Document ID: FERC-2006-2233-0001
Agency: ferc
Document Type: Rule
Title: Long-Term Firm Transmission Rights in Organized Electricity Markets
Posted Date: 2006-11-27T05:00Z

[Federal Register: November 27, 2006 (Volume 71, Number 227)]
[Rules and Regulations]               
[Page 68440-68458]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27no06-6]                         

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 42

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

 
Long-Term Firm Transmission Rights in Organized Electricity 
Markets

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

ACTION: Order on Rehearing and Clarification.

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

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

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

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

Roland Wentworth (Technical Information), Office of Energy Markets and 
Reliability, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8262.
Harry Singh (Technical Information), Office of Enforcement, Division of 
Energy Market Oversight, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, (202) 502-6341.
Jeffery S. Dennis (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6027.
Heidi Werntz (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8910.

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

    1. On July 20, 2006, the Commission issued a Final Rule in this 
proceeding.\1\ In the Final Rule, the Commission amended its 
regulations to require each transmission organization that is a public 
utility with one or more organized electricity markets to make 
available long-term firm transmission rights that satisfy each of the 
guidelines established by the Commission in this Final Rule. We took 
this action pursuant to section 1233 of the Energy Policy Act of 2005 
(EPAct 2005), which added new section 217 to the Federal Power Act 
(FPA).\2\ The Final Rule required each transmission organization 
subject to its requirements to file with the Commission, no later than 
January 29, 2007, either (1) tariff sheets and rate schedules that make 
available long-term firm transmission rights that satisfy each of the 
guidelines set forth in the final regulations, or (2) an explanation of 
how its current tariff and rate schedules already provide for long-term 
firm transmission rights that satisfy each of the guidelines. A 
transmission organization approved by the Commission for operation 
after January 29, 2007 will be required to satisfy the requirements of 
the Final Rule.
---------------------------------------------------------------------------

    \1\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Order No. 681, 71 FR 43564 (Aug. 1, 2006), FERC Stats. & 
Regs. ] 31,226 (2006) (Final Rule).
    \2\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 957 (2005) 
(to be codified at 16 U.S.C. Sec.  824q).
---------------------------------------------------------------------------

    2. The guidelines adopted in the Final Rule give transmission 
organizations the flexibility to propose designs for long-term firm 
transmission rights that reflect regional preferences and accommodate 
their regional market designs, while also ensuring that the objectives 
of Congress expressed in new section 217(b)(4) of the FPA are met. The 
Commission allowed regional flexibility in setting the terms of the 
rights, but required that long-term firm transmission rights be made 
available with terms (and/or rights to renewal) that are sufficient to 
meet the reasonable needs of load serving entities to support long-term 
power supply arrangements used to satisfy their service obligations.
    3. In this order, the Commission denies rehearing and upholds its 
determinations in the Final Rule. We also offer certain clarifications.

I. Background

A. The Development of ISOs and RTOs

    4. In both our Notice of Proposed Rulemaking (NOPR) \3\ and the 
Final Rule, we discussed the development of Independent System 
Operators (ISOs) and Regional Transmission Organizations (RTOs). In 
Order No. 888, the Commission found that undue discrimination and 
anticompetitive practices existed in the provision of electric 
transmission service in interstate commerce.\4\ Accordingly, the 
Commission required all public utilities that own, control or operate 
facilities used for transmitting electric energy in interstate commerce 
to file open access transmission tariffs (OATTs) containing certain 
non-price terms and conditions and to ``functionally unbundle'' 
wholesale power services from transmission services.\5\ In addition, 
the Commission found in Order No. 888 that ISOs had the potential to 
aid in remedying undue discrimination and accomplishing comparable 
access.\6\
---------------------------------------------------------------------------

    \3\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Notice of Proposed Rulemaking, 71 FR 6693 (Feb. 9, 2006), 
FERC Stats. & Regs. ] 32,598 (2006) (NOPR).
    \4\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ] 
31,036 at 31,682 (1996), order on reh'g, Order No. 888-A, 62 FR 
12274 (March 14, 1997), FERC Stats & Regs. ] 31,048 (1997), order on 
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, 
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub 
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 
(2002).
    \5\ Under functional unbundling, the public utility is required 
to: (1) Take wholesale transmission services under the same tariff 
of general applicability as it offers its customers; (2) state 
separate rates for wholesale generation, transmission and ancillary 
services; and (3) rely on the same electronic information network 
that its transmission customers rely on to obtain information about 
the utility's transmission system. Id. at 31,654.
    \6\ Order No. 888 at 31,655; Order No. 888-A at 30,184.
---------------------------------------------------------------------------

    5. In light of the creation of ISOs and other changes in the 
electric industry, the Commission issued Order No. 2000.\7\ In that 
order, the Commission concluded that traditional management of the 
transmission grid by vertically integrated electric utilities was 
inadequate to support the efficient and reliable operation of 
transmission facilities necessary for continued development of 
competitive electricity

[[Page 68441]]

markets,\8\ and opportunities for undue discrimination continued to 
exist.\9\ As a result, the Commission adopted rules to facilitate the 
voluntary development of RTOs. The Commission concluded that RTOs would 
provide several benefits, including regional transmission pricing, 
improved congestion management, and more effective management of 
parallel path flows.\10\
---------------------------------------------------------------------------

    \7\ Regional Transmission Organizations, Order No. 2000, FERC 
Stats. & Regs. ] 31,089 (1999), order on reh'g, Order No. 2000-A, 
FERC Stats. & Regs. ] 31,092 (2000), aff'd sub nom. Public Utility 
District No. 1 of Snohomish County, Washington v. FERC, 272 F.3d 607 
(D.C. Cir. 2001).
    \8\ Order No. 2000 at 30,992-93 and 31,014-15.
    \9\ Id. at 31,015-17.
    \10\ Id. at 31,024.
---------------------------------------------------------------------------

    6. Most of the RTOs and ISOs now operate organized markets for 
energy and/or ancillary services in addition to providing transmission 
service under a single transmission tariff. Under the definitions 
adopted in the Final Rule, these RTOs and ISOs are transmission 
organizations with organized electricity markets subject to the 
regulations adopted in this proceeding.
    7. Most of the organized electricity markets operated by 
transmission organizations utilize a congestion management system based 
on Locational Marginal Pricing (LMP). Congestion is defined as the 
inability to inject and withdraw additional energy at particular 
locations in the network due to the fact that the injections and 
withdrawals would cause power flows over a specific transmission 
facility to violate the reliability limits for that facility. The 
market operator manages congestion by scheduling and dispatching 
generators that can meet load in the presence of congestion. 
Financially, in LMP markets the price of congestion is measured as the 
difference in the cost of energy at two different locations in the 
network. When such price differences occur, a congestion charge is 
assessed to transmission users based on their injections and 
withdrawals at particular locations. These price differences can be 
variable and difficult to predict. In order to manage the risk 
associated with the variability in prices due to transmission 
congestion, these markets use various forms of financial transmission 
rights (FTRs),\11\ which enable market participants who hold the rights 
to protect against such price risks. In most cases, these FTRs have 
terms of one year or less.\12\ In general, load serving entities 
receive FTRs through either direct allocation or through a two-step 
process in which the load serving entity is first allocated auction 
revenue rights (ARRs) and then either uses those rights to purchase 
FTRs, or has the ability under the transmission organization tariff to 
convert them to FTRs.\13\
---------------------------------------------------------------------------

