[Federal Register Volume 63, Number 230 (Tuesday, December 1, 1998)]
[Notices]
[Pages 66158-66165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31959]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission
[Docket No. RM99-2-000]


Regional Transmission Organizations, Notice of Intent To Consult 
Under Section 202(a)

November 24, 1998.
AGENCY: Federal Energy Regulatory Commission.

ACTION: Notice of Intent to Consult with State Commissions.

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SUMMARY: The Federal Energy Regulatory Commission (Commission) intends 
to consult with State commissions for the purpose of affording them a 
reasonable opportunity to present their views with respect to the 
Commission's use of authority under section 202(a) of the Federal Power 
Act.

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 the Public Reference Room 
at 888 First Street, N.E., Room 2A, Washington, D.C. 20426.
    The Commission Issuance Posting System (CIPS) provides access to 
the texts of formal documents issued by the Commission. CIPS can be 
accessed via Internet through FERC's Homepage (http://www.ferc.fed.us) 
using the CIPS Link or the Energy Information Online icon. The full 
text of this document will be available on CIPS in ASCII and 
WordPerfect 6.1 format. CIPS is also available through the Commission's 
electronic bulletin board service at no charge to the user and may be 
accessed using a personal computer with a modem by dialing 202-208-
1397, if dialing locally, or 1-800-856-3920, if dialing long distance. 
To access CIPS, set your communications software to 19200, 14400, 
12000, 9600, 7200, 4800, 2400, or 1200 bps, full duplex, no parity, 8 
data bits and 1 stop bit. User assistance is available at 202-208-2474 
or by E-mail to [email protected].
    This document is also available through the Commission's Records 
and Information Management System (RIMS), an electronic storage and 
retrieval system of documents submitted to and issued by the Commission 
after November 16, 1981. Documents from November 1995 to the present 
can be viewed and printed. RIMS is available in the Public Reference 
Room or remotely via Internet through FERC's Homepage using the RIMS 
link or the Energy Information Online icon. User assistance is 
available at 202-208-2222, or by E-mail to [email protected].
    Finally, the complete text on diskette in WordPerfect format may be 
purchased from the Commission's copy contractor, RVJ International, 
Inc. RVJ International, Inc. is located in the Public Reference Room at 
888 First Street, N.E., Washington, D.C. 20426.
    As part of a broader inquiry concerning the Commission's policies 
on independent system operators (ISOs) and other regional transmission 
organizations (RTOs) in the electric utility industry,1 the 
Commission is considering whether and how to use its authority under 
section 202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a) 
(1994), which was recently delegated to the Commission by the Secretary 
of Energy.2 As a first step in that process, the Commission 
gives notice of its intent to initiate a consultation process with 
State commissions pursuant to section 202(a). The purpose of this 
initial consultation is to afford State commissions a reasonable 
opportunity to present their views and recommendations with respect to 
dividing the country into regional districts for development of 
independent regional transmission organizations.
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    \1\ See Midwest Independent Transmission System Operator, Inc., 
84 FERC para. 61,231 at 62,142 (1998), reh'g pending (Midwest ISO).
    \2\ A copy of section 202(a) is attached to this notice and will 
also be published in the Federal Register.
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    The Commission intends initially to seek the views and 
recommendations of State commissions on the issues of what criteria 
should be used to establish regional boundaries for RTOs, and what 
should be the appropriate role of States in the formation and 
governance of RTOs, in the event that the Commission decides to 
exercise its authority. We will do so through one or more conferences 
to be held in January or early February 1999. After these conferences, 
there will be additional consultation, during which the Commission will 
solicit and consider the views of the States, and others, in a 
rulemaking or other generic proceeding on RTOs. Among the issues to be 
examined then will be whether to exercise section 202(a) authority to 
establish regional boundaries for RTOs.

[[Page 66159]]

Background

    In Order Nos. 888 3 and 889,4 the Commission 
required all public utilities that own, operate or control interstate 
transmission facilities to provide open access transmission services 
and to separate their transmission operations functions from their 
wholesale power marketing functions. The Commission took this step to 
``remedy undue discrimination in access to monopoly owned transmission 
lines'' in order to ``remove impediments to competition in the 
wholesale bulk power marketplace and to bring more efficient, lower 
cost power to the Nation's electricity consumers.'' 5 During 
the course of that proceeding, the Commission received comments urging 
it to require generation divestiture or structural institutional 
arrangements such as regional ISOs to better assure non-discrimination. 
The Commission responded at that time that, while it believed that ISOs 
had the potential to provide significant benefits, efforts to remedy 
undue discrimination should begin by requiring the less intrusive 
functional unbundling approach.6 Order No. 888 stated:

