[Federal Register Volume 69, Number 110 (Tuesday, June 8, 2004)]
[Notices]
[Pages 32102-32198]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12579]



[[Page 32101]]

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Part II





Department of Energy





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Federal Energy Regulatory Commission



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Order Accepting and Suspending Tariff Sheets, Rejecting Tariff Sheets, 
Setting Timelines and Establishing Procedures for Certain Grandfathered 
Contracts; Notices

  Federal Register / Vol. 69, No. 110 / Tuesday, June 8, 2004 / 
Notices  

[[Page 32102]]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket Nos. ER04-691-000 and EL04-104-000]


Order Accepting and Suspending Tariff Sheets, Rejecting Tariff 
Sheets, Setting Timelines and Establishing Procedures for Certain 
Grandfathered Contracts

Issued May 26, 2004.
    Before Commissioners: Pat Wood, III, Chairman; Nora Mead Brownell, 
Joseph T. Kelliher, and Suedeen G. Kelly.

 Midwest Independent Transmission System Operator, Inc., Public 
Utilities With Grandfathered Agreements in the Midwest ISO Region

    1. On March 31, 2004, the Midwest Independent Transmission System 
Operator, Inc. (Midwest ISO) filed a proposed Open Access Transmission 
and Energy Markets Tariff (TEMT) pursuant to section 205 of the Federal 
Power Act (FPA), 16 U.S.C. 824d (2000). The proposed TEMT contains the 
terms and conditions necessary to implement a market-based congestion 
management program, including a Day-Ahead Energy Market, Real-Time 
Energy Market and Financial Transmission Rights (FTR) Market, on 
December 1, 2004. It also presents the Commission with the critical 
threshold issue of how to treat approximately 300 grandfathered 
agreements (GFAs) currently in force in the Midwest ISO region.\1\
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    \1\ The public utilities providing service under these GFAs are 
listed by contract in Appendix B.
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    2. The Midwest ISO states that the integration of the GFAs into its 
energy markets is ``important to the success and reliability'' of those 
markets, and that absent the integration of the GFAs, third parties may 
be subject to substantial costs that could threaten the markets' 
viability.\2\ As discussed below, it proposes a methodology, for 
approval under section 205, that it argues would enable the GFAs to 
function within the Midwest ISO's proposed energy markets.
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    \2\ Transmittal Letter at 11.
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    3. The Midwest ISO's proposed method of congestion management is a 
high priority for the Commission, due to its reliability benefits and 
its economic efficiency benefits, but we firmly believe that it should 
not start until the GFA issue is more completely addressed. As a 
stepping stone to our consideration of the proposed TEMT, this order 
initiates a three-step process to address the GFAs and offers an option 
for settling the GFAs. In addition, this order presents a revised 
timeline to guide us, and the parties to this proceeding, through the 
process of considering the TEMT filing and implementing the Midwest 
ISO's proposed energy markets. We wish to emphasize that setting out 
this timeline does not amount to preapproval or prejudgment of the 
merits of the Midwest ISO's TEMT filing. Rather, we recognize that the 
Midwest ISO has been attempting to implement its congestion management 
proposal for some time, and that resolution of this critical issue is 
required. We wish to provide more time for the parties to complete 
these intermediate steps. To provide sufficient due process for GFA 
parties, allow appropriate allocation of FTRs and ensure that market 
participants have sufficient time to perform market trials, the 
Commission moves the date for implementation of the energy markets to 
March 1, 2005.
    4. Today's order benefits customers by clarifying the procedural 
steps that will be necessary to open the Midwest ISO energy markets by 
March 1, 2005, and by taking measures necessary to ensure that the GFAs 
and other market participants are treated fairly and reasonably if the 
TEMT is approved.

I. Background

    5. In an order dated December 20, 2001, the Commission found that 
the Midwest ISO's proposal to become a Regional Transmission 
Organization (RTO) satisfied the requirements of Order No. 2000,\3\ and 
thus granted the Midwest ISO RTO status.\4\ The Commission also 
determined that the Midwest ISO's proposal for congestion management 
was a reasonable initial approach to managing congestion and satisfied 
the requirements of Order No. 2000 for Day 1 operation of an RTO. It 
directed the Midwest ISO to coordinate its Day 2 congestion management 
efforts with the pending rulemaking on Standard Market Design.
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    \3\ Regional Transmission Organizations, Order No. 2000, 65 Fed. 
Reg. 809 (Jan. 6, 2000), FERC Stats. & Regs. ] 31,089 (2000), order 
on reh'g, Order No. 2000-A, 65 FR 12088 (Feb. 25, 2000), FERC Stats. 
& Regs. ] 31,092 (2000), aff'd, Public Utility District No. 1 of 
Snohomish County, Washington v. FERC, 272 F.3d 607 (D.C. Cir. 2001).
    \4\ Midwest Independent Transmission System Operator, Inc., 97 
FERC ] 61,326 (2001), order on reh'g, 103 FERC ] 61,169 (2003).
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    6. To address the Commission's instruction that the Midwest ISO 
remain mindful of the proposed Standard Market Design in developing its 
Day 2 congestion management proposal, the Midwest ISO filed a Petition 
for Declaratory Order that sought the Commission's endorsement of the 
general approach represented in three proposed market rules (Market 
Rules). The Market Rules would provide for: (1) A security-constrained, 
centralized bid-based scheduling and dispatch system (i.e., day-ahead 
and real-time market rules); (2) FTRs for hedging congestion costs; and 
(3) market settlement rules. The Commission approved the general 
direction of the Midwest ISO's energy markets proposals, reserving 
judgment on some issues and providing guidance on others as discussed 
below.\5\ The Commission affirmed many of its conclusions on 
rehearing.\6\
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    \5\ Midwest Independent Transmission System Operator, Inc., 102 
FERC ] 61,196 (2003) (Declaratory Order).
    \6\ Midwest Independent Transmission System Operator, Inc., 103 
FERC ] 61,210 (2003) (Declaratory Order Rehearing).
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    7. On July 25, 2003, the Midwest ISO filed a proposed TEMT pursuant 
to FPA section 205 (July 25 Filing). Like the instant filing, the July 
25 Filing included terms and conditions necessary to implement the 
Midwest ISO's Day-Ahead Energy Market, Real-Time Energy Market and FTR 
Market. The filing met with numerous protests, many of which alleged 
that the proposed tariff was incomplete and that its filing was 
premature. The Midwest ISO filed a motion to withdraw the proposed 
TEMT, but it requested ``any and all guidance the Commission can give 
the Midwest ISO and its stakeholders on the matters presented in the 
July 25th Filing.''\7\
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    \7\ Motion to Withdraw Without Prejudice the July 25 Energy 
Markets Tariff Filing at 5 (Docket No. ER03-1118-000, Oct. 17, 
2003).
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    8. The Commission granted the Midwest ISO's motion to withdraw the 
July 25 Filing and provided, on an advisory basis, guidance on a number 
of issues raised in that filing.\8\ The Commission stated in the TEMT 
Order that it expected its guidance to better enable the Midwest ISO to 
prepare and file a complete version of the TEMT or a similar proposal.
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    \8\ Midwest Independent Transmission System Operator, Inc., 105 
FERC ] 61,145 (2003) (TEMT Order), reh'g dismissed, 105 FERC ] 
61,272 (2003).
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II. Revised Transmission and Energy Markets Tariff

    9. Through the revised TEMT filed on March 31, 2004, the Midwest 
ISO again proposes to implement real-time energy imbalance services and 
a market-based congestion management system via a centralized platform 
for the dispatch of generation resources throughout the Midwest ISO 
region. It plans to implement day-ahead and real-time energy markets 
with locational marginal pricing (LMP), and allocate and auction FTRs 
to allow market participants to hedge against the costs of congestion 
in

[[Page 32103]]

the Day-Ahead Market. The Midwest ISO seeks an effective date of 
December 1, 2004, for its new tariff.
    10. The Midwest ISO explains that it would like to implement 
limited sections of the TEMT on an earlier schedule in order to resolve 
two issues that will be critical to starting the markets. First, the 
Midwest ISO notes that a large number of GFAs are in force in its 
region, and that in order to accommodate GFA transactions in the energy 
markets, it needs the parties to the GFAs to decide how transactions 
pursuant to their agreements will be treated in the energy markets. The 
Midwest ISO proposes an Expedited Dispute Resolution (EDR) process that 
will allow parties to GFAs to decide which party to each GFA will serve 
as the Market Participant for that GFA. It asks the Commission to make 
the portions of its tariff relevant to EDR effective on June 7, 2004.
    11. The Midwest ISO also requests that the Commission make 
effective on June 7, 2004, all portions of the TEMT that pertain to 
FTRs. The Midwest ISO has developed a four-tiered nomination method 
that will allow Market Participants to nominate Candidate FTRs (CFTRs) 
associated with point-to-point or network transmission service subject 
to the TEMT. The Midwest ISO plans for the FTR nomination process to 
begin in July 2004 and continue through the fall of 2004.

III. Discussion

A. Procedural Matters

    12. Notice of the Midwest ISO's filing was published in the Federal 
Register, 69 FR 18893-94 (2004), with interventions and protests due on 
or before May 7, 2004. The parties listed in Appendix A filed 
interventions, protests and comments. Otter Tail Power Company (Otter 
Tail) filed a supplemental protest on May 17, 2004. The Midwest ISO 
filed an answer to the protests on May 19, 2004, and an amendment to 
its answer on May 20, 2004. The Midwest TDUs \9\ and Cinergy Services, 
Inc. (Cinergy) filed comments responding to the protests on May 21, 
2004; the Midwest TDUs' filing included an answer to the Midwest ISO's 
answer. National Rural Electric Cooperative Association (NRECA) and 
Dairyland Power Cooperative, Inc. (Dairyland) filed answers to the 
Midwest ISO's answer on May 24, 2004.
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    \9\ Great Lakes Utilities, Indiana Municipal Power Agency, 
Lincoln Electric System, Madison Gas and Electric Company, Midwest 
Municipal Transmission Group, Missouri Joint Municipal Electric 
Utility Commission, Missouri River Energy Services, Southern 
Minnesota Municipal Power Agency, Upper Peninsula Transmission 
Dependent Utilities and Wisconsin Public Power, Inc.
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    13. Pursuant to rule 214 of the Commission's rules of practice and 
procedure, 18 CFR 385.214 (2003), the notices of intervention and 
timely, unopposed motions to intervene serve to make the entities that 
filed them parties to this proceeding. We will accept the motions of 
Manitoba Hydro and Xcel Energy Services, Inc. (Xcel) to intervene out 
of time. Given the early phase of the proceeding and the parties' 
interest, the late interventions will not disrupt the proceeding. For 
the same reasons, we will accept Otter Tail's supplemental protest.
    14. Rule 213(a)(2) of the Commission's rules of practice and 
procedure, 18 CFR 385.213(a)(2) (2003), prohibits an answer to a 
protest or answer unless otherwise ordered by the decisional authority. 
We will accept the answers because they have provided information that 
assisted us in our decision-making process.

