FERC ISSUES FINAL RULE RELATING TO LONG-TERM FIRM TRANSMISSION RIGHTS
On July 20, 2006, the Federal Energy Regulatory Commission ("FERC") issued a final rule requiring transmission organizations in organized electricity markets to make available long-term firm transmission rights (each, a "LTFTR") that satisfy the guidelines set forth in the final rule. (Docket No. RM06-8-000). The guidelines provide a framework within which the transmission organizations and their market participants can design and implement LTFTRs to allow parties to hedge congestion costs.
The purpose of the final rule is to provide increased certainty regarding the congestion cost risks of long-term transmission service in organized electricity markets. This certainty will help load-serving entities and other market participants make new investments and other long-term power supply arrangements. Specifically, the rule adopts seven guidelines:
- The LTFTR should specify the point of injection, the point of withdrawal and the quantity.
- The LTFTR must provide a hedge against day-ahead locational marginal pricing congestion charges.
- LTFTRs made feasible by transmission upgrades or expansions must be made available upon request to any party that pays for such upgrades or expansions.
- LTFTRs must have a minimum term of ten years.
- Load-serving entities must have priority over non-load serving entities in the allocation of LTFTRs relating to existing transmission capacity, and the transmission organization may place a reasonable limit on the total amount of capacity it will offer as LTFTRs.
- A LTFTR held by a load-serving entity to support a service obligation should be re-assignable to another entity that acquires that service obligation.
- The initial allocation of the LTFTRs shall not require recipients to participate in an auction.
The final rule becomes effective on August 31, 2006, and transmission organizations subject to the rule are required to make compliance filings by January 29, 2006.
FERC CERTIFIES NATIONAL ELECTRIC RELIABILITY ORGANIZATION
On July 20, 2006, FERC certified the North American Electric Reliability Corp. ("NERC") as the Electric Reliability Organization for the United States, as established in the Energy Policy Act of 2005. NERC will be responsible for developing and enforcing mandatory electric reliability standards approved by FERC. FERC is currently considering102 reliability standards proposed by NERC in April. FERC’s Chairman indicated that the Commission plans to act on the proposed reliability standards in September. Each standard must be just, reasonable, not unduly discriminatory or preferential, and in the public interest. The standards will apply to all users, owners and operators of the bulk-power system.
In the order on certification, FERC accepted NERC’s proposed governance structure, its proposed reliability standards development process, and its proposed enforcement program. The order requires NERC to provide certain additional information and to make certain modifications to its ERO application within 90 days of the date of the order. In addition, the order requires certain modifications to the pro forma delegation agreement which will be entered into by NERC and each regional entity to which NERC delegates enforcement authority.
FERC PROMOTES TRANSMISSION INVESTMENT THROUGH PRICING REFORM
On July 20, 2006, FERC adopted specific pricing incentives to encourage investment in new transmission infrastructure. (Docket No. RM06-4-000) All utilities (including transmission companies) are eligible for many of the incentives, and stand-alone transmission companies are eligible for a few additional incentives. Included among the incentives for all jurisdictional utilities are: (1) a rate of return on equity sufficient to attract new investment; (2) recovery (through rates) of all prudent transmission-related construction costs for work in progress; (3) expensing rather than capitalizing prudent pre-commercial operation costs; (4) allowing hypothetical capital structures to provide flexibility needed to maintain the viability of new capacity projects; (5) accelerating recovery of depreciation expense; (6) recovery of all prudent development costs where construction is abandoned due to causes beyond the control of the utility; (7) allowing for deferred cost recovery; (8) providing a higher rate of return on equity for utilities that join transmission organizations; and (9) favorable adjustments (for tax purposes) to the book value of assets sold to transmission companies.
The final rule requires case-by-case approvals of requested incentives, and FERC has adopted expedited procedures to facilitate projects. The burden will be on the applicant to justify the incentives. Once a utility has received incentive rate treatment for a specific project, the utility will be subject to an annual reporting requirement. The final rule becomes effective on September 29, 2006.
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