[Federal Register Volume 74, Number 57 (Thursday, March 26, 2009)]
[Rules and Regulations]
[Pages 13103-13111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-6698]
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DEPARTMENT OF ENERGY
Federal Energy Regulatory Commission
18 CFR Part 42
[Docket No. RM06-8-002; Order No. 681-B]
Long-Term Firm Transmission Rights in Organized Electricity
Markets
Issued March 20, 2009.
AGENCY: Federal Energy Regulatory Commission, DOE.
ACTION: Final rule; order on rehearing and clarification.
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SUMMARY: The Federal Energy Regulatory Commission is issuing an order
on rehearing and clarification of Long-Term Firm Transmission Rights in
Organized Electricity Markets, Order No. 681-A, 71 FR 68,440 (November
16,
[[Page 13104]]
2006). The order on rehearing affirms, with certain clarifications, the
fundamental determinations made in Order No. 681, as clarified by Order
No. 681-A.
DATES: Effective Date: Order No. 681 became effective on August 31,
2006. This order on rehearing and clarification will become effective
April 27, 2009.
FOR FURTHER INFORMATION CONTACT: Roland Wentworth (Technical
Information), Office of Energy Market Regulation, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426,
(202) 502-8262.
Michael P. McLaughlin (Technical Information), Office of Energy
Market Regulation, Federal Energy Regulatory Commission, 888 First
Street, NE., Washington, DC 20426, (202) 502-6135.
Heidi Werntz (Legal Information), Office of the General Counsel,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-8910.
Richard Wartchow (Legal Information), Office of the General
Counsel, Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426, (202) 502-8744.
SUPPLEMENTARY INFORMATION:
Table of Contents
Paragraph
Numbers
I. Introduction............................................ 1
II. Background............................................. 4
A. Energy Policy Act of 2005........................... 4
B. Notice of Proposed Rulemaking....................... 5
C. Final Rule: Order No. 681........................... 6
D. Rehearing Order: Order No. 681-A.................... 11
III. Discussion............................................ 15
A. Procedural Matters.................................. 15
B. Requests for Rehearing and/or Clarification......... 16
1. Contract with Transmission Owner Rather than 16
Transmission Organization.........................
Commission Determination........................... 19
2. Lack of a Transmission Agreement................ 20
Commission Determination........................... 22
3. Clarification of Paragraph 80 of Order No. 681-A 24
Commission Determination........................... 26
4. Comparable Treatment for External and Internal 29
Load Serving Entities.............................
Commission Determination........................... 35
5. Marginal Losses................................. 38
Commission Determination........................... 43
I. Introduction
1. In this order we affirm, with certain clarifications, the
fundamental determinations made in Order Nos. 681 and 681-A.\1\ In
Order No. 681, as reaffirmed and clarified in Order No. 681-A, the
Commission required each transmission organization that is a public
utility with one or more organized electricity markets to make
available long-term firm transmission rights that satisfy each of seven
guidelines.\2\
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\1\ Long-Term Firm Transmission Rights in Organized Electricity
Markets, Order No. 681, 71 FR 43,564 (Aug. 1, 2006), FERC Stats. &
Regs. ] 31,226, reh'g denied, Order No. 681-A, 117 FERC ] 61,201
(2006).
\2\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 1, 23;
Order No. 681-A, 117 FERC ] 61,201 at P 1.
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2. Under guideline (5), the Commission permits transmission
organizations to place reasonable limits on the amount of capacity used
to support long-term firm transmission rights.\3\ Recognizing that
``transmission capacity is limited and the amount that can reasonably
be made available for long-term transmission rights may be lesser
still,'' \4\ the Commission construed new section 217 of the Federal
Power Act (FPA) to provide a general preference for load serving
entities to obtain transmission service.\5\ On rehearing, in discussing
priority when transmission capacity is limited, the Commission declined
to draw a broad conclusion that it would always be unreasonable for a
transmission organization to treat external and internal load serving
entities differently in allocating long-term firm transmission
rights.\6\ Three parties filed requests for clarification or, in the
alternative, rehearing of Order Nos. 681 and 681-A, focusing primarily
on issues associated with the allocation of long-term firm transmission
rights to load serving entities serving load located outside the
transmission organization (external load serving entities). Rehearing
was also requested on the Commission's determination that the statute
does not require a hedge for marginal loss charges.
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\3\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318.
\4\ Id. P 320.
\5\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318
(construing EPAct 2005, section 217; Pub. L. 109-58, Sec. 1233, 119
Stat. 594, 957 (2005); 16 U.S.C. 824q (2006)).
\6\ Order No. 681-A, 117 FERC ] 61,201 at P 81.
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3. In this order, we grant certain clarifications concerning
allocation of long-term firm transmission rights to external load
serving entities and deny requests for rehearing.
II. Background
A. Energy Policy Act of 2005
4. On August 8, 2005, EPAct 2005 \7\ was signed into law. Section
1233 of EPAct 2005 added a new section to the FPA, section 217, which
provides:
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\7\ Public Law No. 109-58, 119 Stat. 594 (2005).
The Commission shall exercise the authority of the Commission
under this Act in a manner that facilitates the planning and
expansion of transmission facilities to meet the reasonable needs of
load-serving entities to satisfy the service obligations of the
load-serving entities, and enables load-serving entities to secure
firm transmission rights (or equivalent tradable or financial
rights) on a long-term basis for long-term power supply arrangements
made, or planned, to meet such needs.\8\
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\8\ 16 U.S.C. 824q (2006).
The statute further required the Commission to implement section
217 of the FPA within one year of the effective date of EPAct 2005.\9\
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\9\ 119 Stat. 594, 960. ``Transmission organization'' is defined
in EPAct 2005 as ``a Regional Transmission Organization, Independent
System Operator, independent transmission provider, or other
transmission organization finally approved by the Commission for the
operation of transmission facilities.'' Public Law No. 109-58, Sec.