B. Treatment and Analysis of GFAs

1. The Midwest ISO's Proposal
a. Description of GFAs
    15. The TEMT identifies GFAs as ``agreements executed or committed 
to prior to September 16, 1998, or ITC Grandfathered Agreements that 
are not subject to the specific terms and conditions of the [TEMT] 
consistent with the Commission's policies,'' \10\ and that are listed 
in Attachment P to the Midwest ISO's open access transmission tariff 
(OATT).\11\ The Midwest ISO notes the Commission's prior approval of 
special treatment for transmission service under GFAs for a six-year 
transition period, and states that transmission service taken under 
GFAs is separate from transmission service taken under the OATT.\12\ 
The Midwest ISO states, however, that allowing holders of GFAs similar 
scheduling rights to current GFA practice would require a physical 
reservation, or ``carve out,'' of transmission capacity in the day-
ahead market and until the scheduling deadline prior to real-time 
dispatch. The Midwest ISO day-ahead energy market would be scheduled 
around this reservation and adjustments to the reliability unit 
commitment (RUC) would also be required to support reliability. This 
``cannot be accomplished without negatively impacting the Midwest ISO's 
ability to reliably operate the Energy Markets and without placing 
excessive financial burden on other Market Participants.'' \13\ 
Accordingly, as described below, the Midwest ISO proposes a tariff 
methodology to allow the GFAs to function under the TEMT, and advocates 
that this treatment be used until at least February 1, 2008. Two years 
before that time, it proposes to begin to evaluate the GFAs' impact on 
the energy markets under this tariff proposal; one year before that 
time, it will file a new proposal for the treatment of the GFAs.\14\
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    \10\ Module A, Section 1.126, Original Sheet No. 82. An ITC 
Grandfathered Agreement is ``an agreement under which an 
[independent transmission company] will perform pursuant to its 
terms and conditions, consistent with the Commission's policies, 
rather than under the terms of this tariff or the ITC Rate 
Schedule.'' Module A, Section 1.161, Original Sheet No. 89.
    \11\ See id. We note that in a separate proceeding, the Midwest 
ISO filed to revise Attachment P. The proposed revisions were meant 
to update and clean up the list of GFAs in the attachment. The 
Commission accepted the filing and ordered the Midwest ISO to make 
further revisions. See Midwest Independent Transmission System 
Operator, Inc., 105 FERC ] 61,387 (2003), further order, 106 FERC ] 
61,288 (2004).
    \12\ See Midwest Independent Transmission System Operator, Inc., 
et al., 84 FERC ] 61,231 at 62,167, 62,169-70 (1998) (Formation 
Order) (granting conditional approval for ten public utilities to 
transfer operational control of their jurisdictional transmission 
facilities to the Midwest ISO, and deferring placement of existing 
wholesale loads and bilateral agreements for six years).
    \13\ Transmittal Letter at 9.
    \14\ See Module C, Section 38.8.4, Original Sheet No. 454.
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    16. The Midwest ISO states that it has reviewed all contracts 
listed in Attachment P to the OATT. It says that specific details of 
the contracts, such as usage, scheduling requirements and megawatt 
quantity or capacity, are not readily apparent on the face of some of 
the contracts.\15\ The Midwest ISO adds, however, that about half the 
contracts had a specific megawatt value associated with them, and that 
in the aggregate those contracts accounted for approximately 20,000 
megawatts of capacity. The Midwest ISO projects that the remaining half 
of the GFAs are likely to be associated with a similar number of 
megawatts. As a result, it says that up to 40,000 megawatts of 
capacity--about 40 percent of total load in the region--are likely to 
be associated with the GFAs.\16\ It concludes that the treatment of 
GFAs will have a significant impact on the total load serviced within 
the region and that a physical carve-out of the GFAs from the proposed 
energy markets is not feasible.
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    \15\ See Transmittal Letter at 9-10; McNamara testimony at 82-
83.
    \16\ The Midwest ISO's analysis assumed a peak capacity of 
97,000 megawatts. Since the time of the analysis, Ameren Corporation 
has announced that it will purchase Illinois Power, and that 
Illinois Power will join the Midwest ISO. See McNamara Testimony at 
84 n.5. Ameren itself was successfully integrated into the Midwest 
ISO on May 1, 2004.
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    17. The Midwest ISO avers that operation of wholesale energy 
markets

[[Page 32104]]

without information related to the flows of energy pursuant to GFAs 
would pose ``substantial reliability risks.'' \17\ It also asserts that 
not requiring parties to the GFAs to schedule consistent with 
scheduling rules proposed in the TEMT would prevent the Midwest ISO 
from fulfilling its requirement under Order No. 2000 to develop a 
market-based congestion management mechanism. Finally, the Midwest ISO 
emphasizes that the GFAs' extensive impact on the Midwest ISO region 
makes a physical carve-out of the GFAs unduly burdensome for third 
parties. It cautions that ``absent the integration of [GFAs] into the 
market, third parties may be subject to substantial costs which may 
ultimately threaten the viability of the market.'' \18\
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    \17\ Transmittal Letter at 11.
    \18\ Transmittal Letter at 11.
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b. Scheduling and Settlement Options
    18. The Midwest ISO states that, working in conjunction with a task 
force, it developed a solution to treat GFAs in a way that would: (1) 
Leave the parties to the GFAs ``financially indifferent upon 
implementation of the energy markets;'' as described below; (2) avoid 
negatively impacting the Midwest ISO's ability to operate energy 
markets; and (3) avoid placing undue burdens on third parties.\19\ The 
Midwest ISO argues that its proposal, described below, does not 
abrogate the terms of the agreements; therefore, the proposed treatment 
should be reviewed under the just and reasonable standard.\20\ In the 
alternative, the Midwest ISO argues that if the Commission determines 
that any portion of the Midwest ISO's proposed treatment of the GFAs 
amounts to reformation of those agreements, Commission should consider 
such treatment to be in the public interest pursuant to section 206 of 
the FPA and the Mobile-Sierra doctrine.\21\
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    \19\ Transmittal Letter at 11-12.
    \20\ In support of this proposition, the Midwest ISO cites 
Northeast Utilities Service Company, 66 FERC ] 61,332, reh'g denied, 
68 FERC ] 61,041 (1994), aff'd sub nom. Northeast Utilities Service 
Company v. FERC, 55 F.3d 686 (1st Cir. 1995).
    \21\ See United Gas Pipeline Company v. Mobile Gas Service 
Corp., 350 U.S. 332 (1956); FPC v. Sierra Pacific Power Company, 350 
U.S. 348 (1956).
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    19. The Midwest ISO proposes to include all schedules and 
transactions, including those associated with GFAs, in its optimization 
and pricing procedures. It will allow parties to convert their GFAs to 
agreements under the TEMT at any time before or after the 
implementation of the energy markets. It also proposes to require 
parties that do not voluntarily convert their GFAs to select from among 
three options--to remain in place for a three-year transition period 
that will end coincident with the six-year transition period initially 
approved in 1998 \22\--that will determine what rights and obligations 
the Midwest ISO will assign to market participants on behalf of the 
GFAs. All three options for unconverted GFAs will require the parties 
to submit to the Midwest ISO the following GFA information: (1) The 
name of the GFA Responsible Entity; \23\ (2) the name of the GFA 
Scheduling Entity; \24\ (3) the source and sink points applicable to 
the GFA; and (4) the maximum megawatt capacity permissible under the 
GFA.\25\ The parties must submit this information no later than June 7, 
2004. If they cannot agree on the information before then, the Midwest 
ISO proposes to require them to enter EDR and provide the GFA 
information to the Midwest ISO no later than July 14, 2004.\26\ At the 
time they submit their GFA information, GFA parties that do not convert 
their agreements to TEMT service also must select the scheduling and 
settlement option that will apply to their GFAs.\27\
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    \22\ See Formation Order at 62,167, 62,169-70.
    \23\ The GFA Responsible Entity, which must be a Market 
Participant under the TEMT, will be financially responsible for 
Market Activities charges, Schedule 16 and 17 charges, Transmission 
Usage Charges and debits or credits associated with FTRs held by the 
GFA Responsible Entity. See Module C, Section 38.8.1, Original Sheet 
No. 443.
    \24\ The GFA Scheduling Entity--which can be the GFA Responsible 
Entity or its agent--will submit bilateral transaction schedules 
under the TEMT for sales or purchases of energy under the GFA. See 
Module C, Section 38.8.2, Original Sheet No. 444.
    \25\ See Module C, Section 38.2.5.j, Original Sheet No. 402.
    \26\ See Module C, section 38.2.5.j, Original Sheet Nos. 400-02. 
EDR will address disputes involving the designation of GFA 
information in the event that parties cannot resolve the disputes 
informally or pursuant to dispute resolution procedures specified in 
their GFAs. See Module A, section 12A.1, Original Sheet No. 212. 
Each party (or group of parties) to GFAs for which GFA information 
has not been submitted to the Midwest ISO by June 7, 2004, will 
select an arbitrator, and the two arbitrators will select a third 
arbitrator to chair the arbitration panel. See Module A, section 
12A.2, Original Sheet No. 213. The arbitrators will have 25 days to 
render a decision, and the parties must notify the Midwest ISO of 
that decision by August 1, 2004. The Midwest ISO proposes that the 
arbitrators' decision will be final and binding; appeal will lie 
only on the grounds that the arbitrators' conduct, or their 
decision, violated the standards set forth in the Federal 
Arbitration Act and/or the Administrative Dispute Resolution Act. 
See Module A, section 12A.3, Original Sheet No. 214.
    \27\ See Module C, section 38.2.5.j, Original Sheet No. 400-02.
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    20. Under Option A, the GFA Responsible Entity will be entitled to 
nominate the capacity under the GFA for an allocation of FTRs. It will 
hold the FTRs it receives in the allocation and assume responsibility 
for credits, debits, rights and responsibilities associated with those 
FTRs. The Midwest ISO will assess congestion charges and the cost of 
losses for all transactions under the GFA.\28\
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    \28\ See Module C, section 38.8.3.a, Original Sheet Nos. 445-46.
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    21. Option B provides that the GFA Responsible Entity will not 
nominate or receive FTRs.\29\ The Midwest ISO will charge the GFA 
Responsible Entity the cost of congestion for all transactions pursuant 
to the GFA, but--if the GFA Scheduling Entity submits the bilateral 
transaction schedule a day ahead, in keeping with section 39.1.4--the 
Midwest ISO will credit back to the GFA Responsible Entity the costs of 
congestion resulting from day-ahead schedules that the GFA Responsible 
Entity clears in the day-ahead market.\30\ The Midwest ISO will also 
charge the GFA Responsible Entity the cost of losses for all 
transactions under the GFA, then--as before, if the GFA Scheduling 
Entity has timely submitted a conforming schedule for the GFA--credit 
back to the GFA Responsible Entity the difference between marginal 
losses and system losses at the GFA source and sink points.\31\
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    \29\ See Module C, section 38.3.3.b.i, Original Sheet No. 447.
    \30\ If a revenue inadequacy results, the Midwest ISO will 
compensate the GFA Responsible Entity for the costs of congestion by 
assessing debits on all Market Participants on a pro rata basis. See 
Module C, Section 38.8.3.b.ii, Original Sheet Nos. 448-50.
    \31\ The TEMT states that the Midwest ISO will determine the 
difference between marginal losses and system losses ``on an 
equitable basis.'' Module C, section 38.8.3.b.iii, Original Sheet 
No. 451. The Midwest ISO further notes that this mechanism will be 
different from the mechanism used to refund overcollections of loss 
revenues to parties to non-GFA transactions. See Transmittal Letter 
at 14.
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    22. Market Participants that select Option C will neither nominate 
nor receive FTRs. The GFA Responsible Entity will pay marginal losses 
and the cost of congestion for all transactions pursuant to GFAs 
without receiving reimbursements as in Option B; they will, however, 
receive an allocation of excess marginal losses revenue.\32\
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    \32\ See Module C, section 38.8.3.c, Original Sheet No. 452.
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b. Schedule 16 and 17 Charges
    23. The Midwest ISO notes that Schedules 16 and 17 of the TEMT--
which provide for the recovery of costs associated with the 
administration and allocation of, respectively, FTR services and energy 
market services--are the subject of a paper hearing in Docket No. ER02-
2595-000. The Midwest ISO states that any Commission decisions 
concerning these schedules ultimately will be incorporated into the 
TEMT. To

