[Federal Register Volume 67, Number 198 (Friday, October 11, 2002)]
[Proposed Rules]
[Pages 63327-63330]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25736]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. RM01-12-000]


Remedying Undue Discrimination Through Open Access Transmission 
Service and Standard Electricity Market Design

October 2, 2002.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of conferences and revisions to public comment schedule 
for proposed rule.

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SUMMARY: On July 31, 2002, the Commission issued a Notice of Proposed 
Rulemaking (NOPR) in the above-captioned docket, proposing to amend its 
regulations to remedy undue discrimination through open access 
transmission service and standard electricity market design. The 
Commission is scheduling a series of public conferences to discuss 
areas of concern about the proposed rule and extending the deadline for 
filing comments that address the following issues: Market design for 
the Western Interconnection; transmission planning and pricing, 
including participant funding; Regional State Advisory Committees and 
state participation; resource adequacy; and Congestion Revenue Rights 
and transition issues.

DATES: Initial comments on specified issues are due on or before 
January 10, 2003. Initial comments on all other issues are due on or 
before November 15, 2002. Reply comments are due on or before February 
17, 2003. All initial and reply comments should include an executive 
summary that should not exceed ten pages.
    Conferences will be held on: November 4, 2002, November 6, 2002, 
November 10-13, 2002, November 19, 2002 and December 3, 2002.

ADDRESSES: Send comments to: Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. See 
SUPPLEMENTARY INFORMATION for conference locations.

FOR FURTHER INFORMATION CONTACT: Sarah McKinley, Office of External 
Affairs, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8004.

SUPPLEMENTARY INFORMATION:

Notice of Conferences and Revisions to Public Comment Schedule

    1. In the nine weeks since the Commission issued its Notice of 
Proposed Rulemaking (NOPR) in the above-captioned docket (67 FR 55452, 
August 29, 2002), Commission members and staff have participated in 
numerous meetings and conferences throughout the country to discuss the 
proposed rule. These meetings have been a valuable source of 
information about the response of the general public, and specifically 
the electric utility industry, to the proposed Standard Market Design 
rule and the issues that the Commission must address going forward.
    2. Commission staff has identified areas of public concern about 
the proposed rule and recommended that the Commission hold meetings 
that will address and attempt to resolve these issues. A copy of the 
staff memorandum that makes these recommendations is attached to this 
notice.
    3. Standard Market Design is an important initiative that will 
bring the public significant benefits, but the rule must be formulated 
properly in order to work as the Commission envisions. We understand 
the public concerns, and we want to work through them individually and 
in detail. As a first step, the Commission will hold a series of public 
meetings to discuss specific items of concern.
    4. The public meetings will be held as follows. Unless otherwise 
noted, these meetings are open to the public, and registration is not 
required; however, in-person attendees are asked to notify the 
Commission of their intent to attend by sending an e-mail message to 
[email protected]. Members of the Commission may attend and participate 
in the discussions. Further details about each Commission conference 
will be provided in supplemental documents.
    [sbull] November 4, 2002: (Portland, Oregon) This conference will 
address the unique operating characteristics of Western bulk power 
markets. It will also attempt to identify aspects of the proposed 
Standard Market Design for which regional flexibility may be 
appropriate for the West, and corresponding degrees of flexibility.
    [sbull] November 6, 2002: (Washington, DC) This conference will 
focus on pricing proposals for network upgrades and expansions. In 
particular, the discussions will attempt to clarify the definition of 
``participant funding'' and seek consensus on the types of facilities 
that should be eligible for participant funding.
    [sbull] November 10-13, 2002: (Chicago, Illinois) Commissioners and 
staff propose to participate in the National Association of Regulatory 
Utilities Commissioners Annual Convention. The Commission will make a 
presentation on the morning of Wednesday, November 13, and the Chairman 
will deliver a keynote address.
    Registration is required for this conference. You may obtain a copy 
of the registration form and information about fees at http://www.naruc.org/Meetings/annualconv/2002/index.html, under the 
``Registration'' link.
    [sbull] November 19, 2002: (Washington, DC) This conference will 
focus on aspects of the resource adequacy requirement proposed in the 
NOPR, specifically: (1) The sufficiency of proposed penalties; (2) the 
function of the resource adequacy requirement in areas that have retail 
access; and (3) how to accommodate regional variations in proposals to 
satisfy the resource adequacy requirement without interfering with 
state jurisdiction.
    [sbull] December 3, 2002: (Washington, DC) This conference will 
discuss specific issues related to the transition to congestion revenue 
rights (CRRs), such as: (1) Ensuring that native load and load serving 
entities receive sufficient CRRs; (2) guarding against the use of CRRs 
to exercise market power; and (3) the possibility of regional variation 
on how rights are allocated to load.
    5. Each Washington, DC conference will be held from approximately 
9:30 a.m. to 5:00 p.m. at the offices of the Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC. Transcripts of the 
conferences will be immediately available from Ace Reporting Company 
(202-347-3700 or 1-800-336-6646), for a fee. They will be available for 
the public on the Commission's FERRIS system two weeks after the 
conference. Additionally, Capitol Connection offers the opportunity for 
remote listening and viewing of the conference. It is available for a 
fee, live over the Internet, via C-Band Satellite. Persons interested 
in receiving the broadcast, or who need information on making 
arrangements should contact David Reininger or Julia Morelli at the 
Capitol Connection (703-993-3100) as soon as possible or visit the 
Capitol Connection Web site at http://www.capitolconnection.gmu.edu and 
click on ``FERC.''