1291, 119 Stat. 594, 985. In Order Nos. 681 and 681-A, we adopted
this definition with slight modifications for the purposes of the
Final Rule.
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[[Page 13105]]
B. Notice of Proposed Rulemaking
5. As a first step towards implementing FPA section 217, on
February 2, 2006, the Commission issued a Notice of Proposed Rulemaking
(NOPR) that proposed to amend its regulations to require each
transmission organization that is a public utility with one or more
organized electricity markets to make available long-term firm
transmission rights that satisfy guidelines established by the
Commission.\10\ The NOPR proposed eight guidelines, and sought comments
on various issues raised by the introduction of long-term firm
transmission rights in the organized electricity markets.
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\10\ Long-Term Firm Transmission Rights in Organized Electricity
Markets, NOPR, 71 FR 6,693 (Feb. 9, 2006), FERC Stats. & Regs. ]
32,598 (2006).
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C. Final Rule: Order No. 681
6. On July 20, 2006, the Commission issued a Final Rule in this
proceeding, Order No. 681. Consistent with EPAct 2005, in Order No.
681, the Commission required independent transmission organizations
that oversee electricity markets to make available long-term firm
transmission rights that satisfy each of the seven guidelines
ultimately established by the Commission in that order. The Commission
further directed transmission organizations subject to the Final Rule
to file, no later than January 29, 2007, either: (1) Tariff sheets and
rate schedules that make available long-term firm transmission rights
that satisfy each of the seven guidelines; or (2) an explanation of how
the transmission organization's tariff and rate schedules already
provide for long-term firm transmission rights that satisfy each of the
guidelines. The Commission also required entities that subsequently
meet the statutory definition of transmission organization after
January 29, 2007 to satisfy the requirements of the Final Rule.\11\
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\11\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 494.
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7. In issuing Order No. 681, the Commission explained that it
sought to provide increased certainty regarding the congestion cost
risks of long-term firm transmission service in organized electricity
markets in order to facilitate new investments and other long-term
power supply arrangements.\12\ The guidelines adopted in Order No. 681
were intended to ensure that the long-term firm transmission rights
made available by transmission organizations subject to the rule would
support long-term power supply arrangements.\13\ Moreover, the
Commission emphasized that it would not compel transmission
organizations to provide rights that are infeasible based on the
existing system, nor would the Commission guarantee that a load serving
entity will be able to obtain long-term firm transmission rights
sufficient to hedge its entire resource portfolio or be able to obtain
all of its requested long-term firm transmission rights.\14\ Rather,
the Commission concluded that transmission organizations and their
stakeholders should each have flexibility to determine the level at
which a load serving entity may nominate long-term firm transmission
rights, as long as that level does not fall below the entity's
``reasonable needs.'' \15\ By reasonable needs, the Commission meant
that long-term firm transmission rights should be sufficient to hedge
the congestion associated with providing baseload service.\16\ Once an
entity obtains long-term firm transmission rights, Order No. 681
requires these rights to be fully funded over their entire term.\17\
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\12\ Id. P 16.
\13\ Id.
\14\ Id. P 17-18.
\15\ Id. P 323.
\16\ Id.
\17\ Id. P 18.
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8. Significantly, Order No. 681 adopted guidelines rather than
prescriptive requirements for long-term firm transmission rights. While
transmission organizations are required to satisfy each guideline, the
Commission gave them the flexibility to design long-term firm
transmission rights that reflect regional preferences and accommodate
regional market designs.\18\
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\18\ Id. P 2. The Commission recognized the possibility that the
flexible regional approach adopted in the Final Rule could create
seams issues, and directed each transmission organization to explain
in its compliance filing how its proposal addresses potential seams
issues. Id. P 107.
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9. Many of the rehearing requests focus on guideline (5), which
gives load serving entities priority to transmission rights on the
existing system:
Load serving entities must have priority over non-load serving
entities in the allocation of long-term firm transmission rights
that are supported by existing capacity. The transmission
organization may propose reasonable limits on the amount of existing
capacity used to support long-term firm transmission rights.\19\
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\19\ Id. P 325; 18 CFR 42.1(d)(5) (2008).
10. In the preamble to guideline (5), the Commission rejected the
NOPR proposal for an absolute preference for load serving entities with
long-term power supply arrangements.\20\ Instead, the Commission opted
for a general preference for load-serving entities over non-load
serving entities, although transmission organizations, on a regional
basis, are not precluded from giving allocation priority to holders of
long-term contracts over other load serving entities when capacity is
limited.\21\ Further, with respect to priority of eligibility, the
Commission explained that ``long-term firm transmission rights should
be made available first to those entities that have an obligation to
serve load within the transmission organization's service territory and
are required to contribute to the embedded cost of the transmission
organization's transmission system.'' \22\ The Commission concluded
that ``[a]ny entity that has neither an obligation to serve load on the
transmission organization's transmission system, nor an obligation to
pay the embedded costs of that system, should not be given a preference
to acquire long-term firm transmission rights supported by the system's
existing capacity.'' \23\ Further, the Commission explained that
``long-term firm transmission rights must be available to all market
participants.'' \24\ Guideline (5) ``serves only as a `tiebreaker'
between load serving entities and non-load serving entities when
existing transmission capacity is limited.'' \25\
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\20\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 318.
\21\ Id. P 321.
\22\ Id. P 328.
\23\ Id.
\24\ Id. P 329.
\25\ Id.
