[Federal Register Volume 59, Number 131 (Monday, July 11, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16626]


[[Page Unknown]]

[Federal Register: July 11, 1994]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM94-7-000]

 

Recovery of Stranded Costs by Public Utilities and Transmitting 
Utilities

June 29, 1994.

AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commission is proposing to amend its regulations to 
establish provisions concerning the recovery of wholesale and retail 
stranded costs by public utilities and transmitting utilities under 
sections 205, 206, 211 and 212 of the Federal Power Act. The Commission 
seeks public comment concerning the issues raised by the proposed 
rulemaking.

DATES: Written comments must be received by the Commission by September 
9, 1994. Reply comments must be received by the Commission by October 
11, 1994.

ADDRESSES: Send comments to: Office of the Secretary, Federal Energy 
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC 
20426.

FOR FURTHER INFORMATION CONTACT:

James H. Douglass, Office of the General Counsel, Federal Energy 
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC 
20426; Telephone: (202) 208-2143 (legal issues).
Michael A. Coleman, Office of Electric Power Regulation, Federal Energy 
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC 
20426; Telephone: (202) 208-1236 (technical issues).

SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission also provides all 
interested persons an opportunity to inspect or copy the contents of 
this document during normal business hours in room 3104, at 941 North 
Capitol Street, NE., Washington, DC 20426.
    The Commission Issuance Posting System (CIPS), an electronic 
bulletin board service, provides access to the texts of formal 
documents issued by the Commission. CIPS is available at no charge to 
the user and may be accessed using a personal computer with a modem by 
dialing (202) 208-1397. To access CIPS, set your communications 
software to use 300, 1200, or 2400 bps, full duplex, no parity, 8 data 
bits and 1 stop bit. CIPS can also be accessed at 9600 bps by dialing 
(202) 208-1781. The full text of this order will be available on CIPS 
for 30 days from the date of issuance. The complete text on diskette in 
WordPerfect format may also be purchased from the Commission's copy 
contractor, La Dorn Systems Corporation, also located in room 3104, 941 
North Capitol Street, NE., Washington, DC 20426.

Notice of Proposed Rulemaking

June 29, 1994.

Table of Contents

I. Introduction
II. Public Reporting Burden
III. Discussion
    A. Background
    B. Current Stranded Cost Policy
    1. Wholesale Customers Leaving The System
    2. Retail-Turned-Wholesale Customers Leaving The System
    3. Retail Customers Leaving The System
    C. The Proposed Regulations
    1. Recovery of Stranded Costs Associated With New Wholesale 
Power Sales Contracts
    2. Recovery of Stranded Costs Associated With Existing Wholesale 
Power Sales Contracts
    3. Recovery Of Wholesale Stranded Costs In Wholesale 
Transmission Rates
    4. Filing Requirements For Wholesale Stranded Cost Recovery
    5. Evidentiary Demonstration For Wholesale Stranded Cost 
Recovery
    6. Recovery Of Retail Stranded Costs
    i. Jurisdictional Analysis
    ii. Treatment of Retail Costs
IV. Regulatory Flexibility Act
V. Environmental Statement
VI. Information Collection Statement
VII. Public Comment Procedures
Regulatory Text

I. Introduction

    The Federal Energy Regulatory Commission (Commission) seeks public 
comment on amending its regulations to establish provisions concerning 
the recovery of wholesale and retail stranded costs by public utilities 
and transmitting utilities under sections 205, 206, 211 and 212 of the 
Federal Power Act (FPA).\1\ Wholesale stranded costs are defined as any 
legitimate, prudent and verifiable costs incurred by a public utility 
or a transmitting utility to provide service to a wholesale 
requirements customer that subsequently becomes, in whole or in part, 
an unbundled transmission services customer\2\ of that public utility 
or transmitting utility. Retail stranded costs are defined as any 
legitimate, prudent and verifiable costs incurred by a public utility 
or transmitting utility to provide service to a retail franchise 
customer that subsequently becomes, in whole or in part, directly or 
indirectly, an unbundled transmission services customer of that public 
utility or transmitting utility.
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    \1\A public utility is defined under section 201(e) of the FPA 
as ``any person who owns or operates facilities subject to the 
jurisdiction of the Commission under this Part (other than 
facilities subject to such jurisdiction solely by reason of section 
210, 211, or 212).'' A transmitting utility is defined under section 
3(23) of the FPA as ``any electric utility, qualifying cogeneration 
facility, qualifying small power production facility, or Federal 
power marketing agency which owns or operates electric power 
transmission facilities which are used for the sale of electric 
energy at wholesale.'' Not all transmitting utilities are public 
utilities. For instance, a municipally-owned electric utility that 
owns transmission facilities which are used for the sale of electric 
energy at wholesale is a transmitting utility, but is not a public 
utility.
    \2\An unbundled transmission services customer is one who 
purchases transmission as a product that is separate from the 
purchase of generation.
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    For recovery of wholesale stranded costs, the proposed rule 
distinguishes between stranded costs associated with wholesale 
requirements contracts executed after the date the proposed rule is 
published in the Federal Register (``new'' contracts) and stranded 
costs associated with wholesale requirements contracts executed on or 
before that date (``existing'' contracts).
    The proposed rule would not allow a public utility or transmitting 
utility to seek recovery of stranded costs associated with ``new'' 
wholesale requirements contracts through transmission rates for section 
205 or 211 transmission services. Recovery of such costs will not be 
allowed except through explicit stranded cost provisions contained in 
new wholesale requirements contracts.
    If the seller under a new wholesale requirements contract is a 
public utility, and the new contract explicitly addresses stranded cost 
recovery, the public utility may seek recovery, in accordance with the 
contract, under sections 205-206 of the FPA.\3\ The public utility may 
not seek recovery of wholesale stranded costs through any transmission 
rate for section 205 or 211 transmission services. If the seller under 
a new wholesale requirements contract is a transmitting utility subject 
to the Commission's jurisdiction under section 211, but not also a 
public utility subject to the Commission's section 205-206 
jurisdiction,\4\ there will be no Commission forum for addressing 
wholesale stranded costs associated with the new contract. Such 
utilities will not be able to seek recovery of wholesale stranded costs 
associated with such new contracts through rates for transmission 
services ordered under section 211, and the Commission does not have 
jurisdiction over their power sales contracts. Therefore, these 
utilities must address recovery of stranded costs through their new 
wholesale requirements contracts subject to the appropriate regulatory 
authority approval.
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    \3\For example, when a public utility files a new wholesale 
requirements contract that contains an explicit exit fee amount, it 
may request that the Commission allow it to recover the fee, in 
accordance with the contract, without having to make a subsequent 
section 205 filing, as long as the exit fee provision is 
sufficiently specific. Customers are contractually obligated to pay 
such exit fees previously approved by the Commission, and such an 
exit fee is part of the filed rate.
    \4\Compare 16 U.S.C. 796(23) with 16 U.S.C. 824(e).
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    With regard to stranded costs associated with ``existing'' 
wholesale requirements contracts, the proposed rule provides a three-
year transition period during which public utilities must attempt and 
non-public utilities are encouraged to attempt to renegotiate certain 
existing contracts, and during which they may seek recovery of stranded 
costs as follows:
    (a) If an existing wholesale requirements contract explicitly 
addresses stranded costs through an exit fee or other stranded cost 
provision, no public utility or transmitting utility may seek recovery 
of stranded costs associated with that contract through transmission 
rates; the utility may recover such costs only as specified in the 
requirements contract.
    (b) If an existing wholesale requirements contract does not 
explicitly address stranded costs through an exit fee or other stranded 
cost provision, the parties to the contract, within a three-year 
transition period, must make a good faith attempt to negotiate a 
stranded cost amendment to the contract. If the parties are able to 
negotiate an amendment, and the selling utility under the contract is a 
public utility, the amendment should be filed for Commission approval 
under section 205 or 206 of the FPA prior to the end of the three-year 
period. If the parties to the existing contract are not able to 
negotiate an amendment, and the selling utility under the contract is a 
public utility, the public utility may unilaterally file a proposed 
amendment, under section 205 or 206 of the FPA, prior to the end of the 
three-year period.\5\ If an amendment is not filed and the customer 
leaves the public utility's system after the end of the three-year 
transition period, the Commission will deny any extra-contractual 
stranded cost claim in a section 205 or 206 requirements rate 
proceeding arising under the contract in question.
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    \5\If the selling utility is a transmitting utility that is not 
also a public utility, its wholesale requirements contracts are not 
subject to this Commission's jurisdiction. Therefore, such 
transmitting utility should within the three-year transition period 
take whatever steps are permitted or required under its regulatory 
requirements to unilaterally propose to its regulatory authority a 
stranded cost provision as an amendment to its existing contract. 
Under this proposal, it will not be permitted to seek stranded cost 
recovery from this Commission after the close of the three-year 
transition period.
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    (c) If an existing wholesale requirements contract does not 
explicitly address stranded costs through an exit fee or other stranded 
cost provision, and if, prior to the end of the three-year transition 
period, the customer gives notice pursuant to the contract\6\ that it 
will no longer purchase all or part of its requirements from the 
selling utility but instead will purchase from the selling utility 
unbundled section 205 or section 211 transmission services\7\ that will 
begin prior to the end of the three-year period, then the selling 
utility may seek to recover stranded costs from that customer through 
jurisdictional transmission rates. This is the only circumstance in 
which the rule proposes to allow wholesale stranded cost recovery 
through transmission rates.
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    \6\This refers to proper notice given in accordance with the 
contract. If the customer attempts to breach the contract, the 
utility will have the usual recourse.
    \7\I.e., services pursuant to a transmission tariff or agreement 
on file with the Commission under FPA section 205, or services 
pursuant to a request for an order under FPA section 211.
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    (d) If a utility does seek recovery of stranded costs as permitted 
by the proposed rule, and the existing wholesale requirements contract 
contains a notice provision, there will be a rebuttable presumption 
that the utility had no legitimate expectation of continuing to serve 
the customer beyond the period provided for in the notice provision.
    With regard to retail stranded costs, the proposed rule adopts a 
strong policy preference that appropriate State or local regulatory 
authorities address, in whatever manner they deem appropriate, stranded 
cost recovery. The proposed rule provides alternative proposals for how 
the Commission will address retail stranded costs. The Commission 
expresses no preference in favor of either alternative. Under the first 
alternative, the rule provides that if the appropriate State or local 
authority does not explicitly address retail stranded costs,\8\ or if 
there is conflict among authorities within a State or among different 
States, the Commission will entertain requests to recover stranded 
costs in section 205-206 rates for wholesale or retail transmission 
services in interstate commerce,\9\ or in section 212 rates for 
wholesale transmission services ordered under section 211. Under the 
second alternative, the rule provides that the Commission will not 
entertain any request for recovery of retail stranded costs. However, 
the Commission solicits comments on whether there should be exceptions 
to this alternative rule.
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    \8\See discussion, infra, section III.C.(6)(ii), regarding 
mechanisms by which states might explicitly address retail stranded 
costs.
    \9\``Wholesale transmission services'' means the transmission of 
electric energy sold, or to be sold, at wholesale in interstate 
commerce. This is the definition contained in FPA section 3(24).
    For purposes of this proposed rulemaking, ``retail transmission 
services'' refers to the transmission of electric energy sold, or to 
be sold, in interstate commerce directly to a retail customer.
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    Finally, the proposed rule provides guidance as to the substantive 
criteria and evidentiary demonstration necessary for wholesale and 
retail stranded cost recovery.
    The Commission requests the general views, comments and analyses of 
all interested persons, pursuant to the procedures herein. It has set 
forth enumerated questions in the Appendix attached hereto on which it 
solicits comment in particular.

