[Federal Register Volume 68, Number 149 (Monday, August 4, 2003)]
[Notices]
[Pages 45799-45808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19796]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. EL02-111-000 and EL03-212-000]


Before Commissioners: Pat Wood III, Chairman; William L. Massey, 
and Nora Mead Brownell; Order on Initial Decision

Issued: July 23, 2003.

    Midwest Independent Transmission System Operator, Inc.; PJM 
Interconnection, L.L.C. and all Transmission Owners (including the 
entities identified below); Union Electric Company; Central Illinois 
Public Service Company; Appalachian Power Company; Columbus Southern 
Power Company; Indiana Michigan Power Company; Kentucky Power 
Company; Kingsport Power Company; Ohio Power Company; Wheeling Power 
Company; Michigan Electric Transmission Company; Dayton Power and 
Light Company; Commonwealth Edison Company; Commonwealth Edison 
Company of Indiana, Inc.; American Transmission Systems, Inc.; 
Illinois Power Company; Northern Indiana Public Service Company; 
Virginia Electric and Power Company; IES Utilities, Inc.; Interstate 
Power Company; Aquila, Inc. (formerly UtiliCorp United, Inc.); PSI 
Energy, Inc.; Union Light Heat & Power Company; Dairyland Power 
Cooperative; Great River Energy; Hoosier Energy Rural Electric 
Cooperative; Indiana Municipal Power Agency; Indianapolis Power & 
Light Company; Louisville Gas & Electric Company; Kentucky Utilities 
Company; Lincoln Electric (Neb.) System; Minnesota Power, Inc. and 
its subsidiary Superior Water, Light & Power Company; Montana-Dakota 
Utilities; Northwestern Wisconsin Electric Company; Otter Tail Power 
Company; Southern Illinois Power Cooperative; Southern Indiana Gas & 
Electric Cooperative; Southern Minnesota Municipal Power Agency; 
Sunflower Electric Power Corporation; Wabash Valley Power 
Association, Inc.; Wolverine Power Supply Cooperative; International 
Transmission Company; Alliant Energy West; Xcel Energy Services, 
Inc.; MidAmerican Energy Company; Corn Belt Power Corporation; 
Allegheny Electric Cooperative, Inc.; Atlantic City Electric 
Company; Baltimore Gas & Electric Company; Delmarva Power & Light 
Company; Jersey Central Power & Light Company; Metropolitan Edison 
Company; PECO Energy Company; Pennsylvania Electric Company; PPL 
Electric Utilities Corporation; Potomac Electric Power Company; UGI 
Utilities, Inc.; Allegheny Power; Carolina Power & Light Company; 
Central Power & Light Company; Conectiv; Detroit Edison Company; 
Duke Power Company; Florida Power & Light Company; GPU Energy; 
Northeast Utilities Service Company; Old Dominion Electric 
Cooperative; Public Service Company of Colorado; Public Service 
Electric & Gas Company; Public Service Company of Oklahoma; Rockland 
Electric Company; South Carolina Electric & Gas Company; 
Southwestern Electric Power Company; Cincinnati Gas & Electric 
Company; Missouri Public Service; WestPlains Energy; Cleco 
Corporation; Kansas Power & Light Company; OG+E Electric Services; 
Southwestern Public Service Company; Empire District Electric 
Company; Western Resources; Kansas Gas & Electric Co.; Ameren 
Services Company on behalf of: Union Electric Company, Central 
Illinois Public Service Company; American Electric Power Service 
Corporation on behalf of: Appalachian Power Company, Columbus 
Southern Power Company, Indiana Michigan Power Company, Kentucky 
Power Company, Kingsport Power Company, Ohio Power Company, Wheeling 
Power Company; Dayton Power and Light Company; Exelon Corporation on 
behalf of: Commonwealth Edison Company, Commonwealth Edison Company 
of Indiana, Inc.; FirstEnergy Corporation on behalf of: American 
Transmission Systems, Inc., Cleveland Electric Illuminating Power 
Company, Ohio Edison Company, Pennsylvania Power Company, Toledo 
Edison Company; Illinois Power Company; and Northern Indiana Public 
Service Company.

    1. This order addresses an initial decision issued in the above 
proceeding, where the Presiding Judge determined that he had no 
precedential authority that would permit him to eliminate the Regional 
Through and Out Rates (RTORs) between the expanded Midwest Independent 
Transmission System Operator, Inc. (Midwest ISO) and expanded PJM 
Interconnection, L.L.C. (PJM) under the circumstances of this case. The 
order disagrees with the Presiding Judge's finding and concludes that 
the Midwest ISO and PJM RTORs, when applied to transactions sinking 
within the proposed Midwest ISO/PJM footprint, are unjust and 
unreasonable, and directs PJM and Midwest ISO to make a compliance 
filing within 30 days eliminating these RTORs effective November 1, 
2003.
    2. The order also finds that the through and out rates under the 
tariffs of certain individual former Alliance Companies may be unjust, 
unreasonable or unduly discriminatory or preferential and initiates an 
investigation and hearing in Docket No. EL03-212-000 under section 206 
of the Federal Power Act (FPA), 16 U.S.C. 824e (2000) regarding these 
rates. The Commission will conduct a ``paper'' hearing to determine 
whether such rates are just, reasonable and not unduly discriminatory 
or preferential and thus provides parties with an opportunity to 
explain why the rates are or are not unjust, unreasonable or unduly 
discriminatory or preferential on or before August 15, 2003.
    3. The order also states that the Commission will entertain section 
205 filings to establish transitional cost recovery mechanisms once the 
RTORs are eliminated, and provides guidance in this regard.

Background

July 31 Order

    4. On July 31, 2002, the Commission issued an order \1\ that 
conditionally accepted the compliance filings of the former Alliance 
Companies, under which they proposed to join either Midwest ISO or PJM, 
as consistent with Order No. 2000,\2\ subject to satisfactory 
compliance with certain conditions, summarized as follows: (1) That a 
single market across the two Regional Transmission Organizations (RTO) 
must be implemented by October 1, 2004; (2) that National Grid USA 
(National Grid) participates in both Midwest ISO as GridAmerica and in 
PJM, and performs

[[Page 45800]]

