| Promoting Wholesale Competition Through Open Access Services by Public Utilities
Recovery of Stranded Costs by Public Utilities and Transmitting Utilities | Docket No. RM95-8-000 Docket No. RM94-7-001 |
In the Supplemental Stranded Cost NOPR, the Commission noted that the Open Access Rule would give a utility's historical wholesale customers greatly enhanced opportunities to reach new suppliers. 553/ This would affect the way in which utilities have recovered costs under the traditional regulatory system that, on the one hand, imposed an obligation to serve, 554/ and, on the other hand, permitted recovery of all prudently incurred costs. We noted that if customers leave their utilities' generation systems without paying a share of these costs, the costs will become stranded unless they can be recovered from other customers. The Commission stated in the NOPR that we must address the costs of the transition to a competitive industry by allowing utilities to recover their legitimate, prudent and verifiable stranded costs simultaneously with any final rule we adopt requiring open access transmission. 555/
Virtually all of the investor-owned utility commenters as well as commenters representing state commissions and other constituencies support the NOPR's premise that stranded costs can be created when a customer switches suppliers. They endorse the proposal to allow the recovery of legitimate and verifiable stranded costs. 556/ Numerous commenters also support the Commission's proposal to link stranded cost recovery with open access tariffs. These commenters agree that the recovery of stranded costs is critical to the successful transition of the industry to an open transmission access, competitive industry. 557/ Commenters such as EEI and NU submit that open access and stranded cost recovery should be implemented simultaneously; that unbundled transmission service should not be required until a stranded cost recovery mechanism is in place. Some commenters propose that if the full recovery of stranded costs is disallowed as a result of rehearing or judicial review, utilities that have filed open access transmission tariffs should be permitted to withdraw them, or the Commission should otherwise reconsider its rule on open access transmission in light of such a reversal. 558/
Commenters representing the financial community reiterate their strong support for the full recovery of stranded costs, noting that the prospect of not recovering stranded costs could erode a utility's ability to attract capital which, in turn, could impede the long-term goal of achieving competitive wholesale markets. 559/ Several commenters also argue that stranded cost recovery is economically efficient and is necessary to ensure parity among competitors and to avoid uneconomic bypass. 560/
The commenters that oppose allowing utilities to recover legitimate and verifiable stranded costs repeat many of the arguments that were raised in response to the initial Stranded Cost NOPR. For example, a number of commenters argue that the risk that a utility could lose customers (and thereby incur stranded costs) is not a new phenomenon created by regulatory and statutory initiatives that utilities could not have anticipated. 561/ Some commenters argue that there was never an implied obligation to serve at wholesale. 562/ According to TDU Systems, monopoly power, not regulatory obligation, has kept wholesale customers captive over the years.
Other commenters argue that allowing the recovery of stranded costs would make it uneconomic for customers to seek alternative sources of power and that the prospect of liability for and protracted litigation over stranded cost claims would create paralyzing uncertainty for customers, uncertainty that may dissuade them from taking advantage of new opportunities in the wholesale power market. 563/ Some commenters also argue that stranded cost recovery would be a disincentive to efficient operation by affording the greatest protection to utilities that made the worst investment decisions. 564/
Commenters also argue that the scope of the proposed rule is overbroad; that stranded cost recovery should be allowed, if at all, on a case-by-case basis; that there should be no presumption that every utility will experience stranded costs; and that utilities should not be allowed to recover 100 percent of prudently incurred stranded costs. 565/
Several commenters suggest that there is no factual basis for the stranded cost rule, citing a lack of evidence of a wholesale stranded cost problem. 566/ TDU Systems refers to a Resource Data International study that shows that, of $114 billion in potential investor-owned utility stranded investment, only $10.4 billion is associated with wholesale transactions. 567/ Others submit that the Commission should obtain more current data concerning the magnitude of potential stranded cost recovery before issuing the final rule. 568/ In reference to the statement in the Supplemental NOPR that the Commission will continue to gather information on the magnitude of potential stranded costs, 569/ DE Muni states that the Commission must commit to making public all the data it obtains so that all can evaluate the impact of the recovery of stranded costs on an ongoing basis.
NRRI submits that the Commission has drawn the wrong conclusion from its natural gas industry experience. According to NRRI, pipelines were "caught in an unusual transition" by changes caused by Congress and the Commission. In the case of the electric industry, NRRI submits that although there are uneconomic wholesale power contracts, the Commission is not responsible for this situation. 570/
Several commenters suggest that the Commission condition a utility's ability to recover stranded costs upon the utility agreeing to take certain actions (such as reducing environmental effects 571/ or ensuring the payment of costs that are stranded if the utility commences direct service to an end-use customer that was previously a wholesale customer of a transmission dependent utility 572/), or agreeing to refrain from certain actions (such as seeking unilaterally to terminate or modify IPP contracts). 573/ CCEM proposes that open access, conversion rights, and divestiture should each be a precondition to a utility's eligibility for any stranded cost recovery. VT DPS submits that, if the Commission adopts a stranded cost rule, it should limit utility stranded cost claims to those cases where the utility can demonstrate that its costs have been rendered unrecoverable as a direct result of the final rule. 574/
A number of commenters object that the proposed rule contains no provisions for non-transmission-owning utilities to collect stranded costs. 575/ Illinois Municipal Electric Agency asks the Commission to consider providing a forum for municipals to recover stranded costs from their customers under the same guidelines as investor-owned utilities. Recognizing that the FPA gives the Commission no general jurisdiction over municipalities for purposes of rate regulation, 576/ Illinois Municipal Electric Agency argues that the FPA nevertheless does not prevent the Commission from providing a forum for municipalities that may experience stranded costs as a result of new federal regulations. NE Public Power District, RUS, and rural electric cooperative commenters object that the NOPR gives public utilities a greater chance than other transmitting utilities to recover stranded costs from departing customers by offering public utilities two avenues of recovery (an exit fee under a power sales contract or a transmission surcharge) but offering other transmitting utilities only one avenue (a transmission surcharge). 577/
PA Munis objects that the Commission's proposal to impose stranded costs only on wholesale requirements customers (and not on other wholesale customers) is unduly discriminatory and counter to the goals of the Open Access NOPR. It submits that the Commission's proposal, by subjecting a wholesale requirements customer to increased transmission rates for stranded costs not levied on other wholesale customers, is indistinguishable in substance from the pre-Order 436 plan held to be discriminatory in Maryland People's Counsel v. FERC. 578/
ELCON and others 579/ urge the Commission to clarify that stranded costs do not arise when a customer leaves a system because its plant becomes uneconomic or the customer wishes to co-generate or self-generate. They note that "[t]hese alternatives have always existed and do not arise from new opportunities for wholesale and retail wheeling." 580/
We reaffirm our preliminary determination that the recovery of legitimate, prudent and verifiable stranded costs should be allowed. Having considered the arguments raised by the commenters that oppose stranded cost recovery, we continue to believe that utilities that entered into contracts to make wholesale requirements sales under an entirely different regulatory regime should have an opportunity to recover stranded costs that occur as a result of customers leaving the utilities' generation systems through Commission-jurisdictional open access tariffs or FPA section 211 orders, 581/ in order to reach other power suppliers. As we indicated in the Supplemental Stranded Cost NOPR, we do not believe that utilities that made large capital expenditures or long-term contractual commitments to buy power years ago should now be held responsible for failing to foresee the actions this Commission would take to alter the use of their transmission systems in response to the fundamental changes that are taking place in the industry. 582/ We will not ignore the effects of recent significant statutory and regulatory changes on the past investment decisions of utilities. 583/ While, as some commenters point out, there has always been some risk that a utility would lose a particular customer, in the past that risk was smaller. It was not unreasonable for the utility to plan to continue serving the needs of its wholesale requirements customers and retail customers, and for those customers to expect the utility to plan to meet future customer needs. With the new open access, the risk of losing a customer is radically increased. If a former wholesale requirements customer or a former retail customer uses the new open access to reach a new supplier, we believe that the utility is entitled to recover legitimate, prudent and verifiable costs that it incurred. 584/
We learned from our experience with natural gas that, as both a legal and a policy matter, we cannot ignore these costs. During the 1980s and early 1990s, the Commission undertook a series of actions that contributed to the impetus for restructuring of the gas pipeline industry. The introduction of competitive forces in the natural gas supply market as a result of the Natural Gas Policy Act of 1978 585/ and the subsequent restructuring of the natural gas industry left many pipelines holding uneconomic take-or-pay contracts with gas producers. When the Commission initially declined to take direct action to alleviate that burden, the U.S. Court of Appeals for the District of Columbia Circuit faulted the Commission for failing to do so. 586/ The court noted that pipelines were "caught in an unusual transition" as a result of regulatory changes beyond their control. 587/
As we stated in the Supplemental NOPR, the court's reasoning in the gas context applies to the current move to a competitive bulk power industry. Indeed, because the Commission failed to deal with the take-or-pay situation in the gas context, the court invalidated the Commission's first open access rule for gas pipelines. Once again, we are faced with an industry transition in which there is the possibility that certain utilities will be left with large unrecoverable costs or that those costs will be unfairly shifted to other (remaining) customers. That is why we must directly and timely address the costs of the transition by allowing utilities to seek recovery of legitimate, prudent and verifiable stranded costs. At the same time, however, this Rule will not insulate a utility from the normal risks of competition, such as self-generation, cogeneration, or industrial plant closure, that do not arise from the new availability of non- discriminatory open access transmission. Any such costs would not constitute stranded costs for purposes of this Rule.
