UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Long-Term Firm Transmission Rights
In Organized Electricity Markets
Long-Term Transmission Rights in Market
Operated by Regional Transmission
Organizations and Independent System
Operators
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Docket No. RM06-8-000
Docket No. AD05-7-000
COMMENTS OF
EDISION ELECTRIC INSTITUTE
Pursuant to the Notice of Proposed Rulemaking (“NOPR”) issued in the abovecaptioned proceedings, Edison Electric Institute (“EEI”) hereby submits its comments on
the Federal Energy Regulatory Commission (“FERC” or “Commission”) proposal to
implement Section 1233(b) of the Energy Policy Act of 2005 (“EPAct”) by amending its
regulations to require transmission organizations that are public utilities with organized
electricity markets to make available long-term firm transmission rights that satisfy
certain guidelines that may be established in this proceeding. EEI is the association of
the nation’s investor-owned electric utilities, most of which are transmission providers
subject to the jurisdiction of the Commission. In addition, most EEI members directly,
through affiliate power producers, or both, own electric generation facilities that provide
electricity to wholesale markets subject to Commission jurisdiction.
SUMMARY
In EPAct, Congress recognized the essential role of a reliable and robust
transmission system in meeting the nation’s increasing demand for electricity by
providing a package of provisions to strengthen the nation’s transmission network. As a
result of this landmark legislation, the Commission has undertaken numerous
proceedings intended to secure greater reliability, improved transmission siting and
expanded transmission investment in transmission facilities. Now, in the abovecaptioned proceeding, the Commission has issued a NOPR seeking to implement Section
1233 (b) of EPAct by amending 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 the established by the
Commission in this proceeding.
EEI and its member companies believe that the development and maintenance of
effective wholesale markets requires a robust, reliable transmission infrastructure, and
that the Commission should devote substantial efforts to facilitating the development and
maintenance of that infrastructure. The focus should be on the need to develop the
energy infrastructure to facilitate growth in efficient wholesale market transactions. In
this regard, EEI’s member companies are committed to investing in the nation’s bulk
power transmission system, as indicated by the substantial budget increases in
transmission investment over the period of 2004-2008.1
The emphasis should be on
making the transmission infrastructure “pie” bigger rather than debating how the pie
should be divided, or whether some entities must give their share of the pie back.
Nonetheless, EEI recognizes that exposure to congestion costs is a challenge for some
market participants. Thus, EEI believes there is value in providing increased certainty
regarding the congestion cost risks of long-term transmission service in organized
1
See EEI comments filed January 11, 2006 in Promoting Transmission Investment Through Pricing
Reform, Docket No. RM06-4.
2
electricity markets so long as the costs do not outweigh the benefits. The Commission’s
should be careful that the Final Rule in this proceeding does not create regulatory
uncertainty. To the contrary, any resulting guidelines should provide certainty to the
RTO/ISO stakeholder determinations on how to provide a net benefit to the market
through making long-term FTRs available. Providing long-term firm transmission rights
to hedge transmission congestion should not harm market performance and unreasonably
shift costs among market participants.
The design of the currently operating organized markets has been carefully
negotiated and fine-tuned over a period of years. For over a decade, the Commission has
encouraged the development of organized electricity market through issuances such as
Order No. 888, and Order No. 2000.2 In most organized markets, physical transmission
rights have been phased-out in favor of market mechanisms to manage transmission
congestion such as locational marginal pricing (“LMP”) and financial transmission rights
(“FTRs”). To reduce uncertainty due to congestion, transmission organizations that use
LMP make FTRs available to market participants.
With this background, as an initial matter, the Commission should ensure that the
Final Rule will only address long-term financial instruments. Furthermore, given the
considerable negotiation and careful planning that has gone into the design of organized
electricity markets and the resulting regional differences in market design, EEI continues
2
See Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Service
by Public Utilities and 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 (1996), order on reh’g, Order No. 888-B, 81 FERC  61,248 (1997), order on reh’g, Order No.
888-C, 82 FERC  61,036 (1998), aff’d in relevant part, remanded in part on other grounds sub nom,
Transmission Access Policy Group, et al. v. FERC, 225 F.3d 667 (D.C. Cir. 2000), aff’d sub nom, New
York v. FERC, 535 U.S. 1. (2002).