the same functions, consistent with the allocation of functions to 
independent transmission companies (ITCs) provided in the April 25 
Order \3\ and TRANSLink,\4\ in both RTOs for Day One operations; (3) 
that there be pro forma agreements under the respective tariffs of 
Midwest ISO and PJM that provide for participation of ITCs consistent 
with the delegation of functions provided for in the April 25 Order and 
TRANSLink; (4) that the agreement to form an ITC between National Grid, 
American Electric Power Service Corporation, on behalf of certain of 
its public utility affiliates \5\ (collectively, AEP), Commonwealth 
Edison Company and Commonwealth Edison Company of Indiana, Inc. 
(collectively, ComEd), Dayton Power and Light Company (DP&L), and PJM 
must be filed within 30 days of the July 31 Order; (5) that the North 
American Electric Reliability Council (NERC) must approve the 
Reliability Plans pursuant to which PJM and Midwest ISO will coordinate 
their operations under the new configuration; (6) that a solution 
addressing the through and out rates between Midwest ISO and PJM must 
be developed; (7) that certain of the former Alliance Companies seeking 
to join PJM, along with PJM and Midwest ISO, provide a solution which 
will effectively hold utilities in Wisconsin and Michigan harmless from 
any loop flows or congestion that results from the proposed 
configuration; (8) that PJM and Midwest ISO must each file a statement 
agreeing to the conditions within 15 days of the July 31 Order, an 
implementation plan for achieving a common market by October 1, 2004, 
within 45 days, and frequent progress reports thereafter; and (9) that 
Commission Staff participate in the process.\6\
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    \1\ See Alliance Companies, et al., 100 FERC ] 61,137 (2002) 
(July 31 Order).
    \2\ Regional Transmission Organizations, Order No. 2000, 65 FR 
809 (January 6, 2000), FERC Stats. & Regs., Regulations Preambles 
July 1996-December 2000 ] 31,089 (1999), order on reh'g, Order No. 
2000-A, 65 FR 12088 (March 8, 2000), FERC Stats. & Regs., 
Regulations Preambles July 1996-December 2000 ] 31,092 (2000), 
affirmed sub nom. Public Utility District No. 1 Snohomish County 
Washington, et al., v. FERC, 272 F.3d 607 (D.C. Cir. 2002) (Order 
No. 2000).
    \3\ Alliance Companies, et al., 99 FERC ] 61,105 (2002) (April 
25 Order).
    \4\ TRANSLink Transmission Company, L.L.C., et al., 99 FERC ] 
61,106 (2002) (TRANSLink).
    \5\ Appalachian Power Company, Columbus Southern Power Company, 
Indiana Michigan Power Company, Kentucky Power Company, Kingsport 
Power Company, Ohio Power Company, Wheeling Power Company.
    \6\ See July 31 Order at P 35-57.
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    5. The Commission explained that the former Alliance Companies' 
choices, standing alone, appeared to produce unjust and unreasonable 
rates, terms and conditions for transmission services, but that these 
conditions would ensure just and reasonable rates, terms, and 
conditions for transmission services. The July 31 Order also noted that 
these conditions reflected areas which NERC concluded needed to be 
addressed, as well as commitments made by the parties in order to 
further the goal of reaching a region-wide common market as soon as 
possible.\7\
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    \7\ Id. at P 35-36.
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    6. The Commission particularly found that one of the primary 
obstacles to RTO formation has been rate pancaking for transactions 
crossing RTO borders, and that both Midwest ISO and PJM agreed that 
this was an issue. The Commission stated that, in light of the former 
Alliance Companies' RTO choices and in view of the comments, the 
resolution of inter-RTO rates was fundamental to its decision to accept 
the choices of Illinois Power, ComEd, and AEP to join PJM, and that 
resolving inter-RTO rates was fundamental to establishing a single 
common market. Therefore, the July 31 Order also instituted an 
investigation and hearing of inter-RTO rates under Section 206 of the 
FPA before an administrative law judge in Docket No. EL02-111-000, with 
regard to the rates for through and out service in the Midwest ISO/PJM 
region and with respect to the protocols relating to the distribution 
of revenues associated with such through and out service.\8\
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    \8\ Id. at P 49-50.
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    7. The Commission also stated that it was mindful that any solution 
may need to be revised once a common market across the Midwest ISO/PJM 
region is fully developed, and would be subject to the Commission's 
final determination on Standard Market Design in Docket No. RM01-12-
000.\9\ In addition, we stated that any such solution must result in 
rates that are designed in a reasonable fashion and do not favor 
participants in one RTO over those in the other. We noted that, while 
we were instituting a Section 206 proceeding, we nevertheless 
encouraged Midwest ISO and PJM to develop a solution to eliminate rate 
pancaking between the organizations on their own as expeditiously as 
possible, and we allowed them a period of time to do so.
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    \9\ Remedying Undue Discrimination Through Open Access 
Transmission Service and Standard Electricity Market Design, Notice 
of Proposed Rulemaking, FERC Stats & Regs. ] 32,563 (2002) (SMD 
NOPR).
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Order on Rehearing of the July 31 Order

    8. In the order on rehearing and clarification of the July 31 
Order,\10\ the Commission denied rehearing of the Commission's findings 
that the former Alliance Companies' RTO choices could not be accepted 
without the conditions set forth in the July 31 Order. The Commission 
stated that, given the record in this proceeding, without the 
conditions ordered the choices of some of the former Alliance Companies 
to join PJM would result in inappropriate RTO configuration. Moreover, 
the Commission found that, given the locations of the former Alliance 
Companies and their links with other neighboring utilities, outright 
acceptance of their RTO choices, without any conditions, would not have 
been just and reasonable. In this regard, the Commission stated that, 
for example, given the locations of the New PJM Companies \11\ and 
Illinois Power \12\ in the heart of the Midwest ISO region and the 
tight links between these companies and their neighboring utilities in 
the Midwest ISO region, we could not accept their joining PJM as just 
and reasonable without the conditions we adopted.\13\
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    \10\ Alliance Companies, et al., 103 FERC ] 61,274 (2003) 
(Rehearing Order).
    \11\ On December 11, 2002, in Docket No. ER03-262-000, AEP, 
ComEd, DP&L, and Virginia Electric Power Company (collectively, the 
New PJM Companies) and PJM filed an application under Section 205 of 
the FPA to include the New PJM Companies as transmission owners 
within PJM. On April 1, 2003, the Commission accepted the filing 
related to ComEd's and AEP's joining PJM, effective as of the date 
of the transfer of control of AEP's and ComEd's facilities to PJM. 
See American Electric Power Service Corporation, et al., 103 FERC ] 
61,008 (2003); see also American Electric Power Service Corporation, 
103 FERC ] 61,009 (2003).
    We also note that the Virginia Legislature recently passed a 
bill that prohibits Virginia utilities (which would include AEP) 
from joining an RTO before July 1, 2004, and requires them to obtain 
prior approval form the Virginia State Corporation Commission. In 
contrast, on March 14, 2003, the Pennsylvania Public Utility 
Commission, the Michigan Public Service Commission, and the Ohio 
Public Utilities Commission filed a motion in Docket No. EC98-40-
000, et al., requesting, among other things, that the Commission 
direct AEP to join an established RTO, as earlier required in that 
proceeding.
    \12\ In the Rehearing Order, we noted that, in an application 
pending before the Commission in Docket No. EC03-30-000, et al., 
Illinois Power has proposed to transfer its transmission system to 
Illinois Electric Transmission Company, LLC (IETC), an indirect 
subsidiary of Trans-Elect, Inc. As part of that proposed 
transaction, IETC commits to make all of the necessary filings with 
the Commission to facilitate transfer of functional control of the 
transmission system to Midwest ISO. Such commitment is contingent on 
the sale to IETC, which has yet to be authorized by the Commission 
or consummated. We note that Illinois Power has terminated its Asset 
Purchase Agreement with Trans-Elect, Inc and Illinois Electric 
Transmission Co., LLC. See Illinois Power's Company Filing (Form 8K) 
with the Securities and Exchange Commission (July 9, 2003), 
available at http://www.sec.gov.
    \13\ Rehearing Order at P 20-21.
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    9. The Commission disagreed with the parties' contention that the 
record did not support the July 31 Order's conditions. We stated that 
the record in this proceeding indicated that the RTO choices, as 
proposed (and as accepted albeit with conditions) were problematic when 
considered in light of Order No. 2000. The Commission found that the 
proposed RTO choices and

[[Page 45801]]

resulting configuration, without conditions, would frustrate the 
realization of the goals of RTO formation such as resolution of loop 
flow issues, effective management of congestion, and enhanced 
reliability and efficiency.\14\
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    \14\ Rehearing Order at P 24-30.
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Initial Decision

    10. On March 31, 2003, in Midwest Independent System Operator, et 
al., 102 FERC ] 63,049 (2003) (Initial Decision), the Presiding Judge 
issued his Initial Decision. The Presiding Judge found no precedential 
authority that would permit him to eliminate the RTORs between Midwest 
ISO and PJM under the circumstances of this proceeding, and he declined 
to do so. The Presiding Judge added that if in a change in policy the 
Commission were to order it, he would recommend that the Commission 
adopt, without requiring the filing of new rate cases, a mechanism such 
as one of the Seams Elimination Charge/Cost Adjustment/Assignment 
(SECA) proposals by the parties to prevent cost shifting between 
customers of the two RTOs. Furthermore, the Presiding Judge stated that 
the Commission should decide whether to consider the impact and 
equities vis-a-vis retail rate caps when it fashions the SECA.\15\
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    \15\ Initial Decision at P 7, 101.
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    11. The Presiding Judge found that eliminating the RTORs without a 
SECA will improperly shift costs from Midwest ISO's native load to 
PJM's native load.\16\ The Presiding Judge also found that if the RTORs 
are eliminated, a SECA could prevent unwarranted cost shifts between 
the RTOs without violating any rules against retroactive 
ratemaking.\17\
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    \16\ Initial Decision at P 68-86.
    \17\ Initial Decision at P 87-90.
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    12. The Presiding Judge also recommended that the SECA should not 
be phased out until another method is placed into effect to prevent 
cost shifting, and also stated that the Michigan and Wisconsin 
customers should be permitted to opt out of the SECA and continue to be 
subject to the PJM RTOR. In addition, the Presiding Judge stated that 
the SECA should be calculated using 2002 as the test year rather than 
2001, and that the starting period for any SECA should be after a final 
Commission order, allowing enough time for the filing of compliance 
filings. The Presiding Judge added that the SECA should replace only 
through and out charges on transactions that sink in either the 
expanded PJM or the expanded Midwest ISO and either source in or wheel 
through the other RTO. Finally, the Presiding Judge stated that the 
Commission should decide, as a matter of policy, whether a SECA should 
be adopted for each pricing zone, or alternatively, whether there 
should be a sub-zone option that the entities within a pricing zone can 
choose.\18\
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    \18\ Initial Decision at P 91-100.
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Discussion

