IV. THE
PROPOSED REMEDY
1. The Commission’s goal in Order Nos. 888
and 2000 was to harness the benefits of competition for the nation’s
electricity customers by assuring adequate and reliable supplies of electricity
at a just and reasonable price. As
discussed above in the Need for Reform section (Section III), the current rules
and regulations have prevented the full attainment of that objective. To address these problems in the current
system, we are proposing a comprehensive package of reforms that are described
more fully in this section.
2. Section III and Appendix C provide
numerous examples of ways that an entity that owns both transmission and
generation can discriminate in favor of its own customers or generation under
the current tariff. The problem stems
from the differences in the sets of rules that apply to users of the
transmission system. First, the current
regulatory system allows vertically integrated utilities to discriminate in
favor of their bundled retail load at the expense of wholesale customers. This occurs because transmission service for
bundled retail customers is subject to different rules and rates than service
for wholesale customers. Second, the current
distinction between Point-to-Point Transmission Service and Network Integration
Transmission Service also creates opportunities for undue discrimination in
favor of generation owned by the transmission owner or an affiliate.
3. To
remedy this discrimination we propose to place all transmission customers under
the same set of rules. We propose to
place transmission service for bundled retail customers under the same terms
and conditions of service as wholesale transmission service. To accomplish this we propose to revise the
existing pro forma tariff to remove provisions that grant
preferential treatment to transmission service for bundled retail
customers. We propose that all public
utilities that own, control or operate interstate transmission file these
interim changes no later than July 31, 2003.
We also propose that no later than September 30, 2004, or such date as
the Commission may establish, only Independent Transmission Providers would
operate Commission-jurisdictional facilities.
This requirement will apply whether or not the public utility that owns,
controls or operates interstate transmission facilities has joined an RTO.77 We are
proposing specific governance requirements that must be met by the Independent
Transmission Provider.
4. Also, no later than September 30, 2004,
or such date as the Commission may establish, we propose to eliminate the
distinction between Point-to-Point and Network Integration Transmission
Services by having one service, Network Access Service, that contains elements
of both types of service – the flexibility of Network Integration Transmission
Service and the tradability of Point-to-Point Transmission Service. We propose these time periods to provide
sufficient time for the development of the necessary new software systems. Network Access Service is based on an open
spot market for imbalance energy and a uniform congestion management
methodology, i.e., LMP, to more efficiently manage the transmission
grid. The spot energy market and LMP
rely on management of the transmission system and bidding by supply and demand
resources attached to the transmission grid under market rules and
protocols.
5. To provide the price signals needed to
manage congestion, the Independent Transmission Provider will be required to
operate a day-ahead and real-time market for energy. To provide customers with a mechanism for achieving price
certainty under the new congestion management system, we also propose to
require that customers be given Congestion Revenue Rights for their historical
uses that protect against congestion costs when specific receipt and delivery
points are used.
6. LMP
and Congestion Revenue Rights will provide price signals to indicate where new
investment is needed; however, the price signals alone may not guarantee
sufficient investment. We also propose
to require a regional transmission planning and expansion process to provide a
backstop process for ensuring that needed transmission construction is
undertaken. We propose that this
process begin six months from the effective date of the Final Rule, even though
much of the country will not have had the opportunity to respond to LMP and
Congestion Revenue Rights for another few years.
7. At this stage of the industry's
evolution, structural barriers to competitive markets remain, so to address
this we are proposing market power mitigation measures for the spot markets
that will be operated by the Independent Transmission Provider. These measures are designed to address the
two significant structural problems in wholesale energy markets – the existence of localized market power that
arises from transmission constraints, and the lack of price-responsive
demand. The market power mitigation
proposal is a framework that can be tailored to reflect the competitive
conditions of the particular region. It
is designed to be reexamined annually and adjusted as needed to reflect changes
in the competitive structure of the region, including a phasing out of
mitigation measures as resource adequacy and demand response develops. Because market power mitigation of spot
market prices will tend to suppress the price signals for new entry, we are
also proposing a non-price mechanism to assure that load meets a long-term
resource adequacy requirement.
8. To avoid the market design flaws
discussed in the Need for Reform section (Section III) and Appendix C and
market manipulation in Appendix E, and to minimize the potential for seams
issues, we propose a standardized tariff that incorporates the best practices
and builds on the lessons from our experience with organized markets. In Appendix B, the proposed SMD Tariff
standardizes many aspects of the basic market design. However, it also allows flexibility in a number of areas to
customize the basic market design to meet regional requirements where such
customization will not lead to further discrimination or inefficiencies.
9. We propose to permit small entities to
seek waiver of the Standard Market Design Final Rule requirements. The regulations we propose include waiver
provisions under which public utilities, and non-public utilities seeking
exemption from the reciprocity condition, may file requests for waivers form
all or part of the Commission's regulations.
Finally, while we have attempted to standardize the basic aspects of the market design policy, this proposed rule does not include detailed business practices and communication protocols that will be needed to administer Standard Market Design. We fully appreciate the benefits of business practice standardization and, as we did in the natural gas industry, we believe it is best if industry participants develop these types of highly detailed and technical standards. Thus, we are proposing a process, similar to that used in the natural gas industry, that could be used for standardization of business practices, data sets and communication protocols that includes representation of all affected market participants. Upon its formation, the Wholesale Electric Quadrant of the North American Energy Standards Board (NAESB), working closely with Independent Transmission Providers who would collectively serve in an advisory capacity to the board, would produce business practice and electronic communication standards. NAESB would notify the Commission when it has adopted standards, and the Commission would then use rulemaking proceedings to propose the incorporation of these standards by reference into the Commission's regulations. If the industry is unable to reach consensus on a particular standard, the Commission would be available to resolve the dispute, so that the industry process can continue, or the Commission could develop its own standards if necessary. Consistent with gas industry regulation, issues of policy that affect significant resources or that may cause cost_shifting would be resolved at the Commission rather than through the standard setting body.