We are issuing the Stranded Cost Final Rule simultaneously with the Open Access Final Rule because we believe that the recovery of legitimate, prudent and verifiable stranded costs is critical to the successful transition of the electric industry to a competitive, open access environment. We believe that our decision today will be upheld by the courts. While the D.C. Circuit is still considering the various appeals of Order No. 636, 588/ it has already upheld, in at least two instances, our ultimate decision to allow the recovery of costs stranded in the transition to a competitive natural gas industry. 589/ As a result, we reject the suggestions of some commenters that a utility's obligation to comply with the provisions of the Open Access Final Rule should be conditioned upon final court approval of the Stranded Cost Final Rule. We also decline otherwise to condition a utility's ability to recover its stranded costs. As described in greater detail in Section IV.J.8, if a utility can make the necessary evidentiary showings, it will be eligible for stranded cost recovery.
With regard to the magnitude of potential wholesale stranded costs, as the Supplemental Stranded Cost NOPR recognizes, the level may be small relative to that of retail stranded costs. Nevertheless, wholesale costs may be stranded as a result of open access transmission. Because the significance of such costs to the utilities that would face them may be great (and the prospect of not recovering such costs could erode utilities' ability to attract capital and be very detrimental to a diverse array of utility shareholders), we believe that we have a responsibility to allow for the recovery of such costs.
We disagree with the commenters who contend that this Rule would discriminate against certain segments of the industry, such as non-transmission-owning utilities (who would not be allowed to collect stranded costs) or wholesale requirements customers (who would be subject to stranded cost charges while other wholesale customers would not). These commenters misconstrue the purpose of this Rule and the nature of the stranded costs for which this Rule would allow recovery. This Rule is designed to address a new and specific problem: the fact that a utility that historically has supplied bundled generation and transmission services to a wholesale requirements customer and incurred costs to meet reasonably expected customer demand may experience stranded costs when its customer is able to reach a new generation supplier due to the availability of open access transmission. This Rule proposes a solution to that problem by allowing the recovery of legitimate, prudent and verifiable costs incurred by a utility to provide service to a wholesale requirements customer that subsequently becomes, in whole or in part, an unbundled wholesale transmission services customer of the utility. The opportunity for extra-contractual wholesale stranded cost recovery is allowed for only a discrete set of requirements contracts for which the utility can demonstrate that it had a reasonable expectation of continuing service, as well as for retail-turned-wholesale situations in which the utility satisfies the necessary evidentiary criteria. Thus, the fundamental premise of this rule -- namely, that a utility should have an opportunity to recover reasonably-incurred costs that arise because open access use of the utility's transmission system enables a generation customer to shop for power -- would not apply to a non-transmission-owning utility that, by definition, has no transmission by which its generation customer can escape to another supplier.
The same historical relationship discussed above, including the expectation of continued service, justifies imposing the stranded costs covered by this Rule on wholesale requirements customers only (not on non-requirements customers that contract separately for transmission services to deliver their purchased power). Requirements customers historically were long-term customers who typically did not expect to take service from other suppliers. Utilities thus assumed they would continue serving these customers and may have made significant investments based on that long-term expectation. In contrast, utilities did not (and do not today) generally make investments for short-term economy-type transactions. Rather, such transactions were entered into only when the utility temporarily had available capacity or energy that could be provided to the buyer at a price lower than the buyer's decremental cost. The utility was not obligated in any way -- either explicitly or implicitly -- to provide for the needs of non-requirements customers. Because coordination transactions were not the cause of stranded investment decisions, it would be inappropriate to allocate such costs to non-requirements customers.
Further, although some commenters object that the Rule would give public utilities a greater opportunity than other transmitting utilities to recover stranded costs, our jurisdiction over transmitting utilities that are not also public utilities is limited. If the selling utility under an existing contract is a transmitting utility that is not also a public utility, its wholesale requirements contracts are not subject to this Commission's jurisdiction. Thus, we can allow such a transmitting utility to recover stranded costs only through Commission-jurisdictional transmission rates under sections 211 and 212 of the FPA. Nevertheless, in the context of a specific section 211 case, we would expect to apply similar principles to the extent possible to assure full stranded cost recovery. We also encourage such transmitting utilities to negotiate mutually agreeable stranded cost provisions with their customers.
In the Supplemental Stranded Cost NOPR, the Commission made a preliminary finding that the Cajun court decision does not bar the recovery of stranded costs as proposed in the NOPR and set forth our reasoning in support of that finding. 591/
Various commenters contend that the proposal to permit recovery of stranded costs at all, or particularly through transmission rates of departing customers, fails to address the Cajun court's concerns. 592/ These commenters repeat many of the same arguments previously raised in this proceeding, which we have already addressed. Some commenters argue that including generation-based stranded costs in transmission rates is an anticompetitive tying arrangement and that Cajun compels the Commission to abandon this aspect of its stranded cost proposal or, at a minimum, to explain how the chosen method of recovery differs from that remanded in Cajun. 593/
Several commenters 594/ question whether the NOPR's stranded cost provisions would undermine the "meaningful" access to alternative suppliers referenced by the Cajun court. 595/ For example, Arkansas Cities asserts that the Commission has failed to address whether a transmitting utility retains market power over transmission even after imposition of an open access tariff. It contends that this question is vital to determining whether imposition of stranded costs would interfere with a wholesale transmission customer's meaningful access to other power suppliers.
Some commenters also submit that the proposed procedures for a customer to obtain an estimate of its stranded cost liability are inadequate because they do not ameliorate the uncertainty confronting the customer, which was a concern of the court in Cajun. They suggest that a customer would still face the prospect of litigation concerning whether a proposed stranded cost charge is appropriate. 596/
Other commenters argue that Cajun requires a trial-type evidentiary hearing before stranded costs may be recovered. They question whether the Commission's generic proposals on open access and the Commission's statements about the need to recover stranded costs are adequate. 597/ ELCON references the Cajun court's statement that "if the Commission is wrong at the outset concerning the possibility of legitimate stranded investment cost, it is not fair or reasonable to create such a mechanism for recovery." 598/ ELCON submits that the factual record does not demonstrate any significant wholesale stranded cost problem and, as a result, a final rule allowing recovery of such costs would not be "fair or reasonable."
