[Federal Register Volume 68, Number 17 (Monday, January 27, 2003)]
[Proposed Rules]
[Pages 3842-3847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1699]



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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 35

[Docket No. PL03-1-000]


Proposed Pricing Policy for Efficient Operation and Expansion of 
Transmission Grid

January 15, 2003.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed policy statement

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SUMMARY: The Federal Energy Regulatory Commission (Commission) proposes 
a new pricing policy for the rates of transmission owners that transfer 
operational control of their transmission facilities to a Regional 
Transmission Organization (RTO), form independent transmission 
companies (ITCs) within RTOs, or pursue additional measures that 
promote efficient operation and expansion of the transmission grid. The 
proposed policy would create rate incentives that reward RTO and ITC 
formation and grid investment, because independent regional grid 
operation and coordination will improve grid performance, reduce 
wholesale transmission and transactions costs, improve electric 
reliability, and make electric wholesale competition more effective in 
ways that benefit all customers. We invite comments on the proposed 
policy statement.

DATES: Comments are due March 13, 2003.

ADDRESSES: Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT: Stephen Pointer (Technical 
Information), Office of Markets, Tariffs and Rates, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426, 
(202) 502-8761.
    Andre Goodson (Legal Information), Office of General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8560.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    1. The Federal Energy Regulatory Commission proposes a new policy 
for the rates of transmission owners operating within a Regional 
Transmission Organization (RTO). Because they are independent of market 
participants, RTOs and Independent Transmission Companies (ITCs) make 
competitive wholesale electric markets more efficient, fair, 
trustworthy, and cost-effective. This new policy will reward 
transmission owners for joining RTOs and turning their assets over for 
RTO operation. It will reward transmission owners for forming ITCs or 
taking other measures which make their transmission facilities 
operationally independent from the activities of other market 
participants. It will reward transmission owners for pursuing 
additional measures to operate and expand the transmission grid 
efficiently in ways that solve RTO-identified system needs using either 
classic transmission investments or innovative technologies. However, 
only transmission owners which participate in RTOs will be able to take 
advantage of these incentives. This policy will promote competitive 
wholesale electric markets, reduce wholesale electric costs and improve 
electric reliability.

II. Summary of Proposed Incentives

    2. Under this proposed policy: (1) Any entity that transfers 
operational control of transmission facilities to a Commission-approved 
RTO would qualify for an incentive adder of 50 basis points on its 
return on equity (ROE) for all such facilities transferred; (2) ITCs 
that participate in RTOs and meet the independent ownership requirement 
(discussed below) would qualify for an additional incentive equivalent 
to 150 basis points applied to the book value of facilities at the time 
of the divestiture; and (3) we also propose a generic ROE-based 
incentive equal to 100 basis points for investment in new transmission 
facilities which are found appropriate pursuant to an RTO planning 
process.

III. Background

A. Order No. 2000

    3. We adopted Order No. 2000\1\ to encourage voluntary and timely 
formation of RTOs. Order No. 2000 found that transmission facilities 
can be operated more reliably and efficiently when coordinated over 
large geographic areas, and that RTOs would achieve this result by 
establishing: regional transmission pricing and the elimination of rate 
pancaking; improved congestion management; more accurate estimates of 
available transmission capacity (ATC); more effective management of 
parallel path flows; more efficient planning for transmission and 
generation investment; and improved grid reliability. It concluded that 
RTOs would help eliminate the opportunity for unduly discriminatory 
practices by transmission providers, reduce the need for overly 
intrusive regulatory oversight, and instill trust among competitors 
that all are playing by the same rules.
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    \1\ Regional Transmission Organizations, Order No. 2000, 65 FR 
809 (Jan. 6, 2000), FERC Stats. & Regs. ] 31,089 (1999), order on 
reh'g, Order No. 2000-A, 65 FR 12,088 (Mar. 8, 2000), FERC Stats. & 
Regs. ] 30,092 (2000), aff'd sub nom. Public Utility District. No. 1 
of Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir. 
2001).
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    4. Order No. 2000 recognized that realization of ``effective and 
efficient RTOs is dependent in large measure on the feasibility and 
vitality of the stand-alone transmission business.''\2\ It also found 
that transmission pricing reforms may be needed to facilitate both RTO 
formation and the formation of stand-alone transmission businesses such 
as ITCs. The order discussed various innovative rate options and 
identified specific innovative rate mechanisms that we would consider 
for entities that meet the minimum characteristics of RTOs.\3\ In 
identifying the specific innovative rate mechanisms (including 
performance-based rates) that we would consider for entities that meet 
the minimum characteristics of RTOs, Order No. 2000 neither prescribed 
a specific transmission pricing method nor guaranteed approval of any 
particular innovative pricing proposal. All innovative pricing 
proposals should be fully justified:
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    \2\ Order No. 2000 at 31,170.
    \3\ See Sec.  35.34(e) of our regulations, 18 CFR 35.34(e) 
(2002) (innovative rate treatments for RTOs).

