Document ID: FERC-2009-0458-0001
Agency: ferc
Document Type: Rule
Title: Long-Term Firm Transmission Rights in Organized Electricity Markets
Posted Date: 2009-03-26T04:00Z

[Federal Register: March 26, 2009 (Volume 74, Number 57)]
[Rules and Regulations]               
[Page 13103-13111]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26mr09-13]                         

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 42

[Docket No. RM06-8-002; Order No. 681-B]

 
Long-Term Firm Transmission Rights in Organized Electricity 
Markets

Issued March 20, 2009.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Final rule; order on rehearing and clarification.

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SUMMARY: The Federal Energy Regulatory Commission is issuing an order 
on rehearing and clarification of Long-Term Firm Transmission Rights in 
Organized Electricity Markets, Order No. 681-A, 71 FR 68,440 (November 
16,

[[Page 13104]]

2006). The order on rehearing affirms, with certain clarifications, the 
fundamental determinations made in Order No. 681, as clarified by Order 
No. 681-A.

DATES: Effective Date: Order No. 681 became effective on August 31, 
2006. This order on rehearing and clarification will become effective 
April 27, 2009.

FOR FURTHER INFORMATION CONTACT: Roland Wentworth (Technical 
Information), Office of Energy Market Regulation, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202) 502-8262.
    Michael P. McLaughlin (Technical Information), Office of Energy 
Market Regulation, Federal Energy Regulatory Commission, 888 First 
Street, NE., Washington, DC 20426, (202) 502-6135.
    Heidi Werntz (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8910.
    Richard Wartchow (Legal Information), Office of the General 
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8744.

SUPPLEMENTARY INFORMATION: 

Table of Contents

                                                              Paragraph
                                                               Numbers

I. Introduction............................................            1
II. Background.............................................            4
    A. Energy Policy Act of 2005...........................            4
    B. Notice of Proposed Rulemaking.......................            5
    C. Final Rule: Order No. 681...........................            6
    D. Rehearing Order: Order No. 681-A....................           11
III. Discussion............................................           15
    A. Procedural Matters..................................           15
    B. Requests for Rehearing and/or Clarification.........           16
        1. Contract with Transmission Owner Rather than               16
         Transmission Organization.........................
        Commission Determination...........................           19
        2. Lack of a Transmission Agreement................           20
        Commission Determination...........................           22
        3. Clarification of Paragraph 80 of Order No. 681-A           24
        Commission Determination...........................           26
        4. Comparable Treatment for External and Internal             29
         Load Serving Entities.............................
        Commission Determination...........................           35
        5. Marginal Losses.................................           38
        Commission Determination...........................           43

I. Introduction

    1. In this order we affirm, with certain clarifications, the 
fundamental determinations made in Order Nos. 681 and 681-A.\1\ In 
Order No. 681, as reaffirmed and clarified in Order No. 681-A, the 
Commission required 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 seven 
guidelines.\2\
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    \1\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Order No. 681, 71 FR 43,564 (Aug. 1, 2006), FERC Stats. & 
Regs. ] 31,226, reh'g denied, Order No. 681-A, 117 FERC ] 61,201 
(2006).
    \2\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 1, 23; 
Order No. 681-A, 117 FERC ] 61,201 at P 1.
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    2. Under guideline (5), the Commission permits transmission 
organizations to place reasonable limits on the amount of capacity used 
to support long-term firm transmission rights.\3\ Recognizing that 
``transmission capacity is limited and the amount that can reasonably 
be made available for long-term transmission rights may be lesser 
still,'' \4\ the Commission construed new section 217 of the Federal 
Power Act (FPA) to provide a general preference for load serving 
entities to obtain transmission service.\5\ On rehearing, in discussing 
priority when transmission capacity is limited, the Commission declined 
to draw a broad conclusion that it would always be unreasonable for a 
transmission organization to treat external and internal load serving 
entities differently in allocating long-term firm transmission 
rights.\6\ Three parties filed requests for clarification or, in the 
alternative, rehearing of Order Nos. 681 and 681-A, focusing primarily 
on issues associated with the allocation of long-term firm transmission 
rights to load serving entities serving load located outside the 
transmission organization (external load serving entities). Rehearing 
was also requested on the Commission's determination that the statute 
does not require a hedge for marginal loss charges.
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    \3\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318.
    \4\ Id. P 320.
    \5\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318 
(construing EPAct 2005, section 217; Pub. L. 109-58, Sec.  1233, 119 
Stat. 594, 957 (2005); 16 U.S.C. 824q (2006)).
    \6\ Order No. 681-A, 117 FERC ] 61,201 at P 81.
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    3. In this order, we grant certain clarifications concerning 
allocation of long-term firm transmission rights to external load 
serving entities and deny requests for rehearing.

II. Background

A. Energy Policy Act of 2005

    4. On August 8, 2005, EPAct 2005 \7\ was signed into law. Section 
1233 of EPAct 2005 added a new section to the FPA, section 217, which 
provides:
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    \7\ Public Law No. 109-58, 119 Stat. 594 (2005).

    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.\8\
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    \8\ 16 U.S.C. 824q (2006).

    The statute further required the Commission to implement section 
217 of the FPA within one year of the effective date of EPAct 2005.\9\
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    \9\ 119 Stat. 594, 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.'' Public Law No. 109-58, Sec.  
1291, 119 Stat. 594, 985. In Order Nos. 681 and 681-A, we adopted 
this definition with slight modifications for the purposes of the 
Final Rule.