II. Public Reporting Burden

    The proposed rule specifies filing requirements to be followed by 
public utilities seeking to recover stranded costs. The information 
collection requirements of the proposed rule are attributable to FERC-
516 ``Electric Rate Filings''. The current total annual reporting 
burden for FERC-516 is 783,700 hours.
    The proposed rule requires public utilities seeking to recover 
stranded costs to provide certain information to the Commission. The 
public reporting burden for the information collection requirements 
contained in the proposed rule is estimated to average 50 hours per 
response. This estimate includes time for reviewing the requirements of 
the Commission's regulations, searching existing data sources, 
gathering and maintaining the necessary data, completing and reviewing 
the collection of information, and filing the required information.
    There are approximately 200 public utilities. The Commission 
estimates that approximately ten of these utilities will respond to the 
information collection annually. The respondents would be public 
utilities who seek to recover stranded costs. The information will be 
collected on an annual basis. Accordingly, the public reporting burden 
is estimated to be no more than 500 hours.
    Send comments regarding this burden estimate or any other aspect of 
the Commission's collection of information, including suggestions for 
reducing this burden, to the Federal Energy Regulatory Commission, 941 
North Capitol Street, NE., Washington, DC 20426 [Attention: Michael 
Miller, Information Services Division, (202) 208-1415], and to the 
Office of Information and Regulatory Affairs of the Office of 
Management and Budget [Attention: Desk Officer for Federal Energy 
Regulatory Commission].

III. Discussion

A. Background

    Historically, electric utilities entered into long-term contracts 
to make wholesale requirements sales (bundled sales of generation and 
transmission) to municipal, cooperative and investor-owned utilities. 
Under these contracts, utilities often committed to provide all (full 
requirements) or part (partial requirements) of a customer's power 
needs for the contract period. Although these wholesale requirements 
contracts are typically for defined terms, they often were rolled over 
or extended when the contract term expired.
    The historical supply relationship between utilities and their 
wholesale requirements customers, however, has begun to undergo 
significant change as a result of increased competition in wholesale 
power generation and greater customer access to transmission services.
    Increased competition in wholesale power generation began with the 
enactment of the Public Utility Regulatory Policies Act of 1978 
(PURPA).\10\ PURPA provided incentives for the development of 
alternative generation sources known as qualifying facilities (QFs). In 
addition, state-approved competitive bidding programs paved the way for 
the growth of non-traditional utility generators. Finally, the Energy 
Policy Act of 1992 (Energy Policy Act)\11\ provided regulatory 
exemptions to encourage a new class of wholesale power producers known 
as exempt wholesale generators (EWGs).
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    \10\16 U.S.C. 2601, et seq.
    \11\Pub. L. 102-486, 106 Stat. 2776 (1992).
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    As competition in wholesale power generation has increased, so has 
the ability of customers to gain access to the transmission services 
necessary to reach competing suppliers. In earlier years, a few 
customers were able to obtain access as a result of court proceedings, 
beginning with the Supreme Court's decision in Otter Tail Power Co. v. 
United States, 410 U.S. 366 (1973). In recent years, a growing number 
of public utilities voluntarily agreed to file transmission tariffs of 
general applicability, i.e., tariffs that permit transmission access 
for any entity that will be making sales for resale of electric 
energy.12 In most instances, access was provided in order to 
obtain Commission approval of a merger or consolidation13 or 
Commission authorization of market-based rates for generation 
services.14 The Commission, in many instances, conditioned its 
approval of certain mergers upon transmission access in order to 
mitigate potential anticompetitive effects.15
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    \1\2See, e.g., Entergy Services, Inc., 58 FERC  61,234, order 
on reh'g, 60 FERC  61,168 (1992), appeal pending sub nom. Cajun 
Electric Power Cooperative, Inc., et al. v. FERC, Nos. 92-1461, et 
al. (D.C. Cir. filed Sept. 24, 1992) (Entergy).
    \1\3See, e.g., Public Service Company of Colorado, 59 FERC  
61,311 (1992), reh'g denied, 62 FERC  61,013 (1993).
    \1\4See, e.g., Entergy, 58 FERC at 61,740.
    \1\5See, e.g., Utah Power & Light Company, et al., Opinion No. 
318, 45 FERC  61,095 (1988), order on reh'g, Opinion No. 318-A, 47 
FERC  61,209 (1989), order on reh'g, Opinion No. 318-B, 48 FERC  
61,035 (1989), aff'd in relevant part sub nom. Environmental Action 
Inc., et al. v. FERC, 939 F.2d 1057 (D.C. Cir. 1991); Northeast 
Utilities Service Company (Re Public Service Company of New 
Hampshire), Opinion No. 364-A, 58 FERC  61,070, reh'g denied, 
Opinion No. 364-B, 59 FERC  61,042, order granting motion to vacate 
and dismissing request for rehearing, 59 FERC  61,089 (1992), 
affirmed in relevant part sub nom. Northeast Utilities Service 
Company v. FERC, Nos. 92-1165, et al. (1st Cir. May 19, 1993).
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    The trend toward greater transmission access has been accelerated 
by the passage of the Energy Policy Act, which substantially expanded 
the Commission's authority to order transmission services. Under 
amended section 211 of the FPA, the Commission may order wholesale 
transmission services, upon application, to any electric utility, 
Federal power marketing agency, or any other person generating electric 
energy for sale for resale.16 Thus far, the Commission has granted 
requests for mandatory transmission services pursuant to section 211 in 
five of the six cases it has acted on, including four proposed orders 
and one final order. In addition, several public utilities have filed 
voluntary wholesale transmission tariffs subsequent to the passage of 
the Energy Policy Act.17
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    \1\6Under section 212(h), no order issued by the Commission 
shall be conditioned on or require the transmission of electric 
energy to an ultimate consumer or to a ``sham'' wholesale customer. 
However, the Commission may order services to a ``non-sham'' 
wholesale customer, e.g., a person having an obligation under State 
or local law to provide electric services to the public and who 
would utilize transmission or distribution facilities that it owns 
or controls to deliver all such electric energy to such electric 
consumer.
    \1\7See, e.g., American Electric Power Service Corporation, 67 
FERC  61,168 (1994); Commonwealth Edison Company, 65 FERC  61,288 
(1993), order on reh'g, 67 FERC  61,325 (1994); Florida Power & 
Light Company, 64 FERC  61,361 (1993), order on policy issues, 66 
FERC  61,227 (1994), order on reh'g, 67 FERC  XXX (1994); 
Northern States Power Company (Minnesota) and Northern States Power 
Company (Wisconsin), 67 FERC  61,240 (1994).
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    During the transition to a fully competitive wholesale power 
market, some utilities may incur stranded costs as wholesale customers 
leave their systems to purchase power elsewhere. A utility may have 
built facilities or entered into long-term fuel or purchased power 
supply contracts with the reasonable expectation, based on historical 
experience and the behavior of its customer, that its wholesale 
requirements contract to sell electric energy to that customer would be 
renewed, and that the customer would pay its proportionate share of 
long-term investments and other costs incurred. If the customer is able 
to obtain unbundled transmission service from the utility in order to 
reach other power suppliers, the utility may have ``stranded costs.'' 
If the utility does not have an alternative buyer for the power 
previously sold to the departing wholesale requirements customer, or 
some other means of mitigating the stranded costs, the costs must be 
recovered from either thedeparting customer or the remaining customers 
or borne by the utility's shareholders.
    Changes are also occurring in retail electric markets, which could 
also cause retail stranded costs.18 For instance, as a result of 
recent action by the Massachusetts legislature, discussed infra, the 
Massachusetts Bay Transit Authority (MBTA) changed from being a retail 
franchise customer to a wholesale transmission customer of 
Massachusetts Electric Company. Another example is the California 
Public Utilities Commission's recent initiation of a proceeding to 
consider the restructuring of California's retail electric industry to 
allow all consumers to obtain direct access to competing generation 
service providers.19 The Michigan Public Service Commission is 
also considering a plan to offer consumer access to competing 
generation suppliers on a limited basis.20
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    \1\8Retail stranded costs may occur when a retail franchise 
customer of a public utility or transmitting utility obtains 
unbundled transmission service from the utility; the franchise 
customer may become a wholesale transmission customer of the utility 
or a retail transmission customer of the utility. Retail stranded 
costs may also result from customer ``self-help'' actions such as 
customer self-generation, or a customer building its own 
transmission line, or a customer relocating to another utility's 
service territory. These types of retail stranded costs have long 
been a fact of life for utilities. This proceeding is not intended 
to address stranded costs resulting from customer ``self-help'' 
actions.
    \1\9Order Instituting Rulemaking and Order Instituting 
Investigation on the Commission's Proposed Policies Governing 
Restructuring California's Electric Services Industry and Reforming 
Regulation, California Public Utilities Commission Nos. R. 94-04-
031, I. 94-04-052 (April 20, 1994).
    \2\0In the matter of the application of the Association of 
Businesses Advocating Tariff Equity for approval of an experimental 
retail wheeling tariff for Consumers Power Company, et al., MPSC 
Case Nos. U-10143 and U-10176 Opinion and Interim Order Remanding to 
the Administrative Law Judge for Further Proceedings, Michigan 
Public Service Commission, 150 P.U.R.4th 409 (April 11, 1994), 
appeal dismissed for lack of jurisdiction, Attorney General v. 
Michigan Public Service Commission, No. 175245 (Mich. Ct. App. June 
15, 1994).
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    In summary, as a result of the transition to a competitive 
wholesale power market, we must be concerned with three ways in which 
stranded costs are most likely to occur:
    Scenario 1: A wholesale requirements customer (i.e., a wholesale 
purchaser of bundled generation and transmission services) may obtain 
unbundled transmission services from its existing supplier in order to 
reach an alternative generation supplier. It may obtain wholesale 
transmission services either through a voluntary bilateral agreement or 
voluntary open-access tariff filed by a utility under FPA section 205, 
or by obtaining a Commission order under FPA section 211;
    Scenario 2: A retail franchise customer (or a group of retail 
franchise customers) may, through State or local government action, 
become a wholesale customer who obtains from its existing supplier 
either voluntary unbundled wholesale transmission services under 
section 205 agreements or tariffs as described above, or obtains such 
services pursuant to a Commission order under section 211;
    Scenario 3: A retail franchise customer may obtain unbundled retail 
transmission services from its existing supplier in order to reach a 
new generation supplier, either through voluntary unbundled retail 
transmission services or as a result of a State or local action 
requiring the existing supplier to provide such retail transmission 
services.21
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    \2\1The Commission takes no position in this proceeding 
regarding the legal issue of whether States have the authority to 
order retail wheeling in interstate commerce.
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    Below we discuss the Commission's precedent for each of these 
scenarios, and how we propose to deal with such stranded costs in the 
future.

B. Current Stranded Cost Policy

1. Wholesale Customers Leaving The System
    The Commission has always permitted public utilities to include 
reasonable cancellation provisions in power sales contracts in order to 
protect themselves from stranded costs and to plan for the future needs 
of their systems.22 Reasonable cancellation provisions may include 
specified ``exit fees'' or ``termination charges'' that must be paid by 
a purchaser if it terminates service prior to a contract's termination 
date. They may also include requirements that customers provide 
sufficient prior notice of cancellation to allow utilities to avoid 
stranded costs.
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    \2\2See Kentucky Utilities Company, Opinion No. 169, 23 FERC  
61,317 at 61,668, order on reh'g, Opinion No. 169-A, 25 FERC  
61,205 (1983), vacated and remanded on other grounds, Kentucky 
Utilities Co. v. FERC, 766 F.2d 239 (6th Cir. 1985) (remanded for 
lack of evidence supporting the length of the notice provision), 
order on remand, 37 FERC  61,299 (1986).
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    Contracts negotiated prior to the recent movement toward increased 
transmission access and competitive bulk power markets may not contain 
provisions requiring notice of termination and/or allocating 
responsibility for stranded costs. Accordingly, the Commission has 
permitted public utilities to include wholesale stranded investment 
cost recovery provisions in wholesale transmission rates when a public 
utility has filed a transmission tariff of general applicability.
    In Entergy, public utilities sought to include provisions for the 
recovery of wholesale stranded investment costs as part of their 
proposed transmission tariff of general applicability. In that case, 
the Commission stated:

    If Entergy has made investment decisions based on a contractual 
commitment or reasonable expectation at that time that it would 
continue to serve these customers, it should be able to recover from 
them the legitimate and verifiable costs invested on their 
behalf.\23\