    The [a]pplicant [for innovative rate treatments] must explain 
how the proposed rate treatment would help achieve the goals of 
RTOs, including efficient use of and investment in the transmission 
system and reliability benefits to consumers; provide a cost-benefit 
analysis, including rate impacts; and explain why the proposed rate 
treatment is appropriate for the RTO proposed by the Applicant. This 
means that filings under section 35.34(e) must be complete and fully 
explained; must demonstrate that the resulting rates are just, 
reasonable, and not unduly discriminatory or preferential; must 
identify how the rate treatment promotes efficiency and what 
benefits result; and must demonstrate that the rate treatment does 
not impede the RTO from meeting the minimum characteristics and 
functions required under Order No. 2000.\4\
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    \4\ Id. at 31,171.
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B. Experience since Order No. 2000

    5. Order No. 2000 called for RTOs to be in operation across the 
nation by December 2001. While the industry is making significant 
progress in the development of RTOs and we have preliminarily approved 
seven RTO proposals, only two of those have become fully approved 
RTOs--Midwest

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Independent Transmission System Operator, Inc. (Midwest ISO), which 
began operating in early 2002, and PJM Interconnection, L.L.C. 
(PJM).\5\ Moreover, while we have found that ITCs would be instrumental 
in achieving the goals of Order No. 2000, only one ITC--Michigan 
Electric Transmission Company, LLC (Michigan Transco)--is currently 
operating.
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    \5\ See PJM Interconnection, L.L.C., 101 FERC ] 61,345 (2002).
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1. Innovative Rates for Independence
    6. To date we have approved incentive rates for RTO participation 
and additional levels of independence on a case-by-case basis. In 
International Transmission Company,\6\ we conditionally approved a 
transmission rate moratorium based on the transmission component of 
bundled retail rates, and recovery of an amount necessary to hold the 
seller harmless from the income tax consequences of the divestiture of 
transmission assets, subject to the company becoming a fully 
independent transmission company (with no active or passive ownership 
by market participants) and fully participating in a Commission-
approved RTO by a date certain.\7\ We stated:
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    \6\ 92 FERC ] 61,276 (2000), reh'g pending (International 
Transmission).
    \7\ The rates were approved to become effective prior to the 
date certain, but were subject to refund if RTO participation and 
independent ownership were not both achieved by that date.

    We are cognizant of the risks [International Transmission 
Company] has assumed under this proposal and believe that its 
willingness to bear the financial risks of failing to meet the 
conditions [of Commission approval] is an example of the different 
approach to the transmission business that we can expect from a 
stand-alone transmission company. We also believe that accelerated 
development of independent stand-alone transmission businesses will 
lead to an accelerated transition to competitive, regional bulk 
power markets and is in the best interest of consumers.\8\
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    \8\ 92 FERC at 61,917.

