress Pipeline; and 

l In September 2006, the Commission authorized Questar Overthrust Pipeline Co.

to construct 27.1 miles of 36-inch diameter 

pipeline in Wyoming from its interconnect 

with Wyoming Interstate Co.’s system to an 

interconnection with Kern River Gas Transmission Co.’s system.

Natural Gas Storage Projects 

The Commission is committed to the timely 

review of natural gas storage filings to support the 

need for additional storage capacity. The damage 

and disruption to energy infrastructure caused 

by hurricanes in the Gulf Coast region in 2005, 

underscored the price ramifications of insufficient 

supply. Underground natural gas storage can be 

used to balance a variable market with a nearly 

constant supply of natural gas provided by the 

pipeline system. Storage fields are the warehouses 
A n n u a l R e p o r t 2 0 0 6 19

that give a ready supply of natural gas that can serve 

a market with high peak demands in warm or cold 

weather. In FY 2006, the Commission continued to 

issue certificates to projects in order to increase the 

storage capacity in the United States. Specifically 

the Commission issued certificates to the following 

major storage projects:

l In December 2005, the Commission authorized the construction and operation of the 

Liberty Gas Storage Project, a salt dome natural gas storage facility, and other associated 

pipeline facilities, in Calcasieu and Beauregard 

Parishes, Louisiana. Upon completion, the 

storage facility will be capable of delivering 

natural gas at the rate of approximately 1.0 Bcf 

per day, and receiving injection gas at a rate of 

approximately 0.5 Bcf per day;

l In May 2006, the Commission authorized 

Unocal Windy Hill Gas Storage to construct 

and operate a salt bed natural gas storage facility near the City of Brush, Morgan County, 

Colorado. Maximum withdrawal capability 

will initially be 0.2 Bcf per day upon completion of the first two caverns in Phase 1, and 

will then increase to 0.4 Bcf per day after 

completion of Phase 2; and

l In July 2006, the Commission authorized 

Bobcat Storage to construct and operate a 

new salt dome natural gas storage facility and 

related pipelines, a compression station and 

other facilities in St. Landry Parish, La., near 

the town of Port Barre. Upon completion, the 

storage facility will be capable of delivering 

natural gas at the rate of approximately 1.2 Bcf 

per day, and receiving injection gas at a rate of 

approximately 0.9 Bcf per day.

Natural Gas Storage Pricing

In June 2006, the Commission issued a final 

rule intended to mitigate natural gas price volatility by encouraging the development of new natural 

gas storage capacity. The rule provides further 

incentives for the development of new natural gas 

storage capacity and ensures access to storage 

services at just and reasonable rates, while at the 

same time ensuring that adequate storage capacity 

will be available to meet anticipated market demand. The rule set up two ways for developers of 

natural gas storage facilities to seek authorization 

to charge market-based rates. The first approach 

includes a broadened definition of the relevant 

product market for storage. The second approach 

implements EPAct 2005 provisions which would 

allow an applicant to request authority to charge 

market-based rates even if a lack of market power 

has not been demonstrated, under certain circumstances where market-based rates are in the public 

interest and necessary to encourage the construction of storage capacity in the area needing storage 

service, and customers are adequately protected.

The rule allows storage service providers to 

apply for market-based rates by filing appropriate supporting data when they submit a certificate 

application, or as part of a request for rate authorization under section 311 of the NGPA, or in a request for a declaratory order for authority to charge 

market-based rates. The Commission also established a process to ensure that reasonable terms and 

conditions are in place to protect customers.

Hydropower Projects

Hydropower remains an important component 

of the Nation’s energy portfolio and supports efficient, competitive electric markets by providing 

low-cost energy reserves and ancillary services. In 

December 2005, the Commission held a workshop 

to focus on several pending license applications 

filed at the Commission. The goals of the workshop were to: (1) review and discuss the pending 

license applications; (2) identify unresolved issues; 

(3) determine next steps; (4) agree on who will 

take the next steps; and (5) focus on solutions.

The workshop concentrated on identifying the 

unresolved issues associated with each project, and 

determining the best course of action to resolve or 

remove obstacles to final action on each pending 

license application.
 20 A n n u a l R e p o r t 2 0 0 6 

F E R C

In FY 2006, the Commission authorized 287.7 

megawatts (MW) of additional capacity at existing 

licensed hydropower projects. The Commission also 

granted an increasingly large number of preliminary 

permits authorizing feasibility studies for 2,900 

MW of capacity for new projects, including Tidal 

Energy Projects. 

Tidal Energy involves the harnessing of tidal 

movements using new technology to generate 

electricity without the construction of a dam or 

water retaining device at the mouth of rivers, bays, 

or other natural channels. The new technology can 

generate electricity with the incoming tide and the 

outgoing tide. These new technologies may or may 

not be anchored to the river/channel bottom with 

cables or shafts and the tidal water can flow through 

them unimpeded to generate power. In FY 2006, 

the Commission issued three preliminary permits 

for sites in California, Washington, and New York 

to study the feasibility of harnessing ocean waves, 

tidal or current energy potential.

The purpose of a preliminary permit is to maintain priority of application for a license for three 

years while the permit holder conducts investigations and secures data necessary to determine the 

feasibility of a new project and prepares an application to develop it.

During FY 2006, the Commission acted on a 

total of 29 hydropower applications, which included 

a total of 20 applications to relicense, five original 

license applications and three, 5 MW exemption 

applications. These applications represented an 

installed capacity of over 51 MW. The Commission 

also initiated the processing of nine proposals to 

relicense, four of which have an installed capacity 

in excess of 100 MW. Meanwhile, the Commission 

reduced the average processing time for hydropower 

relicensing by 4.3 percent.

Several new hydropower projects were licensed 

or issued 5 MW exemptions, contributing to an 

increase in overcall capacity. Specifically the following actions took place in FY 2006:

l In February 2006, the Commission issued an 

original license to SAF Hydroelectric LLC for 

the construction and operation of the 8.98 MW 

Lower St. Anthony Falls Project. The project 

would be located at the existing U.S. Army 

Corps of Engineers’ Lower St. Anthony Lock 

and Dam on the Mississippi River, in the city 

of Minneapolis, Hennepin County, Minnesota;

l In July 2006, the Commission issued an 

original license to Birch Power Company for 

the construction and operation of the 5 MW 

Lower Turnbull Drop Project. The project 

would be located on the Spring Valley Canal 

in Teton County, Montana; and

l In July 2006, the Commission issued an 

original license to Wade Jacobsen for the 

construction and operation of the 1.05 MW 

Mill Coulee Drops Hydroelectric Project. The 

project would be located on the Mill Coulee 

Canal in Cascade County, Montana.

The Commission also issued the following 

new licenses:

l In December 2005, the Commission issued a 

new license to the Portland General Electric 

Co. and Blue Heron Paper Co. for continued 

operation of the Willamette Falls Project, a 

16.68 MW project located on the Willamette 
A n n u a l R e p o r t 2 0 0 6 21

River near the cities of West Linn and Oregon 

City, Oregon; 

l In January 2006, the Commission issued a new 

license to the New York State Electric & Gas 

Corp. to continue operation and maintenance 

of the 40.26 MW Saranac River Hydroelectric 

Project located on the Saranac River in Clinton County, New York;

l In May 2006, the Commission issued a new 

license to Southern California Edison Co. to 

continue operation and maintenance of the 

Borel Hydroelectric Project, a 12 MW project 

located on the North Fork of the Kern River 

and the main stem of the Kern River in Kern 

County, California;

l In June 2006, the Commission issued a new 

license to Alabama Electric Cooperative Inc.

to continue operation and maintenance of the 

Conecuh River Project, an 8.25 MW project 

located on the Conecuh River, in Covington 

County, Alabama; 

l In August 2006, the Commission issued a new 

license to the Grand River Dam Authority to 

continue operation and maintenance of the 108 

MW Markham Ferry Hydroelectric Project 

located on the Grand River in Mayes County, 

Oklahoma; and

l In August 2006, the Commission issued a new 

license to Central Maine Power Co. for the 

continued operation and maintenance of the 

existing 31.54 MW Gulf Island-Deer Rips Hydroelectric Project located on the Androscoggin 

River in Androscoggin County, Maine.

Headwater Benefits

The additional electric generation that results at 

a downstream project from regulation of the flow 

of the river by an upstream headwater project is 

referred to as headwater benefits. These benefits are 

usually attributable to increasing or decreasing the 

release of water from a storage reservoir. Pursuant to 

section 10(f) of the FPA, in FY 2006 the Commission assessed $8,357,000 in headwater benefits in 

22 river basins covering 103 hydroelectric projects 

for energy benefits provided by federal headwater 

storage facilities. Headwater benefit assessments 

are returned to the U.S. Treasury to offset headwater project construction costs.

Integrated Licensing Process

In an effort to increase the efficiency of the 

licensing process, which involves a multitude of 

stakeholders, including citizen groups, environmental organizations, tribal interests, and local, 

state and federal resource agencies, the Commission developed the Integrated Licensing Process 

(ILP). The ILP’s ultimate goal is to establish an 

efficient, predictable and timely licensing process 

that develops a record sufficient for the Commission to take final action. 

In FY 2006, the number of hydropower projects 

using the ILP doubled from eight to 17. The Commission expanded the use of the ILP which, among 

other things, merges prefiling consultation with 

the development of the environmental analysis 

document under NEPA. Throughout FY 2006, the 

Commission undertook numerous outreach efforts 

to educate the industry, resource agencies, tribes, 

nongovernmental organizations, citizen groups and 

other stakeholder groups on the ILP. Staff made 

presentations and led discussions on the ILP at 

several national hydropower meetings. In addition, 

regional conferences and intensive project-specific 

meetings with multiple stakeholder groups were 

held to educate participants on the ILP. Specifically, the Commission took the following steps in 

FY 2006 to improve the ILP:

l In February 2006, the Commission prepared 

a document on ideas for implementing and 

participating in the ILP, which provided tools 

for industries, agencies, tribes, non-governmental organizations and citizens; and

l In February 2006, the Commission evaluated 

the effectiveness of the ILP by summarizing 

comments from interviews, teleconferences, 

and regional outreach meetings.
 22 A n n u a l R e p o r t 2 0 0 6 

F E R C

Electric Transmission Pricing Reform

EPAct 2005 directed the Commission to develop incentive-based rate treatments for transmission of electric energy in interstate commerce and 

added a new section 219 to the FPA. In response, 

the Commission issued a pricing reform rule in July 

2006. With it, the Commission seeks to bolster 

investment in the Nation’s transmission infrastructure, and to promote electric power reliability and 

lower costs for consumers by reducing transmission 

congestion. The rule identified specific incentives 

the Commission would allow based on a case-bycase analysis of individual transmission proposals.