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D. Rehearing Order: Order No. 681-A
11. On rehearing, the Commission upheld its determinations in Order
No. 681 and offered certain clarifications. Specifically, on the issue
of priority for load serving entities with load outside the region, the
Commission stated that a load serving entity should receive preference
in the allocation of long-term firm transmission rights within a
transmission organization's region ``only to the extent that the
transmission organization plans and constructs its transmission system
to support the load of the load serving entity, and the load serving
entity contributes to the cost that the transmission organization
incurs for that purpose.'' \26\ The Commission found that it would be
unreasonable to provide a preference where the load has not contributed
to the system's embedded costs, and the transmission organization has
not planned and built its system to accommodate the load.\27\
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\26\ Order No. 681-A, 117 FERC ] 61,201 at P 78.
\27\ Id.
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[[Page 13106]]
12. The Commission provided two examples where external load
serving entities should be given a preference in the allocation of
long-term firm transmission rights equivalent to the preference
accorded to load serving entities with loads that lie within the
transmission organization's region. First, the Commission recognized
that a load serving entity that has an existing agreement with the
transmission organization to pay a share of the embedded costs of the
transmission system on a long-term basis to support load outside the
region should be entitled to receive this preference.\28\ Second,
external load-serving entities should qualify for the preference where
pancaked rates between the transmission organization and the other
transmission provider(s) have been eliminated, as long as the agreement
with the load-serving entity provides for cost sharing in accordance
with the non-pancaked rates currently in effect.\29\
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\28\ Id. P 79.
\29\ Id.
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13. In addition, the Commission stated that, where there is no
agreement between an external load serving entity and the transmission
organization:
a load serving entity with load that sinks outside the transmission
organization's region is entitled to receive long-term firm
transmission rights from existing system capacity to support that
load to the extent that capacity is available after the needs of the
load serving entities whose loads are within the region have been
met. However, in such cases, we expect that the load serving entity
would be required to contribute, on a long-term basis, toward the
embedded cost of the transmission system, by paying either pancaked
or non-pancaked rates, as applicable.\30\
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\30\ Id. P 80.
14. The Commission also denied the Sacramento Municipal Utility
District (SMUD) request to clarify that it would be unreasonable for a
transmission organization to allocate long-term firm transmission
rights based on whether load is located in the transmission
organization's control area or has agreed to cede control of its
transmission facilities to that organization. The Commission noted that
it is not unduly discriminatory for a transmission organization to
impose additional requirements on external load as a precondition to
receiving such rights.\31\ The Commission declined to draw a broad
conclusion in a rulemaking of general applicability that it may never
be reasonable to treat external load differently from internal load for
purposes of allocating long-term firm transmission rights.\32\
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\31\ Id. P 81 (erroneously citing New England Power Pool, 100
FERC ] 61,287, at P 85 (2002); correctly citing Cal. Indep. Sys.
Operator Corp., 116 FERC ] 61,274, at P 766 (2006) (MRTU Order),
order on reh'g, 119 FERC ] 61,076 (2007) (MRTU Rehearing Order)).
\32\ Id.
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III. Discussion
A. Procedural Matters
15. Timely requests for rehearing and/or clarification were filed
by the following entities: Long Island Power Authority and its wholly-
owned operating subsidiary, LIPA (LIPA), Modesto Irrigation District
(Modesto), and SMUD.
B. Requests for Rehearing and/or Clarification
1. Contract With Transmission Owner Rather Than Transmission
Organization
16. Modesto states that the Final Rule allowed load serving
entities that pay the embedded costs of a transmission organization's
system to qualify for priority in receiving long-term firm transmission
rights, even if located outside of the transmission organization's
control area. Modesto argues that in so doing, however, the Commission
created ``an unjust and unreasonable and unduly discriminatory
condition'' in that such load-serving entities must contract directly
with the transmission organization, rather than with entities within
the transmission organization's footprint, to pay the embedded cost of
the transmission system, in order to qualify for priority in receiving
long-term firm transmission rights.\33\
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\33\ Modesto Rehearing Request at 4-5.
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17. Modesto explains that it is a load serving entity located
outside of and adjacent to the California Independent System Operator
(CAISO). To meet its native load obligations, Modesto states that it
often must wheel power over the CAISO-controlled grid from resources
located inside and outside of the CAISO control area. Modesto states
that one of its pre-existing arrangements through which it facilitates
transmission of its electricity through the CAISO control area is with
Pacific Gas & Electric Company (PG&E), a participating transmission
owner of the CAISO.
18. Modesto asserts that, through its payments to PG&E, it
contributes to the embedded costs of the transmission system that is
under the CAISO's operational control. Modesto argues that, under Order
No. 681-A, it would be denied a priority for obtaining long-term firm
transmission rights because its agreement is with a participating
transmission owner, PG&E, and not with the CAISO. Modesto argues that
conditioning eligibility for allocation of long-term firm transmission
rights on whether an agreement is with a transmission organization
rather than a participant of that organization unduly discriminates
against entities that are similarly situated. Specifically, Modesto
complains that entities that are contributing to the embedded costs of
the transmission organization's system through pre-existing
arrangements with the transmission organization are unduly
discriminated against, compared with entities that have pre-existing
arrangements with transmission owners who have turned their
transmission over to the operational control of the transmission
organization.
Commission Determination
19. We grant Modesto's requested clarification. In Order No. 681-A,
the Commission did not intend to restrict unnecessarily the types of
contractual vehicles by which a load serving entity with load outside a
transmission organization's region may demonstrate that it is entitled
to receive a preference in the allocation of long-term firm
transmission rights supported by the region's existing transmission
capacity. The salient issue here is whether the external load serving
entity has historically contributed and will continue to contribute on
an ongoing basis to the embedded costs of the transmission system.\34\
As long as the external load serving entity can demonstrate that it has
paid and will continue to pay the embedded costs of the transmission
system, the precise vehicle by which this is accomplished is not
important. Thus, a commitment to pay an appropriate share of embedded
costs could be achieved through a contractual agreement with the
transmission organization itself, through a pre-existing agreement with
one or more transmission owners that have turned operational control of
their transmission system over to the transmission organization, or by
some other verifiable means.\35\ We further note that, while Modesto's
specific contractual issue is beyond the scope of this general
rulemaking proceeding, it appears to have been favorably resolved
[[Page 13107]]
in the compliance phase of this proceeding.\36\
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\34\ See, e.g., New England Power Pool, 100 FERC ] 61,287, at P
85 (2002).