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[[Page 13105]]

B. Notice of Proposed Rulemaking

    5. As a first step towards implementing FPA section 217, on 
February 2, 2006, the Commission issued a Notice of Proposed Rulemaking 
(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.\10\ The NOPR proposed eight guidelines, and sought comments 
on various issues raised by the introduction of long-term firm 
transmission rights in the organized electricity markets.
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    \10\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, NOPR, 71 FR 6,693 (Feb. 9, 2006), FERC Stats. & Regs. ] 
32,598 (2006).
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C. Final Rule: Order No. 681

    6. On July 20, 2006, the Commission issued a Final Rule in this 
proceeding, Order No. 681. Consistent with EPAct 2005, in Order No. 
681, the Commission required independent transmission organizations 
that oversee electricity markets to make available long-term firm 
transmission rights that satisfy each of the seven guidelines 
ultimately established by the Commission in that order. The Commission 
further directed transmission organizations subject to the Final Rule 
to file, 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 seven guidelines; or (2) an explanation of how 
the transmission organization's tariff and rate schedules already 
provide for long-term firm transmission rights that satisfy each of the 
guidelines. The Commission also required entities that subsequently 
meet the statutory definition of transmission organization after 
January 29, 2007 to satisfy the requirements of the Final Rule.\11\
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    \11\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 494.
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    7. In issuing Order No. 681, 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 in order to facilitate new investments and other long-term 
power supply arrangements.\12\ The guidelines adopted in Order No. 681 
were intended to ensure that the long-term firm transmission rights 
made available by transmission organizations subject to the rule would 
support long-term power supply arrangements.\13\ Moreover, the 
Commission emphasized that it would not compel transmission 
organizations to provide rights that are infeasible based on the 
existing system, nor would the Commission guarantee that a load serving 
entity will be able to obtain long-term firm transmission rights 
sufficient to hedge its entire resource portfolio or be able to obtain 
all of its requested long-term firm transmission rights.\14\ Rather, 
the Commission concluded that transmission organizations and their 
stakeholders should each 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 entity's 
``reasonable needs.'' \15\ By reasonable needs, the Commission meant 
that long-term firm transmission rights should be sufficient to hedge 
the congestion associated with providing baseload service.\16\ Once an 
entity obtains long-term firm transmission rights, Order No. 681 
requires these rights to be fully funded over their entire term.\17\
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    \12\ Id. P 16.
    \13\ Id.
    \14\ Id. P 17-18.
    \15\ Id. P 323.
    \16\ Id.
    \17\ Id. P 18.
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    8. Significantly, Order No. 681 adopted guidelines rather than 
prescriptive requirements for long-term firm transmission rights. While 
transmission organizations are required to satisfy each guideline, the 
Commission gave them the flexibility to design long-term firm 
transmission rights that reflect regional preferences and accommodate 
regional market designs.\18\
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    \18\ Id. P 2. The Commission recognized 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. Id. P 107.
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    9. Many of the rehearing requests focus on guideline (5), which 
gives load serving entities priority to transmission rights on the 
existing system:

    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.\19\
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    \19\ Id. P 325; 18 CFR 42.1(d)(5) (2008).

    10. In the preamble to guideline (5), the Commission rejected the 
NOPR proposal for an absolute preference for load serving entities with 
long-term power supply arrangements.\20\ Instead, the Commission opted 
for a general preference for load-serving entities over non-load 
serving entities, although transmission organizations, on a regional 
basis, are not precluded from giving allocation priority to holders of 
long-term contracts over other load serving entities when capacity is 
limited.\21\ Further, with respect to priority of eligibility, the 
Commission explained 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.'' \22\ The Commission concluded 
that ``[a]ny 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.'' \23\ Further, the Commission explained that 
``long-term firm transmission rights must be available to all market 
participants.'' \24\ Guideline (5) ``serves only as a `tiebreaker' 
between load serving entities and non-load serving entities when 
existing transmission capacity is limited.'' \25\
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    \20\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318.
    \21\ Id. P 321.
    \22\ Id. P 328.
    \23\ Id.
    \24\ Id. P 329.
    \25\ Id.
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D. Rehearing Order: Order No. 681-A

    11. On rehearing, the Commission upheld its determinations in Order 
No. 681 and offered certain clarifications. Specifically, on the issue 
of priority for load serving entities with load outside the region, the 
Commission stated that a load serving entity should receive 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.'' \26\ The Commission found that it would be 
unreasonable to provide a preference where the load has not contributed 
to the system's embedded costs, and the transmission organization has 
not planned and built its system to accommodate the load.\27\
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    \26\ Order No. 681-A, 117 FERC ] 61,201 at P 78.
    \27\ Id.

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[[Page 13106]]

    12. The Commission provided two examples where external load 
serving entities should be given a preference in the allocation of 
long-term firm transmission rights equivalent to the preference 
accorded to load serving entities with loads that lie within the 
transmission organization's region. First, the Commission recognized 
that a load serving entity that 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 should be entitled to receive this preference.\28\ Second, 
external load-serving entities should qualify for the preference where 
pancaked rates between the transmission organization and the other 
transmission provider(s) 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.\29\
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    \28\ Id. P 79.
    \29\ Id.
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    13. In addition, the Commission stated that, where there is no 
agreement between an external load serving entity and the transmission 
organization:

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.\30\
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    \30\ Id. P 80.

