[Federal Register Volume 68, Number 89 (Thursday, May 8, 2003)]
[Proposed Rules]
[Pages 24679-24689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11357]


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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

April 28, 2003.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Proposed rule; Notice of white paper and request for comments.

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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. See 67 FR 
55452 (Aug. 29, 2002). The Commission has distributed a white paper to 
set forth its assessment of how the electric industry should move 
forward to achieve long-term benefits for electricity customers, and 
how it intends to change the rule proposed in the above docket on July 
31, 2002, to meet the concerns that have been raised in rulemaking 
comments. The Commission welcomes public comment on this document.

DATES: Comments are welcome at any time.

ADDRESSES: Send comments to: Office of the Secretary, Federal Energy 
Regulatory Commission, 888 First Street, NE., Washington, DC 20426.

FOR FURTHER INFORMATION CONTACT: 
Alice Fernandez (Technical Information), Office of Markets, Tariffs and 
Rates, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8284.
David Mead (Technical Information), Office of Markets, Tariffs and 
Rates, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8028.
Mark Hegerle (Technical Information), Office of Markets, Tariffs and 
Rates, Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8287.
David Withnell (Legal Information), Office of General Counsel, Federal 
Energy Regulatory Commission, 888 First Street, NE., Washington, DC 
20426, (202) 502-8421.

[[Page 24680]]


SUPPLEMENTARY INFORMATION: In addition to publishing the full text of 
this document in the Federal Register, the Commission provides all 
interested persons an opportunity to view and/or print the contents of 
this document via the Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's Public Reference Room during normal 
business hours (8:30 a.m. to 5 p.m. Eastern time) at 888 First Street, 
NE., Washington, DC 20426.
    Today the Commission is publishing a White Paper to set forth its 
assessment of how the electric utility industry should move forward to 
achieve long-term benefits for electricity customers, and how it 
intends to change the rule proposed in the above docket on July 31, 
2002, to meet the concerns that have been raised in rulemaking 
comments.
    The White Paper is being placed in the record of this rulemaking 
docket. It will also be available on the Commission's Web site at 
http://www.ferc.gov/Electric/RTO/mrkt-strct-comments/discussion_paper.htm.
    The Commission welcomes public comment on this document. All 
comments will be available for review at the Commission or may be 
viewed on the Commission's Web site at http://www.ferc.gov, using the 
``FERRIS'' link. Enter the docket number excluding the last three 
digits in the docket number field to access the document. For 
assistance, contact FERC Online Support at [email protected] 
or toll-free at (866) 208-3676, or for TTY, contact (202) 502-8659. 
Comments may be filed electronically via the Internet in lieu of paper; 
see 18 CFR 385.2001(a)(1)(iii) and the instructions on the Commission's 
Web site under the ``e-Filing'' link. The Commission strongly 
encourages electronic filings.
    The Commission also intends to begin holding regional technical 
conferences in the near future, to discuss with states and market 
participants in each region reasonable timetables for addressing 
wholesale market design issues discussed in the White Paper and ways to 
tailor the Commission's final rule to benefit customers within the 
region. We will issue notices of the conferences shortly.

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

White Paper; Wholesale Power Market Platform

    The Federal Energy Regulatory Commission's core mission under the 
Federal Power Act is to achieve wholesale electricity markets that 
produce just and reasonable prices and work for customers. The 
Commission's July 2002 proposal to harmonize wholesale power markets 
sought to advance this core mission in the context of the new realities 
of regional electricity markets.\1\
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    \1\ Notice of Proposed Rulemaking, Docket No. RM01-12-000, 
issued July 31, 2002.
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    The industry has been evolving toward a market-based approach for 
well over a decade and active long-term wholesale bilateral markets 
exist in all regions of the country. However, short-term wholesale 
markets with transparent prices and market structures that will 
reliably produce just and reasonable prices are not likely to develop 
without strong Commission action. Wholesale electricity markets do not 
automatically structure themselves with fair behavioral rules, provide 
a level playing field for market participants, effectively monitor 
themselves, check the influence of market power, mitigate prices that 
are unlawful, or fix themselves when broken. These are the 
responsibilities of the Commission under current law, and our proposal 
was made with these responsibilities in mind.
    Our proposal was informed by the experiences of this country and 
other countries in electric market design, including the effects of 
supply shortages, demand that does not respond to high prices, lack of 
price transparency in the marketplace, and the importance of market 
monitoring and market power mitigation. Based on the extensive comments 
we have received during the past nine months, we are issuing this White 
Paper to set forth our assessment of how best to move forward in the 
electric industry for the long-term benefit of electricity customers, 
and how we intend to change our proposed rule to meet the concerns that 
have been raised.
    Our goals continue to be reliable, reasonably priced electric 
service for all customers; sufficient electric infrastructure; 
transparent markets with fair rules for all market participants; 
stability and regulatory certainty for customers, the electric power 
industry, and investors; technological innovation; and efficient use of 
the nation's resources. Further, providing regulatory certainty for the 
industry and investors in order to build needed infrastructure is a 
critical need facing the energy industry and requires Commission 
action.
    Under the Final Rule, we intend to focus on the formation of 
regional transmission organizations (RTOs) and on ensuring that all 
RTOs and independent system operators (ISOs) have good wholesale market 
rules in place.\2\ We will eliminate the proposed requirement that 
public utilities create or join an Independent Transmission Provider. 
Instead, in light of the fact that almost all public utilities already 
have joined, or committed to join, an RTO or ISO, the Final Rule will 
require public utilities to join an RTO or ISO.\3\ Further, we intend 
to adopt a Final Rule that allows for phased-in implementation and 
sequencing tailored to each region and that allows modifications to 
benefit customers within each region. In addition, if for a specific 
RTO or ISO it can be demonstrated to the Commission that the costs of 
implementing any feature of the market platform outweigh its benefits, 
the Commission will not require implementation of the feature for that 
particular RTO or ISO.\4\
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    \2\ For the purposes of the Final Rule, all of the 
characteristics and functions for RTOs would apply to Independent 
System Operators (ISOs), except for scope and regional 
configuration.
    \3\ The requirements of the Final Rule will not apply to 
Commission-jurisdictional electric power cooperatives that serve 
only retail load.
    \4\ We intend to commence technical conferences in each region 
and to work with states and market participants to develop 
reasonable timetables for moving forward.
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    For the basic wholesale market platform, we intend to build upon 
the existing rules adopted in Order No. 2000 for RTOs by adding 
features that we have learned are necessary for effective wholesale 
power markets.\5\ For example, Order No. 2000 did not include market 
power mitigation measures and does not prevent flawed market designs. 
Wholesale electric markets will not be able to deliver full customer 
benefits in the future without the oversight and transparency that 
regional independent transmission organizations can provide. Healthy 
and well-functioning wholesale power markets are central to the 
national economy, and we believe that regional, independent operation 
of the transmission system, with proven market rules in place, is the 
critical platform for the future success of electric markets. 
Divestiture is not required to achieve independent operation of the 
transmission system. Companies may remain vertically integrated under 
an RTO or ISO.
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    \5\ Details of the wholesale power market platform and a 
comparison of them to the requirements of Order No. 2000 are 
included in Appendix A.
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    In the years since Congress enacted the Energy Policy Act of 1992, 
competition among power plants for wholesale customers' business has 
largely replaced traditional cost-of-service regulation of wholesale 
power sales. The Department of Energy found