\35\ See, e.g., PJM Interconnection, L.L.C., 119 FERC ] 61,144,
at P 40 & n.34, order on clarification, 121 FERC ] 61,073 (2007)
(upholding PJM's proposal to allow an external load serving entity
to receive long-term firm transmission rights in stage 1A if it is a
transmission customer taking and paying for firm service and if it
was serving load from resources within a zone at the time that zone
was integrated into PJM).
\36\ See Cal. Indep. Sys. Operator Corp., 120 FERC ] 61,023, at
P 188 (2007), reh'g denied, 124 FERC ] 61,095, at P 42-45 (2008)
(accepting MRTU Tariff section 36.9, which establishes an external
load serving entity's eligibility for firm transmission rights based
on a forward-looking showing of need).
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2. Lack of a Transmission Agreement
20. SMUD asks the Commission to clarify whether a load serving
entity outside an ISO/RTO control area could qualify for an allocation
priority equivalent to that of a load serving entity within the control
area where its lack of an existing long-term firm service arrangement
is the transmission organization's ``fault.'' \37\ Asserting that this
question is not purely ``academic,'' SMUD explains that it had a long-
term firm transmission arrangement for more than 35 years, which,
according to SMUD, lapsed due to the CAISO's delay in developing long-
term firm transmission rights. Pointing out that the CAISO was
initially ordered to develop long-term firm transmission rights in
1997, SMUD argues that it would have continued to have a long-term firm
transmission agreement in place and would have qualified for a priority
equivalent to that accorded load serving entities within the CAISO
control area if the CAISO had developed those long-term rights on a
timely basis.\38\
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\37\ SMUD Rehearing Request at 14. ``ISO'' refers to
``Independent System Operator'' and ``RTO'' refers to ``Regional
Transmission Operator.''
\38\ Id.
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21. SMUD states that it is willing to provide assurances to the
CAISO that it will continue to pay a share of the fixed costs of the
transmission grid operated by the CAISO. SMUD insists that absent
clarification, however, Order No. 681-A does not provide a clear
opportunity for SMUD and other similarly situated load serving entities
to provide such assurances.\39\ SMUD asks the Commission to clarify
that a load serving entity located outside an ISO/RTO control area that
lacks an existing long-term firm transmission agreement can qualify for
the same treatment accorded a load serving entity with an existing
long-term firm transmission agreement, if it can demonstrate: (1) Its
reliance on the ISO/RTO transmission grid; (2) its commitment to
continue to contribute to the fixed costs of the system; and (3) that
its lack of a long-term transmission agreement with the ISO/RTO was
outside of its control.\40\
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\39\ Id. at 14-15.
\40\ Id.
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Commission Determination
22. We grant in part and deny in part the clarification requested
by SMUD. First, we decline to adopt SMUD's three-part test for
determining whether an external load serving entity should qualify for
a preference in the allocation of long-term firm transmission
rights.\41\ However, we grant clarification regarding the broader issue
SMUD raises, which is whether an external load serving entity may
qualify for a preference if it contributes to the embedded cost of the
regional transmission system, but is not a party to a qualifying
agreement for long-term transmission service at the time of its
request. We clarify that the lack of an existing long-term service
agreement with the transmission organization or a participating
transmission owner does not necessarily disqualify an external load
serving entity from receiving a preference in the allocation of long-
term firm transmission rights that are supported by the existing
capacity of the transmission organization's system. If the external
load serving entity has maintained a continuous service relationship
with the transmission organization or transmission owner, through which
it continues to contribute to the embedded costs of the transmission
system for the duration of the long-term firm transmission rights it
seeks, that entity may be entitled to an allocation of long-term firm
transmission rights. However, the entity must also satisfy all of the
other eligibility requirements of the transmission organization, and it
must provide the transmission organization with appropriate assurances
that it will continue to satisfy these requirements going forward.
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\41\ See MRTU Rehearing Order, 119 FERC ] 61,076 at P 373
(rejecting request to give external load serving entities the
opportunity to demonstrate reliance on the CAISO grid in order to
avoid prepaying for the transmission service necessary to qualify
for allocation of congestion revenue rights, which can be converted
into long-term firm transmission rights).
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23. With regard to the status of SMUD's long-term contractual
relationship with the CAISO or any of its Participating Transmission
Owners, including the question of which party may be at fault for
causing a prior agreement to lapse, we note that this is a case-
specific matter and, as such, is beyond the scope of this
proceeding.\42\
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\42\ We note that the DC Circuit Court upheld the Commission's
finding that PG&E's notice of termination of its long-term contract
with SMUD was just and reasonable. Sacramento Municipal District v.
FERC, 474 F.3d 797, 801 (DC Cir. 2007). Nevertheless, the CAISO
allows an external load serving entity such as SMUD to obtain long-
term firm transmission rights through a combination of pre-payment
of wheeling access charges and ownership of or contract for
generation within the CAISO. See generally MRTU Tariff Sec. 36.9.
In addition, the MRTU Tariff allows SMUD to rollover a short-term
firm transmission right indefinitely and use this to hedge CAISO
congestion charges, as long as this does not interfere with the
simultaneous feasibility of other allocated rights. Id. Sec.
36.9.5.