[[Page 32105]]

the extent that the determinations apply Schedule 16 and 17 charges to 
GFA transactions, the Midwest ISO believes that the market participant 
assessed these charges for GFA transactions should be able to recover 
those costs in its rates.
2. Protests and Comments
    24. The Midwest ISO TOs maintain that the Midwest ISO's proposal is 
effectively seeking to revise existing contracts without the 
appropriate legal requirements being satisfied, or it is seeking to 
impose charges on public utilities to those GFAs without those 
utilities having a reasonable opportunity to recover the costs. They 
believe that the Midwest ISO has failed to make the necessary showing 
under the Mobile-Sierra doctrine that revision of the existing 
contracts meets the public interest standard. Xcel adds that it 
believes that GFA customers will be unwilling to pay Schedule 16 and 17 
charges for the portion of their load served under the GFA or to 
participate in the proposed EDR process. Alternately, the Midwest ISO 
TOs assert that the proposal would impose trapped costs on parties to 
the contracts and that the Midwest ISO has failed to propose a 
regulatory mechanism to allow these charges to be recovered by these 
parties. The Midwest ISO TOs argue that the TEMT provisions regarding 
grandfathered agreements should be rejected. Further, the Midwest ISO 
TOs state that there is no operational reason for the Midwest ISO's 
position that it cannot operate by excluding the GFAs, much as PJM 
operates its market. The Midwest ISO TOs state that they are willing to 
provide the Midwest ISO with the operational information that it needs 
in order to implement the market with a carve-out for the GFAs that 
would hold the GFAs harmless from any market related costs and charges.
    25. FirstEnergy requests that the Commission either amend the GFAs 
to change the price term in the contract or allow transmission owners 
to recover TEMT costs through a surcharge in their transmission rates. 
FirstEnergy states that without these changes, all market participants 
would subsidize individual contracts while the transmission owner still 
would bear some uncompensated costs for Schedule 16 and 17 charges. WPS 
Resources states that the Midwest ISO's proposal discriminatorily 
favors GFA parties at the expense of the majority of the Midwest ISO's 
load contrary to the anti-discrimination provisions of the FPA. WPS 
Resources and WUMS Load Serving Entities assert that such treatment 
perversely results in transfer of GFA-related costs from parties who 
retained their GFAs, inconsistent with Commission policy, to those, 
such as the WUMS utilities, who converted to OATT service. WPS 
Resources suggests that Option B should be given to all load or GFA 
parties should be limited to Options A and C.
    26. OMS is concerned that the proposed insertion of Option B GFAs 
into Tier I and II of the FTR allocation process will offset the 
available CFTRs for non-GFA loads.\33\ OMS describes the Midwest ISO's 
proposal as allowing 100 percent of FTRs for Option B GFAs to be 
allocated first in Tier I and Tier II.\34\ OMS request that the 
Commission instruct the Midwest ISO that the GFA nominations for GFA 
holders that select Option B should not be allowed to exceed the tier 
limits of Tier I (35 percent) or Tier II (50 percent). On the matter of 
the Midwest ISO's proposed GFA scheduling and settlement options, OMS 
states that while it believes treating GFAs the same as other network 
and point-to-point transmission service contracts would be the best 
alternative, it recognizes that compromises must be made in the 
transition to an organized energy market. In this regard, OMS requests 
that the Commission open an investigation of the justness and 
reasonableness of the impact of the Midwest ISO's proposed GFA options 
on other market participants and on the overall efficiency of the 
market in order to inform the Commission on the treatment of the GFAs 
following the transition period ending February 1, 2008.
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    \33\ Market Participants will nominate in four tiers: (1) Tier 1 
nomination, for up to 35 percent of entitlement; (2) Tier II 
nomination, for up to 50 percent of entitlement; (3) Tier III 
nomination, for up to 75 percent of entitlement; and (4) Tier IV 
nomination, for up to 100 percent of entitlement.
    \34\ See Gribik testimony at 30. A Market Participant with 700 
MW of Network Integration Transmission Service peak load and 500 MW 
of GFA Option B service would be eligible to nominate 420 MW in Tier 
I ((700 MW + 500MW) x .35). The Tier I nomination would be for the 
full amount of GFA Option B service with 80 MW of GFA Option B 
service setting nominations in Tier II.
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    27. EPSA concurs with the Midwest ISO's threshold determination 
that any attempt to physically carve out the capacity associated with 
the GFAs would threaten reliability and place an unacceptable financial 
burden on Market Participants. But EPSA, Dynegy, Reliant, PSEG and 
Cinergy also assert that GFA Option B places an unacceptable financial 
burden on Market Participants through uplift costs by creating added 
benefits for the GFAs under Option B that go beyond preserving the 
material benefits and obligations of the pre-existing contracts. EPSA 
and Cinergy quote Professor Hogan's Midwest ISO-sponsored testimony in 
describing these added benefits for GFAs under Option B. Professor 
Hogan states that under Option B the GFA customer's use-it-or-lose-it 
feature of physical schedules would be eliminated or substantially 
reduced; the chance of curtailment under TLR rules would be reduced; 
the costs of redispatch to accommodate GFA transactions would be 
shifted to non-GFA parties through uplift charges; and the costs of 
marginal losses would be reduced to average losses. Dynegy contends 
that the lack of comparable treatment between grandfathered and non-
grandfathered contracts will deter new members from joining the Midwest 
ISO and deter the development of new generation. Dynegy requests that 
the Commission reject the Midwest ISO's proposed treatment of the GFAs 
and direct the Midwest ISO to allocate the market costs of the GFAs to 
the transmission owners that are parties to the GFAs. Reliant states 
that since some of the GFAs may not have provisions for paying 
redispatch costs, that the Commission should reject the Midwest ISO GFA 
option that provides for a perfect hedge in the Day-Ahead Market. 
Alternatively, Reliant states that GFA holders should bear the 
responsibility for congestion costs created by GFA transactions unless 
these costs are specifically addressed and allocated in the GFA. PSEG 
states that the Commission should encourage voluntary conversion of the 
GFAs to OATT service by expediting review of the contract filed at the 
Commission for conversion. Cinergy states that if the Commission is 
unprepared to reject Option B outright, that the Commission should 
require the Midwest ISO to quantify the scope and impact of the uplift 
under Option B and justify the justness and reasonableness of the 
uplift to non-GFA market participants.
    28. Cinergy asserts that mandatory, binding EDR is unlawful. It 
states that as the Midwest ISO will not make an Attachment P compliance 
filing until May 26, 2004, there will only be seven business days for 
GFA holders to reach agreement before the proposed start of the EDR 
process. Cinergy states that seven days to resolve GFA issues prior to 
mandatory EDR is manifestly unjust and unreasonable and should be 
rejected by the Commission. In addition, Cinergy states that the 
proposed twenty-five-day window for arbitrators to make their decision, 
as well as the lack of technically qualified arbitrators, creates a 
high probability of error in the decision-making process. Further,

[[Page 32106]]

Cinergy states that the Midwest ISO's proposal is unclear as to whether 
the proposed EDR is voluntary and non-binding or mandatory and binding. 
Cinergy concludes that the Commission alone has jurisdiction over 
matters related to the relationship between a FERC-filed tariff and a 
FERC-filed GFA and cannot allow an arbitrator's decision to bind the 
Commission. Cinergy asserts that the appropriate venue for dispute 
resolution is at the Commission unless both parties agree to 
arbitration.
    29. Contrary to Cinergy's position, EPSA supports the Midwest ISO's 
request to approve the proposed EDR process to ensure that all load 
provide the necessary information for allocation of FTRs. Dairyland 
believes that any proposed EDR process for GFAs must be voluntary under 
the Mobile-Sierra doctrine. Midwest TDUs assert that the EDR procedures 
fail to protect the substantive rights of parties to the GFAs because 
the EDR process addresses too broad an array of disputes on too tight a 
timeline and imposes costs that TDUs may pay twice--once through their 
half of the arbitration costs and again as passed through the 
transmission owners' rates. They state that the EDR process should be 
reformed to be more like the Appendix D arbitration process for 
transmission owner disputes, including allowing informal dispute 
resolution followed by non-binding mediation, followed by arbitration.
    30. The Midwest TDUs, Basin, Midwest Municipal Transmission Group, 
and others state that the Midwest ISO's proposal would change both the 
pricing and the economically consequential operational terms of the 
grandfathered agreements through a generic filing that would not 
examine the individual contracts being rewritten. These protestors 
assert that the benefits of an LMP market do not justify taking the 
rights of GFA holders without compensation. The protestors assert that 
although the proposed treatment is preferable to the treatment the 
Midwest ISO proposed in 2003, it still has not provided for real 
consistency with contractual rights. They state that although Option B 
comes closest to preserving existing rights it falls short of honoring 
these rights by: (1) Requiring that average losses be purchased at 
market prices where in the past they were self-provided; (2) imposing 
congestion charges for any change between day-ahead and real-time 
schedules where the contract contains provisions allowing for no-fee 
schedule changes later than the Midwest ISO's deadlines; (3) applying 
marginal losses to GFA real-time transactions where average losses 
applied in the past; (4) requiring parties to follow Midwest ISO-
proposed EDR procedures where the contract has different dispute 
resolution provisions (including preclusion of unilateral rate 
changes); and (5) allocating a share of the costs of keeping the GFA 
Option B holders harmless from day-ahead congestion costs to the GFA 
holders where no such uplift costs were allocated to the contracts in 
the past.
    31. The Midwest TDUs state that if the Midwest ISO substantiates 
that GFAs impinge on its ability to successfully operate the LMP market 
and show that the GFAs represent a large share of the transmission 
capacity, the Midwest TDUs would forego their legal objections on 
certain conditions. These conditions include: (1) No reduction in FTR 
allocation for GFA holders that accept Option B later than the start of 
the FTR allocation process; (2) assurances that Option B will fully 
hedge against increased loss charges; (3) assurances that Option B 
allows holders to schedule their full entitlement in the Day-Ahead 
market and allows submission of virtual bids; (4) clarification by the 
Commission that the transition period does not bind the Midwest ISO to 
make a filing that would eliminate Option B by 2008, but only that MISO 
will make a 205 filing in 2007 to address the GFA issue; and (5) all 
GFA holders accept Option A, B or C. MMTG states that its members are 
open to discussions with the Midwest ISO about modifying the contracts, 
but that the Midwest ISO cannot make a unilateral section 205 filing to 
modify the GFAs en masse.
    32. Many GFA holders state that the Midwest ISO has not made the 
``practically insurmountable'' public interest showing that is required 
under the Mobile-Sierra doctrine before altering existing contracts 
through a section 205 or 206 filing.\35\ They request that the 
Commission reject the Midwest ISO proposal and direct the Midwest ISO 
to adopt procedures that ensure that both the physical and financial 
rights under the GFAs are preserved. WPPI supports a complete carve-out 
of the GFAs from the TEMT. The Midwest TDUs state that Central Hudson 
is particularly instructive in this situation because, like the Midwest 
ISO's proposal, it concerned the initial implementation of a regional 
LMP market. Additionally, the Midwest TDU and other parties request 
that the Commission suspend the proposed tariff sheets and establish 
hearing procedures to determine the justness and reasonableness of the 
Midwest ISO's proposal.
---------------------------------------------------------------------------

    \35\ Midwest TDUs, Basin, Midwest Municipal Transmission Group, 
Corn Belt, Minnesota MPA, Manitoba Hydro, Montana-Dakota, NRECA, 
Detroit Edison, Wisconsin Transmission Customer Group and Alliant.
---------------------------------------------------------------------------