Many other commenters, in contrast, believe that the NOPR is distinguishable from the case that was before the court in Cajun and that the Commission has fully addressed the Cajun court's concerns. According to the Coalition for Economic Competition, this proceeding is very different from the Cajun proceeding because the proposed rule would not automatically permit utilities to charge market-based rates. The Coalition for Economic Competition states that in the absence of generic market-based rate authorization, there is no basis in Cajun for barring the recovery of stranded investment in transmission tariffs. 599/
A number of commenters agree with the Commission that the Cajun court was concerned with the need for a more complete explanation of the basis for stranded cost recovery and the mechanism selected for such recovery. These commenters believe that the NOPR provides both the evidentiary record for addressing these concerns on a generic basis and the opportunity for all participants to present evidence and arguments. 600/
Noting the Cajun court's concern as to whether the wholesale customer in that case had "meaningful" access to alternative suppliers, a number of commenters agree that the Commission, through the open access provisions of the NOPR, is in fact providing wholesale customers meaningful, reasonable access to alternative suppliers. 601/
As evidence that the Cajun court was concerned with inadequate explanation and procedures and did not find that stranded costs could never be justified, several commenters point out that the Cajun court did not mention the D.C. Circuit's landmark decision in AGD, which strongly supports stranded cost recovery. 602/ For example, Coalition for Economic Competition suggests that construing Cajun to hold that stranded cost recovery is always anticompetitive would be at odds with AGD and other decisions that have upheld the Commission's policy of allowing recovery of the costs of the transition to competitive markets. 603/
Numerous commenters also support the Commission's conclusion that stranded cost recovery through transmission rates is not a tying arrangement. 604/ Among other things, these commenters argue that a tying claim requires that the defendant force the sale of a separate product with the sale of a product over which it has market power, and that here there is no second product being tied to transmission. Several commenters also suggest that, in any event, stranded cost recovery as proposed in the NOPR would be considered a legitimate business justification under the antitrust laws. 605/ Com Ed explains that the Commission, as part of its effort to enhance competition in generation by opening up the transmission network, is avoiding placing on utilities the entire burden of the stranded costs resulting from their past regulatory obligations; it is not permitting utilities to maintain a monopoly of power sales.
We reaffirm that we do not interpret the Cajun court decision as barring the recovery of stranded costs. The court in that case did not bar stranded cost recovery, as some commenters suggest; it instead found that the Commission had not provided adequate proceedings and had not fully explained its decision. The Commission had failed to hold an evidentiary hearing concerning whether the inclusion of a stranded cost recovery provision in a particular utility's transmission tariff, along with other provisions in the tariff, resulted in the adequate mitigation of Entergy's market power so as to justify market- based rates. The court also found that the Commission had failed to explain adequately its approval of the stranded cost provision, among other provisions. In contrast, as discussed below, we have addressed in this consolidated proceeding (the Stranded Cost NOPR, the Supplemental Stranded Cost NOPR, the Open Access NOPR, and the Open Access/Stranded Cost Final Rule) all of the Cajun court's concerns.
Our interpretation of Cajun is bolstered by a recent opinion of the Court of Appeals for the D.C. Circuit (the same circuit that decided Cajun) that confirms the validity of Commission-imposed stranded cost recovery mechanisms in the transition to competitive markets. In Western Resources, Inc. v. FERC, 606/ the court affirmed the Commission's decision to allow the recovery of costs stranded in the transition of the natural gas industry to a competitive market. 607/ We believe that, by this decision, the court has again affirmed the Commission's ability to allow stranded cost recovery, as long as we follow adequate procedures and explain our decision. 608/
We are providing in this proceeding the evidentiary record to support our decision to allow the recovery of legitimate, prudent and verifiable stranded costs on a generic basis. We also are ensuring the "meaningful" access to alternative suppliers that was identified as a concern of the Cajun court. The Open Access Final Rule is designed to attack one essential element of market power -- namely, control over transmission access. The standard we are adopting for transmission service is far stricter than the standard we used at the time Cajun was decided; we now require non-discriminatory open access transmission, as well as a code of conduct and non-discriminatory sharing of transmission information (OASIS). The collective effect of these actions is that public utilities that own, control or operate interstate transmission facilities will not be able to favor their own generation and will have to compete on an equal basis with other suppliers. 609/ All public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce will have tariffs on file that offer to any eligible customer any transmission services that the public utility could provide to itself, and under comparable terms and conditions.
We note that the Cajun court identified several provisions in Entergy's proposed tariff as potentially restraining competition: Entergy's retention of sole discretion to determine the amount of transmission capability available for its competitors' use; 610/ the point-to-point service limitation; 611/ the failure to impose reasonable time limits on Entergy's response to requests for transmission service; 612/ and Entergy's reservation of the right to cancel service in certain instances, 613/ even where a customer had paid for transmission system modifications. 614/ These types of provisions, which have the potential to restrain competition, will not be allowed under the Open Access Rule. On the contrary, the Final Rule pro forma tariff contains terms and conditions to ensure the provision of non-discriminatory transmission service. In addition, the requirements that a public utility take service under its own tariff, adopt a non-discriminatory transmission information network, and separate power marketing and transmission functions further ensure non-discrimination and remove constraints to fair competition. Thus, the non-discriminatory open access transmission that is the hallmark of this Rule is designed to ensure meaningful access to alternative suppliers and goes far beyond that which was offered in the transmission tariff that was under review in Cajun.
We also have addressed the Cajun court's concern over the method of recovery. In that case, Entergy proposed to include a charge in the departing customer's transmission rate to recover its stranded investment costs. The court said that this might constitute an anticompetitive tying arrangement. 615/ As we explained in the Supplemental NOPR, the stranded cost recovery procedure we prescribe in this Rule is a transitional mechanism only that is intended to enable utilities to recover costs prudently incurred under a different regulatory regime. The purpose and effect of the stranded cost recovery mechanism that we approve in this Rule is to facilitate the transition to competitive wholesale power markets. Although we recognized in the Supplemental NOPR that stranded cost recovery may delay some of the benefits of competitive bulk power markets for some customers, such transition costs must nevertheless be addressed at an early stage if we are to fulfill our regulatory responsibilities in moving to competitive markets. The stranded cost recovery mechanism that we direct here is a necessary step to achieve pro-competitive results. In the long term, the Commission's Rule will result in more competitive prices and lower rates for consumers.
The Commission's approach also is consistent with the traditional regulatory concept of cost causation. We do not believe it is an illegal tying arrangement to hold a customer accountable for the consequences of leaving an incumbent supplier if, under our rules, the incumbent supplier must show a reasonable expectation of continuing service before it can recover stranded costs from the customer.
Further, in response to the Cajun court's concern that the Commission had failed in that case to explain adequately its approval of the stranded cost provision and other provisions, we have provided in this proceeding a detailed explanation of the fundamental industry and regulatory changes that have given rise to the potential for stranded costs; the transitional nature of stranded costs; the critical need to deal with these costs in order to reach more competitive wholesale markets; and the consumer benefits that will result from competitive generation markets. We also have provided a detailed explanation of the terms and conditions in the Final Rule pro forma tariff that will meet the non-discriminatory open access service requirement.
Several commenters (and the Cajun court) express concern for the need to provide as much certainty as possible for departing customers concerning their potential stranded cost obligation. Without some certainty, customers may be unable to shop for alternative suppliers. In response to these concerns, we have modified the stranded cost recovery mechanism to include a formula for calculating a departing customer's potential stranded cost obligation. As discussed in greater detail in Section IV.J.9, the revenues lost formula is designed to provide certainty for departing customers and to create incentives for the parties to address stranded cost claims between themselves without resort to litigation.