Procedural Matter

    13. On April 17, 2003, the Wisconsin Commission filed a motion to 
intervene out-of-time. The Wisconsin Commission states that, since it 
participated in the proceeding in Docket No. EL02-65-000, and the 
instant proceeding was instituted in Docket No. EL02-65-000, it assumed 
it was unnecessary to separately intervene in the instant proceeding. 
The Wisconsin Commission continues that, while it monitored the hearing 
in this proceeding and felt it unnecessary to actively participate, the 
Initial Decision raised issues that required the filing of a brief on 
exceptions in order to protect its regulatory interest in matters 
pertaining to Midwest ISO.
    14. On May 7, 2003, the New PJM Companies and PECO filed an answer 
opposing the Wisconsin Commission's motion to intervene and asking that 
the Commission deny the Wisconsin Commission's request and strike its 
brief on exceptions. They contend that the Wisconsin Commission chose 
to ``wait and see'' what transpired in the hearing and the outcome of 
the Presiding Judge's decision before seeking intervention and filing a 
brief on exceptions, and that the Wisconsin Commission has not 
demonstrated good cause for its request and granting the intervention 
would unduly burden the parties.
    15. On May 12, 2003, Detroit Edison Company (Detroit Edison) filed 
an answer opposing the New PJM Companies and PECO's motion to strike. 
Detroit Edison claims that no party is unduly prejudiced because 
parties will have an opportunity to respond to the Wisconsin Commission 
in briefs opposing exceptions. Detroit Edison also asserts that the 
Wisconsin Commission is the only party representing ratepayers in 
Wisconsin.
    16. On May 13, 2003, the Wisconsin Public Service Corp. (WPSC) 
filed an answer opposing the New PJM Companies and PECO's motion to 
strike, arguing that the Wisconsin Commission has regulatory 
jurisdiction for the retail ratepayers of Wisconsin whose interests 
will be significantly impacted by the Commission's resolution of the 
issues in this proceeding.
    17. On May 14, 2003, the Wisconsin Commission filed an answer to 
the New PJM Companies and PECO's motion to strike. The Wisconsin 
Commission asks that the Commission deny the motion because: (1) The 
Commission did not set a deadline for interventions; (2) the movants 
filed their answer and motion to strike out of time; (3) the Commission 
should construe the Wisconsin Commission's motion to intervene as a 
timely filed notice of intervention; and (4) the Commission should not 
strike its brief on exceptions because its motion to intervene 
satisfies the standards for late intervention.
    18. Under Rule 214 of the Commission's Rules of Practice and 
Procedure,\19\ we will deny the Wisconsin Commission's untimely, 
opposed motion to intervene. Under the facts presented, we do not 
believe that it would be in the public interest to permit the Wisconsin 
Commission's motion to intervene in this proceeding at this late date. 
We think, however, that participation as amicus curiae would serve the 
purposes of the Wisconsin Commission to carry out its responsibilities 
and would contribute to our consideration of the issues in this case. 
Therefore, we will deny the Wisconsin Commission's request for 
intervention but we will permit it to file its brief and deny New PJM 
Companies and PECO's motion to strike.\20\
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    \19\ 18 CFR 385.713(d)(2) (2003).
    \20\ See Transwestern Pipeline Company, 35 FPC 334, 335 (1966); 
see also Transcontinental Gas Pipe Line, 88 FERC ] 61,155 at 61,521 
(1999); Texas Eastern Transmission Corporation, 88 FERC ] 61,167 at 
61,559 (1999).
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The Justness and Reasonableness of the RTORs

Presiding Judge's Ruling
    19. The Presiding Judge claimed that there was no precedential 
authority that would permit a finding, under the circumstances of this 
proceeding, that the RTORs between the expanded PJM and the expanded 
Midwest ISO are unjust and unreasonable. He concluded that, while the 
Commission has encouraged the elimination of rate pancaking between 
RTOs, it has never required it.
    20. The Presiding Judge stated that, if the proposed incorporation 
of the New PJM Companies into PJM would create seams that result in 
islanding a significant portion of the Midwest ISO load so that it 
would have to pay pancaked rates to have power transmitted to it from 
generation

[[Page 45802]]

elsewhere in Midwest ISO, then the RTORs would be unjust and 
unreasonable. However, the Presiding Judge found that the choices of 
the New PJM Companies to join PJM did not create any new seams because 
seams already exist between Midwest ISO and New PJM Companies; rate 
pancaking currently exists across the seams between the individual 
former Alliance Companies joining PJM and Midwest ISO because the 
Midwest ISO members are currently required to pay through and out rates 
to the individual New PJM Companies and Illinois Power under their 
individual-company OATTs. The Presiding Judge noted that, after these 
companies join PJM, the Midwest ISO members will pay the PJM RTOR 
instead of the individual-company through and out rates, and he found 
no evidence that replacing the individual-company through and out rates 
with the PJM RTOR was unjust and unreasonable.
    21. However, while the Presiding Judge stated that he could not 
find the RTORs unjust and unreasonable under the circumstances, he did 
find that no credible evidence was presented that would suggest that 
rate pancaking across the proposed border is any less detrimental to 
short-term efficiency than rate pancaking in general (i.e., rate 
pancaking within an RTO). He also rejected arguments that the RTORs 
were a reasonable basis for reflecting a distance factor in rates, so 
that long-term efficiency is enhanced. He found that the anomalous seam 
configuration that would exist between Midwest ISO and PJM argues very 
persuasively against that and suggested that, if a distance factor 
should be incorporated into transmission charges, it should be done 
directly, not imperfectly reflected in the seams charges.\21\
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    \21\ Initial Decision at P 62-63.
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Briefs on Exceptions
    22. Many parties except to the Presiding Judge's decision to not 
eliminate the existing RTORs due to a lack of precedential authority, 
and/or his conclusion that the choice of the New PJM Companies to join 
PJM did not create new and irrational seams.\22\ They argue that the 
through and out rates are unjust and unreasonable and should be 
immediately eliminated. Many argue that there is, in fact, sufficient 
evidence and precedential authority to warrant the elimination of these 
through and out rates.
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    \22\ See, e.g., Trial Staff, Edison Mission, Consumers, Michigan 
Agencies, Michigan Commission, Ohio Commission, Wisconsin 
Commission, MidAmerican, WEPCO, WPSC/UPPC, Madison, GridAmerica, 
TRRG, Cinergy, Illinois Power, Midwest ISO.
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    23. Several parties contend that the Commission has already decided 
the issue of the justness and reasonableness of the RTORs in the July 
31 Order.\23\ These parties argue that the Commission would not have 
set the through and out rates for hearing in the first place if it did 
not believe the Presiding Judge held the authority to find them unjust 
and unreasonable and order their elimination.
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    \23\ See Ohio Commission Brief on Exceptions at 2, Michigan 
Agencies Brief on Exceptions at 10, MidAmerican Brief on Exceptions 
at 9, Midwest ISO Brief on Exceptions at 4.
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    24. Several parties also except to the Presiding Judge's finding 
that the choices of the New PJM Companies and Illinois Power do not 
create irrational seams.\24\ They contend that the choices of these 
companies to join PJM did in fact create the inter-RTO seam problem 
being addressed in this proceeding. The excepting parties assert that, 
since the irrational nature of this seam increases the number of 
transactions that must pay pancaked rates, the RTORs are unjust and 
unreasonable. Edison Mission argues that the sheer inefficiencies and 
market distortions that result from the RTORs are reason alone to 
warrant their elimination.\25\ The Michigan Commission notes that the 
resulting ``Swiss cheese'' configuration leads to some members of PJM 
being west of certain of the Midwest ISO members, with some of these 
Midwest ISO members being in the inequitable position of having to pay 
RTORs to access their own generation.\26\
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    \24\ See, e.g., Trial Staff, Michigan Agencies, Michigan 
Commission, WEPCO, Cinergy, Illinois Power, and Midwest ISO.
    \25\ See Edison Mission Brief on Exceptions at 10.
    \26\ See Michigan Commission Brief on Exceptions at 6.
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    25. Some parties argue that the Presiding Judge erred by failing to 
eliminate the RTORs for other reasons. For example, the excepting 
parties claim that the Presiding Judge erroneously failed to eliminate 
the RTORs even after agreeing that they promote inefficiency and 
acknowledging that the unusual seam configuration will exacerbate the 
adverse impacts of the through and out rates.\27\ They contend that the 
Presiding Judge has an inherent responsibility to promote the public 
interest, yet neglected to do so by failing to eliminate the RTORs.
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    \27\ See, e.g., MidAmerican Brief on Exceptions at 14, stating 
that ``the Initial Decision declines to eliminate seams charges for 
lack of perceived precedential authority, but it nonetheless 
identifies deficiencies with those seams charges as they now 
exist.''
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Briefs Opposing Exceptions
    26. A number of parties agree with the Presiding Judge that there 
is no precedent for eliminating the RTORs at this time.\28\ They state 
that many parties excepting to the Presiding Judge on the issue of 
precedent do not provide any citations to cases in which the Commission 
determined that it was unjust and unreasonable to charge for through 
and out service. The New PJM Companies and Classic PJM companies 
contend that the July 31 Order did not require the elimination of the 
RTORs; otherwise a hearing would not have been needed.\29\ The New PJM 
Companies and PECO argue that the Commission's April 28, 2003 White 
Paper in Docket No. RM01-12-000 \30\ would allow PJM transmission 
owners to recover contributions to their transmission cost of service 
from Midwest ISO through access fees or export fees because of notable 
imbalances in the exports and imports between the expanded PJM and the 
expanded Midwest ISO.\31\
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    \28\ See e.g., Classic PJM Companies, JCA, Maryland and 
Pennsylvania Commissions, New PJM Companies and PECO.
    \29\ See New PJM Companies Brief Opposing Exceptions at 11, 
Classic PJM Companies Brief Opposing Exceptions at 5.
    \30\ See Wholesale Market Platform White Paper (White Paper), 
Appendix A at 6.
    \31\ See New PJM Companies and PECO Brief Opposing Exceptions at 
5 and Classic PJM Companies Brief Opposing Exceptions at 5-6.
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    27. Several parties question the benefits of eliminating the RTORs. 
JCA contends that evidence in the record indicates that there may be no 
overall efficiency gains from eliminating the RTORs, which it argues 
may increase constraints between the two RTOs and allow customers to 
hoard transmission capacity.\32\ JCA also argues, as do the Classic PJM 
Companies, that elimination of the RTORs would remove the distance 
component from rates, which could distort the market.\33\ The Classic 
PJM Companies admit that the inefficiencies associated with the RTORs 
are likely to be significant once the common market is operational. 
They argue that the inefficiencies associated with the RTORs are likely 
to be much less during the period before the common market is 
operational, and they maintain that the RTORs should not be eliminated 
before such time.\34\
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    \32\ See JCA Reply Brief on Exceptions at 11 (citing testimony 
of Rodney Frame, Classic PJM Companies witness). Mr. Frame testified 
that elimination of the RTOR charges could result in hoarding of 
capacity across the inter-ties since there would be no payment for 
use ofthis capacity. Id.
    \33\ Id.
    \34\ See Classic PJM Companies Brief Opposing Exceptions at 26.