    33. Absent assurances that the GFAs' parties will be held 
financially harmless for the duration of the GFA, Nebraska Public Power 
District and Omaha Public Power District state that they will not be 
able to join the Midwest ISO. Nebraska Intervenors state that there are 
no business or reliability reasons that parties to the GFAs should be 
assigned additional costs due to the TEMT. None of the Nebraska 
Intervenors are willing to have their contract rights--either the 
physical delivery or the financial costs--affected due to participation 
in the TEMT. Nebraska Intervenors are concerned that the Midwest ISO 
does not guarantee that the GFA parties will be financially 
indifferent, only that financial indifference is intended. Great Lakes 
adds that if the present market redesign does not scrupulously honor 
existing contracts, financial markets will have no confidence in the 
sanctity of the arrangement entered into under the new market 
structure, and access to capital needed to support investment will 
thereby be degraded.
    34. Dairyland, Minnesota Municipal Power Agency (Minnesota 
Municipal) and Minnkota Power Cooperative, Inc. state that the options 
the Midwest ISO proposes, including Option B, fail to hold the GFA 
parties financially indifferent. Dairyland states that GFA parties will 
be exposed to: (1) Real-time congestion and loss costs for energy 
imbalance; (2) costs of establishing credit with a third party; (3) 
increased internal costs to provide information to the Midwest ISO and 
review billing settlements; and (4) Schedule 16 and 17 charges. 
Dairyland has a grandfathered contract with Xcel that provides for 
losses to be repaid in kind and for congestion costs to be shared based 
on a load ratio cost of redispatch based on true marginal cost of units 
redispatched on a least-cost basis. Dairyland asserts that it would 
incur new labor and administrative costs for tracking the costs of 
Xcel's losses in serving the Dairyland load under this contract. 
Dairyland also asserts that under the TEMT, redispatch costs would 
likely be higher than costs under its Xcel contract since they will be 
based on bids rather than true marginal costs. Dairyland proposes that 
GFAs be physically carved out of the Midwest ISO's dispatch model and 
not be held accountable for congestion costs, marginal losses, energy 
imbalance costs, and Schedule 16 and 17 costs associated with the 
Midwest ISO market. In order

[[Page 32107]]

to address the Midwest ISO's concerns about a physical carve-out, 
Dairyland proposes that GFA parties be required to give load forecast 
information to the Midwest ISO on a day-ahead basis and be directed to 
enter settlement discussions on the issue of market manipulation by the 
GFA holders.
    35. Montana-Dakota Utilities Company (Montana-Dakota) expresses 
concern that it will incur market costs on behalf of its GFAs with 
Western Area Power Authority (WAPA) and Basin since the Commission has 
no authority to order non-jurisdictional, non-Midwest ISO members to 
comply with the TEMT provisions. Montana-Dakota also suggest that 
grandfathered transmission service serving load that does not have a 
Midwest ISO member as its power supplier should be excluded from market 
impacts. Montana-Dakota states that the Midwest ISO proposal for 
treatment of GFAs should be rejected and GFAs and Grandfathered 
Integrated Transmission Agreements should be left intact.
    36. Midwest SATCs state that the allocation of functions between 
GFA parties is a potentially seminal issue, particularly for stand-
alone transmission companies that have structured their organizations 
to avoid certain Market Participant functions that may be implicated by 
GFAs. The Midwest SATCs request that the proposed EDR process be made 
voluntary and that load-serving entities be designated for an interim 
period to act on behalf of the Midwest SATCs in negotiations regarding 
FTR allocation for the GFAs.
    37. Manitoba Hydro states that it is a party to several GFAs that 
contain provisions for imports and exports from Canada in the same 
agreement and thus are only partially jurisdictional. In such cases, 
Manitoba states that it is questionable how the Commission could modify 
portions of the agreements without altering the non-jurisdictional 
aspects of the GFA. Manitoba Hydro requests that the Commission clarify 
that the Midwest ISO's proposed GFA treatment does not apply to any 
GFAs involving non-jurisdictional entities to the extent such 
agreements relate to power exported from Canada.
    38. Tennessee Valley Authority (TVA) requests that the Commission 
direct the Midwest ISO to include provisions in the TEMT for TVA to 
continue to dynamically schedule energy to serve its grandfathered load 
in the Midwest ISO footprint.
3. The Midwest ISO's Answer and Intervenors' Reply Comments
    39. In its Answer, the Midwest ISO reiterates its concern that the 
creation of a physical carve-out of the capacity associated with the 
GFAs cannot be accomplished without negatively impacting the Midwest 
ISO's ability to reliably operate the energy markets and without 
placing excessive financial burdens on other Market Participants. The 
Midwest ISO states that it is vital that the GFA transactions be 
required to meet the same scheduling deadlines and requirements as 
other transactions.
    40. The Midwest ISO states that the EDR process is not intended to 
supersede the contract rights of the parties, but only to serve as a 
procedural mechanism to enable the Midwest ISO to obtain the 
information necessary to initially allocate FTRs. The Midwest ISO 
states that the EDR process is not binding upon the parties and that it 
merely provides a recommended data input to enable FTRs to be initially 
allocated to parties.
    41. In answer to protestors' contentions that Option B should be 
rejected, the Midwest ISO states that its proposed treatment of GFAs 
appropriately meets both the Commission's general directive to address 
phantom congestion in a way that is consistent with GFA contractual 
rights and the specific need to ensure reliable operation of the Energy 
Markets.
    42. The Midwest TDUs endorse OMS's arguments that the costs of 
fully honoring GFAs should be uplifted broadly. They say that OMS takes 
a step toward better allocation of the associated costs by proposing to 
hold back in Tier I 35 percent, rather than 100 percent, of non-issued 
FTRs. They add, however, that it would be simpler and fairer to hold 
back nothing and uplift all of the Option B refund costs.
    43. The Midwest TDUs rebut the assertions of Cinergy, 
Constellation, Dynegy and EPSA that Option B will leave GFA holders 
better off than they are under their existing contracts. The Midwest 
TDUs also note that any potential advantages that could be attributed 
to Option B are offset by disadvantages, mostly in the form of 
increased costs.
    44. Dairyland argues that the Midwest ISO's representations in the 
Transmittal Letter and in its Answer regarding EDR are inconsistent 
with the wording of section 12A of the proposed TEMT. Dairyland notes 
that section 12A allows for more than data gathering necessary to 
allocate FTRs, and that it would make EDR mandatory and binding. 
Dairyland states that it understands the Midwest ISO's need to gather 
data necessary to allocate FTRs, but that the EDR proposal goes beyond 
that need and seeks for GFA holders to resolve unrelated issues--
specifically, those of the GFA Responsible Entity and Scheduling 
Entity. Dairyland urges the Commission to reject section 12A of the 
TEMT.
4. Discussion
    45. In Order No. 2000, the Commission affirmed that RTOs must 
ensure the development and operation of market-based mechanisms to 
manage congestion.\36\ The Commission declined to prescribe a specific 
congestion pricing mechanism, but observed that markets based on LMP 
and financial rights for firm transmission service ``appear to provide 
a sound framework for efficient congestion management.''\37\ The 
Commission further encouraged the Midwest ISO to create an LMP-based 
approach to congestion management since the time the Midwest ISO was 
approved as an RTO.\38\
---------------------------------------------------------------------------

    \36\ See Order No. 2000 at 31,126.
    \37\ Id. at 31,126-27.
    \38\ See Declaratory Order at P 29-32; Declaratory Order 
Rehearing at P 27-31; TEMT Order at P 22 (encouraging the Midwest 
ISO to resubmit its energy markets proposal).
---------------------------------------------------------------------------

    46. The Commission has also indicated that it wants to preserve the 
rights of existing users of the Midwest ISO's transmission grid. The 
Declaratory Order noted that the Midwest ISO must strive to keep 
existing customers whole following implementation of a new market-based 
congestion management system.\39\ Accordingly, the Commission directed 
the Midwest ISO to continue to seek broad consensus among its 
participants regarding the future allocation of existing rights.\40\ 
The Commission made a similar statement in the TEMT Order, noting that:

    \39\ Declaratory Order at P 64. (``We continue to believe that 
customers under existing contracts, both real or implicit, should 
continue to receive the same level and quality of service under a 
standard market design.'').
    \40\ See id. at 68.

Understanding what rights grandfathered contracts convey and the 
impact the contracts might have on the proposed markets is essential 
to develop a fair resolution of the grandfathering issue. We expect 
* * * that the Midwest ISO will work to resolve the issue of FTR 
allocation in tandem with the issue of the treatment of 
grandfathered contracts, as the two issues are linked.\41\
---------------------------------------------------------------------------

    \41\ TEMT Order at P 60.
---------------------------------------------------------------------------

    47. The Midwest ISO's congestion management proposal and the 
preservation of all aspects of the GFAs may be incompatible. The 
Midwest ISO states several times in the TEMT filing that allowing 
GFA holders to schedule only in real time, which will require 
reservation or carve-out of substantial

[[Page 32108]]

transmission capacity until the GFA schedules are submitted, may 
threaten the markets' operation, impair reliability and shift GFA-
related costs to third parties. In light of its concerns, it states 
that, should the Commission find any portion of its proposed 
treatment of GFAs to constitute a reformation of the GFAs, the 
Commission should consider such treatment in the public interest 
pursuant to the Mobile-Sierra doctrine.
    48. While we note the Midwest ISO's preference for voluntary 
conversions or the assignment of scheduling responsibility under 
section 205 of the FPA,\42\ we are concerned that these proposed 
approaches will not be sufficient to resolve the issue. We cite to 
the numerous protests to the Midwest ISO's process and the lack of 
interest, if not opposition of parties, to the proposed scheduling 
and settlement options or to the concept of assigning the scheduling 
responsibility to transmission owners.
---------------------------------------------------------------------------

    \42\ See Hogan testimony at 8-9 (``[V]oluntary conversion of the 
GFAs to revised agreements consistent with the Midwest ISO [TEMT] 
should be preferred and encouraged.''), 32-34, 54.
---------------------------------------------------------------------------

    49. The Commission has a responsibility under the FPA to ensure 
that jurisdictional rates in wholesale power markets remain just and 
reasonable. We must ensure that public utility sellers do not charge 
unjust and unreasonable wholesale rates, and that the market 
structures and market rules affecting the wholesale rates of public 
utility sellers do not result in, or have the potential to result 
in, wholesale rates, charges or classifications that are unjust, 
unreasonable, unduly discriminatory or preferential. However, we 
also regard any potential modification of the GFAs with great 
seriousness, and we are unwilling to decide an issue of such 
magnitude without more information.
    50. The Midwest ISO has proposed EDR in order to gather the GFA 
information. EDR, as described above, is an expedited arbitration 
proceeding designed to identify the GFA information and report it to 
the Midwest ISO. While the Commission agrees that identifying the 
GFA information is critical, we find that the proposed EDR process 
is fatally flawed. We agree with Dairyland that the Midwest ISO's 
proposal must be voluntary because it could affect the substance of 
GFAs. We are sympathetic to Cinergy's and Midwest TDUs' assertions 
that EDR provides for resolution of too many issues in too short a 
time frame, and we want to provide the parties more time (and 
options) to identify and address disputes regarding the GFA 
information. We also note that the proposed EDR provisions do not 
adequately address our own need for the GFA information, and that 
the GFA information is critical to our consideration of the merits 
of the TEMT filing.
    51. For the reasons described below, we will institute a 
proceeding under section 206 of the FPA, for the initial purpose of 
enhancing our understanding of the GFAs and to determine whether any 
of the GFAs need to be modified. Our goal is to ensure that the GFAs 
are accommodated in the Midwest ISO's energy markets in a way that 
will not harm reliability or third parties, yet preserves the 
commercial bargain between the parties. In order to achieve this 
end, our procedure for the GFAs will elicit the GFA information 
directly from the parties, without need for arbitrators, and thereby 
supersede the Midwest ISO's EDR proposal.
    52. We acknowledge Dairyland's concerns about the costs of EDR, 
the Midwest TDUs' desire for multilayer dispute resolution 
processes, and several commenters' concerns about resolving many 
issues in a short time frame. We have designed the GFA process to 
allow parties to focus their attention and their resources on the 
issue or issues that most need their attention. We also intend to 
allow parties to take advantage of all dispute resolution procedures 
available to them so that they may make the most effective use of 
the time available and minimize their dispute resolution costs. We 
strongly encourage parties to work together and to reach agreements 
informally.
a. Concerns Regarding Provision of Reliable Service
i. Lack of Information Regarding GFAs
    53. The Commission is very concerned about the effect that a 
physical carve-out of the GFAs will have on the reliability of the 
Midwest ISO's dispatch and transmission operations. As an initial 
matter, we note that there is very little transparency regarding 
transactions that take place under the terms of GFAs. The Midwest ISO 
is unsure how many megawatts of capacity the GFAs represent,\43\ or 
where the source and sink points of the GFA transactions will be. As 
the transmission provider, the Midwest ISO will also need to know the 
schedules for net power injections and withdrawals in order to 
coordinate scheduling and redispatch functions.\44\ In terms of 
economic and reliability impact, the lack of information makes it 
difficult to forecast which parts of the Midwest ISO region will be 
adversely affected and whether some areas will be clearly 
disproportionately impacted.\45\ The Commission therefore believes that 
having parties to GFAs produce GFA information will better enable the 
Midwest ISO to reliably operate the transmission system.
---------------------------------------------------------------------------