3
to urge the Commission to allow each organized market to work with its stakeholders to
decide the best approach to offering long-term FTRs. This will ensure that an organized
market’s design criteria associated with developing long-term FTRs are in concert with
other aspects of its market design and will be equitable to all market participants.
It is crucial that the resulting Final Rule in this proceeding does not disturb FTR
allocations made pursuant to Order No. 2000 and Order No. 888, and in regions without
FERC-approved FTR allocations, the Commission should provide flexibility in the
manner established in Order No. 2000. The Final Rule should provide RTO/ISOs
stakeholder determinations with broad flexibility with respect to specific long-term FTRs
offered in particular organized electricity markets. RTOs/ISO stakeholders are in the best
position to ensure that long-term FTRs offered by transmission organizations compliment
existing market designs and regional characteristics. In the discussion below, EEI
describes a host of regionally specific issues that might be considered in determining the
of length long-term FTRs offered in a particular organized electricity market, EEI
therefore recommends that the Final Rule allow for regional flexibility with respect to
establishing the specific length of term for long-term FTRs offered by transmission
organizations.
EEI believes that it is important that the Final Rule in this proceeding allow each
RTOs/ISO to determine whether to limit the allocation of system capacity for long-term
FTRs to a percentage of total transmission capacity. Limiting the amount of transmission
system capacity dedicated to providing long-term transmission rights will help to address
concerns that the transmission planning process may be undermined by the provision of
long-term FTRs, and to avoid harming the current users of short-term FTRs.
4
Furthermore, since allocating a significant proportion of the transmission system capacity
to long-term FTRs significantly increases the likelihood that there will be inadequate
funding of these rights, EEI does not believe the Commission should mandate that longterm FTRs must be fully-funded, and should allow the particular regions to decide how to
best fund long-term FTRs. Moreover, should the Commission decide to require some
form of fully funding, it should not require payments by transmission owners to ensure
revenue sufficiency since that would unreasonably shift risk away from the holder of
long-term FTRs, who are the beneficiaries of these rights.
In the discussion below, EEI provides specific comments on the NOPR’s
proposed definition of the term “load-serving entity,” as well as the proposed guidelines.
EEI suggests that the Commission should define the term “load-serving entity” to mean
the distribution company, unless it service obligation has been reassigned. With respect
to the NOPR’s eight proposed guidelines, EEI believes:

Guideline (2) should provide transmission organizations with sufficient
flexibility to determine the appropriate hedge against congestion costs, subject to the
rules established by the transmission organization prior to establishing such long-term
right. In order to minimize the effect on the availability of short-term FTRs and limit
the cost shifting to existing holders of short-term FTRs, EEI believes that long-term
FTRs should be designed as obligation rights, and not options.

Guideline (3) should allow a transmission organization to define the length
of terms of the long-term FTRs within its planning process

Guideline (4) should allow a transmission organization to define the terms
of long-term FTRs by balancing the interests of all stakeholders in the process.

Guideline (5) should not reverse the Commission’s prior decisions with
respect to the allocations and market structures of RTOs/ISOs, and should provide
flexibility to transmission organizations that have not yet implemented an FTR
allocation methodology.
5

Guideline (6) should provide transmission organization with the flexibility
to avoid administrative burdens with respect to tracking reassignments of long-term
FTRs.

Guideline (7) should not be implemented in any way that could prevent
regions from choosing to use auctions.

Guideline (8) should be interpreted to the broadest extent possible and
should be accorded primacy among all the guidelines that may result from this
proceeding.
DISCUSSION
I. General Comments
A.
The Commission Should Uphold Approved FTR Allocations Made by
RTOs and ISOs.
The Commission should implement Section 1233 in a manner that upholds market
structures and FTR 3 allocations developed and approved pursuant to prior orders and by
Independent System Operators (“ISOs”) that have been approved by the Commission.
As the Commission notes in the NOPR, most of the RTOs and ISOs “use various forms
of Financial Transmission Rights (FTRs)” to allow market participants who hold the
FTRs to protect against the variability in prices due to transmission congestion. See
NOPR at P 14.
The Commission has already approved FTR allocations in PJM, MISO, NYISO
and ISO-New England.4 Load-serving entities and other transmission customers have
made supply and investment decisions in reliance on these Commission-approved
3
The NOPR used the term FTR to generally refer to financial transmission instruments used in various
organized electricity markets. In some markets these financial instruments are call transmission congestion
contracts or congestion revenue rights.