    14. The Commission also denied the Sacramento Municipal Utility 
District (SMUD) request to clarify that it would be unreasonable for a 
transmission organization to allocate long-term firm transmission 
rights based on whether load is located in the transmission 
organization's control area or has agreed to cede control of its 
transmission facilities to that organization. The Commission noted that 
it is not unduly discriminatory for a transmission organization to 
impose additional requirements on external load as a precondition to 
receiving such rights.\31\ The Commission declined to draw a broad 
conclusion in a rulemaking of general applicability that it may never 
be reasonable to treat external load differently from internal load for 
purposes of allocating long-term firm transmission rights.\32\
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    \31\ Id. P 81 (erroneously citing New England Power Pool, 100 
FERC ] 61,287, at P 85 (2002); correctly citing Cal. Indep. Sys. 
Operator Corp., 116 FERC ] 61,274, at P 766 (2006) (MRTU Order), 
order on reh'g, 119 FERC ] 61,076 (2007) (MRTU Rehearing Order)).
    \32\ Id.
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III. Discussion

A. Procedural Matters

    15. Timely requests for rehearing and/or clarification were filed 
by the following entities: Long Island Power Authority and its wholly-
owned operating subsidiary, LIPA (LIPA), Modesto Irrigation District 
(Modesto), and SMUD.

B. Requests for Rehearing and/or Clarification

1. Contract With Transmission Owner Rather Than Transmission 
Organization
    16. Modesto states that the Final Rule allowed load serving 
entities that pay the embedded costs of a transmission organization's 
system to qualify for priority in receiving long-term firm transmission 
rights, even if located outside of the transmission organization's 
control area. Modesto argues that in so doing, however, the Commission 
created ``an unjust and unreasonable and unduly discriminatory 
condition'' in that such load-serving entities must contract directly 
with the transmission organization, rather than with entities within 
the transmission organization's footprint, to pay the embedded cost of 
the transmission system, in order to qualify for priority in receiving 
long-term firm transmission rights.\33\
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    \33\ Modesto Rehearing Request at 4-5.
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    17. Modesto explains that it is a load serving entity located 
outside of and adjacent to the California Independent System Operator 
(CAISO). To meet its native load obligations, Modesto states that it 
often must wheel power over the CAISO-controlled grid from resources 
located inside and outside of the CAISO control area. Modesto states 
that one of its pre-existing arrangements through which it facilitates 
transmission of its electricity through the CAISO control area is with 
Pacific Gas & Electric Company (PG&E), a participating transmission 
owner of the CAISO.
    18. Modesto asserts that, through its payments to PG&E, it 
contributes to the embedded costs of the transmission system that is 
under the CAISO's operational control. Modesto argues that, under Order 
No. 681-A, it would be denied a priority for obtaining long-term firm 
transmission rights because its agreement is with a participating 
transmission owner, PG&E, and not with the CAISO. Modesto argues that 
conditioning eligibility for allocation of long-term firm transmission 
rights on whether an agreement is with a transmission organization 
rather than a participant of that organization unduly discriminates 
against entities that are similarly situated. Specifically, Modesto 
complains that entities that are contributing to the embedded costs of 
the transmission organization's system through pre-existing 
arrangements with the transmission organization are unduly 
discriminated against, compared with entities that have pre-existing 
arrangements with transmission owners who have turned their 
transmission over to the operational control of the transmission 
organization.
Commission Determination
    19. We grant Modesto's requested clarification. In Order No. 681-A, 
the Commission did not intend to restrict unnecessarily the types of 
contractual vehicles by which a load serving entity with load outside a 
transmission organization's region may demonstrate that it is entitled 
to receive a preference in the allocation of long-term firm 
transmission rights supported by the region's existing transmission 
capacity. The salient issue here is whether the external load serving 
entity has historically contributed and will continue to contribute on 
an ongoing basis to the embedded costs of the transmission system.\34\ 
As long as the external load serving entity can demonstrate that it has 
paid and will continue to pay the embedded costs of the transmission 
system, the precise vehicle by which this is accomplished is not 
important. Thus, a commitment to pay an appropriate share of embedded 
costs could be achieved through a contractual agreement with the 
transmission organization itself, through a pre-existing agreement with 
one or more transmission owners that have turned operational control of 
their transmission system over to the transmission organization, or by 
some other verifiable means.\35\ We further note that, while Modesto's 
specific contractual issue is beyond the scope of this general 
rulemaking proceeding, it appears to have been favorably resolved

[[Page 13107]]

