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 ) ) ) ) ) ) ) ) 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). 9 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. 11 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 20 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- 21 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. 23 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. 24 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 25