September 27, 2001





Commission Meeting -- September 26, 2001

The Commission meeting was the first held under the leadership of Chairman Wood and there were several notable changes to the content and format of this and future meetings.  There are now six categories of items: administrative, miscellaneous, electric, gas, hydroelectric, and certificates.  Next, a greater number of items were placed on the discussion agenda at the Commission meeting, with the meeting concluded shortly before 5 pm.  In addition, some of the items placed on the discussion addressed larger, were issues such as RTO formation and utility infrastructure.

	ADMINISTRATIVE MATTERS

Strategic and 2002 Business Plans, Docket No. AD01-1
The Commission will release A Making Markets Work, a five-year strategic and business plan that will revise its current plan.  The Commissioners identified four core principles: (i) promoting a secure, high-quality, environmentally-responsible energy infrastructure through consistent policies, (ii) fostering competitive energy markets as a substitute for traditional regulation, (iii) protecting customers and market participants through vigilant and fair market oversight, and (iv) efficiently administering the agency's resources to achieve its goals.  Thus, the plan elevates the priority of the market oversight and monitoring function of the Commission.  After receiving internal and external comments on the proposed plan, the Commissioners expect to issue a plan sometime at the end of October 2001.  The final plan will be internally reviewed each quarter. 

Infrastructure Adequacy, Docket No. AD01-2
The Commission announced that it will hold open meetings in four regions of the country; West, South, Northeast and Mid-West, to discuss the adequacy of infrastructure within each region.  At each open-meeting, the Commission hopes to reach a consensus within the region on the following items: (i) what comprises the region's current infrastructure; (ii) the projected demand within the region; and (iii) the constraints that currently exist within the region.  Chairman Wood noted that the open-meetings will assist the Commission in planning for the future as well as addressing current issues related to inadequate infrastructure.  

The first meeting will address the West and will likely be held at the Western Governors Association meeting scheduled for October 2001.  The Northeast meeting will be held in December 2001 or early 2002, with the South and Mid-West meetings held sometime later in 2002.
California Infrastructure Adequacy, Docket No. AD01-3
The Commission Staff provided an update on the projects undertaken by the California Public Utilities Commission (CPUC) to enhance infrastructure in California.  Staff noted that many of the figures provided by the CPUC did not reconcile with those figures available through the Energy Information Administration.  The CPUC's final report on infrastructure within California is available on its web site.

MISCELLANEOUS MATTERS

Standards of Conduct for Transmission Providers, Docket No. RM01-10
The Commissioners outlined a NOPR for revised affiliate standards of conduct that would apply to both the electric transmission providers and natural gas pipelines.  There were two important aspects to the revisions: (i) the expansion of the definition of an affiliate, and (ii) the separation of the transmission function and the sales function, including, specifically, the bundled retail sales function.  

The Commissioners proposed to broaden the definition of an affiliate to include all affiliates, not just a pipeline or transmission provider's marketing affiliate.  This definition would include affiliates that are solely engaged in financial transactions, such as options or derivatives, related to the transmission of energy.  Notably, asset managers would also be covered by this definition of affiliate.

After some discussion, the Commissioners also elected to propose the separation of the transmission function from the bundled retail sales function.  Commissioner Breathitt explained that she was uncomfortable with the separation of the bundled retail sales function, noting that many state commissions would not welcome the development.  Additional language was added to the order, which specifically solicited comments from state commissions on this issue.  

Chairman Wood explained that while he favors the separation of the bundled retail sales function, the final rule will depend upon the comments the Commission receives.  He encouraged parties to submit cost-benefit analyses regarding the proposed separation of the retail bundled sales function.    In response to Commissioner Massey, Staff provided support for the separation: (i) it would provide consistency among all functions, and (ii) it may not be a major operational change because the wholesale sales function has already been separated from the transmission function.  Commissioner Massey acknowledged the federal-state tension, but concluded that the opportunity for discrimination trumped such concerns.

Under the proposed rule, transmission providers= employees engaged in transmission system operation would be required to function separately from the providers= sales and/or marketing employees and energy affiliates.  Both transmission providers and pipelines would have to treat outsiders in a non-discriminatory manner, with the prohibition on preferential sharing of transmission information broadened to include all energy affiliates.  Thus, transmission providers and pipelines would only be able to share price-sensitive information with their affiliates if they contemporaneously released the information to outsiders. 


It appears that there would be a limited waiver of the standards of conduct under certain circumstances.  First, a waiver of the standards of conduct would be available for transmission owners that: (i) belong to a Commission-approved RTO and (ii) do not have control over their transmission assets.  Second, a transmission provider could request a waiver for operational or size reasons.  Finally, a waiver would also be available for transmission providers under emergency operating circumstances.  

Electronic Service of Documents, Docket No. RM01-11
Chairman Wood expressed his desire to transition from paper filings to electric filings.

ELECTRIC MATTERS

Discussion on Provision of Adequate Electrical Capacity, Docket No. EX01-1
Staff presented a discussion paper on ensuring adequate reserve capacity in the electric market.  The discussion paper was not meant to be a definitive study of a problem, but simply a brief description of the problem in order to stimulate discussion.  Staff concluded that market forces can do little to prevent shortages of reserve capacity.  Instead, Staff advocated the use of purchases of forward reserves, as well as the use of a deficiency charge that would invoked if reserves fall below a certain level (for example, ICAP).  Staff also cited demand-side management as a possible mechanism to ensure adequate capacity.  Staff's discussion paper will be formally issued, with initial comments due by October 17, 2001.