[[Page 24681]]

that relying more on markets has saved customers $13 billion per year 
over traditional regulation. It has stimulated innovation in generation 
and transmission technologies. It has freed customers from being forced 
to pay for the ``stranded costs'' of unwise investments. This 
competitive market framework came about as a result of national 
legislation and a series of Commission initiatives in both the 
wholesale gas and electric industries. In particular, these actions 
were intended to provide all wholesale power sellers with equal access 
to the transmission grid. Equal, nondiscriminatory access is a 
necessary prerequisite for fair competition among sellers, and, 
together with regional operation of the grid, gives wholesale buyers 
access to a much wider range of supply choices.
    The transition to restructured markets has not been smooth or 
uniform. In regions with an effective wholesale market platform, an ISO 
or RTO provides effective market monitoring and has clear market rules 
designed to protect customers. Some markets, however, clearly have not 
been immune from market design flaws. Experiences in California have 
shown the consequences of poorly designed markets and inadequate 
generation, transmission and demand response. Moreover, they 
demonstrate the need for before-the-fact market power mitigation and 
ongoing market monitoring. Some areas also have experienced ``seams'' 
problems where differences in design between regions create artificial 
barriers to trade which raise costs, limit customer supply choices, and 
create opportunities for exploitation of differences between markets.
    In other areas of the country, where markets do not have 
independent or regional grid operation, the lack of price transparency 
in the marketplace can mask problems and transmission operators can use 
their ability to control the transmission system to favor their own 
power sales. New competitors may be blocked or delayed because the 
transmission operator can favor its affiliated suppliers both in 
interconnecting to the grid and in allocating the costs of 
interconnection. The result of these problems is higher customer costs, 
making independence a critical element for protecting native load. 
Dealing with these issues and concerns on a case-by-case basis takes 
significant time and effort for both the Commission and market 
participants to resolve.
    In the proposed rule, the Commission identified the building blocks 
for a healthy wholesale market to address the problems we have 
experienced in both competitive and non-competitive markets. In moving 
forward on a Final Rule, we believe it is critical to retain certain 
fundamental building blocks for healthy electric markets, and we agree 
with commenters that regional economic differences and regional timing 
constraints must be recognized. Below we identify market issues that 
lend themselves to regional solutions without compromising the 
integrity of a solid market platform.
    The Commission is aware that the success of our RTO-based 
initiative is more likely in a region where the bulk of the 
transmission grid is in the hands of jurisdictional public utilities. 
But in the Pacific Northwest, roughly 80 percent of the grid assets are 
controlled by the Bonneville Power Administration, which is not a 
public utility under the Federal Power Act. Bonneville's participation 
in RTO West is essential for RTO West to succeed. Thus, we encourage 
Bonneville's continued voluntary participation in RTO West. We are also 
aware that Bonneville will continue to participate only if RTO West has 
the flexibility to meet the unique needs of the Pacific Northwest. We 
clarify what may be obvious. Any decision of Bonneville to meet its 
obligations and operational responsibilities with respect to such 
matters as irrigation, flood control, treaties, environmental rules and 
the like is solely Bonneville's to make and is not jurisdictional to 
the Commission. While the Commission has limited jurisdiction over 
Bonneville's rates under the Pacific Northwest Electric Power Planning 
and Conservation Act, the contracts between Bonneville and its 
customers do not require Commission review or approval. We have heard 
the concerns expressed about the merits of locational pricing and a day 
ahead market in a region dominated by interdependent hydroelectric 
resources. With respect to these concerns, our commitment is to work 
with interested parties, including state commissions, to find solutions 
that are appropriate to the unique needs of the Pacific Northwest.
    The Commission will consider all comments received on this White 
Paper, as well as any pending electricity legislation being considered 
in the U.S. Congress, prior to issuing a Final Rule.

Comments on the Proposed Rule

    A number of concerns have been raised about various aspects of the 
proposed rule. We have received approximately 1,000 sets of formal 
comments on our proposed rule. The most extensive concerns involved the 
following issues. We state these concerns and our responses below:

    [sbull] The Commission proposed to assert jurisdiction over 
transmission used to provide retail service to native load customers.

    Pursuant to Order No. 888, the Commission currently asserts 
jurisdiction over wholesale transmission service and unbundled retail 
transmission service by public utilities. In the Final Rule, with 
respect to bundled retail service, we will continue our existing 
practice for RTOs and ISOs of distinguishing between the non-price 
terms and conditions of transmission service and the rates for 
transmission service. As discussed in Appendix A, the non-price terms 
and conditions of the RTO or ISO tariff will apply equally to all 
users, including those taking service to meet their obligation to serve 
bundled retail customers. However, the Commission will not assert 
jurisdiction over the transmission rate component of bundled retail 
service, thereby avoiding unintended issues raised by a new assertion 
of jurisdiction.

    [sbull] Specific features of the proposed rule, particularly the 
resource adequacy requirement and the regional transmission planning 
requirement, infringe on state jurisdiction.

    The Commission clarifies that nothing in the Final Rule will change 
state authority over these matters. We will not include a minimum level 
of resource adequacy. The RTO or ISO may implement a resource adequacy 
program only where a state (or states) asks it to do so, or where a 
state does not act. The Final Rule will direct RTOs and ISOs to develop 
a periodic regional transmission plan for submission to relevant state 
and local siting authorities and to assist the states in whatever 
manner they desire, including evaluating the impact of new generation, 
transmission, energy efficiency, and demand response on regional 
reliability and resource adequacy.

    [sbull] The transition process to the new proposed transmission 
service would not provide sufficient protection for existing customers.

    As with our earlier restructuring efforts in the natural gas and 
electric power industries, we want to ensure that existing customers 
retain their existing transmission rights and retain rights for future 
load growth. While all customers that pay a basic access charge can 
schedule transmission service, it is important that customers be able 
to protect themselves from congestion costs through Firm Transmission 
Rights (FTRs). The Final Rule will eliminate any requirement that FTRs 
be auctioned. We will, instead, look to

[[Page 24682]]

regional state committees to determine how such rights should be 
allocated to current customers based on current uses of the grid. 
Varying approaches to FTR allocation need not create ``seams'' with 
neighboring regions.

    [sbull] The proposed rule was too prescriptive in substance and in 
implementation timetable, and did not sufficiently accommodate regional 
differences.

    As discussed above, we intend to adopt a Final Rule that allows for 
phased-in implementation and sequencing tailored to each region and 
that allows modifications to benefit customers within each region. To 
the extent that it can be demonstrated to the Commission that the costs 
of implementing any feature of the Final Rule outweigh its benefits, 
the Commission will not require the RTO or ISO to implement that 
feature. Before issuing a Final Rule, we intend to convene technical 
conferences with state commissioners and market participants in each 
region to discuss which aspects of the platform (if any) have not 
already been addressed and the timeline, sequence and budget for moving 
forward.\6\ Also, as discussed in Appendix A, each RTO or ISO would 
provide a forum for state representatives to participate in the RTO's 
or ISO's decisionmaking process. That forum is referred to as the 
regional state committee.
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    \6\ To avoid the reliability and operational problems that 
result when some parts of the grid do not participate in RTO or ISO 
functions, we strongly encourage regional decision-making on RTO or 
ISO implementation through regional state committees, stakeholder 
committees, and other authorities in the region.

    [sbull] The proposed rule did not provide sufficient clarity on 
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cost recovery for investment in new transmission facilities.