We conclude that we have fully explained our decision to allow the recovery of legitimate, prudent and verifiable costs that are stranded in the transition to competitive wholesale bulk power markets. We also have provided ample opportunity for all concerned to present arguments and evidence on the issue. Further, we have significantly strengthened our open access requirements to ensure mitigation of transmission market power. Thus, we have fully addressed the concerns of the Cajun court.
In the Supplemental Stranded Cost NOPR, the Commission made a preliminary finding that direct assignment of stranded costs to the departing wholesale generation customer is the appropriate method for recovery of such costs. 616/
Numerous parties representing all constituencies support direct assignment of stranded costs to the departing generation customer. 617/ These commenters argue, among other things, that direct assignment is consistent with the cost causation principle and preferable to increasing the delivered price of electricity to a whole region through the imposition of a wires charge, and that recovery of stranded costs from remaining customers would not be in the public interest. Several state commenters seek assurance from the Commission that native load customers will be held harmless from stranded costs resulting from other customers leaving the system. 618/ KY Com submits that the possible results of a broader assessment of stranded costs, with the related uncertainty of its impact on the utilities' cost of capital, is more problematic in the long run than the possibility that the direct assignment of stranded costs would deter customers from shopping for power.
Although TAPS opposes stranded cost recovery in general, it submits that, if the Commission decides to allow recovery, the Commission should directly assign stranded costs and not spread them across the board to all transmission users. Several commenters also oppose any allocation of stranded cost liability to shareholders. 619/
Some commenters state that direct assignment of stranded costs sends the correct pricing signals during the transition to a competitive regime. For example, Electric Consumers Alliance states that a wholesale customer should be able to obtain power elsewhere, but that the motive to do so should not be to escape responsibility for sunk investments made on its behalf. El Paso submits that failure to make the departing generation customer liable for stranded cost recovery would create a "first-off" incentive; the customers that leave the system first would not suffer from higher future rates designed to recover prudently incurred costs from the reduced base of remaining customers.
Some commenters support direct assignment but oppose recovery of stranded costs through transmission rates. These commenters prefer an exit fee or lump-sum approach that would reflect cost causation in an unbundled fashion. 620/ DOJ maintains that a transmission adder is analogous to an excise tax and that the excise tax approach would distort pricing signals and customers' decisions on the use of electric power. It submits that the lump-sum approach, on the other hand, would establish a fixed, sunk liability that would not depend upon how much transmission service the departing customer takes in the future. 621/
Other commenters oppose direct assignment as being inconsistent with wholesale competition. 622/ They argue that placing all of the responsibility for stranded costs on departing generation customers would discourage customers from switching to other generation providers and would thereby inhibit competition. 623/ Some commenters also assert that departing generation customers are not the sole "cause" of stranded costs. 624/ VT DPS contends that direct assignment cannot be reconciled with the Commission's refusal to allow the imposition of exit fees by gas pipelines when their wholesale customers depart. 625/
Some commenters support spreading the burden of stranded costs broadly among departing customers, shareholders, and remaining wholesale customers on the basis that it would be equitable for all industry stakeholders to share both the benefits and the costs of the transition to competition. 626/
Others support spreading the costs to all customers through, for example, a meter charge to all utilities (to be passed on to customers), a one-time charge across the total market base, an access fee on the transmission system, or a component of transmission rates. 627/ Nordhaus proposes a uniform national tax on all customers, at a rate that declines over time in a predetermined manner. He submits that this approach would remove "gaming" between utilities and potential exiters, would ensure that the stranded costs are not disproportionately loaded on price-sensitive demanders (that is, exiting customers), and would gradually disappear over time in a predictable fashion, thereby increasing the predictability of the new market.
PA Munis disputes the Commission's assertion in the Supplemental Stranded Cost NOPR that there is no compelling reason to assess costs broadly. It argues that a broad-based recovery mechanism that distributes uneconomic stranded costs to all power users would minimize the competition-inhibiting aspects of the Commission's proposed surcharge on departing generation customers. In a similar fashion, NSP states that across-the- board recovery from all users of the grid would recognize the societal benefits to be achieved from the transition to a competitive bulk power market and would reflect precedent set during the move to competition in the natural gas and telephone industries. It submits that the cost per service unit would be lower than exit fees assigned to particular customers and would eliminate the need for detailing stranded cost exposure for each customer contemplating leaving the system.
FTC submits that some investments that now appear as stranded costs may have been intended to benefit customers over a wider area than a single utility. It suggests that national regional assessment methods could recover stranded costs undertaken to benefit these wider groups of customers.
We also received comments suggesting that less than full recovery of stranded costs should be allowed. A number of commenters urge the Commission to require some shareholder liability for stranded cost recovery to give utilities an incentive to mitigate. 628/ Several of these commenters assert that utility shareholders should be required to pay a portion of any stranded costs (such as 25-50 percent) because at least some of the responsibility for stranded costs lies with poor business decisions by utility management. 629/ Occidental Chemical proposes that the Commission grant utilities a "presumption of prudence" in return for requiring them to absorb a minimum of 25 percent (up to 50 percent) of stranded costs, citing as support the Commission's precedent in the natural gas industry.
We reaffirm our decision that direct assignment of stranded costs to the departing wholesale generation customer through either an exit fee 630/ or a surcharge on transmission is the appropriate method for recovery of such costs. We believe it is appropriate that the departing generation customer, and not the remaining generation or transmission customers (or shareholders), bear its fair share of the legitimate and prudent obligations that the utility undertook on that customer's behalf.
In reaching this decision, we have carefully weighed the arguments supporting direct assignment of stranded costs against those supporting a more broad-based approach, such as spreading stranded costs to all transmission users of a utility's system. Recognizing that each approach has advantages and disadvantages, we conclude that, on balance, direct assignment is the preferable approach for both legal and policy reasons.
One of the main reasons to adopt direct assignment of stranded costs is that direct assignment is consistent with the well-established principle of cost causation, namely, that the party who has caused a cost to be incurred should pay it. Direct assignment of stranded costs to departing generation customers is particularly appropriate given the nature of the stranded cost recovery mechanism contained in this Rule, which links the incurrence of stranded costs to the decision of a particular generation customer to use open access transmission to leave the utility's generation system and shop for power, and which bases the prospect of stranded cost recovery on the utility's ability to demonstrate that it incurred costs with the reasonable expectation that the customer would remain on its generation system.
A broad-based approach, in contrast, would violate the cost causation principle by shifting costs to customers (such as transmission users of the utility's system) that had no responsibility for stranding the costs in the first place. In addition, if the Commission were to adopt a broad-based approach, it would have to determine whether to base the transmission surcharge on all users of a utility's transmission system on a one-time, up-front estimate of stranded costs (that is, each utility claiming stranded costs would make a one-time, comprehensive determination of stranded costs for the utility as a whole) or on an as-realized basis (the surcharge would be based on actual customer departures and would be adjusted each time a customer departs). Each option would have disadvantages that are not present in the direct cost causation approach we are adopting.
For example, a major disadvantage of an up-front, broad- based transmission surcharge is that it in effect would charge customers for costs before the costs are incurred (i.e., before customers have even decided to leave the utility's generation system) and could charge for costs that may never be incurred (e.g., some customers may decide to stay on the utility's system as requirements customers). The other option, a broad-based transmission surcharge that would be adjusted as customers leave the utility's system, also has disadvantages. While this option might recover stranded costs that are closer to the actual amount incurred by the utility, it could produce variability in transmission rates every time stranded costs from a newly- departed customer are included in the transmission surcharge and, in turn, could possibly hamper efficient power supply choices and efficient generator location decisions. These disadvantages are not present in the direct assignment approach.