    \43\ See McNamara testimony at 84-85.
    \44\ See Hogan testimony at 23-24.
    \45\ About 55 percent of the capacity associated with the 145 
GFAs for which the Midwest ISO could develop data is located in the 
eastern half of the Midwest ISO region and about 45 percent is 
located in the western half. See Transmittal Letter at 10.
---------------------------------------------------------------------------

ii. GFA Scheduling Requirements and Reliability
    54. Our primary concern with scheduling GFAs in the Midwest ISO Day 
2 market using physical carve-out methods is its potential impact on 
reliability. We anticipate reliability benefits associated with the Day 
2 market, some flowing from ongoing system operational improvements 
subsequent to the August 14, 2003, blackout and some from the better 
regional coordination and reduction in frequency of Transmission Line-
Loading Relief (TLRs) that can be expected from the Day 2 market's 
centralized, security-constrained scheduling and dispatch and the use 
of LMP.\46\ We believe that the carve-out approach could undercut some 
of these reliability benefits.
---------------------------------------------------------------------------

    \46\ See McNamara testimony at 17-23, 31-32.
---------------------------------------------------------------------------

    55. One reliability implication of the carve-out approach is the 
greater degree of uncertainty that not scheduling GFAs in the day-ahead 
market will introduce into the overall Midwest ISO scheduling and 
dispatch process. As Professor Hogan points out in his testimony, if 
GFAs are exempt from day-ahead scheduling, then the Midwest ISO has to 
make assumptions about the GFA schedules that are likely to flow in 
real time. At one extreme, the Midwest ISO could decide not to set 
aside any capacity for GFAs in the day-ahead schedule, then adjust that 
schedule to accommodate real-time GFA schedules. Alternatively, the 
Midwest ISO could reserve some capacity a day ahead, in anticipation of 
the actual GFA schedules. In either case, the Midwest ISO is left with 
some level of uncertainty regarding real-time schedules and some 
possible threat to reliability. For example, if the Midwest ISO 
forecasts in its day-ahead schedule and reliability unit commitment 
substantially more GFA schedules or load than actually flows, then 
real-time demand could exceed available supply and in some instances 
require load shedding. In other cases, last-minute physical scheduling 
could require resort to TLRs to manage congestion if there is not 
sufficient generation available for redispatch. Hence, as Professor 
Hogan points out with regard to this issue, ``if the Midwest ISO did 
not forecast correctly, as could easily and often be the case, then the 
consequences could be more serious * * * and, in the extreme, [have] 
reliability impacts on the system as a whole.'' \47\
---------------------------------------------------------------------------

    \47\ See Hogan testimony at 26-28.
---------------------------------------------------------------------------

    56. We are concerned that the Midwest ISO not create conditions for 
TLRs in the Day 2 markets due to scheduling of GFAs using the physical 
carve-out when there are better alternatives. The Final Report on the 
August 14, 2003, Blackout recommends that TLRs should not be used in 
situations involving an actual violation of an Operating Security 
Limit.\48\ The

[[Page 32109]]

Blackout Report finds that ``the TLR procedure is cumbersome, perhaps 
unnecessarily so, and not fast and predictable enough for use [in] 
situations in which an Operating Security Limit is close to or actually 
being violated.'' \49\ In addition, reliance on TLR and curtailments 
events to manage congestion shifts decision-making responsibility from 
the Midwest ISO to individual control areas. Dr. McNamara testifies 
that most control area operators perform the dispatch function for 
their respective control areas, and they are able to coordinate flows 
with neighboring control areas only to a limited extent.\50\ He adds 
that the Midwest ISO cannot accommodate requests for transmission 
service by assuming that redispatch will be available, because 
individual control areas are not required to accommodate all 
transactions.\51\ Dr. McNamara further testifies that TLRs are an 
imprecise tool for managing congestion and ensuring reliability because 
each control area affected by a TLR has a choice of how to respond, and 
they may not all respond the same way. As such, it is not possible for 
reliability coordinators to use TLRs to maintain power flows at 
operating security limits on a sustained basis.\52\ In short, TLRs tend 
to degrade reliability.
---------------------------------------------------------------------------

    \48\ U.S.-Canada Power System Outage Task Force, Final Report on 
the August 14, 2003, Blackout in the United States and Canada: 
Causes and Recommendations at 163 (2004) (Blackout Report).
    \49\ Id.
    \50\ See McNamara testimony at 11-14.
    \51\ See id. at 12-13.
    \52\ See id. at 14-15.
---------------------------------------------------------------------------

    57. Recently PJM's LMP-based market has expanded into Illinois such 
that there are significant interactions between the grids of the 
Midwest ISO and PJM, and reliability and efficiency will be improved if 
these two markets use a common platform.
    58. Reliability could be impaired under the carve-out approach not 
just through the scheduling uncertainty, but by the sheer volume of 
scheduling changes in real time. We are concerned about requiring the 
Midwest ISO operations personnel to schedule a significant number of 
GFA transactions within minutes before the trading hour begins--
especially for a market in initial startup over a 15-state footprint, 
with 12,000 price nodes and extensive seams.\53\ Our concern is 
heightened by the fact that when the market starts, the Midwest ISO 
will be handling GFA transaction scheduling for the first time for the 
portion of GFAs not originally incorporated into the Open-Access Same-
Time Information System (OASIS).
---------------------------------------------------------------------------

    \53\ See California Independent System Operator Corporation, 106 
FERC ] 63,026 at P 82-83 (2004) (Initial Decision) (``Considering 
that the ISO typically has 1300 Schedule changes in the hour-ahead 
market, significant computing time is necessary to produce final 
hour-ahead schedules; even if those schedules could be provided to 
scheduling coordinators within the twenty minutes prior to the 
trading hour, that time would be too short for market participants 
to modify and coordinate their schedules.'').
---------------------------------------------------------------------------

b. Undue Discrimination Concerns
    59. The Midwest ISO states that the energy markets will be severely 
compromised if it must carve the GFAs out of the market, and therefore 
concludes that the GFAs should be modified to meet the requirements of 
the energy markets.\54\ Numerous GFA holders argue, however, that 
modification of the GFAs will contravene Commission policy in favor of 
the sanctity of contracts. We are instituting this proceeding to 
determine whether carving out the contracts may have unduly 
discriminatory results.
---------------------------------------------------------------------------

    \54\ See McNamara testimony at 82; Hogan testimony at 25-29.
---------------------------------------------------------------------------

    60. The Midwest ISO's filing estimates that GFAs account for at 
least 20 percent, and perhaps more than 40 percent, of the capacity of 
the Midwest ISO transmission system. Analysis submitted by the Midwest 
ISO in the July 25th Filing and answer thereto shows that a majority of 
the GFAs do not explicitly allocate the costs of congestion to contract 
parties, and none of the GFAs require marginal losses (although many 
GFA holders pay average losses). If the GFAs are not interpreted 
consistent with the regional market rules, non-parties to the GFA 
contracts may be required to bear a disproportionate percentage of the 
market costs, including the costs of administering the markets under 
Schedules 16 and 17.
    61. One major problem with simply physically carving out GFAs and 
allowing them to schedule flexibly in real time (similar to current 
practice) is that this may create ``phantom'' congestion, congestion in 
the day-ahead market caused by the need to accommodate the scheduling 
of the GFAs. Such congestion may shift additional costs to parties 
transacting under non-GFA contracts. Scheduling for GFAs under a 
physical carve-out would not be tied to energy market scheduling 
requirements; therefore, parties to these contracts may schedule on 
short notice, with greater flexibility than non-GFA transmission users. 
The Midwest ISO must therefore assume that all capacity represented in 
GFAs will be used and, in the day-ahead market, reserve that capacity 
for GFA transactions even if it is unlikely that all the capacity will 
be utilized. As a result, transmission paths may become artificially 
congested more quickly than they would if all transactions were 
scheduled at the same time. The result--phantom congestion--would be 
reflected in LMP prices; consequentially, those prices may become 
artificially elevated.\55\
---------------------------------------------------------------------------

    \55\ See id. The opposite circumstance, underestimating GFA 
scheduling, results in unnecessary day-ahead redispatch costs on 
other parties. See Hogan testimony at 28.
---------------------------------------------------------------------------

    62. We are instituting this proceeding to determine whether, if we 
require the Midwest ISO to carve the GFAs out of the market without 
conforming those contracts to the regional market rules, there is 
potential for unduly discriminatory results. The Commission takes 
seriously the Midwest ISO's concern that the sheer volume of capacity 
subject to unique scheduling requirements under GFAs may produce unduly 
discriminatory effects. While the Midwest ISO proposes to offer options 
to GFA holders that will, for the most part, hold them financially 
indifferent in the new markets, we believe that the Midwest ISO's 
proposal may impact the physical and financial rights between GFA 
holders. We cannot thoroughly evaluate the proposed TEMT unless we 
develop a full understanding of the effect of the Midwest ISO's 
proposed tariff changes on the GFAs, and the magnitude of the GFAs' 
impact on the proposed energy markets.
c. Effects on Economic Efficiency
    63. The physical carve-out method of scheduling GFAs can also 
adversely impact the anticipated economic efficiency gains in the Day 2 
market by allowing entities that schedule in this way to increase 
market prices for energy and congestion. This is due to more expensive 
generation being settled through the Midwest ISO energy markets to 
resolve the apparent congestion. Also, the release of unused physical 
transmission reservations may not happen with sufficient time for an 
efficient dispatch over the operating day. Moreover, to the extent that 
the holder of the GFA can benefit from the impact of its scheduling on 
market prices, it has little incentive to participate in the market 
efficiently.
    64. As stated above, TLRs could occur under some methods for 
scheduling GFAs under carve-out scenarios. This will produce adverse 
economic effects in addition to the adverse reliability effects 
discussed above.\56\ Also, the

[[Page 32110]]

Commission has been encouraging the Midwest ISO to develop alternatives 
to TLRs for managing congestion. In light of the Blackout Report's 
findings, this goal takes on increased urgency. We continue to favor an 
approach to reliability coordination that will enable the Midwest ISO 
to rely more on price signals, and less on curtailment, in its Day 2 
markets. We believe that the LMP mechanism will be much more effective 
at providing the economic benefits of efficient congestion management 
in the Midwest ISO region if all transactions--including those under 
GFAs--are scheduled in the day-ahead market.
---------------------------------------------------------------------------