    \3\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, 61 FR 21,540 (May 10, 1996), FERC Stats. & Regs. 
para. 31,036 (1996), order on reh'g, Order No. 888-A, 62 FR 12,274 
(Mar. 14, 1997), FERC Stats. & Regs. para. 31,048 at 30,278-79 
(1997), order on reh'g, Order No. 888-B, 62 FR 64688 (Dec. 9, 1997) 
81 FERC para. 61,248 (1997), order on reh'g, Order No. 888-C, 82 
FERC para. 61,046 (1998).
    \4\ Open Access Same-Time Information System and Standards of 
Conduct, Order No. 889, 61 FR 21737 (May 10, 1996), FERC Stats. & 
Regs. para. 31,035 (1996); order granting request for clarification, 
62 FR 610 (Jan. 1, 1997), 77 FERC para. 61,335 (1996); order on 
reh'g, Order No. 889-A, 62 FR 12484 (Mar. 14, 1997), FERC Stats. & 
Regs. para. 31,049 (1997); and order denying reh'g, Order No. 889-B, 
62 FR 64715 (Dec. 9, 1997), 81 FERC para. 61,253 (1997).
    \5\ Order No. 888, FERC Stats. & Regs. at 31,634.
    \6\ Functional unbundling requires the separation of 
transmission system functions and wholesale generation marketing 
functions, and a code of conduct to define impermissible contact 
between generation and transmission personnel. Under functional 
unbundling, a public utility must: (1) take transmission services 
under the same tariff of general applicability as do others; (2) 
state separate rates for wholesale generation, transmission, and 
ancillary services; and (3) rely on the same electronic information 
network that its transmission customers rely on to obtain 
information about its transmission system when buying or selling 
power. See Order No. 888, FERC Stats. & Regs. at 31,654-55.
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    [W]e see many benefits in ISOs, and encourage utilities to 
consider ISOs as a tool to meet the demands of the competitive 
marketplace.
    As a further precaution against discriminatory behavior, we will 
continue to monitor electricity markets to ensure that functional 
unbundling adequately protects transmission customers. At the same 
time, we will analyze all alternative proposals, including formation 
of ISOs, and, if it becomes apparent that functional unbundling is 
inadequate or unworkable in assuring non-discriminatory open access 
transmission, we will reevaluate our position and decide whether 
other mechanisms, such as ISOs, should be required.\7\

    \7\ Order No. 888, FERC Stats. & Regs. at 31,655.
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    Order No. 888 also set forth eleven principles that would be used 
to assess ISO proposals that may be submitted to the 
Commission.8 Since Order No. 888 was issued, the Commission 
conditionally approved proposals for the establishment of five ISOs. 
These are the California ISO,9 the PJM ISO,10 ISO 
New England,11 the New York ISO,12 and the 
Midwest ISO.13 In addition, the Texas Commission has ordered 
an ISO for the Electric Reliability Council of Texas 
(ERCOT).14 These organizations, and others rumored to be in 
development, vary widely with respect to their operational 
responsibilities, geographic scope, governance, and structure.
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    \8\ Id. at 31,730.
    \9\ Pacific Gas & Electric Company, et al., 77 FERC para. 61,204 
(1996), order on reh'g, 81 FERC para. 61,122 (1997).
    \10\ Pennsylvania-New Jersey-Maryland Interconnection, et al., 
81 FERC para. 61,257 (1997), reh'g pending.
    \11\ New England Power Pool, 79 FERC para. 61,374 (1997), order 
on reh'g, 85 FERC para. 61,242 (1998) (order conditionally 
authorizing ISO New England); New England Power Pool, 83 FERC para. 
61,045 (1998), reh'g pending (order on NEPOOL tariff and 
restructuring).
    \12\ Central Hudson Gas & Electric Corporation, et al., 83 FERC 
para. 61,352 (1998), reh'g pending.
    \13\ Midwest ISO, 84 FERC para. 61,231 (1998).
    \14\ See 16 Texas Administrative Code Sec. 23.67(p).
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    On April 15-16, 1998, the Commission held a public conference in 
Washington, D.C., in Docket No. PL98-5-000, to examine the future of 
ISOs in administering the electric transmission grid on a regional 
basis. The Washington conference highlighted the industry's change in 
thinking about types of regional transmission organizations other than 
ISOs that the Commission should consider. As a follow-up to the 
Washington conference, the Commission held seven regional conferences 
at locations around the country between May 28 and June 8, 1998. These 
regional conferences focused on specific regional characteristics and 
institutional factors that bear on the formation of regional 
transmission organizations. As a result of these conferences, the 
Commission received numerous oral and written comments on the 
appropriate size, scope, organization and functions of regional 
transmission organizations.
    In our recent order conditionally approving the Midwest ISO, the 
Commission noted that many issues had been raised in that proceeding 
about the proper size and configuration of the ISO; the relative merits 
of ISOs, transcos, and other possible forms of regional organization; 
how much control the regional entity should have over various 
facilities, and other issues. The Commission stated that it would not 
attempt to resolve industry-wide issues in that proceeding, but that it 
would address such issues in a rulemaking or other generic proceeding 
in the future.15
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    \15\ Midwest ISO, 84 FERC at 62,142. The Commission also stated 
therein, among other things, that ``at this early stage in the 
restructuring of the U.S. electric power industry'' it believes that 
there is no ``single structural or operational arrangement that must 
apply universally to all utilities seeking to form regional 
transmission entities'' and that the better approach ``at this 
time'' is ``to encourage and accommodate regional experimentation.'' 
Id. The Commission further stated that coordination in the public 
interest is best served if a proposed transmission entity is as 
large as possible. Id. at 62,145.
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    On October 1, 1998, the Secretary of Energy delegated his authority 
under section 202(a) of the FPA to the Commission. The Secretary stated 
that section 202(a) ``provides DOE with sufficient authority to 
establish boundaries for Independent System Operators (ISOs) or other 
appropriate transmission entities.'' 16
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    \16\ 63 FR 53889 (Oct. 7, 1998).
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Discussion