    \2\3Entergy, 60 FERC at 61,631.
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    The Commission reasoned that the existence of a transmission tariff 
of general applicability could increase a public utility's risk of 
stranded investment far beyond what was contemplated when the public 
utility originally negotiated its power supply contracts.\24\ The 
Commission further observed that public utilities may not voluntarily 
offer expanded transmission access if doing so means becoming subject 
to an increased risk of stranded investment.\25\ Therefore, the 
Commission stated that it would be appropriate for Entergy to seek to 
recover legitimate and verifiable stranded investment costs through 
transmission rates, if such costs were associated with contracts 
entered into before the date of the Commission's order. However, the 
Commission stated that it would not allow the Entergy utilities to seek 
recovery of stranded costs associated with contracts entered into or 
extended after that date. The Commission further indicated in Entergy 
that while a public utility may seek to recover stranded costs, 
recovery is by no means guaranteed. The public utility bears the heavy 
burden of showing, among other things, that it made relevant investment 
decisions based on a ``contractual commitment or reasonable 
expectation'' that it would continue to serve its existing wholesale 
power customers.\26\
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    \24\Entergy, 58 FERC at 61,770.
    \25\Id.
    \26\Entergy, 60 FERC at 61,631.
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2. Retail-Turned-Wholesale Customers Leaving The System
    The Commission has been presented with the question of whether it 
should permit public utilities to seek recovery in wholesale 
transmission rates of stranded investment costs incurred to serve 
former retail franchise customers.\27\ In United Illuminating Company, 
the Commission held that retail franchise matters are state matters 
that should be handled, in the first instance, by the appropriate state 
regulatory bodies or courts.\28\ In Massachusetts Electric Company, the 
Commission accepted for filing and set for hearing the reasonableness 
of a proposed stranded cost charge involving a utility seeking to 
recover stranded costs in transmission rates from a former retail 
franchise customer that became a wholesale requirements customer and 
then became a transmission-only wholesale customer.29
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    \27\For example, stranded costs may occur if a newly-formed 
municipal utility reduces or terminates service from its current 
supplier.
    \28\See United Illuminating Company, 63 FERC  61,212 at 62,583, 
reh'g denied, 64 FERC  61,087 (1993) (UI).
    \29\Massachusetts Electric Company, 66 FERC  61,036 (1994) 
(Mass Electric). The Massachusetts Department of Public Utilities 
(Massachusetts Commission) recently requested that the Commission 
suspend the hearing it ordered in this proceeding for six months to 
allow time for its investigation of the utility's stranded cost 
claims. On June 6, 1994, the presiding administrative law judge 
denied the Massachusetts Commission's motion. On June 29, 1994, the 
Massachusetts Commission filed an interlocutory appeal to the 
Commission of the presiding judge's June 22, 1994 denial of the 
motion.
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3. Retail Customers Leaving The System
    The Commission has not been presented with the question of whether 
it can or should permit public utilities to seek recovery, in rates for 
unbundled interstate transmission services provided to retail 
customers, of stranded costs incurred to serve retail franchise 
customers. However, this issue could arise as a result of voluntary 
retail wheeling or State or local actions resulting in retail wheeling 
arrangements such as those being considered in California, Michigan and 
elsewhere.