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3. Clarification of Paragraph 80 of Order No. 681-A
24. LIPA asks the Commission to clarify that, consistent with
paragraph 78 of Order No. 681-A, there should be no distinction between
the treatment of internal and external load serving entities when
allocating long-term firm transmission rights, where the transmission
organization plans and constructs its transmission system to support
the external load serving entity's requirements and the load serving
entity is obligated to contribute to the costs the ISO/RTO incurs for
that purpose. LIPA's concern centers on paragraph 80 of Order No. 681-
A, which provides that:
in cases where [an external load serving entity does not have an
existing agreement to pay embedded system costs], a load serving
entity with load that sinks outside the transmission organization's
region is entitled to receive long-term firm transmission rights
from existing system capacity to support that load to the extent
that capacity is available after the needs of the load serving
entities whose loads are within the region have been met.\43\
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\43\ Order No. 681-A, 117 FERC ] 61,201 at P 80.
In LIPA's view, the allocation preference expressed in paragraph 80
only applies with respect to the initial allocation of long-term firm
transmission rights to an external load serving entity that has no
existing agreement with the ISO/RTO or does not hold long-term rights
for which such ISO/RTO plans and constructs its transmission system.
25. LIPA argues specifically that firm transmission withdrawal
rights in PJM meet the standard articulated by the Commission in
paragraph 78 of Order No. 681-A and, according to LIPA, these
withdrawal rights should entitle external load serving entities to the
same rights as internal load serving entities. As LIPA explains, PJM
awards firm transmission withdrawal rights for merchant transmission
lines that include the right to withdraw energy and capacity from the
PJM system up to a specific megawatt level. LIPA explains that PJM
first subjects the award of such firm transmission withdrawal rights to
system impact studies through the interconnection process and considers
any potential system upgrades. Next, according to LIPA, PJM includes
such
[[Page 13108]]
firm transmission withdrawal rights in its Regional Transmission
Enhancement Plan (RTEP) and thereby plans for and constructs its system
to ensure the availability of such firm transmission withdrawal rights.
LIPA further states that PJM has proposed (and the Commission has
agreed) that the costs of RTEP upgrades to support such withdrawal
rights may be allocated to merchant transmission lines. LIPA adds that
the use of withdrawal rights also requires scheduling of transmission
service over the PJM system, for which the customer also then pays a
``Border Rate'' charged to exports from the system, and through which
PJM recovers the embedded system costs. LIPA asks the Commission to
clarify that the lower allocation priority and potential for reduced
allocation of long-term firm transmission rights discussed in paragraph
80 does not apply to holders of long-term firm transmission rights such
as firm withdrawal rights. Further, LIPA argues that any reduction
contemplated under paragraph 80 should only be triggered when, as part
of the evaluation of all internal and external load serving entity
requests, there is a binding constraint that does not allow a full
allocation of long-term firm transmission rights to qualifying load
serving entities. LIPA states that, in such a case, the initial request
for long-term firm transmission rights may be prorated downward to
ensure that an internal load serving entity or external load serving
entity with an existing agreement or long-term rights receives its full
allocation of long-term firm transmission rights.
Commission Determination
26. We grant in part and deny in part LIPA's requested
clarification. First, we clarify that an external load serving entity
may receive the same allocation priority as an internal load serving
entity if the external load serving entity can demonstrate that the
transmission organization plans and constructs its transmission system
to support the external load serving entity's load serving requirements
and the external load serving entity contributes to the costs incurred
for such purpose. We further clarify that paragraph 80 of Order No.
681-A is intended to apply only to situations where a load serving
entity with load external to the region makes an initial request to
obtain long-term firm transmission rights. That is, paragraph 80 serves
only to establish the initial priority for the allocation of long-term
firm transmission rights to an external load serving entity that has
not historically contributed to the embedded costs of the transmission
system, and for whom the transmission organization has not planned and
constructed its transmission system.\44\
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\44\ See Midwest Indep. Transmission Sys. Operator, Inc., 121
FERC ] 61,062, at P 40-41 (2007), order on reh'g, 123 FERC ] 61,178
(2008), and Midwest Indep. Transmission Sys. Operator, Inc., 121
FERC ] 61,063, at P 53-54 (2007) (finding that stage 2 eligibility
for long-term firm transmission rights to cover transmission service
obtained after the reference year is not unduly discriminatory).
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27. LIPA also requests clarification of the conditions under which
a reduced allocation of long-term firm transmission rights is
contemplated under paragraph 80. We clarify that an external load
serving entity may be allocated fewer long-term firm transmission
rights than it requests in a situation where its initial request for
long-term firm transmission rights cannot be accommodated by the system
capacity that is available after the needs of the load serving entities
whose loads are within the region have been met. This rule would apply
to an initial request where the transmission organization has not
historically planned and constructed its system to meet the external
load serving entity's load serving needs.
28. However, we decline to grant LIPA's requested clarification
that its firm transmission withdrawal rights in PJM meet the standard
articulated by the Commission in paragraph 78 of Order No. 681-A, such
that these rights should entitle external load serving entities like
LIPA to be granted the same rights as internal load serving entities.
Whether these firm withdrawal rights qualify LIPA for receipt of long-
term firm transmission rights in PJM requires a fact-based
determination that is outside the scope of a general rulemaking
proceeding.\45\
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\45\ Indeed, it appears this issue has been appropriately asked
and answered in the compliance phase of this rulemaking proceeding.
See PJM Interconnection, L.L.C., 119 FERC ] 61,144 at P 37-44,
clarified on other grounds, 121 FERC ] 61,073 (denying LIPA's
request for preferential allocation of long-term firm transmission
rights in PJM because LIPA did not take service from PJM during the
historical reference year, nor does it continue to pay the embedded
cost of the PJM transmission system). The Commission notes, however,
that on Jan. 28, 2009, in Docket No. ER09-585-000, PJM filed tariff
revisions that would allow external load-serving entities, including
holders of firm withdrawal rights, to obtain long-term firm
transmission rights, provided certain conditions are met.