4
PJM Interconnection, L.L.C., et al., 101 FERC ¶ 61,345 (2002), 110 FERC ¶ 61,254 (2005); Midwest
Independent Transmission System Operator, Inc., 108 FERC ¶ 61,163 at PP 141-213 (2004); Central
Hudson Gas & Electric, et al., 86 FERC ¶ 61,062, order on reh’g, 88 FERC ¶ 61,138 (1999); New England
Power Pool and ISO New England, Inc., 100 FERC ¶ 61, 287, order on reh’g, 101 FERC ¶ 61,344 (2002).
6
allocations. The Commission should not reverse its prior decisions by changing these
allocations and market structures. As the Commission has noted on numerous occasions,
providing certainty to market participants is an important aspect of building competitive
markets. Providing long firm term transmission rights must be integrated into the overall
structure of the RTO or ISO markets in a way that does not diminish the rights of
transmission customers under the existing market rules of the transmission organization.
Thus, provision for long-term rights and should not be the single factor that trumps other
aspects of the transmission organization’s already established rules and structures.
In transmission organizations where FTR allocations have not yet been approved
or where the stakeholders determine that existing allocations should be changed, the
Commission should provide flexibility, as it did in prior orders such as Order No. 2000,
for each transmission organization to implement the availability of long-term
transmission rights in a manner that best fits with its market structures and rules. The
Commission noted the flexibility built into Order No. 2000, and stated that given the
“rapidly evolving state of the electric industry,” it was appropriate to give “participants
the flexibility to develop mutually agreeable regional arrangements with respect to RTO
formation and coordination.” Order No. 2000 at PP 91, and 115-116.
In this NOPR, the Commission also recognizes that stakeholders in each region
should have the flexibility to develop a long-term transmission rights design that “fits the
prevailing market design and best meets the needs of market participants in that region.”
NOPR at P 43. However, where stakeholders have already developed a method to
allocate FTRs that has been approved by the Commission, the Commission should not
7
overturn that allocation method and disrupt the supply and investment decisions that have
been made in reliance on it.
B.
The Final Rule Should Apply Only to Long-term Financial Rights.
To enable market participants to manage the risk of transmission price variability
that is due to transmission congestion, the NOPR correctly observes that most
RTOs/ISOs currently employ a congestion management system based on LMP that
provides market participants with access to various forms of FTRs. NOPR at P 14. The
NOPR defines an FTR “to refer generally to financial transmission instruments used in
various organized electricity markets that currently exist,” and indicates that such a right
offers “financial coverage.”5 Accordingly, it appears that the NOPR applies to financial
transmission instruments for market participants that are long-term and firm. EEI
therefore recommends that Final Rule should make this clear.
EEI believes that clarifying the Final Rule in this manner is consistent with the
direction the Commission has taken with respect to development of RTOs/ISOs.6 The
Commission gave impetus to RTOs/ISOs to use financial transmission rights in its Order
No. 2000 function 2 on market based congestion management. The Commission stated
that, “[a]s we proposed in the NOPR, we will require the RTO to implement a market
mechanism that provides all transmission customers with efficient price signals regarding
the consequences of their transmission use decisions.” Order No. 2000 at P 382. This in
effect is a prescription for the RTO to adopt a financial based congestion management
5
See NOPR at P 23, n. 31, and P48.
6
For a full discussion of why long-term physical transmission rights should not be introduced into
organized markets that currently operate with LMP and FTRs, see EEI’s Comments at 3-6, submitted in
Docket No. AD05-7-000 on June 27, 2005.
8
system. However, the Commission appropriately left considerable flexibility to each
RTO to develop the congestion management system and to allocate the FTRs. The
design of currently operating markets has been carefully negotiated and fine-tuned over a
period of years. Physical transmission rights have been phased out in favor of market
mechanisms to manage transmission congestion.7 Re-introducing physical transmission
rights to these markets will impair the economic performance of the FTR market and lead
to inefficiencies that are contrary to the Commission’s objectives in developing Day 2
markets within RTOs. 8 Furthermore, the Commission should recognize that changing
the rules/procedures under which an RTO currently functions or which are in
development by the RTO’s stakeholders will further exacerbate the sense of uncertainty
among market participants that no rules or procedures can be counted on to remain in
force for very long. Accordingly, any Final Rule should be limited to establishing
flexible guidelines for RTOs/ISOs to make available long-term firm financial
transmission instruments to market participants.