The rule does not grant utilities all of the incentives 

the Commission listed, but rather allows utilities on 

a case-by-case basis to select and justify the package 

of incentives needed to support new investment.

Additionally, the rule provides expedited procedures for the approval of incentives to provide utilities regulatory certainty and facilitate the financing 

of projects.

At the same time, the Commission conditionally approved rate incentives for the following two 

projects:

l American Electric Power Corp.’s 765-kilovolt 

(kV), 550-mile proposed transmission line 

that would extend from West Virginia to New 

Jersey; and

l Allegheny Energy Inc.’s proposed 500-kV 

transmission line, which would extend from 

southwestern Pennsylvania to Virginia.

Transmission Upgrade Cost Allocation

With the need for more transmission, in some 

areas significantly more, the Commission faces the 

issue of who will pay for needed electric transmission expansion and upgrades. In FY 2006, the 

Commission reviewed proposed cost allocation 

plans to ensure they result in rates that are just and 

reasonable, not unduly discriminatory or preferential. For example, the Commission took the following actions in FY 2006:

l In January 2006, the Commission accepted 

Southwest Power Pool Inc.’s (SPP) compliance 

filing, which modified provisions of SPP’s 

OATT relating to allocation of costs of new 

and/or upgraded transmission facilities and, 

in particular, provisions regarding credits to 

be paid to customers to whom such costs were 

originally allocated; 

l In February 2006, the Commission conditionally accepted the Midwest ISO’s transmission expansion cost allocation policy that 

will allocate and recover costs associated 

with new transmission projects and system 

upgrades within the Midwest ISO Transmission System; 

l In April 2006, the Commission convened a 

technical conference to discuss the Midwest 

ISO’s proposed cost allocation policy. Specifically, the conference focused on the degree of 

regional cost sharing for reliability projects at 

345-kV and above, pursuant to a prior Commission order.

Merchant Transmission

Merchant transmission projects are transmission projects in which the builder typically assumes 

the risk of the project, and seeks market-based 

rates approved by the Commission. Merchant 

transmission projects play a useful role in expanding competitive generation alternatives for customers and meeting reliability needs, as demonstrated 

by the success of the 330 MW Cross-Sound Cable 

project that connects Long Island to Connecticut.

The 660 MW Neptune project, which is expected 

to be in service by the end of 2007, will connect 

New Jersey with Long Island. The Commission 

continues to work to facilitate merchant transmission projects. For example, in FY 2006, the 

Commission approved negotiated rates for the 

Montana-Alberta Tie’s proposal that will provide 

up to 600 MW of transmission capacity between 

Alberta, Canada, and Great Falls, Montana. The 

project will allow resources, including renewable 
A n n u a l R e p o r t 2 0 0 6 23

resources that are being developed in Montana, to 

get to markets throughout the West. It also further 

integrates the United States and Canadian transmission grids and serves to increase electric system 

reliability in both countries.

Emergency Cost Recovery 

The measures the Commission has undertaken to 

provide timely cost recovery for infrastructure investors also provide reasonable rates and greater rate 

certainty for customers. The Commission has also 

used its declaratory order process to provide clear cost 

recovery processes to energy industry stakeholders.

In FY 2006, the Commission continued taking action to ensure that security-related costs are 

recovered. In accordance with its policy statement 

regarding Extraordinary Expenditures Necessary to 

Safeguard National Energy Supplies, issued three days 

after the September 11th terrorist attacks, the Commission continues to give the highest priority to 

deciding any requests made for the recovery of extraordinary expenditures to safeguard the reliability 

and security of the Nation’s energy transportation 

systems and energy supply infrastructure.

The damage done by Hurricanes Katrina and 

Rita in the Gulf Coast area in late summer 2005 

was widespread and severe. Offshore energy 

production was shut in; pipelines, power lines, and 

other means of energy transportation were seriously damaged; and other important parts of the 

energy infrastructure system, such as natural gas 

processing plants, were off line. In order to encourage rapid restoration of service, the Commission 

took a number of actions, including temporarily 

raising cost limits and including mainline facilities within the definition of eligible facilities that 

may be constructed by natural gas companies under 

blanket certificates; granting waivers on a caseby-case basis of the 120-day limit on emergency 

natural gas transactions, including the construction 

and operation of necessary facilities; and granting 

waivers of tariff provisions to allow delivery of gas 

at alternative points when the usual delivery points 

were out of service from hurricane damage. In the 

February 2006 report, The Federal Response to Hurricane Katrina: Lessons Learned, the Commission 

was recognized as having taken immediate steps 

to reconstruct the natural gas infrastructure of the 

region as well as reduce the disruption in natural 

gas supply.

In August 2006, the Commission revised its 

regulations to better monitor and assess the physical state of the interstate natural gas pipeline grid 

and gas storage infrastructure when service is disrupted, due to damage caused by a hurricane, other 

natural disasters or acts of terrorism. The final rule 

requires jurisdictional natural gas companies to 

report to the Commission damage to their facilities 

and report service disruptions that occur when a 

natural disaster or other cause results in a reduction 

in pipeline throughput or storage deliverability.

Objective B: Maintain a 

Reliable and Safe Infrastructure

The Nation’s energy infrastructure must be reliable and safe for customers to enjoy the benefits of 

competitive energy markets. Given the economy’s 

dependence on a reliable supply of electricity, it is 

critical for the industry to have clear, unambiguous, 

mandatory and enforceable reliability standards 

and secure communications and control technology. The Commission also needs a highly trained 

staff that understands the complexities of the bulk 

power system.

The Commission is responsible for the safety of 

on-shore LNG and non-federal hydropower facilities throughout the entire life cycle of a project: 

design review, construction, and operation.

The Commission reviews and approves the final 

engineering design of authorized LNG projects, 

inspects these facilities during construction to 

ensure compliance with the safety and reliability requirements of Commission orders, and conducts the 

annual and biennial safety and reliability inspections 

of the existing jurisdictional LNG peak shaving 

and marine import terminals for the life of these 
 24 A n n u a l R e p o r t 2 0 0 6 

F E R C

facilities. The Commission will take steps to ensure 

the review of new facilities does not conflict with the 

ongoing obligation of the Commission to ensure the 

safe and reliable operation of existing facilities.

Natural gas projects and hydropower projects 

have environmental impacts that can be mitigated 

with appropriate measures. The Commission is 

committed to satisfying environmental concerns 

through cost-effective mitigation of environmental 

impacts, while also seeking to avoid construction 

delays. Commission licenses include terms and 

conditions that are designed to mitigate possible 

environmental impacts of project construction and 

operation, and to provide opportunities to enhance 

the public’s use of the available resources. The Commission monitors these terms and conditions for 

compliance throughout the term of the license.

Reliability of Interstate 

Transmission Grid

Historically, while the Commission regulated 

access to the transmission grid, it had no role in the 

approval or enforceability of reliability standards.

Prior to 1965, reliability of the interconnected 

electric grid was managed by individual electric 

utilities, or groups of interconnected utilities, which 

were, to varying degrees, accountable to state and 

local regulators. Following the Northeast Blackout 

of 1965, regional reliability organizations and, later, 

NERC, were formed to develop voluntary reliability 

rules and to encourage reliable operating practices.

In August 2005, EPAct 2005 added to the FPA 

a new section 215 on reliability. It directed the 

Commission to promulgate new rules addressing 

establishment of an ERO and development of mandatory electric reliability standards and enforcement 

procedures. During FY 2006, the Commission took 

the following steps to implement section 215:

l In February 2006, the Commission finalized 

new rules on the certification of an ERO and 

the procedures for the establishment, approval and enforcement of mandatory electric 

reliability standards. This followed technical 

conferences in November and December 2005 

which addressed: the process that the ERO 

will use in proposing the new mandatory reliability standards; the role of regional entities 

in the ERO’s standards development process; 

how existing reliability standards can be improved over time by the regional entities; how 

to establish new electric reliability standards; 

the roles states play with respect to reliability; 

and issues related to compliance and enforcement of standards;

l In April 2006, the Commission established a 

rulemaking proceeding to address proposed 

mandatory and enforceable reliability standards developed by NERC; 

l In May 2006, the Commission completed a 

staff preliminary assessment of NERC’s proposed mandatory and enforceable reliability 

standards and asked for public comments on 

the assessment to help it prepare a Notice of 

Proposed Rulemaking; and

l In July 2006, the Commission certified 

NERC as the Nation’s ERO and accepted, 

with some modifications and clarifications, 

NERC’s proposed governance structure, funding, reliability standards development process, 

enforcement program and pro forma Regional 

Entity delegation agreement, through which 

NERC would delegate certain of its compliance and enforcement responsibilities to 

regional entities.

The Commission has also begun to analyze and 

facilitate the industry’s work in cyber and physical security and information exchange within the 

industry. Additionally, the Commission took other 

significant steps to ensure the reliability of the 

interstate transmission grid:

l In January 2006, the Commission directed 

the PJM Interconnection (PJM) and Potomac 

Electric Power Co. to develop and implement 

a comprehensive plan to preserve reliability in 

the Washington, D.C., region. The Commis-
A n n u a l R e p o r t 2 0 0 6 25

sion concluded that reliability standards are 

not being met during certain conditions, and 

that the long-term reliability of the regional 

power grid in the Washington, D.C., area is 

compromised. In July 2006, the 69-kV portion 

of the Potomac River Project was completed 

(i.e., two feeders were 

energized). Additionally, 

PJM and Potomac Electric 

Co. anticipate an in-service 

date of June 21, 2007 for 

the 230-kV portion of the 

Potomac River Project; 

l In May 2006, the Commission and the NRC met 

to discuss and promote interactions between the two 

agencies on matters relating 

to the Nation’s electric 

power grid reliability and 

the operation of United 

States commercial nuclear 

power plants; and

l In September 2006, the Commission approved 

an innovative agreement among electric utilities put forth by the Edison Electric Institute 

establishing a Spare Transformer Equipment 

Program designed to increase the industry’s 

inventory and availability of spare electric 

transformers. The Commission concluded 

that this agreement will help to maintain the 

integrity of the Nation’s transmission system 

in the event of a terrorist attack by providing 

participating utilities immediate access to a 

pool of spare transformers and, thus, dramatically reducing the length of an outage resulting 

from an attack. The Commission has encouraged the participating utilities to expand the 

scope of the program to include such emergency situations as natural disasters, under 

which the transfer of spare transformers will 

be required under the Agreement.