    \56\ As an example of inefficiencies related to TLRs, TLR 
curtailment quantities have been more than three times larger on 
average than the potential redispatch amounts. As well, the Market 
Monitor notes the increased utilization of real-time redispatch in 
energy markets See, 2003 State of the Market Report (p. 20) prepared 
by the Midwest ISO Independent Market Monitor, April 2004. Also, Dr. 
McNamara notes that following NERC procedures, the Midwest ISO has 
had to curtail a 135 MW transaction to achieve as little as 7 MW of 
relief on a constrained flowgate. McNamara testimony at 16.
---------------------------------------------------------------------------

C. Three-Step Analysis of GFAs

    65. As described above, the Commission believes that the 
development of the Midwest ISO as an RTO has reached a point at which 
the Commission must examine the potential conflict between our desire 
to preserve the GFAs and our instructions that the Midwest ISO should 
develop a market-based system of congestion management. We propose to 
analyze the GFAs in order to give us a more comprehensive understanding 
of their effects on the energy markets, and the effect of the energy 
markets on the GFAs. We believe that the Midwest ISO TOs have 
accurately identified the risk of litigating the GFA issue: The 
Commission's options include modifying contracts or requiring the TOs 
to bear the cost of taking service to fulfill the contracts as they 
exist today. We prefer, and strongly encourage, settlement of the GFAs. 
As described below, parties may choose to settle their GFAs by 
voluntarily accepting the treatment of GFAs that the Midwest ISO 
proposes in its tariff.
    66. We have three goals for our analysis of the GFAs. First, we 
hope that the investigation will clarify the contracts in such a way to 
add specificity. To that end, we will require that jurisdictional 
public utility parties to GFAs produce relevant GFA information and we 
will invite any non-jurisdictional parties to GFAs to do likewise on a 
voluntary basis. Second, we hope to isolate third parties from costs 
caused by GFAs. Knowing more about the GFA information will help us 
evaluate the magnitude of the phantom congestion and cost shifts that 
GFAs could cause. Third, we hope to preserve the commercial bargain 
between the parties and we plan to ensure that the Midwest ISO's 
proposed energy markets can operate reliably at their inception. The 
greater our understanding of GFAs, the more confident we can be of 
achieving these goals.
    67. Today we will initiate, in Docket No. EL04-104-000, a narrowly-
focused, three-step analysis designed to provide the basis for us to 
decide whether GFA operations can be coordinated with energy market 
operations, whether and to what extent the TOs should bear the costs of 
taking service to fulfill the existing contracts and whether and to 
what extent the GFAs should be modified. We note that this process does 
not foreclose parties to GFAs agreeing at any time to voluntarily 
convert their transmission and energy markets service to service under 
the TEMT, thereby making them eligible for the FTR nomination process 
in accord with other customers currently served under the Midwest ISO 
OATT. We note that FTR allocation for such conversion could only occur 
on the regular Midwest ISO annual allocation schedule or on an 
otherwise-available basis.
1. Step 1: Paper Hearing
a. Contract Information
    68. The Commission cannot fully analyze the proposed TEMT, its 
effect on the GFAs or the GFAs' effect on it without additional GFA 
information. As stated above, it is imperative that we know the number 
and location of megawatts represented under GFAs, and how the GFAs are 
used in practice. This will help us to understand the effect of the 
GFAs on the proposed energy markets. Accordingly, the first step of our 
analysis will require jurisdictional public utilities providing or 
taking service under GFAs, and invite any non-jurisdictional parties on 
a voluntary basis, who provide or take service under GFAs, to submit 
the following GFA information to the Commission: (1) The name of the 
GFA Responsible Entity, as defined in the proposed TEMT; (2) the name 
of the GFA Scheduling Entity, as defined in the proposed TEMT; (3) the 
source point(s) applicable to the GFA; (4) the sink point(s) applicable 
to the GFA; (5) the maximum number of megawatts transmitted pursuant to 
the GFA for each set of source and sink points;\57\ and (6) whether any 
modification to the GFA is subject to a ``just and reasonable'' 
standard of review or a Mobile-Sierra ``public interest'' standard of 
review.\58\ If the parties agree that their GFA will not be in effect 
as of the March 1, 2005, start date of the Midwest ISO's energy 
markets, the parties are directed to jointly file a statement to that 
effect in lieu of the above information. This information must be filed 
with the Commission, in Docket Nos. ER04-691-000 and EL04-104-000, on 
or before June 25, 2004.
---------------------------------------------------------------------------

    \57\ Note that this is somewhat different from the TEMT's 
requirements, which call for ``the maximum megawatt capacity 
permissible under the GFA.'' Module C, section 38.2.5j, Original 
Sheet No. 402 (emphasis added). For GFAs that do not contain 
language specifying a maximum number of megawatts, the parties to 
the GFA should submit at least three years' worth of historical 
data, to demonstrate what transactions they have made pursuant to 
the GFA.
    \58\ See United Gas Pipeline Company v. Mobile Gas Service 
Corp., 350 U.S. 332 (1956); FPC v. Sierra Pacific Power Company, 350 
U.S. 348 (1956).
---------------------------------------------------------------------------

    69. If parties to each GFA are able to agree on the GFA 
information, they should file the GFA information jointly. Parties with 
multiple GFAs between them are encouraged to submit a single filing 
that covers all GFAs on which they can agree. Joint filings should 
clearly specify, in the title or in a transmittal letter, that the 
filing is a joint interpretation of GFAs and identify the subject GFAs 
by the number associated with each agreement in Attachment B to this 
order.\59\ The parties should make a simple statement in their joint 
filings to indicate whether or not they are willing to voluntarily 
convert their contract to TEMT service or settle their GFA by accepting 
the Midwest ISO's proposed treatment of GFAs.
---------------------------------------------------------------------------

    \59\ Attachment B includes the Midwest ISO's Attachment P, List 
of Grandfathered Agreements, that is currently effective in the 
Midwest ISO tariff, modified to number each agreement. This version 
of Attachment P is subject to a further compliance filing. See 106 
FERC ] 61,288 (2004).
---------------------------------------------------------------------------

    70. GFAs that are the subject of joint filings will not be included 
in the hearing described in Step 2. Instead, the Commission will 
evaluate these joint filings as a group to help determine the effects 
of the GFAs on the proposed energy markets and, in the order described 
in Step 3, determine whether GFAs that are not converted or settled can 
be incorporated into the energy markets as written.
    71. If parties to a particular GFA or GFAs are not able to agree on 
the GFA information, then the Commission will require each party to 
file its own interpretation of the GFA. (If the parties have agreed on 
some, but not all, GFA information, they should note in their separate 
filings their areas of agreement and disagreement.) The title or 
transmittal letter on a single-party filing should indicate the name of 
the party making the interpretation and identify the subject GFAs by 
the number associated with each agreement in Attachment B to this 
order. Parties that

[[Page 32111]]

submit such filings will proceed to Step 2 of the Commission's 
analysis.
b. Additional Evidence and Comments
    72. In addition, to assist the Commission in determining whether to 
modify GFAs that are not settled (see settlement discussion below), we 
will require the Midwest ISO to provide additional information as to 
the reliability and economic benefits of its proposed congestion 
management system with GFAs included in the market. As we noted in 
Order No. 2000, an LMP-based congestion management system appears to 
provide a sound framework for efficient congestion management. In its 
filing, the Midwest ISO provided general information and testimony on 
the impact of TLRs in the Midwest ISO region, including the reliability 
impacts of TLRs and curtailment events on the coordination of flows 
between neighboring control areas. We seek specific evidence for the 
record in the Docket No. EL04-104-000 proceeding. Thus, we direct the 
Midwest ISO and its Independent Market Monitor to submit evidence of 
the historical reliability impact of TLRs in the Midwest ISO region. 
Additionally, the Midwest ISO is directed to submit evidence that 
examines in detail how a carve-out of the GFAs would impede the 
reliability of the proposed Day 2 markets.
    73. Further, the Midwest ISO did not file information that 
quantified the cost savings in moving from its current congestion 
management process (that relies predominantly on TLRs) to its proposed 
LMP-based congestion management system as applied to GFAs. We direct 
the Midwest ISO to file information on the economic impacts of TLRs in 
its region and quantify the benefits of the proposed congestion 
management system, focusing on how a carve-out of the GFAs would impede 
these costs savings. We also direct the Midwest ISO to include all 
workpapers and assumptions supporting its quantification of the 
economic benefits of the proposed congestion management system as it 
applies to the GFAs. We direct the Midwest ISO to file this evidence on 
reliability and economic impacts by June 25, 2004. Parties will have 14 
days to comment on the Midwest ISO analysis.
    74. The Commission also seeks comments from all affected parties 
on: (1) Whether keeping the GFAs separate from the market would 
negatively impact reliability; (2) the extent to which GFAs shift costs 
to third parties; and (3) whether keeping the GFAs separate from the 
market would result in undue discrimination. These comments should not 
be repetitive of the protests already filed in this docket, and must be 
filed directly with the Commission no later than June 25, 2004. We 
encourage parties with similar interests to combine their responses 
into a single pleading; however, these responses should not be combined 
with the GFA information filings described above. Parties will have 14 
days to submit reply comments.
2. Step 2: Trial-Type Hearing
    75. The Commission will consider all GFA information on which 
parties cannot agree to be disputed issues of material fact. 
Accordingly, we will set such GFAs for hearing before one or more 
administrative law judges (ALJs) under section 206 of the FPA. The sole 
objective of the trial-type hearing will be to identify GFA information 
for every GFA on which the parties have not agreed by June 25, 2004.
    76. In order to accommodate the March 1, 2005, implementation of 
the energy markets, as well as the schedule we will set forth below for 
nomination of FTRs under the proposed TEMT, hearing proceedings will be 
narrowly focused and expedited. Hearing proceedings will begin on June 
28, 2004, and terminate on July 23, 2004. The Commission will require 
the presiding ALJ or ALJs to issue written findings, and to orally 
present these written findings at the Commission meeting of July 28, 
2004, on the following: (1) The name of the GFA Responsible Entity, as 
defined in the proposed TEMT; (2) the name of the GFA Scheduling 
Entity, as defined in the proposed TEMT; (3) the source point(s) 
applicable to the GFA; (4) the sink point(s) applicable to the GFA;
    (5) the maximum number of megawatts transmitted pursuant to the GFA 
for each set of source and sink points; and (6) whether the GFA is 
subject to a ``just and reasonable'' standard of review or a Mobile-
Sierra standard of review. Parties will be allowed to file written 
exceptions to ALJ findings by August 17, 2004. Briefs opposing 
exceptions will not be allowed.
    77. In the event that GFA parties reach agreement on their GFA 
information prior to the conclusion of the ALJ proceeding, they should 
immediately seek the ALJ's permission to withdraw from the hearing 
proceeding. If the ALJ grants permission, the parties must immediately 
make a joint filing with the Commission as described in Step 1. Parties 
may voluntarily agree to convert or settle their GFAs in this filing. 
Such filings are due no later than July 27, 2004, the day before the 
ALJ's report issues.
3. Step 3: Order on the Merits
    78. Following the ALJ's oral presentation, the Commission will use 
the GFA information provided by the parties or the ALJ, together with 
the parties' evidence and comments, discussed in paragraphs 72-74 
above, and information on voluntary conversion of GFAs to transmission 
and energy market service or GFA service under the TEMT, to determine 
in a subsequent order: (1) Whether the GFAs can function as written 
within the proposed energy markets; (2) whether the GFAs can function 
within the energy markets under the Midwest ISO's proposed treatment 
(which the Commission retains the right to amend); or (3) whether 
modifications to the GFAs should be required. The Commission will make 
every attempt to expedite this order, keeping in mind the timeline 
described below, so that all Midwest ISO market participants may begin 
their FTR nominations on October 1, 2004.