[[Page 63328]]

    6. The Commission will extend to January 10, 2003, the deadline for 
submission of comments that address the following issues: (1) Market 
design for the Western Interconnection; (2) transmission planning and 
pricing, including participant funding; (3) Regional State Advisory 
Committees and state participation; (4) resource adequacy; and (5) CRRs 
and transition issues. The deadline for submission of all other 
comments remains November 15, 2002.
    7. The Commission will extend the deadline for all reply comments 
to February 17, 2003. All initial and reply comments should include an 
executive summary that should not exceed ten pages.

    By direction of the Commission.
Magalie R. Salas,
Secretary.

Memo to Members of the Federal Energy Regulatory Commission Regarding 
Industry Outreach on Standard Market Design

September 30, 2002.

To: Pat Wood, III, Chairman, William L. Massey, Commissioner, Linda K. 
Breathitt, Commissioner, Nora M. Brownell, Commissioner
From: FERC SMD Outreach Team
Re: Report on SMD Outreach activities, summary of issues raised, and 
staff recommendations

    On July 31, 2002 the Federal Energy Regulatory Commission issued 
its Notice of Proposed Rulemaking on Remedying Undue Discrimination 
through Open Access Transmission Service and Standard Electricity 
Market Design (SMD NOPR). Since that date, the staff of the Commission 
(Staff) has engaged in extensive outreach, both to state regulatory 
commissions, industry trade groups and the industry at large. 
Specifically, we have held six SMD briefings exclusively for state 
commissions and staff, three SMD briefings for state commissions and 
the industry at large, and ten meetings with groups representing 
different sectors of the industry. In addition, Staff has attended 
dozens of industry meetings, both in Washington, DC, and across the 
country. Our contacts have now included several thousand industry 
representatives, covering a wide spectrum of interests.

Identified Areas of Concern

    Several broad areas of concern have been identified as a result of 
this outreach effort. Most of these areas are ones that were not 
addressed in great detail in the NOPR because the details were to be 
worked out on a regional basis. However, because of the lack of detail, 
parties are interpreting the proposals in different ways and sometimes 
interpreting them based on their worst fears. Clarifying that the 
Commission intends to permit additional regional flexibility would 
satisfy many of the concerns. Staff recommends that the Commission 
obtain further input from states and the industry before comments are 
due, so that it can provide greater clarification on these issues and 
identify areas where regional flexibility would be allowed. Discussed 
below are brief summaries of these areas and a proposed process for 
addressing these concerns.

