benefit of counsel: nondiscriminatory transmission cannot ensure competition

When Part II of the Federal Power Act was enacted in 1935, electric power was sold, almost exclusively, as a bundled product by vertically-integrated utilities (VIUs). Competition was virtually nonexistent. Beginning in the mid-1980s, though, new competitive generation suppliers emerged rapidly in response to two major pieces of federal legislation: the Public Utility Regulatory Policies Act of 1978, and the Energy Policy Act of 1992.

These new competitive suppliers needed access to the transmission grid, but could only secure access from the VIUs with which they were now competing. The VIUs had, therefore, both the incentive and the ability to deny access to their competitors altogether, or to delay or to offer access only at discriminatory rates, terms and conditions that were markedly different from, and substantially more onerous than, those that applied when the VIUs used the transmission system. Initially, FERC addressed these impediments on a case-by-case basis. Ultimately, however, in 1996, FERC issued its landmark Order No. 888, in which it codified its access rules in a generic tariff (Tariff) that all transmission providers (TPs) were required to follow unless they could show that their existing tariffs were equivalent or superior to those in the generic Tariff.

Unfortunately, while Order 888 did much to open the transmission grid to competitive suppliers, it fell well short of protecting workably competitive wholesale power markets due to three fundamental weaknesses. First and foremost, Order 888 was intended only to address “transmission” foreclosure and not “market” foreclosure. Second, comparable services, even if fairly provided, are not always compatible with or even suitable to the new competitive marketplace. Third, because Order 888 did not require that the TP or its affiliates take service under the Tariff for purposes of serving native load, FERC has to rely almost exclusively on cumbersome and difficult to enforce codes and standards of conduct to ensure that third-party customers are treated fairly and to prevent affiliate abuse.

FERC now intends to revisit Order 888 and to implement whatever changes are necessary to eliminate any residual discrimination in the provision of jurisdictional service. FERC could focus narrowly on curing the shortcomings of functional unbundling and make only those Tariff changes necessary to eliminate residual transmission market power. These changes would include improving the Open Access Same-Time Information System, adding more flexible transmission services, enhancing compliance by imposing penalties on those who violate the rules, and requiring some level of independent oversight of the provider’s system.

In addition, FERC could and, in our opinion, should adopt a more comprehensive approach intended not only to eliminate discriminatory (non-comparable) access to, and foreclosure from the transmission system, but also from the wholesale markets that the transmission system serves and that FERC is statutorily obligated to protect from undue discrimination and unjust and unreasonable rates. Obviously transmission access has little value without open markets; and it is precisely because access to wholesale power markets does not necessarily result from access to the transmission system that mitigation of wholesale market foreclosure must go beyond mitigation of transmission foreclosure.

In order to sustain workably competitive wholesale markets by requiring open access to these markets, the next generation Tariff should, minimally, require TPs to adopt three structural mechanisms. First, TPs (or other affiliates serving load) should be required to undertake, preferably through a state-created and independently monitored process, all source competitive procurement programs and all inclusive, security constrained economic dispatch regimes that do not unfairly favor the TPs’ own resources when more economic, efficient and equally reliable resources are available to serve wholesale power needs. Second, transmission service to all native load should be procured under the non-rate terms and conditions of the Tariff and all such transmission requests, capacity reservations and associated planning must be independently monitored and approved. Third, TPs should be required to offer the services that market participants need (such as a long-term conditional firm service, and a parking service similar to that available from gas transporters, provided they can be fully compensated), and not simply those services required to support the vertically-integrated model.

Finally, because these measures or their substantial equivalents already are present in fully functioning Regional Transmission Organizations, FERC should consider confining their adoption to non-RTO regions and to those nascent RTOs, such as the Southwest Power Pool, which have yet to develop organized markets and the structural protocols designed to prevent or mitigate market foreclosure. Bottom-line, though: Absent these features, there is no a priori reason to conclude that the potential for transmission foreclosure or market foreclosure otherwise could be eliminated; and, perhaps most importantly, these proposals only would change the status quo where ratepayers demonstrably would be better served.

Larry Eisenstat is a partner with Dickstein Shapiro Morin & Oshinsky LLP and head of the firm’s electric power practice.

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