D. Opportunity to Settle

    79. At this time, we do not make a finding on the justness and 
reasonableness of the Midwest ISO's proposed scheduling and settlement 
options for treatment of GFA transactions under the TEMT. Protests on 
this proposed treatment and particularly on the proposed Option B 
indicate that some GFA parties, as well as non-GFA parties, believe 
that the proposed treatment creates added benefits for the GFAs that go 
beyond preserving the material benefits and obligations of the pre-
existing contract, thereby shifting costs to non-GFA parties or non-GFA 
loads. Other GFA parties assert that while Option B provides some 
assurance that they will be kept financially indifferent, Option B does 
not go far enough in preserving the benefit of the bargain in their 
contracts. The Commission will not know the extent of the benefits and 
obligations under each GFA unless and until the Commission examines 
each contract in a hearing context.
    80. To avoid the expensive and time-consuming hearing process that 
would otherwise be necessary and to provide all parties the benefits of 
a functional organized market in a more timely manner than would 
otherwise be possible, the Commission strongly encourages GFA 
settlements and intends to process such settlements expeditiously. We 
would be receptive to GFA parties voluntarily agreeing, in settlement, 
to accept one of the Midwest

[[Page 32112]]

ISO's proposed scheduling and settlement options for treatment of GFA 
transactions, or to convert their contracts to TEMT service. Further, 
we clarify that, if the Commission approves a settlement, it does not 
intend to later revisit its decision when it addresses the non-settling 
parties' GFAs.
    81. Although we note Dr. Hogan's concern that Option B of the 
Midwest ISO's proposed GFA treatment could undermine the efficient 
scheduling properties of the LMP-based tariff,\60\ we believe that the 
Midwest ISO's proposed GFA treatment provides a fair basis for GFA 
holders to settle and incorporate the GFAs into the Day 2 markets. We 
also expect that parties that settle on the GFA scheduling provisions 
provided in the proposed GFA treatment, including the proposed Option 
B, will schedule transactions consistent with legitimate business 
purposes.\61\
---------------------------------------------------------------------------

    \60\ See Hogan testimony at 54.
    \61\ See generally Investigation of Terms and Conditions of 
Public Utility Market-Based Rate Authorizations, 105 FERC ] 61,218 
(2003), reh'g granted in relevant part, 107 FERC ] 61,175 (2004).
---------------------------------------------------------------------------

    82. The optional GFA scheduling and settlement treatment, including 
Option B, as drafted in the Midwest ISO proposal,\62\ will be available 
to GFA parties that jointly provide GFA information to the Commission 
in Step 1 (or prior to the conclusion of Step 2) of our three-step 
analysis, and that jointly indicate that they want to accept this 
treatment. Such settlements avoid litigation of GFA issues and further 
the Commission's goals in facilitating voluntary resolution of these 
issues prior to the start of the Midwest ISO energy markets.
---------------------------------------------------------------------------

    \62\ This includes the Option B treatment as described in the 
Midwest ISO's proposed tariff under Module C, Section 38.8.3(b), 
Original Sheet Nos. 447-51 and Module C, Section 43.2.4(a) `` (d), 
Original Sheet Nos. 613-25.
---------------------------------------------------------------------------

    83. Such settlements also preserve the parties' rights to comment 
on the Midwest ISO's section 205 proposal for treatment of the GFAs 
after the transition period, which it proposes to file no later than 12 
months prior to the end of the transition period. We instruct the 
Midwest ISO to provide a report no later than 12 months prior to the 
end of the transition period to examine the impact of the initial GFA 
treatment, as selected by GFA parties through this settlement process, 
on other market participants and the overall efficiency of the market.

E. Revised TEMT Processing and Energy Markets Startup Timelines

1. The Midwest ISO's Proposal
    84. The Midwest ISO requests an effective date of June 7, 2004, for 
sections of the tariff pertaining to the EDR process and the initial 
FTR allocation. It states that the requested effective date for the FTR 
allocation provisions coincides with the requested effective date for 
the EDR process and will allow all Market Participants and the Midwest 
ISO certainty as to the final FTR allocation methodology prior to the 
start of the initial FTR allocation process on July 15, 2004.
    85. The Midwest ISO proposes an FTR process developed with 
significant input from stakeholders that features several rounds of 
nominations and restoration of FTRs for base load generation. All FTR 
nominations and restoration are subject to a single Simultaneous 
Feasibility test. The Midwest ISO proposes that the first nomination of 
FTRs take place on July 15, 2004. It will provide an initial FTR 
allocation to market participants on September 30, 2004, and begin the 
auction process on October 4, 2004.\63\ The October auctions will then 
be used as a basis for market trials prior to market startup on 
December 1, 2004.
---------------------------------------------------------------------------

    \63\ We note that the Midwest ISO filed on April 28, 2004 an 
illustrative allocation of the FTRs. The Midwest ISO states that it 
filed the illustrative allocation to comply with the Declaratory 
Order and an order issued on March 28, 2003. See Midwest Independent 
System Operator, Inc. 102 FERC ] 61,338 (2003) (March 28 Order). In 
the March 28 Order, the Commission directed the Midwest ISO to file 
FTR information at least 60 days prior to the Midwest ISO's final 
TEMT filing.
---------------------------------------------------------------------------

    86. The Midwest ISO raises non-tariff concerns related to the 
December 1, 2004, start date. These concerns include matters related to 
the impact of a December 1, 2004, energy market start date in light of 
the reporting requirements contained in the Sarbanes-Oxley Act of 2002; 
\64\ the readiness of the Midwest ISO to begin market operations; the 
existence of seams agreements between the Midwest ISO and its 
neighboring entities; and the integrated nature of certain transmission 
systems in the Mid-Continent Area Power Pool (MAPP) region.
---------------------------------------------------------------------------

    \64\ Pub. L. 107-204, 116 Stat. 745 (2002) (to be codified in 
scattered sections of 15 U.S.C.).
---------------------------------------------------------------------------

    87. The Midwest ISO notes that prior to the TEMT filing, many of 
its stakeholders raised concerns associated with meeting the 
requirements of the Sarbanes-Oxley Act. Under section 404 of the 
Sarbanes-Oxley Act, all companies registered with the Securities and 
Exchange Commission (SEC) must report on the effectiveness of the 
company's internal controls over financial reporting, as well as obtain 
a report from an outside auditor attesting to the effectiveness of the 
internal controls.\65\ These assessments will cover the reporting year 
ending December 31, 2004, and must be submitted to the SEC in early 
2005. With a market start date of December 1, 2004, SEC-registered 
companies within the Midwest ISO would report on controls governing one 
month's worth of market transactions.
---------------------------------------------------------------------------

    \65\ Pub. L. 107-204 Sec.  404, 116 Stat. 745, 789 (to be 
codified at 15 U.S.C. 7262).
---------------------------------------------------------------------------

    88. The Midwest ISO states that it has repeatedly committed to its 
stakeholders that it will not commence the Energy Markets on December 
1, 2004, unless it is ready to operate effectively. The Midwest ISO 
also states that if it is unable to substantially accomplish metrics 
related to its market implementation plan, it will announce a delay in 
the commencement of the Energy Markets.\66\
---------------------------------------------------------------------------

    \66\ See Transmittal Letter at 22-23.
---------------------------------------------------------------------------

    89. The Midwest ISO notes that prior to the TEMT filing, many of 
its stakeholders raised concerns associated with the seams between the 
Midwest ISO and its neighbors. The Midwest ISO acknowledges the 
importance of developing seams agreements or operating agreements 
similar to the Joint Operating Agreement between the Midwest ISO and 
PJM Interconnection, L.L.C.; \67\ however, it does not believe that the 
lack of these agreements bar the initiation of market operations. The 
Midwest ISO states that it is discussing seams issues with Midwest ISO 
members and non-members in the MAPP region in an effort to address the 
treatment of the integrated transmission systems of those entities in 
the energy markets. The Midwest ISO has agreed to provide the 
integrated transmission agreements of the MAPP region similar treatment 
to the treatment it offers GFAs.
---------------------------------------------------------------------------

    \67\ See Midwest Independent Transmission System Operator, Inc. 
and PJM Interconnection, L.L.C., 106 FERC ] 61,251 (2004).
---------------------------------------------------------------------------

2. Protests and Comments
    90. A number of parties want to delay the market startup, and they 
cite a wide range of reasons to support this view. The most common 
argument is that the Sarbanes-Oxley audit requires delay. The Midwest 
ISO's Answer indicates that it would not oppose such a delay.
    91. Detroit Edison, Xcel Energy Services and Consumers Energy 
recommend that market startup be conditioned on readiness approval from 
NERC. They cite NERC's concerns from the August 14, 2003, blackout and 
the significant reliability challenges associated with the control area 
interfaces. Montana-Dakota states the market should not start until 
Midwest ISO demonstrates that reliability, as

[[Page 32113]]

measured by network model and state estimator accuracy and successful 
completion of reliability metrics, is better than the level achieved 
before the Midwest ISO was formed.
    92. A number of parties, including Midwest TDUs, the Wisconsin 
Commission and Nebraska Intervenors contend that market delay is 
warranted due to reliability concerns associated with many control 
areas. They argue that the market should not start until the seam issue 
between jurisdictional and non-jurisdictional members of MAPP is 
resolved with a comprehensive agreement. Midwest TDUs and Cinergy also 
consider the American Electric Power seam a problem. They request a 
delay until either a seams agreement is executed (in the Midwest TDUs' 
opinion) or American Electric Power is integrated into PJM (in 
Cinergy's opinion). A number of these same parties also contend that 
the markets should not start until the flaws associated with initial 
FTR allocations are resolved and several market trials are run. In 
contrast, Exelon and Coalition MTC state that the Midwest ISO market 
start must stay on schedule to ensure, respectively, that the joint and 
common market with PJM can be realized and that customers receive the 
benefits of the energy market.
    93. The Midwest ISO responds in its Answer that while the proposed 
milestones are still appropriate, there would be benefits from 
additional system training, performance and testing activities.
3. Discussion
    94. Recognizing the impact that the above-detailed procedures for 
interpreting the GFAs will have on the schedule for apportioning FTRs, 
and the need to have sufficient market trials in advance of 
implementation of the Day 2 market, the Commission directs the Midwest 
ISO to move the start of the energy market from December 1, 2004, to 
March 1, 2005. Extension of the start date will allow more time to 
complete the initial allocation of FTRs, including an update of the 
model to include changes to the system occurring up to June 2004. This 
extension will also address the Sarbanes-Oxley Act compliance issue 
mentioned by commenters.
    95. The illustrative FTR allocation filed by the Midwest ISO does 
not meet the requirement set forth in the Declaratory Order. The 
Declaratory Order directed information showing ``each market 
participant's expected allocation of FTRs based on the proposed tariff 
allocation method, the Candidate FTRs, and any proposed pro rata 
reduction in the Candidate FTRs.'' We will expect the Midwest ISO to 
file an initial FTR allocation with the expected allocation of FTRs, 
not an illustrative allocation, 90 days prior to the start of the 
market. The filing should be made concurrent with, or prior to the 
beginning of, market trials. If the Midwest ISO believes this 
information to be commercially sensitive, it may file such information 
with the Commission and request that it be kept confidential. The 
Commission will act on the request for confidential treatment at that 
time.
    96. We will also revise the schedule for FTR nominations. The later 
time frame will permit the Commission time to complete its analysis of 
the GFAs and the Midwest ISO time to continue to refine its FTR 
allocation model. We expect Tier I nomination to take place on October 
1, 2004, and Tier IV nomination to be completed by December 1, 2004.
    97. Given the new schedule for the FTR allocation process, we 
anticipate that the Midwest ISO will begin initial market trials in 
early December 2004 and complete them in January 2005. We will also 
expect the Midwest ISO to provide a report to the Commission on the 
results of initial market trials, no later than 45 days prior to the 
start of the energy markets. We share the parties' concerns that the 
market needs to be at a high level of readiness on the start date. 
Accordingly, our assessment of whether the market is ready to start 
will be based on our ongoing analysis of market trials, readiness 
metrics and NERC reliability reports throughout this pre-market period.
    98. We direct the Midwest ISO to continue to pursue seams 
agreements with neighboring entities, regardless of the outcome of this 
proceeding.
    99. In addition, we direct the Midwest ISO to (work with its 
stakeholders to) develop default mechanisms and procedures for 
instances where communication failures cause a loss of the Midwest ISO 
dispatch signal to any Control Area. Such fail-safe procedures must be 
in place prior to the start of the energy markets.
    100. Given the change to the start date for the Energy Markets, the 
Commission finds that it is no longer necessary to act by June 7, 2004, 
on the FTR or the EDR provisions of the proposed TEMT. We will accept 
and suspend the FTR provisions contained in Module C, Section IV, 
Original Sheet Nos. 602-77, as described below. We will reject the EDR 
provisions contained in Module A, Section 12A, Original Sheet Nos. 212-
15, and any other tariff sheets proposed to become effective June 7, 
2004. The Commission recognizes the need for a timely order on the GFAs 
and the FTR allocation proposal to permit nominations to begin on 
October 1, 2005.
    101. Our preliminary review of the proposed FTR provisions 
indicates that the Midwest ISO's proposal has not been shown to be just 
and reasonable, and may be unjust, unreasonable, unduly discriminatory 
or preferential, or otherwise unlawful. Therefore, we will accept the 
FTR provisions contained in Module C, Section IV, Original Sheet Nos. 
602-77, for filing and suspend them, to become effective on or before 
November 7, 2004, subject to refund and further orders in this 
proceeding.
    The Commission orders:
    (A) Module A, section 12A, Original Sheet Nos. 212-15, pertaining 
to Expedited Dispute Resolution, is hereby rejected, as described in 
the body of this order.
    (B) Module C, Section IV, Original Sheet Nos. 602-77, pertaining to 
Financial Transmission Rights, is hereby accepted and suspended, to 
become effective on or before November 7, 2004, subject to refund and 
further orders in this proceeding.
    (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 206 thereof, and pursuant 
to the Commission's rules of practice and procedure and the regulations 
under the Federal Power Act (18 CFR chapter I), the Commission sets for 
hearing all GFAs under which jurisdictional public utilities provide or 
take service in the Midwest ISO region, as discussed in the body of 
this order.
    (D) The Secretary shall promptly publish this order in the Federal 
Register.
    (E) The refund effective date established pursuant to section 
206(b) of the FPA will be 60 days following publication in the Federal 
Register of this order, as directed in Ordering Paragraph (D) above.
    (F) Parties to this proceeding that are providing or taking service 
under GFAs enumerated in Appendix B to this order are directed to file 
GFA information no later than June 25, 2004, as described in the body 
of this order.
    (G) 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 the 
Federal Power Act, particularly sections