1. The Unique Operational Characteristics of the Western Interchange

    State regulators and industry representatives have pointed out that 
the Western North American market has unique characteristics that may 
not readily lend itself to the Standard Market Design proposed by the 
Commission. Specifically, they are concerned that a market design that 
has evolved over a long period of time in the Eastern U.S. cannot be 
readily adapted to the West. Many participants believe that the 
Commission does not have a grasp of the inherent differences, which 
include:
    [sbull] The complexities of hydroelectric production, based on 
agreements and international treaties negotiated over several decades, 
and which include the accommodation of many regional concerns, 
including agricultural uses, fishing and recreational requirements, and 
environmental constraints.
    [sbull] The major role of public power in the West, and the 
difficulties that might be encountered if public power chooses not to 
join an ITP/RTO.
    [sbull] Changes in transmission prices for long-distance purchases, 
which would create hardship for some customers, as well as operational 
anomalies brought about by distance-related issues, including large 
loop flow patterns.
    Some Western regulators have requested that the Commission consider 
a separate market design for the West. They are also concerned about 
the amount of flexibility that the Commission would consider to 
accommodate their concerns, including flexibility in designing and 
allocating Congestion Revenue Rights (CRRs), and operational issues 
related to hydro and other intermittent generator resources.\1\
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    \1\ The Commission has already expressed its willingness to 
offer regional flexibility in its order on RTO West, Docket Nos. 
RT01-35-005 and RT01-35-007, issued September 18, 2002.
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    To resolve these issues, there needs to be a process to identify 
the specific issues where there are concerns and start developing 
solutions in these areas. Staff recommends doing this through a two 
stage process. First, we recommend that the Commission schedule a 
staff-level technical meeting to discuss specific technical concerns 
and potential solutions. Second, the commissioners should also hold a 
conference to discuss the specific concerns that have been raised by 
the West. At this conference the Commission could explore the level and 
areas where flexibility would be appropriate. Staff recommends that 
both of these meetings be held in the West.

2. Planning and Pricing Transmission Expansions, Including Participant 
Funding

    In the SMD NOPR the Commission expressed a preference for 
participant funding and noted that it would consider participant 
funding for proposed transmission facilities that are included in a 
regional planning process conducted by an independent entity. The 
Commission also indicated that it would look favorably on a pricing 
proposal, whether it is roll-in, an assignment to beneficiaries, or 
some combination of the two, by a Regional State Advisory Committee 
(RSAC) if it is consistent with the FPA. However, it did not attempt to 
clearly define the types of network upgrades that would be priced 
through ``participant funding'' and those that would be priced through 
rolled-in pricing.
    There has been considerable reaction to this proposal in the 
outreach sessions. Southern state commissioners and southern utilities 
have been supportive of the use of participant funding. One rationale 
used is that participant funding would protect native load customers 
from paying for network upgrades constructed to export power to other 
regions. However, transmission owners in other areas, public power, and 
industrial customers are concerned that if participant funding is the 
main vehicle for pricing network upgrades, there will be inadequate 
investment to relieve transmission congestion and thus limit wholesale 
competition. While their positions differ in some areas, they all argue 
for the ability to roll-in at least some upgrades that relieve 
constraints and thus increase competition. This will be an important 
issue in the Commission's approval of SeTrans, which is expected to be 
considered in the near future.
    Staff believes that the Commission's proposal needs to be 
clarified. During the outreach, it has become clear that

[[Page 63329]]

there is not a consistent definition of participant funding. It could 
be defined to include only upgrades that a market participant 
volunteers to pay for, or it could be defined as upgrades that the 
beneficiaries would pay for, either on a voluntary or cost-allocation 
basis. If load benefits from the upgrades, the costs could be rolled-in 
to the access charge paid by the load that benefits. That load would 
receive CRRs. If a generator benefits, then the generator would pay for 
the upgrades, and receive CRRs. Many observers assume that construction 
to relieve transmission constraints could not be rolled-in to the 
access charge under a participant funding scenario. In that case, there 
would be little construction to relieve transmission congestion. Staff 
believes that this issue could be clarified through a technical 
conference that discusses this pricing issue.
    A related issue is the requirement for regional planning. 
Transmission owners in particular are concerned that the process is 
reminiscent of central planning and that it could be used to slow 
construction of necessary upgrades, including construction to relieve 
congestion. Additionally, state commissioners and others are concerned 
that the use of four large regions will unnecessarily delay the 
planning process. This concern is especially strong in the Midwest and 
the Mid-Atlantic, which was identified as one of the four regions. 
There is support for having the planning process done within the 
territory covered by each RTO or ISO. RTOs could then coordinate the 
regional plans in each Interconnection.
    Staff believes the Commission needs to further define how the 
regional planning process will work. Also, the Commission may want to 
explore the size of the regions used in the planning process. Staff 
believes these topics could be addressed at the same technical 
conference as participant funding.