    \11\ While ``FTR'' is sometimes used to refer to ``firm 
transmission rights,'' in this Final Rule we use this acronym to 
refer to the various forms of financial transmission rights that 
exist in organized electricity markets. In some markets, these are 
referred to as congestion revenue rights or transmission congestion 
contracts.
    \12\ In May 2005, the Commission released a Staff Paper that 
provided background and solicited comments on whether long-term 
transmission rights were needed in the ISO and RTO markets, and if 
so, how to implement them. Notice Inviting Comments On Establishing 
Long-Term Transmission Rights in Markets With Locational Pricing and 
Staff Paper, Long-Term Transmission Rights Assessment, Docket No. 
AD05-7-000 (May 11, 2005) (Staff Paper). There, the current FTR 
situation was discussed. See id. at 1 (stating that, as of the date 
of issuance ``the longest term FTR offered in any of the RTO or ISO 
markets is one year'').
    \13\ For a more detailed discussion, see NOPR at P 27. As we 
noted in the NOPR, ARRs confer the right to collect revenues from 
the subsequent FTR auction.
---------------------------------------------------------------------------

B. Interest in Long-Term Firm Transmission Rights

    8. We noted in the Final Rule that in recent years, interest in 
long-term firm transmission rights in organized electricity markets has 
increased, stemming in large part from a desire of some market 
participants to obtain rights that replicate the transmission service 
that was available to them prior to the formation of the organized 
electricity markets and remains available today in regions without 
organized electricity markets. The principal concern of these market 
participants is the inability to obtain a fixed, long-term level of 
service under pricing arrangements that hedge the congestion cost risk 
that they face in the organized electricity markets.\14\
---------------------------------------------------------------------------

    \14\ See Staff Paper at 1-2.
---------------------------------------------------------------------------

    9. There are several important differences between transmission 
service under the Order No. 888 pro forma OATT and transmission rights 
in organized electricity markets that use LMP and FTRs.\15\ However, 
the differences that are most relevant for purposes of the Final Rule 
concern the management of congestion, the recovery of congestion costs, 
and the availability of long-term service arrangements. These 
differences are discussed in the Final Rule.\16\
---------------------------------------------------------------------------

    \15\ A detailed discussion of transmission rights in traditional 
and organized markets was presented in the NOPR at P 15-33.
    \16\ Final Rule at P 7-10.
---------------------------------------------------------------------------

C. Energy Policy Act of 2005

    10. On August 8, 2005, EPAct 2005 \17\ became law. As noted above, 
section 1233 of EPAct 2005 added a new section 217 to the FPA, which 
provides:
---------------------------------------------------------------------------

    \17\ Pub. L. No. 109-58, 119 Stat. 594.

    The Commission shall exercise the authority of the Commission 
under this Act in a manner that facilitates the planning and 
expansion of transmission facilities to meet the reasonable needs of 
load-serving entities to satisfy the service obligations of the 
load-serving entities, and enables load-serving entities to secure 
firm transmission rights (or equivalent tradable or financial 
rights) on a long-term basis for long-term power supply arrangements 
made, or planned, to meet such needs.\18\
---------------------------------------------------------------------------

    \18\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.

---------------------------------------------------------------------------
    Section 1233(b) of EPAct 2005 requires:

    Within 1 year after the date of enactment of this section and 
after notice and an opportunity for comment, the Commission shall by 
rule or order, implement section 217(b)(4) of the Federal Power Act 
in Transmission Organizations, as defined by that Act with organized 
electricity markets.\19\
---------------------------------------------------------------------------

    \19\ Id. at 960. Transmission organization is defined in EPAct 
2005 as ``a Regional Transmission Organization, Independent System 
Operator, independent transmission provider, or other transmission 
organization finally approved by the Commission for the operation of 
transmission facilities.'' Pub. L. No. 109-58, Sec.  1291, 119 Stat. 
594, 985. In the Final Rule, we adopted this definition with slight 
modifications for the purposes of the Final Rule.
---------------------------------------------------------------------------

D. Notice of Proposed Rulemaking

    11. On February 2, 2006, the Commission issued a NOPR that proposed 
to amend its regulations to require each transmission organization that 
is a public utility with one or more organized electricity markets to 
make available long-term firm transmission rights that satisfy 
guidelines established by the Commission.\20\ The NOPR proposed eight 
guidelines, and sought comments on various issues raised by the 
introduction of long-term firm transmission rights in the organized 
electricity markets.
---------------------------------------------------------------------------

    \20\ See supra note 3.
---------------------------------------------------------------------------

E. Final Rule: Order No. 681

    12. As noted above, in the Final Rule the Commission adopted 
regulations requiring public utilities that are transmission 
organizations with organized electricity markets (as defined in the 
Final Rule) to make available long-term firm transmission rights that 
satisfy each of the seven guidelines established by the Commission, 
which are set forth in the regulations. By adopting guidelines for the 
development of long-term firm transmission rights, the Commission gave 
transmission organizations the flexibility to propose designs for long-
term firm transmission rights that reflect regional preferences and 
accommodate regional market designs, while ensuring that the objectives 
of Congress expressed in new section 217(b)(4) of the FPA are met.\21\
---------------------------------------------------------------------------

    \21\ The Commission discussed the possibility that the flexible 
regional approach adopted in the Final Rule could create seams 
issues, and directed each transmission organization to explain in 
its compliance filing how its proposal addresses potential seams 
issues. Final Rule at P 107.

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

[[Page 68442]]

    13. In adopting the Final Rule, the Commission explained that it 
sought to provide increased certainty regarding the congestion cost 
risks of long-term firm transmission service in organized electricity 
markets that will help load serving entities and other market 
participants make new investments and other long-term power supply 
arrangements. The Commission also stated that the guidelines adopted in 
the Final Rule are designed and intended primarily to ensure that the 
long-term firm transmission rights that are made available by 
transmission organizations that are subject to the rule have 
characteristics that will support long-term power supply 
arrangements.\22\
---------------------------------------------------------------------------

    \22\ Final Rule at P 16.
---------------------------------------------------------------------------

    14. Additionally, the Final Rule made clear that, while it 
unequivocally requires transmission organizations to offer long-term 
firm transmission rights with characteristics that will support long-
term power supply arrangements, in most cases, offering such rights 
should not require major changes in allocations or allocation 
procedures.\23\ We noted that our intent with regard to the existing 
transmission system is that load serving entities be able to request 
and obtain transmission rights up to a reasonable amount on a long-term 
firm basis, instead of being limited to obtaining exclusively annual 
rights.\24\ Moreover, we emphasized that offering such rights should 
not force transmission organizations to provide rights to the existing 
system that are infeasible, and that the Final Rule does not 
necessarily guarantee that a load serving entity will be able to obtain 
long-term firm transmission rights to hedge its entire resource 
portfolio or be able to obtain all the long-term firm transmission 
rights it requests.
---------------------------------------------------------------------------