    7. In Trans-Elect, Inc., et al.,\9\ a newly formed ITC, we 
conditionally approved a rate moratorium based on the transmission 
component of bundled retail rates, effective upon the transfer of 
operational control of transmission facilities to an approved RTO.\10\ 
Further, we approved rate recovery of an amount equal to the value of 
deferred taxes on the seller's books at the time of the sale associated 
with the difference between tax and book basis of transmission plant, 
with cost recovery over twenty years beginning January 1, 2006, as long 
as Michigan Transco joins and remains in a Commission-approved RTO.
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    \9\ 98 FERC ] 61,142, order on reh'g, 98 FERC ] 61,368 (2002) 
(Trans-Elect).
    \10\ The transaction involved a transfer of Michigan Electric 
Transmission Company, LLC (Michigan Transco) from Consumers Energy 
Company to Michigan Transco Holdings, LP, an entity with no active 
or passive ownership interests in market participants. These 
facilities would be managed by Trans-Elect Michigan, LLC, managing 
member of Michigan Transco Holdings, LP and a subsidiary of Trans-
Elect, Inc. (Trans-Elect), an independent, for-profit transmission 
company.
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    8. In Midwest Independent Transmission System Operator, Inc.,\11\ 
we permitted an upward adjustment of 50 basis points to the proxy 
group's ROE midpoint for use by all participating transmission owning 
utilities, and left open the possibility of additional upward 
adjustments, based on the Midwest ISO's level of operational 
independence:
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    \11\ 100 FERC ] 61,292 (2002), reh'g pending (Midwest ISO).

    There are, however, policy reasons to make upward adjustments--
particularly with regard to the level of operational independence 
that the Midwest ISO provides. In this case, we will make an upward 
adjustment of 50 basis points from the proxy group midpoint for the 
turning over of operational control of transmission facilities. We 
will consider providing additional upward adjustments for greater 
levels of independence.\12\
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    \12\ 100 FERC at P 31.
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2. Merchant Transmission
    9. We have conditionally approved rates, terms and conditions for 
service over merchant transmission facilities. The basic features of 
the rate treatments allowed for merchant transmission facilities 
include negotiated rates with the project sponsor assuming all market 
risk associated with the project and all capacity initially allocated 
through a fair, non-discriminatory and transparent open season process. 
Additionally, we required that operational control of the facilities be 
turned over to an RTO adjacent to or containing the geographic area of 
the proposed facility and that service be provided under the OATT of 
the RTO.
    10. For example, we conditionally approved the rates, terms and 
conditions proposed by TransEnergie U.S. Ltd. (TransEnergie) for 
service over three proposed merchant transmission projects.\13\ The 
first project, the Cross-Sound Cable (CSC) Interconnector, uses an 
undersea high-voltage direct current (HVDC) cable system to connect the 
New England Power Pool (NEPOOL) regional transmission system in 
Connecticut to the New York Independent Transmission System Operator 
(NYISO) transmission system on Long Island. We also authorized 
TransEnergie to provide service over a merchant transmission facility, 
the Harbor Cable interconnector project, an underground and undersea 
HVDC transmission cable system that would connect the PJM and NYISO 
transmission systems.\14\ Finally, we authorized TransEnergie's 
proposal with Hydro One Delivery Services, Inc., to provide 
transmission service over the Lake Erie Link, which is planned as an 
underwater HVDC transmission system connecting the Ontario Independent 
Electricity Market Operator to either PJM or the Midwest ISO.\15\
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    \13\ TransEnergie U.S., Ltd., 91 FERC ] 61,230, orders on 
compliance filing, 91 FERC ] 61,347 and 93 FERC ] 61,289 (2000). 
Additionally, the CSC project facilities were integrated into the 
NEPOOL regional transmission system operated and administered by ISO 
New England, Inc., through amendments to the NEPOOL Tariff and 
Restated NEPOOL Agreement. New England Power Pool, 99 FERC ] 61,338 
and 100 FERC ] 61,259 (2002).
    \14\ TransEnergie U.S., Ltd., 98 FERC ] 61,144 (2002).
    \15\ TransEnergie U.S., Ltd., 98 FERC ] 61,147 (2002).
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    11. Similarly, we conditionally approved the rates, terms and 
conditions proposed by Neptune Regional Transmission System, LLC, 
(Neptune) for service over its planned merchant transmission 
facilities.\16\ Neptune proposed to build in four stages several 
thousand miles of undersea high-voltage direct current transmission 
lines and associated facilities to connect Maine, New Brunswick and 
Nova Scotia with capacity-constrained markets in Boston, New York City, 
Long Island, and Connecticut.
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    \16\ Neptune Regional Transmission System, LLC, 96 FERC ] 
61,147, order on reh'g, 96 FERC ] 61,326 (2001), order on motion for 
clarification, 98 FERC ] 61,140 (2002).
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    12. We also conditionally authorized a proposal by Northeast 
Utilities Service Company (NUSCO) to construct a merchant transmission 
project consisting of a 330 MW direct current cable under Long Island 
Sound, Connecticut-Long Island Cable.\17\
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    \17\ Northeast Utilities Service Company, 98 FERC ] 61,310 
(2002).
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3. Western Orders
    13. We issued a series of orders (Western Orders) to remove 
obstacles to increased energy supply in the West in response to the 
severe electric energy crisis facing California and the Western United 
States during 2000-2001.\18\ The Western Orders waived prior notice 
requirements and granted authorization of market-based rates for 
wholesale