in the compliance phase of this proceeding.\36\
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    \34\ See, e.g., New England Power Pool, 100 FERC ] 61,287, at P 
85 (2002).
    \35\ See, e.g., PJM Interconnection, L.L.C., 119 FERC ] 61,144, 
at P 40 & n.34, order on clarification, 121 FERC ] 61,073 (2007) 
(upholding PJM's proposal to allow an external load serving entity 
to receive long-term firm transmission rights in stage 1A if it is a 
transmission customer taking and paying for firm service and if it 
was serving load from resources within a zone at the time that zone 
was integrated into PJM).
    \36\ See Cal. Indep. Sys. Operator Corp., 120 FERC ] 61,023, at 
P 188 (2007), reh'g denied, 124 FERC ] 61,095, at P 42-45 (2008) 
(accepting MRTU Tariff section 36.9, which establishes an external 
load serving entity's eligibility for firm transmission rights based 
on a forward-looking showing of need).
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2. Lack of a Transmission Agreement
    20. SMUD asks the Commission to clarify whether a load serving 
entity outside an ISO/RTO control area could qualify for an allocation 
priority equivalent to that of a load serving entity within the control 
area where its lack of an existing long-term firm service arrangement 
is the transmission organization's ``fault.'' \37\ Asserting that this 
question is not purely ``academic,'' SMUD explains that it had a long-
term firm transmission arrangement for more than 35 years, which, 
according to SMUD, lapsed due to the CAISO's delay in developing long-
term firm transmission rights. Pointing out that the CAISO was 
initially ordered to develop long-term firm transmission rights in 
1997, SMUD argues that it would have continued to have a long-term firm 
transmission agreement in place and would have qualified for a priority 
equivalent to that accorded load serving entities within the CAISO 
control area if the CAISO had developed those long-term rights on a 
timely basis.\38\
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    \37\ SMUD Rehearing Request at 14. ``ISO'' refers to 
``Independent System Operator'' and ``RTO'' refers to ``Regional 
Transmission Operator.''
    \38\ Id.
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    21. SMUD states that it is willing to provide assurances to the 
CAISO that it will continue to pay a share of the fixed costs of the 
transmission grid operated by the CAISO. SMUD insists that absent 
clarification, however, Order No. 681-A does not provide a clear 
opportunity for SMUD and other similarly situated load serving entities 
to provide such assurances.\39\ SMUD asks the Commission to clarify 
that a load serving entity located outside an ISO/RTO control area that 
lacks an existing long-term firm transmission agreement can qualify for 
the same treatment accorded a load serving entity with an existing 
long-term firm transmission agreement, if it can demonstrate: (1) Its 
reliance on the ISO/RTO transmission grid; (2) its commitment to 
continue to contribute to the fixed costs of the system; and (3) that 
its lack of a long-term transmission agreement with the ISO/RTO was 
outside of its control.\40\
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    \39\ Id. at 14-15.
    \40\ Id.
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Commission Determination
    22. We grant in part and deny in part the clarification requested 
by SMUD. First, we decline to adopt SMUD's three-part test for 
determining whether an external load serving entity should qualify for 
a preference in the allocation of long-term firm transmission 
rights.\41\ However, we grant clarification regarding the broader issue 
SMUD raises, which is whether an external load serving entity may 
qualify for a preference if it contributes to the embedded cost of the 
regional transmission system, but is not a party to a qualifying 
agreement for long-term transmission service at the time of its 
request. We clarify that the lack of an existing long-term service 
agreement with the transmission organization or a participating 
transmission owner does not necessarily disqualify an external load 
serving entity from receiving a preference in the allocation of long-
term firm transmission rights that are supported by the existing 
capacity of the transmission organization's system. If the external 
load serving entity has maintained a continuous service relationship 
with the transmission organization or transmission owner, through which 
it continues to contribute to the embedded costs of the transmission 
system for the duration of the long-term firm transmission rights it 
seeks, that entity may be entitled to an allocation of long-term firm 
transmission rights. However, the entity must also satisfy all of the 
other eligibility requirements of the transmission organization, and it 
must provide the transmission organization with appropriate assurances 
that it will continue to satisfy these requirements going forward.
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    \41\ See MRTU Rehearing Order, 119 FERC ] 61,076 at P 373 
(rejecting request to give external load serving entities the 
opportunity to demonstrate reliance on the CAISO grid in order to 
avoid prepaying for the transmission service necessary to qualify 
for allocation of congestion revenue rights, which can be converted 
into long-term firm transmission rights).
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    23. With regard to the status of SMUD's long-term contractual 
relationship with the CAISO or any of its Participating Transmission 
Owners, including the question of which party may be at fault for 
causing a prior agreement to lapse, we note that this is a case-
specific matter and, as such, is beyond the scope of this 
proceeding.\42\
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    \42\ We note that the DC Circuit Court upheld the Commission's 
finding that PG&E's notice of termination of its long-term contract 
with SMUD was just and reasonable. Sacramento Municipal District v. 
FERC, 474 F.3d 797, 801 (DC Cir. 2007). Nevertheless, the CAISO 
allows an external load serving entity such as SMUD to obtain long-
term firm transmission rights through a combination of pre-payment 
of wheeling access charges and ownership of or contract for 
generation within the CAISO. See generally MRTU Tariff Sec.  36.9. 
In addition, the MRTU Tariff allows SMUD to rollover a short-term 
firm transmission right indefinitely and use this to hedge CAISO 
congestion charges, as long as this does not interfere with the 
simultaneous feasibility of other allocated rights. Id. Sec.  
36.9.5.
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3. Clarification of Paragraph 80 of Order No. 681-A
    24. LIPA asks the Commission to clarify that, consistent with 
paragraph 78 of Order No. 681-A, there should be no distinction between 
the treatment of internal and external load serving entities when 
allocating long-term firm transmission rights, where the transmission 
organization plans and constructs its transmission system to support 
the external load serving entity's requirements and the load serving 
entity is obligated to contribute to the costs the ISO/RTO incurs for 
that purpose. LIPA's concern centers on paragraph 80 of Order No. 681-
A, which provides that:

in cases where [an external load serving entity does not have an 
existing agreement to pay embedded system costs], 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.\43\
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    \43\ Order No. 681-A, 117 FERC ] 61,201 at P 80.