    Under section 202(a) of the FPA, ``the Commission is empowered and 
directed to divide the country into regional districts for the 
voluntary interconnection and coordination of facilities for the 
generation, transmission, and sale of electric energy.'' The purpose of 
this division into regional districts is for ``assuring an abundant 
supply of electric energy throughout the United States with the 
greatest possible economy and with regard to the proper utilization and 
conservation of natural resources.'' Section 202(a) states that it is 
``the duty of the Commission to promote and encourage such 
interconnection and coordination within each such district and between 
such districts.''
    The Commission believes that an abundant supply of electric energy 
throughout the United States with the greatest possible economy can be 
best achieved with fully competitive wholesale power markets and open 
and non-discriminatory access to interstate transmission facilities. 
Order No. 888 has laid the necessary predicate for competition but, 
after more than two years of experience, the requirements of Order Nos. 
888 and 889 may not alone

[[Page 66160]]

be sufficient to accomplish a completely competitive market. The 
Commission therefore is considering whether the goals of full 
competition and non-discriminatory access can be achieved in the 
absence of broad participation by transmission-owning electric 
utilities in regional transmission organizations.
    The Commission has identified in earlier orders several issues 
inherent in the present system that may interfere with the development 
of fully competitive markets. These include lack of sufficient 
separation between transmission and merchant functions, multiple 
pancaked transmission rates within a region, congestion management 
issues, loop flow issues, the complexities of current transmission 
planning, and generation market power that results when market size is 
constricted by transmission constraints.17 As the Commission 
has previously explained, the establishment of and participation in 
properly structured regional transmission organizations can foster 
fully competitive markets. To be effective, the Commission believes 
that these regional transmission organizations must, at a minimum, have 
adequate operational authority, ensure comparable treatment for all 
transmission users, address loop flow issues, eliminate pancaked 
transmission rates, manage short-term transmission reliability, manage 
congestion, and plan transmission expansion.18
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    \17\ See, e.g., Order No. 888, FERC Stats. & Regs. para. 31,036 
at 31,730-32; Order No. 888-A, FERC Stats. & Regs. para. 31,048 at 
30,247-51; Notice of Conference, Inquiry Concerning the Commission's 
Policy on Independent System Operators, Docket No. PL98-5-000; 
Louisville Gas and Electric Company, et al., 82 FERC para. 61,308 at 
62,222 (1998); Midwest ISO at 62,142, 62,145, 62,153-165.
    \18\ Id.
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    The Commission does not have preconceived notions as to what types 
of structures would be optimal for such regional transmission 
organizations, and they may in fact vary from region to region. ISOs 
are one type of regional institution, but there are other ways that 
interests in generation and transmission can be separated. These may 
include the creation of separate transmission companies.
    Section 202(a) requires that before the Commission exercises its 
authority to establish regional districts and to fix or modify their 
boundaries:

    The Commission shall give notice to the State commission of each 
State situated wholly or in part within such district, and shall 
afford each such State commission reasonable opportunity to present 
its views and recommendations, and shall receive and consider such 
views and recommendations.

    Accordingly, the Commission intends to hold one or more conferences 
during January or early February 1999 for the purpose of beginning the 
consultative process with the State commissions. The Commission 
currently envisions that one representative from each State commission 
would attend and discuss questions that would include, but not 
necessarily be limited to, the following:
    (1) What criteria and policy considerations should be used to 
establish the boundaries for effective RTOs if the Commission later 
decides to do so?
    (2) Are there factors that make it appropriate for the utilities in 
your state to belong in a specific region?
    (3) What is the appropriate role of the States in the formation of 
RTOs?
    (4) What is the appropriate role of the States in the governance of 
RTOs?
    This notice is being given at this early time to permit interested 
State commissions sufficient time to consult with each other or with 
the industry on these technical matters. Details about the specific 
time, place, and format of this conference (or conferences) will be 
announced in the future.
    Finally, as noted above, the Commission views the consultation with 
State commissions as an initial step in a broader inquiry on RTOs. If 
the Commission determines there is a need to establish regional 
boundaries for RTOs to further the goals of full competition and non-
discriminatory access, it will do so as part of a rulemaking or other 
generic proceeding on RTOs. That proceeding will afford State 
commissions and others an opportunity to comment on the broader policy 
issues involved in creating RTOs, as well as specific regional 
boundaries.

    By direction of the Commission. Commissioner Bailey concurred in 
part and dissented in part with a separate statement attached. 
Commissioner Breathitt concurred with a separate statement attached.
David P. Boergers,
Secretary.
    Section 202(a) of the Federal Power Act, 16 U.S.C. Sec. 824a(a) 
(1994).

Interconnection and Coordination of Facilities; Emergencies; 
Transmission to Foreign Countries

    Sec. 202. (a) For the purpose of assuring an abundant supply of 
electric energy throughout the United States with the greatest 
possible economy and with regard to the proper utilization and 
conservation of natural resources, the Commission is empowered and 
directed to divide the country into regional districts for the 
voluntary interconnection and coordination of facilities for the 
generation, transmission, and sale of electric energy, and it may at 
any time thereafter, upon its own motion or upon application, make 
such modifications thereof as in its judgment will promote the 
public interest. Each such district shall embrace an area which, in 
the judgment of the Commission, can economically be served by such 
interconnected and coordinated electric facilities. It shall be the 
duty of the Commission to promote and encourage such interconnection 
and coordination within each such district and between such 
districts. Before establishing any such district and fixing or 
modifying the boundaries thereof the Commission shall give notice to 
the State commission of each State situated wholly or in part within 
such district, and shall afford each such State commission 
reasonable opportunity to present its views and recommendations, and 
shall receive and consider such views and recommendations.

Regional Transmission Organizations

[Docket No. RM99-2-000]

    Issued: November 24, 1998.