Safety at LNG Facilities 

The Commission works with the Department 

of Transportation, the U.S. Coast Guard and 

other agencies to ensure the safe siting, operations, 

and reliability of facilities. This process ensures 

that approved LNG terminals and associated 

LNG vessel traffic meet safety and environmental 

requirements during construction and operation.

The Commission can also impose safety requirements to ensure or enhance operational reliability 

of the LNG terminals.

In FY 2006, the Commission staff completed 

the process of producing guidelines on the content 

and level of engineering detail required for LNG 

applications. Specifically, in December 2005, the 

Commission issued Draft Guidance for Filing 

Resource Reports 11 & 13 for LNG Facility Applications to assist applicants by identifying the 

specific information and level of detail required for 

filing these resource reports as specified by Title 

18 of the Code of Federal Regulations, Sections 

380.12 (m) and (o).

To get industry feedback on this guidance, in 

May 2006, the Commission convened a technical conference to discuss the engineering and 

safety information required in applications for 

LNG facilities. In FY 2006, the Commission also 

performed detailed reviews of safety and security 

issues, in coordination with the U.S. Coast Guard 

and the U.S. Department of Transportation.

In May 2006, the Commission established a 

new LNG Compliance Branch within the Office 

of Energy Projects to further the Commission’s 

mission to ensure safe and environmentally 

responsible construction and operation of LNG 

facilities. The LNG Compliance Branch is responsible for the Commission’s continued safety 

inspections and oversight of operating LNG facilities. The staff, including LNG engineers, civil and 

mechanical engineers, and other experts, reviews 

final facility design and engineering to ensure 

compliance with Commission orders.
 26 A n n u a l R e p o r t 2 0 0 6 

F E R C

Safety at Hydropower Facilities 

The Commission administers the largest dam 

safety program in the United States. The Commission cooperates with a large number of federal and 

state agencies to ensure and promote dam safety 

and homeland security. More than 2,500 FERClicensed dams are in the program. Two-thirds of 

these dams are more than 50 years old. As dams 

age, concern over their safety and integrity grows, 

and oversight and regular inspection programs are 

extremely important.

Dam safety is a critical part of the Commission’s 

hydropower program. Before projects are constructed, 

the Commission staff reviews and approves the designs, plans and specifications of dams, powerhouses 

and other structures. During construction, Commission staff engineers frequently inspect a project, and 

once construction is complete, Commission engineers 

continue to inspect the dam on a regular basis. Commission staff inspect projects on an unscheduled basis 

to investigate potential dam safety problems; complaints about constructing and operating a project; 

safety concerns related to natural disasters; and issues 

concerning compliance with terms and conditions of 

a license. In FY 2006, the Commission held a series 

of workshops to improve the Commission’s safety 

program at hydro facilities. Specifically, the Commission held the following workshops:

l In February 2006, the Commission organized 

a workshop for Pacific Northwest dam owners, 

operations personnel, and regulatory staff to 

discuss and explore collaborative opportunities 

on topics related to seismic issues and extreme 

hydrologic events;

l In April 2006, the Commission held a 

workshop with the Department of Homeland 

Security to discuss dam security, dam safety, 

and emergency preparedness issues;

l In April 2006, the Commission hosted an 

Emergency Action Plan Exercise Design 

Course to discuss exercise emergency requirements and the design process; and

l In May 2006, the Commission hosted a Dam 

Safety Surveillance and Monitoring Workshop for dam owners, operators, consultants, 

instrumentation equipment manufacturers 

and Commission staff, which focused on the 

appropriate design, installation and data interpretation of instrumentation and monitoring 

systems at dams and appurtenant structures.

In response to a December 2005 reservoir breach 

at the Taum Sauk Pumped Storage Project, the 

Commission sent teams of engineers to investigate 

at the facility near Lesterville, Missouri. In May 

2006, the Commission released for public comment 

a report by an Independent Panel of Consultants 

on the technical reasons for the breach of the Taum 

Sauk Pumped Storage Project upper reservoir.

Immediately following the breach, the Commission initiated a review of all Commission-regulated 

pumped storage projects to assure project safety 

and determine the need for and development of 

guidelines for the safe operation of pumped storage projects. This ongoing effort includes a review 

of the effectiveness of the instrumentation and 

monitoring systems, operating procedures, operator 

training programs and Emergency Action Plans. In 

addition, the Commission requested each operator 

to conduct a fault-tree analysis of possible failure 

mechanisms addressing the project structures, all 

instrumentation and monitoring systems, backup 

alarms and computer controls; and to begin planning for a meeting of operators, managers, and 

consultants from the 21 pumped storage projects 

under the Commission’s regulation.

On May 5, 2005, a sinkhole was discovered 

in the crest of the Swinging Bridge Dam on the 

Mongaup River in Sullivan County, New York. The 

Commission commenced an investigative program 

to assess the condition of the dam, to determine the 

cause of the sinkhole, and to determine what actions may be necessary to correct the problem.

Throughout FY 2006, the Commission took 

steps towards the rehabilitation of the Swinging Bridge Dam. Commission staff oversaw the 
A n n u a l R e p o r t 2 0 0 6 27

construction activities designed to ensure the safety 

of the dam to handle the spring flood season, which 

was completed in May 2006, and continued working toward the completion of all remedial activities 

at the site.

Environmental Considerations – 

Natural Gas

In FY 2006, the Commission promoted the use 

of the third-party compliance monitoring program for environmental compliance in natural gas 

projects. The program established a full-time on-site 

presence during the construction and restoration of 

major projects, giving the Commission staff immediate access to information regarding field conditions and the ability to respond quickly to requests 

from landowners and construction contractors. This 

gives the industry more flexibility to react to changing or unanticipated construction conditions.

During FY 2006, the Commission staff completed the environmental review of 452 gas pipeline 

and LNG filings, including 54 environmental assessments (EAs) and 8 Environmental Impact Statements (EISs). Concurrently, the Commission staff 

continued work on 33 additional EAs and 14 additional EISs, primarily for new LNG import terminals. Because of the effective use of the Commission’s 

pre-filing process, the average time for the staff’s 

completion of the EISs was about 14.8 months.

Environmental Conditions – 

Hydropower Projects

Hydropower licenses include requirements that 

are designed to protect, mitigate and enhance the 

environmental resources of project areas. The Commission safeguards the environment by requiring all 

hydropower applicants to communicate with affected 

federal and state natural resources agencies, tribes 

and state water quality agencies prior to submitting 

an application to the Commission.

In many cases, environmental measures are 

proposed in settlement agreements filed with the 

Commission. The Commission will encourage 

parties to develop settlements consistent with the 

Commission’s responsibilities under the FPA so the 

Commission can include agreed-upon provisions 

in licenses. To facilitate this process, in September 

2006 the Commission issued a policy statement in 

the form of a guidance document for participants 

in settlement agreements associated with hydroelectric licensing cases. This document aims to help 

parties determine which conditions are appropriate 

for inclusion in these settlement agreements.

The Commission continues to receive an 

increasing number of land–and water–use development applications that involve contested, complex 

issues related to water quality, navigation hazards, 

aesthetics and erosion around licensed lakes and 

reservoirs. The Commission expects the same trend 

to continue, as public leisure demands continue to 

grow on lakes and reservoirs. The Commission has 

issued a guidance manual for shoreline management, and will hold land resources management 

and development workshops in the affected regions 

of the country.

In FY 2006, Commission staff completed the 

environmental review of 34 hydroelectric license 

and exemption applications, including 20 EAs 

and four EISs. Concurrently, the Commission 

staff continued work on three draft EAs and 

seven draft EISs.

In FY 2006, the Commission continued to 

monitor compliance through its environmental 

inspection program to ensure that resource protection measures designed to maintain environmental 

quality at hydropower projects are constructed and 

implemented according to license requirements.

The Commission’s compliance assistance program, 

comprising environmental inspections, building 

partnerships, engaging in collaborative problem 

solving and delivering guidance will ensure effective license compliance and resource protection.
S e c t i o n 3
A n n u a l R e p o r t 2 0 0 6 29

The Commission continues to develop rules that encourage fair and effective competitive markets 

and prevent the accumulation and exercise of market power.

The Commission is charged by statute with ensuring that prices in jurisdictional energy markets 

remain just and reasonable and are not unduly discriminatory or preferential. One way the Commission does this is by preserving and expanding the transparency of information and operations in energy markets. This in turn relies on Commission rules being effective at encouraging fair and efficient 

competitive markets. The Commission accomplishes this primarily through:

l its rate and corporate jurisdiction under sections 205, 206 and 203 of the FPA;

l its rate jurisdiction under sections 4 and 5 of the NGA; and 

l EPAct 2005 amendments to the FPA and NGA related to market operations, including new 

transparency provisions and anti-manipulation provisions.

To help reach these goals, the Commission reorganized the staff and structure from the Office 

of Markets, Tariffs and Rates into the Office of Energy Markets and Reliability in early FY 2006.

Changes were also made to the Office of Market Oversight and Investigations which resulted in the 

new Office of Enforcement. These realignments match the Commission’s work in the areas of competitive markets and enforcement.

Objective A: Develop Rules that Encourage Fair and 

Efficient Competitive Markets

In exercising its jurisdiction over wholesale markets and transportation in interstate commerce, 

the Commission strives to reduce barriers in gas and electric intra- and inter-market trade. The 

operations of jurisdictional energy providers in the United States must work together as seamlessly as 

possible to reduce transaction costs and help ensure that rates are reasonable. Furthermore, the Commission seeks to adopt approaches that are complementary to those of the states in their regulation of 

retail markets.