7
For example, central to the market design of ISO New England, the Midwest ISO, the New York ISO, and
the PJM Interconnection was the phase-out of physical rights and reliance on market forces to manage
transmission congestion with LMP and FTRs.
8
The problems of incorporating physical transmission rights in markets based on a coordinated spot market
were summarized well by Bill Hogan in 2002: “[a]ny attempt to match a large number of scheduled
transactions to a set of transmission rights creates a burden that threatens the flexibility of trade needed to
support a market or the flexibility of operations needed to maintain reliability. And in a design built on the
centerpiece of a coordinated spot market, physical transmission rights or any associated scheduling priority
would create perverse incentives and conflicts with priorities defined by the bids used in a securityconstrained economic dispatch. The idea that a simple physical right can be made to work soon mutates
into a complex system of rules intended to force market participants to act against market incentives.”
(Hogan, William, “Financial Transmission Right Formulations”, March 31, 2002).
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II. Comments on the Proposed Approach and Guidelines for Design and
Administration of Long-term FTRs in Organized Electricity Markets
A.
The NOPR’s Approach and Guidelines Should Provide RTOs/ISOs
Broad Flexibility for Stakeholder Determinations to Make Available
Specific Long-term FTRs that Compliment Existing Market Designs
and Regional Characteristics.
EEI appreciates the Commission’s proposal in the NOPR that each transmission
organization should be allowed to work with its stakeholders in developing specific longterm FTRs to meet the needs of their respective markets. The NOPR is correct that
“transmission rights in organized transmission markets cannot always be designed in a
way that captures all of the features of transmission rights that have long been available
under the OATT.” NOPR at P 33. EEI agrees that the objective for the Commission’s
Final Rule should be “to present a framework within which transmission organizations
and their market participants can design and implement long-term firm transmission
rights in the organized electricity markets that are compatible with the design of those
markets, in particular retaining the advantages of price-based congestion management,
and meet the needs of market participants.” NOPR at P 33. EEI is encouraged that the
Commission states in the NOPR that it “will allow regional flexibility in setting the terms
of rights . . . .” NOPR at P 3.
EEI agrees with the Commission “that there may be many possible approaches,”
to fulfilling the requirement of Section 1233 (b) of EPAct 2005 and “that a ‘one size fits
all’ long-term firm transmission right design is not appropriate.” NOPR at P 41. EEI
believes the Commission may fulfill its statutory obligation by using this proceeding to
establish flexible “guidelines” for the design and administration of long-term FTRs. Any
FERC established “guidelines” or “framework” should not unreasonably constrain or
10
impede the development of specific long-term FTR designs within the stakeholder
process of each transmission organization that fits the prevailing market design and best
meets the needs of the market participants in that region. Although “guidelines” are a
welcome approach to providing long-term FTRs in organized electricity markets, it is
essential that FERC does not apply these guidelines rigidly lest these “guidelines” in
practice amount to rules. EEI believes the “guidelines” should be as that term implies: a
general direction for a future course of action. Thus, FERC’s approach to compliance
with the Final Rule should allow regions ample flexibility with respect to any FERCestablished guidelines in order to develop long-term transmission rights that meet the
objectives of EPAct 2005.
Each RTO/ISO, working with its stakeholders, is in the best position to examine
the technical feasibility of offering various forms of long-term FTRs, and determine how
long-term FTRs can be developed that provides a net positive benefit to the market. EEI
believes the RTO/ISO stakeholder process is the most effective way to ensure that the
development of long-term FTRs is cost-effective and equitable to all market participants,
and avoid transferring risk from one set of market participants to another. Given the
considerable negotiation and careful planning that has gone into the design of organized
markets and resulting regional differences in market design, EEI continues to believe that
the Commission’s framework should allow each organized market ample latitude to work
with its stakeholders to decide the specific approach to offering long-term FTRs. This
will ensure that the design criteria associated with developing long-term FTRs is
complimentary with other aspects of its market design and will be equitable to all market
participants.
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1. Length of Terms
Regional flexibility will allow the stakeholders in each region to decide on the
length of the terms along with many other factors.