BAILEY, Commissioner, concurring in part and dissenting in part

    I support the initiation of a consultation process with State 
commissions. I do not support, however, at this time the exercise of 
whatever authority we possess under section 202(a) of the Federal Power 
Act, 16 U.S.C. Sec. 824a(a) (1998), to divide up the country and to 
establish regional boundaries for the development of regional 
transmission organizations (RTOs). For these reasons, I respectfully 
concur in part and dissent in part with today's notice.
    Today's notice does not decide the threshold question of whether 
the Commission should do anything more at this time other than to 
consult with State commissions. The notice is clear in its very first 
sentence that the Commission has not decided whether and how to use its 
authority under newly-delegated section 202(a) to establish regional 
boundaries for RTOs. In addition, the notice does not limit the scope 
of State consultation. While the notice articulates a number of 
questions for State consideration, focusing on the criteria that the 
Commission should employ in establishing regional boundaries for RTOS, 
those questions are decidedly inclusive rather than exclusive.
    I have not reached any conclusions as to the issue of whether the 
Commission, acting pursuant to section 202(a), needs to establish 
regional districts to further the goals of full competition and non-
discriminatory access. I am interested in hearing from the States as to 
whether it is imperative for the Commission to take this aggressive and 
immediate step. My own view is that after two years of operational 
experience under the procedures of Order Nos. 888 and 889, less 
aggressive steps could be pursued.

[[Page 66161]]

    As the notice indicates, in Order Nos. 888 and 889, the Commission 
purposefully favored functional unbundling of utility operations over 
more dramatic structural separation. I understand that transmission 
customers have challenged whether transmission providers are continuing 
to offer their wholesale merchant function or affiliates with 
preferential access to transmission and transmission information. But I 
am not convinced that functional unbundling, backed by the Commission's 
vigilance and commitment in responding to customer complaints, is 
ineffectual in deterring and detecting preferential access and undue 
discrimination.
    However, as events in the last year have demonstrated, transmission 
providers are increasingly reaching the conclusion that competitive 
market forces--as opposed to Commission directive--favor some type of 
structural disaggregation. The Commission has acted on a number of 
recent filings that seek Commission authorization for the divestiture 
of generation assets. The Commission also is aware of a number of 
recent proposals to place transmission assets in the control and 
operation of a separate regional transmission entity (going under 
various names and forms).
    I continue to encourage all of these undertakings, and I do not 
want to see these efforts stymied awaiting the outcome of our process. 
I am pleased to see that utilities are voluntarily agreeing to go 
beyond the directions of Order Nos. 888 and 889. I expect these types 
of voluntary undertakings to increase in the future, as utilities 
increasingly come to the conclusion that they can best respond to 
competitive market pressures by transforming themselves into 
generation- or transmission-only entities, thus providing the type of 
structural separation that better protects against undue discrimination 
or preference in the provision of transmission services. I am wary of 
Commission action that might act to undermine the initiative of 
utilities to come forward with their own voluntary proposals.
    Moreover, I am not convinced that the Commission, should it decide 
to provide greater guidance and prescription as to regional or 
unbundling filings, necessarily must proceed to an action pursuant to 
this newly-delegated section 202(a) authority. I am willing to commit 
to some type of generic proceeding, as I believe that it is in the 
public interest to do more to encourage the filing of regional 
transmission entities that enhance competition and offer improvements 
with respect to pricing, reliability, and market monitoring. I 
understand that voluntary efforts to promote and develop these type of 
regional entities have stalled, or have failed to commence, in many 
parts of the country. I am willing to provide Commission instruction on 
the subject, beyond that already found in Order No. 888 and our ISO 
orders, to jump start dormant or otherwise lagging discussions on the 
subject.
    But why must that instruction necessarily come in the form of a 
generic initiative intended to result in the formation of regional 
districts, encompassing all regions of the country? While today's 
notice is drafted very carefully, I feel there is a strong bias in 
favor of the Commission's exercising its section 202(a) authority--
whatever that entails--and establishing regional boundaries and 
districts in which all public utilities will be urged, subtlely or more 
overtly, to join. I am not endorsing such a process, especially when I 
do not know where that process is heading. I want the States to answer 
that threshold question for me.
    At this juncture, I believe that the Commission is endorsing a 
process that is among the most aggressive it could have chosen to 
encourage the formation of RTOs. There are a number of alternatives to 
consider, and I urge the States to consider and consult with us as to 
whether less aggressive steps can be taken by the Commission to 
encourage the formation of ISOs.
    There are other options the Commission could consider in 
encouraging the formation of RTOs. I enumerate them below, proceeding 
from the most mild and passive to the most aggressive option. Of 
course, there are numerous variations on these options for us all to 
consider.
    First, the Commission could issue nothing in this docket. It could 
simply provide generic instruction in the context of its review of the 
filings it receives proposing ISOs, transcos, and related structures. 
In the Midwest ISO proceeding, for example, in an order issued only two 
months ago, the Commission, noting the early stage of restructuring of 
the U.S. electric power industry, proceeded very cautiously and 
refrained from endorsing any particular ISO model or ideal.1
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    \1\ See Midwest Independent Transmission System Operator, 84 
FERC para. 61,231 at 62,142 (1998), reh'g pending.
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    Second, the Commission could issue a non-binding statement of 
Commission policy indicating more proactively what it is seeking when 
it receives and reviews a voluntary utility-specific or region-specific 
filing. This would provide badly-needed guidance to utilities which are 
now uncertain as to the size and configuration, for example, of any 
regional entity they propose.
    Third, the Commission could do more to encourage the voluntary 
filing of RTO initiatives. Specifically, it could issue a policy 
statement or rulemaking that encourages voluntary regional filings that 
satisfy certain minimum criteria. Or, in addition to such minimum 
criteria (or ``lowest common denominators''), the Commission could 
articulate various incentives encouraging utilities to participate 
actively in RTOs--such as transmission pricing or rate of return 
incentives.
    Fourth, moving to the more aggressive of options, the Commission 
could require utility participation in RTOs, establishing basic 
criteria but leaving many or most of the details for the utility 
participants themselves. In other words, the Commission could let the 
participants decide for themselves, in consultation with appropriate 
state officials, how best to comply with Commission criteria and 
mandates.
    Fifth, the Commission could issue a rulemaking that not only 
requires participation in RTOs, but also involves the Commission in the 
setting and review of regional boundaries. Such a process could involve 
the invocation of section 202(a) authority in combination with the 
Commission's obligation under sections 205 and 206 of the Federal Power 
Act to act to ensure against undue discrimination and preference in the 
provision of jurisdictional services.
    Today's notice, according to my reading, places the Commission 
solidly on steps 4 and 5. Since the Commission is initiating a 
consultative process, I ask the States to offer their advice as to how 
aggressive a posture the Commission should assume.
    From a policy perspective, I personally much prefer providing 
incentives to encourage utilities to voluntarily step forward in 
promoting the development of regional entities. I am very wary of 
sitting here in Washington, D.C., and acting as a central planner with 
a large map of the utility grid on my wall, with a magic marker at my 
disposal. The competitive evolution of the industry has been very 
dramatic and is ongoing and quite fluid. I am exceedingly uncomfortable 
dictating to utilities how best to configure the industry in order to 
best take advantage of competitive opportunities, or how best to 
alleviate concern for unfair competitive advantages. Despite the expert 
advice of this Commission's staff, I believe that I am not situated in 
as good a position as