    \23\ As we discuss in more detail below, while we do not believe 
major changes to existing allocation procedures will be necessary, 
Congress did not intend to protect existing or future allocation 
methodologies from the implementation of section 217(b)(4) of the 
FPA. See new section 217(c) of the FPA, Pub. L. No. 109-58, Sec.  
1233, 119 Stat. 594, 958-959.
    \24\ Capacity available would be limited to that which is 
generally available and excludes capacity that is the exclusive 
right of a participant, e.g., a participant that paid for such 
capacity and obtained FTRs for that payment.
---------------------------------------------------------------------------

    15. The specific guidelines adopted by the Commission in the Final 
Rule, which the long-term firm transmission rights offered by 
transmission organizations must satisfy, are:

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

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

II. Discussion

A. Procedural Matters

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

    \25\ 18 CFR 385.213(a)(2) (2006).
---------------------------------------------------------------------------

B. Requests for Rehearing and Clarification and Commission Conclusions

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

[[Page 68443]]

have a service obligation.\28\ The Commission also clarified that 
industrial customers who self-supply their own load are construed to be 
load serving entities under the Final Rule, even though some of these 
entities may not technically ``sell * * * electric energy.'' The 
Commission stated that this would ensure that Congress' objectives 
under the FPA are fulfilled.
---------------------------------------------------------------------------

    \26\ Final Rule at P 44; 18 CFR 42.1(b)(2); section 217(a)(2) of 
EPAct.
    \27\ Final Rule at P 44; 18 CFR 42.1(b)(3); section 217(a)(3) of 
EPAct.
    \28\ Final Rule at P 45.
---------------------------------------------------------------------------

Rehearing Requests

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

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

    Id. (emphasis added). DWR argues that, while the Final Rule clearly 
intends to implement section 217(g), it does so in an erroneous 
fashion, by conflating water pumping facilities--which have no electric 
service obligation--with load serving entities. DWR asserts that the 
Final Rule erroneously states that water pumping facilities, which are 
non-public utilities, already appear to be captured by the definition 
of load serving entity, ``provided of course, that they have a service 
obligation.'' \29\ DWR points out that ``service obligation'' in the 
Final Rule is defined as ``a requirement applicable to, or the exercise 
of authority granted to, an electric utility under Federal, State or 
local law or under long-term contracts to provide electric service to 
end-users or to a distribution utility.\30\ DWR argues that this 
regulatory language makes no mention of the water pumping facilities as 
described by Congress in section 217(g) of the FPA.
---------------------------------------------------------------------------

    \29\ Request for Rehearing/Clarification of DWR at 5 (quoting 
Final Rule at P 48).
    \30\ Id. at 6 (citing 18 CFR 42.1(b)(3); section 217(a)(3) of 
EPAct).
---------------------------------------------------------------------------

    22. DWR explains that it has put into place long-term transmission 
entitlements used ``to support its own water pumping facilities'' as 
provided in section 217(g). DWR states that, while it self-provides 
power to its own water pumping facilities, it does not provide electric 
service to end-users or to a distribution utility, as it must to 
qualify as a load serving entity under 18 CFR 42.1(b)(3). Rather, DWR 
is a water agency whose pumping facilities provide flood management, 
water deliveries, and other water related services to California. 
Therefore, DWR asks the Commission to revise section 42.1 of the 
regulations to ensure compliance with section 217(g) of the FPA.
    23. BP also requests clarification of the scope of the Final Rule's 
definition of a load serving entity. BP states that it is concerned 
that the Final Rule does not consistently apply its definition of a 
load serving entity eligible for long-term firm transmission rights 
allocation priority. BP argues that the Final Rule discriminates 
against certain entities with binding contractual obligations to 
provide power to load serving entities, by denying them load serving 
entity status, while granting load serving entity status to other 
similarly situated entities. BP points out that Manitoba Hydro had 
argued that the priority allocation of long-term firm transmission 
rights should extend to entities that, through agreement with a load 
serving entity, have ``provided the transmission required by the load-
serving entity to satisfy its service obligation and agreed to assume 
congestion risk.'' \31\ BP states that Manitoba Hydro cited the 
Commission's assertion that it sought to help ``other market 
participants'' as well as load serving entities make new investments 
and other long-term power supply arrangements. BP reiterates Manitoba 
Hydro's example of a load serving entity unable to obtain transmission 
that utilizes another party's transmission rights in exchange for 
assumption of the congestion risk.\32\ BP states that Manitoba Hydro 
requested the Commission to ensure that if a market participant other 
than a load serving entity has a contractual obligation to a load 
serving entity to provide transmission rights and to assume associated 
congestion risk, it too should have priority access to long term firm 
transmission rights in the same manner as a load serving entity.\33\ In 
the same vein, BP similarly requests the Commission to clarify that, 
like those entities that self supply, entities that enter into long-
term obligations to sell electric energy to load serving entities that 
have the option to self supply, be similarly construed as load serving 
entities for purposes of the Final Rule.\34\
---------------------------------------------------------------------------

    \31\ Request for Rehearing of BP at 7 (citing Manitoba Hydro 
Comments at 1).
    \32\ Id. (citing Manitoba Hydro Comments at 3).
    \33\ Id. at 8 (citing Manitoba Hydro Comments at 3-4).
    \34\ Id.
---------------------------------------------------------------------------

Commission Conclusion
    24. With respect to the issue raised by DWR concerning whether 
water pumping entities fall under the definition of load serving 
entities, we grant clarification. While water pumping entities do not 
come under the definition of load serving entities, we clarify that, to 
effectuate Congressional intent, water pumping entities as described in 
section 217(g) of the FPA should be treated as load serving entities. 
As DWR points out, section 217(g) of the FPA provides that the 
``Commission shall ensure that any entity described in section 201(f) 
[of the FPA] that owns transmission facilities used predominately to 
support its own water pumping facilities shall have, with respect to 
the facilities, protections for transmission service comparable to 
those provided to load-serving entities pursuant to this section.'' 
\35\ From this provision, it is evident that Congress intended water 
pumping entities, such as DWR, to be on par with load serving entities 
with respect to protections for transmission services. Consequently, we 
clarify that water pumping entities and their obligation to provide 
water related services, as described in section 217(g), should be 
construed as meeting the definition of ``service obligation'' in 18 CFR 
42.1(b)(3), and should be treated as load serving entities with service 
obligations for purposes of the Final Rule. This should effectuate 
Congressional intent that water pumping entities receive protections 
for transmission service comparable to those provided to load-serving 
entities.
---------------------------------------------------------------------------

    \35\ EPAct 2005, Pub. L. No. 109-58, Sec.  1233, 119 Stat. at 
959.
---------------------------------------------------------------------------

    25. Next, we deny BP's request to construe entities that enter into 
long-term obligations to sell electric energy to load serving entities 
that have the option to self supply as load serving entities. As we 
stated in the Final Rule (in the discussion of guideline (5)), we 
cannot allow certain entities that do not meet the strict definition of 
load serving entity to come under the definition of load serving entity 
and, consequently, receive priority in allocation of long-

[[Page 68444]]

term firm transmission rights.\36\ Extending the definition as BP 
requests would likely defeat the purpose of the preference, which is to 
ensure that load serving entities have sufficient protection for 
transmission service. If, as BP requests, we were to construe a 
supplier of a load serving entity, such as a generator, to be a load 
serving entity, this could lead to a situation where multiple load 
serving entities are counting the same load as part of their load 
serving obligation.
---------------------------------------------------------------------------

    \36\ See Final Rule at P 326.
---------------------------------------------------------------------------