3. State Concerns and Regulatory Participation in Regional State 
Advisory Committees

    State commissions were particularly concerned about their ability 
to protect native load from cost shifting, particularly in those states 
that have not chosen electric restructuring. They were concerned that 
the rule might have an impact on their ability to continue regulating 
vertically integrated utilities under traditional cost-of-service 
ratemaking and bundled rates that these states continue to favor.
    Commissioners from low-cost states were also concerned that the new 
market envisioned by the Commission might result in low-cost power 
being exported from their states, to the detriment of local ratepayers. 
They also want assurances that their native load will be protected from 
paying the cost of new transmission that would serve customers in other 
states or regions. They also seek clarification that CRRs will fully 
protect ratepayers as well as they are protected today.
    States are also concerned about their role in establishing resource 
adequacy, whether the Commission's plan conflicts with ongoing state 
efforts to set reserve margins, and the extent to which states will be 
able to ensure future supplies.
    Commissioners in all regions of the country expressed concern about 
the organization of ``Regional State Advisory Committees'' and what 
that would represent. They want to know who will become members of such 
an organization, how it would be funded, what its duties would 
encompass, how large a region it would serve and whether commissioners 
would be required to belong to more than one RSAC. Most importantly, 
state commissioners want to know the exact nature of the organization 
and what its responsibilities would include, and whether that conflicts 
with existing state law or with existing regional cooperative efforts. 
Finally, many state commissioners also would like to create a new name 
for these committees that does not use the word ``advisory''.
    Staff recommends that the Commission use the NARUC meeting 
scheduled for November to develop a process for resolving these types 
of concerns and coming to a common understanding of the role of state 
commissions in the RSACs and how SMD might affect retail rates. Staff 
and state commission staff in the various regions could also hold a 
series of meetings to work on a common understanding and potential 
solutions.

4. Resource Adequacy

    While there has been general support for load to meet some form of 
resource adequacy requirement, there has been a good deal of criticism 
of the proposal in the NOPR. Generators are concerned that the types of 
penalties proposed are insufficient and unworkable. Specifically, they 
are concerned that penalties may not be sufficient to keep load from 
``leaning on the system'' in real time. State commissioners, ISOs and 
many market participants in the Northeast and Mid-Atlantic states also 
believe it is unworkable in areas that have retail access. They want to 
have a form of capacity obligation for load to ensure resource 
adequacy. State commissions in areas where there has been little or no 
divestiture see the requirement for a 12% reserve margin as intruding 
on their authority to review the purchasing decisions of utilities.
    Staff believes this issue would benefit from a full discussion at a 
public conference. At the conference, the commissioners could explore 
how much regional flexibility there should be for satisfying the 
resource adequacy requirement. For example, could regions with retail 
access use a capacity obligation? In regions without retail access, 
could state commissions require vertically integrated utilities to 
satisfy a minimum reserve requirement? If so, would there be any 
additional requirements needed to satisfy the requirements of SMD?

5. Transition Issues and Congestion Revenue Rights

    Many industry participants are concerned that they will not have 
adequate protection from congestion costs when they move from the 
current system to SMD. Transmission dependent utilities and industrial 
customers are concerned that they will not receive sufficient CRRs 
through the initial allocation process and will be vulnerable to the 
exercise of market power by vertically integrated utilities. They also 
raised market power concerns, particularly if generators held CRRs in 
load pocket areas. They also are concerned that they will not be 
adequately protected if the CRRs are auctioned and they receive the 
auction revenues. They believe they have better protection if CRRs are 
allocated to load. They also believe it is necessary to retain the 
allocated CRRs on a long-term basis.
    State commissions have raised similar issues regarding protecting 
native load. There also is concern about load growth and how load 
serving entities would be able to get CRRs for increased needs, or how 
the use of CRRs would impact construction of new transmission capacity. 
Finally, there is a concern that CRRs need to be available for 
resources used to satisfy the resource adequacy requirement. The SMD 
NOPR left the regions a great deal of discretion in designing the 
transition process. There seems to be a desire among load in some 
industry segments for additional guidance on how the transition process 
will work.
    Staff believes a public conference would be a good forum for airing 
and developing these issues and perhaps additional principles to be 
used in the transition process. Staff will prepare a paper providing 
more details on how

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CRR allocation would work. Additionally, the Commission could explore 
whether there should be eventual auction of CRRs or if a region could 
decide that an allocation process should be used for the foreseeable 
future.