    Each RTO or ISO will be required to have a clear transmission cost 
recovery policy outlined in its tariff. We will look to the RTO or ISO 
and the regional state committee to determine the appropriate regional 
approach for allocating the costs of new transmission. Regions may 
differ on the extent to which they want to rely on participant funded 
expansions; this difference need not create ``seams'' with neighboring 
regions. Because this issue is such an important one in stimulating 
appropriate investment by both existing and new transmission companies, 
we will allow an RTO or ISO to implement such policies once there is a 
regional planning process through which an independent entity performs 
all necessary facilities studies and determines cost responsibility for 
the required transmission upgrades.\7\
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    \7\ In Appendix A, we explain that allowing participant funding 
on the basis of having an independent entity perform transmission 
planning and related cost allocation is a transitional approach that 
could be used in anticipation of the RTO or ISO assuming operational 
control of the regional transmission grid within one year.
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Wholesale Market Platform

    The Commission believes that certain elements need to be in place 
for well-functioning wholesale markets.

Regional Independent Grid Operation

    Order No. 2000 required that all RTOs meet four minimum 
characteristics: independence, scope and regional configuration, 
operational authority, and short-term reliability. The Final Rule will 
reaffirm the need for these characteristics. In particular, the lack of 
independence continues to plague electricity markets because it 
provides an incentive for those who own generation and operate 
transmission facilities to operate the transmission system in ways that 
exclude competing generation suppliers and can allow the exercise of 
market power. This conflict of interest cannot be remedied through 
oversight and enforcement. Rather, structural separation of 
transmission operation from other wholesale market activities is 
required to eliminate the ability for such manipulation.
    Regional operation is critical for both reliability and efficiency 
because power flows freely throughout regional grids. Order No. 2000 
said ``the scope and configuration of the regions in which the RTOs are 
to operate will significantly affect how well they will be able to 
achieve the necessary regulatory, reliability, operational and 
competitive benefits.'' However, in the Final Rule we will allow 
flexibility on scope and configuration for ISOs. RTOs and ISOs are 
developing methods of interregional coordination that allow separate 
control, but a single market from the customer's perspective. 
Therefore, in the Final Rule we will not require ISOs to meet the scope 
and regional configuration requirement. However, all must actively 
pursue interregional coordination between RTOs and ISOs, including the 
elimination of the payment of multiple access fees for transactions 
that cross ISO and RTO borders.
    Order No. 2000 required that the RTO be the sole provider of 
transmission service and sole administrator of its own open access 
tariff. Included in this is the requirement that the RTO have the sole 
authority for the evaluation and approval of all requests for 
transmission service including requests for new interconnections. The 
Final Rule will reaffirm these requirements.

Regional Transmission Planning Process

    Regional planning of the transmission grid is essential to ensure 
the most effective use of the interconnected grid facilities. The RTO 
or ISO is in a unique position to discern regional needs and address 
factors inhibiting investment in transmission and generation through 
conducting a region-wide planning process. As required in Order No. 
2000, the Final Rule will require the RTO or ISO to produce technical 
assessments of the regional grid and support the state siting 
authorities or multi-state entities by performing necessary studies. 
The purpose is to assist the states and market participants by giving 
an independent assessment of the transmission facilities needed by the 
region to reliably and economically serve load located within the 
region. How the RTO or ISO, state commissions, transmission owners, and 
other market participants participate in the process will be decided 
regionally. By administering the regional tariff, RTOs and ISOs also 
provide the critical link to a cost recovery mechanism for regional 
transmission expansions. The Final Rule would require RTOs and ISOs to 
have a regional planning process in place as soon as practicable.

Fair Cost Allocation for Existing and New Transmission

    The costs associated with the existing grid, other than those 
directly assigned, will continue to be recovered through rates paid by 
customers. To avoid having customers pay multiple, cumulative charges 
for transmission service across multiple utility grids in a region, the 
rate paid by a customer should permit that customer to have access to 
the entire region at a single rate. As discussed in Appendix A, 
regional state committees may agree on the form of access charge that 
will be filed by the RTO or ISO under section 205 of the Federal Power 
Act. That means the committee will decide whether to propose to move to 
a uniform rate for transmission service throughout the region (known as 
postage stamp rates), or whether to propose to maintain single, but 
different access charges depending on where power is taken off the grid 
(known as license plate rates).\8\
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    \8\ Under license plate rates, the single access charge is 
usually based on each transmission owners' service area.

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[[Page 24683]]

    To gain access to a wider range of supply choices, RTOs and ISOs 
should eliminate the payment of multiple access fees across RTO and ISO 
borders. Rate mechanisms to minimize cost shifts should be used. If 
there is a notable imbalance between imports to and exports from an RTO 
or ISO, the net exporting RTO or ISO may seek to recover some of its 
transmission costs through an export rate.
    As discussed above, costs of new transmission expansions will be 
recovered in accordance with the regional pricing policy, which may be 
informed by the appropriate regional state committee. As discussed in 
Appendix A, the regional pricing policy will be filed with the 
Commission by the RTO or ISO.

Market Monitoring and Market Power Mitigation

    These are relatively undeveloped features of Order No. 2000, which 
did not have a market power mitigation component. For customers to 
benefit from wholesale power markets, it is critical that market prices 
fairly reflect the conditions of supply and demand rather than the 
exercise of market power. Each RTO or ISO would have an independent 
market monitor either for the individual RTO or ISO or for a larger 
region.
    The market power mitigation measures must protect against the 
exercise of market power without suppressing prices below the level 
necessary to attract needed investment in new infrastructure in the 
region. At a minimum, the RTO's or ISO's tariff should include rules 
limiting bidding flexibility where there is localized market power. The 
RTO's or ISO's tariff must also include clear market rules designed to 
prevent market manipulation strategies, including the types of anti-
gaming tariff provisions in the proposed rule.
    The types of mitigation tools and the triggers and consequences of 
mitigation should be tailored to the needs of each region. For example, 
energy-limited resources, such as hydroelectric generators, may need to 
have bidding mitigation protocols and thresholds that are different 
from thermal generators. However, mitigation tools which vary by region 
across market seams have the potential to create enforcement problems 
and undesirable behavioral incentives. For this reason, the Commission 
will look closely at mitigation proposals, not only for their 
suitability for the RTO's or ISO's regional markets, but for their 
compatibility with neighboring RTOs and ISOs.

Spot Markets To Meet Customers' Real-Time Energy Needs

    While we expect that the vast majority of energy bought and sold 
will continue to be under negotiated long-term contracts between 
customers and suppliers, the nature of electricity requires the 
availability of a spot market for the last-minute sales or purchases 
needed to ensure system reliability. This balancing function is 
currently performed by the transmission provider. Under the Final Rule, 
the RTO or ISO must use a real-time market for energy to resolve 
imbalances. A transparent spot market not only helps keep the system 
reliable and lowers costs but also provides important price and other 
information to all market participants on an equal and open basis. It 
also gives the public a timely way to assess the functioning of the 
market. These markets will also facilitate customer response to prices 
as well as ease the introduction of some renewable and other innovative 
supply technologies.\9\ The RTO or ISO in each region will develop the 
detailed market rules that will be included in its Commission-filed 
tariff. An RTO or ISO must also introduce a day-ahead market and a 
market for various ancillary services when the market is ready for 
those steps. Unlike Order No. 2000, which allowed power exchanges 
without a check for security constraints, any RTO or ISO day-ahead 
market must be designed to work reliably with the congestion management 
system.\10\
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    \9\ State action is required for retail customers to have demand 
response options. Where states permit end users to participate 
directly in wholesale markets, demand response programs could be 
administered through the RTO or ISO tariff. The Commission strongly 
advocates demand response to limit supplier market power, enhance 
reliability and resource adequacy, and limit price volatility.
    \10\ The failure to check for security constraints created 
perverse incentives for participants in California to create 
congestion.
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Transparency and Efficiency in Congestion Management