    26. Furthermore, we disagree with BP's contention that the Final 
Rule does not consistently apply the definition of load serving entity. 
In the Final Rule, we construed large industrial customers who self-
supply their own load to be load serving entities for purposes of the 
Final Rule, in order to ensure fulfillment of Congress's objectives in 
section 217 of the FPA.\37\ While a large industrial customer is not 
technically a ``distribution utility'' or an ``electric utility,'' like 
a traditional load serving entity it provides electricity to serve its 
``load,'' i.e., its industrial facilities, on an ongoing basis from 
either its own generation or through a direct purchase from another 
generator. Contrary to BP's assertion, large industrial customers who 
self-supply their own load are not similarly situated to entities, such 
as generators, with contractual obligations to serve load serving 
entities. Entities that enter into long-term obligations to supply load 
serving entities are at least one step removed from load serving 
entities, insofar as they have a contractual obligation to serve an 
entity (the load serving entity) that subsequently has the service 
obligation. Consequently, we deny BP's request to construe as load 
serving entities those entities that enter into long-term obligations 
to supply load serving entities.
---------------------------------------------------------------------------

    \37\ See id.
---------------------------------------------------------------------------

    27. While we reject BP's requested clarification, we nevertheless 
emphasize that, even though suppliers of load serving entities are not 
treated as load serving entities under the statute, this does not mean 
that they will be deprived of long-term firm transmission rights. On 
the contrary, consistent with section 217 of the FPA, once load serving 
entities have received their allocated long-term firm transmission 
rights, those rights and any additional long-term firm transmission 
rights available from existing system capacity can be offered to such 
non-load serving entities (as well as other load serving entities) 
through a secondary auction, bilateral trades or another method of 
allocation.\38\ The load serving entity could sell or otherwise 
transfer its long-term firm transmission rights to its supplier. As 
noted in the Final Rule, a generator or any other entity that has a 
contract with a load serving entity can structure its contract with the 
load serving entity as necessary to attain the desired congestion cost 
risk sharing.\39\
---------------------------------------------------------------------------

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

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

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

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

[[Page 68445]]

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

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

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

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

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

[[Page 68446]]

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

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

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

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

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

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

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

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

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

[[Page 68447]]

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

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

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

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

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

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

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

[[Page 68448]]

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

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

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

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

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

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

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

[[Page 68449]]

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

    \67\ Final Rule at P 319.
---------------------------------------------------------------------------

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

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

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

[[Page 68450]]

rights they need. According to APPA, among the possible ways the 
Commission could do this would be to require load serving entities 
seeking long-term firm transmission rights to demonstrate that they: 
(1) will indeed serve load at the delivery points covered by their 
long-term firm transmission rights and have power supplies committed to 
them at the requested receipt points; and (2) have an obligation to pay 
the embedded costs of their transmission provider's system, thus 
signaling their commitment to pay their allocated share of the 
transmission system's fixed costs.
Commission Conclusion
    65. We deny the rehearing requests of the CPUC, TAPS and APPA to 
reinstate in guideline (5) a preference for load serving entities with 
long-term power supply arrangements in the allocation of long-term firm 
transmission rights. We retain the preference for load serving entities 
vis-[agrave]-vis non-load serving entities as adopted in the Final 
Rule. We reiterate that, in our view, a broader preference for load 
serving entities in general vis-[agrave]-vis non-load serving entities 
is fully supported by the statute and will achieve the statute's 
purposes. This feature of guideline (5), taken together with the other 
guidelines in the Final Rule, will enable load serving entities to 
obtain long-term firm transmission rights for long-term power supply 
arrangements to meet their service obligations, as section 217(b)(4) 
requires. However, as explained below, we clarify that, in cases where 
the transmission organization must limit the amount of existing 
capacity available for long-term firm transmission rights to a level 
that cannot support the ``reasonable needs'' of all load serving 
entities, guideline (5) allows the transmission organization to give 
priority to load serving entities with long-term power supply 
arrangements in allocating the scarce capacity.
    66. First, in response to TAPS' and APPA's argument that the Final 
Rule does not satisfy the mandate of section 217(b)(4) of the FPA, as 
we stated in the Final Rule, while this section can be read to support 
a preference for load serving entities with long-term power supply 
arrangements, it does not require that a preference be given to this 
class of load serving entities at the expense of those that prefer 
short-term power supply arrangements. New section 217(b)(4) of the FPA 
requires the Commission to exercise its authority under the FPA ``in a 
manner that * * * enables load-serving entities to secure firm 
transmission rights (or equivalent tradable or financial rights) on a 
long-term basis for long-term power supply arrangements made, or 
planned, to meet'' service obligations.\69\ This language requires the 
Commission to enable load serving entities to secure a reasonable 
amount of long-term firm transmission rights that will support long-
term power supply arrangements to meet their service obligations. We 
satisfied this directive by adopting guidelines in the Final Rule that 
require each transmission organization with an organized electricity 
market to design and offer to customers long-term firm transmission 
rights with basic properties that will support specific long-term power 
supply arrangements. These basic properties include, but are not 
limited to, the specification of source, sink and MW quantity 
(guideline 1), full funding (guideline 2), and sufficient term length 
(guideline 4). Guideline (5) is a measure to ensure that where existing 
transmission capacity is scarce, load serving entities will have 
priority over non-load serving entities to secure long-term firm 
transmission rights to satisfy their service obligations, as Congress 
intended. The language in new section 217(b)(4) \70\ is sufficiently 
broad that it does not require, and does not prohibit, a narrower 
preference (like that proposed in the NOPR) for load serving entities 
with specific long-term power supply arrangements, either made or 
planned.
---------------------------------------------------------------------------

    \69\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.
    \70\ E.g., id. (``* * * and enables load-serving entities to 
secure firm transmission rights * * * on a long-term basis for long-
term power supply arrangements made, or planned, to meet such 
needs'') (emphasis added).
---------------------------------------------------------------------------

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

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

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

[[Page 68451]]

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

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

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

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

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

[[Page 68452]]

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

    \74\ See, e.g., New England Power Pool, 100 FERC ] 61,287, at P 
85 (2002) (requiring external load to pre-pay its transmission 
access charge in order to receive FTRs); see also California 
Independent System Operator Corporation, 116 FERC ] 61,274 at P 766 
(2006) (stating that external load and internal load are not 
similarly situated with respect to their reliance on the 
transmission organization's grid) (MRTU Order).
---------------------------------------------------------------------------

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

[[Page 68453]]