In LIPA's view, the allocation preference expressed in paragraph 80 
only applies with respect to the initial allocation of long-term firm 
transmission rights to an external load serving entity that has no 
existing agreement with the ISO/RTO or does not hold long-term rights 
for which such ISO/RTO plans and constructs its transmission system.
    25. LIPA argues specifically that firm transmission withdrawal 
rights in PJM meet the standard articulated by the Commission in 
paragraph 78 of Order No. 681-A and, according to LIPA, these 
withdrawal rights should entitle external load serving entities to the 
same rights as internal load serving entities. As LIPA explains, PJM 
awards firm transmission withdrawal rights for merchant transmission 
lines that include the right to withdraw energy and capacity from the 
PJM system up to a specific megawatt level. LIPA explains that PJM 
first subjects the award of such firm transmission withdrawal rights to 
system impact studies through the interconnection process and considers 
any potential system upgrades. Next, according to LIPA, PJM includes 
such

[[Page 13108]]

firm transmission withdrawal rights in its Regional Transmission 
Enhancement Plan (RTEP) and thereby plans for and constructs its system 
to ensure the availability of such firm transmission withdrawal rights. 
LIPA further states that PJM has proposed (and the Commission has 
agreed) that the costs of RTEP upgrades to support such withdrawal 
rights may be allocated to merchant transmission lines. LIPA adds that 
the use of withdrawal rights also requires scheduling of transmission 
service over the PJM system, for which the customer also then pays a 
``Border Rate'' charged to exports from the system, and through which 
PJM recovers the embedded system costs. LIPA asks the Commission to 
clarify that the lower allocation priority and potential for reduced 
allocation of long-term firm transmission rights discussed in paragraph 
80 does not apply to holders of long-term firm transmission rights such 
as firm withdrawal rights. Further, LIPA argues that any reduction 
contemplated under paragraph 80 should only be triggered when, as part 
of the evaluation of all internal and external load serving entity 
requests, there is a binding constraint that does not allow a full 
allocation of long-term firm transmission rights to qualifying load 
serving entities. LIPA states that, in such a case, the initial request 
for long-term firm transmission rights may be prorated downward to 
ensure that an internal load serving entity or external load serving 
entity with an existing agreement or long-term rights receives its full 
allocation of long-term firm transmission rights.
Commission Determination
    26. We grant in part and deny in part LIPA's requested 
clarification. First, we clarify that an external load serving entity 
may receive the same allocation priority as an internal load serving 
entity if the external load serving entity can demonstrate that the 
transmission organization plans and constructs its transmission system 
to support the external load serving entity's load serving requirements 
and the external load serving entity contributes to the costs incurred 
for such purpose. We further clarify that paragraph 80 of Order No. 
681-A is intended to apply only to situations where a load serving 
entity with load external to the region makes an initial request to 
obtain long-term firm transmission rights. That is, paragraph 80 serves 
only to establish the initial priority for the allocation of long-term 
firm transmission rights to an external load serving entity that has 
not historically contributed to the embedded costs of the transmission 
system, and for whom the transmission organization has not planned and 
constructed its transmission system.\44\
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    \44\ See Midwest Indep. Transmission Sys. Operator, Inc., 121 
FERC ] 61,062, at P 40-41 (2007), order on reh'g, 123 FERC ] 61,178 
(2008), and Midwest Indep. Transmission Sys. Operator, Inc., 121 
FERC ] 61,063, at P 53-54 (2007) (finding that stage 2 eligibility 
for long-term firm transmission rights to cover transmission service 
obtained after the reference year is not unduly discriminatory).
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    27. LIPA also requests clarification of the conditions under which 
a reduced allocation of long-term firm transmission rights is 
contemplated under paragraph 80. We clarify that an external load 
serving entity may be allocated fewer long-term firm transmission 
rights than it requests in a situation where its initial request for 
long-term firm transmission rights cannot be accommodated by the system 
capacity that is available after the needs of the load serving entities 
whose loads are within the region have been met. This rule would apply 
to an initial request where the transmission organization has not 
historically planned and constructed its system to meet the external 
load serving entity's load serving needs.
    28. However, we decline to grant LIPA's requested clarification 
that its firm transmission withdrawal rights in PJM meet the standard 
articulated by the Commission in paragraph 78 of Order No. 681-A, such 
that these rights should entitle external load serving entities like 
LIPA to be granted the same rights as internal load serving entities. 
Whether these firm withdrawal rights qualify LIPA for receipt of long-
term firm transmission rights in PJM requires a fact-based 
determination that is outside the scope of a general rulemaking 
proceeding.\45\
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    \45\ Indeed, it appears this issue has been appropriately asked 
and answered in the compliance phase of this rulemaking proceeding. 
See PJM Interconnection, L.L.C., 119 FERC ] 61,144 at P 37-44, 
clarified on other grounds, 121 FERC ] 61,073 (denying LIPA's 
request for preferential allocation of long-term firm transmission 
rights in PJM because LIPA did not take service from PJM during the 
historical reference year, nor does it continue to pay the embedded 
cost of the PJM transmission system). The Commission notes, however, 
that on Jan. 28, 2009, in Docket No. ER09-585-000, PJM filed tariff 
revisions that would allow external load-serving entities, including 
holders of firm withdrawal rights, to obtain long-term firm 
transmission rights, provided certain conditions are met.
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4. Comparable Treatment for External and Internal Load Serving Entities
    29. LIPA asks the Commission to clarify that ``qualifying'' 
external load serving entities are able to participate in the same 
phase of long-term firm transmission rights allocation as internal load 
serving entities and receive a long-term firm transmission right of the 
same length and attributes as an internal load serving entity.\46\ LIPA 
states that, as noted in Order No. 681-A, Order No. 681 provides that 
transmission organizations must make long-term firm transmission rights 
available to load serving entities with term lengths and/or renewal 
rights that are sufficient to meet load serving entities' need to hedge 
long-term power supply arrangements. LIPA points out that the 
Commission required long-term firm transmission rights to have a 
specific term length and/or use of renewal rights to provide firm 
coverage for at least a 10-year period.\47\ LIPA states that a 10-year 
term length, renewal rights, and firmness of coverage are the 
``backbone'' of long-term firm transmission rights, which LIPA argues 
should not differ regardless whether a load serving entity is internal 
or external to the ISO or RTO.
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    \46\ LIPA states that, for purposes of its clarification 
request, qualifying external load serving entities are those 
entities for which the transmission organization plans and 
constructs its transmission system to support the load serving 
entity's load and the load serving entity contributes to the cost 
that the transmission organization incurs for that purpose. LIPA 
Rehearing Request at 3 & n.9.
    \47\ Id. at 4 & n.10.
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    30. Also focusing on this issue, SMUD challenges the Commission's 
ruling that only load serving entities in a transmission organization's 
control area or those load serving entities with existing long-term 
firm service contracts would qualify for a first-tier allocation \48\ 
of long-term firm service rights. SMUD argues that this ruling 
prejudices those load serving entities located outside the CAISO's 
control area whose long-term firm service agreements lapsed, with no 
long-term firm service replacement, due to the CAISO's ``history of 
procrastination'' in developing such rights.
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    \48\ SMUD refers to the fact that the CAISO, like other ISOs/
RTOs, uses nomination tiers to allocate long-term firm transmission 
rights. In each tier, a load serving entity is allowed to nominate a 
percentage of the total amount of transmission rights it is eligible 
to request. The ISO/RTO then runs a simultaneous feasibility test on 
all nominated rights to determine the feasible set of rights that it 
can award. Load serving entities typically nominate their most 
highly-valued rights in the first tier. See generally Cal. Indep. 
Sys. Operator Corp., 125 FERC ] 61,153 (2008).
---------------------------------------------------------------------------