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power sales from generation used primarily for back-up and self-
generation, authorized the resale of load reductions at wholesale at 
market-based rates, waived prior notice requirements for wholesale 
contract modifications to facilitate demand-side management, permitted 
demand side management costs to be treated consistently with other 
types of incremental and out-of-pocket costs, and allowed premiums on 
equity returns and accelerated depreciation for projects that increase 
electric transmission capacity and could be in service by November 1, 
2002.
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    \18\ See Removing Obstacles to Increased Electric Generation and 
Natural Gas Supply in the Western United States, 94 FERC ] 61,277, 
further order on removing obstacles to increased energy supply and 
reduced demand in the Western United States and dismissing petition 
for rehearing, 95 FERC ] 61,225, order on reh'g, 96 FERC ] 61,155, 
order on reh'g, 97 FERC ] 61,024 (2001).
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4. SMD NOPR
    14. On July 31, 2002, we issued a notice of proposed rulemaking 
that proposed a framework to remedy remaining undue discrimination in 
the provision of interstate transmission services and in other industry 
practices.\19\ The SMD NOPR also proposed to create ``seamless'' 
wholesale power markets that allow sellers to transact easily across 
transmission grid boundaries, through the implementation of 
standardized transmission service and spot markets and through the 
elimination of rate pancaking, among other things. Because of their 
regional scope and configuration, we believe that RTOs can most quickly 
and efficiently implement standardized transmission service and spot 
markets and most effectively eliminate rate pancaking.
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    \19\ Remedying Undue Discrimination through Open Access 
Transmission Service and Standard Electricity Market Design, 67 FR 
55,451, FERC Stats. & Regs. ] 32,563 (2002) (SMD NOPR).
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    15. The SMD NOPR points out other concerns identified by market 
participants through formal complaints, hotline calls, public 
conferences, and pleadings. Market participants complain about the 
difficulties they have experienced in gaining equal access to the 
transmission grid to compete with vertically integrated utilities. 
Market participants also complain that companies that own both 
transmission and generation under-invest in transmission because the 
resulting competitive entry often decreases the value of their 
generation assets. Much of this problem is directly attributable to the 
remaining incentives and ability of vertically integrated utilities to 
exercise transmission market power to protect their own generation 
market share. Independent transmission providers and owners, operating 
under a common set of rules, would solve these problems.
    16. The SMD NOPR noted that we have long recognized that the ITC 
business model can bring significant benefits to the industry:

    Their for-profit nature with a focus on the transmission 
business is ideally suited to bring about: (1) Improved asset 
management including increased investment; (2) improved access to 
capital markets given a more focused business model than that of 
vertically integrated utilities; (3) development of innovative 
services; and (4) additional independence from market 
participants.\20\
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    \20\ See SMD NOPR at P 132.