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

[[Page 68454]]

section 217(b)(4) requires the Commission to exercise its authority 
under the FPA in a manner that facilitates the planning and expansion 
of transmission facilities, and to enable load serving entities to 
obtain long-term firm transmission rights. To implement that section in 
a transmission organization with an organized electricity market, as 
required by section 1233(b) of EPAct 2005, we concluded that the 
transmission organization must plan its system to ensure that allocated 
or awarded long-term firm transmission rights are feasible. We stated 
that FPA section 217(b)(4) itself, by including both the requirement to 
facilitate planning and expansion and the requirement to provide long-
term transmission rights, supports the Commission's authority to impose 
this requirement.
    95. The Commission stated that FPA section 217(b)(4) does not 
merely require the provision of long-term firm transmission rights; it 
requires the Commission to facilitate the planning and expansion of 
transmission facilities. However, we noted that we were not requiring 
in the Final Rule any ``obligation to build'' or other obligation that 
does not already exist under Order No. 888. We noted that we are 
considering issues concerning our broader mandate to exercise our FPA 
authority to facilitate planning and expansion (which applies to all 
regions) in Docket No. RM05-25-000, the Order No. 888 OATT reform 
rulemaking.
Rehearing Requests
    96. APPA asks the Commission to clarify that, while the Final Rule 
imposes no ``obligation to build'' transmission facilities that does 
not already exist in Order No. 888, this does not mean there is no 
obligation for transmission organizations to ensure that the 
transmission facilities necessary to support long-term firm 
transmission rights are constructed. In this regard, APPA notes that 
the OATT imposes an equivalent obligation on individual transmission 
providers, and transmission organization transmission providers must 
meet the ``consistent with or superior to'' requirement for their own 
OATTs. APPA states that it presumes this requirement will include a 
showing that transmission organizations under their OATTs will have 
obligations ``consistent with or superior to'' the obligations set out 
in the OATT (as revised in Docket No. RM05-25) to ensure the 
construction of new transmission facilities needed to support ongoing 
firm transmission service (including, in the transmission organization 
context, long-term firm transmission rights). APPA asks the Commission 
to clarify this point.
Commission Conclusion
    97. The Commission stated in the Final Rule that it was not, 
through the long-term firm transmission rights regulations, imposing a 
new ``obligation to build'' that does not already exist under Order No. 
888.\75\ The Commission also noted that it was considering issues 
concerning its broader mandate to exercise its FPA authority to 
facilitate planning and expansion in both transmission organization and 
non-transmission organization regions in Docket No. RM05-25-000, the 
Order No. 888 reform rulemaking.\76\ The nature of the general planning 
obligation in the OATT referred to by APPA here is under consideration 
in that docket. As a result, APPA's request for clarification is 
outside of the scope of this rulemaking proceeding, which concerns only 
the obligation to plan and expand the system as it relates to the 
provision of long-term firm transmission rights.
---------------------------------------------------------------------------

    \75\ See Final Rule at P 21, n. 22 and P 453, n. 138.
    \76\ Id. at P 457.
---------------------------------------------------------------------------

10. Properties of Physical Versus Financial Rights
    98. In the Final Rule, we interpreted section 217(b)(4) of the FPA 
to require that load serving entities be able to obtain long-term firm 
transmission rights, whether as physical rights or financial rights. 
While we left the choice of specifying long-term rights as physical or 
financial rights to transmission organizations and their stakeholders, 
we did not require that transmission organizations with existing or 
approved designs for financial transmission rights create a new long-
term physical right, such as an Order No. 888 network service right, 
upon request of a load serving entity.\77\ In addition, in our 
discussion of guideline (2), we explained our interpretation of the 
firmness requirement in a financial rights context as the right to hold 
a fixed (MW) quantity of long-term firm transmission rights over the 
life of the rights and stability in the revenue stream from the right 
through full funding.\78\ We observed that this interpretation roughly 
parallels the features of quantity and financial stability of long-term 
physical transmission contracts.\79\ We further noted that organized 
markets with locational marginal pricing generally improve the firmness 
of physical transmission scheduling, by reducing the incidence of 
transmission loading relief, or TLRs.\80\
---------------------------------------------------------------------------

    \77\ See Final Rule at P 120 and 474.
    \78\ See id. at P 170 and 473-74.
    \79\ Id. at P 473.
    \80\ Id.
---------------------------------------------------------------------------

Rehearing Requests
    99. Santa Clara seeks clarification or, in the alternative, 
rehearing on the ``physical attributes'' of long-term firm transmission 
rights. Santa Clara asserts this is necessary so that transmission 
organizations can meet what Santa Clara interprets to be section 
217(b)(4)'s mandate ``that financial rights be `equivalent to' physical 
rights.'' \81\ Santa Clara recognizes that the Final Rule proposes 
several measures to support the financial ``firmness'' of the long-term 
firm transmission rights, including full funding of the rights and 
fixing the quantity of the rights over time. However, Santa Clara 
argues that additional attributes are needed, including ``physical 
scheduling attributes that enable LSEs to deliver energy to native 
load.'' \82\ Santa Clara states that ``financial rights do nothing for 
situations where service is denied to a transmission-dependent user,'' 
including, in Santa Clara's view, physical curtailment of transmission 
service.\83\ Hence, Santa Clara requests that holders of long-term firm 
transmission rights receive scheduling priority over other transmission 
users in the event of curtailment. In addition, Santa Clara argues that 
financial rights do not support building new transmission capacity.
---------------------------------------------------------------------------

    \81\ Request for Clarification/Rehearing of Santa Clara at 3.
    \82\ Id. at 6.
    \83\ Id. at 7.
---------------------------------------------------------------------------

Commission Conclusion
    100. We reject Santa Clara's request for clarification or, in the 
alternative, rehearing. First, we do not agree with Santa Clara that 
existing physical transmission rights have physical scheduling 
attributes that are superior to the scheduling rights that are 
available in organized electricity markets with financial transmission 
rights. Currently, in organized markets with LMP, all physical 
transmission schedules are honored subject to congestion charges and 
physical feasibility. In general, physical feasibility has not been a 
problem in such markets, as reflected in the very infrequent need to 
undertake physical curtailment of transmission through transmission 
loading relief. Outside the organized markets, the frequency of 
transmission loading relief can be much higher.
    101. Moreover, we do not agree that long-term firm transmission 
rights

[[Page 68455]]

warrant any additional physical scheduling priority in the event of 
transmission curtailment. Under guideline (5), we have already accorded 
load serving entities priority in the allocation of long-term firm 
transmission rights. Granting physical scheduling priority to holders 
of long-term rights would provide load serving entities that hold such 
rights with greater claim over physical scheduling than load serving 
entities that do not hold such rights. We are concerned that 
distinguishing between long-term and short-term transmission rights 
holders in this manner may not be just and reasonable and could be 
unduly discriminatory. In fact, in our conclusion on guideline (5) in 
the Final Rule, we determined that EPAct 2005 should not be construed 
to require transmission organizations to give a preference to load 
serving entities with long-term rights at the expense of load serving 
entities that prefer short-term power supply arrangements.\84\ Santa 
Clara has failed to persuade us that changing this determination would 
yield a just and reasonable and non-discriminatory outcome.
---------------------------------------------------------------------------

    \84\ Final Rule at P 319.
---------------------------------------------------------------------------

    102. Second, we disagree with Santa Clara's assertion that we have 
provided insufficient support for transmission expansion to support 
long-term firm transmission rights. The Final Rule requires that 
transmission organizations with organized electricity markets establish 
a transmission system planning process that will accommodate the long-
term transmission rights that are awarded by ensuring that they remain 
feasible over their entire term.\85\ Santa Clara has not specifically 
addressed that requirement or explained why it is insufficient.
---------------------------------------------------------------------------

    \85\ See id. at P 453.
---------------------------------------------------------------------------