Rule Changes

In FY 2006, the Commission continued to look for areas in which to improve upon Commission 

policies in furtherance of wholesale competitive markets.

l In May 2006, the Commission issued a Notice of Proposed Rulemaking containing proposals 

to amend the Commission’s regulations adopted in Order Nos. 888 and 889 and its pro forma 

OATT. The proposed changes were designed to ensure that transmission services are provided 

on a basis that is just, reasonable and not unduly discriminatory or preferential. The proposed 

rulemaking is intended to strengthen the pro forma OATT to ensure that it achieves its original 

Goal 2: Competitive Markets: 

Benefiting the Customer
 30 A n n u a l R e p o r t 2 0 0 6 

F E R C

purpose —remedying undue discrimination—not to create new market structures. The 

Commission took this action to strengthen 

the OATT and address deficiencies that have 

become apparent over the decade since its 

adoption, particularly in the areas of available 

transmission capability (ATC) calculation and 

transmission planning

l In May 2006, the Commission issued a 

Notice of Proposed Rulemaking to reform its 

four-prong analysis for determining whether 

a wholesale seller of electric energy, capacity 

or ancillary services is qualified for marketbased rate authority. The four-prong analysis 

examines generation market power, transmission market power, other barriers to entry and 

affiliate abuse/reciprocal dealing. Under the 

proposed rule, the Commission’s review would 

be reformed into a more traditional horizontal 

and vertical market power analysis

l In April 2006, the Commission, after finding 

that PJM’s existing capacity obligation rules 

unjust and unreasonable, determined that certain elements of the proposed alternative, the 

reliability pricing model (RPM), may form the 

basis for a just and reasonable capacity market.

Guidance was provided on the features of 

RPM that must be further analyzed before 

the Commission can determine whether RPM 

is a just and reasonable capacity market, and 

established procedures – including a technical 

conference – to resolve the issues. Concurrently, the parties entered into settlement talks

l In March 2006, and in subsequent orders in 

FY 2006, the Commission provided guidance and approvals for SPP’s proposed tariff 

revisions intended to implement a real-time, 

offer-based, energy imbalance market that will 

be used to calculate the price of imbalance 

energy, and establish a market monitoring and 

market power mitigation plan 

l In June 2006, the Commission approved a 

settlement agreement addressing problems in 

New England’s generation capacity market.

The settlement attempted to resolve protracted 

litigation and bring a needed measure of 

stability to the region. The Commission found 

that the settlement agreement was a just and 

reasonable outcome consistent with the public 

interest and should resolve the deficiencies in 

New England’s existing capacity market. The 

agreement was the product of a series of more 

than 30 formal settlement conferences over a 

four-month period overseen by a Commission 

administrative law judge

l In September 2006, the Commission conditionally accepted the California Independent 

System Operator Inc.’s (CAISO’s) Market 

Redesign and Technology Upgrade proposal, 

concluding that the tariff reforms will bring 

important corrections and improvements to the 

CAISO markets necessary to enhance reliability of the grid, protect customers from market 

manipulation and promote infrastructure 

development. The same month, the Commission approved Midwest ISO’s phased approach 

to implementing a long-term resource adequacy 

plan and offered guidance on Midwest ISO’s 

future plans to implement ancillary service 

markets and an energy-only market.

The Commission has also encouraged the 

development of business rules and practices that 

maximize market efficiency, ease market entry and 

reduce transaction costs, relying in the first instance 

on organizations such as the North American 

Energy Standards Board (NAESB), RTOs and 

independent transmission system operators (ISOs), 

where appropriate. For example, in FY 2006, the 

Commission finalized the first set of standards 

governing business practices and electronic communications for public utilities, which were developed through consensus by the Wholesale Electric 

Quadrant of NAESB. The business standards 

developed by NAESB included Open Access Same 
A n n u a l R e p o r t 2 0 0 6 31

Time Information System (OASIS) Business Practice Standards, OASIS Standards and Communications Protocols, and an OASIS Data Dictionary.

These standards replace the Commission’s business 

practice standards for OASIS transactions and OASIS Standards and Communication Protocols and 

Data Dictionary requirements.

Reduce Barriers to Entry 

Barriers to entry can be caused by differences 

between federal and state rules or by differences in 

approach by individual service providers within a 

market. In FY 2006, the Commission supported 

efforts by industry groups, such as NAESB, to 

address these types of differences in operating and 

business practices by standardizing business practices in both gas and electric markets. In wholesale 

electric markets, the Commission’s OATT reform 

proceeding seeks to increase the consistency and 

transparency of the rules governing jurisdictional 

transmission service.

In FY 2006, the Commission took steps toward 

increasing transparency. For example, in December 

2005 the Commission revised its Uniform System 

of Accounts and financial reporting requirements 

to provide greater transparency and uniformity regarding costs incurred by public utilities, including 

RTOs and ISOs. The accounting changes provide 

additional information on transmission service, 

market-related services and generator interconnection studies. They will enhance the transparency and consistency of accounting and financial 

reporting for the costs of RTO assets, expenses and 

revenues.

Also, in December 2005, the Commission 

enhanced transparency when it issued rules to 

implement the Public Utility Holding Company 

Act of 2005 (PUHCA 2005). Among other things, 

these rules established requirements for holding 

companies and service companies to maintain and 

make available to the Commission their books and 

records, and established annual reporting requirements for service companies.

Later in FY 2006, the Commission issued proposed rules to establish a Uniform System of Accounts for centralized service companies, to revise 

the annual reporting requirements for centralized 

service companies on a basis consistent with the 

proposed accounting rules, and to establish records 

retention requirements for holding companies and 

service companies under PUHCA 2005. These 

proposed rules would provide transparency on centralized service company activities and operations 

and give the Commission the necessary oversight 

tools to carry out its responsibilities under PUHCA 2005. In July 2006, the staff held a technical 

conference to discuss and get further comments on 

these proposed rules.

A lack of real-time pricing can be a barrier 

to increased use of demand response in both 

wholesale and retail markets. In January 2006, 

the Commission held a technical conference on 

demand response and advanced metering issues.

In August 2006, the Commission issued a report 
 32 A n n u a l R e p o r t 2 0 0 6 

F E R C

that assesses demand response resources, by appropriate region, including those available from all 

customer classes.

Inter-market barriers, such as seams, are an 

important focus of Commission work. Seams refer 

to the differences in market rules and designs, 

operating and scheduling protocols, and other 

control-area practices that inhibit or preclude the 

ability to execute transactions that cross regional 

boundaries and create inefficiencies. Significant differences in power products and pricing and market 

rules between markets can reduce competition between suppliers across the regions. Thus, resolving 

seams differences could lower the transaction costs 

of power sales, permit dispatch of lower cost power 

and ultimately lower costs to customers.

The Commission has facilitated discussions 

between industry and states to address and resolve 

the seams issues that occur at boundaries between 

organized markets. For example, when the Commission conditionally accepted the CAISO’s Market Redesign and Technology Upgrade proposal, 

in September 2006, the Commission established 

a technical conference to discuss seams issues between California and other Western states.

In addition, during FY 2006, as part of the 

Commission’s directive that Midwest ISO and 

PJM consider a joint and common market to resolve 

seams, Midwest ISO and PJM developed broader 

price transparency between markets and common 

reporting to facilitate trading between markets.

Midwest ISO and PJM also began the alignment 

of reliability agreements and practices to cover 

emergency energy needs and joint expansion planning to increase the reliability of the grid. To meet 

Commission directives for reliability, Midwest ISO 

and PJM intend to align their black start restoration practices to further strengthen reliability of the 

grid in 2007. Additionally, the Commission acted 

on a proposal to revise the existing joint operating 

agreement between the Midwest ISO and PJM and 

their respective transmission owners to allocate to 

customers in each RTO the cost of new transmission facilities that are built in one RTO but provide 

benefits to customers in the other RTO.

Finally, in order to create a more seamless 

administration between the tariffs of the Midwest ISO’s energy markets and other utilities and 

regional transmission operators bordering the 

Midwest ISO, the Commission has acted on several 

seams agreements, or revisions to such agreements 

during FY 2006. Specifically, to reduce seams 

issues between the Midwest ISO and the nonmarket operations of Mid-Continent Area Power 

Pool’s (MAPP) members that do not belong to the 

Midwest ISO, the Commission approved MAPP’s 

proposal to conform its ATC calculation methodologies to provisions of the seams operating agreement between MAPP and the Midwest ISO. The 

Commission also approved revisions to an existing 

seams agreement between the Midwest ISO and 

SPP to align the agreement more closely with the 

existing joint operating agreement between the 

Midwest ISO and PJM.
A n n u a l R e p o r t 2 0 0 6 33

Objective B: Prevent 

Accumulation and Exercise of 

Market Power

Commission rules encourage fair and efficient 

competitive markets by preventing the accumulation 

and exercise of market power and promoting transparency of competitive electric and gas markets.

Most industries that transition to increased 

competition witness considerable restructuring, 

including consolidations of companies within individual segments of the industry. Mergers and other 

dispositions or acquisitions can bring efficiencies 

from economies of scale and also can represent the 

result of successful competition when more effective business models grow. However, they can also 

eliminate competitors and can lead to markets that 

are too concentrated and not fully competitive.

The Commission safeguards the customer 

from consolidations of energy assets that decrease 

competition and ensures the rates customers pay for 

electricity and transmission services in wholesale 

markets are just and reasonable.

The FPA and the NGA enable the Commission to detect and disallow imprudently incurred, 

unjust or unreasonable or unduly discriminatory or 

preferential costs from affiliate transactions between 

companies in the same holding company system.

Merger and Acquisition Review

In December 2005, the Commission issued a 

final rule to implement the electric company merger 

and acquisition provisions of EPAct 2005. The rule 

provided blanket authorizations for certain transactions while ensuring that captive utility customers 

are protected. The goals of the revised rule are to 

ensure that all jurisdictional transactions subject 

to FPA section 203 are consistent with the public 

interest and at the same time ensure that our rules 

do not impede day-to-day business transactions 

or stifle timely investment in transmission and 

generation infrastructure. Also in December 2005, 

to ensure protection of customers, the Commission 

issued a final rule to implement its enhanced access 

to holding company books and records under the 

PUHCA 2005.