    Regions should develop an approach to manage congestion that 
protects against manipulation, uses the grid efficiently, and promotes 
use of the lowest cost generation. Efficient market behavior depends 
heavily on assigning cost responsibility to those who cause the costs 
and the benefits to those who reduce costs. Today, transmission 
providers resolve congestion through a system that causes unnecessarily 
expensive generation redispatch. These added costs are hidden but are 
real and are paid by customers today. Order No. 2000 required RTOs to 
have transparent market mechanisms with efficient price signals in 
place to manage transmission congestion within one year of initial 
operation. We would continue that general approach for both RTOs and 
ISOs. We clarify that this rule will not override decisions we have 
already made in individual RTO or ISO cases regarding congestion 
management.\11\
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    \11\ As discussed in Appendix A, we are also including options 
that will minimize cost shifts.
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Firm Transmission Rights

    RTOs and ISOs that use locational pricing to manage congestion 
would be required to make Firm Transmission Rights (FTRs) available to 
customers.\12\ FTRs protect customers from the costs of congestion. 
Under the Wholesale Power Market Platform, customers in RTOs that use 
locational pricing along with network transmission service would have 
firm physical transmission service, and customers with FTRs would be 
protected from congestion costs.
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    \12\ The discussion applies to RTOs and ISOs that have embraced 
locational pricing. As noted in Appendix A, there are ongoing 
discussions in the Western Interconnection regarding common elements 
of market design. We will not prejudge the results of those ongoing 
discussions.
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    We will not require auctions of these rights. FTRs allow customers 
to schedule service according to the paths specified in their rights, 
with no risk of congestion charges. There also would be no risk of 
curtailment, absent a force majeure event such as the loss of a 
transmission line. By providing protection from congestion costs, FTRs 
also allow market participants to enter into contracts with a locked-in 
price if desired. Thus, FTRs allow for maximum utilization of valuable 
scarce grid capacity and therefore lower costs to customers.
    In the Final Rule, for RTOs or ISOs that have not already addressed 
this issue, these rights would be allocated according to existing 
contracts and existing service arrangements in order to hold customers 
harmless. To the extent transmission rights have already been approved 
by the Commission in RTO or ISO orders we would not override these 
decisions in the Final Rule.

Resource Adequacy Approaches

    Order No. 2000 did not include a regional view of resource 
adequacy. We have learned that if one state has inadequate resources, 
it can create severe problems for the larger region. It is difficult 
for the Commission to assure just and reasonable wholesale market 
prices if there are insufficient resources to meet demand. Each region 
with an RTO or ISO will determine how it will ensure that the region 
has sufficient

[[Page 24684]]

resources to meet customers' needs. The approach to and level of 
resource adequacy will be decided by the states in the region drawing 
from a mix of generation, transmission, energy efficiency, and demand 
response. It is important to have a consistent approach throughout the 
region, which should be developed by the regional state committee. 
States may decide to ensure resource adequacy through state imposed 
requirements on utilities serving load within the region. Other states 
may choose to have RTOs or ISOs operate capacity markets. In any case, 
the choice on the approach is made by the states within the region.

Other Issues on Which Commenters Seek Clarification

    [sbull] RTO and ISO Governance--We will include overarching 
principles of independent governance in the Final Rule, but will decide 
governance issues on a case-by-case basis. The Final Rule will not 
override governance already approved in earlier RTO orders.
    [sbull] RTO Decisions--We confirm that the decisions made in prior 
RTO orders in which we noted an overlap with the Standard Market Design 
rulemaking will not be overturned in the Final Rule.
    [sbull] Liability--A standard tariff provision limiting liability 
for transmission providers will be included in the Final Rule.
    [sbull] Cyber Security--We will adopt the North American Electric 
Reliability Council (NERC) standards for cyber security.
    [sbull] Reciprocity--We propose no change to the Order No. 888 
reciprocity requirements and Order No. 2000 provisions affecting non-
jurisdictional entities in the U.S., Canada, and Mexico. We believe 
non-jurisdictional entities will benefit from RTO formation and the 
development of standardized wholesale market rules. We encourage such 
non-jurisdictional entities to voluntarily participate in RTOs and ISOs 
as full and equal members.
    [sbull] Independent Transmission Company--We propose no change in 
our prior decisions on the functions that should be performed by an RTO 
and those that may be performed by an independent transmission company 
that operates within the RTO's territory.\13\
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    \13\ See TRANSLink Transmission Company, LLC, et al., 99 FERC ] 
61,106 (2002).
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    [sbull] Standards--We are encouraged that NERC, the North American 
Energy Standards Board, and RTOs and ISOs have reached agreements on a 
process through which they will work together in the development of 
reliability and market standards. Market standards developed through 
this process could be included in RTO and ISO tariffs to facilitate 
compatible and seamless rules across the interconnected power grid.

Appendix A Comparison of the Proposed Wholesale Market Platform with 
the RTO Requirements of Order No. 2000

    This appendix compares the current requirements for RTOs of Order 
No. 2000 with the requirements of the Wholesale Market Platform that 
would apply to both RTOs and ISOs. The Wholesale Market Platform is 
designed to build on these existing requirements. ISOs would have to 
satisfy all of the same requirements as RTOs except with respect to 
Scope and Regional Configuration.
    This appendix identifies the changes and additions to the 
Characteristics and Functions specified in Order No. 2000 that would 
result from the Wholesale Market Platform. All other Characteristics 
and Functions requirements would remain the same. The Final Rule for 
the Wholesale Market Platform would also clarify when incremental 
pricing of new transmission facilities (participant funding) could be 
used. Finally, the Final Rule would impose several new market-related 
requirements on RTOs and ISOs.
    Order No. 2000 was a voluntary program. Since that time, almost 
every public utility has joined or has committed to join an RTO or ISO. 
Therefore, the Final Rule will require that all public utilities join 
an RTO or ISO.\1\
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    \1\ The requirements of the Final Rule will not apply to 
Commission-jurisdictional electric power cooperatives that serve 
only retail load.
---------------------------------------------------------------------------

    As discussed in the White Paper, if for a specific RTO or ISO it 
can be demonstrated to the Commission that the costs of implementing 
any feature of the market platform outweigh its benefits, the 
Commission will not require implementation of the feature for that 
particular RTO or ISO.
    Throughout this appendix we discuss the role of the states in RTO 
and ISO decisions. The Wholesale Market Platform would require each RTO 
and ISO to provide a forum for state representatives in the decision-
making process, i.e., a regional state committee. This requirement is 
discussed in more detail below.
    Finally, as discussed in the White Paper, the Commission does not 
intend to overturn decisions that have already been made in individual 
RTO cases. Decisions made in prior RTO orders in which we noted an 
overlap with Standard Market Design will not be overturned in the Final 
Rule. The Commission also does not intend to change our prior decisions 
regarding the functions that should be performed by an RTO and those 
that may be performed by an Independent Transmission Company that 
operates within the RTO's territory.

Characteristics and Functions

    The four Characteristics required of an RTO are: Independence; 
Scope and Regional Configuration; Operational Authority; and Short-term 
Reliability.
    The eight required Functions are: Tariff Administration and Design; 
Congestion Management; Parallel Path Flows; Ancillary Services \2\; 
OASIS; Market Monitoring; Planning and Expansion; and Interregional 
Coordination.
---------------------------------------------------------------------------

    \2\ This includes operation of a real-time spot market for 
energy imbalances.
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Characteristics

1. Independence

    Order No. 2000. RTOs must be independent of market participants. As 
set out in Order No. 2000, by market participant, the Commission means 
any entity that, either directly or through an affiliate, sells or 
brokers electric energy, or provides transmission or ancillary services 
to the RTO unless the Commission finds that the entity does not have 
economic or commercial interests that would be affected by the RTO's 
actions or decisions.
    Wholesale Market Platform. RTOs and ISOs would be required to meet 
all of the Order No. 2000 principles for Independence. In addition, the 
Final Rule will add to the Order No. 2000 requirements overarching 
principles on how to structure independent governance. The Commission 
will decide RTO governance matters on a case-by-case basis. Further, 
these overarching principles will not change governance decisions that 
have been approved in earlier RTO orders.