11. Exemption From Marginal Loss Charges
    103. We stated in the Final Rule that we do not interpret section 
217(b)(4) as addressing marginal loss charges.\86\ In addition, we 
noted that the transmission organizations with organized electricity 
markets currently refund any marginal loss surplus that they collect, 
and that those refund methods have been approved by the Commission on a 
case-by-case basis, reflecting regional preferences. Accordingly, we 
concluded that we would not overturn those decisions in the Final 
Rule.\87\
---------------------------------------------------------------------------

    \86\ Id. at P 478.
    \87\ Id.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification
    104. SMUD argues that the Commission properly concluded that under 
section 217(b)(4), a financial rights-based long-term firm transmission 
service should provide a hedge to customers that allows them 
``equivalent'' protection to physical rights service, one that is 
``sufficient to meet the needs of load serving entities to hedge long-
term power supply arrangements.'' \88\ But, according to SMUD, the 
Commission arbitrarily and illogically failed to require transmission 
organizations employing marginal loss charges to either: (1) offer 
long-term firm service customers a hedge against those charges; or (2) 
exempt such customers from those charges.
---------------------------------------------------------------------------

    \88\ SMUD Rehearing Request at 2 (citing Final Rule at P 495).
---------------------------------------------------------------------------

Commission Conclusion
    105. We stated in the Final Rule that we do not interpret section 
217(b)(4) as addressing marginal loss charges.\89\ The issue of hedging 
long-term marginal loss charges is distinct from that of hedging 
marginal congestion charges. Congestion charges arise in part due to 
transmission grid constraints (or bottlenecks). For congestion charges, 
transmission organizations allocate transmission rights to provide a 
hedge. Marginal losses are similar to congestion costs in that they are 
a function of locational energy prices and line loadings. However, the 
development of a financial instrument or other means for hedging of 
marginal losses has not been accomplished to date in any of the 
organized electricity markets.
---------------------------------------------------------------------------

    \89\ Id. at P 478.
---------------------------------------------------------------------------

    106. Section 217(b)(4) of the FPA requires the Commission to act in 
a manner that ``* * * enables load-serving entities to secure firm 
transmission rights (or equivalent tradable or financial rights) on a 
long-term basis. The terms ``firm transmission rights,'' and 
``equivalent tradable or financial rights'' are consistent with 
terminology traditionally used to discuss hedging of congestion, rather 
than marginal losses. Furthermore, we do not interpret EPAct 2005 as 
requiring transmission organizations to provide long-term firm 
transmission rights with properties that are fundamentally different 
from those of the short-term rights that they now offer. Consequently, 
we do not interpret the statute as requiring hedging of marginal 
losses.\90\ In addition, we note that, while we do not interpret EPAct 
as requiring hedging of marginal losses, this does not preclude future 
market design changes that allow hedging of losses. Indeed, we 
encourage transmission organizations to explore methods by which they 
can assist load serving entities and others to obtain a hedge for 
marginal losses.
---------------------------------------------------------------------------

    \90\ Transmission rights holders are nevertheless free, of 
course, to contract with generators to hedge losses.
---------------------------------------------------------------------------

12. Compliance Procedures
    107. In the Final Rule, the Commission required transmission 
organizations subject to its requirements to file compliance proposals 
within 180 days of the publication of the Final Rule in the Federal 
Register.\91\ The Commission specified that transmission organizations 
must file proposed tariff sheets and rate schedules that would make 
available long-term firm transmission rights that satisfy each of the 
guidelines in the Final Rule. We noted that while the implementation of 
long-term transmission rights would present difficult issues and 
require significant effort to prepare proposals within 180 days, 
Congress had directed in section 1233(b) of EPAct 2005 that the 
Commission act within one year of the legislation's passage, evidencing 
its intent that long-term transmission rights be made available as soon 
as possible.
---------------------------------------------------------------------------

    \91\ The Final Rule was published in the Federal Register on 
August 1, 2006, making compliance proposals due on January 29, 2007.
---------------------------------------------------------------------------

Rehearing Requests
    108. NYISO objects to the 180-day compliance deadline set forth in 
the Final Rule, arguing that this amount of time is insufficient for 
transmission organizations to collaborate with their stakeholders and 
prepare tariff revisions addressing the issues raised by the Final 
Rule. According to NYISO, unlike other transmission organizations, it 
must make major changes to its existing systems for allocating and 
auctioning transmission rights, making its compliance burden more 
significant than the Commission anticipates. NYISO argues that the 
Commission based its 180-day compliance deadline on an expectation that 
``most'' transmission organizations would not require major changes in 
their financial transmission rights systems.\92\ NYISO is different 
from the transmission organizations the Commission apparently had in 
mind, it asserts, for several reasons, including the fact that it does 
not have an ARR allocation system, does not currently have rules 
awarding incremental long-term firm transmission rights for upgrades 
paid for by a market participant, does not have

[[Page 68456]]

rules for mandatory re-assignments of transmission rights, and has 
substantial grandfathered transmission rights in place. NYISO also 
argues that it must take care to ensure that its long-term firm 
transmission rights design does not harm New York's successful retail 
access program.
---------------------------------------------------------------------------

    \92\ Request for Rehearing of NYISO at 16 (citing Final Rule at 
P 18).
---------------------------------------------------------------------------

    109. NYISO further contends that nothing in section 217 of the FPA 
requires the Commission to impose such an aggressive compliance 
timeline. If anything, NYISO asserts, section 217's references to 
financial transmission rights and explicit protection of existing 
transmission organization auction rules suggests that Congress did not 
believe there was a pressing need for change. Moreover, NYISO compares 
the Commission's interpretation of the necessary compliance 
requirements here with new section 215 of the FPA (concerning bulk 
electric system reliability and certification of an Electric 
Reliability Organization (ERO)); it argues that the Commission did not 
interpret that statute's requirement that an ERO be certified within 
180 days as imposing deadlines on the ERO's compliance with future 
Commission regulations.
    110. Accordingly, NYISO states that the Commission is under no 
legal obligation to set a uniform compliance deadline, and should allow 
each transmission organization to propose an individual compliance 
deadline that reflects what it must do to comply with the Final 
Rule.\93\ This approach better comports with the Commission's flexible 
approach, NYISO contends. If nothing else, it argues that the 
Commission should delay the start of the 180-day period for compliance 
filings until after it issues its order on rehearing. There is likely 
to be a large number of rehearing requests, some of which may seek 
significant revisions to the Final Rule. As a result, NYISO states, the 
order on rehearing may not issue until halfway through the compliance 
period (if not later), which would waste the effort of stakeholders if 
changes are required. Granting this request would not substantially 
affect the actual effective date of the tariff revisions filed in 
compliance with the Final Rule and would not delay technical 
implementation work, NYISO argues.
---------------------------------------------------------------------------

    \93\ Specifically, NYISO states that each transmission 
organization should be required to submit a detailed compliance plan 
within 90 days (after consultation with stakeholders), including 
timetables for developing and filing tariff revisions.
---------------------------------------------------------------------------

Commission Conclusion
    111. We deny this rehearing request, and maintain the requirement 
in the Final Rule that transmission organizations file compliance 
proposals by January 29, 2007 (180 days from the date of publication in 
the Federal Register). While we appreciate that NYISO will need to work 
through many issues during this time period, perhaps even more than 
some other transmission organizations, we believe that it is necessary 
to implement Congress's mandate regarding provision of long-term 
transmission rights in an expeditious manner. The implementation of 
section 217(b)(4) and the availability of long-term firm transmission 
rights in transmission organizations with organized electricity markets 
is a directive from Congress in EPAct 2005. As we stated in the Final 
Rule, if implementing the rule requires NYISO or another transmission 
organization to reorder its market design initiatives, it should do so, 
seeking approval from the Commission to reset deadlines as 
necessary.\94\
---------------------------------------------------------------------------