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[[Page 45803]]

Commission Decision
    28. We disagree with the Presiding Judge's conclusion that he did 
not have the authority to find the through and out rates for 
transactions crossing the proposed RTO boundary unjust and 
unreasonable. We would not have instituted an investigation, and 
established hearing procedures, pursuant to section 206 of the FPA, if 
the Presiding Judge lacked the authority to conclude that the rates 
were unjust and unreasonable. Moreover, the RTORs in the Midwest ISO/
PJM region perpetuate seams that prevent the realization of more 
efficient and competitive electricity markets in the region, and thus 
violate a central tenet of the Commission's RTO policy.
    29. Although the Presiding Judge correctly stated that Order No. 
2000 does not require the elimination of rate pancaking between RTOs, 
Order No. 2000 also requires that RTOs meet certain minimum 
characteristics, including proper scope and configuration. Order No. 
2000 also requires that RTOs eliminate rate pancaking within a region 
of appropriate scope and configuration.\35\ Order No. 2000 emphasizes 
that this is a central goal of the Commission's RTO policy because rate 
pancaking restricts the amount of generation that can be economically 
delivered to any customer, thereby frustrating the realization of 
competitive and efficient bulk power markets.\36\ In addition, Order 
No. 2000 indicates that, among the factors that will be considered when 
determining appropriate RTO configuration, the Commission will consider 
the extent to which the proposal would encompass one contiguous area, 
encompass a highly interconnected portion of the grid, and recognize 
trading patterns.\37\ When we find that a proposed RTO does not meet 
the scope and configuration requirements of Order No. 2000, as we did 
with respect to the organizations resulting from certain former 
Alliance Companies' decisions to join PJM, the Commission must impose 
conditions on its acceptance of those decisions, such as requiring 
inter-RTO coordination agreements and/or the elimination of inter-RTO 
rate pancaking, in order to mitigate otherwise inappropriate RTO 
configuration.\38\ While the Commission has not required the 
elimination of inter-RTO rate pancaking before, the Commission has not 
had to address the issue before; the circumstances presented in this 
proceeding are unprecedented.
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    \35\ See Order No. 200 at 31, 173.
    \36\ Id.
    \37\ Id. at 31,082-84.
    \38\ See Order No. 2000 at 31,083; see also Rehearing Order at P 
31. As we explained in the July 31 Order, the alternative to 
accepting the former Alliance Companies' compliance filings with 
conditions was rejecting them. See July 31 Order at P 38.
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    30. The former Alliance Companies are uniquely situated in relation 
to two operating regional transmission organizations such that 
elimination of the seam between Midwest ISO and PJM is necessary to 
promote more efficient and competitive electricity markets and to meet 
the requirements of Order No. 2000. Some of the former Alliance 
Companies, including Illinois Power and the New PJM Companies, are 
located in the heart of the Midwest ISO region and have close links 
with their neighboring utilities in Midwest ISO. The Commission 
recognized the critical position of these companies vis-a-vis Midwest 
ISO when it granted the Midwest ISO RTO status. Specifically, the 
Commission originally noted that Midwest ISO had a configuration on its 
eastern border that was inconsistent with the scope and configuration 
requirements of Order No. 2000, and found that the problem would be 
solved by successful integration of some or all of the former Alliance 
Companies into Midwest ISO.\39\
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    \39\ Midwest Independent Transmission System Operator, Inc., 97 
FERC ] 61,326 (2001). As explained in the Rehearing Order, our 
granting of RTO status to Midwest ISO, despite this configuration 
problem, was entirely consistent with Order No. 2000's provision 
that RTO status would not be categorically denied or RTO start-up 
delayed where transmission owners representing a large majority of 
the facilities in a region are ready to move forward, even though 
agreement by a few transmission owners in the region has yet to be 
obtained. See Rehearing Order at P 43 n.36, Order No. 2000 at 
31,086.
---------------------------------------------------------------------------

    31. Correspondingly, other former Alliance Companies are located 
along the western border of PJM. In the Commission's initial order on 
PJM's RTO proposal, the Commission found that PJM exhibited 
insufficient scope to meet the requirements of Order No. 2000 and 
encouraged PJM to continue its efforts to expand in the region.\40\
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    \40\ On rehearing, the Commission found that PJM's planned 
expansion to incorporate some of the former Alliance Companies, as 
conditionally accepted in the July 31 Order, alleviated concerns 
regarding the possible insufficient scope of PJM as an RTO. PJM 
Interconnection, LLC et al., 96 FERC ] 61,061 (2001), order on 
reh'g, 101 FERC ] 61,345 (2002).
---------------------------------------------------------------------------