RTOs and ISOs analyze the need for
transmission upgrades under specific assumptions about the grid, including plans for
generation additions and load growth among other parameters. Thus, it may be
appropriate to restrict the length of the rights conferred to the length of the transmission
planning horizon and to define any additional rights in subsequent studies. However,
planning horizons are just one of a number of issues that might be considered by
stakeholders in establishing the length of the FTRs. RTO/ISO stakeholders might also
consider, among other things, such factors as: (a) whether or not the system is
constrained; (b) the length of time it reasonably take to expand the system; (c) the
existing uses of the system; (d) the demand for long-term and short term rights of the
system. Also, stakeholders may consider grandfathered rights, and whether or not they
are expiring, expected generation retirements that may impact the transfer capability of
the system, the volume of FTRs being sold long-term, and whether or not there are any
renewal rights to be considered.
2. Limits on System Capacity Allocated for Long-Term FTRs:
In the NOPR, the Commission asks whether to allow transmission organizations
to adopt limits on the amount of capacity that they will allocate to long-term rights.
NOPR at P 59. The Commission states in the NOPR that, pursuant the Final Rule,
transmission organizations will need to have effective planning and expansion regimes in
place. NOPR at P 88. The Commission further acknowledges that “[w]ithout
appropriate planning and expansion of the system where necessary, it may be difficult to
12
ensure that long-term firm transmission rights remain financially viable without
significant charges to some set of participants.” NOPR at P 88.
The introduction of long-term FTRs should not be allowed to have any
detrimental effects on the operation of the transmission system. Holders of long-term
FTRs will have a vested interest in assuring that changes in the operations of the system
do not harm their financial position. Protections may be needed to ensure that operations
procedures and system reliability are not adversely affected by issues associated with
upholding the financial position of a subset of market participants.
An unintended consequence of offering long-term FTRs may be to create future
resistance to transmission improvements, including new construction. This is because the
value of a long-term FTR can be both positively and negatively affected by such changes.
Long-term FTR holders will have the incentive to resist infrastructure enhancements to
the system that adversely affect the value of their long-term FTRs. Steps should be
undertaken to ensure that the transmission planning process is not undermined by the
provision of long-term FTRs but enhanced by long-term FTRs. Limiting the share of
transmission capacity dedicated to providing long-term FTRs may effectively address the
concern.
EEI believes that because of the regional differences in market design, each
RTO/ISO, working with its stakeholders, is in the best position to examine the technical
feasibility of offering long-term FTRs and determine how to offer long-term FTRs in a
manner that provides net benefits to the market. Accordingly, EEI believes that the
Commission should allow RTOs/ISOs to develop specific limits on the amount of
13
capacity allocated through long-term FTRs. The introduction of long-term FTRs is
expected to reduce the availability of shorter term FTRs. Because the current FTR model
based on offering short term FTRs is working well in the organized markets, care should
be taken in ensuring that both the current users of short-term FTRs as well as the
customers that pay the transmission revenue requirements are not harmed. The volume
of long-term FTRs should be targeted to be a small proportion of the total FTRs
available. Over time, the proportion of outstanding long-term FTRs should not exceed
the targeted volume of the system. This approach will minimize the potential for any
resulting detrimental effect to customers relying on short-term FTRs.
3. Risk of Shortfalls
The Commission in establishing a set of guidelines has proposed to require the
transmission organization to provide a long-term transmission right that provides a
complete hedge against day-ahead locational marginal price congestion charges. EEI
sees two separate but interrelated issues in the design of such a right.
First, there are likely to be circumstances in which there are insufficient revenues
collected from the congestion charges on the transmission network to cover all the FTRs
sold, including long-term and shorter-term ones. The system operator pays FTR holders
from market revenue collections based on the locational price differentials in the market.
Collections by the system operator will be adequate to cover the FTR payments as long
as the set of FTRs awarded represents a feasible pattern of electricity flow on the
transmission system. The current practice of relying on short-term FTRs to hedge the
price of congestion allows for the FTR allocation process to take into account the
14
expected real capacity available on the system and for the most part to ensure that the
system operator will have sufficient revenue to pay FTR holders.
In contrast, offering a significant percentage of the transfer capability of the
system as long-term FTRs significantly increases the likelihood that there will be
inadequate funding of these rights because over a span of years there is significant
uncertainty associated with the process of determining the real capacity available on the
system due to unexpected physical changes to the transmission system (e.g., new flow
patterns resulting from the addition of new generation resources). Because of this
uncertainty over time, awarding long-term FTRs may increase the risk that revenue
collection by the system operator will not be sufficient to pay FTR holders. It is this
possibility of revenue shortfall that makes fully funding long-term congestion rights a
challenge. For this reason EEI does not believe that the Commission should mandate that
long-term FTRs be fully funded. Instead the Commission should permit regions to
decide how FTRs are funded, preserving the option of not providing full funding.