    It concluded that these characteristics of ITCs can have 
significant benefits for the implementation of Standard Market Design, 
particularly in the areas of development of transmission infrastructure 
and structural independence from market participants.\21\
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    \21\ Id.
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    17. The SMD NOPR also proposes that independent transmission 
providers institute locational marginal pricing to provide market 
participants with efficient price signals. We expect such price signals 
to facilitate efficient operation and expansion of the grid; but these 
price signals alone will not achieve efficient grid operation and 
expansion in many cases. ITCs would be more likely to relieve 
congestion through transmission investment than a company that benefits 
from the value of generation in constrained areas.
    18. This proposed policy statement supports the SMD NOPR and Order 
No. 2000 goals of RTO formation and participation and a standardized, 
independent competitive wholesale electricity market by creating 
incentives for RTO participation, independent transmission operation, 
efficient transmission system operations and new transmission 
construction and technology investment.
5. Energy Infrastructure Conferences and Reports
    19. Beginning in the fall of 2001, we have held four regional 
conferences on energy infrastructure issues to explore the near- and 
long-term needs for additional electric transmission facilities in each 
area of the country and the challenges to timely identification, 
permitting and construction of those facilities.\22\ Several notable 
reports have been issued on these topics.\23\ It is clear that over the 
past decade, investment in the nation's transmission infrastructure has 
not kept pace with load growth or with the increased demands brought 
about by industry restructuring, including open access transmission 
service and regional service provided by ISOs and RTOs.\24\ The result 
has been increased transmission congestion, which is evidenced by a 
dramatic increase in low ATC postings and use of Transmission Loading 
Relief (TLR) procedures,\25\ and in significant energy price 
differentials between regions.\26\
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    \22\ See transcripts of the Western Conference held on November 
2, 2001 (Docket No. AD01-2), the Southeast Conference held on May 9, 
2002 (Docket No. AD02-13), the Northeast Conference held on January 
31, 2002 (Docket No. AD02-6), and the Midwest Conference held on 
November 13, 2002 (Docket No. AD02-22). These transcripts, along 
presentations made at the conferences, are available on our website, 
http://www.ferc.gov /electric/infrastructure.htm.
    \23\ See, e.g., Transmission Planning for a Restructuring U.S. 
Electricity Industry, prepared for Edison Electric Institute by Eric 
Hirst and Brandon Kirby, June 2001 (EEI Report); Conceptual Plans 
for Electricity Transmission in the West, Report to the Western 
Governors' Association, August 2001; Financing Electricity 
Transmission in the West, Report to the Western Governors' 
Association, February 2002; National Transmission Grid Study, United 
States Department of Energy (DOE), May 2002 (DOE Grid Study). 
Cambridge Energy Research Associates is working on a similar study.
    \24\ See EEI Report at 5-8; DOE Grid Study at 7.
    \25\ In the Southeast, the incidence of TLRs increased 354 
percent from the summer of 1999 to the summer of 2000. See Staff 
Report to the Federal Energy Regulatory Commission on the Bulk Power 
Markets in the United States (Nov. 1, 2000), available at http://www.ferc.gov /electric/bulkpower/southeast.pdf, at 3-38. In the 
Midwest, the incidence increased 472 percent over the same time 
period. See Staff Report to the Federal Energy Regulatory Commission 
on the Bulk Power Markets in the United States (Nov. 1, 2000), 
available at http://www.ferc.gov /electric/bulkpower/midwest.pdf, at 
2-32. See also DOE Grid Study at 5-7.
    \26\ See DOE Grid Study at 16-18; Electric Transmission 
Constraint Study, Staff Report to the Federal Energy Regulatory 
Commission (December, 2001), available at http://www.ferc.gov /
calendar/commissionmeetings/Discussion--papers/12-19-01/e-
1xproject%20cm--121901--presentation% 20v3.ppt.
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IV. Discussion

A. A Clear Policy is Needed

    20. We are committed to achieving the goals envisioned by Order No. 
2000 and the SMD NOPR. Accordingly, we are proposing incentives to 
promote the efficient operation and expansion of the transmission grid 
through the development of independent RTOs and ITCs. We also propose 
incentives for the construction of grid enhancements or employment of 
innovative operating practices that should yield improved performance 
of the transmission grid and a more competitive wholesale electricity 
market. Many of our orders to date on transmission rates have been 
targeted more toward ``hold harmless'' provisions to protect a utility 
from adverse ratemaking consequences due to transfer of its facilities 
to an RTO or ITC and have not resulted in true incentive