C. The Proposed Regulations

    Consistent with the policy objectives of Congress in enacting the 
electric provisions of the Energy Policy Act, the Commission is 
committed to developing a competitive, open transmission access, 
wholesale bulk power market. Our goal is to facilitate the development 
of competitively priced generation supply options, and to ensure that 
wholesale purchasers of electric energy can reach alternative power 
suppliers and vice versa. We therefore believe it is important at this 
stage of the evolution of the electric industry to address stranded 
costs.
    The financial stability of the electric industry during the 
transition to a competitive wholesale generation market will depend in 
large part on: (1) Whether the transition to a competitive environment, 
at either the wholesale or retail level, will leave utility companies 
without an adequate opportunity to recover costs invested to serve 
customers under less competitive circumstances; and (2) whether and how 
regulators address recovery of some or all of those ``stranded'' costs. 
While there is no universally accepted estimate of the potential 
magnitude of stranded costs, some observers have suggested that 
stranded costs could total tens of billions of dollars, while others 
have suggested $200 billion or more. These estimates are based, to a 
large degree, on the difference between the book value of generating 
assets and their presumed market value.\30\
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    \30\These estimates include both wholesale and retail stranded 
costs. It has been suggested that the potential amount of retail 
stranded costs may be an order of magnitude larger than the 
potential amount of wholesale stranded costs, given that only 10-15 
percent of generating investment by investor-owned utilities is in 
wholesale rate base.
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    In addition to concerns about the financial stability of the 
industry, we believe it is important to provide as much regulatory 
certainty as possible, as early as possible, to buyers and sellers of 
electric energy and transmission, regarding the recovery of these 
potentially significant costs. Buyers seeking competitive generation 
alternatives need to know the costs associated with leaving their 
existing suppliers in order to make reasoned decisions. Likewise, 
sellers need to know the extent, if any, to which they will be 
obligated to provide requirements service on an extra-contractual basis 
so that they can plan their participation in competitive generation 
markets.
    Accordingly, the Commission believes it can best fulfill its 
regulatory responsibilities by addressing the issue of stranded costs 
during the initial stages of the transition to a competitive wholesale 
generation market.\31\ The Commission therefore is proposing to 
establish generic policies and procedures covering the treatment of 
stranded costs by public utilities and transmitting utilities.
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    \31\Indeed, our experience during the regulatory restructuring 
of the gas pipeline industry, including the issue of ``take-or-pay'' 
contracts, tells us that reasoned decisionmaking requires thorough 
consideration of the effects of regulatory and statutory changes, 
including stranded costs. See Associated Gas Distributors v. FERC, 
824 F.2d 981, 1021-1030 (D.C. Cir. 1987).
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    The Commission believes that stranded cost recovery is a transition 
problem. In the past, costs may have been incurred by wholesale 
suppliers under an implicit regulatory ``bargain,'' i.e., based on a 
reasonable expectation that captive customers would continue taking 
service beyond the term of their contracts and that the utility would 
continue to plan for their needs.\32\ This regulatory ``bargain,'' 
particularly in the context of the recovery of extra-contractual 
stranded costs, may not be sustainable in the face of wholesale market 
forces. The expectation is that market forces will ensure adequate 
supply and wholesale customers will be able to contract for services 
from alternative suppliers.
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    \32\See also 18 CFR 35.15 (requiring utilities to make a filing 
with the Commission before terminating a rate schedule); Pacific Gas 
& Electric Company, 25 FERC 61,142 at 61,381 (1983) (``termination 
is a change in service for which notice is statutorily required'').
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    Whereas any obligation to serve requirements customers at the 
wholesale level is a contractual one, the traditional obligation to 
serve at the retail level arises through utility monopoly franchise 
rights. The traditional retail regulatory compact has ensured the 
utility's financial integrity by granting it an opportunity to recover 
prudently incurred costs plus a fair rate of return, in exchange for 
regulation by the State regulatory authority and the duty to provide 
safe, reliable, reasonably priced electric service on demand. Some 
states have recently considered whether the traditional franchise duty 
to serve all customers within the boundaries of the designated 
franchise area ought to evolve and whether this duty should be modified 
by the State.\33\
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    \33\See, e.g., California Commission Order Instituting 
Rulemaking, supra, section III.A. & n.19.
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    The Commission notes that new generating capacity can be built and 
operated at costs that are less than many utilities' current embedded 
generating costs. This simple fact of current economic conditions is 
encouraging many users to seek access to the new lower cost sources of 
supply. Utilities traditionally have been obligated to serve all retail 
customers within their franchise territory and all wholesale 
requirements customers to whom they have contractually agreed to 
provide service. They have constructed or contracted for generating 
capacity sufficient to meet these service obligations. If existing 
customers leave their current utility suppliers, the utilities may not 
be able to recover all of their prudently incurred costs. In light of 
the utilities' status as regulated entities with retail franchise 
service obligations and contractual (and perhaps extra-contractual) 
wholesale service commitments, the Commission believes it is 
appropriate to provide a mechanism for utilities to seek to recover 
prudently incurred costs that are stranded during the transition to a 
competitive electricity supply market.
    However, the amount of and responsibility for any costs stranded in 
the transition to competitive markets should be resolved in as short a 
time as possible, so as not to inhibit customers from taking advantage 
of the competitive market and so that sellers can restructure their 
marketing strategy to reflect competitive markets.\34\
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    \34\In competitive markets, sellers can recover their costs, 
whether prudently incurred or not, only up to the market price.
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    The Commission assumes that stranded costs will be dominated by 
generating capacity. However, we believe that it is appropriate to 
consider stranded costs more broadly, including the possibility that 
fuel supply costs, purchased power costs, nuclear decommissioning 
costs, regulatory assets and possibly other costs that the utility 
seller is obligated to pay may be stranded. The Commission seeks public 
comment on what categories of costs, in addition to investment costs, 
should be eligible for stranded cost recovery. The Commission also 
seeks comment concerning how stranded costs should be allocated to 
specific customers.
    The proposed regulations discussed below would allow utilities the 
opportunity to seek to directly assign stranded costs to the departing 
wholesale and perhaps retail customers. However, an alternative policy 
might assign wholesale or retail stranded costs more broadly. For 
example, some stranded cost proposals would require all transmission 
customers (including native load which takes bundled service) to pay an 
access charge related to use of the transmission system. The Commission 
invites comments on the direct assignment and alternative methods of 
stranded cost recovery. The Commission also invites comments on whether 
alternative methods, e.g., an access charge, might give customers 
reasonable certainty on the scope of their stranded cost obligation 
more quickly than a direct assignment approach would, and thus might 
expedite the transition to a more competitive wholesale market.
    The proposed regulations are discussed in detail below.
1. Recovery of Stranded Costs Associated With New Wholesale Power Sales 
Contracts
    The Commission believes that future wholesale contracts should 
explicitly address the mutual obligations of the seller and buyer, 
including the seller's obligation to continue to serve the buyer, if 
any, and the buyer's obligation, if any, if it changes suppliers. 
Therefore, the proposed regulations regarding wholesale stranded costs 
encourage the resolution of future stranded cost issues through 
negotiated agreement. At the same time, we are aware that many existing 
contracts, entered into prior to the time that unbundled transmission 
access became more widely available, may not have adequately addressed 
the potential for stranded costs.
    The proposed regulations regarding wholesale stranded costs 
distinguish between new and existing wholesale requirements contracts. 
New contracts are defined as contracts executed after the date that the 
proposed rule is published in the Federal Register. Existing contracts 
are defined as contracts executed on or before the date that the 
proposed rule is published in the Federal Register.
    The proposed regulations would disallow extra-contractual recovery 
of wholesale stranded costs associated with any new requirements 
contract. That is, we will not allow any request for recovery unless 
the contract contains specific provisions allowing stranded cost 
recovery when it is accepted by the Commission.\35\ In addition, the 
Commission will not allow any stranded costs associated with new 
requirements contracts to be recovered through transmission rates.
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    \35\Proposed provisions to allow stranded cost recovery will, of 
course, be subject to the approval of the Commission and must be 
just and reasonable and not unduly discriminatory or preferential.
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    Therefore, in the future, wholesale power suppliers and their 
customers must address stranded cost issues by including appropriate 
notice and exit fee provisions, or any other explicit statement related 
to stranded cost recovery, in their new requirements contracts. For 
example, sellers may wish to require adequate notice in contracts to 
reflect the realities of supply planning, and may wish to include exit 
fees that buyers would be required to pay if the buyer prematurely 
exits the system. Similarly, buyers may wish to preserve the rights to 
exit contracts when market conditions warrant it.
    In addition to encouraging parties to explicitly address their 
mutual obligations in new wholesale requirements contracts, the 
Commission believes it is important to address any future regulatory 
obligation to serve at the wholesale level. Competitive generation 
markets not only require that customers be able to freely shop for 
competitively priced generation, but that sellers be free to enter new 
markets and to exit markets. Asymmetrical rights and obligations that 
allow existing customers to leave their current suppliers consistent 
with their existing contractual obligations, but that require sellers 
to continue to serve those customers beyond the terms of their existing 
contracts, would not be efficient or fair. Therefore, the Commission 
does not believe that it is appropriate to impose on wholesale 
requirements suppliers a regulatory obligation to continue to serve 
their existing requirements customers beyond the end of the contract 
term. This means that a requirements customer is responsible for 
planning to meet its power needs beyond the end of the contract term. 
It may re-contract with its existing supplier, or it may contract with 
new suppliers, using its existing supplier's transmission system.
    The Commission invites public comment on the extent to which there 
is or should be a regulatory obligation to continue to serve wholesale 
requirements customers beyond the end of the contract term and the 
source of any such obligation. The Commission also seeks comment 
concerning whether section 35.15 of the Commission's regulations, which 
concerns notice of termination, should be deleted in its entirety, or 
only in certain circumstances (e.g., when the seller provides 
transmission access on a comparable basis to the seller's own uses of 
its system).
2. Recovery of Stranded Costs Associated With Existing Wholesale Power 
Sales Contracts
    Because stranded costs are a transitional problem, and neglecting 
their recovery could delay the realization of a fully competitive bulk 
power market, it is important to set a date beyond which the Commission 
will no longer permit extra-contractual recovery of stranded costs that 
result from existing requirements contracts.
    The proposed regulations would establish a three-year transition 
period during which utilities must make a good faith effort to 
negotiate with their customers to add appropriate stranded cost 
provisions to their existing contracts that do not already contain exit 
fee or other explicit stranded cost provisions. For purposes of this 
rule, if an existing contract contains an exit fee provision, that 
provision will be deemed to be an explicit stranded cost provision 
which cannot be renegotiated unless explicitly provided for in the 
contract.
    One purpose of setting a time limit for renegotiation is to provide 
an incentive for utilities and their customers to attempt to promptly 
renegotiate existing requirements contracts that do not address 
stranded costs, so that the contracts reflect the new realities of 
emerging competitive generating markets. In these situations, the 
Commission expects utilities and their customers to make a good-faith 
effort to reach a mutually agreeable resolution. If the parties 
negotiate such a provision and the seller is a public utility, the 
utility must file the provision as an amendment to the existing power 
sales contract prior to the end of the three-year period.
    If the parties to an existing wholesale requirements contract 
cannot negotiate a stranded cost provision, the selling utility, if it 
is a public utility, may, before the end of the three-year transition 
period, unilaterally file under FPA section 205 or 206 a proposed 
stranded cost provision as an amendment to the existing contract.\36\ 
This is discussed in further detail below.
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    \36\See, supra, n.5, regarding transmitting utilities that are 
not also public utilities.
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    Alternatively, as discussed in the following section, if the 
customer under the existing wholesale requirements contract: (1) Gives 
notice pursuant to the contract, before the end of the three-year 
transition period, that it will no longer purchase all or part of its 
requirements from the selling utility, but instead will purchase 
unbundled section 205 or section 211 transmission services from the 
utility in order to reach a different supplier of electric energy; and 
(2) the transmission services will commence prior to the end of the 
three-year transition period, the selling utility may file before the 
end of the three-year transition period a proposal to recover stranded 
costs through rates for the requested wholesale transmission services. 
This is the only circumstance under which the Commission will allow 
utilities to seek wholesale stranded cost recovery through transmission 
rates.37
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    \3\7We note that the rebuttable presumption we are proposing for 
contracts with notice provisions, infra, p. 30, also applies in this 
instance. We clarify further that, under this proposal, in order for 
utilities to protect themselves against a customer exercising 
(inside or outside the three-year transition period) a notice of 
termination provision which takes effect outside of the three-year 
transition period, utilities must propose to change their existing 
contracts within the three-year period. However, the rebuttable 
presumption will apply in this instance as well.
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    Existing requirements contracts are highly variable with respect to 
exit conditions. While some existing contracts may have explicit exit 
fee or other stranded cost provisions, many others may be totally 
silent with respect to exit conditions. Yet others may have notice 
provisions, but may not be explicit as to stranded cost recovery.
    If a contract includes an explicit provision for payment of 
stranded costs or an exit fee, it will be assumed that the parties 
fully intended the contract to cover the contingency of the buyer 
leaving the system. Therefore, as a matter of policy announced here, 
the Commission proposes to reject stranded cost amendments to existing 
contracts that already contain such provisions. If existing contracts 
permit renegotiation of existing stranded cost provisions, the parties 
may renegotiate in accordance with the contract. However, if existing 
contracts prohibit stranded cost recovery, or explicitly prohibit 
renegotiation of an existing stranded cost or exit fee provision, or 
prohibit renegotiation until after the three-year period has expired, 
the parties will not be required to renegotiate within the three-year 
period. The Commission invites comments on what other types of 
contractual provisions, if any, might demonstrate a sufficient 
``meeting of the minds'' between parties so that renegotiation should 
be barred. The Commission also solicits comments on whether to apply 
these rules regarding existing contracts only to contracts between 
unaffiliated entities.
    If a contract does not include an exit fee or other explicit 
stranded cost provision, but does contain a notice provision, there 
will be a rebuttable presumption that the selling utility had no 
reasonable expectation of continuing to serve the customer beyond the 
period provided for in the notice provision. This presumption will 
apply when public utilities propose unilateral amendments to 
requirements contracts, as described above, as well as when public 
utilities or transmitting utilities seek stranded cost recovery through 
transmission rates, as described above. The Commission solicits comment 
on whether the rebuttable presumption should also be applied to any 
contract entered into after the date of enactment of the Energy Policy 
Act, even though such contract does not contain an exit fee or other 
explicit stranded cost provision, or a notice provision.
    For existing contracts that do not contain specific exit fee or 
other explicit stranded cost provisions, the Commission proposes to 
require parties to make a good faith attempt at renegotiation. This is 
because many of these contracts were negotiated twenty years ago, or 
more, when the parties likely did not foresee the advent of competition 
in wholesale generation markets and the ability of transmission-
dependent utilities to gain access to their supplier's transmission 
system to reach other sellers.
    The Commission recognizes that new requirements contracts and 
renegotiated existing requirements contracts may contain contractual 
features that have heretofore not been included in requirements 
contracts. Buyers and sellers will seek to protect themselves from 
contingencies made more likely as a result of increased competition in 
power markets. The Commission will not impose a preconceived notion of 
what those contract provisions should look like, and does not 
necessarily believe that a ``one size fits all'' approach is 
appropriate.
    We recognize that some utilities' existing contracts may be Mobile-
Sierra contracts that prohibit unilateral rate changes.38 Under 
the Mobile-Sierra doctrine, for instance, a customer may waive its 
right to challenge the contract and/or the utility may waive its right 
to make unilateral rate changes. However, the parties may not waive the 
indefeasible right of the Commission to alter rates that are contrary 
to the public interest.39 Accordingly, the Commission could permit 
public utilities that have contracts containing Mobile-Sierra 
provisions an opportunity to file unilateral rate changes if the 
Commission finds that such an action is required in the public 
interest.\40\
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    \3\8See United Gas Pipeline Co. v. Mobile Gas Service Corp., 350 
U.S. 332 (1956); FPC v. Sierra Pacific Power Co., 350 U.S. 348 
(1956).
    \3\9Papago Tribal Utility Authority v. FERC, 723 F.2d at 950, 
953 (D.C. Cir. 1983).
    \4\0350 U.S. at 355.
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    The Commission believes that a failure to permit public utilities 
to address stranded costs through negotiation or unilateral rate 
changes could harm the public interest in at least two ways. First, the 
inability to seek recovery of stranded costs could impair the financial 
ability of a utility to continue to provide reliable service. This will 
depend on the magnitude of stranded costs and the prospect or lack 
thereof for recovering such costs from ratepayers. The prospect of not 
recovering from ratepayers significant amounts of stranded costs could 
seriously erode a utility's access to capital markets, or could drive 
the utility's cost of capital to unprecedented levels. This high cost 
of capital could precipitate other customers leaving the system which, 
in turn, could cause others to leave. Such a spiral could be difficult 
to stop once begun. Second, if some customers are permitted to leave 
their suppliers without paying for stranded costs, this may cause an 
excessive burden on the remaining customers who for whatever reason 
cannot leave and therefore may have to bear those costs. For these 
reasons, our preliminary view is that it is in the public interest to 
permit public utilities with Mobile-Sierra contracts a limited 
opportunity to unilaterally propose contract changes to address 
stranded costs, if those contracts do not already explicitly address 
stranded costs.41
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    \4\1Customers with Mobile-Sierra contracts that do not 
explicitly address stranded costs may also file complaints under 
section 206 of the FPA, within the three-year transition period, to 
propose to address stranded costs in existing contracts.
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    We clarify that if a public utility unilaterally files a proposed 
stranded cost amendment under either section 205 or 206, this does not 
necessarily mean that the Commission ultimately will find it 
appropriate to allow any amendment. The same is true for customer 
complaints under section 206. In addition, the Commission intends to 
allow the customer to the contract to present any other proposed 
stranded cost amendment which it believes reasonable.42 Further, 
in analyzing what is an appropriate stranded cost amendment in the 
particular circumstances, we will take into account the other 
contractual provisions and hear arguments as to why other contractual 
provisions may also need to be amended.
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    \4\2If the customer is the initial proponent of the change, it 
will bear the burden under section 206 of the FPA.
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    The Commission invites public comment on the proposal to establish 
a transition period during which utilities may renegotiate their 
existing contracts. The Commission also invites public comment on 
whether public utilities or customers with Mobile-Sierra contracts 
should be able to make unilateral filings or file complaints. The 
Commission also invites comments on whether the Commission should make 
a Mobile-Sierra public interest finding based on company-specific 
findings instead of generic industry-wide findings.
    The Commission is uncertain how long the proposed transition period 
should be. On the one hand, the renegotiation process is likely to be 
time-consuming, since difficult issues are at stake and some utilities 
have multiple contracts and may therefore be engaged in negotiations 
with a number of parties at the same time. On the other hand, we do not 
want to extend the transition period more than is necessary, since the 
uncertainty concerning stranded cost recovery may inhibit wholesale 
customers from pursuing more efficient or cheaper supply alternatives. 
The Commission's preliminary view is that a transition period of three 
years strikes an appropriate balance. However, the Commission invites 
comment on the appropriate length of the proposed transition period.
    The Commission requests that utility commenters include in their 
comments an estimate of the number of requirements contracts that they 
would seek to renegotiate to address stranded cost issues. How many of 
these contracts are silent on this question? How many have notice 
provisions, and of what duration? The Commission requests that 
responding utilities estimate the amount of stranded costs associated 
with such contracts, the relationship of the estimated stranded costs 
to the utility's total costs or revenues, and the potential cost shift 
to remaining customers.
3. Recovery of Wholesale Stranded Costs in Wholesale Transmission Rates
    The Commission has previously authorized provisions that permit 
public utilities to seek recovery of stranded costs in wholesale 
transmission rates in the context of utilities filing transmission 
tariffs of general applicability, e.g., Entergy.
    As discussed in the prior section, during the transition period the 
proposed regulations would permit utilities to file rates for 
transmission services that include stranded costs associated with 
existing wholesale requirements contracts, but only if: (1) the 
wholesale requirements customer gives notice pursuant to the contract, 
prior to the end of the three-year transition period, that it will no 
longer purchase all or part of its requirements from the selling 
utility, but instead will purchase unbundled section 205 or section 211 
transmission services from the utility in order to reach a different 
supplier of electric energy; and (2) the transmission services will 
begin prior to the end of the three-year transition period. After the 
transition period, public utilities and transmitting utilities would no 
longer be permitted to recover wholesale stranded costs in rates for 
transmission services under section 205 or 211 of the FPA.
    The Commission believes that utilities should retain the option of 
seeking recovery of stranded costs in rates for transmission services 
during the transition period, but only in the limited circumstance 
described.43 The Commission is proposing this limitation in order 
to encourage utilities and their customers to negotiate stranded cost 
provisions in accordance with the other provisions of the proposed 
regulations.
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    \4\3See also, supra, n.1 (discussing transmitting utilities that 
are not public utilities).
---------------------------------------------------------------------------

    The Commission proposes to apply the above limitations on recovery 
of stranded costs in wholesale transmission rates to all utilities, 
whether or not they currently have on file transmission tariffs 
containing stranded cost provisions.44 The Commission seeks 
comment on this proposal.
---------------------------------------------------------------------------