    31. Furthermore, SMUD asserts that the Commission failed to engage 
in reasoned decision-making by inconsistently applying its precedent 
and suggesting that a transmission organization may give preference to 
load serving entities located in its own control area over those 
located outside its control area. SMUD states that the Commission 
offered no valid grounds for its departure from Order No. 888,

[[Page 13109]]

and cases interpreting Order No. 888, which SMUD argues require 
transmission providers to offer service to all customers on a non-
discriminatory basis.\49\ In addition, SMUD argues that the 
Commission's proposal to distinguish among load serving entities on the 
basis of control area is inconsistent with section 217 of the FPA. 
Specifically, SMUD asserts that allowing transmission organizations to 
impose a prepayment obligation \50\ on external load serving entities 
is unduly discriminatory.
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    \49\ SMUD Rehearing Request at 6-7 (referencing 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, 
FERC Stats. & Regs. ] 31,036 (1996), order on reh'g, Order No. 888-
A, FERC Stats. & Regs. ] 31,048, 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)).
    \50\ By ``prepayment obligation,'' SMUD refers to the fact that 
the CAISO, for example, requires an external load serving entity to 
agree in advance to pay a year's worth of wheeling access charges to 
be eligible for allocation of long-term firm transmission rights on 
the same basis as internal load serving entities. See MRTU Order, 
116 FERC ] 61,274 at P 706-15; MRTU Rehearing Order, 119 FERC ] 
61,076 at P 358 (discussing prepayment in connection with short-term 
firm transmission rights, which may be converted to long-term 
rights); Cal. Indep. Sys. Operator Corp., 120 FERC ] 61,023 at P 
266.
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    32. First, SMUD argues that the principle that a transmission 
provider may place preconditions on a customer's right to service based 
on whether it is located inside or outside of the transmission 
provider's control area ``turns Order No. 888 on its head.'' \51\ 
Citing the NOPR for Order No. 890,\52\ SMUD asserts that the Commission 
has made clear that transmission organizations covered by Order No. 681 
must continue to offer service as good as or superior to that offered 
under an Order No. 888 Open Access Transmission Tariff (OATT). SMUD 
states that under Order No. 888, a transmission provider is required to 
provide customers non-discriminatory access to the grid equivalent to 
the transmission service it provides itself.\53\ SMUD posits that if a 
transmission owner with a traditional OATT were to treat a customer 
outside its control area differently than it treats its own control 
area load, that transmission owner would be engaging in blatantly 
discriminatory conduct. SMUD insists that the Commission's 
interpretation of New England Power Pool leads to the conclusion that 
transmission owners with OATTs could turn control of their facilities 
over to an ISO and then have the ISO discriminate against those same 
customers, customers still dependent on their transmission, but now 
located outside the ISO's control area.
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    \51\ SMUD Rehearing Request at 6.
    \52\ Id. (citing Preventing Undue Discrimination and Preference 
in Transmission Service, Notice of Proposed Rulemaking, Docket Nos. 
RM05-17-000 and RM05-25-000, FERC Stats. & Regs. ] 32,603, at P 100 
(2006), order issuing final rule Order No. 890, FERC Stats. & Regs. 
] 31,241 (2007), order on reh'g, Order No. 890-A, 73 FR 2984 (Jan. 
16, 2008), FERC Stats. & Regs. ] 31,261 (2007), order on reh'g, 
Order No. 890-B, 73 FR 39,092 (July 8, 2008), 123 FERC ] 61,299 
(2008)).
    \53\ Id. (citing Order No. 888, FERC Stats. & Regs. ] 31,036 at 
31,760).
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    33. Next, SMUD argues that the Commission's interpretation of New 
England Power Pool is an ``unexplained departure'' from its holding in 
Mid-Continent Area Power Pool, 87 FERC ] 61,075 (1999) (MAPP). SMUD 
quotes MAPP:

    Order No. 888 requires that pool compliance tariffs provide 
service to members and non-members alike. We stated that members of 
a loose power pool, as well as non-members, must have access to the 
same transmission services within that power pool on a comparable 
basis and pay the same or a comparable rate for those services.\54\
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    \54\ SMUD Rehearing Request at 7 (citing MAPP, 87 FERC ] 61,075 
at 61,309-10).