    32. Thus, by virtue of their location and ties to their neighbors, 
the former Alliance Companies, through their failure to join RTOs, and 
also through their proposed RTO choices, create a barrier that 
obstructs more efficient and competitive electricity markets and the 
realization of adequate RTO scope and configuration in the region, 
thereby denying the benefits of more efficient and competitive regional 
electricity markets to customers in 21 states and one Canadian 
province.
    33. As noted in the July 31 Order and the Rehearing Order, the 
choice of Illinois Power and the New PJM Companies to join PJM results 
in a long and irregular RTO border that perpetuates Midwest ISO's 
configuration problems. Specifically, as we discussed in the Rehearing 
Order, evidence indicates that the proposed RTO configuration would 
divide a highly interconnected portion of the grid, leaving in place an 
elongated and irregular seam across which significant trading activity 
takes place.\41\ For example, 10,700 MVA transfer capability exists 
between Midwest ISO and the New PJM Companies and Illinois Power, while 
only 3,300 MVA of transfer capability exists between PJM and New PJM 
Companies and Illinois Power. Additionally, there is 66,500 MVA of tie 
line capacity between Midwest ISO and the New PJM Companies and 
Illinois Power, while only 6,000 MVA of tie line capacity exists 
between PJM and New PJM Companies and Illinois Power.\42\ 
Notwithstanding their closer ties to Midwest ISO, the New PJM Companies 
and Illinois Power have opted to join PJM. Further, during a one-year 
period commencing June 1, 2001, AEP received 4,400 requests for 
transmission service into the Midwest ISO footprint for a total of 
48,800 MW-years of transmission service, while AEP received only 1,500 
requests for transmission service into PJM for a total of 12,500 MW-
years of transmission service.\43\ Again, notwithstanding the close 
ties to Midwest ISO, AEP has opted to join PJM. Thus, accepting the 
former Alliance Companies' RTO choices unconditionally would result in 
fewer benefits from one-stop shopping or the elimination of rate 
pancaking than if, for example, AEP joined Midwest ISO.\44\ Other 
evidence indicates that, due to the entry of the New PJM Companies and 
Illinois Power into PJM, Michigan and Wisconsin would remain only 
partially contiguous with the rest of Midwest ISO, and companies in 
Michigan and Wisconsin would be required to pay pancaked rates in order 
to wheel power through PJM from elsewhere in Midwest ISO.\45\ In 
addition, the record indicates that various other market participants 
will be adversely affected by continued rate

[[Page 45804]]

pancaking across the proposed seam, effects that would be eliminated 
had certain of the former Alliance Companies joined Midwest ISO instead 
of PJM.\46\
---------------------------------------------------------------------------

    \41\ Rehearing Order at P 26-30.
    \42\ Id. at P 29, n.27.
    \43\ Id. at P 27.
    \44\ Id. at P 28.
    \45\ Id. at P 28 & n.26.
    \46\ See, e.g., Exhibit No. CAS-1 at 13-18.
---------------------------------------------------------------------------

    34. These facts thus indicate that the proposed RTO configuration 
would: (1) Preserve an elongated and irregular seam that divides a 
highly interconnected portion of the grid and a natural market; (2) 
leave portions of Midwest ISO barely contiguous with the rest of the 
region; and (3) subject a significant number of transactions in the 
region to continued rate pancaking. In addition, as we noted in the 
July 31 Order, decisions as to which RTO to join may be affected by 
inter-RTO rate pancaking. That is, transmission owners may be driven by 
the interests of their merchant function, rather than motivated by a 
desire to achieve the most rational and efficient RTO configuration, 
resulting in inappropriate RTO configuration that places the 
transmission owner's merchant function at a competitive advantage 
relative to other similarly situated market participants. Indeed, in 
this proceeding, one transmission owner stated that Midwest ISO's 
through and out rate was a factor in its decision to join PJM,\47\ and 
both Midwest ISO and PJM agreed that this is an issue.\48\
---------------------------------------------------------------------------

    \47\ June 26, 2002 Commission Meeting, Tr. at 321.
    \48\ July 17, 2002 Commission Meeting, Tr. at 176-77.
---------------------------------------------------------------------------

    35. In sum, the choices of the former Alliance Companies as to 
which RTOs they join: (1) Exacerbate rate pancaking across the proposed 
seam for transactions sinking within the RTOs, thereby obstructing more 
efficient and competitive electricity markets in the region; (2) 
violate the fundamental requirement of Order No. 2000 that RTOs 
eliminate rate pancaking over a region of appropriate scope and 
configuration; and (3) result in unjust, unreasonable, unduly 
discriminatory or preferential RTO rates.\49\ Indeed, given Order No. 
2000's requirement that RTOs eliminate rate pancaking over a region of 
appropriate scope and configuration, rate pancaking across the proposed 
seam is incorrectly characterized as inter-RTO rate pancaking; rather, 
it constitutes intra-RTO rate pancaking which is unequivocally 
prohibited under Order No. 2000. The solution is to eliminate the 
RTORs, i.e., eliminate the through and out rates that constitute the 
rate pancaking, and in a very real sense constitute the seam.
---------------------------------------------------------------------------

    \49\ We note that only four parties in this proceeding object to 
the elimination of the through and out rates (New PJM Companies and 
PECO, JCA, Classic PJM Companies, and the Maryland and Pennsylvania 
Commissions). However, even certain of these parties recognize 
inefficiencies related to the through and out rates and benefits of 
eliminating them. See Tr. at 185 (where a witness for the New PJM 
Companies recognizes that elimination of rate pancaking would 
represent an improvement); Exhibit No. Certain Classic PJM TOs-1 at 
24 (recognizing that through and out rates are inefficient and 
should be eliminated when a common market is implemented).
---------------------------------------------------------------------------

    36. We disagree with the New PJM Companies and PECO that 
eliminating the RTORs is inconsistent with the Commission's recently-
issued White Paper. As an initial matter, we note that parties to this 
proceeding are in agreement that the RTORs must be eliminated when the 
common market becomes operational, in order to realize the goal of 
truly efficient and competitive electricity markets in the region. (As 
discussed above, it is due to the proposed RTO configuration that the 
Commission finds that Midwest ISO and PJM RTORs are unjust and 
unreasonable and directs Midwest ISO and PJM to eliminate these 
charges.) Furthermore, we note that, while the White Paper contemplates 
use of an export fee in situations where there is an imbalance between 
imports to and exports from a region, the White Paper reaffirms the RTO 
scope and configuration requirements of Order No. 2000.\50\ Indeed, the 
replacement of RTORs with inter-regional allocation of transmission 
revenue requirements is consistent with the transmission pricing 
concepts advanced in the SMD NOPR and the White Paper.\51\
---------------------------------------------------------------------------

    \50\ See White Paper, Appendix A at 3.
    \51\ Id. at 6; SMD NOPR at P 183-89.
---------------------------------------------------------------------------

    37. We also disagree with arguments that rate pancaking across the 
proposed seam provides beneficial price signals by incorporating an 
element of distance into transmission rates.\52\ As we explain above, 
rate pancaking across the proposed seam obstructs more efficient and 
competitive electricity markets and thus violates Order No. 2000's goal 
and requirement that RTOs eliminate rate pancaking within regions of 
appropriate scope and configuration. Moreover, in Order No. 2000, the 
Commission rejected similar arguments that the Commission allow rate 
pancaking within RTOs in order to reflect distance in rates. In doing 
so, the Commission essentially rejected rate pancaking based on 
corporate boundaries as a supportable distance-based rate 
methodology.\53\ Rate pancaking across the proposed seam suffers from 
the same flaw.\54\ Because the RTORs are based on embedded transmission 
costs, they can have a distorting effect on economic choices.\55\ Thus, 
we disagree that the RTORs provide beneficial price signals. In this 
regard, we affirm the Presiding Judge's finding that the configuration 
of the seam argues against relying on rate pancaking across the seam to 
incorporate an element of distance in rates.\56\
---------------------------------------------------------------------------

    \52\ JCA Brief on Exceptions at 13.
    \53\ See Order No. 2000 at 31,174-75. However, the Commission 
clarified that it would be receptive to distance-sensitive rates 
that can be justified.
    \54\ Indeed, the record indicates that, due to the irregular 
contour of the proposed seam, rate pancaking across it does not 
accurately incorporate distance into rates. See Tr. at 212-14 
(indicating that a hypothetical transaction sourcing in Richmond, 
Virginia and sinking in Chicago, Illinois would not be subject to 
pancaked rates, while a transaction sourcing in Gary, Indiana and 
sinking in Chicago would be subject to pancaked rates).
    \55\ See Exhibit No. CAS-1 at 9.
    \56\ Initial Decision at P 63.
---------------------------------------------------------------------------