Second, assuming that one wanted to establish rights that would fully hedge the
cost of congestion, the issue is who provides insurance for such a right. There are some
candidates such as: transmission customers, transmission owners, the market, etc. There
is cost associated with each choice. The incidence of that cost may be different, but the
cost exists and must be borne by someone regardless of who provides the insurance. One
could allocate the costs to all transmission customers in the transmission organization.
However, on large interconnected systems such as the northeast RTOs/ISOs this would
spread the risk over many customers that may not have any reasonable relation to the
underlying problem. Alternatively, one could spread the risk over those that participate
15
in the day-ahead market, but this, among other concerns, creates an incentive for market
participants to avoid the day-ahead market. One could also reduce the amount of auction
revenues that are distributed and thereby spread the cost over the participants that benefit
from the auction revenue rights. Another option is that one might allocate the cost of the
insurance to the beneficiaries, the holders of the long-term transmission rights. EEI
believes that this latter option may be the best alternative, but, this may conflict with
Guideline (2).
EEI generally opposes any suggestion that payments be required by transmission
owners to ensure revenue sufficiency. However, acting as a backstop for FTR revenue
inadequacy would unreasonably shift risk from the FTR holder to transmission owners.
Transmission owners within organized markets have turned over control of their
transmission systems to RTOs and ISOs. In most cases transmission owners lack the
tools and the authority to take actions to reduce congestion costs or even to reduce their
exposure through selling fewer FTRs.9
Also, and perhaps more important, transmission owners’ rates are set by the
regulator based on the transmission owner’s cost of service. Congestion charges, which
derive from locational differences in generation prices, are not included or even
considered in establishing transmission revenue requirements and rates. Transmission
owners should not be required to assume the risk of revenue insufficiency associated with
providing long-term financial transmission rights because it is a risk that most
9
In New York the Transmission Owners currently fully fund FTRs, but the determination of FTRs
available for sale is considered on a short term basis, and each transmission owner is provided the
opportunity to withhold a limited amount of FTRs to reflect normal system availability and reduce their
exposure to revenue shortfalls.
16
transmission owners cannot manage. Under this alternative equity and sound regulatory
policy requires that transmission owners be afforded the opportunity to raise transmission
rates to cover this cost. Thus, EEI believes that the Commission should modify its
approach to one in which the transmission organization decides whether to or not to fully
fund long-term transmission rights; and if these organizations decide to provide such
insurance, who should pay for it.
B.
LSE Definition
The Commission proposes to define the terms “load-serving entity” and service
obligation for the purposes of the proposed rule exactly as they are defined in section 217
of the FPA, and asks whether it is necessary to expand or clarify these definitions in the
Final Rule. NOPR at P 7. EEI believes it is necessary for the Commission to expand and
clarify these definitions in the Final Rule. The proposed definition is too narrow and
should be clarified to be the distribution utility, unless its service obligation has been
reassigned.
C.
Guidelines
EEI believes that the Commission should provide latitude to transmission
organizations within their stakeholder process to design and allocate long-term
transmission rights that meet the needs of all of their stakeholders. Moreover, it is
important that the Commission recognize that the design of the ISO-New England, the
Midwest ISO, the New York ISO and the PJM Interconnection markets have been
debated, implemented, and fine-tuned over a period of years. Requiring changes to the
underlying agreements and understandings that formed the basis of these organizations
would be very disruptive and fundamentally unfair without the stakeholders voluntarily
17
agreeing to the change. Accordingly, the Commission should provide the stakeholder
process with discretion on the design of the long-term transmission rights defined in this
rule. To that end, EEI proposes that the Commission modify the guideline and the
general direction given under section (d) to the transmission organizations as follows:
Transmission organizations subject to paragraph (c) of this section should to the extent
they find reasonable given their existing arrangements make available long-term
transmission rights that satisfy the following guidelines:10
1. Guideline (1):
No specific comment.
2. Guideline (2):
The guideline as drafted should be written to provide sufficient flexibility for the
transmission organization through its stakeholder process to craft the appropriate hedge.