    \4\4See, e.g., Entergy.
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    Filings to recover stranded costs in transmission rates during the 
transition period will be permitted regardless of whether the service 
is voluntarily provided (under section 205 of the FPA pursuant to an 
open-access tariff, a tariff of general applicability or an individual 
contract) or mandated under section 211 of the FPA. However, the 
Commission invites public comment on the issue of whether stranded cost 
recovery should be different depending on whether transmission service 
is under section 205 or 211.
    As noted earlier, supra, section III.C., the proposed regulations 
allow utilities an opportunity to seek direct assignment of stranded 
costs to the departing wholesale customer. We request comment on 
whether, in lieu of direct assignment, utilities should be able to seek 
a general surcharge to all of their transmission customers to cover the 
costs stranded by a departing customer.45
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    \4\5For example, the Commission followed this type of approach 
in Order No. 636 with respect to gas supply realignment charges. See 
Pipeline Service Obligations and Revisions to Regulations Governing 
Self-Implementing Transportation; and Regulation of Natural Gas 
Pipelines After Partial Wellhead Decontrol, 57 FR 13267 (Apr. 16, 
1992), III FERC Stats. & Regs. Preambles  30,939 at 30,457-460 
(Apr. 8, 1992), order on reh'g, Order No. 636-A, 57 FR 36128 (Aug. 
12, 1992), III FERC Stats. & Regs. Preambles  30,950 (Aug. 3, 
1992), order on reh'g, Order No. 636-B, 57 FR 57911 (Dec. 8, 1992), 
61 FERC  61,272 (1992), appeal re-docketed sub nom., Atlanta Gas 
Light Company and Chattanooga Gas Company, et al. v. FERC, No. 94-
1171 (D.C. Cir. May 27, 1994).
---------------------------------------------------------------------------

    The Commission does not in this proposed rulemaking address who 
will bear the stranded costs caused by a departing customer if the 
Commission finds that the utility had no reasonable expectation of 
continuing to serve that customer. Under the proposed rule, the costs 
cannot be recovered from the departing customer through transmission 
rates for that customer or through a unilateral exit fee amendment in 
that customer's power sales contract. We anticipate that in such a case 
a public utility will seek in subsequent requirements rate cases to 
have the costs reallocated among the remaining customers on its system.
    The Commission recognizes that stranded costs can occur when a 
customer fails to renew its requirements contract and, instead of 
obtaining unbundled transmission services from its former requirements 
supplier, obtains unbundled transmission services from another utility. 
We anticipate that in such a case any prudent costs that are stranded 
as a result of the customer's departure would be reallocated to 
remaining customers in the utility's next requirements rate case. This 
results in the departing customer bearing none of the costs which it 
may have caused to be stranded. We request comments on how the 
Commission should deal with such costs.
4. Filing Requirements for Wholesale Stranded Cost Recovery
    The Commission proposes to amend Part 35, Chapter I, Title 18 of 
the Code of Federal Regulations to establish filing requirements for 
public utilities (as defined in FPA section 201(e)) and transmitting 
utilities (as defined in FPA section 3(23)) that seek stranded cost 
recovery. Our view is that the only circumstance in which transmitting 
utilities that are not also public utilities may seek stranded cost 
recovery from this Commission is through rates for transmission 
services under FPA sections 211 and 212.
    The proposed regulations define ``wholesale stranded cost'' as 
``any legitimate, prudent and verifiable cost incurred by a public 
utility or transmitting utility to provide service to a wholesale 
requirements customer that subsequently becomes, in whole or in part, 
an unbundled transmission customer of such public utility or 
transmitting utility.''46
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    \4\6In theory, a utility's stranded costs could include 
transmission and distribution facilities. However, when a customer 
switches from being a requirements customer and becomes a 
transmission service-only customer, the public utility or 
transmitting utility probably will continue to provide roughly 
equivalent amounts of transmission services and, if relevant, 
distribution services. Thus, the Commission's preliminary view is 
that stranded costs will primarily be related to power production, 
i.e., generation costs.
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    The proposed regulations would permit a public utility or 
transmitting utility to seek recovery of wholesale stranded costs as 
follows. First, for stranded costs associated with new wholesale 
requirements contracts (i.e., any wholesale requirements contract 
executed after the date that this order is published in the Federal 
Register), the proposed regulations would allow recovery of stranded 
costs only if the contract explicitly provides for recovery of stranded 
costs.
    Second, for existing wholesale requirements contracts (i.e., any 
wholesale requirements contract executed on or before the date that 
this order is published in the Federal Register), the proposed 
regulations would specify that a utility may not recover stranded costs 
associated with such contract if recovery is explicitly prohibited by 
the contract (including associated settlements) or by any power sales 
or transmission tariff on file with the Commission.47
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    \4\7See Maine Public Service Company, 61 FERC  61,319 (1992), 
reh'g denied, 62 FERC  61,226 (1993).
---------------------------------------------------------------------------

    Third, for existing wholesale requirements contracts that do not 
address stranded costs through exit fee or other explicit stranded cost 
provisions, the proposed rule would allow a public utility to seek 
recovery of stranded costs only if: (1) The existing contract contains 
a specific provision allowing recovery of stranded costs; or (2) the 
parties to the existing contract renegotiate the contract in accordance 
with this rule and file an amendment dealing with stranded costs prior 
to the expiration of the three-year transition period; or (3) if the 
parties to the existing contract do not renegotiate a stranded cost 
amendment, the selling utility unilaterally files, no later than the 
end of the transition period, a proposed stranded cost amendment to the 
parties' existing contract; or (4) if the parties to the existing 
contract do not renegotiate an amendment, the public utility files a 
request to recover stranded costs in its transmission rates under FPA 
sections 205-206, or 211-212, under the limited circumstance described 
in section III.C.(3) herein.
    Fourth, if the selling utility under an existing wholesale 
requirements contract is a transmitting utility but not also a public 
utility, and the contract does not address stranded costs through an 
explicit exit fee or other stranded cost provision, the transmitting 
utility may file a request to recover stranded costs in transmission 
rates under FPA sections 211-212, as described in section III.C.(3) 
herein.
5. Evidentiary Demonstration Necessary for Wholesale Stranded Cost 
Recovery
    In Entergy and subsequent cases, the Commission provided guidance 
concerning the evidentiary demonstration that utilities must make to 
recover stranded costs in wholesale transmission rates. The Commission 
believes that this demonstration is still relevant and appropriate. We 
therefore propose to apply it to any proposal for extra-contractual 
recovery in accordance with this proposed rule.48
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    \4\8This would include public utilities who unilaterally seek to 
amend an existing wholesale requirements contract as described 
herein and public utilities and transmitting utilities that seek to 
recover stranded costs through transmission rates.
---------------------------------------------------------------------------

    The following is the proposed demonstration that a public utility 
or transmitting utility must satisfy in order to recover stranded costs 
in wholesale transmission rates, and that a public utility must satisfy 
if it proposes a unilateral amendment to its wholesale requirements 
contract:
    (1) A utility must show that it incurred stranded costs based on an 
expectation that was reasonable when the costs were incurred that the 
applicable contract would be extended;
    (2) A utility must show that the stranded costs it incurred are not 
more than the customer would have contributed to the utility had the 
customer remained a wholesale requirements customer of the utility;
    (3) A utility must show that it has taken and will take reasonable 
and prudent measures to mitigate stranded costs.
    The question of whether a utility had a reasonable expectation of 
continuing to serve a customer is a factual matter that will depend on 
the evidence produced in each case. Whether the utility's expectation 
was reasonable will depend on the circumstances at the time that 
stranded costs were incurred, including, for instance, whether the 
customer at that time had access to alternative suppliers. A utility 
also must offer evidence that its expectation was based on the actual 
conduct or course of dealing of the two parties (the utility and its 
customer). However, the Commission does not believe it is in the public 
interest to have prolonged litigation on these issues. Therefore, we 
will provide general guidance as to the type of evidence that would 
tend to prove or disprove the existence of a reasonable expectation.
    When a public utility seeks to include certain types of 
construction-work-in-progress (CWIP) in rate base for a particular 
customer, the utility must use forward-looking cost allocators 
(estimates of the customer's cost responsibility when the facility will 
be in service).49 Therefore, the fact that a utility has recovered 
CWIP from a particular customer (without the customer's objection) may 
provide persuasive evidence of a reasonable expectation that it would 
continue to serve that customer for a certain term. The Commission is 
aware, however, that few utilities have taken advantage of the CWIP 
rule, perhaps because few utilities have been undertaking major 
construction projects.
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    \4\9See 18 CFR 35.25(c)(4).
---------------------------------------------------------------------------

    A reasonable expectation that a contract would be extended could 
also be shown by communications between supplier and customer 
concerning system planning. For example, if a buyer has indicated that 
the seller should continue to include the buyer's load in the seller's 
resource planning beyond the contract term or has indicated to the 
seller that it has not taken active steps to secure a new supplier, the 
seller may have legitimately had a reasonable expectation of continuing 
the service, particularly if the parties have routinely extended the 
contract in the past.
    On the other hand, a utility very likely would have no reasonable 
expectation that a contract would be extended if the contract includes 
a notice of cancellation provision. Therefore, there will be a 
rebuttable presumption that if a contract contains a notice provision, 
the utility had no reasonable expectation of serving the customer 
beyond the period provided for in the notice provision. The Commission 
invites comments on all aspects of the evidence necessary to 
demonstrate a reasonable expectation. We specifically request comments 
on our proposal that any notice provision creates a rebuttable 
presumption of no reasonable expectation, or whether we should adopt a 
minimum notice period that would provide a presumption that the utility 
had no reasonable expectation of continuing to provide service beyond 
the notice period, e.g., a five-year notice period.
    The second element described above concerns reasonable compensation 
for stranded costs. We request comments on what is reasonable 
compensation:

    (a) Would it be reasonable for the Commission to limit the 
annual amount of stranded costs that a former requirements customer 
must pay to be no more than what the customer would have contributed 
to the utility's capital (customer revenues minus variable costs), 
or would some alternative concept be appropriate?
    (b) Would it be reasonable for the Commission to limit the 
future time period over which a customer's liability for stranded 
costs would be determined? That is, the present value of the 
customer's liability could be the discounted value of an annual 
amount for a limited time period. This total amount could be paid in 
a lump sum or over any mutually agreeable period. The limited time 
period over which the customer's liability is determined could be 
called the reasonable compensation period. If so:
    (i) Would the Commission apply the reasonable compensation 
period to assess the reasonableness of an exit fee in a revised 
requirements contract as well as a transmission surcharge?
    (ii) How long should such a time period be, e.g., five years or 
ten years or some other period; and
    (iii) When should such a period begin, e.g., if five years is a 
reasonable time over which a customer is liable for stranded costs, 
does the five-year period begin when the Commission adopts a final 
rule or when the utility files for stranded cost recovery in the 
future?
    (c) Should the length of a reasonable compensation period be 
based on what would constitute a reasonable notice period in 
requirements contracts or would some other concept be appropriate?
    (d) Establishing a reasonable compensation period effectively 
would also establish a future date beyond which requirements 
customers would no longer have any liability for stranded costs, 
either as an exit fee in revised requirements contracts or as a 
surcharge on transmission rates. Would this be appropriate? In 
responding, commenters should keep in mind that the concept of a 
reasonable time period for computing stranded cost liability is 
independent of the proposed three-year recontracting period for 
which the Commission is also requesting separate comments.