2. Scope and Regional Configuration

    Order No. 2000. The RTO must serve an appropriate region. The 
region must be of sufficient scope and configuration to permit the RTO 
to maintain reliability, effectively perform its required functions, 
and support efficient and non-discriminatory power markets.
    Wholesale Market Platform. RTOs would be required to satisfy this 
Characteristic. However, new and existing ISOs would not be required to 
satisfy this Characteristic. But, ISOs must actively pursue 
interregional coordination to minimize the creation of

[[Page 24685]]

seams that act as barriers to trade among regions.

3. Operational Authority

    Order No. 2000. The RTO must have operational authority for all 
transmission facilities under its control. The RTO must also be the 
security coordinator for the facilities that it controls.
    Wholesale Market Platform. RTOs and ISOs would be required to meet 
this Characteristic.

4. Short-Term Reliability

    Order No. 2000. The RTO must have exclusive authority for 
maintaining the short-term reliability of the grid that it operates. It 
must have exclusive authority for receiving, confirming and 
implementing all interchange schedules. The RTO must have the right to 
order redispatch of any generator connected to transmission facilities 
it operates if necessary for the reliable operation of these 
facilities. When the RTO operates transmission facilities owned by 
other entities, it must have authority to approve or disapprove all 
requests for scheduled outages of transmission facilities to ensure 
that the outages can be accommodated within established reliability 
standards.
    Wholesale Market Platform. RTOs and ISOs would be required to 
satisfy this Characteristic.

Functions

    Under Order No. 2000, the RTO must perform the following Functions 
when it commences operations, unless otherwise noted.

1. Tariff Administration and Design

    Order No. 2000. The RTO must administer its own transmission tariff 
and employ a transmission pricing system that will promote efficient 
use and expansion of transmission and generation facilities. The RTO 
must be the only provider of transmission service over the facilities 
under its control, and must be the sole administrator of its own 
Commission-approved open access transmission tariff. It must have the 
sole authority to receive, evaluate, and approve or deny all requests 
for transmission service. The RTO must have the authority to review and 
approve requests for new interconnections. Customers under the RTO 
tariff must not be charged multiple access fees for the recovery of 
capital costs for transmission service over facilities that the RTO 
controls.
    Wholesale Market Platform. The Final Rule would retain these 
features and also would clarify the jurisdictional consequences that 
result when a public utility that owns, controls, or operates 
transmission facilities in interstate commerce joins an RTO or ISO. In 
the context of RTOs and ISOs, the RTO or ISO becomes the sole provider 
of transmission services for the facilities it controls, and 
transmission owning members of the RTO or ISO become wholesale 
customers of the RTO or ISO.
    To accommodate both the realities of a regionally operated 
transmission system and the jurisdiction concerns raised by the states, 
the Commission will distinguish non-price terms and conditions of 
transmission service from rates for transmission service. As discussed 
below, we will assert jurisdiction over the non-price terms and 
conditions of transmission used by wholesale transmission customers to 
serve bundled retail customers, but we will not assert jurisdiction 
over the transmission rate component of bundled retail sales of 
electric energy.\3\ Moreover, in setting the wholesale rate for 
transmission, the Commission will rely upon the transmission rate set 
by the states for bundled retail service.
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    \3\ Bundled retail sales of electric energy are sales of 
electric energy to retail customers where generation, transmission, 
distribution, and other services necessary to supply electric energy 
to such customers are sold as a single delivered service by a single 
seller and retail supplier choice is not permitted by state 
authorities.
---------------------------------------------------------------------------

    Non-price terms and conditions of transmission service include 
matters such as reserving capacity and scheduling service, and it is 
critical in the context of RTOs and ISOs that such non-price terms and 
conditions apply to all customers on a not unduly discriminatory basis, 
with appropriate protection of native load customers. Consistent with 
our existing policy for transmission service used to serve unbundled 
retail customers (i.e., those in retail choice states), the Final Rule 
would allow state regulatory authorities to request waivers of any non-
price terms and conditions of the RTO or ISO tariff that are not 
compatible with bundled retail service needs. We note that Commission-
filed open access tariffs have successfully accommodated service to 
unbundled retail customers since Order No. 888 went into effect in 1996 
and that ISO and RTO tariffs have successfully accommodated service to 
unbundled as well as bundled retail customers.
    We clarify that Commission jurisdiction over non-price terms and 
conditions of transmission used by wholesale transmission customers to 
serve bundled retail customers does not affect state authority over 
retail choice decisions, transmission siting, or local issues 
associated with transmission or distribution (e.g., maintenance, tree 
trimming, downed lines, etc.).
    The price that a transmission owner pays to the RTO or ISO becomes 
its cost for the transmission used to deliver the energy sold at 
retail. Consistent with existing Commission policy, transmission owners 
would be free to seek a rate from the RTO or ISO for the transmission 
purchased to deliver energy to bundled retail customers that is equal 
to the transmission component of the bundled retail rates set by the 
state commission. Under this approach, the rate set for transmission in 
interstate commerce to be re-sold as part of bundled retail service 
would be the same rate set by the state for the transmission component 
of bundled retail sales. This arrangement would be accomplished under a 
wholesale contract between the RTO or ISO and the transmission owner. 
Service agreements reflecting such proposed rates would be filed with 
the Commission and must be consistent with the Federal Power Act (FPA).
    The Final Rule would also clarify that the RTO or ISO may use 
license plate or postage stamp rates for designing the access charges 
for the region. Each regional state committee may determine which 
approach the RTO or ISO should file with the Commission under section 
205 of the FPA. If the regional state committee is unable to reach a 
decision on the methodology that should be used, the RTO or ISO would 
file its own proposal pursuant to section 205 of the FPA.
    RTOs and ISOs should eliminate export and import fees where there 
is not a notable imbalance between imports to and exports from a 
region. Other rate measures could be used to prevent cost shifts among 
the regions.\4\ This could include adjusting the revenue requirement 
for the importing region to include a portion of the revenue 
requirement of the exporting region. However, where there is a notable 
imbalance between imports to and exports from a region, the RTO or ISO 
may seek to recover some of its transmission costs through an export 
fee.
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    \4\ For example, a portion of the transmission cost of service 
of the exporting region could be recovered through the access charge 
of the importing region. Such a measure would reduce the 
transmission costs that would be collected from customers in the 
exporting region.
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2. Congestion Management

    Order No. 2000. The RTO must ensure the development and operation 
of market mechanisms to manage transmission congestion. The market 
mechanisms must accommodate broad