[[Page 32114]]

205 and 206 thereof, and pursuant to the Commission's rules of practice 
and procedure and the regulations under the Federal Power Act (18 CFR 
chapter 1), a public hearing shall be held in Docket Nos. ER04-691-000 
and EL04-104-000 to investigate the GFAs for which parties do not 
jointly submit GFA information, as discussed in the body of this order. 
As discussed in the body of this order, we will hold the proceeding in 
abeyance until June 28, 2004, to allow GFA parties time to make their 
GFA information submissions.
    (H) A presiding administrative law judge, designated by the Chief 
Administrative Law Judge, shall convene a conference in this 
proceeding, to be held as soon as practicable after the date on which 
the Chief Judge designates the presiding judge, in a hearing room of 
the Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426. Such conference shall be held for the purpose of 
establishing a procedural schedule. The presiding administrative law 
judge is authorized to establish procedural dates, and to rule on all 
motions (except motions to dismiss), as provided in the Commission's 
rules of practice and procedure.
    (I) The presiding administrative law judge is directed to issue 
written findings summarizing the result of the hearing proceeding, and 
to present these findings to the Commission at its public meeting on 
July 28, 2004.
    (J) The Midwest ISO is hereby directed to continue to pursue seams 
agreements with neighboring entities and to develop default mechanisms 
and procedures as described in the body of this order.
    (K)The Midwest ISO is hereby directed to file the reports described 
in the body of this order.

    By the Commission.
Linda Mitry,
Acting Secretary.

Appendix A

Parties Filing Interventions

BP Energy Company
Central Iowa Power Cooperative
Clay Electric Cooperative, Inc.
ConocoPhillips Company
Coral Power, L.C.C.
The Energy Authority
Environmental Law and Policy Center of the Midwest
Illinois Commerce Commission
Illinois Municipal Electric Agency
Indiana Office of Utility Consumer Counselor
Indianapolis Power & Light
Iowa Utilities Board
Michigan Public Power Agency and Michigan South Central Power Agency
Minnesota Office of the Attorney General
TVA--Tennessee Valley Authority
WAPA--Western Area Power Administration

Parties Filing Interventions and Protests or Comments

Alliant--Alliant Energy Corporate Services, Inc.
Ameren--Ameren Services Company
American Forest & Paper Association
AMP-Ohio--American Municipal Power-Ohio, Inc.
Archer-Daniels-Midland--Archer-Daniels-Midland Company
ATCLLC--American Transmission Company LLC
Basin, et al.--Basin Electric Power Cooperative, East River Electric 
Power Cooperative, Inc., Central Power Electric Cooperative, Inc. 
and Capital Electric Cooperative, Inc.
Cinergy--Cinergy Services, Inc.
Cleveland--City of Cleveland, Ohio
Coalition MTC--Coalition of Midwest Transmission Customers
Constellation--Constellation Power Source, Inc., Constellation 
Generation Group, LLC and Constellation NewEnergy, Inc.
Consumers--Consumers Energy Company
Corn Belt--Corn Belt Power Cooperative
Crescent Moon Utilities--Basin Electric Power Cooperative, Heartland 
Consumers Power District, Minnkota Power Cooperative, Inc., 
NorthWestern Energy, Sunflower Electric Power Corporation and the 
Upper Great Plains Region of the Western Area Power Administration
Dairyland--Dairyland Power Cooperative
Detroit Edison--Detroit Edison Company
Dominion--Dominion Retail, Inc., Dominion Energy Marketing, Inc. and 
Troy Energy, LLC
Duke--Duke Energy North America, LLC
Dynegy--Dynegy Power Marketing, Inc. and Dynegy Midwest Generation, 
Inc.
Edison Mission--Edison Mission Energy, Edison Mission Marketing & 
Trading, Inc., and Midwest Generation EME, LLC
ELCON/AISI/ACC--Electricity Consumers Resource Council, American 
Iron and Steel Institute and American Chemistry Council
Epic and SESCO--Epic Merchant Energy LP and SESCO Enterprises LLC
EPSA--Electric Power Supply Association
Exelon--Exelon Corporation
FirstEnergy--FirstEnergy Service Company
Great Lakes--Great Lakes Utilities
Great River--Great River Energy
IMEA--Illinois Municipal Electric Agency
Indianapolis P&L--Indianapolis Power & Light Company
LG&E--LG&E Energy LLC
Manitoba Hydro
Manitowoc Public Utilities
MAPP--Mid-Continent Area Power Pool
Marshfield--Marshfield Electric & Water Department
Michigan Commission--Michigan Public Service Commission
MidAmerican--MidAmerican Energy Company
Midwest Municipal Transmission Group
Midwest ISO TOs--Ameren Services Company, as agent for Union 
Electric Company d/b/a AmerenUE, Central Illinois Public Service 
Company d/b/a AmerenCIPS, and Central Illinois Light Co. d/b/a 
AmerenCilco; Aquila, Inc. d/b/a Aquila Networks (f/k/a Utilicorp 
United, Inc.); City Water, Light & Power (Springfield, Illinois); 
Hoosier Energy Rural Electric Cooperative, Inc.; Indianapolis Power 
& Light Company; LG&E Energy Corporation (for Louisville Gas and 
Electric Co. and Kentucky Utilities Co.); Minnesota Power (and its 
subsidiary Superior Water, L&P); Montana-Dakota Utilities Co.; 
Northern Indiana Public Service Company; Northern States Power 
Company and Northern States Power Company (Wisconsin), subsidiaries 
of Xcel Energy, Inc.; Northwestern Wisconsin Electric Company; Otter 
Tail Corporation d/b/a Otter Tail Power Company; Southern Illinois 
Power Cooperative; Southern Indiana Gas & Electric Company d/b/a 
Vectren Energy Delivery of Indiana); and Wabash Valley Power 
Association, Inc.
Midwest SATCs--American Transmission Company LLC, GridAmerica LLC, 
International Transmission Company and Michigan Electric 
Transmission Company, LLC
Midwest TDUs--Great Lakes Utilities, Indiana Municipal Power Agency, 
Lincoln Electric System, Madison Gas and Electric Company, Midwest 
Municipal Transmission Group, Missouri Joint Municipal Electric 
Utility Commission, Missouri River Energy Services, Southern 
Minnesota Municipal Power Agency, Upper Peninsula Transmission 
Dependent Utilities and Wisconsin Public Power, Inc.
Minnesota Municipal--Minnesota Municipal Power Agency
Minnesota Entities--Minnesota Public Utilities Commission and 
Minnesota Department of Commerce
Minnkota--Minnkota Power Cooperative, Inc.
Mirant--Mirant Americas Energy Marketing, LP, Mirant Zeeland, LLC 
and Mirant Sugar Creek, LLC
Montana-Dakota--Montana-Dakota Utilities Company
Municipal Participants--Michigan Public Power Agency, Michigan South 
Central Power Agency, Department of Municipal Services of Wyandotte, 
Michigan and City of Hamilton, Ohio
Nebraska Intervenors--Lincoln Electric System, Omaha Public Power 
District and Nebraska Public Power District
Nebraska Public Power District
NiSource Companies--Northern Indiana Public Service Company, 
EnergyUSA-TPC Corp. and Whiting Clean Energy, Inc.
North Dakota Commission--North Dakota Public Service Commission
NRECA--National Rural Electric Cooperative Association
Ohio Commission--Public Utilities Commission of Ohio
Ohio REC--Ohio Rural Electric Cooperatives, Inc. and Buckeye Power, 
Inc.
OMS--Organization of MISO States
Otter Tail--Otter Tail Power Company
PSEG--PSEG Energy Resources & Trade LLC
Reliant--Reliant Energy, Inc.
Southern Minnesota--Southern Minnesota Municipal Power Agency
Southwestern--Southwestern Electric Cooperative, Inc.
Soyland--Soyland Power Cooperative, Inc.

[[Page 32115]]

Steel Producers--Steel Dynamics--Bar Products Division and Nucor 
Steel
Strategic Energy, LLC
TVA--Tennessee Valley Authority
WEPCO--Wisconsin Electric Power Company
Wisconsin Commission--Public Service Commission of Wisconsin
Wisconsin Retail Customers Group--Citizens'' Utility Board, 
Wisconsin Industrial Energy Group, Inc., Wisconsin Paper Council and 
Wisconsin Merchants Federation
Wisconsin Transmission Customer Group
WPPI--Wisconsin Public Power Inc.
Wolverine--Wolverine Power Supply Cooperative, Inc.
WPS Resources--WPS Resources Corporation
WUMS Load-Serving Entities--Wisconsin Electric Power Company, Edison 
Sault Electric Company, Wisconsin Public Service Corporation, Upper 
Peninsula Power Company, Wisconsin Power and Light Company, Madison 
Gas and Electric Company, Wisconsin Public Power, Inc. and Manitowoc 
Public Utilities
Xcel--Xcel Energy Services Inc.

Appendix B

BILLING CODE 6717-01-P

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[FR Doc. 04-12579 Filed 6-7-04; 8:45 am]
BILLING CODE 6717-01-C