    \94\ Final Rule at P 491.
---------------------------------------------------------------------------

    112. Despite NYISO's observation that an expeditious implementation 
schedule is not explicitly required by section 217 of the FPA and 
section 1233(b) of EPAct 2005, we believe that Congress would not have 
specifically directed in section 1233(b) that the Commission act within 
one year to implement section 217(b)(4) within transmission 
organizations with organized electricity markets unless Congress 
believed that this directive would ensure presence of long-term firm 
transmission rights shortly thereafter. The references to financial 
transmission rights in section 217 only suggest that such rights, if 
offered on a long-term basis to support long-term power supply 
arrangements, can satisfy the requirements of that section, not that no 
change is required. NYISO's reference to the Commission's 
implementation of section 215 of the FPA (concerning mandatory 
reliability standards and certification of the ERO) is not relevant to 
our implementation of section 217(b)(4) of the FPA. Section 1233(b) of 
EPAct 2005 expressly directed that long-term firm transmission rights 
be implemented within one year of its passage. The Commission has 
already granted as much flexibility as we believe the statute allows in 
providing a six month period after the one-year deadline to file tariff 
sheets making long-term firm transmission rights available to market 
participants.
    113. Accordingly, we decline to modify the Final Rule to allow 
transmission organizations to propose individual implementation 
schedules. We remind NYISO and the other transmission organizations, 
however, that they must file compliance proposals within 180 days, and 
may propose an individual effective date in that filing that takes into 
account existing allocation schedules for transmission rights or the 
need to make software or procedural changes to implement long-term 
rights.\95\ The Commission will consider effective date proposals in 
light of Congress's intent that long-term firm transmission rights be 
implemented as soon as possible and demonstrated constraints faced by 
the transmission organization in implementing long-term rights.\96\
---------------------------------------------------------------------------

    \95\ Id. at P 493.
    \96\ Id.
---------------------------------------------------------------------------

    114. We also decline to begin the 180-day compliance period from 
the date of this order on rehearing. We are not changing the Final 
Rule, so the work transmission organizations and their stakeholders 
have accomplished to date will not be wasted.
13. Implementation Date
    115. In the Final Rule, the Commission declined to prescribe 
effective dates for the tariff sheets to be filed 180 days after 
issuance of the Final Rule. We recognized that transmission 
organizations may need to synchronize the availability of long-term 
firm transmission rights with their existing allocation schedules, and 
take additional steps, such as making necessary software or procedural 
changes, to implement their long-term firm transmission rights 
proposals. Consequently, we concluded that we would evaluate effective 
dates on a case-by-case basis, and in light of Congress's intent that 
long-term firm transmission rights be implemented as soon as possible.
    116. In addition, we explicitly required CAISO, along with all 
existing transmission organizations, to make proposals to comply with 
the Final Rule according to the 180-day timetable. While we were 
sympathetic to CAISO's concerns regarding its pending market redesign, 
we determined that we could not address in a rulemaking of general 
applicability any possible plans for phase-in or delayed implementation 
of long-term firm transmission rights. We further noted in the Final 
Rule that CAISO had not provided any timetable in its comments for 
implementing long-term firm transmission rights as required by EPAct 
2005. Accordingly, we directed CAISO to work with its stakeholders to 
develop and submit a compliance filing within the timetable prescribed 
in the Final Rule. We also

[[Page 68457]]

concluded that we would consider any issues specific to CAISO in its 
compliance filing for implementing long-term firm transmission rights 
in CAISO.\97\
---------------------------------------------------------------------------

    \97\ Final Rule at P 495.
---------------------------------------------------------------------------

Rehearing Requests
    117. SMUD states that the Commission properly concluded that 
Congress intended transmission organizations to implement long-term 
firm service offerings ``as soon as possible.'' \98\ Nevertheless, SMUD 
asserts that, given CAISO's prior unwillingness to offer a timetable 
for implementation, the Commission erred in two ways. First, according 
to SMUD, the Commission reached a conclusion inconsistent with its 
factual findings in concluding that the details of CAISO's 
implementation plans could be addressed when CAISO made a compliance 
filing.\99\ SMUD asks the Commission to clarify that: (1) compliance 
filings must propose a timetable for implementation and include a 
timely implementation date; and (2) the implementation of long-term 
firm transmission rights must take priority over the implementation of 
new market designs, if implementation of new market designs would delay 
availability of long-term service include a timely implementation date.
---------------------------------------------------------------------------

    \98\ SMUD Rehearing Request at 2 (citing Final Rule at P 495).
    \99\ Id. at 2 (citing Burlington Truck Lines v. United States, 
371 U.S. 156, 168 (1962)).
---------------------------------------------------------------------------

    118. Second, SMUD asserts that the Commission acted arbitrarily in 
failing to address SMUD's comment that transmission providers/
organizations unable to develop financial rights-based long-term firm 
service within a short time after the date for the compliance filing 
should be required to offer interim plans, such as the use of physical 
rights service, until a financial rights service can be 
implemented.\100\
---------------------------------------------------------------------------

    \100\ Id. at 2 (citing Noram Gas Transmission Co v. FERC, 148 
F.3d 1158, 1165 (D.C. Cir. 1990)); see also id. at 6-7.
---------------------------------------------------------------------------

    119. SMUD explains that CAISO's market redesign and technological 
upgrade (MRTU) will not be implemented until at least November 2007, so 
that even if CAISO's proposed ``priority renewal provisions'' for 
congestion revenue rights (CRRs) \101\ offered a reasonable interim 
bridge, delaying implementation to coincide with implementation of a 
new market design will not meet the Congressional and Commission 
directives that long-term service be available ``as soon as possible.'' 
\102\ SMUD expresses concern, based on its contact with CAISO and 
CAISO's track record on this issue, that CAISO may not implement long-
term firm transmission rights before its MRTU implementation date or 
even by that date should its MRTU implementation schedule slip. SMUD 
asserts that CAISO's promise to make a timely compliance filing, 
without a corresponding commitment to propose any implementation date, 
much less a date ``as soon as possible'' after the filing, could lead 
to further disputes.
---------------------------------------------------------------------------

    \101\ ``FTRs'' are called ``CRRs'' under California's new market 
design, MRTU.
    \102\ SMUD Rehearing Request at 8 (citing Final Rule at P 495).
---------------------------------------------------------------------------

    120. Santa Clara also requests clarification, or, in the 
alternative, rehearing concerning CAISO's obligation to comply with the 
Final Rule. Citing the NOPR and the Final Rule, Santa Clara argues that 
the Commission has found CAISO to be an organized electricity market 
that is required to submit a compliance filing within the 180-day time 
frame.\103\ Santa Clara asks the Commission to clarify or grant 
rehearing and find that CAISO is a transmission organization with 
organized electricity markets, and is currently subject to the 
requirements of the Final Rule. Santa Clara states that the Final Rule 
makes clear that it applies to organized electricity markets that 
include ``auction-based day ahead and real time wholesale market[s],'' 
that do not offer financial transmission instruments with terms longer 
than one year.\104\ Asserting that CAISO ``clearly operates an auction 
based single price day-ahead and real-time market'' and does not offer 
long-term rights with longer than annual terms, Santa Clara asks the 
Commission to confirm its prior ruling that CAISO must comply with the 
Final Rule. Santa Clara explains that confusion has arisen, ostensibly 
based on the Commission's statement that organized electricity markets 
do not include ``Day 1'' markets.\105\
---------------------------------------------------------------------------