To that end, the guideline should not mandate the form of the hedge. Before any longterm rights are offered, the term under which and the extent to which those rights are
offered should be left to the transmission organization and its stakeholders to decide. In
this paragraph the word “term” is used in the context of “terms and conditions.” The
Commission also uses the word “term” to refer to the length or duration of a right. In
those contexts, EEI also uses the word “term” to mean the length or duration of the right.
Moreover, the transmission system is a dynamic system and modification of the existing
financial transmission right may be necessary in order to accommodate the uses of the
system. Accordingly, before the right is offered the terms under which and extent to
which the financial right may be modified should be left to the transmission organization
10
Italic and strikethrough text indicates EEI’s suggested revised language.
18
to decide. Once the existing right is conferred, EEI believes that the terms of the right
should not be modified. Thus, a benefit of affording stakeholders flexibility in designing
the type and terms of the long-term transmission rights is that the stakeholders can and
should fully specify the rights that are being conferred.
Accordingly, EEI believes that Guideline 2 should be modified to read as follows:
(2) The long-term firm financial transmission right should must provide a hedge against
locational marginal pricing day-ahead congestion charges for the period covered and
quantity specified, subject to the rules established by the transmission organization prior
to establishing the long-term right. Once allocated, the financial coverage provided by
the right under the terms established by the transmission organization should not be
modified during its term except in the case of unusual circumstances or through voluntary
agreement of both the holder of the right and the transmission organization.
EEI continues to believe that long-term FTRs should be designed as obligation
rights and not as options. Where a constraint occurs between two locations, the FTR
obligation defines a payment that is consistent with the congestion costs, regardless of the
direction of the constraint. These rights grant the holder the right to collect positive
congestion revenues and also carry the obligation to pay negative congestion revenues.
Alternatively, the development of long-term FTRs as options would grant only the right
to collect positive congestion revenues, but not the obligation to pay negative congestion
revenues. As indicated above,11 load flow patterns and the physical configuration of the
transmission system are dynamic, and changes over time cannot be fully anticipated.
11
See above section II.A.3 discussion of “Risk of Shortfalls.”
19
This will increase the likelihood of inadequate funding of FTRs in general. Furthermore,
because long-term options do not allow for the counterflow payments embodied in longterm obligations, the total amount of FTRs that can be allocated – both short term and
long-term FTRs - will be reduced. Hence, designing long-term FTRs as obligations
would minimize the effect on the availability of short term FTRs and thus limit the cost
shifting to existing short term FTR users. In other words, holders of long-term FTR
obligations appropriately assume more of the risk associated with allocating long-term
FTRs than what would be required with long-term options. Long-term obligations must
also carry strict collateral requirements to ensure revenue adequacy, particularly for
negative or counter flow rights.
Notwithstanding the comments above, options rights can be shown to be
simultaneously feasible and revenue adequate given several restrictive conditions and
substantial adaptations of the dispatch software. But EEI is not aware of any successful
widespread demonstrations of use of FTR options that meet these conditions or
requirements. If there is to be adoption of FTR options, it should be done in a careful and
deliberative manner by the initiative of regional RTO/ISO markets, with full recognition
of the changes in planning and risk allocation, necessary modifications to operating
software, etc.
3. Guideline (3):
Transmission upgrades provide increased transfer capability under specific
assumptions about the grid which are generally defined within the transmission planning
analysis in which the upgrade is studied. Accordingly, it may be appropriate to restrict
the duration the rights conferred to the length of the transmission plan studied and to
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define any additional rights in subsequent studies. Thus, EEI believes that the
transmission organization should define the duration of the rights within its planning
process.
EEI believes Guideline 3 should read as follows: “(3) Long-term firm
transmission rights made feasible by transmission upgrades or expansions must be
available to any party that pays for such upgrades or expansions in accordance with the
transmission organization’s prevailing planning and cost allocation method for upgrades
and expansions. The term of the rights should be defined within the transmission
organization’s planning process as the lesser of the planning horizon of the transmission
organization, the life of the facility (or facilities) or a term requested by the party paying
for the upgrade.”
4. Guideline (4):
EEI believes that the transmission organization should define the terms of the
long-term rights by balancing the interests of all the stakeholders in the process. The
transmission organization needs to not only meet the needs of customers that seek longterm firm transmission rights, but the existing uses of the transmission system.
Accordingly, EEI believes that the Commission should not try to prescribe how the
transmission organization decides to balance the needs of all its customers.