[[Page 66162]]

the utilities we regulate in determining the map and boundaries of 
utility companies, acting alone or in concert with other utilities, 
operating in the future.
    From a legal perspective, I have many questions as to the 
legitimacy of any generic Commission action that forces utilities, 
overtly or subtlely, into regional districts of our choosing. This is a 
difficult matter. Neither the Department of Energy nor the Commission 
has exercised section 202(a) authority to divide the country into 
regional districts. Moreover, the case law and legislative history on 
this point are obscure, and provide no definitive judgment as to the 
extent of the Commission's authority to encourage or compel utility 
participation in regional districts.
    In a separate attachment, I lay out for the interested reader my 
understanding of relevant legislative history and precedent. It is my 
opinion that while the Commission can act affirmatively to encourage, 
promote and supervise utility participation in regional districts, it 
lacks the power to compel participation. Rather, Congress left it, in 
the language of the legislative history of section 202(a), to the 
``enlightened self-interest'' of utilities to work cooperatively in the 
advancement of the cause of utility interconnection and coordination. I 
think the Commission should work to better ``enlighten'' utilities why 
it may be in their best economic self-interest to cooperate with their 
neighbors in advancing regional solutions to lingering competitive 
problems, rather than adopt a more heavy-handed approach.
    While today's notice has compelled me to lay out my views in as 
comprehensive a manner as possible, I do appreciate its provisions to 
the extent the notice stops short of endorsing any one model of 
regional cooperation. I certainly agree that there are a number of 
types of structures that, depending on circumstances, might be optimal 
for a particular RTO. I leave it to individual utilities to decide for 
themselves whether, if they decide to proceed, a classic ISO structure 
best suits their needs, or whether a separate transmission company or 
other structure may be most appropriate.
    For all of these reasons, I concur with today's notice to the 
extent it initiates a process allowing for consultation with the States 
as to how best to proceed to encourage utility participation in 
regional groupings. I dissent with today's notice to the extent it can 
be perceived as formally initiating a process intended to lead to the 
creation of regional districts, and to the extent this process might 
undermine the ability of utilities to determine for themselves how best 
to respond to emerging competitive opportunities and challenges.
Vicky A. Bailey,
Commissioner.

Attachment to Commissioner Bailey's Concurrence in Part/Dissent in 
Part

    Presented below is the text and legislative history of section 
202(a) of the Federal Power Act (FPA), 16 U.S.C. Sec. 824a(a) (1994), 
as well as a brief discussion as to how it has been administered by the 
Department of Energy (DOE) and the Federal Energy Regulatory 
Commission. Relevant case law and Commission precedent, adding context 
to section 202(a), follows.
    This analysis has been prepared entirely by the Office of 
Commissioner Bailey. It is intended to further explain her 
interpretation of the scope of section 202(a).

The Statute

    Section 202(a) reads in its entirety as follows:

(a) Regional districts; establishment; notice to State commissions

    For the purpose of assuring an abundant supply of electric 
energy throughout the United States with the greatest possible 
economy and with regard to the proper utilization and conservation 
of natural resources, the Commission is empowered and directed to 
divide the country into regional districts for the voluntary 
interconnection and coordination of facilities for the generation, 
transmission, and sale of electric energy, and it may at any time 
thereafter, upon its own motion or upon application, make such 
modifications thereof as in its judgment will promote the public 
interest. Each such district shall embrace an area which, in the 
judgment of the Commission, can economically be served by such 
interconnected and coordinated electric facilities. It shall be the 
duty of the Commission to promote and encourage such interconnection 
and coordination within each such district and between such 
districts. Before establishing any such district and fixing or 
modifying the boundaries thereof the Commission shall give notice to 
the State commission of each State situated wholly or in part within 
such district, and shall afford each such State commission 
reasonable opportunity to present its views and recommendations, and 
shall receive and consider such views and recommendations.