    \103\ Request for Clarification/Rehearing of Santa Clara at 5.
    \104\ See id. (quoting Final Rule at P 30).
    \105\ Id. (citing Final Rule at P 31).
---------------------------------------------------------------------------

Commission Conclusion
    121. First, we grant SMUD's requested clarification that compliance 
filings must include implementation timetables. As we emphasized in the 
Final Rule, Congress intended the swift introduction of long-term firm 
transmission rights. In the Final Rule, we declined to prescribe an 
effective date for tariff sheets implementing long-term firm 
transmission rights, so as to provide flexibility to the various 
transmission organizations to effectuate the Final Rule. Nevertheless, 
we find it reasonable to require all transmission organizations, 
including CAISO, to include and justify in their compliance proposals a 
timetable for implementation of long-term firm transmission rights.
    122. Next, we deny SMUD's request for a blanket clarification that 
the implementation of long-term firm transmission rights must take 
priority over the implementation of new market designs, if 
implementation of new market designs would delay availability of long-
term service. Instead, we find it reasonable to evaluate market design 
priorities, including implementation of long-term firm rights, on a 
case-by-case basis. As in the Final Rule, and as discussed above, see 
supra P 107, we urge transmission organizations to find ways to reorder 
their priorities to ensure timely implementation of long-term firm 
transmission rights.
    123. With respect to CAISO in particular, SMUD's requested 
clarification assumes CAISO cannot concomitantly accomplish its market 
redesign on schedule and devise and timely implement long-term firm 
transmission rights. We decline to make that assumption. As we recently 
concluded, California's market redesign and technology upgrade (MRTU) 
is needed to prevent recurrence of the California and Western power 
crisis of 2000-2001. As the Commission explained in its acceptance of 
the tariff CAISO filed to implement MRTU, MRTU will fix a flawed market 
design, enhance reliability of the CAISO-controlled grid, and improve 
market power mitigation.\106\ These improvements over the current 
market design will help protect California, and the rest of the West, 
from a repeat of that crisis.\107\ Long-term firm transmission rights 
are also a critical feature of MRTU's improved congestion management 
system, in part because these rights will help shield load serving 
entities from exposure to potentially volatile congestion costs.\108\ 
The Final Rule directed CAISO to work with its stakeholders to develop 
and submit a compliance filing within the timetable prescribed in the 
Final Rule.\109\ The MRTU Order similarly required CAISO to comply with 
the Final Rule concerning timely implementation of long-term firm 
transmission rights.\110\ We understand SMUD's concerns, given CAISO's 
lackluster history of delay with respect

[[Page 68458]]

to providing long-term firm transmission rights.\111\ However, now that 
Congress has weighed in on the issue, we remain optimistic that CAISO 
will develop a plan, tariff sheets and implementation timetable to 
allow provision of long-term transmission rights at the inception of 
MRTU, without delaying MRTU's target November 2007 implementation date.
---------------------------------------------------------------------------

    \106\ MRTU Order at P 3.
    \107\ Id.
    \108\ Id. at P 9.
    \109\ Final Rule at P 493.
    \110\ MRTU Order at P 890 and 892.
    \111\ See id. at P 891 (recounting CAISO's history of 
procrastination concerning long-term rights development).
---------------------------------------------------------------------------

    124. We also deny SMUD's request that, if implementation of 
financial long-term firm transmission rights cannot be accomplished 
within a short time after the date for the compliance filing, the 
affected transmission organizations should develop interim plans, such 
as the use of physical rights service, until a financial rights service 
can be implemented. We expect that, apprised of the importance of this 
matter to Congress, transmission organizations will make compliance 
proposals that fully comply with the Final Rule in a timely manner. It 
is premature and inappropriate to consider in this generic proceeding 
whether interim plans, such as the provision of physical rights, are 
needed. Similarly, we will not address in this rehearing of a 
rulemaking of general applicability SMUD's assertion that the CAISO's 
proposed priority nomination process, or PNP, is discriminatory. As we 
explained in the Final Rule, we will address the specifics of 
individual transmission organizations' implementation of the Final Rule 
in our orders on compliance proposals.\112\ The compliance proposal 
process provides transmission organizations with the opportunity to 
offer for comment the proposals they have created after vetting issues 
through their stakeholder process, and the comment process ensures the 
opportunity for thorough and fair discussion of the proposals.
---------------------------------------------------------------------------

    \112\ Id. at P 495.
---------------------------------------------------------------------------

    125. Finally, with respect to Santa Clara's requested 
clarification/rehearing concerning CAISO's obligation to comply with 
the Final Rule, section 1233(b) of EPAct 2005 requires the Commission 
to implement the FPA's new statutory provision, section 217, concerning 
long-term firm transmission rights in transmission organizations with 
organized electricity markets. Significantly, as we pointed out in the 
NOPR, neither EPAct 2005 nor section 217 of the FPA defines ``organized 
electricity market.'' \113\ In the NOPR, we proposed to define 
``organized electricity market'' as ``an auction-based market where a 
single entity receives offers to sell and bids to buy electric energy 
and/or ancillary services from multiple sellers and buyers and 
determines which sales and purchases are completed and at what prices, 
based on formal rules contained in Commission-approved tariffs, and 
where the prices are used by a transmission organization for 
establishing transmission usage charges.'' \114\ In the Final Rule, 
however, we modified the first clause of the definition to state that 
organized electricity market ``means an auction based day ahead and 
real time wholesale market. * * * '' \115\ We explained that the 
purpose of this modification was:

    \113\ See NOPR at P 8.
    \114\ See id.
    \115\ See Final Rule at P 30 (emphasis added).
---------------------------------------------------------------------------

    to clarify the application of the Final Rule and ensure that the 
definition captures the transmission organizations with organized 
electricity markets using LMP and FTRs to which Congress directed 
the Commission to apply this Final Rule in section 1233(b) of EPAct 
2005.\116\
---------------------------------------------------------------------------

    \116\ Id.

    126. CAISO does not currently operate a day-ahead wholesale energy 
market, although it will upon the inception of MRTU, scheduled to take 
place in November 2007. While CAISO currently has FTRs, their 
characteristics will change dramatically upon implementation of MRTU--
e.g., they will be point-to-point and available to load serving 
entities without participation in an auction, two features of long-term 
firm transmission rights required by our guidelines. Given that the 
nature of FTRs in CAISO is in transition, implementing long-term FTRs 
under the current market design would be problematic. Nevertheless, we 
clarify that CAISO must submit a compliance filing on January 29, 2007. 
This will enable the Commission (and its staff) to monitor CAISO's 
progress and ensure availability of long-term firm transmission rights 
---------------------------------------------------------------------------
when MRTU goes into effect.

    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. E6-19999 Filed 11-24-06; 8:45 am]

BILLING CODE 6717-01-P