Direct assignment will result in a more accurate determination of a utility's stranded costs than would an up- front, broad-based transmission surcharge. This is because the stranded cost for any customer is finally determined only if that customer actually leaves a utility. Moreover, there is no stranded cost unless the then-current market price of power for the period that the utility reasonably expected to continue serving the customer is below the utility's cost. Thus, because the circumstances of each departing customer will be known, the amount of any stranded cost liability can be determined with reasonable accuracy. Further, if a customer does not leave the utility or leaves at some future time when the utility's costs are competitive, the issue need not be addressed.
On this basis, the direct assignment approach is more suited to the recovery of stranded costs as defined in this Rule (including the reasonable expectation standard and open access transmission causation requirement) than is a broad-based approach. We expect that a utility would have difficulty estimating in advance all of its stranded costs for purposes of an up-front, broad-based transmission surcharge. In the face of this uncertainty, the utility's best strategy likely would be to try to recover through the broad-based surcharge as much of its uneconomic assets as possible by claiming that all of its wholesale customers are likely to depart and to leave large stranded costs. In this regard, the broad-based approach would provide an incentive for a utility to try to recover the costs of all of its uneconomic assets whether or not they were prudently incurred. This is in contrast to what this Rule provides, which is for recovery of only those legitimate, prudent and verifiable costs that were incurred on behalf of a specific customer based on a reasonable expectation that the utility would continue to serve the customer and that are stranded when the customer departs the utility's generation system by using the utility's open access transmission.
The direct assignment approach also can be readily applied to both wholesale and retail-turned-wholesale departing customers. It also can be adapted for retail customers. Further, it works for costs stranded by a section 211 order requiring either a public utility, or a transmitting utility that is not also a public utility, to provide transmission service. However, this is not the case for a broad-based approach, particularly an up-front broad-based approach. Assuming that a principal motivation for an up-front broad-based approach would be to recover all of a utility's stranded costs as quickly as possible, retail-turned-wholesale stranded costs nevertheless are not susceptible of being collected on an up-front basis. It is not possible to make a realistic up-front estimate of costs stranded by municipalizations that may occur in the future. Thus, even if we were to adopt an up-front broad-based approach for recovering costs that are stranded when wholesale requirements customers use their former supplier's transmission system to reach a new supplier, retail-turned wholesale stranded costs would have to be identified as they occur and the stranded cost surcharge on transmission users adjusted accordingly. Similarly, the broad-based approach is not easily adaptable to transmitting utilities that are not also public utilities. It is doubtful that, in establishing the rate for a section 211 applicant, the Commission could also set transmission surcharges for customers that were not section 211 applicants; this is what a broad-based approach, in effect, would require us to do.
Direct assignment by means of an exit fee or a transmission surcharge that is not dependent on any subsequent power or transmission purchases by the customer is also an economically efficient way to collected stranded costs. The customer may make a lump-sum stranded cost payment, amortize the lump-sum payment, or spread the payment as a surcharge in addition to its transmission rate. The total amount of stranded costs that the directly-assigned customer ultimately pays would not depend on how much transmission service it takes and thus would not influence the customer's subsequent transmission purchase decisions.
With a broad-based surcharge (which could be demand- or usage-based), on the other hand, the surcharge for transmission users would depend on how much transmission service the users take. A broad-based approach also would be inefficient as it would raise the price of transmission service for all customers, thereby potentially cutting off some beneficial power trading that would otherwise occur for all unbundled transmission customers. The surcharge also could convert some profitable existing power purchase contracts into unprofitable contracts. In addition, it could reduce economy trading because the surcharge would be added to the price of economy transmission. In this manner, a broad-based surcharge would constitute a cross- subsidy that could distort the market. We recognize that direct assignment is not without its potential drawbacks. For example, when compared to an up-front, broad-based transmission surcharge approach, direct assignment may entail a longer stranded cost recovery period. The transition period for stranded cost recovery under a direct assignment approach would depend on the length of the remaining terms of the wholesale requirements contracts for which this Rule provides an opportunity for recovery (contracts executed on or before July 11, 1994 that do not contain an exit fee or explicit stranded cost provision).
On the other hand, a broad-based approach could identify and recover stranded costs earlier than the direct assignment approach; recovery of stranded costs for all of a utility's wholesale requirements customers could begin as soon as the utility's up-front stranded cost amount for departing wholesale customers is determined (through litigation or settlement). However, this potential advantage of a broad-based approach (the shorter transition period) is outweighed by what we believe to be a serious infirmity, namely, the possibility that the broad-based transmission surcharge could end up including costs that have not yet been incurred and may never be incurred.
In addition, another potential drawback to the direct assignment approach is that the departing generation customer may see little or no savings in the short-term by switching power suppliers once its stranded cost exit fee is added to its lower power price from a new supplier. Direct assignment may leave the customer uncertain about the benefits of shopping for power because of the customer's potential stranded cost liability and, in turn, may bias the customer toward staying with its existing power supplier. 631/
In the case of a broad-based approach, in contrast, much of the customer's direct assignment stranded costs are spread to others through a transmission surcharge. As a result, the departing generation customer's power cost savings may more than offset the customer's stranded cost transmission surcharge. The customer may therefore see earlier power cost savings if a broad-based approach were adopted. 632/ Once again, however, we believe that this potential benefit to a broad-based approach is outweighed by a significant countervailing disadvantage. In particular, the potential power cost savings to the departing generation customer would be realized only by shifting costs (that are directly attributable to the departing generation customer) to the other users of the utility's transmission system. We believe that this negative aspect of a broad-based approach -- its violation of the cost causation principle -- is too great a price to pay for allowing a departing generation customer to realize power cost savings as early as possible.
Thus, we recognize that under direct assignment, it is possible that some customers may not be able to afford to leave as soon as they would like. This in turn could mean that lower cost suppliers would not be able to make sales to those customers as soon as they would like. However, this would occur only during a transition period, and it would ensure that, consistent with strict cost causation principles, the burden of these transition costs is not unfairly spread to other customers. Once the existing uneconomic assets and contracts are behind us, all wholesale customers will be better able to shop for power and reap the long-term benefits of competitive supply markets.
Although this direct assignment approach is different from the approach taken in the natural gas industry, we believe that the difference is justified. The transition of the electric industry to an open transmission access, competitive industry (including our proposal to allow an opportunity for extra- contractual recovery of stranded costs associated with a discrete set of wholesale requirements contracts) is different in a number of respects from the natural gas industry's transition to open access transportation service by interstate natural gas pipelines. The gas industry underwent a long period of open access transition, starting with Order No. 436 in 1985 and culminating with Order No. 636 in 1992. In the gas context, prior to addressing potential stranded costs, the Commission in Order No. 436 allowed customers receiving bundled gas sales and transportation service from a pipeline the option to convert to transportation-only service, or to reduce their contract demand for gas service, before the termination of their contracts with the pipeline. 633/ As a result, most of the former bundled customers of the pipeline had already departed the pipeline's sales service before the Commission addressed the recovery of take-or-pay costs in Order Nos. 500 and 528. In addition, by the time that the Commission addressed the remaining transition costs in Order No. 636, the commodity or wellhead natural gas market was already competitive and the majority of gas was already being sold on an unbundled basis.