6. Timing of Industry Responses

    There are two areas of concern on timing. First, SMD contains a 
multiplicity of details and getting the details right is very important 
to ensure customer protection. Load and state commissions in areas that 
have not previously used an LMP system have expressed concern that they 
do not have sufficient time to fully work through and understand all of 
the details of the proposal and how they work together. They are 
unwilling to support concepts in SMD unless they fully understand how 
they can protect themselves. Second, many have expressed concern that 
the implementation timeline (SMD in place by 2004) is too ambitious. 
They believe it will take more time to make the changes.
    Based on the concerns we have heard, Staff believes that the 
timetable for issuing a Final Rule and for full implementation of SMD 
should be revised. Staff anticipates that a Final Rule could be issued 
in summer 2003. We also anticipate that the Commission may not see full 
implementation of SMD in all regions of the country at the same time. 
Certain aspects of the Final Rule should move forward at a faster pace 
than others. Formation of RSACs, for example, could begin soon after 
the Final Rule is issued. Staff recommends that the Commission 
communicate these revised expectations on timelines to the industry in 
the near future.

Staff Recommendations

    Based on the feedback gathered by Staff, we are recommending 
additional meetings and public conferences with state commissions and 
the industry at large. The following is a proposed schedule of 
activities that would help address and resolve the major issues 
identified to date.

Staff-to-Staff Meeting With Southern Commissions

    Suggested Date: Week of October 13, 2002.
    Suggested Site: Atlanta, Georgia.

    Note: FERC staff would confer with Southern Commissions to 
determine the exact date and location.

    This non-public meeting would consist of staff members of the 
Commission and state regulatory agencies. It would focus on identifying 
specific issues for southern states, including the ability to protect 
native load customers from cost shifts, assigning costs for 
transmission expansions, how public power would operate under SMD, the 
allocation of CRRs and other issues of concern.

Staff-to-Staff Meeting on Western Operations

    Suggested Date: October 22, 2002.
    Suggested Site: Denver, Colorado.
    This non-public meeting, attended by senior FERC staff with 
technical staff from the industry, would identify major operational 
concerns by Western operators, including the unique characteristics of 
the Western hydro and public power systems.

Policy Meeting on Western Issues

    Suggested Date: November 4, 2002.
    Suggested Site: Portland, Oregon.
    This meeting would be open to the public and attended by FERC 
commissioners and staff. It would address policy issues related to the 
West, proposals for flexibility in certain areas of the NOPR, and 
differences in market design within the Western Interconnection.

Working Group Meeting on Participant Funding

    Suggested Date: November 6, 2002.
    Suggested Site: FERC Headquarters, Washington, DC.
    This meeting would be open to the public and would address the 
concerns outlined above in the memo.

Discussion of RSACs and State Issues

    Suggested Dates: November 10-13, 2002.
    Suggested Site: NARUC Annual Conference in Chicago, Illinois.
    This event would include participation in the NARUC Annual 
Conference by FERC commissioners and members of the FERC staff, a major 
presentation by FERC on Wednesday morning, November 13, and a keynote 
address by FERC Chairman Pat Wood.

Working Group Meeting on Resource Adequacy

    Suggested Date: November 19, 2002.
    Suggested Site: FERC Headquarters, Washington, DC.
    This meeting would be open to the public and would address the 
concerns outlined above in the memo.

Working Group Meeting on CRRs and Transition Issues

    Suggested Date: December 3, 2002.
    Suggested Site: FERC Headquarters, Washington, DC.
    This meeting would be open to the public and would address the 
concerns outlined above in the memo.

Recommendations on Extension of Time for Comments

    Because of the extensive outreach and discussion that FERC staff is 
recommending, we believe the Commission should consider extending the 
deadline for comments on this proposed rulemaking.
    1. The Commission would retain the November 15 deadline for 
comments covering most issues raised in the proposed rulemaking, but 
would establish a January 10, 2003 deadline for initial comments on the 
following topics:
    [sbull] Market Design for the Western Interconnection
    [sbull] Transmission Planning and Pricing, including Participant 
Funding
    [sbull] RSACs and State Participation
    [sbull] Resource Adequacy
    [sbull] CRRs and Transition Issues
    2. Staff recommends retaining a single deadline for reply comments, 
but rescheduling it for February 17, 2003 for the entire series of 
comments.

[FR Doc. 02-25736 Filed 10-10-02; 8:45 am]
BILLING CODE 6717-01-P