The Commission approved the following significant mergers and acquisitions in FY 2006:

l The Commission authorized Duke Energy and 

Cinergy to combine to create a company with 

more than $70 billion in assets and operations 

in two-thirds of the United States and parts 

of Canada. The merged companies will have 

retail electric and gas customers in Kentucky, 

Indiana, North Carolina, Ohio, South Carolina and Canada, and own more than 45,000 

MW of electric generation and 17,500 miles of 

natural gas transmission pipeline;

l The Commission approved MidAmerican 

Energy Holdings Co.’s $5.1 billion acquisition of Portland, Oregon-based PacifiCorp, 

a subsidiary of Scottish Power. MidAmerican provides electric service to over 698,000 

customers in Illinois, Iowa and South Dakota, 

while PacifiCorp serves electric customers 

in parts of California, Idaho, Oregon, Utah, 

Washington, and Wyoming; and

l In September 2006, the Commission conditionally approved the acquisition of Michigan 

Transco Holdings LP by ITC Holdings 

Corp., marking the first time the Commission has authorized the acquisition of a standalone transmission company, or “transco,” by 

another transco.

Open Access Transmission Tariff 

In May 2006, the Commission issued a Notice 

of Proposed Rulemaking containing proposals to 

amend the Commission’s regulations adopted in 

Order Nos. 888 and 889 and its pro forma OATT.

The proposed changes were designed to ensure that 

transmission services are provided on a basis that is 

just, reasonable and not unduly discriminatory or 

preferential. The proposed rulemaking is intended 

to strengthen the pro forma OATT to ensure that 

it achieves its original purpose—remedying undue 

discrimination—and not to create new market 
 34 A n n u a l R e p o r t 2 0 0 6 

F E R C

structures. The Commission took this action to 

strengthen the OATT and address deficiencies 

that have become apparent over the decade since its 

adoption, particularly in the areas of ATC calculation and transmission planning.

In FY 2006, the Commission approved proposals by four vertically integrated utilities to contract 

with an independent entity to serve as the independent coordinator of transmission. The independent entities oversee these utilities’ transmission 

systems, including authority to administer each 

utilities’ OATT. In approving these proposals, the 

Commission found the companies demonstrated 

the proposals were consistent with or superior to 

the OATT:

l In December 2005, the Commission accepted 

Duke Power’s proposal to have the Midwest 

ISO serve as its Independent Entity responsible for certain transmission functions. The 

Independent Entity will evaluate and approve 

transmission service requests, calculate Total 

Transfer Capacity and ATC, operate the 

OASIS, dispose of interconnection requests 

and coordinate transmission planning;

l In December 2005, the Commission approved 

MidAmerican Energy Co.’s Transmission 

Service Coordinator proposal. In June 2006, 

the Commission conditionally approved 

MidAmerican Energy Co.’s proposed agreement with TranServ International Inc. to serve 

as the utility company’s Transmission Service 

Coordinator; 

l In March 2006, the Commission conditionally approved Louisville Gas and Electric Co.’s 

(LG&E’s) proposal to withdraw its transmission facilities from the transmission system 

operated by the Midwest ISO, and in place of 

its existing arrangements with the Midwest 

ISO, the Commission approved a proposal to 

designate SPP as administrator of LG&E’s 

transmission tariff; and

l In April 2006, and by subsequent orders issued 

in FY 2006, the Commission conditionally 

approved Entergy Services’ proposal for an Independent Coordinator of Transmission finding that “substantial benefits” can be brought 

to market participants and to Entergy’s 

native-load customers from the adoption of 

this proposal. The Commission subsequently 

approved SPP to serve as Entergy’s Independent Coordinator of Transmission.

Market Power in Wholesale Power Sales 

To address market power in jurisdictional 

wholesale markets, in FY 2006 the Commission 

reviewed applications for market-based rates for 

power sales to make sure that applicants do not 

have the ability to exercise market power. The 

Commission also reviewed tariff filings made by 

natural gas pipelines and public utilities providing 

electric transmission service to ensure they do not 

permit undue discrimination or preference.

In May 2006, the Commission proposed reforms to its current four-prong analysis for determining whether a wholesale seller of electric energy, capacity or ancillary services is qualified for 

market-based rate authority. The proposed regula-
A n n u a l R e p o r t 2 0 0 6 35

tions, for the most part, would adopt the Commission’s current standards for granting market-based 

rates, but would refine and codify the standards to 

help ensure that customers are protected from the 

exercise of market power. The proposal also will 

provide greater certainty to sellers seeking marketbased rate authority. Under the proposed rule the 

four-prong analysis would be reformed into a more 

traditional horizontal and vertical market power 

analysis. In addition, the Commission proposed to 

modify and streamline its process by: (1) adopting 

a standardized market-based rate tariff of general 

applicability; (2) adopting a regional approach to 

triennial reviews; and, (3) allowing small sellers to 

file only change-in-status filings (i.e., relieve them 

of the requirement to file a triennial review).

Regarding affiliate abuse/reciprocal dealing, the 

Commission proposed to retain its policy that sales 

of power between a utility and any of its non-franchise power sales affiliates must be pre-authorized 

by the Commission prior to transacting and that 

requires a code-of-conduct governing the relationship between the affiliates. The Commission also 

proposed to codify code-of-conduct restrictions in 

its regulations.

Further, the Commission proposed to prevent 

the exercise of market power through bolstered 

reporting requirements for those found to have 

market power, a modified generation market power 

analysis and a revised and clarified change-of-status 

reporting requirement.

In FY 2006, the Commission took several other 

significant actions to protect consumers from the 

exercise of market power. For example:

l In November 2005, the Commission followed 

up on its May 2005 order directing companies that were delinquent in filing an updated 

market power analysis to file their analyses 

within 60 days or have their market-based rate 

authority revoked. The Commission revoked 

the market-based rate authority of more than 

100 companies that failed to comply with its 

May 2005 order. In addition, the Commission 

revoked the market-based rate authority of 

two companies for “patently deficient” filings.

l In February 2006, the Commission revoked 

the market-based rate authority of eight companies for failure to comply with regulations 

requiring electric quarterly reports.

Industry Compliance through Audits 

Audits are a crucial part of the Commission’s 

strategy to prevent the accumulation and exercise 

of market power. The Commission staff conducts 

audits on a regular but unscheduled basis to ensure 

jurisdictional companies do not exercise market power in four major program areas: OATT; 

market-based rates; market-based rates for natural 

gas storage; and price transparency. Audits in 

these major program areas are performed to ensure 

jurisdictional companies are following the appropriate Commission precedent when providing 

and obtaining transmission service, making power 

sales in wholesale power markets, pricing storage 

and storage services at market prices, and reporting 

trade data to price index publishers. In FY 2006, 

the Commission completed major audits in these 

program areas to improve jurisdictional companies’ 

compliance with Commission precedent. Corrective actions resulting from these audits included 

structural, process, and procedural changes, as well 

remedies to improve market transparency.

Market Power in Gas Storage 

Operations

EPAct 2005 amended NGA section 4 to authorize the Commission to allow market-based rates 

for providing storage and storage-related services 

at natural gas storage facilities even if the seller 

cannot demonstrate that it lacks market power. The 

Commission began establishing the framework 

to evaluate market-based rate applications filed 

under these new rules to ensure that customers are 

adequately protected.
S e c t i o n 4
A n n u a l R e p o r t 2 0 0 6 37

Competitive energy markets can succeed only when competition is tempered by effective regulation. The Commission has adjusted its regulatory policies to meet the dramatic changes that have 

occurred in both the natural gas and electricity industries. While the core legal duties of the Commission have not changed—that is, to guard the consumer from market power abuse—the means of 

discharging this duty have evolved over time.

The Commission permits market-based rates and increasingly sets rules of general applicability 

that govern market participants and, where applicable, an entire market. As a result of this regulatory 

approach, it is even more important for the Commission to promote compliance with, and enforce, the 

statutes it is responsible for implementing and the regulations it issues under those statutes.

The Commission seeks to detect violations quickly, to penalize those who violate orders, rules and 

regulations, to seek disgorgement of unjust profits or other remedies, to publicize misconduct where 

appropriate and to take prompt action to prevent future misconduct.

It is critical that the Commission understand market dynamics, detect problems or issues in 

energy markets early, prevent violations of its rules and enforce compliance with the laws under 

its jurisdiction. Perhaps most important, the Commission needs to ensure that utilities subject to 

its jurisdiction have effective internal monitoring and compliance programs in place to help assure 

they are following established Commission rules and regulations. Commission oversight must then 

provide an independent and external check to ensure the compliance programs of each jurisdictional 

utility are adequate, and to periodically audit utility compliance with Commission’s rules, regulations 

and statutory requirements.

The Commission’s enforcement tools were greatly reinforced when EPAct 2005 conferred expanded authority, which provided for the first time penalty authority for violations of the NGA and 

all of Part II of the FPA. This expanded penalty authority also applies to any entity (not just companies traditionally subject to the Commission’s jurisdiction) that manipulates wholesale gas or electric 

markets by engaging in fraud or deceit in connection with jurisdictional transactions. Armed with this 

expanded authority, the Commission will create an even stronger and more effective compliance and 

enforcement program to protect the public interest.

To better meet the changing needs of the marketplace, the Commission reorganized and established the Office of Enforcement. Within this new Office, the Division of Energy Market Oversight now includes a Market Monitor Relations branch to better define the Office’s and Division’s 

focus on working with the market monitors in the Commission-approved RTOs and ISOs. This 

Branch holds monthly calls with each of the market monitors, and convenes two-day, semi-annual 

meetings to discuss objectives, progress and impediments to achieving mutual goals. The reorganization created the Division of Investigations to conduct non-public investigations of violations 

Goal 3: Enforcement: Guarding 

the Customer
 38 A n n u a l R e p o r t 2 0 0 6 

F E R C

of Commission orders, rules, or regulations, and 

the Division of Audits to conduct operating and 

financial audits of regulated entities practices.

Objective A: Provide Vigilant 

Oversight

Energy markets are complex and change rapidly.

A key part of the Commission’s market-oriented 

approach to the natural gas and electric power 

industries is to identify potential problems quickly 

and to address them before they become severe.