    38. With respect to the concerns expressed by JCA and the Classic 
PJM Companies that eliminating the RTORs may result in hoarding of 
capacity, we agree with Cinergy that there are other, better means to 
discourage hoarding of transmission capacity than to perpetuate unjust 
and unreasonable rates. We will direct the market monitors of PJM and 
Midwest ISO to assess the potential for, and to look for signs of, 
hoarding of transmission capacity. Should they detect any, they should 
notify us and their respective RTOs immediately, and the RTOs should 
promptly file a proposal to rectify the matter.
    39. Accordingly, the Commission finds that the PJM and Midwest ISO 
RTORs, when applied to transactions sinking within the proposed Midwest 
ISO/PJM footprint, are unjust and unreasonable and must be eliminated. 
As discussed below, we will eliminate them effective November 1, 
2003,\57\ in order to provide sufficient time for the parties to 
prepare the appropriate filings and the Commission to review those 
filings.\58\
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    \57\ We disagree with the Classic PJM Companies that the 
Commission should not eliminate the RTORs before the common market 
is operational. As discussed above, the RTORs violate Order No. 2000 
and are unjust and unreasonable. This is true regardless of whether 
the common market has become operational. While we expect the most 
benefits in terms of more efficient and competitive markets once the 
common market is operational, the elimination of the RTORs during 
the transition to a common market will accelerate the realization of 
those benefits.
    \58\ Further, we note that ComEd plans to be fully integrated 
into PJM on November 1, 2003. See Press Release, PJM 
Interconnection, Market Implementation Date for Northern Illinois 
Region Confirmed for November 1 (July 11, 2003), available at http://www.pjm.com/contributions/news-releases. On July 11, 2003, in a 
status report filed in Docket No. ER02-22-002, et al., GridAmerica 
indicated that it is on schedule to become operational under the 
Midwest ISO as of October 1, 2003.
    If GridAmerica and ComEd meet these targets, the individual-
company tariffs of the individual GridAmerica Participants and ComEd 
will be superseded by the applicable RTO tariff, and rate pancaking 
over their transmission systems for transactions sinking within the 
proposed Midwest ISO/PJM footprint will be eliminated.

---------------------------------------------------------------------------

[[Page 45805]]

    40. While we named the through and out rates under the Midwest ISO 
and PJM OATTs as the rates subject to investigation in Docket No. EL02-
111-000, we expected that the inter-RTO seam would be the only seam 
remaining at the close of Docket No. EL02-111-000. When we 
conditionally accepted the former Alliance Companies' RTO choices a 
year ago, we relied upon their express intentions and commitments so 
that, by acting expeditiously in allowing each company to proceed to 
join the RTO of its choosing, those choices would be implemented, and 
the resulting benefits would be realized--quickly. The timely 
elimination of rate pancaking in this region of the country, which, as 
we discuss above, is critical to achieving competitive and efficient 
electric markets, was fundamental to our decision to accept the former 
Alliance Companies RTO choices.
    41. Even with elimination of the Midwest ISO and PJM RTORs, in the 
near term the region will still be riddled with seams, with the through 
and out rates under the individual-company tariffs of AEP, Ameren 
Services Companies on behalf of certain public utility affiliates \59\ 
(collectively, Ameren), ComEd, First Energy Corp. on behalf of certain 
public utility affiliates (collectively, First Energy),\60\ Illinois 
Power, Northern Indiana Public Service Company (NIPSCO), and DP&L 
acting as toll gates that impede the realization of more efficient and 
competitive electricity markets in the region and that preserve a 
competitive advantage for the non-RTO participants' merchant functions. 
We find that the through and out rates under the tariffs of these 
individual former Alliance Companies,\61\ for transactions sinking in 
the proposed Midwest ISO/PJM footprint, may be unjust, unreasonable, 
and unduly discriminatory or preferential, and, pursuant to section 206 
of the FPA, we will initiate an investigation and hearing in Docket No. 
EL03-212-000. We will provide for a ``paper'' hearing \62\ to determine 
whether the through and out rates contained in the tariffs of AEP, 
Ameren, ComEd, First Energy, Illinois Power, NIPSCO, and DP&L are just, 
reasonable, and not unduly discriminatory or preferential. Given our 
statutory responsibility to ensure these rates are just and reasonable, 
we believe that expeditious resolution of this proceeding is critical. 
Accordingly, the Commission will provide AEP, Ameren, ComEd, First 
Energy, Illinois Power, NIPSCO and DP&L, and interested parties, with 
an opportunity to file, explaining why the rates are or are not unjust, 
unreasonable or unduly discriminatory or preferential, on or before 
August 15, 2003.
---------------------------------------------------------------------------

    \59\ Union Electric Co. and Central Illinois Public Service Co.
    \60\ American Transmission Systems, Inc., Cleveland Electric 
Illuminating Power Co., Ohio Edison Co., Pennsylvania Power Co., 
Toledo Edison Co.
    \61\ AEP, Ameren, ComEd, First Energy, Illinois Power, NIPSCO, 
and DP&L. See supra note 58.
    \62\ The use of a ``paper'' hearing, rather than a trial-type, 
evidentiary hearing, has been addressed in previous cases. See, 
e.g., Public Service Company of Indiana, 49 FERC ] 61,346 (1989), 
order on reh'g, 50 FERC ] 61,186, opinion issued, Opinion 349, 51 
FERC ] 61,367, order on reh'g, Opinion 349-A, 52 FERC ] 61,260, 
clarified, 53 FERC ] 61,131 (1990), appeal dismissed, Northern 
Indiana Public Service Company v. FERC, 954 F.2d 736 (DC Cir. 1992). 
As the Commission noted in Opinion No. 349, 51 FERC at 62,218-19 & 
n.67, while the FPA and the case law require that the Commission 
provide the parties with a meaningful opportunity for a hearing, the 
Commission is required to reach decisions on the basis of an oral, 
trial-type evidentiary record only if the material facts in dispute 
cannot be resolved on the basis of the written record, i.e., where 
the written submissions do not provide an adequate basis for 
resolving disputes about material facts.
---------------------------------------------------------------------------

    42. Where, as here, the Commission initiates a section 206 
investigation on its own motion, section 206(b) requires that the 
Commission establish a refund effective date anywhere from 60 days 
after publication in the Federal Register of notice of its initiation 
of a proceeding to five months after the expiration of the 60-day 
period. In order to give maximum protection to customers, and 
consistent with our precedent, we will establish the refund date at the 
earliest date allowed. This date will be 60 days from the date on which 
notice of the initiation of the investigation in Docket No. EL03-212-
000 is published in the Federal Register.
    43. Section 206(b) also requires that if no final decision is 
rendered in the Commission's investigation by the refund effective date 
or by the conclusion of the 180-day period commencing upon the 
initiation of a proceeding pursuant to section 206, whichever is 
earliest, the Commission shall state the reasons why it has failed to 
do so and shall state its best estimate as to when it reasonably 
expects to make such a decision. The Commission expects to issue its 
final decision in Docket No. EL03-212-000 by October 31, 2003.

SECA Issue

Presiding Judge's Ruling
    44. The Presiding Judge stated that if the Commission were to order 
the elimination of the RTORs, he would recommend that the Commission 
adopt, without requiring the filing of new rate cases, a mechanism such 
as one of the SECAs proposed by the parties to prevent cost shifting 
between customers of the two RTOs.\63\ The various SECAs proposed by 
the parties are generally designed as non-by-passable surcharges to 
license plate zonal rates for delivery to load within the RTOs.\64\ The 
Presiding Judge found that eliminating the RTORs without a SECA would 
improperly shift costs from Midwest ISO's native load to PJM's native 
load.\65\ The Presiding Judge took the position that inappropriate cost 
shifting will occur if RTORs are eliminated absent a lost revenue 
recovery mechanism because ``the through and out revenues are no longer 
credited against the cost of service and native load customers assume 
the burden previously carried by importing customers in the form of an 
increase in their own rates.'' \66\
---------------------------------------------------------------------------

    \63\ Initial Decision at P 7.
    \64\ The proposed SECAs reflect the historical test-year 
transmission charges that customers in a given pricing zone in one 
RTO paid for transmission service over the facilities in the other 
RTO to serve load within the pricing zone, and are designed to 
collect revenue from each zone in proportion to the benefits that 
customers serving load within the zone will realize when they no 
longer pay pancaked rates for transmission service over the 
facilities in the other RTO.
    Transactions under Grandfathered Agreements and transactions 
that sink outside the combined region are not included in these 
calculations.
    NERC tag data would be used to identify the loads benefitting 
from particular through and out transactions, and lost through and 
out service revenues would be assigned to loads on the basis of such 
analysis.
    \65\ Initial Decision at P 82.
    \66\ Initial Decision at P 71.
---------------------------------------------------------------------------