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rate mechanisms.\27\ Other rate orders have been narrow and fact-
specific, including Trans-Elect, where our allowance of a positive 
monetary incentive was based, in part, on unique circumstances 
involving stipulations with the affected transmission-dependent 
utilities and the relevant state commission. Similarly, the incentives 
we provided in the Western Orders were premised on circumstances unique 
to California and the Western United States during 2000-2001. Our goal 
with this proposal is to provide the regulatory certainty the industry 
needs to move forward.
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    \27\ For instance, this is true of the allowance for amounts 
necessary to hold a seller of transmission assets harmless from the 
income tax consequences of the divestiture, as approved in 
International Transmission.
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    21. While significant benefits from competition are expected to 
result from RTOs and ITCs, these benefits will be shared among end-use 
customers and generators, among others. To assure that transmission 
owners receive benefits from RTO formation, we believe that it is 
reasonable to allow an adjustment to be applied to the rates of 
transmission owners participating in an RTO, or in an ITC within an 
RTO, as discussed further below.
    22. Similarly, significant benefits from increased competition and 
improved reliability will occur from the construction of needed grid 
expansions and from other measures that make additional transmission 
capacity available to market participants. Therefore, it is reasonable 
to encourage investments in grid capacity expansion by adjusting the 
rates of transmission owners for investment in certain new transmission 
facilities that will be under operational control of RTOs and for other 
actions that result in additional transmission capacity under RTO 
management being made available to market participants.
    23. We believe that this policy could encourage the industry to 
achieve an independent and regional approach to transmission and to 
adopt other measures to improve the performance of the transmission 
grid.

B. Incentive Policy

1. RTO Participation and ITC Formation
    24. We propose to provide generic ROE-based incentives to 
transmission owners that participate in RTOs, and ITCs under RTOs. 
Under this proposed policy, any entity that transfers operational 
control of transmission facilities to a Commission-approved RTO would 
qualify for an incentive adder of 50 basis points on its ROE for all 
such facilities transferred.
    25. ITCs that participate in RTOs and meet the independent 
ownership requirement (discussed below) would qualify for an additional 
incentive equivalent to 150 basis points applied to the book value of 
facilities at the time of the divestiture. Such ITCs would be allowed 
to recover, through transmission rates, a lump sum dollar amount 
calculated on the basis of a 150 basis point ROE adder. The lump sum 
dollar amount would be determined at the time of divestiture but would 
be amortized and recovered over the period during which the incentive 
is applied. Recovery of the lump sum dollar amount would yield the same 
amount, after taxes, on a present value basis, as the increase in 
after-tax returns resulting from application of the ROE adder to 
current rate base over the period during which the incentive is 
applied.
    26. An ITC will qualify for the incentive based on independent 
ownership by becoming a participant in a RTO. There must be no active 
or passive ownership interests in the ITC by market participants and no 
financial interests by the ITC or its employees in any market 
participant. For the purpose of applying this independent ownership 
criterion, ``market participant'' is defined in 18 CFR 35.34(b)(2) with 
respect to the RTO in which the ITC participates.\28\
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    \28\ Order No. 2000 requires case-by-case review of passive 
ownership proposals to determine if they are adequately independent 
by design, and also requires follow-up compliance audits to ensure 
that independence is fully realized. Even so, passive ownership 
arrangements may not give market participants adequate confidence 
that transmission service is being provided without undue 
discrimination. Because of the resources required for case-by-case 
review and compliance audit, and potential for continued perception 
of undue discrimination, we do not believe that extending additional 
incentives for independent ownership to passive ownership 
arrangements is justified.
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    27. The ROE-based lump sum incentive for independent ownership 
would apply prospectively to ITCs.\29\ We have already provided an 
incentive for creation of an ITC for the Michigan Transco system in 
Trans-Elect. We recognize that parties may be currently negotiating 
divestiture of transmission assets to form ITCs.\30\ To avoid delaying 
such transactions, we propose to permit the parties to any divestiture 
to an ITC filed with us within 6 months of adoption of this policy 
statement to propose either the allowance tied to deferred taxes that 
was approved in Trans-Elect or the ROE-based lump sum payment incentive 
for independent ownership proposed herein.
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    \29\ Our incentive for RTO participation would be available to 
public utilities that have already turned over operational control 
of their facilities to a Commission-approved RTO, but have not yet 
received the incentive of 50 basis points.
    \30\ Two transactions have recently been filed and are currently 
pending our review. Illinois Power Company, et al., (Illinois Power) 
filed in Docket No. EC03-30-000, et al., for, among other things, 
the sale of all of Illinois Power's right, title, and interest in 
its jurisdictional transmission facilities and related assets. 
Additionally, ITC Holdings Corporation et al., filed in Docket No. 
EC03-40-000, et al., for approval of DTE Energy's sale of 
International Transmission Company.
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    28. To encourage timely participation in RTOs and formation of 
ITCs, we propose a deadline of December 31, 2004, to qualify for these 
incentives. A public utility would qualify for the RTO incentive adder 
as soon as it has transferred operational control of its transmission 
facilities to an approved and operating RTO, and would be authorized to 
receive the incentive for RTO participation until December 31, 2012, 
with such recovery contingent upon continued participation in a 
Commission-approved RTO. A public utility that has divested its 
transmission facilities to an ITC would qualify for the ITC incentive 
adder once the ITC has transferred operational control of its 
transmission facilities to an approved and operating RTO and meets the 
independent ownership criteria, and would receive the incentive for 
independent ownership until December 31, 2022, with such recovery 
contingent upon continued independence from market participants and 
continued participation in a Commission-approved RTO.
    29. We seek comment on any clearly defined levels between these two 
levels of independence (i.e., RTO participation and ITC formation 
within an RTO) that could merit incentives above the basic 50 basis 
point incentive proposed for RTO participation. For example, if the ITC 
directly employs all of the people who work on the transmission system, 
it will operate with greater independence than if it were staffed by 
employees of transmission owners affiliated with market participants. 
Should such behavior be encouraged?
2. Enhanced Grid Performance
    30. We also propose a generic ROE-based incentive equal to 100 
basis points for investment in new transmission facilities which are 
found appropriate pursuant to an RTO planning process.
    31. We are especially interested in encouraging investment in new 
technologies that can be installed relatively quickly (i.e., do not 
require the long siting process for procurement of new rights-of-way, 
have designs that accommodate modular and portable