To that end, EEI suggests that the language in Guideline (4) should be modified
as follows: (4) Long-term firm transmission rights should be, to the extent reasonable in
light of the existing uses of the system, must be made available with terms (and/or rights
to renewal) that are sufficient to meet the needs of load-serving entities to hedge long-
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term power supply arrangements made or planned to satisfy a service obligation. The
length and conditions under which the term of renewals is offered may be different than
the original term.
5. Guideline (5):
As EEI noted in its earlier comments submitted on this issue in Docket No.
AD05-7-000, EEI believes that to the extent that ARRs or FTRs are allocated rather than
auctioned, native load customers or historical transmission service customers of all load
serving entities should be given priority in the allocation of long-term FTRs. 12
However, as we stated above, in implementing Section 1233 (b) and Guideline 5
in particular, the Commission should not reverse its prior decisions establishing RTOs
and ISOs by changing these allocations and market structures. Implementation of the
priority set forth in Guideline 5 in transmission organizations that have developed
allocation methodologies that are integrated into their market structure, would upset the
legitimate expectations of market participants and the decisions they have made in
reliance on these allocations. Accordingly, reversing these decisions will not provide the
certainty that market participants expect. Where a transmission organization has not
implemented an FTR allocation methodology, the stakeholders of each organization
should have the flexibility to determine how best to implement the availability of longterm transmission rights.
12
Existing transmission capacity was built to provide service to these customers and to provide for their
load growth over time. This approach ensures equity and comparability based on cost responsibility for the
system. Accordingly, any priority established on the system should take into account these existing uses.
See comments filed in Docket No. AD05-7-000 at 12 (June 27, 2005).
22
To accommodate this concern EEI believes that Guideline 5 should be modified
as follows: (5) Load-serving entities with long-term power supply arrangements to meet a
service obligation should, to the extent consistent with pre-existing FERC-approved
allocation methodologies or any other stakeholder-approved allocation methodology
must have priority to existing transmission capacity that supports long-term firm
financial transmission rights requested to hedge such arrangements.
6. Guideline (6):
EEI notes that in certain regions FTRs are currently fully tradable (e.g., New
England). Although EEI generally agrees that a long-term FTR should be re-assignable
to another entity that acquires that service obligation, the Commission should permit
some flexibility in the application of this guideline because it will present administrative
burdens with respect to tracking such transactions on a frequent basis.
7. Guideline (7):
EEI believes this guideline should not be implemented in any way that could
prevent regions choosing to use auctions.
8. Guideline (8):
EEI and its member companies support the continued development of effective
wholesale markets, and generally believe that improved opportunities to hedge long-term
transmission may be desirable.13 The NOPR correctly observes that in RTO/ISO regions
current annual allocations of rights may not provide some market participants with rights
or the certainty to obtain rights year-to-year to cover potentially volatile congestion cost
13
For example, in its AD05-7 comments EEI pointed out that the development and implementation of a
long-term congestion cost hedge may support delivered price certainty. See EEI Comments at 7.
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exposure in desired manner. NOPR at P 35. Thus, EEI recognizes that requiring
transmission organizations with organized electricity markets to make available financial
long-term firm transmission rights could potentially provide some market participants
with a valuable product offering. Nonetheless, sound public policy requires that the
additional costs of providing long-term firm transmission rights cannot outweigh the
benefits of the financial hedges they are designed to provide.14 In this regard, the
Commission is correct to observe in the NOPR that “the provision of long-term firm
transmission rights may have adverse impacts on market participants not receiving such
rights.” NOPR at P 65. Thus, EEI cautions that a Final Rule requiring RTOs/ISOs to
make available long-term FTRs to hedge transmission congestion should not harm
market performance and shift costs unnecessarily or unfairly among market participants.
For this reason, EEI strongly agrees with Guideline (8) and believes this guideline should
be interpreted to the broadest extent possible and should be accorded primacy among all
the guidelines that may promulgated by this proceeding.
14
Nor does EEI believe that EPAct compels such inequitable cost-shifting.
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CONCLUSION
WHEREFORE, EEI respectfully requests that the Commission consider these
comments and ensure that any future Commission action ordered as a result of this
proceeding is consistent as discussed above.
Respectfully submitted
/s/ David K, Owens___________
David K. Owens
Edison Electric Institute
Executive Vice President
701 Pennsylvania Avenue, NW
Washington, DC 20004-2696
(202) 508-5000
Dated: March 13, 2006
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