H. Transition to Single Transmission Tariff

1. This section discusses the transition process that will be used to move from the existing pro forma tariff to the SMD Tariff. First, we discuss the provisions of the revised tariff that remain the same as those in the existing pro forma tariff, but may change based on the comments received in response to our questions. Second, we discuss the provisions we propose to change. When Standard Market Design is implemented, the revised tariff would apply to nearly all transmission services on the system. All customers would receive the same quality and quantity of service they currently receive. Customers currently taking transmission service under an open access transmission tariff would continue to do so, but now would be served under the new Network Access Service under a revised open access transmission tariff. Bundled retail customers would continue to receive service from their existing load-serving entity; however, the load-serving entity would be required to take service under the new Network Access Service pro forma tariff in order to serve those retail customers. Similarly, while wholesale customers with pre-Order No. 888 contracts would be given the opportunity to convert to the new transmission service under a revised open access transmission tariff, if they choose not to do so, the transmission owner that provides service under the pre-888 contract would be required to take service under the new Network Access Service pro forma tariff in order to meet its contractual obligations to serve those customers.

2. Standard Market Design is intended to cure undue discrimination, more efficiently use the transmission grid and give customers additional options. To help ensure that the transition process satisfies these objectives, the proposed rule would allow certain regional flexibility in the implementation process to the SMD Tariff. In particular, the regions would have flexibility in converting the rights of existing customers to Congestion Revenue Rights or auction revenues under the new tariff. Also, the regions would have flexibility in establishing the rate design for the new Independent Transmission Providers. It is anticipated that the state representatives, through the Regional State Advisory Committees discussed in Section IV.K., will play an active role in these regional decisions.

1. Treatment of Customers under Existing Wholesale

Contracts

3. When the Commission issued Order No. 888 it faced the issue of what to do with existing contracts. The Commission decided that it would not generically abrogate existing requirements and transmission contracts, but that under all post-Order No. 888 contracts were to conform to the Order No. 888 pro forma tariff.

4. Similarly, we propose not to abrogate existing pre-Order No. 888 contracts. On a nationwide basis, these contracts should represent a relatively small portion of the total load and should be able to be accommodated within the Standard Market Design.¹⁷8 The customers with these contracts will be able to convert these existing contracts, consistent with their contract terms, to the new Network Access Service upon implementation of Standard Market Design. However, as discussed below, if customers choose not to convert to the new service, the transmission owner would be required to take service under the new tariff in order to meet its contractual obligations to serve the pre-Order No. 888 contract customers.

5. If pre-Order No. 888 contracts remain in effect, the contracting transmission owner would be required to take service from the Independent Transmission Provider in order to serve its existing wholesale power or transmission contract. The Independent Transmission Provider will assess the transmission owner for all charges and payments for providing the transmission service. The transmission owner will receive the allocation of initial Congestion Revenue Rights (or auction revenues associated with Congestion Revenue Rights) to provide protection against congestion costs for these existing contracts. If the ultimate transmission customer prefers having a direct allocation of these rights, it can convert the contract, subject to any contractual limitations, so that the customer directly receives service through a service agreement under the SMD Tariff and would take service directly from the Independent Transmission Provider.¹⁷9 We expect that the Congestion Revenue Rights or auction revenues for Congestion Revenue Rights that the transmission owner will receive in association with these contracts will be sufficient to cover increased congestion costs that would result from having the transmission owner take service under the new tariff in order to serve its wholesale requirements customers. However, the transmission owner would have the right to make a filing pursuant to section 205 of the Federal Power Act to demonstrate that its revenue requirement should be adjusted to recover additional costs caused by implementation of this provision.

6. The Commission is concerned that pre-Order No. 888 contracts could permit the parties to extend a contract indefinitely through the use of roll-over or evergreen provisions in the contracts. The Commission seeks comment on whether it should limit the ability of the parties to extend these contracts past their initial term, or if that has passed the end of the next roll-over period and, if so, what limitations are appropriate.