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4. Comparable Treatment for External and Internal Load Serving Entities
29. LIPA asks the Commission to clarify that ``qualifying''
external load serving entities are able to participate in the same
phase of long-term firm transmission rights allocation as internal load
serving entities and receive a long-term firm transmission right of the
same length and attributes as an internal load serving entity.\46\ LIPA
states that, as noted in Order No. 681-A, Order No. 681 provides that
transmission organizations must make long-term firm transmission rights
available to load serving entities with term lengths and/or renewal
rights that are sufficient to meet load serving entities' need to hedge
long-term power supply arrangements. LIPA points out that the
Commission required long-term firm transmission rights to have a
specific term length and/or use of renewal rights to provide firm
coverage for at least a 10-year period.\47\ LIPA states that a 10-year
term length, renewal rights, and firmness of coverage are the
``backbone'' of long-term firm transmission rights, which LIPA argues
should not differ regardless whether a load serving entity is internal
or external to the ISO or RTO.
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\46\ LIPA states that, for purposes of its clarification
request, qualifying external load serving entities are those
entities for which the transmission organization plans and
constructs its transmission system to support the load serving
entity's load and the load serving entity contributes to the cost
that the transmission organization incurs for that purpose. LIPA
Rehearing Request at 3 & n.9.
\47\ Id. at 4 & n.10.
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30. Also focusing on this issue, SMUD challenges the Commission's
ruling that only load serving entities in a transmission organization's
control area or those load serving entities with existing long-term
firm service contracts would qualify for a first-tier allocation \48\
of long-term firm service rights. SMUD argues that this ruling
prejudices those load serving entities located outside the CAISO's
control area whose long-term firm service agreements lapsed, with no
long-term firm service replacement, due to the CAISO's ``history of
procrastination'' in developing such rights.
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\48\ SMUD refers to the fact that the CAISO, like other ISOs/
RTOs, uses nomination tiers to allocate long-term firm transmission
rights. In each tier, a load serving entity is allowed to nominate a
percentage of the total amount of transmission rights it is eligible
to request. The ISO/RTO then runs a simultaneous feasibility test on
all nominated rights to determine the feasible set of rights that it
can award. Load serving entities typically nominate their most
highly-valued rights in the first tier. See generally Cal. Indep.
Sys. Operator Corp., 125 FERC ] 61,153 (2008).
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31. Furthermore, SMUD asserts that the Commission failed to engage
in reasoned decision-making by inconsistently applying its precedent
and suggesting that a transmission organization may give preference to
load serving entities located in its own control area over those
located outside its control area. SMUD states that the Commission
offered no valid grounds for its departure from Order No. 888,
[[Page 13109]]
and cases interpreting Order No. 888, which SMUD argues require
transmission providers to offer service to all customers on a non-
discriminatory basis.\49\ In addition, SMUD argues that the
Commission's proposal to distinguish among load serving entities on the
basis of control area is inconsistent with section 217 of the FPA.
Specifically, SMUD asserts that allowing transmission organizations to
impose a prepayment obligation \50\ on external load serving entities
is unduly discriminatory.
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\49\ SMUD Rehearing Request at 6-7 (referencing Promoting
Wholesale Competition Through Open Access Non-Discriminatory
Transmission Services by Public Utilities; Recovery of Stranded
Costs by Public Utilities and Transmitting Utilities, Order No. 888,
FERC Stats. & Regs. ] 31,036 (1996), order on reh'g, Order No. 888-
A, FERC Stats. & Regs. ] 31,048, order on reh'g, Order No. 888-B, 81
FERC ] 61,248 (1997), order on reh'g, Order No. 888-C, 82 FERC ]
61,046 (1998), aff'd in relevant part sub nom. Transmission Access
Policy Study Group v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff'd sub
nom. New York v. FERC, 535 U.S. 1 (2002)).
\50\ By ``prepayment obligation,'' SMUD refers to the fact that
the CAISO, for example, requires an external load serving entity to
agree in advance to pay a year's worth of wheeling access charges to
be eligible for allocation of long-term firm transmission rights on
the same basis as internal load serving entities. See MRTU Order,
116 FERC ] 61,274 at P 706-15; MRTU Rehearing Order, 119 FERC ]
61,076 at P 358 (discussing prepayment in connection with short-term
firm transmission rights, which may be converted to long-term
rights); Cal. Indep. Sys. Operator Corp., 120 FERC ] 61,023 at P
266.
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32. First, SMUD argues that the principle that a transmission
provider may place preconditions on a customer's right to service based
on whether it is located inside or outside of the transmission
provider's control area ``turns Order No. 888 on its head.'' \51\
Citing the NOPR for Order No. 890,\52\ SMUD asserts that the Commission
has made clear that transmission organizations covered by Order No. 681
must continue to offer service as good as or superior to that offered
under an Order No. 888 Open Access Transmission Tariff (OATT). SMUD
states that under Order No. 888, a transmission provider is required to
provide customers non-discriminatory access to the grid equivalent to
the transmission service it provides itself.\53\ SMUD posits that if a
transmission owner with a traditional OATT were to treat a customer
outside its control area differently than it treats its own control
area load, that transmission owner would be engaging in blatantly
discriminatory conduct. SMUD insists that the Commission's
interpretation of New England Power Pool leads to the conclusion that
transmission owners with OATTs could turn control of their facilities
over to an ISO and then have the ISO discriminate against those same
customers, customers still dependent on their transmission, but now
located outside the ISO's control area.
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\51\ SMUD Rehearing Request at 6.
\52\ Id. (citing Preventing Undue Discrimination and Preference
in Transmission Service, Notice of Proposed Rulemaking, Docket Nos.
RM05-17-000 and RM05-25-000, FERC Stats. & Regs. ] 32,603, at P 100
(2006), order issuing final rule Order No. 890, FERC Stats. & Regs.