    The third element described above concerns mitigation measures. 
Adequate mitigation measures might include: (1) Evidence that the 
utility has tried to market the asset or assets, market the generating 
capacity, reconfigure or delay investment in or purchase of new 
generating capacity, or reform fuel supply contracts that form the 
basis for the stranded costs charge, and that such measures to mitigate 
stranded costs will continue for the entire period for which the 
stranded costs charge will be paid; or (2) the utility has given the 
customer the option to market the generating capacity or supply of fuel 
or purchased power that forms the basis for the stranded costs charge 
in order to afford the customer an opportunity to lower its stranded 
costs charge.
    The Commission expects the utility to use its best efforts to 
market its existing generating capacity as one way of mitigating costs. 
The Commission would expect to require revenues generated from sales of 
the capacity to be credited against the stranded costs to be recovered 
through transmission rates to the departing customer.
    The Commission invites comment on the requirement that a utility 
must demonstrate reasonable measures to mitigate stranded costs and 
what such measures may include.
    The Commission also invites comment on how to determine the amount 
of stranded costs that the departing customer may be liable to pay. In 
Entergy, the Commission said that stranded costs could be no more than 
the revenues the departing customer would pay to the seller over the 
life of the contract. However, given that parties to requirements 
contracts are encouraged to include exit conditions (including notice 
provisions) in new contracts and renegotiated existing requirements 
contracts, it can be argued that stranded cost recovery should be 
capped at the revenues that the departing customer would pay after 
having given notice to the seller that it wishes to end all or some 
portion of its purchase. The problem then becomes what is a reasonable 
notice period, given the needs of sellers to adequately plan supply and 
the ability of sellers to find alternative buyers for power not taken 
by existing buyers. This issue pertains not only to determining 
stranded cost recovery in transmission rates but also to determining 
appropriate stranded cost provisions in new requirements contracts. The 
Commission invites comments on reasonable notice periods.
6. Recovery of Retail Stranded Costs
    As discussed earlier, there are two general ways in which retail 
stranded costs are likely to occur:\50\ (1) A retail franchise customer 
may, through State or local government action, become a wholesale 
customer who can then obtain unbundled transmission services in order 
to reach a new power supplier;\51\ (2) a retail franchise customer may 
obtain voluntary unbundled retail transmission services from its 
existing power supplier in order to reach a new power supplier, or 
there may be a State or local action that results in the existing 
supplier providing such retail transmission services.
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    \50\Retail stranded costs may result from ``self-help'' actions 
such as customer self-generation, and this has long been a fact of 
life for utilities. See, supra, n.18. This proceeding does not 
address these situations.
    \51\In addition, certain retail customers may become retail 
customers of a newly-created wholesale entity.
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    In the first example (a retail franchise customer becomes an 
unbundled wholesale power and transmission customer), the Commission 
clearly has exclusive jurisdiction under sections 201, 205 and 206, or 
section 212 of the FPA, over the rate for the wholesale interstate 
transmission services\52\ used by the new wholesale entity in order to 
reach its new generation supplier. In the second example, in which a 
retail franchise customer becomes a retail unbundled transmission 
customer of its former franchise utility, and a retail power customer 
of another utility, we conclude that we also have exclusive 
jurisdiction over the rates, terms and conditions for the retail 
interstate transmission services.\53\
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    \52\Under FPA section 211, the Commission's authority to order 
wheeling does not turn on whether the transmission services will be 
in interstate commerce.
    \53\We make no determination here regarding the physical or 
jurisdictional distinctions between transmission and local 
distribution. Section 201(b)(1) of the FPA states that the 
Commission has no jurisdiction, except as specifically provided in 
Parts II and III of the FPA, over facilities used for local 
distribution. Nor do we address here whether States have authority 
to order retail wheeling in interstate commerce.
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(i) Jurisdictional Analysis

    The Commission's jurisdiction over the rates, terms and conditions 
of transmission in interstate commerce derives from Congress' power to 
regulate interstate commerce under the United States Constitution\54\ 
and the FPA. When Congress enacted the FPA, it gave the Commission 
exclusive jurisdiction over the rates, terms and conditions of 
transmission in interstate commerce by public utilities. The Supremacy 
Clause of the Constitution provides that federal laws enacted pursuant 
to the powers delegated to the federal government by the United States 
Constitution are the supreme law of the land.\55\ Accordingly, to the 
extent that retail wheeling involves transmission in interstate 
commerce by public utilities, the rates, terms and conditions of such 
service are subject to the exclusive jurisdiction of the Commission, 
and the rates for such service must be filed with the Commission.\56\
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    \54\U.S. Const. Art. I, Sec. 8, cl.3.
    \55\U.S. Const. Art. VI, cl.2.
    \56\See Montana-Dakota Utilities Co. v. Northwestern Public 
Service Co., 341 U.S. 246, 251-52 (1951) (Montana-Dakota).
---------------------------------------------------------------------------

    Section 201 of the FPA, by its very words, does not limit the 
Commission's jurisdiction over transmission to transmission of electric 
energy in interstate commerce sold at wholesale.
    Subsection 201(b)(1) of the FPA provides:

    (b)(1) The provisions of this Part shall apply to the 
transmission of electric energy in interstate commerce and to the 
sale of electric energy at wholesale in interstate commerce * * * 
The Commission shall have jurisdiction over all facilities for such 
transmission or sale of electric energy * * *

16 U.S.C. Sec. 824(b)(1).
    Much of the legislative history of the FPA indicates that Congress 
intended the Commission's jurisdiction to extend only to those matters 
which the Attleboro decision\57\ held to be beyond the reach of the 
States. For instance, the report accompanying the Senate bill states 
that subsection (b) ``leaves to the States the authority to fix local 
rates even in cases where the energy is brought in from another 
state.''\58\ The Senate report also states:
---------------------------------------------------------------------------

    \57\Public Utilities Commission v. Attleboro Steam & Electric 
Co., 273 U.S. 83 (1927) (Attleboro). In Attleboro, the Supreme Court 
held that State regulation of the interstate sale of electricity was 
barred by the Commerce Clause because such regulation would impose a 
``direct burden'' on interstate commerce.
    \58\S. Rep. No. 621, 74th Cong., 1st Sess. 48 (1935). See also 
H.R. Rep. No. 1318, 74th Cong., 1st Sess. 8 (1935).

    The rate-making powers of the Commission are confined to those 
wholesale transactions which the Supreme Court held in [Attleboro] 
to be beyond the reach of the States. Jurisdiction is asserted also 
over all interstate transmission lines whether or not there is sale 
---------------------------------------------------------------------------
of the energy carried by those lines. * * *

S. Rep. No. 621, 74th Cong., 1st Sess. 48 (1935). Thus, federal 
jurisdiction over transmission lines is not dependent on whether those 
lines are used to effect a sale, wholesale or otherwise.
    While the provisions of section 201 reserving certain regulatory 
authority to the States have been interpreted narrowly,\59\ the courts 
have construed ``in interstate commerce'' broadly. The term does not 
turn on whether the contract path for a particular power or 
transmission sale crosses state lines, but rather follows the physical 
flow of electricity. Because of the highly integrated nature of the 
electric system, this results in most transmission of electric energy 
being ``in interstate commerce.''
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    \59\While Congress may exercise its Commerce Clause authority to 
grant the States that ``ability to restrict the flow of interstate 
commerce that they would not otherwise enjoy,'' Lewis v. BT 
Investment Managers, Inc., 447 U.S. 27, 44 (1980), States may not 
exercise such regulatory powers unless Congress has expressly stated 
its intention to make such an affirmative grant of power. New 
England Power Co. v. New Hampshire, 55 U.S. 331, 343 (1982).
---------------------------------------------------------------------------

    For example, in Jersey Central Power & Light Co. v. FPC, 319 U.S. 
61 (1943), the Court stated:

    It is impossible for us to conclude that this definition [of 
transmission in interstate commerce] means less than it says and 
applies only to the energy at the instant it crosses the state line 
and so only to the facilities which cross the line and only to the 
company which owns the facilities that cross the line.

319 U.S. at 71. Thus, a critical question regarding the jurisdictional 
status of a wheeling transaction is whether the facilities used to 
provide the service transmit electric energy in interstate commerce. 
See also Connecticut Light & Power Co. v. FPC, 324 U.S. 515 (1945) 
(CL&P); FPC v. Florida Power & Light Co., 404 U.S. 453 (1972). In CL&P, 
the Court emphasized that whether certain facilities transmit electric 
energy in interstate commerce is more a technical than a legal 
question. The Court stated, ``[f]ederal jurisdiction was to follow the 
flow of electric energy, an engineering and scientific, rather than a 
legalistic or governmental, test.'' 324 U.S. at 529.
    In all of the above cases, the Court's decisions turned on whether 
energy flowed in interstate commerce as a technical matter. The 
decisions did not turn on whether the energy flowing in interstate 
commerce was being sold for resale or was being sold to an end user. 
However, under FPA section 201(b), the Commission does not have 
jurisdiction over facilities used in local distribution. In CL&P, the 
Court stated that local distribution facilities are exempt from 
Commission jurisdiction even if those facilities ``carry no energy 
except extra-state energy.'' 324 U.S. at 531. The Court rejected the 
argument that transmission and local distribution facilities could be 
distinguished by the proportion or amount of interstate energy that 
they carried:

    We do not find that Congress has conditioned the jurisdiction of 
the Commission upon any particular volume or proportion of 
interstate energy involved, and we do not think it would be 
appropriate to supply such a jurisdictional limitation by 
construction.

324 U.S. at 536. The determination of whether facilities are local 
distribution facilities remains a factual matter to be decided in the 
first instance by the Commission. See FPC v. Southern California Edison 
Co., 376 U.S. 205 (1964).
    While the precise demarcation between transmission and local 
distribution remains unclear, and the Commission has not yet 
definitively addressed this issue, there is nothing in the statute, its 
legislative history, or the case law to indicate that the Commission's 
jurisdiction over rates, terms and conditions of transmission in 
interstate commerce extends only to wholesale transmission and not 
retail transmission.

(ii) Treatment of Retail Costs

    Because the Commission has jurisdiction over the rates, terms and 
conditions of both wholesale and retail transmission services in 
interstate commerce by public utilities, arguably it may allow retail 
stranded cost recovery in rates for either wholesale or retail 
transmission services. There nevertheless may be important legal or 
policy reasons to exclude retail stranded costs from transmission 
rates. As noted earlier, however, the Commission has been presented 
only with the question of whether it should permit public utilities to 
seek recovery in wholesale transmission rates of stranded investment 
costs incurred to serve former retail customers (Scenario 2, section 
III.A.). The Commission has not been presented with the question of 
whether it should permit public utilities to seek recovery in retail 
transmission rates of stranded costs incurred to serve the customer 
when it was a retail customer (Scenario 3, section III.A.).
    While we believe the Commission has the authority to address retail 
stranded costs through its jurisdiction over the rates, terms and 
conditions of interstate transmission services used by retail or newly-
created wholesale customers, we also believe that the recovery of the 
costs of transition to competition at the retail level is a matter that 
should be addressed by State authorities. This is because retail 
stranded costs will occur primarily as a result of State and local 
decisionmaking regarding retail franchise areas and the creation of new 
wholesale entities. In particular, the Commission believes it is 
incumbent upon states to deal with the consequences of stranded costs 
that occur as a result of retail wheeling. Our strong policy preference 
is that states explicitly address the issue. State and local 
decisionmakers have a first-hand understanding of the regulatory 
bargain with respect to stranded costs incurred to serve retail 
customers, and they are familiar with the planning, investment and 
purchase activities of the utilities they regulate.
    There are a number of procedural mechanisms which we believe States 
can use to address retail stranded costs. For example, a State that 
permits a retail franchise customer to become a wholesale entity may 
consider whether to impose an exit fee prior to, or as a condition of, 
creating the wholesale entity. Similarly, a State may consider whether 
to require payment of an exit fee prior to a franchise customer being 
permitted to obtain unbundled retail wheeling. In situations in which 
local distribution facilities are used by a retail wheeling customer, 
the State may consider whether to allow recovery of stranded costs 
through rates for local distribution services. If a State decides not 
to impose exit fees, or a surcharge through distribution rates, it may 
consider whether to allow recovery of stranded costs from remaining 
customers.
    In situations in which a new wholesale entity obtains ownership or 
control of a franchise utility's transmission or distribution 
facilities, it is possible that State condemnation proceedings will 
provide a forum for a utility to seek recovery of any stranded costs. 
What types of payments, if any, do new municipal utilities make to 
prior service providers? Do these reimbursements allow for recovery of 
stranded generation costs? Is there variation among the States as to 
the legal ability of local entities to municipalize? Is there variation 
among the States as to the payments made by new municipal utilities to 
previous suppliers?
    There may, of course, be other mechanisms which States can use to 
determine whether to allow stranded cost recovery, and from whom to 
allow recovery. The Commission solicits comments on what other 
mechanisms might be used, and whether these mechanisms are adequate to 
deal with retail stranded costs.
    While our strong preference is for States to address retail 
stranded costs in whatever way they deem appropriate, we are willing to 
explore whether there are circumstances under which this Commission 
should consider claims for recovery of retail stranded costs. We will 
therefore present two proposed alternatives regarding retail stranded 
costs, and seek comment on both. However, as noted above, we express no 
preference in favor of either alternative.
    Under the first alternative, the proposed rule provides that if in 
a specific circumstance an appropriate State authority explicitly 
considers and deals with retail stranded costs and there is no conflict 
within or among State regulatory bodies regarding a State's disposition 
of the issue, this Commission will not entertain a request for retail 
stranded cost recovery. However, in the absence of a clear expression 
by an appropriate State authority that it has dealt with the issue, or 
in the event of a conflict between States60 or among State 
officials within a single state, the Commission proposes to entertain 
requests to recover retail stranded costs.
---------------------------------------------------------------------------