[[Page 3846]]

application, and may be environmentally benign). Such technologies 
include: (1) Improved materials that allow significant increases in 
transfer capacity using existing rights-of-way and structures; (2) 
equipment that allows greater control of energy flows, enabling greater 
use of existing facilities; (3) sophisticated monitoring and 
communication equipment that allows real-time rating of transmission 
facilities, facilitating greater use of existing transmission 
facilities; and (4) other measures. Such technologies appear to offer 
significant promise to expand grid capacity, reduce congestion, improve 
reliability, and enhance wholesale competition without great cost or 
delay. We seek comment on what we can do to encourage investment in 
such technologies, what criteria we should use to determine that a 
technology investment merits an incentive, and how to structure such 
incentives. For example, these technology options may not always be 
considered in RTO expansion plans, so a requirement that new investment 
be made pursuant to the RTO planning process could foreclose the use of 
many promising technologies.
    32. We realize that the most timely and cost-effective ways to meet 
demand for additional grid capacity will not always be additional 
transmission facilities; rather, they may be innovative operating 
practices, such as operation of facilities beyond traditionally 
accepted limits, distributed generation, demand response or demand-side 
management. We invite comments on what actions other than investment in 
new facilities should receive incentives, what form those incentives 
should take, and how we can encourage them.
    33. We also would like suggestions on how to measure improved 
performance of the grid. What additional guidance or assurances are 
needed from us in order to encourage actions that result in improved 
grid performance?
    34. We want to ensure that market solutions prevail where 
appropriate. Are additional measures needed to facilitate and encourage 
merchant transmission to relieve the nation's transmission bottlenecks?
    35. We seek comments on whether the proposals set forth in this 
policy statement strike an appropriate balance. Are there additional 
incentives or incentive levels consistent with pricing for a monopoly 
service? Should we consider alternatives to ROE-based incentives such 
as accelerated depreciation for investment in critical transmission 
facilities? Finally, we seek comments on whether the duration of the 
proposed incentives is appropriate.
3. Implementation
    36. Once the final policy statement has been issued, eligible 
public utilities would need to make a filing pursuant to section 205 of 
the Federal Power Act and receive Commission authorization to receive 
the proposed incentives. Unlike the innovative rate proposals in Order 
No. 2000, we would not require that public utilities file a cost-
benefit analysis to qualify for the incentives associated with RTO 
participation and divestiture of transmission assets.\31\
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    \31\ We expect that transmission expansions undertaken via the 
RTO planning process would not need an additional cost-benefit 
analysis. However, we seek comments on what analysis, if any, should 
be required to qualify for the incentives for other measures to 
promote efficient operation and expansion of the transmission grid.
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    37. The ROE-based incentives would be subject to a cap on the 
overall ROE, including incentive adders, equal to the top of the range 
of reasonable ROEs for a proxy group consisting of the investor-owned 
transmission owners participating in the relevant RTO whose shares are 
publicly traded. We note that the sum of these incentives, totaling 300 
basis points,\32\ would have resulted in an overall ROE within the zone 
of reasonableness established for the Midwest ISO Transmission Owners 
in Docket No. ER02-485-000. We believe that these incentives will 
encourage RTO participation and independent ownership in a timely 
fashion and that customers will benefit from an independent and 
regional approach to the provision of electric transmission service. 
The additional incentives proposed for new investment in transmission 
facilities, in combination with RTO system expansion planning, should 
encourage long-overdue investment in new transmission, increase the 
number of generators who can compete in the market place, improve 
efficiency and reliability, and ultimately lower the costs paid by 
customers for electricity.
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    \32\ For new transmission investment constructed pursuant to an 
RTO planning process and then subject to divestiture to an ITC, the 
total incentive premium provided by this proposal would be the sum 
of 50 basis points for RTO participation plus 150 basis points for 
ITC formation plus 100 basis points for transmission enhancements.
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    38. The incentives proposed here are not the only ones we will 
consider. Public utilities may continue to submit other innovative rate 
proposals in accordance with 18 CFR 35.34(e)(1). We will determine the 
reasonableness of such proposals on a case-by-case basis. However, we 
clarify that the proposed ROE incentives are intended to encourage RTO 
and ITC participation and new investment and not to serve in lieu of 
innovative rate mechanisms that hold utilities harmless from adverse 
rate effects from the transfer of their facilities to an RTO or ITC 
within an RTO (e.g., innovative rates based on bundled retail rates or 
an allowance for amounts necessary to hold a seller of transmission 
assets harmless from the income tax consequences of the divestiture).