] 31,241 (2007), order on reh'g, Order No. 890-A, 73 FR 2984 (Jan.
16, 2008), FERC Stats. & Regs. ] 31,261 (2007), order on reh'g,
Order No. 890-B, 73 FR 39,092 (July 8, 2008), 123 FERC ] 61,299
(2008)).
\53\ Id. (citing Order No. 888, FERC Stats. & Regs. ] 31,036 at
31,760).
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33. Next, SMUD argues that the Commission's interpretation of New
England Power Pool is an ``unexplained departure'' from its holding in
Mid-Continent Area Power Pool, 87 FERC ] 61,075 (1999) (MAPP). SMUD
quotes MAPP:
Order No. 888 requires that pool compliance tariffs provide
service to members and non-members alike. We stated that members of
a loose power pool, as well as non-members, must have access to the
same transmission services within that power pool on a comparable
basis and pay the same or a comparable rate for those services.\54\
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\54\ SMUD Rehearing Request at 7 (citing MAPP, 87 FERC ] 61,075
at 61,309-10).
SMUD argues that, just as transmission providers within a power pool
cannot condition access to transmission service on a customer's
willingness to join the pool, it is unduly discriminatory to condition
a transmission customer's access to firm transmission service on its
location within a transmission provider's control area.
34. Third, SMUD argues that, far from supporting the notion that
customers outside the control area should be treated differently, New
England Power Pool reaffirms the principle that customers outside an
ISO's control area that are committed to contributing to the ISO's
fixed costs under a long-term firm transmission agreement must be
treated on a non-discriminatory basis and that they should not be given
lower priority based on their location outside the transmission
provider's control area.
Commission Determination
35. In response to the requests of LIPA and SMUD, we clarify that
the transmission organization's criteria for determining a load serving
entity's eligibility to receive a preference in the allocation of long-
term firm transmission rights must not be unduly discriminatory as
between internal and external load serving entities. That is, the
transmission organization may apply a variety of eligibility criteria
that are appropriate for its region, as long as it applies those
criteria in a manner that is not unduly discriminatory.\55\ For
example, to be eligible for an allocation preference, the transmission
organization may require a load serving entity to demonstrate that it
has a long-term power supply arrangement from a historical point of
receipt to a historical point of delivery, and that it will continue to
contribute to the embedded cost of the transmission system for the
duration of the period for which the load serving entity intends to
hold the long-term firm transmission right. Such criteria would not be
unduly discriminatory if they are tailored to meet the transmission
organization's legitimate need to verify entitlement to allocation of
the long-term rights, i.e., that the external load serving entity
intends to use these rights to serve its customers. If the transmission
organization allocates long-term firm transmission rights using a
system of stages or tiers, we would expect all qualified load serving
entities to be placed in the same allocation stage or tier without
regard to whether its load is internal or external to the region.
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\55\ See Regional Transmission Organizations, Order No. 2000-A,
65 FR 12,088 (2000), FERC Stats. & Regs. ] 31,092 at 31,385 (2000)
(``We do not agree with the premise of some of the petitioners who
conclude that rate differences of any type [between RTO participants
and non-participants] would constitute undue discrimination.''),
aff'd sub nom., Public Util. Dist. No. 1 of Snohomish, Wash. v.
FERC, 272 F.3d 607 (DC Cir. 2001).
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36. In response to the assertion by SMUD that the Commission's
interpretation of New England Power Pool is an unexplained departure
from precedent, we clarify that the citation to New England Power Pool
in footnote 74 of Order No. 681-A was the result of an inadvertent
drafting error. Nevertheless, we reiterate our determination that it is
not unduly discriminatory for a transmission organization to impose
reasonable, additional requirements on customers external to the
transmission organization's control area as a precondition to receiving
long-term firm transmission rights.\56\ It is within the transmission
organization's purview to create rules that aim to ensure equitable
allocation/distribution of these potentially valuable rights.
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\56\ See MRTU Order, 116 FERC ] 61,274 at P 766 (stating that
external load and internal load are not similarly situated with
respect to their reliance on the transmission organization's grid);
MRTU Rehearing Order, 119 FERC ] 61,076, at P 377 (2007) (requiring
external load serving entities to satisfy additional requirements to
verify need for long-term firm transmission rights does not violate
Order No. 888 because external load serving entities are not denied
transmission service and all customers receive the same service
under the MRTU Tariff).
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37. However, in response to LIPA, we clarify that any differences
in the attributes (e.g., length, renewal rights
[[Page 13110]]
and firmness of coverage) of long-term firm transmission rights that
are allocated among load serving entities should not be based on
whether a load serving entity is internal or external to the
transmission organization.
5. Marginal Losses
38. In Order No. 681, we concluded that section 217(b)(4) does not
address marginal loss charges.\57\ Noting that each transmission
organization that operates an organized electricity market has
established methods for refunding marginal loss surpluses that reflect
regional preferences, which the Commission has approved, we decided not
to overturn those decisions in this proceeding.\58\ In Order No. 681-A,
we upheld our statutory interpretation that section 217(b)(4) of the
FPA does not address marginal loss charges.\59\ First, we explained
that the issue of hedging long-term marginal loss charges is distinct
from the issue of hedging marginal congestion charges. Congestion
charges, we said, arise in part due to transmission constraints, and
transmission organizations allocate transmission rights to hedge these
costs. Marginal loss charges, we noted, are similar to congestion costs
because they are a function of locational energy prices and line
loadings. However, significantly, ``the development of a financial
instrument or other means for hedging of marginal losses has not been
accomplished to date in any of the organized electricity markets.''
\60\
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\57\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 478.
\58\ Id.
\59\ Order No. 681-A, 117 FERC ] 61,201 at P 105-06.
\60\ Id. P 105.