2. Allocation of Congestion Revenue Rights

7. The initial allocation of Congestion Revenue Rights is important to ensure that the implementation of Standard Market Design preserves the service rights of existing customers, provides access to all available capacity and minimizes cost shifts. We offer a process for this transition. First, the Independent Transmission Provider would compile a catalogue of all the existing long-term firm obligations for its transmission system that would still be in effect when Standard Market Design is implemented.¹⁸0 This would include firm Point-to-Point Transmission Service under an open access transmission tariff,¹⁸1 firm transmission under pre-Order No. 888 contracts, designated resources for network transmission service pursuant to an open access transmission tariff, and bundled retail load (which is served under an implicit contract with the transmission owner). For firm Point-to-Point Transmission Service, the existing rights would be those specified in existing service agreements. For network transmission service and bundled retail transmission service, the existing rights would be limited to the designated resources in effect at the time, up to an amount equal to the customer's current peak load since this would replicate the service the customer is currently receiving. The Congestion Revenue Rights would go to the entity taking service under the Independent Transmission Provider's tariff. In general, these customers would not be granted an initial allocation based on additions for future load growth, but would have to secure those rights. However, there are instances where the vertically integrated transmission provider has identified load growth and limited the term (and rollover rights) of point-to-point transmission contracts. We seek comment as to whether and under what circumstances load growth should be accommodated in the direct allocation of Congestion Revenue Rights. The initial Congestion Revenue Rights would be receipt point-to-delivery point obligations.

8. Next, the catalogue of firm obligations would be subject to a simultaneous feasibility test.¹⁸2 On some systems, it may not be possible to award Congestion Revenue Rights that are simultaneously feasible to all of the existing firm transmission customers on the system, because the system may be leveraging load diversity – different customers using the grid at different times – to meet the peak needs of all users. If those needs cannot all be met simultaneously, then not all customers can have annual Congestion Revenue Rights equal to their peak usage,¹⁸3 then the initial allocation of Congestion Revenue Rights would be limited to the amount that is simultaneously feasible. The Congestion Revenue Rights could be allocated between customers on a pro rata basis or customers could be given the opportunity to change receipt points to achieve a simultaneously feasible result, or the Congestion Revenue Rights could be restricted to certain periods.¹⁸4

9. Either of two methods could ensure that current customers receive the value of their current contracts (actual or implicit) – direct assignment and an auction with a revenue assignment.¹⁸5 First, Congestion Revenue Rights could be directly assigned to the customers that currently have the receipt points and delivery points identified in their existing contracts (actual or implicit). Under this approach, a customer that currently has a firm point-to-point transmission contract for 100 MW from point A to point B would receive 100MW of Congestion Revenue Rights from point A to point B for the length of its contract. A network customer or a load-serving entity serving retail load that has identified a network resource for 100 MW of capacity would receive a Congestion Revenue Right for 100 MW from that receipt point to the customer's load.¹⁸6 The delivery points would be defined as the customer's interface points with the Transmission Provider. For network contracts and implicit contract, it is likely that customers would continue service for the foreseeable future (without a contract termination date). Thus, we seek comment on what type of term should be used for purposes of the Congestion Revenue Rights allocation for these contracts.

10. Alternatively, current firm customers could be given the auction revenues from the sale of Congestion Revenue Rights. Thus, the existing customers would receive the market value of those rights. Under this approach, all of the Congestion Revenue Rights available on the system would be sold through an auction. At a minimum, the Congestion Revenue Rights sold in the initial auction would have to include point-to-point obligations. If there is interest from market participants and it is technically feasible, the auction could also include point-to-point options and flowgate rights.

11. The terms of the Congestion Revenue Rights would vary. Initially, a set percentage would be auctioned on a monthly basis, another set percentage would be auctioned for six months and another for one year. This rulemaking proposes that the regions be given flexibility in setting the initial terms for the Congestion Revenue Rights sold in auctions. Since congestion patterns can change significantly after the implementation of LMP, there may be a benefit to delaying the auction of multi-year Congestion Revenue Rights until after a start-up period. On the other hand, customers may desire long-term Congestion Revenue Rights to correspond to the term of the long-term contracts used to satisfy the long-term resource adequacy requirement. We seek comment on whether we should require long-term Congestion Revenue Rights in such cases. The Congestion Revenue Rights that would be sold during the initial auction would be the set of Congestion Revenue Rights that maximizes the value of the awarded Congestion Revenue Rights based on buyers' bids that is simultaneously feasible. The revenues from the auction would be given to the customers that are paying for the embedded costs of the system through an access charge.