    \6\0For example, a conflict between States could result if State 
A's legislature allows a former retail customer to become a 
wholesale entity and the wholesale entity obtains transmission 
services so that it now takes only one half of its 100 MW load from 
its current utility supplier, which is a multistate utility. As a 
result of State A's action, the utility has retail stranded costs 
for 50 MW of generation. State A's commission allocates the 
utility's retail costs so that State A's retail customers are 
responsible for only one half of the stranded costs. State B's 
commission, the other State in which the utility operates, allocates 
the utility's retail costs so that none of the retail stranded costs 
are allocated to State B's retail customers.
---------------------------------------------------------------------------

    Under the second alternative, the proposed rule provides that the 
Commission will not entertain any request for recovery of retail 
stranded costs. Under this proposal, State or local authorities will be 
the only forum for addressing the issue. The aforementioned preference 
for States to address retail stranded costs in whatever way they deem 
appropriate, the need for regulatory certainty, and the States' 
knowledge and expertise regarding utility planning, investment and 
purchase activities arguably favors the second alterative. However, we 
solicit comment on whether there should be limited exceptions to the 
second alternative rule.
    As to both alternatives, the Commission solicits comments on the 
following questions.
    Are there circumstances under which it is not necessarily 
appropriate to defer to the States (e.g., where one State takes an 
action regarding retail stranded costs which has adverse consequences 
for another State)? Are there circumstances under which a State may not 
have an adequate mechanism for addressing retail stranded costs, and 
may want the Commission to provide a forum?
    If a State does not explicitly address stranded costs resulting 
from an action that allows retail customers to purchase from a supplier 
other than the franchised utility, should this Commission entertain 
requests from the utilities left with the stranded costs? Beyond 
silence from the State, are there other factors that the Commission 
should consider before accepting requests for retail stranded cost 
recovery? Specifically, would financial health and possible adverse 
impacts on reliability be sufficient reason for Federal action?
    The Commission further solicits comments on the following 
questions:
    (1) Does the Commission have legal authority to allow retail 
stranded costs in rates for wholesale transmission services? Should the 
Commission do so as a matter of policy? If so, which costs?
    (2) Does the Commission have legal authority to allow retail 
stranded costs in rates for retail transmission service? Should the 
Commission do so as a matter of policy? If so, which costs?
    (3) Does FPA section 212 give the Commission legal authority to 
allow recovery of retail stranded costs in rates for wholesale 
transmission services under FPA section 211?
    (4) Are there legal or policy reasons why in Scenario 2 (p. 15), 
the Commission should entertain requests for recovery of retail 
stranded costs in wholesale transmission rates, but should not 
entertain requests for recovery of retail stranded costs in retail 
transmission rates in Scenario 3 (section III.A.)?
    If the Commission determines that it will entertain requests for 
recovery of retail stranded costs through rates for wholesale or retail 
transmission in interstate commerce, the Commission proposes not to 
apply the ``reasonable expectation'' test used for wholesale stranded 
costs. To apply such a test would require a hearing on whether the 
franchise utility had a reasonable expectation, e.g., of having its 
franchise renewed, of municipalization occurring, or of a section 
212(h) non-sham wholesale entity being created by the State or local 
authority. No such test appears warranted because, in general, there is 
at the retail level an obligation to serve which is much stronger than 
any contractual obligation to serve at the wholesale level. The 
regulatory compact that has governed provision of retail service 
includes an implicit obligation to purchase concomitant with the 
utility's obligation to serve.
    The Commission requests comments on whether these assumptions are 
correct, i.e., is the reasonable expectation test inapplicable to 
retail stranded costs? Are there situations, for instance, in which 
utilities could have expected municipalization to occur based on an 
established course of dealing?
    Based on these assumptions, if the Commission determines that it 
will entertain requests for retail stranded costs, the proposed 
regulations for retail stranded costs would require only a showing of 
the dollar amounts that have been stranded as a result of the retail 
customer no longer taking bundled service from the franchise utility's 
system. In essence, this results in direct assignment of retail 
stranded costs to the former franchise customer. The Commission 
requests comments on how to determine retail stranded costs as a 
general matter. Is there a future time when a retail customer's action 
of leaving a local franchise no longer has any adverse economic 
consequences on the franchise utility? If so, what is an appropriate 
way to make such a determination?

IV. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA)61 requires that 
rulemakings contain either a description and analysis of the effect the 
proposed rule will have on small entities or a certification that the 
rule will not have a substantial economic effect on a substantial 
number of small entities. Because the entities that would be required 
to comply with the proposed rule are public utilities and transmitting 
utilities that do not fall within the RFA's definition of small 
entities,62 the Commission certifies that this rule will not have 
a ``significant economic impact on a substantial number of small 
entities.''
---------------------------------------------------------------------------

    \6\15 U.S.C. 601-612.
    \6\25 U.S.C. 601(3) (citing section 3 of the Small Business Act, 
15 U.S.C. 632). Section 3 of the Small Business Act defines a 
``small-business concern'' as a business which is independently 
owned and operated and which is not dominant in its field of 
operation. 15 U.S.C. 632(a).
---------------------------------------------------------------------------

V. Environmental Statement

    Commission regulations require the preparation of an environmental 
assessment or an environmental impact statement for any Commission 
action that may have a significant effect on the human 
environment.63 The Commission has categorically excluded certain 
actions from this requirement as not having a significant effect on the 
human environment.64 No environmental consideration is necessary 
for the promulgation of a rule that involves electric rate filings 
submitted by public utilities under sections 205 and 206 of the 
FPA.65 The proposed rule specifies the standards and procedures 
that public utilities must follow in a rate filing proceeding in order 
to seek recovery of stranded costs. Accordingly, no environmental 
consideration of the proposed rule is necessary.
---------------------------------------------------------------------------

    \6\3Regulations Implementing National Environmental Policy Act, 
FERC Statutes & Regulations 30,783 (1987), 52 FR 47897 (Dec. 17, 
1987).
    \6\418 CFR 380.4.
    \6\518 CFR 380.4(a)(15).
---------------------------------------------------------------------------

VI. Information Collection Statement

    The Office of Management and Budget's (OMB) regulations66 
require that OMB approve certain information and recordkeeping 
requirements imposed by an agency.
---------------------------------------------------------------------------

    \6\65 CFR 1320.13.
---------------------------------------------------------------------------

    The information collection requirements in the proposed regulations 
are contained in FERC-516, ``Electric Rate Filings'' (OMB approval No. 
1902-0096). The Commission uses the data collected in this information 
collection to carry out its responsibilities under Part II of the FPA. 
The Commission's Office of Electric Power Regulation uses the data to 
review electric rate filings. The data enable the Commission to examine 
and evaluate the utility's costs and rate of return.
    The Commission is submitting notification of this proposed rule to 
OMB. Interested persons may obtain information on the reporting 
requirements by contacting the Federal Energy Regulatory Commission, 
941 North Capitol Street, NE., Washington, DC 20426 [Attention: Michael 
Miller, Information Services Division, (202) 208-1415]. Comments on the 
requirements of the proposed rule can also be sent to the Office of 
Information and Regulatory Affairs of OMB [Attention: Desk Officer for 
Federal Energy Regulatory Commission].

VII. Public Comment Procedures

    The Commission invites comments on the proposed rule from 
interested persons. An original and 14 copies of written comments on 
the proposed rule must be filed with the Commission no later than 
September 9, 1994.
    The Commission will also permit interested persons to submit reply 
comments in response to the initial comments filed in this proceeding. 
Reply comments should be submitted no later than October 11, 1994.
    In addition, commenters are requested to submit a copy of their 
comments on a 3\1/2\ inch diskette in ASCII II format. All comments 
should be submitted to the Office of the Secretary, Federal Energy 
Regulatory Commission, 825 North Capitol Street, NE., Washington, DC 
20426, and should refer to Docket No. RM94-7-000.
    All written comments will be placed in the Commission's public 
files and will be available for inspection in the Commission's public 
reference room at 941 North Capitol Street, NE., Washington, DC, 20426, 
during regular business hours.

List of Subjects in 18 CFR Part 35

    Electric power rates, Electric utilities, Reporting and 
recordkeeping requirements.

    By direction of the Commission.
Lois D. Cashell,
Secretary.

    In consideration of the foregoing, the Commission proposes to amend 
Part 35, Chapter I, Title 18 of the Code of Federal Regulations, as set 
forth below.

PART 35--FILING OF RATE SCHEDULES

    1. The authority citation for Part 35 continues to read as follows:

    Authority: 16 U.S.C. 791a-825r, 2601-2645; 31 U.S.C. 9701; 42 
U.S.C. 7101-7352.

    2. Part 35 is amended by adding Sec. 35.26 consisting of paragraphs 
(a), (b), (c), and one of two proposed alternative paragraphs (d), to 
read as follows:


Sec. 35.26  Recovery of stranded costs by public utilities and 
transmitting utilities.