Significant National Transmission Constraints Discussion, Docket No. EX01-3
Staff presented a second discussion paper on national transmission constraints.  The full report, which will address the top 10 constraint points in the United States, is expected to be published by November 7, 2001.  Staff briefly described two significant constraints: (i) Path 15 in Central California, and (ii) the Central East Interface in New York.  Staff estimated the congestion costs assessed with the Path 15 and Central East Interface to be $73 million and $19 million, respectively.  Staff noted that such costs are passed on to the consumer.

Further discussion of constraints will likely occur when the full report is issued later this fall.  Commission Massey inquired as to whether California has initiated plans to invest in technology which will make transmission more efficient.  Staff explained that California does have plans to install FAST devices, but noted that stakeholders often resist easing constraint points.  Staff explained that some stakeholders have a financial incentive to maintain the constraint status quo.  Chairman Wood explained that the Commission intends to work with both federal and state authorities to address these points of constraint.  The Commission will forward the findings of its final report to the Department of Energy, which is currently studying the national grid.

Discussion of RTO Progress, Docket No. EX01-4
There was no presentation by Staff; instead, the focus of the discussion was Chairman Wood's recommendation for future proceedings as summarized below:

First, Chairman Wood expressed a strong preference for standardizing market-design rules across all RTOs (the 4 regional RTOs and ERCOT).  He suggested that standardized rules be adopted, then a rebuttable presumption be afforded those rules such that RTOs proposing variances would bear some burden of proof.  He indicated that a formal rulemaking might be preferable to hashing out market design issues in contested proceedings.  Chairman Woods also suggested that a new pro forma OATT should be developed to replace the one adopted by Order No. 888.

Next, Chairman Wood would like to conduct a series of RTO workshops during the week of October 15, 2001.  Topics identified by the Chairman included congestion management, cost recovery, market monitoring, transmission planning, reliability, and the allocation of transmission rights.  The Commissioners indicated that a formal NOPR or similar document would probably not be issued until after the workshops in October.

Third, Chairman Wood suggested the adoption of "sticks" for forcing entities to meet Order No. 2000's December 15, 2001 deadline for RTO membership, or to force membership as soon thereafter as possible.  He indicated such sticks could include: (i) subjecting merger approval to RTO membership and (ii) revoking market-based rate authority.  The Chairman stated that he envisions two worlds:  an "Old World" with separate rules for entities that do not join RTOs, and a "New World" with separate rules for entities that do join RTOs.  While supporting the Chairman's effort to encourage RTO membership, the other Commissioners were somewhat skeptical of the Chairman's proposed sticks.  They noted that the FERC cannot just revoke market-based rate authority without replacing existing rates, presumably with cost-based rates that could require new rate cases.  Commissioner Breathitt noted that December 15 deadline was always ambitious, even when first adopted.

Finally, the Chairman noted that there are numerous other RTO issues that must be addressed, even beyond the realm of market design issues.  Chairman Woods noted that the "transco v. ISO" debate is one the Commission will have to tackles in the coming weeks.  Commissioner Breathitt added that she does not want the Commission to take any actions that would discourage the formation of transcos, although she did not indicate any preference for a transco-on-top RTO structure.

Western Systems Coordinating Council, Western Regional Transmission Association and Southwest Regional Transmission Association, Docket Nos. EL01-74 and ER01-2058
The Commissioners unanimously granted the request filed by the Western Systems Coordinating Council, Western Regional Transmission Association, and Southwest Regional Transmission Association to transfer assets to the Western Electricity Coordinating Council (WECC).  The Commissioners found that WECC's bylaws were reasonable as proposed.  Chairman Wood placed the item on the discussion agenda in order to commend the parties for their initiative.	

Discussion of Market-Based Rate Reviews, Docket No. EX01-4
Due to technical difficulties with the cable feed, we were unable to observe this item on discussion at the Commission meeting.  When our access resumed, we were able to ascertain the following.  First, it appears that an order initiating a Section 206 investigation into market-based rates is scheduled to be issued at the next Commission agenda meeting on October 11, 2001, with initial comments due 15 days after issuance.  The Commissioners goal to delineate what they described as the "A9 Commandments" of market-based rates.  Next, a NOPR will be issued in the future to address market monitoring and the standard by which the Commission will determine whether market power has been asserted.  We will have a better understanding of the substance of the order once it has been issued.

GAS MATTERS

El Paso Natural Gas Company, Docket Nos. CP01-90 and RP00-336
The Commissioners unanimously denied the request for rehearing of the acceptance of El Paso's withdrawal of its prior notice filing to construct and operate two delivery point and lateral pipeline facilities to provide natural gas service to proposed gas-fired electric generation facilities of Pinnacle and Duke Energy Maricopa LLC (Duke) in Maricopa County, Arizona.  El Paso proposed to service Pinnacle under the full requirements contract of its affiliate, Arizona Public Service Company.  After numerous protests, El Paso filed to withdraw its previous prior notice filing.  The Commission granted the request this past summer.

Although the order denies rehearing, Chairman Wood explained that he remains concerned over the capacity available on El Paso.  He maintained that the El Paso system should be watched by the Commission and long-term planning should be undertaken so that the constraints in the Southwest would not be a bedsore for customers in the area.  Chairman Wood concluded that, although the underlying capacity allocation problems would not be resolved in this order, such problems would be resolved in El Paso's Order No. 637 compliance proceeding or earlier.