    Broken down into its most important constituent parts, section 
202(a):

    (1) ``empowers'' and ``directs'' the Commission ``to divide the 
country into regional districts for the voluntary interconnection 
and coordination of facilities;''
    (2) obligates the Commission ``to promote and encourage such 
interconnection and coordination within each such district and 
between such districts;'' and
    (3) obligates the Commission to work in concert with affected 
states prior to ``establishing any such district and fixing or 
modifying the boundaries thereof.''

    Section 202(a) is part of a more comprehensive section of the 
Federal Power Act--section 202, 16 U.S.C. Sec. 824a (1994)--entitled 
``Interconnection and coordination of facilities; emergencies; 
transmission to foreign countries.'' Other subsections of section 202 
deal with: (1) Commission-directed interconnections in certain limited 
circumstances (section 202(b)); (2) Commission-directed temporary 
interconnections in emergency circumstances (sections 202 (c)-(d)); (3) 
limitations on the transmission or sale of electricity to or from 
foreign countries (Canada and Mexico) (sections 202 (e)-(f)); and (4) 
utility reports to the Commission and contingency plans in times of 
electricity shortages.

Legislative History

    There is little legislative history that illuminates the precise 
meaning of section 202(a). The single best piece of legislative history 
that is particular to section 202(a) focuses on the ``enlightened self-
interest'' of utilities and Congress' preference for voluntary 
coordination and interconnection:

    Under this subsection the Commission would have authority to 
work out the ideal utility map of the country and supervise the 
development of the industry toward that ideal. The committee is 
confident that enlightened self-interest will lead the utilities to 
cooperate with the commission and with each other in bringing about 
the economies which can alone be secured through the planned 
coordination which has long been advocated by the most able and 
progressive thinkers on the subject.

Senate Report No. 621 (Senate Committee on Interstate Commerce), 74th 
Cong., 1st Sess. (1935) at p. 49.

    Courts reviewing this piece of legislative history appear to have 
reached the conclusion that Congress, in enacting section 202(a) (and 
related subsections) in 1935, was motivated by a desire to leave the 
coordination and joint planning of utility systems to the voluntary 
judgment of individual utilities, ``and it was not willing to mandate 
that they do so.'' Central Iowa Power Cooperative v. FERC, 606 F.2d 
1156, 1167-68 (D.C. Cir. 1979); see also Municipalities of Groton v. 
FERC, 587 F.2d 1296, 1298 (D.C. Cir. 1978).
    Other passages from the legislative history amplify the 
``voluntary'' nature of utility conduct under section 202(a) and the 
absence of Commission

[[Page 66163]]

mandates. Another section of the Senate Report provided as follows:

    Section 202(a) of [the original Senate bill] imposed upon each 
public utility the duty to furnish energy to, exchange energy with 
and transmit energy for any person upon reasonable request. This 
provision has been eliminated, and the other subsections of the old 
section 202 which relate to rates have been removed to the general 
rate sections (sec. 205). While imposition of these duties may 
ultimately be found to be desirable, the committee does not think 
that they should be included in this first exercise of Federal power 
over electric companies. It relies upon the provision for the 
voluntary coordination of electric facilities in regional districts 
contained in the new section 202(a) * * * for the first Federal 
effort in this direction * * * Furthermore, the provisions of the 
old section 203(b) empowering the Federal Power Commission to 
require one utility to permit the use of its facilities by another * 
* * have been eliminated; these matters are left to the voluntary 
action of the utilities.

Senate Report No. 621, 74th Cong., 1st Sess. (1935) at p.19. In 
addition, the report of the House Committee on Interstate and Foreign 
Commerce similarly emphasized the voluntary character of the 
coordination of utility facilities:

    This section authorizes the Commission to establish regional 
districts and to encourage the voluntary interconnection and 
coordination of facilities within and between such districts, but 
the coordination of facilities is left to the voluntary action of 
the utilities.

H.R. Report No. 1318, 74th Cong., 1st Sess. (1935) at p.27.

    Taken together, the pieces of legislative history quoted above 
focus on the voluntary conduct of utilities and the cautious, limited 
exercise of federal authority in this area. There is no apparent 
discussion of the extent of the Commission's authority to divide the 
country up into regional districts--or what the Commission 
affirmatively can do under section 202(a) if utilities are not 
``voluntarily'' moving in the manner (or as quickly as that) favored by 
the Commission.

Exercise of Section 202(a) Authority

    Section 202(a) authority to ``divide the country into regional 
districts for the voluntary interconnection and coordination of 
facilities'' originally was vested in the Federal Power Commission 
(FPC). This authority was transferred to DOE in 1977 when Congress 
enacted the Department of Energy Organization Act. The DOE Act vested 
in the newly-created FERC only specifically-enumerated statutory 
authority. Because the DOE Act did not specifically vest in the FERC 
the FPC's existing section 202(a) authority with respect to dividing 
the country into regional districts, that authority remained with DOE.
    The DOE did not exercise its section 202(a) authority during the 21 
years in which it controlled that authority. On October 1, 1998, DOE 
Secretary Richardson, in DOE Delegation Order No. 0204-166, ``delegated 
and assigned to the [Commission] the authority to carry out such 
functions as are vested in the Secretary under section 202(a) of the 
Federal Power Act.''
    In delegating section 202(a) authority, Secretary Richardson 
concluded that the Commission is the ``most appropriate agency'' to 
exercise this authority. In support, Secretary Richardson explained, 
without citation to any legal authority, that section 202(a) affords 
the Commission ``sufficient authority to establish boundaries for 
Independent System Operators (ISOs) or other appropriate transmission 
entities.'' He added that ``[p]roviding FERC with the authority to 
establish boundaries for ISOs or other appropriate transmission 
entities could aid in the orderly formation of properly-sized 
transmission institutions and in addressing reliability-related issues, 
thereby increasing the reliability of the transmission system.'' The 
press release accompanying the delegation order added that the DOE 
delegation of section 202(a) authority ``gives FERC much-needed 
authority it now lacks.''