[[Page 24686]]

participation by all market participants, and must provide all 
transmission customers with efficient price signals that show the 
consequences of their transmission usage decisions. The RTO must either 
operate such markets itself or ensure that the task is performed by 
another entity that is not affiliated with any market participant. The 
RTO must satisfy the market mechanism requirement no later than one 
year after it commences initial operation. However, it must have in 
place at the time of initial operation an effective protocol for 
managing congestion.
    Wholesale Market Platform. The Final Rule would retain the 
requirements that the RTO or ISO have an effective protocol for 
managing congestion at the time of initial operation and a market 
mechanism for congestion management after one year of operation.
    The Final Rule would modify the requirement for market mechanisms 
to manage congestion. The RTO or ISO would be required to operate such 
markets itself. However, two or more RTOs or ISOs may apply to the 
Commission to do coordinated congestion management over a multi-RTO or 
ISO area as long as this function is carried out by an independent 
entity approved by the Commission.
    Additionally, the Final Rule would add general principles that a 
good market congestion management system must satisfy. The congestion 
management system must: (1) Protect against market manipulation, such 
as experienced in the California markets; (2) promote the efficient use 
of the transmission grid; (3) promote the use of the lowest cost 
generation as intended under traditional economic generation dispatch; 
(4) assign cost responsibility to those that cause congestion costs and 
assign the benefits to those that reduce congestion costs; (5) reduce 
involuntary transmission service curtailments, e.g., Transmission Line 
Loading Relief; and (6) be compatible with congestion management 
systems used by other RTOs and ISOs in the electrical interconnection, 
to avoid creating barriers to trade among RTOs and ISOs.\5\
---------------------------------------------------------------------------

    \5\ For purposes of this discussion, the electrical 
intereconnections are the Eastern Interconnection and the Western 
Interconnection.
---------------------------------------------------------------------------

    The Commission has already tasked the Seams Steering Group-Western 
Interconnection (SSG-WI) with developing consistent and compatible 
market elements for the Western Interconnection by the fourth quarter 
of 2003. The congestion management system being developed by SSG-WI 
should satisfy these general principles.
    The Commission's preferred approach to congestion management is 
through locational pricing. However, other methods may be proposed. The 
RTO or ISO would need to demonstrate to the Commission how the proposed 
congestion management system satisfies these general principles.
    If an RTO or ISO uses locational pricing, it must ensure that each 
existing firm customer (including transmission owners with a service 
obligation for native load) has the opportunity to obtain FTRs \6\ 
equivalent to that customer's existing firm rights.\7\ We will ensure 
not only that existing customers retain their existing rights, but also 
that they have the ability to obtain rights for future load growth. 
Customers who paid for transmission for load growth can retain the FTRs 
for that capacity. The FTRs that are offered by the RTO or ISO must, in 
the aggregate, be consistent with the physical limitations of the 
transmission system.\8\ If transmission rights or their allocation have 
already been approved by the Commission in RTO or ISO orders, we would 
not override these decisions in the Final Rule.
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    \6\ In the proposed rule, we coined the term ``Congestion 
Revenue Rights,'' or ``CRRs,'' as a standard term to describe the 
tradable, financial rights that would take the place of the current 
``physical'' rights to firm transmission service. We chose this term 
to accurately describe what the holder had a right to receive--
congestion revenues associated with the held CRRs' specified receipt 
and delivery points and MW quantity. These rights mirror those of 
FTRs used in most power markets. Reaction to our replacing ``FTR'' 
with ``CRR'' was less than enthusiastic; many saw no need for a new 
term unless a CRR differs from an FTR. As there is no real 
difference, we will now use the term ``FTR,'' or ``Firm Transmission 
Right,''.
    \7\ A similar transition requirement would apply to a congestion 
management system not based on locational pricing.
    \8\ Existing rights to service will be preserved. If necessary 
to meet these requirements, the RTO or ISO will create counterflow 
FTRs to make the aggregate set of FTRs physically feasible. If this 
results in a revenue shortfall, it could be recovered through an 
uplift charge.
---------------------------------------------------------------------------

    There would be no requirement to auction these FTRs either 
initially or after a transition period. The RTO or ISO tariff must also 
offer customers the ability to obtain additional FTRs for load growth. 
Customers paying the access charge would have the right to receive the 
additional FTRs associated with transmission upgrades that are included 
in the regional transmission plan. Entities that pay for the 
construction of transmission upgrades through participant funding will 
receive the FTRs that result from the transmission upgrades. Once the 
initial allocation of FTRs is completed, the RTO or ISO must operate a 
secondary market for holders of FTRs to voluntarily sell their FTRs to 
others.
    The market mechanism for congestion management must be in place 
within one year after initial operation, unless the Commission approves 
a different timetable. As noted previously, the Commission will be 
flexible both as to timing and implementation based on regional 
differences and needs.

3. Parallel Path Flow

    Order No. 2000. The RTO must develop and implement procedures to 
address parallel path flow issues within its region and with other 
regions. It will have three years to implement measures to address 
parallel path flows between regions.
    Wholesale Market Platform. RTOs and ISOs will be required to 
perform this Function.

4. Ancillary Services

    Order No. 2000. The RTO must serve as a provider of last resort of 
all ancillary services (including energy imbalance service) required by 
Order No. 888 and subsequent orders. The services must be included in 
the RTO administered tariff so that transmission customers will have 
access to one-stop shopping for transmission service. All market 
participants must have the option of self-supplying or acquiring 
ancillary services from third parties. The RTO must have the authority 
to decide the minimum required amounts of each ancillary service and, 
if necessary, the locations at which these services must be provided. 
All ancillary service providers must be subject to direct or indirect 
operational control by the RTO. The RTO must promote the development of 
competitive markets for ancillary services whenever feasible. To 
provide energy imbalance service, the RTO must ensure that its 
transmission customers have access to a real-time balancing market. The 
RTO must either develop and operate this market itself or ensure that 
this task is performed by another entity that is not affiliated with 
any market participant.
    Wholesale Market Platform. The Final Rule would require RTOs and 
ISOs to perform this Function. In addition, the Final Rule would 
require the RTO or ISO itself to operate a security constrained real-
time market for balancing.\9\ The RTO or ISO would not be permitted to 
use a separate power exchange to perform this function. The RTO or ISO 
must also operate a day-ahead market for energy and a market

[[Page 24687]]

for various ancillary services unless it is demonstrated that the costs 
exceed the benefits of such markets.
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    \9\ The spot market(s) operated by the RTO or ISO are intended 
only to supplement long-term supply arrangements.
---------------------------------------------------------------------------

    The spot market(s) operated by the RTO or ISO should facilitate 
price transparency (i.e., for these spot markets the RTO or ISO should 
be required to provide on a timely basis, information about the 
availability and market price of sales of electric energy at wholesale 
in interstate commerce and transmission of electric energy in 
interstate commerce to the Commission, state commissions, buyers and 
sellers of wholesale electric energy, users of transmission services, 
and the public.)
    Load-serving entities must also be able to schedule transmission 
for generation owned by or contracted for by that load-serving entity 
to meet a service obligation to customers or an existing wholesale 
obligation. Buyers, including intermittent resources, may procure power 
through these spot market(s) to meet their short-term energy needs. 
Sellers, including intermittent resources, may offer power for sale 
through the spot market(s).
    The spot market(s) operated by the RTO or ISO must facilitate the 
ability of demand to respond to prices. The RTO or ISO must work with 
state authorities to facilitate any demand response programs operated 
under state retail tariffs. The RTO or ISO must also work with states 
that permit end users to directly access the wholesale market to 
facilitate state required demand response programs or to include 
appropriate demand response programs in the RTO's or ISO's tariff.
    Where a locational pricing system is used for congestion 
management, the prices in these spot market(s) must be location 
specific for sellers (nodal). The RTO or ISO may use zonal or nodal 
prices for buyers. Under a zonal system, the prices paid by load would 
be aggregated for the zone (e.g., a utility service territory).\10\ A 
locational pricing system can use either cost-based bids or market-
based bids to determine the locational prices.\11\
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    \10\ This approach is in operation in the New York Independent 
System Operator, Inc. Under that system, generators see location 
specific prices. Load sees an aggregate price for each zone. Each 
zone is based on the service territory of an individual transmission 
owner.
    \11\ When PJM Interconnection, L.L.C. first started using 
locational pricing it did so using cost-based bids. As a 
transitional measure, regions may wish to take a similar initial 
approach to start locational pricing.
---------------------------------------------------------------------------

    The RTO may charge for transmission losses within the region based 
on average or marginal losses.