Briefs on Exceptions
    45. Many parties objecting to a lost revenue recovery mechanism 
challenge the Initial Decision's position that transmission owners are 
entitled to a specific amount of revenue related to through and out 
transactions.\67\ The Michigan Agencies assert that the concept of 
``lost revenues'' is also faulty since transmission owners are not 
legally guaranteed any particular stream of revenues. They note that 
the FPA only allows them to recover costs plus a reasonable return. 
WEPCO states that, if there is any question as to whether a 
transmission owner is over-recovering its revenue requirement, then the 
Commission should review the transmission owners' actual cost of 
service. WEPCO continues that a SECA-type mechanism would be 
appropriate for use (for a short period of time) only if the 
transmission owner can establish that it will be unable to recover its 
current cost of service without

[[Page 45806]]

increasing its zonal rates once the RTORs are eliminated.\68\ TRRG 
similarly argues that before the Commission approves any lost revenue 
recovery, it must determine that each transmission owner requesting 
lost revenue recovery would otherwise be deprived of its ability to 
recover its costs and earn a reasonable return on its investment.\69\ 
The Wisconsin Commission argues that the burden should be on the New 
PJM Companies to demonstrate that they would not over-recover their 
current cost of service with implementation of a transitional rate 
mechanism.\70\
---------------------------------------------------------------------------

    \67\ See, e.g,. Michigan Agencies, Michigan Commission, TRRG, 
WSPC and UPPC, Maryland and Pennsylvania Commissions.
    \68\ WEPCO Brief on Exceptions at 27-30.
    \69\ TRRG Brief on Exceptions at 24.
    \70\ Wisconsin Commission Brief on Exceptions at 7.
---------------------------------------------------------------------------

    46. TRRG states that a cost-based approach to mitigating cost-
shifts and eliminating rate pancaking, namely license plate rates with 
no lost revenue adders, has been used by the Commission in approving 
rates for the New York Independent System Operator, Inc., ISO-New 
England and PJM. It suggests that, given the intertwined nature of PJM 
and Midwest ISO, the Commission should view elimination of the RTORs as 
involving the elimination of intra-regional rate pancaking, and follow 
those cases.\71\
---------------------------------------------------------------------------

    \71\ See TRRG Brief on Exceptions at 46.
---------------------------------------------------------------------------

    47. The Michigan Commission claims that there are legitimate 
reasons for denying any recovery of lost revenues in this proceeding in 
light of the former Alliance Companies' RTO choices. The Michigan 
Commission notes that the former Alliance Companies have continued to 
charge through and out rates far beyond the seams elimination date 
prescribed in the Illinois Power Settlement.\72\ They argue that this 
continued recovery of revenues under pancaked rates serves as enough of 
a transition period and mitigates the need for any further recovery of 
lost revenues.\73\
---------------------------------------------------------------------------

    \72\ See Illinois Power Company, et al., 95 FERC ] 61,183, order 
denying reh'g, 96 FERC ] 61,026 (2001).
    \73\ See Michigan Commission Brief on Exceptions at 16. WEPCO 
makes a similar argument in its Brief on Exceptions at 25.
---------------------------------------------------------------------------

Briefs Opposing Exceptions
    48. Several parties support the Presiding Judge's ruling that a 
lost revenue recovery mechanism is necessary in the event that the 
Commission decides to eliminate the pancaked rates.\74\ GridAmerica 
Companies and the New PJM Companies agree that transmission owners 
should be entitled to collect any revenues lost from the elimination of 
rate pancaking, and further argue that a full cost of service analysis 
should not be a necessary prerequisite for such recovery. They argue 
that requiring such filings would be inconsistent with established 
Commission precedent.\75\ Trial Staff also notes that the Commission 
has previously adopted proposals to collect lost revenues in an effort 
to remove disincentives to RTO membership without requiring a new, full 
cost of service.\76\ The New PJM Companies argue that if the Commission 
eliminates the RTORs, then it is obligated under Section 206 of the FPA 
to establish a just and reasonable alternative.\77\
---------------------------------------------------------------------------

    \74\ New PJM Companies and PECO, GridAmerica Companies, Ormet, 
Trial Staff, Illinois Power, the Midwest ISO TOs.
    \75\ See also, GridAmerica Companies Brief Opposing Exceptions 
at 19, New PJM Companies and PECO Brief Opposing Exceptions at 34.
    \76\ See Trial Staff Brief Opposing Exceptions at 11.
    \77\ New PJM Companies and PECO Brief Opposing Exceptions at 34.
---------------------------------------------------------------------------

Commission Decision
    49. In prior cases, the Commission has approved the elimination of 
rate pancaking with a transitional rate mechanism for the recovery of 
lost revenues when the parties experiencing such lost revenues 
requested a transitional rate mechanism and demonstrated that it was 
just and reasonable.\78\ On the other hand, the Commission has also 
approved the elimination of rate pancaking without such transitional 
rate mechanisms for recovery of lost revenues in cases where parties 
did not propose them or adequately support them.\79\ That is, the 
Commission is not bound to establish transitional rate mechanisms for 
recovery of lost revenues.
---------------------------------------------------------------------------

    \78\ See Alliance Cos., et al., 94 FERC ] 61,070 (2001); see 
also PJM Interconnection, LLC and Allegheny Power Co., et al., 96 
FERC ] 61,060 (2001).
    \79\ See PJM Interconnection, LLC, 81 FERC ] 61,257 (1997); see 
also Midwest Independent Transmission System Operator, Inc., et al., 
Opinion No. 453, 97 FERC ] 61,033 (2001), order on reh'g, Opinion 
No. 453-A, 98 FERC ] 61,141 (2002).
---------------------------------------------------------------------------

    50. We believe that mechanisms such as the proposed SECAs, if 
properly structured, can serve as reasonable transition mechanisms to 
address revenue losses arising from the elimination of rate pancaking 
due to RTO formation. However, no party to the proceeding has yet made 
a rate filing under section 205 of the FPA, 16 U.S.C. 824d (2000), 
either to increase its rates or to adopt a transitional rate mechanism 
to recover lost revenues.\80\ If parties desire to increase their rates 
or to utilize such a transitional rate mechanism to recover lost 
revenues, they should file pursuant to section 205 of the FPA. For 
those filings made prior to November 1, 2003, we will look favorably 
upon requests to waive the prior notice requirement to allow an 
effective date of November 1, 2003, the date that the through and out 
rates will be eliminated.
---------------------------------------------------------------------------

    \80\ Likewise, no party to this proceeding has developed a 
record sufficient for us to order increased rates or to adopt a 
particular transitional rate mechanism for any party in this 
proceeding.
---------------------------------------------------------------------------

    51. Some parties state that the proper benchmark to use to set 
rates is the cost of providing service, including expenses and a fair 
return on investment, not revenue levels under current rates. 
Consistent with prior rulings,\81\ however, we will not require that 
RTO members file an updated complete cost-of-service in order to 
justify transitional surcharges to recover lost revenues arising from 
the elimination of rate pancaking due to RTO formation.\82\ Such a 
requirement could create an unnecessary impediment to RTO formation. 
However, if customers feel that existing rates and revenues, upon which 
the transitional surcharges would be based, are no longer just and 
reasonable, they may file a complaint pursuant to section 206 of the 
FPA to seek a change in those rates and the corresponding transitional 
surcharges.\83\
---------------------------------------------------------------------------

    \81\ See Alliance Companies, et al., 94 FERC ] 61,070, reh'g 
denied, 95 FERC ] 61,182 (2001); April 25 Order at 61,446; PJM 
Interconnection L.L.C and Allegheny Power, 96 FERC ] 61,060 (2001).
    \82\ We do not address here whether this same approach, i.e., 
not requiring an updated complete cost-of-service (as opposed to 
requiring such a cost-of-service with a demonstration that a party 
would otherwise be deprived of the ability to recover its cost-of-
service due to the elimination of rate pancaking), would be 
appropriate for a public utility that has not yet joined an RTO.
    \83\ While parties to this proceeding presented evidence that 
they claimed demonstrated that the level of certain transmission 
owners' existing license plate rates was excessive, as the Presiding 
Judge correctly found, this analysis was hardly free from doubt and 
did not convincingly show that the existing rates were unjust and 
unreasonable. Initial Decision at P 74.
---------------------------------------------------------------------------