Thus, changes in the natural gas industry had progressed to such a point (i.e., the departure of customers from bundled sales) that it was not possible for the Commission to use a strict cost causation approach. We noted in the Supplemental Stranded Cost NOPR that
[m]any natural gas customers had already left their historical pipeline suppliers' systems. Others had converted from sales and transportation customers to transportation- only customers. Others were in a transition stage having had opportunities to lower their contract demands or otherwise become partial service customers. Significant take-or-pay and other costs had accumulated. [634/]
Under those circumstances, the Commission determined that it was appropriate to spread the majority of the remaining transition costs associated with take-or-pay and other supply contracts to all customers (both existing and new) using the interstate natural gas transportation system. Moreover, because of the changes in contractual relationships that had already occurred among pipelines and their customers, it was no longer possible for the Commission to follow a strict cost causation approach to recovering take-or-pay costs. The Commission-prescribed remedy for the recovery of transition costs in the natural gas industry thus was tailored to fit the needs of that industry given the stage of development at the time.
However, such a broad-based approach to recovery of natural gas transition costs was an exception to the time-honored principle that rates should reflect cost causation, and because of this it was necessary for the Commission to justify its departure from that principle. As the court said in K N Energy v. FERC, 635/ "[i]t has been this Commission's long standing policy that rates must be cost supported. Properly designed rates should produce revenues from each class of customers which match, as closely as practicable, the costs to serve each class or individual customer." In that case, the court found the Commission's departure from cost-causation justified "given the unusual circumstances surrounding the take-or-pay problem, and the limited nature -- both in time and scope -- of the Commission's departure from the cost-causation principle." 636/ It continues to be Commission policy to follow the cost-causation principle to the extent possible.
The factors described above are not present in the electric industry. At this time, the vast majority of customers remain on their bundled suppliers' systems and generation is not yet fully competitive. Because the situation facing the electric industry today is different from that which the natural gas industry faced, the Commission must tailor its approach differently. In the case of the electric industry today, we have the opportunity to address the stranded cost recovery issue up front, before customers leave their suppliers' systems. We thus are able to use the cost causation approach that has been fundamental to our regulation since 1935. 637/
The Commission disagrees with commenters' arguments that we cannot impose an exit fee to recover stranded costs because we did not do so in the gas context. As discussed in Section IV.J.9, this Rule establishes procedures for providing a potential departing generation customer advance notice (before it leaves its existing supplier) of the stranded cost charge (whether it is to be paid as an exit fee or a transmission surcharge) that will be applied if the customer decides to buy power elsewhere. In the natural gas context, in contrast, the Commission has prohibited pipelines from developing and charging an "exit fee" after a customer had implemented its gas purchase decision, noting that otherwise, the customer would not know in advance the full cost consequences of its nomination decision. 638/ The "exit fee" that the Commission rejected in El Paso Natural Gas Company 639/ is also factually distinguishable from the "exit fee" discussed in this Rule. In that case, the Commission rejected a pipeline's attempt post-restructuring to impose an "exit fee" on firm transportation-only customers (that were converted sales customers) who in the future elect either to terminate their firm transportation service upon expiration of the service agreement, or to reduce their firm transportation services level by more than 10 percent pursuant to an existing contractual reduction right. Such a scenario is quite different from the limited opportunity for stranded cost recovery provided in this Rule, which is based on a utility's reasonable expectation of continuing generation service to a bundled (sales and transmission) requirements customer.
We also will decline to require a utility seeking stranded cost recovery to shoulder a portion of its stranded costs. Such a requirement would be a major deviation from the traditional principle that a utility should have a reasonable opportunity to recover its prudently incurred costs. 640/ Although the Commission allowed such an approach with regard to a natural gas pipeline's take-or-pay costs, 641/ we did so only as an extraordinary measure given the nature of the take-or-pay problem and the prevailing environment at that time. We returned to traditional principles when, in issuing Order No. 636, we authorized pipelines to recover all of their prudently incurred gas supply realignment costs (the costs pipelines incur in realigning, renegotiating, or terminating their portfolio of gas supply contracts to adjust to their sales customers' decisions to exercise their unilateral right under the rule to reduce or end their commodity purchase obligations to the pipelines). 642/ In the case of the open access transmission required by this Rule, we believe that a utility is entitled to an opportunity to recover all legitimate, prudent and verifiable costs incurred by the utility when the availability of open access transmission enables a requirements customer to reach a new generation supplier.
Although the alternatives of either spreading the stranded costs to all transmission users or requiring the utility shareholders to share the costs with departing customers might enable a wholesale customer to leave sooner than would the direct assignment approach, the departing customer would be able to do so only at the expense of others who had no responsibility for causing the legitimate, prudent and verifiable costs to be incurred. Although we departed from strict cost causation principles in the gas context and required a broad spreading of the costs given the particular circumstances presented by the gas industry's transition to open access, we ultimately returned to the more traditional approach of allowing utilities to recover all of their prudently incurred transition costs in Order No. 636. At this juncture in the evolution of competition in the electric industry we need not make such a departure from cost causation principles; utilities can identify and seek to charge the customers who caused the costs to be incurred in the first place, before those customers leave the utility's generation system. Accordingly, we believe that a broader spreading of the costs to entities who are not responsible for the incurrence of the stranded costs would not be equitable.
In the Supplemental Stranded Cost NOPR, the Commission preliminarily concluded that future wholesale contracts must explicitly address the obligations of the seller and buyer, including the seller's obligation to continue to serve the buyer, if any, and the buyer's obligation, if any, if it changes suppliers. We stated that utilities will be allowed stranded cost recovery associated with "new" wholesale requirements contracts (executed after July 11, 1994) only if explicit stranded cost provisions are contained in the contract. We indicated that recovery of wholesale stranded costs associated with any such new contract will not be allowed unless such recovery is provided for in the contract. 643/ We also stated that a contract that is extended or renegotiated for an effective date after July 11, 1994 becomes a "new" contract for which stranded cost recovery will be allowed only if explicitly provided for in the contract. 644/
We also stated that it is not appropriate to impose on a wholesale requirements supplier a regulatory obligation to continue to serve its existing requirements customer beyond the end of the contract term. We proposed to retain the section 35.15 prior notice of termination filing requirement only for: (i) all contracts required to be filed under sections 205 and 206 of the FPA that were executed before the effective date of the Final Rule pro forma tariffs; and (ii) any unexecuted contracts that were filed before the effective date of the Final Rule pro forma tariffs. With regard to any power sales contract executed on or after that date, we proposed to no longer require prior notice of termination under section 35.15, but to require (for administrative reasons) written notification of the termination of such contract within 30 days after termination takes place. We requested comments on whether this proposal should also be applied to transmission contracts. 645/
Numerous commenters support our preliminary conclusion that new wholesale requirements contracts should explicitly address the obligations of the seller and buyer and that it is not appropriate to impose on wholesale requirements suppliers a regulatory obligation to continue to serve their existing requirements customers beyond the end of the contract term. 646/ However, Arkansas Cities expresses concern that this could undermine obligations to serve that have been included in certain contracts with utilities. It asks the Commission to state that, unless a utility has undertaken an obligation to serve via contract, there is no obligation to serve beyond the contract term. Arkansas Cities asks the Commission to clarify that contracts establishing an obligation to serve will be enforced.
Several other commenters argue that if a wholesale customer elects to switch suppliers, the previous supplier should be under no obligation to take the customer back onto its system at embedded cost rates. 647/ Sierra asks the Commission to endorse a host utility's ability to insist on protective contract provisions before reestablishing service, including a predetermined period (such as five years -- a commonly-used planning period) before the customer could seek to leave the system again.
A number of commenters support the Commission's proposal to eliminate the prior notice of termination requirement for power sales contracts executed after the date on which the final rule pro forma tariffs become effective. 648/ Southern states that, because of the opportunities for power purchasers that will exist after the proposed rules take effect, the Commission also should eliminate section 35.15 as it applies to old contracts.
Several commenters support eliminating the section 35.15 filing requirement for transmission contracts as well. 649/ This change is needed, some assert, to provide certainty in commercial arrangements in the more competitive environment and as a matter of fairness. CSW suggests that all section 35.15 filing requirements for existing contracts (wholesale and transmission contracts) be phased out over three years and that only contracts that expire within three years after the final rule should be subject to the requirement to file a notice of termination.