5. OASIS and Total Transmission Capability (TTC) and Available 
Transmission Capability (ATC)

    Order No. 2000. The RTO must be the single OASIS site administrator 
for all transmission facilities under its control and independently 
calculate TTC and ATC.
    Wholesale Market Platform. RTOs and ISOs would be required to 
perform this Function.

6. Market Monitoring

    Order No. 2000. The RTO must provide for objective monitoring of 
the markets it operates to identify design flaws, market power abuses, 
and opportunities for efficiency improvements, and must propose 
appropriate actions. Reports on these issues must be filed with the 
Commission and affected regulatory authorities. The Commission believes 
the information collected will be data that the RTO will collect or 
have access to in the normal course of business.
    Wholesale Market Platform. The Final Rule would retain these 
features but would change the name and scope of this Function to Market 
Monitoring and Market Power Mitigation. The Final Rule would both 
expand and further define the role of market monitoring in the RTO or 
ISO. It would also expand this function to require the RTO or ISO and 
its market monitor to file market power mitigation measures that are 
needed for the market(s) operated by the RTO or ISO. Finally, the Final 
Rule would require that the RTO or ISO tariff include clear and 
enforceable rules to define and police market manipulation and gaming 
strategies.
    The Final Rule would require that each RTO or ISO have an 
independent market monitor either for the individual RTO or ISO or for 
a larger region. The RTO or ISO tariff must contain appropriate market 
power mitigation measures to address market power problems in the spot 
markets. These mitigation measures must work together with measures on 
resource adequacy to ensure that the measures do not suppress prices 
below the level necessary to attract needed investment in 
infrastructure in the region.
    The RTO or ISO tariff must also include a clear set of rules 
governing market participant conduct with the consequences for 
violations clearly spelled out. At a minimum these would include rules 
on: (1) Physical withholding of supplies; (2) economic withholding of 
supplies; (3) reporting on availability of units; (4) factual accuracy 
of information submitted to the RTO or ISO; (5) the obligation of 
market participants to provide information to the market monitor; (6) 
cooperation of market participants in investigations or audits 
conducted by the market monitor; and (7) the requirement that all bids 
that designate specific resources must be physically feasible.
    The Final Rule would identify the reporting process that would be 
used if the market monitor thinks the markets are not resulting in just 
and reasonable prices or providing appropriate incentives for 
investment in needed infrastructure. This would include notification of 
the Commission, the regional state committee, and other appropriate 
state regulatory authorities of the nature of the problem and 
recommended solutions.
    The Final Rule would also specify the periodic reports that the 
market monitor must prepare. The market monitor will provide annual 
reports on the state of its markets to the Commission, the regional 
state committee, and other appropriate state regulatory authorities. 
These reports will incorporate market metrics to provide a basis for 
measuring the performance of these markets across RTOs and ISOs, and to 
compare the performance of the market in each RTO or ISO over time. 
Metrics will also be developed to provide standard performance 
information on a monthly basis.

7. Planning and Expansion

    Order No. 2000. The RTO must be responsible for planning, and for 
directing or arranging, necessary transmission expansions, additions, 
and upgrades that will enable it to provide efficient, reliable and 
non-discriminatory transmission service and coordinate such efforts 
with the appropriate state authorities. As part of this function, an 
RTO must encourage market-motivated operating and investment actions 
for preventing and relieving congestion. The RTO's planning and 
expansion process must accommodate efforts by state regulatory 
commissions to create multi-state agreements to review and approve new 
transmission facilities. The RTO planning and expansion process must be 
coordinated with programs of existing Regional Transmission Groups 
where appropriate. If the RTO is unable to satisfy this requirement 
when it commences operation, it must file with the Commission a plan 
with specified milestones that will ensure that it meets this 
requirement no later than three years after initial operation.
    Wholesale Market Platform. The Final Rule would retain these 
features and also would modify this Function to

[[Page 24688]]

provide that the RTO or ISO must satisfy this requirement as soon as 
practicable but no later than when it begins operation, rather than 
after three years of initial operation. The Final Rule would not change 
the decisions in prior RTO orders regarding the role that an 
Independent Transmission Company (ITC) could have in the regional 
planning process.\12\
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    \12\ See TRANSLink Transmission Company, LLC, et al., 99 FERC ] 
61,106 (2002).
---------------------------------------------------------------------------

    The regional transmission plan must include all transmission 
facility expansions in the region. Thus, the RTO or ISO can assess the 
combined effect on loop flows and reliability of all existing and 
planned facilities, including transmission facility expansions for 
which the costs are not necessarily to be borne by all customers. 
However, we clarify that transmission owners and others may propose to 
build transmission enhancements. The RTO or ISO will assess the impact 
of these proposals in the regional transmission plan. In addition, the 
RTO or ISO may assess the need for transmission enhancements in view of 
opportunities for energy efficiency, demand response, and new 
generation technologies, consistent with the policy direction of the 
regional state committee on these issues.
    The RTO or ISO must also be responsible for transmission planning, 
and for directing or arranging, necessary transmission expansions, 
additions, and upgrades that will enable it to reliably and 
economically serve the needs of all customers in the region, including 
historical and native load customers and their projected load growth. 
The RTO or ISO would include transmission upgrades in the regional plan 
that are necessary to maintain or improve reliability or to reduce 
congestion and improve access to lower cost supplies (economic 
enhancements).
    Economic enhancements would be included in the regional 
transmission plan with the costs recovered through the license plate or 
postage stamp access charges, if it is prudent to do so from the 
perspective of native load in the region. For example, these projects 
could include transmission upgrades that: (1) Would resolve significant 
and persistent congestion within the region; (2) due to their size and 
scope, are unlikely to be undertaken as participant funded transmission 
upgrades; or (3) show positive benefits to the region using a cost 
benefit analysis that compares the cost to load within the region and 
the benefits to load within the region.
    We will permit regional flexibility in determining the types of 
economic enhancements that would be recovered through the access 
charges.\13\ Some RTO or ISO regions may choose an expansive definition 
of the types of economic enhancements that benefit customers within the 
region. Other RTO or ISO regions may choose to rely more on participant 
funding.
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    \13\ As discussed below, the choice made by the region will 
affect the cost recovery for transmission upgrades. If a 
transmission upgrade is determined to be needed to reliably and 
economically serve load in the region, the costs will be recovered 
through the license plate or postage stamp access charges used by 
the region.
---------------------------------------------------------------------------

    The RTO or ISO tariff would have a clear plan that states the non-
discriminatory criteria that would be used for determining the 
reliability and economic enhancements that are needed for customers 
within the region. Each regional state committee may determine the 
criteria for these economic enhancements. If the regional state 
committee reaches a decision on the criteria that would be used, the 
RTO or ISO would file these criteria in a filing pursuant to section 
205 of the FPA. If the regional state committee is unable to reach a 
decision, the RTO or ISO would file its own proposal pursuant to 
section 205 of the FPA.
    The Final Rule would not require that the RTO or ISO use a Request 
for Proposal (RFP) process for transmission upgrades.

8. Interregional Coordination

    Order No. 2000. The RTO must ensure the integration of reliability 
practices within an interconnection and market interface practices 
among regions.
    Wholesale Market Platform. RTOs and ISOs would perform this 
Function. In addition, the Final Rule would require that RTOs and ISOs 
within an electrical interconnection coordinate to resolve seams 
issues. Additionally, as discussed above, RTOs and ISOs should 
coordinate to eliminate export fees where there is no significant trade 
imbalance between the regions.