Identify and Remedy Potential Market 

Problems 

To accomplish this objective, in FY 2006, the 

Commission enhanced its comprehensive energy 

market oversight program. The energy market 

oversight program reviews all key markets daily 

to detect both anomalous behavior by individual 

market participants and problems with market rules 

or operations that significantly affect outcomes.

The program uses a real-time information capability to address rapidly developing situations and 

emergencies. The Commission’s Market Monitoring 

Center (MMC) provides analysts with such data 

from numerous sources of market information. The 

information includes data on prices from sources 

such as RTOs and the trade press on physical flows 

on the pipeline and electric transmission systems 

(largely from data aggregators), on the operating status of some generating units (for example, 

from the NRC) and on some aspects of individual 

transactions from some trading platforms. It acts as 

a nerve center where analysts can quickly examine 

market conditions, exchange insights, and develop 

shared understanding of the information observed.

Through daily fact-finding meetings attended by 

Commission staff followed by briefings if warranted, the market oversight program helps keep key 

decision makers updated on market activities.

The MMC, where Commission staff can access 

most of the real-time and other data subscribed to 

from information providers, is a hub of data-collecting and analysis for Commission research staff 

and a “must-visit” for foreign and domestic visitors 

engaged in or contemplating monitoring their 

energy markets. In FY 2006 more than 75 groups 

were briefed on MMC functions and operations 

by Commission staff; these groups included 685 

individuals from 19 foreign country delegations.

Staff from the U.S. Congress, state commissions, 

federal agencies, and other energy-related agencies 

and organizations also received tours of the MMC 

in conjunction with appropriate briefings.

The market oversight program focuses on wholesale physical markets for natural gas and electric 

power and associated transmission markets. The 

Commission’s market oversight program examines 

detailed interactions between the two industries 

to detect any possible problems as soon as possible 

after their occurrence.

Because many other markets affect the operation of the physical electric power and natural 

gas markets, the market oversight program also 

reviews related markets every day, including 

financial markets for electric power and natural 

gas (overseen by the Commodity Futures Trading Commission or CFTC), generation fuels and 

emissions credits, long-term financial markets, and 

international markets.

In connection with the availability of data, 

the Division of Energy Market Oversight held 

34 outreach meetings on data transparency, from 

June through August 2006, with groups representing the natural gas and electricity industry as 

well as information providers. Subsequently, the 

Commission held a price transparency technical 

conference at which the Commissioners and senior 

FERC staff had the opportunity to ask panelists 

from all facets of the industry about transparency 

issues of interest to them.

In FY 2006, the Commission made available 

to state energy agencies information on energy 

markets including natural gas supplies and prices, 
A n n u a l R e p o r t 2 0 0 6 39

electric power, LNG facilities planned and under 

construction, coal market fundamentals, weather 

implications and an analysis of observed changes 

over the month. The program provides for a 

monthly phone discussion with state representatives of the information sent and other energy issues 

the agencies may wish to discuss. This outreach 

program started out modestly and has now grown to 

more than 35 participating state energy agencies.

Complementing the new market oversight 

program is the long-established Enforcement 

Hotline program. The Hotline provides a way for 

market participants and the public to contact the 

Commission’s enforcement staff on a confidential 

basis by telephone or email on matters affecting 

prices and wholesale utility service, including bidding anomalies, price spikes, inappropriate use of 

financial instruments, changes in available capacity 

on electric transmission systems or natural gas pipelines, undue discrimination in access to interstate 

transmission or transportation services, or violations 

of the Commission’s Standards of Conduct or other 

improper affiliate transactions. The Hotline is also 

available to landowners to raise concerns regarding 

pipeline construction and remediation that affects 

their property. Matters brought to the attention 

of the Hotline may result in investigations by the 

Commission’s enforcement staff.

During FY 2006, Commission staff continuously examined the seasonal events affecting 

natural gas and electricity prices. The goal was 

to provide information for Commission staff and 

to help Congress, state officials, and citizens to 

understand the factors affecting energy supply and 

demand, and natural gas and electricity prices.

Starting at the Commission’s October 12, 2005, 

conference on the State of Natural Gas Infrastructure and at every regularly scheduled Open 

Commission Meeting in FY 2006, staff presented 

the Commission and the public detailed information relating to current market prices and analyses 

explaining those prices and their effect on supply 

and demand in the various regions of the Nation.

In FY 2006, the Commission also made 

available to the public information on natural gas 

prices, in particular, by posting on the Commission’s web page and making hard copies available of a pamphlet entitled: “Gas Basics.” This 

pamphlet was developed to give the general public 

a better understanding of wholesale natural gas 

markets and factors that affect the level of natural 

gas prices. Throughout the remainder of the fiscal 

year, the Commission continued to provide information on what has driven these prices and what 

the Commission is doing to monitor them to be 

certain that they are not the result of manipulation or the exercise of market power.

Objective B: Provide Firm but 

Fair Enforcement

In EPAct 2005, Congress amended the NGA 

and FPA to prohibit the use of manipulative or 

deceptive devices or contrivances by any entity in 

connection with the purchase or sale of electric 

energy, natural gas or transmission or transportation services subject to the jurisdiction of the 

Commission.

In light of the new authorities granted the 

Commission by EPAct 2005, the Commission has 

taken a number of steps to craft a cohesive approach 

to enforcement, built around the central theme 

that Commission enforcement actions will be firm 

but fair. The Commission uses the full range of 

remedies available—civil penalties, disgorgement 

of unjust profits, or conditioning, revocation, or 

suspension of authorizations—but exercises discretion to apply such penalties and remedies in a fair, 

reasonable and appropriate manner.

Establish Clear and Fair Processes 

In FY 2006, the Commission took several major steps to establish clear and fair processes to protect energy customers. Together, the Commission’s 

newly enhanced civil penalty authority and adoption of a new rule prohibiting market manipulation 
 40 A n n u a l R e p o r t 2 0 0 6 

F E R C

opened a new chapter in the Commission’s enforcement activity. With the policy statement outlining 

how the civil penalty authority will be applied and 

the industry’s ability to request “no action” letters 

from staff, the Commission has strived to provide 

regulatory certainty.

l In October 2005, the Commission issued the 

Policy Statement on Enforcement, outlining 

factors the Commission will consider when 

assessing civil penalties or developing remedies 

for violations of the statutes, orders, rules, 

and regulations the Commission administers.

The policy statement identified factors to be 

weighed in determining the seriousness of the 

violation, and indicated what consideration 

will be given for mitigating factors, such as 

adopting strong internal compliance programs, 

voluntarily reporting violations, and cooperating with staff investigations

l Also in October 2005, the Commission 

entered into a memorandum of understanding 

(MOU) with the CFTC regarding the sharing 

of information and the confidential treatment 

of proprietary energy trading data. The MOU 

ensures that information requests to markets 

within the respective jurisdiction of each 

agency are properly coordinated to minimize 

duplicative information requests and that the 

agencies consult and coordinate their enforcement activities

l In November 2005, the Commission approved 

a process whereby Commission staff will provide informal advice as to whether a proposed 

transaction, practice or situation may raise 

compliance issues under the Commission’s 

regulations. The No-Action Letter process 

assists regulated entities in seeking guidance 

on real-world applications of the Commission’s 

regulations and orders. It makes available 

informal, advance advice by staff on specific 

proposed transactions on whether staff would 

recommend that the Commission take enforcement action based on the facts presented 

l In January 2006, the Commission adopted 

rules prohibiting market manipulation. Under 

these rules, which implement the EPAct 

2005 statutory prohibition of manipulative 

or deceptive devices or contrivances, it is 

unlawful for any entity, directly or indirectly, 

in connection with the purchase or sale of 

electric energy or natural gas, or in providing 

transmission or transportation services subject 

to the Commission’s jurisdiction: (1) to use 

any device, scheme or artifice to defraud; (2) to 

make any untrue statement of material fact or 

to omit a material fact; or (3) to engage in any 

act, practice or course of business that operates 

or would operate as a fraud or deceit. The new 

rules provide guidance to industry as well as 

important protections for market participants 

l In February 2006, the Commission issued 

revised rules modifying the 2003 Market 

Behavior Rules to reflect adoption of the new 

anti-manipulation rules. Market Behavior 

Rule 2 and 6 were rescinded, and remaining 

Market Behavior Rules were codified. This 

provides certainty for industry as to the rules 

applicable to market activity, while retaining 

important customer protections

l In May 2006, the Commission established 

rules that expand the procedural rights of 

persons subject to all conducted audits by the 

Commission under the FPA, the NGA, the 

NGPA and the Interstate Commerce Act, 

except audits pertaining to reliability that the 

Commission authorized in Order No. 672.

The order expands this protection beyond 

financial audits to non-financial audits and 

establishes the procedures and timeframes 

required to dispute audit findings and recommendations contained in draft audit reports.

Investigations and Enforcement

In competitive markets, participants constantly 

seek new profit opportunities, but some participants may violate rules or manipulate markets to 
A n n u a l R e p o r t 2 0 0 6 41

reap unjust profits. In FY 2006, the Commission 

actively monitored natural gas markets to determine 

whether price movements are the result of market 

manipulation or market fundamentals. The Commission’s market oversight and investigations staff 

continually reviewed market activity for any possible 

manipulation of prices. In close coordination with 

investigations staff, market oversight staff performs 

a detailed review of natural gas prices and market 

activity on a daily basis with the intent of identifying areas of possible manipulation. If Commission 

staff identifies price anomalies that are not explained by market fundamentals, the Commission’s 

investigations staff will investigate the matter.

The Commission’s enforcement investigations in 

FY 2006 have focused on possible market manipulation, undue discrimination or affiliate abuses, violations of Standards of Conduct requirements, compliance with hydropower requirements, violations 

of the terms and conditions of tariffs, referrals of 

behavior in organized markets, and violations related 

to Commission rules and regulations. Enforcement 

investigations arise from a variety of sources: including referrals from the Commission, Enforcement 

Hotline calls, direct contact with enforcement staff, 

observation of markets, market monitors in RTOs 

and ISOs, as well as anonymous tips.