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39. Next, we parsed the language of the statute and explained that
the terms used in section 217(b)(4)--``firm transmission rights'' and
``equivalent tradable or financial rights''--``are consistent with
terminology traditionally used to discuss hedging of congestion, rather
than marginal losses.'' \61\ We further explained that, since we do not
interpret EPAct 2005 as requiring transmission organizations to provide
long-term firm transmission rights with properties that are
fundamentally different from those of the short-term rights that they
now offer, we do not interpret the statute as requiring hedging of
marginal losses. We emphasized that our interpretation of EPAct 2005 as
not requiring hedging of marginal losses does not preclude future
market design changes that allow hedging of losses.\62\ Significantly,
we encouraged transmission organizations to explore methods to assist
load serving entities and others to obtain a hedge for marginal
losses.\63\
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\61\ Id. P 106.
\62\ Id.
\63\ Id.
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40. On rehearing, SMUD argues that, in light of FPA requirements
and Congress' clear intent that ``financially firm'' transmission
service would provide customers the equivalent of firm physical rights,
financial rights must include a hedge against marginal losses. SMUD
argues that the Commission contravened Order No. 888 and the plain
language of the FPA by concluding that long-term firm transmission
rights need only be similar to the short-term transmission rights now
being offered by most transmission organizations, and that long-term
firm transmission rights need not include a hedge against marginal
losses because short-term rights do not include such a hedge. SMUD
argues that the Commission's conclusion that long-term rights should be
similar to short-term rights with respect to their lack of a hedge
against marginal losses has no record, logical, or factual basis.
41. According to SMUD, the purpose of section 217(b)(4) of the FPA,
reflected in the language of the statute, is to require transmission
organizations to provide long-term firm service based on financial
rights that is equivalent to long-term service based on ``firm,'' i.e.,
``physical'' transmission rights. SMUD argues that, since, as a matter
of historical practice, long-term physical rights do not expose
customers to marginal losses, then neither should their financial
rights counterparts.
42. SMUD reiterates its initial comments in this proceeding,
asserting that marginal losses pose at least as big an uncertainty as
congestion charges and, without hedges to insulate parties from the
risks marginal loss exposure creates, interregional trade will be
constrained. SMUD suggests that the Commission's position is
unsupported because most transmission organizations did not include
marginal losses when they started their organized markets, and PJM only
recently began offering them, so the past cannot be a valid prologue
for the future. SMUD argues that relying on the possibility that
transmission organizations may voluntarily offer hedges for marginal
loss exposure is insufficient to ensure equivalence between financial
and physical rights-based firm service. SMUD states that on rehearing
the Commission should require transmission organizations to either: (1)
Offer long-term firm service customers a hedge against marginal losses;
or (2) exempt long-term firm customers from those charges and charge
actual or estimated system average losses.
Commission Determination
43. We deny SMUD's request for rehearing concerning marginal
losses, primarily for the reasons discussed in Order Nos. 681 and 681-
A.\64\ First, as we explained in Order No. 681-A, the issue of hedging
long-term marginal loss charges is distinct from the issue of hedging
long-term marginal congestion charges, and the language of section 217
of the FPA is silent regarding marginal losses.\65\
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\64\ Order No. 681, FERC Stats. & Regs. ] 31,226 at P 478; Order
No. 681-A, 117 FERC ] 61,201 at P 105-06.
\65\ Order No. 681-A, 117 FERC ] 61,201 at P 105-06.
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44. We disagree with SMUD's argument that the language of the
statute mandates a hedge against marginal losses for long-term firm
service customers. SMUD argues that the term ``firm service'' in the
statute denotes physical transmission service, and long-term physical
rights do not expose customers to marginal losses, so neither should
their financial counterparts.\66\ However, SMUD ignores the fact that
transmission losses and congestion are distinct features of
transmission service. While physical rights customers may not have been
exposed to marginal losses, they generally had contractual arrangements
concerning responsibility for losses on the transmission system.
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\66\ SMUD Rehearing Request at 12.
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45. We further object to SMUD's assertion that, in Order No. 681-A,
the Commission declared, without record, logical or factual basis, that
long-term firm transmission rights should have the same characteristics
as short-term rights. Rather, the Commission simply observed that it
did not interpret EPAct 2005 as requiring transmission organizations to
provide long-term firm transmission rights that are fundamentally
different from the short-term rights they now offer.\67\ Specifically,
transmission organizations with short-term rights do not provide hedges
for marginal losses, and EPAct 2005 does not expressly require a hedge
for marginal losses.
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\67\ Order No. 681-A, 117 FERC ] 61,201 at P 106.
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46. Hedging marginal losses is more complex than hedging congestion
costs due to the variable nature of losses. While it is theoretically
possible to design a different type of firm transmission right--an
unbalanced firm transmission right--to hedge against both congestion
and marginal losses, such designs are only in the experimental stage.
No transmission
[[Page 13111]]
organization has yet to implement a hedge for marginal losses.
Accordingly, we decline to order hedging of marginal losses at this
time. Nevertheless, we recognize that a marginal loss hedge could
provide benefits to certain market participants. The Commission
supports development of a marginal loss hedging product if its design
progresses beyond the theoretical level and it can be developed cost-
effectively.
47. The Commission also denies SMUD's request to exempt long-term
firm transmission customers from marginal losses and charge them actual
or estimated system average losses. This raises a market design issue
that has implications beyond the design of long-term firm transmission
rights and is more appropriately resolved by each transmission
organization on a case-by-case basis. Moreover, since we find that
EPAct 2005 does not address marginal losses, this request is beyond the
scope of this rulemaking proceeding.
By the Commission.
Kimberly D. Bose,
Secretary.
[FR Doc. E9-6698 Filed 3-25-09; 8:45 am]
BILLING CODE 6717-01-P