Transmission Pricing

    In addition to the above Characteristics and Functions of an RTO, 
Order No. 2000 also addressed transmission pricing reforms by RTOs.
    Order No. 2000. RTOs may file for a variety of innovative rate 
reforms, including performance-based, returns on equity, non-
traditional methods of determining depreciation schedules for new 
transmission investments, and incremental pricing for new transmission 
investments (which has since become known as participant funding). Some 
of these pricing reforms will be available only through January 1, 
2005.
    Wholesale Market Platform. The Final Rule would provide that both 
RTOs and ISOs would be eligible for the rate reforms identified in 
Order No. 2000.
    The Final Rule would provide further clarification on when 
incremental pricing for new transmission facilities (participant 
funding) could be used. The cost of transmission projects that are 
determined through the regional planning process to be necessary to 
reliably and economically serve load in the region will be recovered 
through the access charge that is assessed to load in the region. As 
stated above, regions would have flexibility in determining the types 
of economic enhancements that would be recovered through the access 
charge. Some RTO or ISO regions may choose an expansive definition of 
the types of economic enhancements that benefit customers within the 
region. Other RTO or ISO regions may choose to rely more on participant 
funding.
    These rate provisions would be revised to permit an optional 
transitional process that could be used for participant funding. For a 
transitional period, not to exceed a year, participant funding may be 
used for transmission upgrades for generator interconnection as soon as 
an independent entity has been approved by the Commission and the 
affected states. Using the regional criteria, the independent entity 
would make decisions on which transmission upgrades should be 
participant funded and which ones should not. These decisions would be 
made through a regional planning process conducted by an independent 
entity in which the independent entity is also responsible for 
conducting all necessary facility studies.\14\ However, this 
transitional process is explicitly predicated on the assumption that 
this will be the first step towards the RTO or ISO satisfying the 
requirements of Sec.  35.34 of the Commission's regulations.
---------------------------------------------------------------------------

    \14\ E.g., if ESBI were selected by the SeTrans Sponsors to be 
their proposed ISA and it received the necessary regulatory 
approvals, ESBI could serve this function for SeTrans RTO on an 
interim basis.
---------------------------------------------------------------------------

Additional Requirements of the Wholesale Market Platform

    In addition to the above changes to the existing requirements for 
RTOs, the Wholesale Market Platform would require the following:

1. Role of the States

    Order No. 2000. Order No. 2000 recognizes that states have an 
important role in RTO formation and governance,

[[Page 24689]]

and regional interests forming an RTO are required to consult with the 
states about the appropriate role for states and about the 
organizational form of the RTO. Although there were calls for the 
Commission to establish some form of regional regulation in Order No. 
2000, the Commission decided, given the diversity of regional state 
interests and state laws, as well as differences in the organizational 
forms that RTOs may adopt, to decline to reach generic conclusions 
about states' roles. The Commission invited states to participate 
collaboratively with the FERC in fostering RTO formation.
    Wholesale Market Platform. The Final Rule would retain the 
requirement for an important role for states in RTO or ISO formation. 
In addition, each RTO or ISO would be required to provide a forum for 
the participation of state representatives in its decision making 
process. The structure and functions of these groups will be determined 
by the states within the region. Each regional state committee will 
also decide how it will reach decisions, e.g., unanimous support or 
simple majority. State commissions working with existing RTOs and ISOs 
have developed procedures that provide examples that could be used in 
other regions. In the Midwest, state commissions have proposed the 
establishment of a flexible regional organization, a ``Midwest Multi-
State Committee,'' that would provide coordinated action on matters 
that are subject to state jurisdiction as well as issues that relate to 
wholesale power markets and interstate transmission. In the mid-
Atlantic region, state commissions have a memorandum of understanding 
with the RTO. Other procedures could also be used.
    An RTO or ISO may propose to recover as part of its annual budget, 
the cost of reimbursing state officials' reasonable expenses incurred 
by serving on the regional state committee.
    Each regional state committee would have the primary responsibility 
for determining the regional proposals for cost responsibility and the 
transition process listed below. The RTO or ISO will provide the 
regional state committee with technical assistance. If the regional 
state committee reaches a decision on the methodology that would be 
used, the RTO or ISO would file this methodology pursuant to section 
205 of the FPA. If the regional state committee is unable to reach a 
decision, the RTO or ISO would file its own proposal pursuant to 
section 205 of the FPA.
    [sbull] Whether, and to what extent, participant funding would be 
used within the region for transmission enhancements. This would 
include whether participant funding would be used on a transitional 
basis before the RTO or ISO assumes operational control of the 
transmission facilities.
    [sbull] Whether license plate or postage stamp rates will be used 
for the access charge paid by load in the region.
    [sbull] Where an RTO or ISO uses locational pricing, whether the 
region will allocate FTRs directly to customers or whether FTRs will be 
auctioned and the revenues from those auctions (Auction Revenue Rights 
or ARRs) allocated directly to customers.
    [sbull] The transition process that will be used in the region to 
ensure that each existing firm customer receives FTRs or ARRs, based on 
the regional choice, equivalent to the customer's existing firm rights. 
This includes whether any revenue shortfalls would be recovered through 
an uplift charge that applies to all customers in the region or over a 
narrower class of customers, e.g., only to customers in certain zones 
within the region.
    Each regional state committee would determine the extent to which 
states within the region need to coordinate or have a consistent 
approach for certain planning issues that can affect cost 
responsibility among transmission owners and other load serving 
entities within the region. The RTO or ISO will provide the regional 
state committee with technical assistance. These include:
    [sbull] Whether transmission upgrades for remote resources will be 
included in the regional transmission planning process.
    [sbull] The role of transmission owners in proposing transmission 
upgrades.
    [sbull] The role of generation, transmission, energy efficiency, 
and demand response in resource adequacy.
    Each regional state committee will also be responsible for 
determining the resource adequacy approach that will be used across the 
entire region.

2. Resource Adequacy

    Order No. 2000. Order No. 2000 has no provision for generation or 
demand response resource adequacy.
    Wholesale Market Platform. Having sufficient available resources 
(generation, transmission, energy efficiency, demand response) is 
central to ensuring that wholesale power prices are just and reasonable 
and that service is reliable. The Final Rule will not require a uniform 
approach to resource adequacy. Rather, each regional state committee 
will be asked to determine the approach for resource adequacy across 
the entire region. The region may choose to use resource adequacy 
measures that are enforced by state regulation of utilities, enforced 
through the RTO or ISO tariff, e.g., a capacity market, or other 
measures. The Final Rule will not set a minimum reserve margin.
    The resource adequacy measures adopted by the region must work 
together with the region's market power mitigation measures to ensure 
that there are appropriate incentives to invest in sufficient 
infrastructure to maintain reliable and reasonably priced service to 
customers in the region.

3. Liability

    The Final Rule would include standardized tariff provisions that 
limit the liability of RTOs and ISOs and transmission owners that 
belong to RTOs and ISOs. The tariff would provide that they would not 
be liable for any damages arising out of ordinary negligence. In 
instances of gross negligence, the RTO or ISO or the transmission 
owners that belong to RTOs or ISOs would only be liable for direct 
damages, and not for consequential or indirect damages. The same 
protections would also apply to generators when they are implementing 
the directives of the RTO or ISO. Courts will determine whether an 
action is negligent or grossly negligent.

4. Cyber Security

    The Commission will adopt the North American Electric Reliability 
Council (NERC) standards on cyber security.

[FR Doc. 03-11357 Filed 5-7-03; 8:45 am]
BILLING CODE 6717-01-P