In FY 2006, the Commission completed 88 

audits of energy companies, including natural gas 

pipelines and electric utilities. The audits focused 

on transmission market power, index of customers, 

electric and gas tariff compliance, affiliate abuse, 

Standards of Conduct and code of conduct compliance, EQR, filing requirements, cash management 

and interlocking directorate rules for officers and 

directors of electric companies. The audits resulted 

in stringent compliance plans requiring the creation 

of robust compliance programs, organizational, procedural and process remedies. Moreover, the Commission ordered refunds of $6 million to energy 

customers and directed a public utility to invest $23 

million in construction to alleviate congestion on 

the transmission system as a result of these audits.

The Commission’s 22 completed investigations 

focused on possible instances of market power and 

manipulation, undue discrimination or affiliate 

abuses, violations of rules and tariffs, hydropower 

requirements, and license or certificate conditions.

In FY 2006, the Commission continued to use 

the Enforcement Hotline, a mechanism whereby 

industry participants provide information to the 

Commission, to identify other potential investigations. In addition to identifying possible investigations, the Enforcement Hotline was used by the 

Commission to encourage self-policing and reporting of violations. In FY 2006, the Enforcement 

Hotline marked its 20th year of operation.

Where the Commission identified violations, 

it applied remedies to mitigate the effects of 

market power, required disgorgement of unjust 

profits where appropriate, imposed civil penalties 

or other sanctions when available under existing 

laws, and required compliance plans to prevent 

future violations.

Internal Compliance

It is incumbent upon the Commission to ensure 

that its market, reliability and other regulatory 

rules are clear, enforceable and fully understood 

by the jurisdictional entities that we regulate.

However, the obligation to comply with those 

regulations, rules and standards lies with the 

regulated entity. Therefore, it is important that 

regulated entities have a rigorous internal compliance program that provides them with the tools, 

processes and high-level management support to 

identify problems or areas of non-compliance and 

to report such problems to the Commission. In FY 

2006, the Commission worked with its regulated 

entities to help them develop and maintain good 

compliance procedures such that any necessary 

enforcement actions by the Commission (including 

penalties or sanctions) are a regulatory tool of last 

resort—invoked only when the compliance process 

has failed.
S e c t i o n 5
A n n u a l R e p o r t 2 0 0 6 43

EPAct 2005 is the first major energy law enacted in over a decade, and makes the most significant 

changes in Commission authority since the FPA and NGA. By passing EPAct 2005, Congress signaled 

a strong vote of confidence in the Commission. In FY 2006, the Commission took on the new duties and 

authorities conveyed to it under EPAct with a sense of purpose, mindful of the public trust they entail.

Moreover, FY 2006 demonstrated the Commission’s commitment to meeting these obligations within the 

time allotted by Congress.

EPAct 2005 had three general policy goals in the areas of concern to the Commission. First, it reaffirmed a commitment to competition in wholesale power markets as national policy, the third major 

federal law in the last 30 years to do so. Second, it strengthened the Commission’s regulatory tools, 

recognizing that effective regulation is necessary to protect the consumer from exploitation and assure fair 

competition. Third, it provided for development of a stronger energy infrastructure.

EPAct 2005 gave the Commission significant new responsibilities and granted significant new 

authority to discharge these responsibilities by modifying the FPA, the NGA, and the Public Utility Regulatory Policies Act of 1978 (PURPA). In addition, EPAct 2005 repealed the Public Utility 

Holding Company Act of 1935 (PUHCA 1935), and in its place created a new PUHCA 2005, which 

emphasizes access to books and records.

New Responsibilities

The Commission’s significant new responsibilities include:

l overseeing the establishment and enforcement of reliability standards for the Nation’s electric transmission grid;

l implementing new tools, including penalty authority, to prevent market manipulation;

l providing rate incentives to promote electric transmission investment; 

l supplementing state transmission siting efforts in national interest electric transmission corridors; and 

l reviewing certain holding company mergers and acquisitions involving electric utility facilities, a well 

as certain public utility acquisitions of generating facilities.

EPAct 2005 also specified a number of actions to be taken by the Commission. In fulfilling these requirements during the first year since EPAct 2005 was signed into law on August 8, 2005, the Commission has promulgated nine final rules, issued three additional notices of proposed rulemaking, authored 

and submitted seven reports to Congress, and entered into a memorandum of understanding with the 

CFTC. The Commission has taken these actions in a timely manner – meeting every deadline set for the 

Commission in EPAct 2005.

Some of these deadlines were challenging, particularly the task of implementing the repeal of PUHCA 1935 and promulgating a new rule to implement PUHCA 2005, as well as implementing rules to 

address the Commission’s expanded corporate transaction review authority under the FPA.

Energy Policy Act of 2005 (EPAct 2005) 

Implementation
 44 A n n u a l R e p o r t 2 0 0 6 

F E R C

Market Manipulation

EPAct 2005 gave the Commission the authority to issue rules to prevent market manipulation in 

jurisdictional wholesale power and gas markets, and in 

jurisdictional transmission and transportation services.

For the Commission, this is one of the most important and challenging provisions of the Act. Congress 

granted this authority out of recognition that wholesale power and gas markets had changed dramatically 

since the 1930s. While the Commission’s legal duty 

remains the same – protecting the wholesale power 

and gas customer – it needed additional regulatory 

tools to discharge this duty.

EPAct 2005 gives the Commission civil penalty 

authority, which the Commission has indicated it 

will exercise carefully by assuring that its market manipulation rules are clear. That will more 

strongly influence regulated entities to assure 

compliance, and make it easier for the Commission 

to identify violations.

Electric Reliability and Infrastructure

EPAct 2005 significantly expanded the Commission’s electric authorities. Perhaps the most important 

of these are the provisions governing reliability of the 

bulk power system. For the first time, the Commission was granted authority to oversee mandatory reliability standards governing the Nation’s electric grid.

The Commission finalized rules on the certification 

of an ERO and on procedures for the establishment, 

approval and enforcement of mandatory electric reliability standards. The Commission has certified the 

ERO and issued a Notice of Proposed Rulemaking 

proposing to approve 83 of 107 reliability standards 

filed by the ERO for Commission approval.

EPAct 2005 also contained a number of provisions directed to expanding and modernizing the 

Nation’s electric grid. The Commission issued a rule 

in July 2006 on electric transmission pricing reforms 

designed to promote needed investment in electric 

energy infrastructure and benefit energy customers.

The goal of this rule is to bolster power grid reliability and lower costs for delivered power by reducing 

transmission congestion. That same month, the 

Commission issued a rule to require transmission 

organizations with organized electricity markets to 

make available to load-serving entities long-term 

firm transmission rights that satisfy certain guidelines. This will help customers who want to make 

long-term supply arrangements. These customers 

want to be able to enter into long-term transmission 

service arrangements without being exposed to unhedged congestion cost risk. The final rule goes far to 

reduce the risk exposure to transmission customers, 

and is important to development of the grid.

EPAct 2005 addressed the difficulties of siting 

major new transmission facilities by authorizing the 

Secretary of Energy to designate “national interest 

electric transmission corridors” to alleviate major 

transmission congestion. EPAct 2005 also allows 

applicants seeking to build transmission within 

these corridors to seek construction permits from the 

Commission under certain conditions. While most 

transmission projects will continue to be sited by states 

under state law, EPAct 2005 granted the Commission this important siting authority. FERC has issued 

proposed rules on transmission siting that will govern 

the issuance of construction permits by the Commission for projects that meet the statutory criteria.

In addition to the provisions relating to transmission grid improvements, EPAct 2005 addressed a significant generation issue within the jurisdiction of the 

Commission. Pursuant to directives in EPAct 2005, 

the Commission tightened the thermal efficiency 
A n n u a l R e p o r t 2 0 0 6 45

requirements for qualifying cogeneration facilities 

under PURPA in February 2006. The Commission’s 

new rules should limit the potential for abuse under 

PURPA, curtail sham transactions, and prevent new 

PURPA “machines.” At the same time, the rules support the development of new cogeneration facilities 

that truly conserve energy by ensuring new qualifying 

cogeneration facilities use thermal output in a productive and beneficial manner, and that the electrical, 

thermal, chemical and mechanical output of new qualifying cogeneration facilities is used fundamentally 

for industrial, commercial and institutional purposes.

Pursuant to EPAct 2005 amendments to the FPA, the 

Commission also eliminated ownership restrictions on 

qualifying cogeneration and small power production 

facilities with the same rule.

The Commission also proposed new regulations 

implementing EPAct 2005 amendments to add 

PURPA section 210(m), which provides among 

other things for termination of the requirement 

that an electric utility enter into a new contract or 

obligation to purchase electric energy from qualifying facilities if the Commission finds the qualifying 

facility has nondiscriminatory access to one of three 

categories of markets.

Only minor changes to the Commission’s hydroelectric regulations were enacted with the passage of 

EPAct 2005. For example, the first action the Commission took upon enactment of the law was to extend 

the Flint Creek Project preliminary permit for three 

years. Pursuant to section 241 of EPAct 2005, the 

Commission has worked with other resource agencies 

to develop mandatory license conditions that are fairer 

and more balanced. The Commission also has issued a 

guidance document to help hydropower licensees seeking renewable tax credit certification for incremental 

energy gains from efficiency improvements.

Natural Gas Infrastructure

Pursuant to EPAct 2005, the Commission has 

moved to encourage more investment in the Nation’s 

natural gas infrastructure. In order to promote the 

expansion of natural gas storage capacity and mitigate natural gas price volatility, the Commission has 

issued new rules for allowing market-based rates for 

interstate natural gas storage.

To decrease the time needed for creating a 

complete application for new LNG terminals, the 

Commission also adopted a rule requiring potential developers to initiate pre-filing procedures at 

least six months prior to filing a formal application 

with the Commission. The Commission also has 

proposed rules to implement provisions that grant 

authority to coordinate the processing of Federal and 

state authorizations, required under Federal law for 

natural gas projects, as well as to maintain a consolidated record of decisions for judicial review.

Mergers and Acquisitions

Further, in response to EPAct 2005 the Commission implemented the repeal of PUHCA 

1935 and the provisions of a new PUHCA 2005.