12. In the long-term, the auction methodology has a number of advantages over the allocation methodology in a competitive wholesale market. First, the auction methodology makes it easier for load-serving entities to change receipt points (and thus supply sources) and obtain protection against congestion costs because of the more frequent auctions for Congestion Revenue Rights. The same would also apply to sellers seeking to sell to different buyers. In contrast, if Congestion Revenue Rights are directly assigned, holders of the Congestion Revenue Rights on congested paths may be reluctant to offer these in the secondary market. This could limit the ability of new suppliers to enter the market. This could be problematic particularly with Congestion Revenue Rights held by vertically-integrated utilities. Second, experience to date has been that there is a more vibrant secondary market where Congestion Revenue Rights are auctioned rather than directly assigned.¹⁸7

13. This proposed rule establishes a preference for the auction of Congestion Revenue Rights. After a transition period, all Independent Transmission Providers would be required to auction their Congestion Revenue Rights. However, for an initial transition period of four years, this rulemaking proposes to allow regional flexibility on this issue. During a transition period, the Independent Transmission Provider after consultation with the Regional State Advisory Committee and stakeholders in a region, could decide to directly assign Congestion Revenue Rights. At the end of the transition period, the Independent Transmission Provider would be required to submit a filing to move to an auction for Congestion Revenue Rights with the auction revenues allocated to those that pay the access charge, or justify why a longer transition period is necessary. The customer that previously had been allocated the Congestion Revenue Rights would now receive the auction revenues. The customer could participate in the auction if it wished to retain the Congestion Revenue Rights. We seek comment on whether to allow a transition period before the start of Congestion Revenue Rights auction allocations and, if so, what the length of such a transition should be.

3. Reciprocity Provision

14. In Order No. 888, the Commission included a reciprocity provision in the pro forma tariff. Under this provision, all customers (and their affiliates), including non-public utility entities, that own, control or operate interstate transmission facilities and that take service under a public utility's open access transmission tariff, must offer comparable (not unduly discriminatory) services in return.¹⁸8 The Commission also recognized that a public utility may deny service simply on a claim that the open access offered by a non-public utility was not satisfactory. Thus, the Commission developed a voluntary safe harbor procedure under which non-public utilities could submit to the Commission a transmission tariff and a request for declaratory order that the tariff meets the Commission's comparability (non-discrimination) standards. If the Commission found it to be an acceptable reciprocity tariff, the Commission would require the public utility to provide open access service to that particular non-public utility.¹⁸9

15. We propose to continue this approach to reciprocity. Further, we propose to grandfather all reciprocity tariffs that the Commission previously found met the comparability standards of Order No. 888. We request comment on this proposal.

4. Force Majeure and Indemnification Provisions

16. In Order No. 888, the Commission recognized that the risk allocations regarding liability and indemnification "must be carefully drafted so that transmission providers and customers can accurately assess and account for their respective risks."¹⁹0 The Order No. 888 pro forma tariff contains a force majeure provision and an indemnification provision.¹⁹1 The force majeure provision provides that neither the transmission provider nor the transmission customer will be liable to the other when they behave properly, but unpredictable and uncontrollable force majeure events prevent compliance with the tariff.