V. Comment Procedures

    39. We invite interested persons to submit written comments on the 
proposals in this notice, including any related matters or alternative 
proposals. Comments are due 45 days from the date of publication in the 
Federal Register. Comments must refer to Docket No. PL03-1-000, and may 
be filed either in electronic or paper format. Those filing 
electronically do not need to make a paper filing.
    40. Documents filed electronically via the Internet can be prepared 
in a variety of formats, including WordPerfect, MS Word, Portable 
Document Format, Rich Text Format, or ASCII format, as listed on our 
Web site at http://www.ferc.gov, under the e-Filing link. The e-Filing 
link provides instructions for how to Login and complete an electronic 
filing. First time users will have to establish a user name and 
password. We will send an automatic acknowledgment to the sender's E-
Mail address upon receipt of comments. User assistance for electronic 
filing is available at 202-502-8258 or by E-Mail to [email protected]. 
Comments should not be submitted to the E-Mail address.
    41. For paper filings, the original and 14 copies of such comments 
should be submitted to the Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426.
    42. All comments will be placed in our public files and will be 
available for inspection in our Public Reference Room at 888 First 
Street, NE., Washington, DC 20426, during regular business hours. 
Additionally, all comments may be viewed, printed, or downloaded 
remotely via the Internet through the Commission's Homepage using the 
FERRIS link, as explained below.

VI. Document Availability

    43. In addition to publishing the full text of this document in the 
Federal Register, we provide all interested persons an opportunity to 
view and/or print the contents of this document via the Internet 
through the Commission's Home Page (http://www.ferc.gov) and in FERC's 
Public Reference Room during normal business hours (8:30 a.m. to 5

[[Page 3847]]

p.m. Eastern time) at 888 First Street, NE., Room 2A, Washington, DC 
20426.
    44. From the Commission's Home Page on the Internet, this 
information is available in the Federal Energy Regulatory Records 
Information System (FERRIS). The full text of this document is 
available on FERRIS in PDF and WordPerfect format for viewing, 
printing, and/or downloading. To access this document in FERRIS, type 
the docket number excluding the last three digits of this document in 
the docket number field.
    45. User assistance is available for FERRIS and the Commission's 
Web site during normal business hours from our Help line at (202) 502-
8222 or the Public Reference Room at (202) 502-8371 Press 0, TTY (202) 
502-8659. E-Mail the Public Reference Room at 
[email protected].

    By direction of the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 03-1699 Filed 1-24-03; 8:45 am]
BILLING CODE 6717-01-U