Nevertheless, several other commenters oppose the Commission's proposal to no longer require prior notice of termination for power sales contracts executed on or after the effective date of the generic tariffs. 650/ TDU Systems opposes elimination of section 35.15 as tantamount to a finding that termination of all contracts is just and reasonable. TDU Systems and NRECA submit that the market power exercised by supplying utilities will not disappear the instant the rule becomes final and that it may be possible for a utility to exercise monopoly power even with regard to "new" contracts. They propose that if the Commission nevertheless decides to allow contract termination under section 35.15, the Commission should require a public utility to pay "stranded benefit" costs to former wholesale power customers if the customers show that they had a reasonable expectation that the power sales would continue past the end of the agreement at the prior rate.
Several commenters also oppose eliminating the section 35.15 filing requirement for transmission contracts. 651/ FL Com asserts that because the Commission has imposed an obligation to serve for transmission service, section 35.15 should be retained for new and existing transmission contracts.
We reaffirm our preliminary determination that future wholesale requirements contracts should explicitly address the mutual obligations of the seller and buyer, including the seller's obligation to continue to serve the buyer, if any, and the buyer's obligation, if any, if it changes suppliers. As we indicated in the Supplemental Stranded Cost NOPR, now that utilities have been placed on explicit notice that the risk of losing customers through increased wholesale competition must be addressed through contractual means only, they must address stranded cost issues when negotiating new contracts or be held strictly accountable for the failure to do so.
We accordingly will allow recovery of wholesale stranded costs associated with any new requirements contract (executed after July 11, 1994) only if explicit stranded cost provisions are contained in the contract. By "explicit stranded cost provision" (for contracts executed after July 11, 1994) we mean a provision that identifies the specific amount of stranded cost liability of the customer(s) and a specific method for calculating the stranded cost charge or rate. For purposes of requirements contracts executed after July 11, 1994 but before the date on which this Final Rule is published in the Federal Register, however, we clarify that a provision that specifically reserved the right to seek stranded cost recovery consistent with what the Commission permits in this Rule (without identifying the specific amount of stranded cost liability of the customer(s) and calculation method) nevertheless will be deemed an "explicit stranded cost provision." However, a provision in a requirements contract executed after July 11, 1994 but before the date on which this Final Rule is published in the Federal Register that merely postpones the issue of stranded cost recovery without specifically providing for such recovery will not be considered an "explicit stranded cost provision." After the date on which this Final Rule is published in the Federal Register, a provision must identify the specific amount of stranded cost liability of the customer(s) and a specific method for calculating the stranded cost charge or rate in order to constitute an "explicit stranded cost provision."
We reaffirm that a requirements contract that is extended or renegotiated for an effective date after July 11, 1994 becomes a "new" requirements contract for which stranded cost recovery will be allowed only if explicitly provided for in the contract.
We also reaffirm our preliminary determination not to impose a regulatory obligation on wholesale requirements suppliers to continue to serve their existing requirements customers beyond the end of the contract term. The only exception to this would be if the customer decides to remain a requirements customer for the period for which the Commission finds that the supplying utility reasonably expected to continue serving the customer. In such a case, the supplying utility will be obligated to offer continuing service to the requirements customer for the period the utility reasonably expected to continue serving the customer.
A requirements customer will be responsible for planning to meet its power needs beyond the end of the contract term by either building its own generation, signing a new power sales contract with its existing supplier, or contracting with new suppliers in conjunction with obtaining transmission service under its existing supplier's open access transmission tariff or another utility's transmission system. In so holding, it is not our intent to undermine any obligations specifically contained in a contract. Thus, if a contract explicitly establishes an obligation to serve beyond the end of the contract term, such a contractually-imposed obligation to serve (as distinguished from a regulatory obligation to serve) would be enforceable as a term of the contract. If a wholesale customer that switches suppliers later seeks to reestablish service with its former supplier, it will be up to the parties to negotiate their respective obligations.
We also reaffirm our preliminary determination to no longer require prior notice of termination under section 35.15 for any power sales contract executed on or after the effective date of the Final Rule pro forma tariff (but to require written notification of the termination of such contract within 30 days after termination takes place). This determination goes hand-in- hand with our determination (discussed above) not to impose a regulatory obligation on wholesale requirements suppliers to continue to serve their existing requirements customers beyond the end of the contract term. 652/ We clarify, however, that this decision applies only to a power sales contract that is to terminate by its own terms (such as on the contract's expiration date). We have revised section 35.15 accordingly. We will, however, continue to require prior notice of cancellation or termination for any power sales contract that is proposed to be cancelled or terminated for a reason other than by the contract's own terms (such as a self-help provision related to, for example, a billing dispute), regardless of when the contract was executed. We also will continue to require prior notice of the proposed termination of any power sales contract executed before the effective date of the Final Rule pro forma tariff (even if the contract is to terminate by its own terms) as well as any unexecuted power sales contract that was filed before that date.
Further, we will retain the section 35.15 filing requirement for all transmission contracts. The reason for retaining the section 35.15 requirement for transmission contracts is that transmission will continue to be provided under conditions of potential market power, and the Commission must be assured that transmission owners are not exerting market power in termination of transmission contracts. In addition, this filing requirement will provide the customer an opportunity to notify the Commission if the termination terms are disputed or if the customer was not given adequate opportunity to exercise its limited right of first refusal under the Final Rule (see Section IV.A.5).
In the Supplemental Stranded Cost NOPR, the Commission reaffirmed its proposal to permit the recovery of legitimate, prudent and verifiable stranded costs for a discrete set of "existing" wholesale requirements contracts (executed on or before July 11, 1994) -- those that do not already contain exit fees or other explicit stranded cost provisions. We encouraged the parties to such contracts to renegotiate them to address stranded costs. In the case of existing contracts that already contain an exit fee or explicit stranded cost provision, however, we proposed to reject a unilateral stranded cost amendment; that is, we stated we would reject an amendment unless the contract permits renegotiation of the existing stranded cost provision or the parties to the contract mutually agree to renegotiate the contract. 653/ In so doing, we proposed to drop the three-year mandatory negotiation period suggested in the initial Stranded Cost NOPR. 654/
If an existing requirements contract does not contain an exit fee or other explicit stranded cost provision (and is not renegotiated to add such a provision), we proposed that before the expiration of the contract: (1) a public utility or its customer may file a proposed stranded cost amendment to the contract under section 205 or 206; or (2) a public utility or transmitting utility may file a proposal to recover stranded costs associated with any such existing contract through its transmission rates for a customer that uses the utility's transmission system to reach another generation supplier.
In the Supplemental Stranded Cost NOPR, we reaffirmed our proposal in the initial Stranded Cost NOPR that, even if the contract contains an explicit Mobile-Sierra 655/ provision, it is in the public interest to permit public utilities to seek unilateral amendments to add stranded cost provisions if the contracts do not in essence forbid such recovery by containing exit fees or other explicit stranded cost provisions. 656/ Under these circumstances, if neither of the parties seeks and obtains acceptance or approval of a stranded cost amendment, we proposed to permit the public utility to seek recovery of stranded costs through its wholesale transmission rates.
We also proposed procedures for providing an existing wholesale requirements customer advance notice of how the utility would propose to calculate costs that the utility claims would be stranded by the customer's departure. 657/
A number of commenters ask the Commission to reconsider the July 11, 1994 cut-off date for distinguishing between "existing" and "new" requirements contracts. Some commenters 658/ support October 24, 1992 (the date of passage of the Energy Policy Act) as the cut-off date on the basis that anyone entering into a wholesale requirements contract after that date should have recognized the greatly increased possibility of the customer terminating or not renewing the contract.