SMUD argues that, just as transmission providers within a power pool 
cannot condition access to transmission service on a customer's 
willingness to join the pool, it is unduly discriminatory to condition 
a transmission customer's access to firm transmission service on its 
location within a transmission provider's control area.
    34. Third, SMUD argues that, far from supporting the notion that 
customers outside the control area should be treated differently, New 
England Power Pool reaffirms the principle that customers outside an 
ISO's control area that are committed to contributing to the ISO's 
fixed costs under a long-term firm transmission agreement must be 
treated on a non-discriminatory basis and that they should not be given 
lower priority based on their location outside the transmission 
provider's control area.
Commission Determination
    35. In response to the requests of LIPA and SMUD, we clarify that 
the transmission organization's criteria for determining a load serving 
entity's eligibility to receive a preference in the allocation of long-
term firm transmission rights must not be unduly discriminatory as 
between internal and external load serving entities. That is, the 
transmission organization may apply a variety of eligibility criteria 
that are appropriate for its region, as long as it applies those 
criteria in a manner that is not unduly discriminatory.\55\ For 
example, to be eligible for an allocation preference, the transmission 
organization may require a load serving entity to demonstrate that it 
has a long-term power supply arrangement from a historical point of 
receipt to a historical point of delivery, and that it will continue to 
contribute to the embedded cost of the transmission system for the 
duration of the period for which the load serving entity intends to 
hold the long-term firm transmission right. Such criteria would not be 
unduly discriminatory if they are tailored to meet the transmission 
organization's legitimate need to verify entitlement to allocation of 
the long-term rights, i.e., that the external load serving entity 
intends to use these rights to serve its customers. If the transmission 
organization allocates long-term firm transmission rights using a 
system of stages or tiers, we would expect all qualified load serving 
entities to be placed in the same allocation stage or tier without 
regard to whether its load is internal or external to the region.
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    \55\ See Regional Transmission Organizations, Order No. 2000-A, 
65 FR 12,088 (2000), FERC Stats. & Regs. ] 31,092 at 31,385 (2000) 
(``We do not agree with the premise of some of the petitioners who 
conclude that rate differences of any type [between RTO participants 
and non-participants] would constitute undue discrimination.''), 
aff'd sub nom., Public Util. Dist. No. 1 of Snohomish, Wash. v. 
FERC, 272 F.3d 607 (DC Cir. 2001).
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    36. In response to the assertion by SMUD that the Commission's 
interpretation of New England Power Pool is an unexplained departure 
from precedent, we clarify that the citation to New England Power Pool 
in footnote 74 of Order No. 681-A was the result of an inadvertent 
drafting error. Nevertheless, we reiterate our determination that it is 
not unduly discriminatory for a transmission organization to impose 
reasonable, additional requirements on customers external to the 
transmission organization's control area as a precondition to receiving 
long-term firm transmission rights.\56\ It is within the transmission 
organization's purview to create rules that aim to ensure equitable 
allocation/distribution of these potentially valuable rights.
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    \56\ See MRTU Order, 116 FERC ] 61,274 at P 766 (stating that 
external load and internal load are not similarly situated with 
respect to their reliance on the transmission organization's grid); 
MRTU Rehearing Order, 119 FERC ] 61,076, at P 377 (2007) (requiring 
external load serving entities to satisfy additional requirements to 
verify need for long-term firm transmission rights does not violate 
Order No. 888 because external load serving entities are not denied 
transmission service and all customers receive the same service 
under the MRTU Tariff).
---------------------------------------------------------------------------

    37. However, in response to LIPA, we clarify that any differences 
in the attributes (e.g., length, renewal rights

[[Page 13110]]