Judicial Precedent

    Not surprisingly, given the dormant nature of this section for its 
63-year history, the United States Supreme Court has never ruled 
directly on the precise meaning of section 202(a). It has, however, 
addressed more generally the ``voluntary'' scheme of utility action 
running throughout the Federal Power Act.
    In the landmark case of Otter Tail Power Company v. United States, 
410 U.S. 366 (1973), the Supreme Court ruled that Commission regulation 
of electric utility rates and practices under the FPA does not immunize 
electric utilities from antitrust scrutiny and liability. In so ruling, 
the Supreme Court rejected the utility argument that its refusal to 
deal with certain municipal customers was immune from antitrust 
prosecution because the Commission has the authority to compel 
involuntary electrical interconnections pursuant to section 202(b) of 
the FPA. The Court responded that ``[t]he essential thrust of Sec. 202, 
however, is to encourage voluntary interconnections of power.'' Id. at 
373 (citing legislative history).
    The Court continued with an analysis of the overall scheme of Part 
II the FPA (which includes section 202) and its legislative history:

    As originally conceived, Part II would have included a ``common 
carrier'' provision making it ``the duty of every public utility to 
* * * transmit energy for any person upon reasonable request. * * * 
'' In addition, it would have empowered the Federal Power Commission 
to order wheeling if it found such action to be ``necessary or 
desirable in the public interest.'' These provisions were eliminated 
to preserve ``the voluntary action of the utilities.''
    It is clear, then, that Congress rejected a pervasive regulatory 
scheme for controlling the interstate distribution of power in favor 
of voluntary commercial relationships.

Id. at 374 (citations to legislative history omitted).

    In an earlier Supreme Court citing section 202, the Court ruled in 
Penn Water & Power Company v. FPC, 343 U.S. 414 (1952), that the 
statutory language of sections 202(a), 202(b), and 206(b) of the FPA 
justified a bilateral, existing contractual ``practice'' of two 
utilities integrating their power output. In relevant part, the Court 
found that the regional coordination of power facilities ``ready made 
by prior contractual arrangements'' was precisely the type of 
coordinated action authorized under section 202(a) of the FPA. Id. at 
423.
    The few lower court decisions to address section 202(a), like the 
Penn Water case, address situations in which utilities voluntarily 
banded together to coordinate their activities in such a manner as to 
achieve efficiencies and economies unachievable by unilateral, utility-
specific conduct. Two cases in particular--involving voluntary pooling 
arrangements by utilities--are instructive as to the reach of section 
202(a) and the Commission's historical hesitation to invoke that 
statutory authority to compel utilities to do more than what they 
voluntarily had committed to do.
    In Central Iowa Power Cooperative v. FERC, 606 F.2d 1156 (D.C. Cir. 
1979), the D.C. Circuit affirmed the Commission's approval of the Mid-
Continent Area Power Pool (MAPP), a tight power pool among Midwestern 
utilities, as modified in only one respect (membership). In so doing, 
the court affirmed the Commission's judgment not to accede to the 
request of intervenors to try to turn the power pool--which provided 
for the coordinated operation of generating facilities and short-term 
exchanges of power (reserve sharing)--into a better power pool.
    Specifically, the court upheld the Commission's judgment to decline 
to expand the scope of pool services, as requested by intervenors, to 
require

[[Page 66164]]

MAPP utilities to construct larger generating units and to engage in 
single-system planning with central dispatch. The Commission had 
reasoned that section 202(a) of the FPA does not compel the Commission, 
against the wishes of the pool utilities, to transform MAPP from its 
limited scope to one offering a wider array of pool services:

    While Section 202(a) of the Federal Power Act speaks in terms of 
``voluntary interconnection and coordination'' and to ``promote and 
encourage'' the same, the pooling agreement is an FPC tariff which 
must pass muster under Sections 205 and 206 of the Federal Power 
Act. For example, we have already found the membership provisions 
unacceptable. Nevertheless, the scope of a power pool is in the 
first instance a matter for the utilities involved. The mere fact 
that a particular pool does not offer the same range of services as 
another pool does not permit the Commission to direct expansion of 
the narrower pools' scope. Unless the limited scope of the MAPP 
Agreement is for some other reason unjust, unreasonable or unduly 
discriminatory, we are not authorized under Part II of the Federal 
Power Act to direct the pool to offer more services. While we can 
and do ``encourage and promote'' greater use of pooling, the 
peculiarities of each region necessitate that the member utilities 
determine the services to be offered. One cannot automatically apply 
the broader scope of NEPOOL, based upon very different geography, 
industry history and make-up in New England, to the mid-continent 
region with its tremendous area, sparse load and different industry 
make-up.

Id. at 1167 (quoting underlying Commission order).