17. Under the indemnification provision, the transmission customer indemnifies the transmission provider against third-party claims that arise from the performance of obligations under the tariff. The Commission explained that the purpose of the indemnification provision was to allocate the risks of a transaction, and costs of the risks, to the party on whose behalf the transaction was conducted.¹⁹2 Further, as the tariff did not obligate the customer to perform services on behalf of the transmission provider there was no comparable basis for imposing an indemnification obligation on the transmission provider. The Commission found it inappropriate to require the customer to indemnify the transmission provider from damages arising from the transmission provider's own negligence. Thus, a transmission customer is not required to indemnify the transmission provider in the case of negligence or intentional wrongdoing by the transmission provider.¹⁹3 The Commission further explained that while it was appropriate to protect the transmission provider when it provides service without negligence, the determination of liability in other instances should be left to other proceedings.

18. Since Order No. 888, several entities have sought to revise their open access transmission tariffs to include liability provisions arguing, among other things, that no current federal forum exists for entities that are now subject to Commission jurisdiction only and can no longer can seek relief at the state level.

19. We recognize that there may be a need to include liability provisions in the Commission's pro forma tariff in circumstances in which there are no liability provisions available in a state tariff; however at this time, we are not prepared to propose a specific provision.¹⁹4

We seek comment on the following issues: Is there a need to include liability provisions in the Commission's pro forma tariff? Under what circumstances should liability protection be provided in a Commission open access transmission tariff (e.g., should we provide such protection only where it is not available through state tariffs)? If we adopt liability provisions, should they be generic or do they need to be adopted on a regional basis? Should the standards adopted in a Commission pro forma tariff reflect what was previously provided under state law? How do we resolve the issue in the multi-state context of an ISO or RTO? The Commission will review the comments filed and then hold a staff technical conference in the fall to further discuss this issue.

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1⁷⁸It appears that these contracts would be less than 10 percent of total load on a nationwide basis based on data from Form No. 1 filings by public utilities for calendar year 2000.

1⁷⁹To the extent that there are contractual limitations, the customer could seek modification of the contract through a filing with the Commission.

1⁸⁰Network transmission contracts are not currently assignable because they do not consist of reservations from particular receipt points to delivery points in specific stated amounts. Therefore, some measure of historical usage on a point-to-point basis will have to be imputed to each network customer in order to assign Congestion Revenue Rights.

1⁸¹Short-term firm contracts would expire before the implementation of Standard Market Design and would thus not be included in the catalogue.

1⁸²Simultaneously feasibility means that power can be simultaneously transmitted from the receipt points to the delivery points specified in the Congestion Revenue Rights in a contingency-constrained dispatch. If this power flow does not cause overloads on the system (either pre- or post-contingency), then the power flow is simultaneously feasible.

1⁸³Congestion Revenue Rights that give a holder different seasonal quantities could be an option in such a case.

1⁸⁴If the simultaneous feasibility tests indicate there are additional Congestion Revenue Rights that could be offered, these Congestion Revenue Rights will be offered through an auction open to all customers.

1⁸⁵For the sake of simplification, this discussion assumes that simultaneously feasible Congestion Revenue Rights could be issued to replicate current rights. If adjustments need to be made to ensure a simultaneously feasible result, the numbers may change, but the same basic methodology would be used for the conversion process.

1⁸⁶In states that have retail competition, provisions would also be needed to ensure that the Congestion Revenue Rights stay with the load. So if a new retail marketer starts serving load previously served by the local utility, the retail marketer would get a proportionate share of the Congestion Revenue Rights.

1⁸⁷New York ISO auctions Congestion Revenue Rights and PJM directly assigns Congestion Revenue Rights. MISO has also proposed to initially directly assign Congestion Revenue Rights but to transition to an auction of Congestion Revenue Rights with an allocation of auction revenues to the customers that pay the embedded costs of the system.

1⁸⁸See Order No. 888 at 31,760; Order No. 888-A at 30,285.

1⁸⁹Id. at 31,761.

1⁹⁰ Order No. 888 at 31,765.

1⁹¹ See Sections 10.1 and 10.2 of the pro forma tariff.

1⁹² See Order No. 888-A at 30,301.

1⁹³ See Order No. 888-A at 30,299-300; Order No. 888-B at 62,080.

1⁹⁴We have included the indemnification and liability provisions from the existing pro forma tariff in the SMD Tariff pending review of the comments in this proceeding.