    (a) Purpose. This section establishes the standards that a public 
utility or transmitting utility must satisfy in order to recover 
stranded costs.
    (b) Definitions. (1) Wholesale stranded cost means any legitimate, 
prudent and verifiable cost incurred by a public utility or a 
transmitting utility to provide service to a wholesale requirements 
customer that subsequently becomes, in whole or in part, an unbundled 
transmission services customer of that public utility or transmitting 
utility.
    (2) Wholesale requirements customer means a customer for whom a 
public utility or transmitting utility provides by contract any portion 
of its bundled wholesale power requirements.
    (3) Wholesale transmission services has the same meaning as 
provided in section 3(24) of the Federal Power Act: the transmission of 
electric energy sold, or to be sold, at wholesale in interstate 
commerce.
    (4) Wholesale requirements contract means a contract under which a 
public utility or transmitting utility provides any portion of a 
customer's bundled wholesale power requirements.
    (5) Retail stranded cost means any legitimate, prudent and 
verifiable cost incurred by a public utility or transmitting utility to 
provide service to a retail franchise customer that subsequently 
becomes, in whole or in part, directly or indirectly, an unbundled 
transmission services customer of that public utility or transmitting 
utility.
    (6) Retail transmission services means the transmission of electric 
energy sold, or to be sold, in interstate commerce directly to a retail 
customer.
    (7) New contract means any contract executed after July 11, 1994.
    (8) Existing contract means any contract executed on or before July 
11, 1994.
    (c) Recovery of Wholesale Stranded Costs.
    (1) General requirement. A public utility or transmitting utility 
will be allowed to seek recovery of wholesale stranded costs only as 
follows:
    (i) No public utility or transmitting utility may seek recovery of 
wholesale stranded costs if such recovery is explicitly prohibited by a 
contract or settlement agreement, or by any power sales or transmission 
rate schedule or tariff.
    (ii) If wholesale stranded costs are associated with a new 
wholesale requirements contract containing an exit fee or other 
explicit stranded cost provision, and the seller under the contract is 
a public utility, the public utility may seek recovery of such costs, 
in accordance with the contract, through rates for electric energy 
under sections 205-206 of the FPA. The public utility may not seek 
recovery of such costs through any transmission rate for section 205 or 
211 transmission services.
    (iii) If wholesale stranded costs are associated with a new 
wholesale requirements contract, and the seller under the contract is a 
transmitting utility but not also a public utility, the transmitting 
utility may not seek an order from the Commission allowing recovery of 
such costs.
    (iv) If wholesale stranded costs are associated with an existing 
wholesale requirements contract, if the seller under such contract is a 
public utility, and if the contract does not contain an exit fee or 
other explicit stranded cost provision, the parties to the contract 
must make a good faith attempt to negotiate an explicit stranded cost 
amendment to the contract by [a date three years from the date a final 
rule is published in the Federal Register]. If the parties negotiate a 
proposed amendment, the public utility seller under the contract must 
file the proposed amendment under section 205 or 206 of the FPA no 
later than [the end of the three-year period]. If the parties do not 
negotiate an explicit stranded cost amendment, the public utility 
seller may unilaterally file a proposed stranded cost amendment no 
later than [the end of the three-year transition period]. In such case, 
the customer may propose an alternate amendment. The filing or proposal 
of such amendment(s) will not affect any contractual rights the 
customer may have to continue taking service beyond [the end of the 
three-year transition period].
    (v) If a customer under an existing wholesale requirements 
contract, prior to [the end of the three-year period], gives notice 
pursuant to the contract that it will no longer purchase requirements 
service under the contract but will purchase unbundled section 205 or 
section 211 transmission services from the selling utility in order to 
reach a different supplier of electric energy, and the transmission 
services will commence prior to [the end of the transition period], a 
public utility or transmitting utility may file by [the end of the 
transition period] a proposal to recover stranded costs in rates for 
the wholesale transmission services.
    (2) Evidentiary Demonstration for Wholesale Stranded Cost Recovery. 
A public utility or transmitting utility seeking to recover wholesale 
stranded costs in accordance with paragraphs (c)(1) (iv) and (v) of 
this section must demonstrate that:
    (i) it incurred stranded costs on behalf of its wholesale 
requirements customer based on an expectation that was reasonable when 
the costs were incurred that the customer's contract would be extended;
    (ii) the stranded costs are not more than the customer would have 
contributed to the utility had the customer remained a wholesale 
requirements customer of the utility; and
    (iii) it has and will take reasonable measures to mitigate stranded 
costs.
    (3) Rebuttable Presumption. If a public utility or transmitting 
utility seeks recovery of wholesale stranded costs associated with an 
existing contract, as permitted in paragraph(c)(1) of this section, and 
the existing contract contains a notice provision, there will be a 
rebuttable presumption that the utility had no reasonable expectation 
of continuing to serve the customer beyond the term of the notice 
provision.
    Alternative A:
    (d) Recovery of Retail Stranded Costs.
    (1) General requirement.
    A public utility or transmitting utility may seek to recover retail 
stranded costs through rates for wholesale or retail transmission 
services only if: (i) an appropriate State or local regulatory body has 
not explicitly considered and addressed retail stranded costs; or (ii) 
an appropriate State or local regulatory body has explicitly addressed 
stranded costs, but there is a conflict within or among State 
regulatory bodies regarding the State or local authority's disposition 
of the issue.
    (2) Evidentiary Demonstration Necessary for Retail Stranded Cost 
Recovery.
    A public utility or transmitting utility seeking to recover retail 
stranded costs must demonstrate that:
    (i) the stranded costs are not more than the customer would have 
contributed to the utility had the customer remained a retail customer 
of the utility; and
    (ii) it has and will take reasonable measures to mitigate stranded 
costs.
    Alternative B:
    (d) Recovery of Retail Stranded Costs.
    (1) General requirement.
    No public utility or transmitting utility may seek recovery of 
retail stranded costs from the Commission.

    [Note: The following appendix will not appear in the Code of 
Federal Regulations.]

Appendix

    For the ease of those submitting comments, the following is a 
compendium of the questions contained in the proposed rule:

Index of Questions

    1. What categories of costs, in addition to investment costs, 
should be eligible for stranded cost recovery? How should stranded 
costs be allocated to specific customers?
    2. The Commission invites comments on the direct assignment and 
alternative methods of stranded cost recovery. Would alternative 
methods, e.g., an access charge, give customers reasonable certainty 
on the scope of their stranded cost obligation more quickly than a 
direct assignment approach would, and thus expedite the transition 
to a more competitive wholesale market?
    3. To what extent is there or should there be a regulatory 
obligation to continue to serve requirements customers beyond the 
end of the contract term and the source of any such obligation? 
Should section 35.15 of the Commission's regulations, which concerns 
notice of termination, be deleted in its entirety, or only in 
certain circumstances (e.g., when the seller provides transmission 
access on a comparable basis to the seller's own uses of its 
system)?
    4. What types of contractual provisions (in addition to notice 
provisions), if any, might demonstrate a sufficient ``meeting of the 
minds'' between parties so that renegotiation of existing contracts 
should be barred? Should the proposed rules regarding existing 
contracts apply only to contracts between unaffiliated entities?
    5. Should the rebuttable presumption which would apply to 
contracts containing notice provisions also be applied to any 
contract entered into after the date of enactment of the Energy 
Policy Act, even though such contract does not contain an exit fee 
or other explicit stranded cost provision, or a notice provision?
    6. Should there be a transition period during which utilities 
may renegotiate their existing contracts? Should utilities or 
customers with Mobile-Sierra contracts be able to make unilateral 
filings or file complaints? Should the Commission make a Mobile-
Sierra public interest finding based on company-specific findings 
instead of generic industry-wide findings?
    7. What is the appropriate length for a transition period.
    8. The Commission requests that utility commenters include in 
their comments an estimate of the number of power sales contracts 
that they would seek to renegotiate to address stranded cost issues. 
How many of these contracts are silent on this question? How many 
have notice provisions, and of what duration? The Commission 
requests that responding utilities estimate the amount of stranded 
costs associated with such contracts, the relationship of the 
estimated stranded costs to the utility's total costs or revenues, 
and the potential cost shift to remaining customers.
    9. Should the limitations on recovery of stranded costs in 
wholesale transmission rates apply to all utilities, whether or not 
they currently have on file transmission tariffs containing stranded 
cost provisions?
    10. Should stranded cost recovery be different depending on 
whether transmission service is under section 205 or 211?
    11. In lieu of direct assignment, should utilities be able to 
seek a general surcharge to all of their transmission customers to 
cover the costs stranded by a departing customer?
    12. The Commission recognizes that stranded costs can occur when 
a customer fails to renew its requirements contract and, instead of 
obtaining unbundled transmission service from its former 
requirements supplier, obtains unbundled transmission service from 
another utility. We anticipate that in such a case any prudent costs 
that are stranded as a result of the customer's departure would be 
reallocated to remaining customers in the utility's next 
requirements rate case. This results in the departing customer 
bearing none of the costs which it may have caused to be stranded. 
How should the Commission deal with such costs?
    13. The Commission invites comments on all aspects of the 
evidence necessary to demonstrate a reasonable expectation of 
continuing to serve a customer beyond the period provided for in a 
notice provision. Should there be a rebuttable presumption that the 
existence of a notice provision means the utility had no reasonable 
expectation of serving the customer beyond the end of that notice 
period? Should we adopt a minimum notice period that would provide a 
presumption that the utility had no reasonable expectation of 
continuing to provide service beyond the notice period, e.g., a 
five-year notice period?
    14. In seeking stranded cost recovery, a utility must show that 
the stranded costs it incurred are not more than the customer would 
have contributed to the utility had the customer remained a 
wholesale requirements customer of the utility. This required 
evidentiary demonstration concerns the reasonable compensation for 
stranded costs. We request comments on what is reasonable 
compensation:
    (a) Would it be reasonable for the Commission to limit the 
annual amount of stranded costs that a power customer must pay to be 
no more than what the customer would have contributed to the 
utility's capital (customer revenues minus variable costs), or would 
some alternative concept be appropriate?
    (b) Would it be reasonable for the Commission to limit the 
future time period over which a customer's liability for stranded 
costs would be determined? That is, the present value of the 
customer's liability could be the discounted value of an annual 
amount for a limited time period. This total amount could be paid in 
a lump sum or over any mutually agreeable period. The limited time 
period over which the customer's liability is determined could be 
called the reasonable compensation period. If so:
    (1) Would the Commission apply the reasonable compensation 
period to assess the reasonableness of an exit fee in a revised 
power contract as well as a transmission surcharge?
    (2) How long should such a time period be, e.g., five years or 
ten years or some other period; and
    (3) When should such a period begin, e.g., if five years is a 
reasonable time over which a customer is liable for stranded costs, 
does the five-year period begin when the Commission adopts a final 
rule or when the utility files for stranded cost recovery in the 
future?
    (c) Should the length of a reasonable compensation period be 
based on what would constitute a reasonable notice period in power 
contracts or would some other concept be appropriate?
    (d) Establishing a reasonable compensation period effectively 
would also establish a future date beyond which existing power 
customers would no longer have any liability for stranded costs, 
either as an exit fee in revised power contracts or as a surcharge 
on transmission rates. Would this be appropriate? In responding, 
commenters should keep in mind that the concept of a reasonable time 
period for computing stranded cost liability is independent of the 
proposed three year recontracting period for which the Commission is 
also requesting separate comments.
    15. Should the Commission require that a public utility 
demonstrate reasonable measures to mitigate stranded costs? What 
should such measures include?
    16. How should the Commission determine the amount of stranded 
costs that the departing customer may be liable to pay?
    17. What are reasonable notice periods for requirements 
contracts?
    18. What types of payments, if any, do new municipal utilities 
make to prior service providers? Do these reimbursements allow for 
recovery of stranded generation costs? Is there variation among the 
States as to the legal ability of local entities to municipalize? Is 
there variation among the States as to the payments made by new 
municipal utilities to previous suppliers?
    19. What mechanisms can States use to allow retail stranded cost 
recovery? Are these mechanisms adequate to deal with retail stranded 
costs?
    20. The Commission solicits comments on the two proposed 
alternatives regarding retail stranded costs. The first proposed 
alternative provides that if in a specific circumstance an 
appropriate State authority explicitly considers and deals with 
retail stranded costs and there is no conflict within or among State 
regulatory bodies regarding a State's disposition of the issue, this 
Commission will not entertain a request for retail stranded cost 
recovery. However, in the absence of a clear expression by an 
appropriate State authority that it has dealt with the issue, or in 
the event of a conflict between States or among State officials 
within a single State, the Commission proposes to entertain requests 
to recover retail stranded costs. Is this proposal reasonable? Is it 
preferable to the second alternative proposal?
    21. Should there be limited exceptions to the second alternative 
rule?
    22. As to both alternatives, the Commission further solicits 
comments on the following questions.
    Are there circumstances under which it is not necessarily 
appropriate to defer to the States (e.g., where one State takes an 
action regarding retail stranded costs which has adverse 
consequences for another State)? Are there circumstances under which 
a State may not have an adequate mechanism for addressing retail 
stranded costs, and may want the Commission to provide a forum?
    If a State does not explicitly address stranded costs resulting 
from an action that allows retail customers to purchase from a 
supplier other than the franchised utility, should this Commission 
entertain requests from the utilities left with the stranded costs? 
Beyond silence from the State, are there other factors that the 
Commission should consider before accepting requests for retail 
stranded cost recovery? Specifically, would financial health and 
possible adverse impacts on reliability be sufficient reason for 
Federal action?
    The Commission further solicits comments on the following 
questions:
    (1) Does the Commission have legal authority to allow retail 
stranded costs in rates for wholesale transmission services? Should 
the Commission do so as a matter of policy? If so, which costs?
    (2) Does the Commission have legal authority to allow retail 
stranded costs in rates for retail transmission service? Should the 
Commission do so as a matter of policy? If so, which costs?
    (3) Does FPA section 212 give the Commission legal authority to 
allow recovery of retail stranded costs in rates for wholesale 
transmission services under FPA section 211?
    (4) Are there legal or policy reasons why in Scenario 2, the 
Commission should entertain requests for recovery of retail stranded 
costs in wholesale transmission rates, but should not entertain 
requests for recovery of retail stranded costs in retail 
transmission rates in Scenario 3?
    23. Are the Commission's assumptions concerning the reasonable 
expectations of utilities with respect to retail customers correct, 
i.e., is the reasonable expectation test inapplicable to retail 
stranded costs? Are there situations, for instance, in which 
utilities could have expected municipalization to occur based on an 
established course of dealing?
    24. The Commission requests comments on how to determine retail 
stranded costs as a general matter. Is there a future time when a 
retail customer's action of leaving a local franchise no longer has 
any adverse economic consequences on the franchise utility? If so, 
what is an appropriate way to make such a determination?

[FR Doc. 94-16626 Filed 7-8-94; 8:45 am]
BILLING CODE 6717-01-P