PUHCA 2005 permits Commission access to 

books and records of holding companies and their 

members if relevant to jurisdictional rates. The 

Commission implemented PUHCA rules governing 

accounting, record retention and reporting, including certain blanket waivers and exemptions, within 

the deadlines in EPAct 2005.
 46 A n n u a l R e p o r t 2 0 0 6 

F E R C

Along with the repeal of PUHCA 1935, EPAct 

2005 expanded the Commission’s corporate review 

authority to include authority over certain holding 

company mergers and acquisitions, as well as certain 

public utility acquisitions of generating facilities. It 

also imposed statutory deadlines for acting on mergers 

and other jurisdictional corporate transactions. The 

Commission implemented these new provisions of 

EPAct 2005 by providing blanket authorizations for 

certain transactions while ensuring that captive utility customers are protected. The Commission acted 

quickly, so that new rules would be in effect before the 

effective dates of the new corporate review authority 

and PUHCA 2005, and before the repeal of PUHCA 

1935. All these changes took effect February 8, 2006.

Studies and Reports

The Commission has issued seven reports as 

mandated by EPAct 2005. In December 2005, the 

Commission issued a report on investigation of charges 

during the California electricity crisis detailing the actions the Commission has taken and the timetable for 

future action to resolve outstanding refund claims from 

this time period. Also in December, the Commission 

submitted to Congress a report on whether any PUHCA technical and conforming changes were needed as 

a result of the repeal of the PUHCA 1935. In February 

2006, the Commission together with the Department 

of Energy issued a report on steps to establish a system 

to make available to all transmission owners and 

regional transmission organizations in the Eastern and 

Western interconnections real-time information on the 

functional status of all transmission lines within the 

interconnections. Also in February, the Commission 

issued its initial report on the progress made in licensing and constructing the Alaska natural gas pipeline, 

and a subsequent progress report was issued in July 

2006 as required by EPAct 2005.

The Commission issued two additional reports before August 8, 2006 as required by EPAct 2005. First 

was a report assessing, by region, demand response 

resources and the use of advanced metering resources.

The second was a report detailing the recommendations of regional joint boards to study the issue of 

security-constrained economic dispatch for the various 

market regions, what constitutes security-constrained 

economic dispatch and how it affects or enhances the 

reliability and affordability of electric service.
A n n u a l R e p o r t 2 0 0 6 47
A p p e n d i x A
A n n u a l R e p o r t 2 0 0 6 49

Duke Power, 

A Div Of Duke Energy 02686 Nc Jackson West Fork Tuckasegee River 24600 Dm Ph

Duke Power, 

A Div Of Duke Energy 02698 Nc Jackson Wolf Creek 26175 Dm Ph

Union Electric Co (Mo) 00459 Mo Benton Osage 176200 Dm Ph

Pacificorp (Or) 02082 Or Siskiyou Klamath River 161338 Dm Ph

Duke Power, A Div Of Duke Energy 02692 Nc Macon White Oak Creek 43200 Dm Ph

South Carolina Pub Serv Auth (Sc) 00199 Sc Clarendon Santee River 134520 Dm Ph

Pacificorp (Or) 00935 Wa Cowlitz Lewis River 136000 Dm Ph

Pacificorp (Or) 02111 Wa Cowlitz Lewis River 240000 Dm Ph

Puget Sound Energy, Inc.(Wa) 02150 Wa Whatcom Baker River 170030 Dm Ph

Pud No 1 Of Cowlitz County (Wa) 02213 Wa Skamania Lewis River 70000 Dm Ph

Pud No 1 Of Chelan County (Wa) 02145 Wa Douglas Columbia River 1237400 Dm Ph

Portland General Electric Co (Or) 02195 Or Clackamas Oak Grove Fork of Clackamas River 136600 Dm Ph

California Dept-wtr Resources (Ca) 02100 Ca Butte Feather River 762850 Dm Ph

Pacific Gas And Electric Co (C 00606 Ca Shasta South Cow Creek 4440 Dm Ph

Chugach Electric Assn Inc (Ak) 02170 Ak Kenai Peninsula Borough Kenai Lake 15000 Dm Ph

Garkane Energy Cooperative, Inc. 02219 Ut Garfield West Fork Boulder Creek 4300 Dm Ph

Alabama Power Co (Al) 00082 Al Coosa Coosa River 170000 Dm Ph

Alabama Power Co (Al) 00618 Al Elmore, Chilton Coosa River 100000 Dm Ph

Sacramento Municipal Util Dist (Ca) 02101 Ca El Dorado South Fork American R 640950 Dm Ph

Alabama Power Co (Al) 02146 Ga Floyd Coosa River 690900 Dm Ph

Pacific Gas And Electric Co (C 02155 Ca El Dorado South Fork American River 7000 Dm Ph

Avista Corporation 02545 Wa Spokane Spokane River 136600 Dm Ph

Alaska Power & Telephone Co (Wa) 01051 Ak Skagway-yak Dewey Creek 943 Dm Ph

Alabama Power Co (Al) 02165 Al Winston, Tuscaloosa Sipsey Fork 203250 Dm Ph

New York Power Authority 02216 Ny Niagara Niagara River 2755500 Dm Ph

Southern California Edison Co (Ca) 02085 Ca Madera San Joaquin River 150938 Dm Ph

Synex Michigan, Llc. 02785 Mi Midland Tittabawassee 3300 Dm Ph

Sitka City Of & Borough Of (Ak) 02230 Ak Sitka Division Sawmill Cr 7540 Dm Ph

Ottumwa City Of (Ia) 00925 Ia Wapello Des Moines River 3250 Dm Ph

Hyrum City Corp (Ut) 00946 Ut Cache Blacksmith Fork River 400 Dm Ph

Alcoa Power Generating Inc. 02197 Nc Stanly Yadkin River 216380 Dm Ph

Progress Energy Carolinas,inc. 02206 Nc Stanly, Montgomery Pee Dee R 108600 Dm Ph

FERC	 	 	 Facilities

Project	 	 	 Installation	 Under

Licensee	 No.	 State	 County	 River	 (KW)	 License

Projects For Which Licenses Will Expire Between January 1, 2006 and December 31, 2011

Hydroelectric Power Table

A n n u a l R e p o r t 2 0 0 6 49
 50 A n n u a l R e p o r t 2 0 0 6 

F E R C

Virginia Electric & Power Co (Va) 00906 Va Amherst James River 7500 Dm Ph

Crisp County Power Comm (Ga) 00659 Ga Worth Flint River 15200 Dm Ph

Duke Power, A Div Of Duke Energy 02232 Sc Lancaster,york,fairfield Wateree River 804940 Dm Ph

Pud No 1 Of Pend Oreille Cnty (Wa) 02225 Wa Pend Oreille Sullivan Creek 0 Dm Ph

City Of Eugene 02242 Or Linn Mckenzie River 120500 Dm Ph

Southern California Edison Co (Ca) 00067 Ca Fresno South Fork San Joaquin River 373320 Dm Ph

Southern California Edison Co (Ca) 00120 Ca Tulare San Joaquin River 165375 Dm Ph

Southern California Edison Co (Ca) 02175 Ca Tulare San Joaquin River 150150 Dm Ph

Georgia Power Co (Ga) 02237 Ga Fulton Chattahoochee River 16800 Dm Ph

Eagle & Phenix Hydro Co Inc (Sc) 02655 Ga Russell Chattahoochee River 27660 Dm Ph

South Feather Water And Power Agenc 02088 Ca Yuba South Fork Feather River 104100 Dm Ph

Augusta Canal Authority 09988 Ga Richmond Savanah River 2050 Dm Ph

Public Service Co Of Nh (Nh) 07528 Vt Essex Deubert 1100 Dm Ph

Boulder City Of (Co) 01005 Co Boulder Middle Boulder Creek 20000 Dm Ph

Pacific Gas And Electric Co (C 00803 Ca Butte West Branch Feather River 26650 Dm Ph

Littleville Power Co Inc (Ma) 02801 Ma Berkshire Sum 1140 Dm Ph

Pp&l Montana, Llc 02301 Mt Stillwater West Rosebud Creek 10000 Dm Ph

Moss Richard 06885 Ca Mono Middle Creek 175 Dm Ph

Clark Fork And Blackfoot, Llc. 02543 Mt Missoula Clark Fork 3200 Dm Ph

Energy Northwest 02244 Wa Lewis Lake Creek 26125 Dm Ph

Appalachian Power Co (Va) 02210 Va Roanoke Roanoke(Staunton) R 636000 Dm Ph

Consumers Energy Co (Mi) 00785 Mi Allegan Kalamazoo River 2550 Dm Ph

Jacobson Eric R 00733 Co Ouray Uncompahgre River 700 Dm Ph

Willis Ken 01992 Ca Tehama Fern Springs Creek 15 Dm Ph

Public Service Co Of Colorado (Co) 00400 Co San Miguel San Miguel River 11500 Dm Ph

Idaho Power Co (Id) 00503 Id Owyhee Snake River 25000 Dm Ph

Union Electric Co (Mo) 02277 Mo Washington East Fork Black River 408000 Dm Ph

Kaukauna City Of (Wi) 02677 Wi Outagamie Fox River 8000 Ph

South Carolina Electric&gas Co (Sc) 00516 Sc Saluda Saluda River 207300 Dm Ph

Mackay Bar Corp (Id) 03041 Id Idaho Smith Creek 12 Dm Ph

Green Island Power Authority 00013 Ny Albany Hudson R 6000 Dm Ph

Duke Energy Indiana, Inc. 02211 In Switzerland Ohio River 64800 Dm Ph

Mead Paper Corp (Ma) 02985 Ma Berkshire Zavesky 100 Dm Ph

Everett, City Of (Wa) 02157 Wa Snohomish Sultan River 111800 Dm Ph

Appalachian Power Co (Va) 00739 Va Pulaski New River 75000 Dm Ph

Pacific Gas And Electric Co (C 02106 Ca Shasta Pit River 340500 Dm Ph

Seattle City Of (Wa) 02144 Wa Pend Oreille Pend Oreille River 1024000 Dm Ph

Northern Lights Inc (Id) 02594 Mt Lincoln Lake Creek 4500 Dm Ph

FERC	 	 	 Facilities

Project	 	 	 Installation	 Under

Licensee	 No.	 State	 County	 River	 (KW)	 License

Federal Energy Regulatory Commission

888 First Street, NE, Washington, DC 20426

202-502-8200 •1-866-208-3372 (toll free)

202-502-8659 (TTY)

www.ferc.gov