and firmness of coverage) of long-term firm transmission rights that 
are allocated among load serving entities should not be based on 
whether a load serving entity is internal or external to the 
transmission organization.
5. Marginal Losses
    38. In Order No. 681, we concluded that section 217(b)(4) does not 
address marginal loss charges.\57\ Noting that each transmission 
organization that operates an organized electricity market has 
established methods for refunding marginal loss surpluses that reflect 
regional preferences, which the Commission has approved, we decided not 
to overturn those decisions in this proceeding.\58\ In Order No. 681-A, 
we upheld our statutory interpretation that section 217(b)(4) of the 
FPA does not address marginal loss charges.\59\ First, we explained 
that the issue of hedging long-term marginal loss charges is distinct 
from the issue of hedging marginal congestion charges. Congestion 
charges, we said, arise in part due to transmission constraints, and 
transmission organizations allocate transmission rights to hedge these 
costs. Marginal loss charges, we noted, are similar to congestion costs 
because they are a function of locational energy prices and line 
loadings. However, significantly, ``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.'' 
\60\
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    \57\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 478.
    \58\ Id.
    \59\ Order No. 681-A, 117 FERC ] 61,201 at P 105-06.
    \60\ Id. P 105.
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    39. Next, we parsed the language of the statute and explained that 
the terms used in section 217(b)(4)--``firm transmission rights'' and 
``equivalent tradable or financial rights''--``are consistent with 
terminology traditionally used to discuss hedging of congestion, rather 
than marginal losses.'' \61\ We further explained that, since 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, we do not interpret the statute as requiring hedging of 
marginal losses. We emphasized that our interpretation of EPAct 2005 as 
not requiring hedging of marginal losses does not preclude future 
market design changes that allow hedging of losses.\62\ Significantly, 
we encouraged transmission organizations to explore methods to assist 
load serving entities and others to obtain a hedge for marginal 
losses.\63\
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    \61\ Id. P 106.
    \62\ Id.
    \63\ Id.
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    40. On rehearing, SMUD argues that, in light of FPA requirements 
and Congress' clear intent that ``financially firm'' transmission 
service would provide customers the equivalent of firm physical rights, 
financial rights must include a hedge against marginal losses. SMUD 
argues that the Commission contravened Order No. 888 and the plain 
language of the FPA by concluding that long-term firm transmission 
rights need only be similar to the short-term transmission rights now 
being offered by most transmission organizations, and that long-term 
firm transmission rights need not include a hedge against marginal 
losses because short-term rights do not include such a hedge. SMUD 
argues that the Commission's conclusion that long-term rights should be 
similar to short-term rights with respect to their lack of a hedge 
against marginal losses has no record, logical, or factual basis.
    41. According to SMUD, the purpose of section 217(b)(4) of the FPA, 
reflected in the language of the statute, is to require transmission 
organizations to provide long-term firm service based on financial 
rights that is equivalent to long-term service based on ``firm,'' i.e., 
``physical'' transmission rights. SMUD argues that, since, as a matter 
of historical practice, long-term physical rights do not expose 
customers to marginal losses, then neither should their financial 
rights counterparts.
    42. SMUD reiterates its initial comments in this proceeding, 
asserting that marginal losses pose at least as big an uncertainty as 
congestion charges and, without hedges to insulate parties from the 
risks marginal loss exposure creates, interregional trade will be 
constrained. SMUD suggests that the Commission's position is 
unsupported because most transmission organizations did not include 
marginal losses when they started their organized markets, and PJM only 
recently began offering them, so the past cannot be a valid prologue 
for the future. SMUD argues that relying on the possibility that 
transmission organizations may voluntarily offer hedges for marginal 
loss exposure is insufficient to ensure equivalence between financial 
and physical rights-based firm service. SMUD states that on rehearing 
the Commission should require transmission organizations to either: (1) 
Offer long-term firm service customers a hedge against marginal losses; 
or (2) exempt long-term firm customers from those charges and charge 
actual or estimated system average losses.
Commission Determination
    43. We deny SMUD's request for rehearing concerning marginal 
losses, primarily for the reasons discussed in Order Nos. 681 and 681-
A.\64\ First, as we explained in Order No. 681-A, the issue of hedging 
long-term marginal loss charges is distinct from the issue of hedging 
long-term marginal congestion charges, and the language of section 217 
of the FPA is silent regarding marginal losses.\65\
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    \64\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 478; Order 
No. 681-A, 117 FERC ] 61,201 at P 105-06.
    \65\ Order No. 681-A, 117 FERC ] 61,201 at P 105-06.
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    44. We disagree with SMUD's argument that the language of the 
statute mandates a hedge against marginal losses for long-term firm 
service customers. SMUD argues that the term ``firm service'' in the 
statute denotes physical transmission service, and long-term physical 
rights do not expose customers to marginal losses, so neither should 
their financial counterparts.\66\ However, SMUD ignores the fact that 
transmission losses and congestion are distinct features of 
transmission service. While physical rights customers may not have been 
exposed to marginal losses, they generally had contractual arrangements 
concerning responsibility for losses on the transmission system.
---------------------------------------------------------------------------

    \66\ SMUD Rehearing Request at 12.
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    45. We further object to SMUD's assertion that, in Order No. 681-A, 
the Commission declared, without record, logical or factual basis, that 
long-term firm transmission rights should have the same characteristics 
as short-term rights. Rather, the Commission simply observed that it 
did not interpret EPAct 2005 as requiring transmission organizations to 
provide long-term firm transmission rights that are fundamentally 
different from the short-term rights they now offer.\67\ Specifically, 
transmission organizations with short-term rights do not provide hedges 
for marginal losses, and EPAct 2005 does not expressly require a hedge 
for marginal losses.
---------------------------------------------------------------------------

    \67\ Order No. 681-A, 117 FERC ] 61,201 at P 106.
---------------------------------------------------------------------------

    46. Hedging marginal losses is more complex than hedging congestion 
costs due to the variable nature of losses. While it is theoretically 
possible to design a different type of firm transmission right--an 
unbalanced firm transmission right--to hedge against both congestion 
and marginal losses, such designs are only in the experimental stage. 
No transmission

[[Page 13111]]

organization has yet to implement a hedge for marginal losses. 
Accordingly, we decline to order hedging of marginal losses at this 
time. Nevertheless, we recognize that a marginal loss hedge could 
provide benefits to certain market participants. The Commission 
supports development of a marginal loss hedging product if its design 
progresses beyond the theoretical level and it can be developed cost-
effectively.
    47. The Commission also denies SMUD's request to exempt long-term 
firm transmission customers from marginal losses and charge them actual 
or estimated system average losses. This raises a market design issue 
that has implications beyond the design of long-term firm transmission 
rights and is more appropriately resolved by each transmission 
organization on a case-by-case basis. Moreover, since we find that 
EPAct 2005 does not address marginal losses, this request is beyond the 
scope of this rulemaking proceeding.

    By the Commission.
Kimberly D. Bose,
Secretary.
 [FR Doc. E9-6698 Filed 3-25-09; 8:45 am]

BILLING CODE 6717-01-P