    The reviewing court found the Commission's reluctance to direct the 
pooling utilities to do more than what they had voluntarily committed 
to do to represent an ``informed and reasoned decision consistent with 
congressional purposes.'' Id. In support, the court reviewed the 
language and legislative history of section 202(a) and concluded that 
Congress intended to leave the coordination of electric systems to the 
voluntary decisions of utilities acting in their ``enlightened self-
interest.'' For this reason,

    Given the expressly voluntary nature of coordination under 
section 202(a), the Commission could not have mandated adoption of 
the Agreement, and failure of the MAPP participants to establish a 
fully-integrated electric system could not justify rejection of the 
[MAPP] Agreement filed.

Id. at 1168. The court recognized that, pursuant to section 202(a), 
regional coordination of electric power systems is in the public 
interest. Nevertheless,

    This does not mean, however, that a pooling plan is unlawful * * 
* merely because a more comprehensive arrangement might better 
achieve the purposes of section 202(a). To so conclude would 
undermine Congress' determination that coordination under section 
202(a) be voluntary. Moreover, we cannot agree with South Dakota 
that in approving the [MAPP] Agreement the Commission abdicated its 
duty under section 202(a) to promote and encourage regional 
interconnection and coordination of electric facilities.

Id.

    The findings and rationale of the D.C. Circuit, in upholding the 
Commission's limited exercise of its section 202(a) authority, mimic 
its conclusions in an earlier case, also involving the voluntary 
actions of utilities to create a coordinated power pool in another 
region of the country. In Municipalities of Groton v. FERC, 587 F.2d 
1296 (D.C. Cir. 1978), the court affirmed the Commission's approval, 
with one modification (as to a deficiency charge), of the New England 
Power Pool (NEPOOL), a tight power pool among New England utilities.
    In so doing, the court affirmed the Commission's judgment to reject 
the argument of certain municipal electric systems that the NEPOOL 
Agreement was necessarily discriminatory and anticompetitive because it 
omits certain services (including firm power sales). The court 
explained that section 202(a) of the FPA ``sanctions and encourages 
these voluntary pooling agreements,'' and that the Commission's 
conclusions that the NEPOOL Agreement is not unduly discriminatory or 
anticompetitive, despite its limited size and scope, ``is reasonable in 
light of the voluntary nature of this agreement.'' Id. at 1298-99. See 
also Duke Power Company v. FPC, 401 F.2d 930, 943-44 (D.C. Cir. 1968) 
(emphasizing that section 202(a) encourages voluntary interconnection 
and coordination of facilities, that the Commission's responsibility 
under that section is only to promote and encourage such 
interconnection and coordination, and that the Commission is not 
authorized to ``compel any particular interconnection or technique of 
coordination.'').2
---------------------------------------------------------------------------

    \2\ In Duke Power Company, the court reviewed the language and 
legislative history of section 202(a), and other subsections of 
section 202 ((b)-(d)) dealing with interconnections and emergency 
authorizations, as part of its interpretation of the statutory reach 
of section 203 of the FPA, dealing with the sale, lease, 
disposition, merger or consolidation of jurisdictional facilities. 
The court found that the Commission does not have jurisdiction under 
section 203 to review the utility acquisition of limited local 
distribution facilities.
---------------------------------------------------------------------------

BREATHITT, Commissioner, concurring

    I view today's Notice of Intent to Consult Under Section 202(a) as 
the initiation of important discussions between the FERC and state 
commissions and others on whether and how the Commission will use its 
authority under Section 202(a) of the Federal Power Act. These initial 
discussions will begin to shape the debate of how and under what time 
frame the Commission intends to proceed with a broader inquiry into the 
formation of regional transmission organizations. The direction we take 
in this endeavor is of utmost importance to me. It is for this reason 
that I respectfully concur with today's Notice of Intent to Consult. As 
I will explain, the Notice does not adequately frame our initial 
discussion with state commissioners.
    I believe it is crucial that we conduct thorough and meaningful 
discussions with our state colleagues. Efforts by this Commission to 
draw regional boundaries for transmission organizations will have a 
tremendous impact on state commissions and on the utilities and their 
customers that conduct business and reside in those states. We must 
acknowledge that states are at varying points in the development of 
retail open access plans and that actions by this Commission will have 
different impacts on states depending on the level of functional 
unbundling and retail competition that has occurred in those states. 
Furthermore, we must consider the significant regional differences that 
exist in this country and the degree to which transmission planning and 
pricing issues will affect a state's analysis and consideration of 
RTOs. Obviously, this consultation process is not a simple exercise. 
Indeed it is one that requires a great deal of consideration. That is 
why the Commission must ensure that every pertinent question, even the 
most fundamental ones, are asked and answered.
    The Notice we are voting on today asks important and relevant 
questions and invites comments from state commissioners on issues 
pertaining to the formation of regional transmission organizations and 
the establishment of boundaries for these RTOs. However, the Notice 
does not invite state commissioners, in this initial discussion, to 
comment on, what I believe to be, the fundamental, threshold question. 
That is, whether there is a need to establish regional boundaries in 
order to further the goals of full competition and non-discriminatory 
access or whether there are other means that can be equally as 
effective. This should be the first question we ask ourselves and state 
commissioners. Furthermore, I believe it

[[Page 66165]]

is crucial that we define the scope of our authority under Section 
202(a).
    I fully support the Notice of Intent to Consult and look forward to 
our discussions with state commissioners and, later on, with other 
parties. This dialogue is important and necessary. However, I do not 
want the Commission to lose sight of fundamental, threshold issues 
pertaining to the establishment of regional boundaries and the 
formation of RTOs. I therefore respectfully concur with this decision.
Linda K. Breathitt,
Commissioner.
[FR Doc. 98-31959 Filed 11-30-98; 8:45 am]
BILLING CODE 6717-01-P