Specific Attributes of the SECA

    52. Two SECA proposals were sponsored by parties to the proceeding, 
one by GridAmerica and one by the Midwest ISO TOs. The Presiding Judge 
made certain recommendations regarding the specific attributes of the 
SECA. Specifically, the Presiding Judge recommended that: (1) Calender-
year 2002 should be the test period; (2) there should be no phase-out 
of the SECA until another methodology is devised to ensure that there 
is no cost shifting to PJM's native load customers; (3) Michigan and 
Wisconsin customers should be able to opt out of the SECA and continue 
paying the RTORs; (4) the starting point for the elimination of the 
RTORs and implementation of any

[[Page 45807]]

SECA should be after a final Commission order, allowing enough time for 
the filing of compliance filings containing the requisite calculations, 
and no refunds should be ordered; (5) the SECA should replace only 
charges for through and out service for transactions that sink in 
either the expanded Midwest ISO or the expanded PJM and source in or 
wheel through the other RTO; and (6) the Commission must decide as a 
matter of policy whether the SECA should be charged to the sink RTO as 
a whole or whether there should be a sub-zonal option.\84\
---------------------------------------------------------------------------

    \84\ Initial Decision at P 91-97.
---------------------------------------------------------------------------

    53. Most parties supported at least some of the Presiding Judge's 
recommendations while opposing the other recommendations.
Commission Decision
    54. We cannot rule here on the Presiding Judge's recommendations or 
the parties' various concerns with the mechanics of the SECA. We will 
examine the specific attributes of any transitional cost recovery 
mechanisms when parties make section 205 filings, as discussed 
above.\85\ However, based on our experience, we will provide the 
following guidance in this regard. As a general matter, we believe that 
any such filing should use NERC tag data and develop lost through and 
out revenues for the most recent twelve months, with adjustments for 
known and measurable differences, to most closely reflect future 
trading patterns. In addition, the transitional period for a SECA 
should be as short as possible, while allowing enough time for parties 
to develop a permanent solution to pricing transmission service between 
the regions. We believe that a two-year transition period for a 
transition cost recovery mechanism will provide sufficient time for the 
parties to find a permanent solution for pricing transmission service 
between regions in the Midwest ISO/PJM footprint. We will also permit 
charges on a sub-zonal basis, since sub-zonal charges best align the 
benefits of eliminating rate pancaking with the associated lost 
revenues. If transactions cannot be traced to load in various zones of 
the Classic PJM Companies' region, because of operation of the PJM spot 
market, Classic PJM Companies should address alternative methodologies 
for evaluating the relative benefits from import transactions between 
the various zones of the Classic PJM Companies' region.\86\ Finally, we 
encourage those entities that intend to make Section 205 filings to 
consult with interested parties and each other, to seek creative 
solutions to the concerns raised in this proceeding and to resolve as 
many issues as possible prior to making their Section 205 filings.
---------------------------------------------------------------------------

    \85\ We note that, in the April 25 Order, while we found that a 
transitional rate mechanism appeared promising in concept, we stated 
that we would still need to evaluate the resulting rates to ensure 
that the mechanism produces a reasonable result. Consistent with the 
April 25 Order, we do not have actual rates before us here, and 
therefore, will not render a decision on any particular methodology.
    \86\ We remind the parties that such a methodology will likely 
be necessary, in any event, for a long-term solution to pricing 
transmission service between regions.
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    55. The Presiding Judge explained that efficiencies could only be 
produced by eliminating rate pancaking after the Commission issues a 
final order since past behavior cannot be changed.\87\ Therefore, he 
recommended that no refunds should be ordered for past through and out 
charges. The Presiding Judge also ruled that no refunds should be 
ordered because the SECA replaces the RTORs with charges of a different 
form, a non-by-passable surcharge to be added to existing license plate 
zonal transmission rates but in approximately the same magnitude and 
imposed on the same groups of ratepayers; customers are not entitled to 
refunds because they have not overpaid.\88\
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    \87\ Initial Decision at P 95.
    \88\ The Presiding Judge states that the parties which contested 
the RTOR are not contesting the level of the RTORs. Initial Decision 
at P 56.
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    56. Consumers argues that, because the Commission set a refund 
effective date, refunds should be available if the RTORs are found to 
be unjust and unreasonable. Midwest ISO TOs argue that, if the 
Commission requires elimination of the through-and-out rates, the 
elimination should be on a prospective basis, without refunds, and take 
effect simultaneous with the implementation of the SECA charge.
    57. We affirm the Presiding Judge and will not order refunds here. 
Rather, as discussed above, we will make the elimination of the through 
and out rates effective on November 1, 2003. We direct PJM and Midwest 
ISO to make a compliance filing, within 30 days, eliminating the RTORs 
under their tariffs for transactions that sink in the Midwest ISO/PJM 
footprint into proposed RTOs, effective November 1, 2003.
    The Commission orders:
    (A) The Initial Decision is hereby affirmed in part, and reversed 
in part, as discussed in the body of this order. The through and out 
rates under the tariffs of Midwest ISO and PJM for transactions sinking 
within their combined region, are hereby eliminated effective November 
1, 2003, as discussed in the body of this order.
    (B) The Wisconsin Commission's motion to intervene is hereby 
denied, but the Wisconsin Commission is hereby granted permission to 
participate as amicus curiae, as discussed in the body of this order.
    (C) Pursuant to the authority contained in and subject to the 
jurisdiction conferred upon the Federal Energy Regulatory Commission by 
section 402(a) of the Department of Energy Organization Act and by the 
Federal Power Act, particularly Section Procedure and the 206 thereof, 
and pursuant to the Commission's Rules of Practice and regulations 
under the Federal Power Act (18 CFR chapter I), a public hearing shall 
be held in Docket No. EL03-212-000 concerning the justness and 
reasonableness of the through and out rates of AEP, Ameren, ComEd, 
First Energy, Illinois Power, NIPSCO, and DP&L, as discussed in the 
body of this order.
    (D) AEP, Ameren, ComEd, First Energy, Illinois Power, NIPSCO and 
DP&L and other parties may submit to the Commission in Docket No. EL03-
212-000 arguments and evidence, as outlined in the body of this order 
on or before August 15, 2003.
    (E) Any interested person desiring to be heard in Docket No. EL03-
212-000 should file a notice of intervention to intervene with the 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, in accordance with Rule 214 of the Commission's 
Rules of Practice and Procedure (18 CFR 385.214) on or before August 8, 
2003.
    (F) The Secretary shall promptly publish in the Federal Register a 
notice of the Commission's initiation of the proceeding in Docket No. 
EL03-212-000.
    (G) The refund effective date established pursuant to section 
206(b) of the FPA will be 60 days following publication in the Federal 
Register of the notice discussed in Ordering Paragraph (F) above.
    (H) The Secretary shall promptly publish this order in the Federal 
Register.

    By the Commission.
Magalie R. Salas,
Secretary.

[[Page 45808]]



                                                    Appendix
----------------------------------------------------------------------------------------------------------------
                                                                            Acronym
----------------------------------------------------------------------------------------------------------------
Cinergy Services, Inc., Cincinnati Gas and     Cinergy.
 Electric Co., PSI Energy Inc., Union Light
 and Heat Co.
Certain Classic PJM Transmission Owners......  Classic PJM Companies.
Consumers Energy Company.....................  Consumers.
Dairyland Power Cooperative..................  Dairyland Power.
Edison Mission Energy........................  Edison Mission.
Grid America Companies.......................  GridAmerica.
Illinois Power Company.......................  Illinois Power.
Joint Consumer Advocates.....................  JCA.
Madison Gas and Electric Company.............  Madison.
Maryland Public Service Commission and         Maryland and Pennsylvania Commissions.
 Pennsylvania Public Utility Commission.
Michigan Public Power Agency and Michigan      Michigan Agencies.
 South Central Power Agency.
Michigan Public Service Commission and the     Michigan Commission.
 State of Michigan.
MidAmerican Energy Company...................  MidAmerican.
Midwest Independent System Operator..........  the Midwest ISO.
Midwest ISO Transmission Owners..............  Midwest ISO TOs.
New PJM Companies and PECO Energy Company....  New PJM Companies and PECO.
Public Utilities Commission of Ohio..........  Ohio Commission.
Ormet Primary Aluminum Corporation...........  Ormet.
Commission Trial Staff.......................  Trial Staff.
Transmission Revenue Requirement Group.......  TRRG.
Wisconsin Electric Power Company.............  WEPCO.
Public Utilities Commission of Wisconsin.....  Wisconsin Commission.
Wisconsin Public Service Corporation and       WPSC/UPPC.
 Upper Peninsula Power Company.
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[FR Doc. 03-19796 Filed 8-1-03; 8:45 am]
BILLING CODE 6717-01-P