Other commenters 659/ support a later date for defining "new" requirements contracts, such as the date on which the final rule open access tariffs become effective. Utilities For Improved Transition argues that the Commission cannot retroactively adopt the July 11, 1994 cut-off date, but must wait until the final rule is issued before setting the date after which requirements contracts must contain stranded cost provisions in order for stranded cost recovery to be allowed.
Commenters representing electric cooperatives also oppose the July 11, 1994 cut-off date. 660/ They contend that RUS borrowers were not free to negotiate stranded cost amendments to wholesale power contracts as soon as the Commission warned them to do so because their wholesale power contracts are mandated both as to form and substance by the RUS. 661/
PA Munis asks the Commission to treat certain contracts that were executed before July 11, 1994 (but not approved by the Commission until after that date) as "new" contracts. PA Munis argues that the utility, after issuance of the initial NOPR, could have withdrawn its filing of the contract and sought to negotiate an exit fee at that time. It submits that the utility's failure to do so would justify a finding by the Commission that contracts approved after July 11, 1994 be treated similarly to contracts executed after that date.
A number of commenters express support for the Commission's proposal to permit modification of existing requirements contracts that do not already contain exit fees or other explicit stranded cost provisions. 662/ NEPCO states its interpretation that the NOPR does not consider notice provisions to be "explicit stranded cost provisions;" it argues that the presence of a notice provision in a contract, while bearing on the supplier's ability to demonstrate the duration of its reasonable expectation of continued service, should not foreclose the amendment of a wholesale contract to add an exit fee or similar payment provision. Several other commenters ask the Commission to clarify that contracts that contain notice provisions and that preclude recovery for termination or reduction of service (but that do not necessarily use the terms "exit fee" or "stranded cost"), or that expressly provide that stranded costs shall not be charged, cannot be reopened for a stranded cost claim. 663/
A number of other commenters oppose the Commission's proposal to permit amendment of wholesale requirements contracts that do not address stranded cost recovery, for reasons previously raised in this proceeding. 664/ They argue, among other things, that contracts should stand on their own. RUS asserts that the integrity of its Federal loan program is to a large extent predicated on honoring the long-term requirements wholesale power contracts between G&Ts and their distribution members.
Several commenters also challenge the Commission's proposed determination that it is in the public interest to permit utilities to seek unilateral amendments to add stranded cost provisions to requirements contracts. These commenters argue that the NOPR's assumptions concerning the financial stability of public utilities are unsupported and thus do not meet the burden of proof required for the public interest finding under the Mobile-Sierra doctrine. They urge the Commission to require a utility-specific finding of imminent financial jeopardy before overriding a Mobile-Sierra contract. 665/
ELCON argues that the recent Northeast Utilities Service Company v. FERC 666/ case reaffirms the traditional high threshold for overriding Mobile-Sierra clauses in the "classic Mobile-Sierra situation" in which one of the parties seeks modification of a contract that has already been reviewed and approved by the Commission. It submits that a utility seeking to add a stranded cost provision to an existing contract would fall within the "classic situation." ELCON also argues that the First Circuit strongly implied that to satisfy Mobile-Sierra, the Commission must identify specifically those aspects of a contract that are contrary to the public interest and why. On this basis, ELCON argues that the case supports its position that a utility- specific finding of imminent financial jeopardy is necessary to override an existing Mobile-Sierra contract. 667/
Some commenters argue that if utilities are to be granted industry-wide Mobile-Sierra relief, then the Commission should give wholesale customers the reciprocal right to convert their wholesale power contracts to transmission-only service. 668/ However, EEI contends that the Commission is barred by section 211(c)(2) of the FPA from ordering wheeling where a customer is taking service under a contract or under a rate tariff on file with the Commission.
Several commenters ask the Commission to require renegotiation of the notice and/or term of all existing contracts with long lead-time cancellation provisions in order to allow all wholesale customers access to the market at the same time. 669/ They submit that customers with short notice provisions will be the first to enjoy the benefits of open access and will have an effective "first right of refusal" of the most economical transmission paths and low cost suppliers, putting customers with long lead-time cancellations at a competitive disadvantage.
A number of commenters support the Commission's proposal not to mandate a three-year time limit for renegotiation of existing wholesale requirements contracts. They note that existing contracts have unique characteristics and complexities that affect the time required to renegotiate the contract bilaterally, to file a unilateral amendment with the Commission, or to file for stranded cost recovery through transmission rates. 670/
On the other hand, some commenters object that the proposal to replace the previously proposed three-year window with an opportunity to raise stranded cost claims throughout the existing contract term creates a virtually unlimited transition period. 671/ For example, ELCON asserts that because the NOPR would allow utilities to seek amendment of an existing contract any time prior to its expiration, stranded cost issues could extend through the life of existing facilities (30 years or more). Portland suggests that the Commission set a schedule now for proceedings to determine transmission costs and stranded costs for each utility with wholesale requirements customers.
Commenters propose various limits to the period within which stranded cost recovery could be raised, such as:
We reaffirm our proposal to permit the recovery of legitimate, prudent and verifiable stranded costs for "existing" wholesale requirements contracts (executed on or before July 11, 1994) that do not already contain exit fees or other explicit stranded cost provisions. We believe that July 11, 1994 -- the date on which the initial Stranded Cost NOPR was published and, thus, on which the industry was put on notice of the proposal to disallow prospectively extra-contractual recovery of stranded costs -- is the appropriate date for distinguishing "existing" requirements contracts from "new" requirements contracts. Because all parties were put on notice in the initial Stranded Cost NOPR that July 11, 1994 would be the operable date for the "existing"/"new" contract distinction, utilities that executed requirements contracts after that date could have had no reasonable expectation that they would be permitted to recover any costs extra-contractually.
Moreover, because the costs at issue are extra-contractual costs, the Commission's notice to all parties that contracts executed after July 11, 1994 will be enforced by their terms as far as stranded cost recovery is concerned does not constitute "retroactive rulemaking." Contrary to UFIT's contention, the Commission is not "requir[ing]" utilities to include stranded cost recovery provisions in all contracts executed after July 11, 1994. 676/ The Commission has merely put all parties on notice that the opportunity for extra-contractual stranded cost recovery (which will be allowed on a prospective basis upon the effective date of the Rule) will not be available for any requirements contracts executed after July 11, 1994. The parties to requirements contracts executed after July 11, 1994 have been free to provide for stranded cost recovery in the contract, or not. 677/ The point is that, for requirements contracts executed after the cut-off date, stranded cost recovery will be governed solely by the terms of the contract.
We reaffirm that we will permit utilities to seek recovery of stranded costs for a limited set of existing wholesale requirements contracts, namely, those that do not already contain exit fees or other explicit stranded cost provisions. 678/ If an existing requirements contract includes an explicit provision for payment of stranded costs or an exit fee, we will assume that the parties intended the contract to cover the contingency of the buyer leaving the system. We will reject a stranded cost amendment to such a contract, unless the contract permits renegotiation of the existing stranded cost provision or the parties to the contract mutually agree to a new stranded cost provision. Similarly, we will reject a stranded cost amendment to an existing requirements contract if the contract prohibits stranded cost recovery (or precludes recovery for termination or reduction of service) or prohibits renegotiation of an existing stranded cost or exit fee provision, unless the parties to the contract mutually agree to a new stranded cost provision. 679/
We reaffirm our desire that utilities attempt to renegotiate with their customers existing requirements contracts that do not contain exit fees or other explicit stranded cost provisions. If the parties negotiate a stranded cost provision and the seller is a public utility, the utility must file the provision with the Commission as an amendment to the existing requirements contract.
If an existing requirements contract does not contain an exit fee or other explicit stranded cost provision (and is not renegotiated to add such a provision), before the expiration of the contract: (1) a public utility or its customer may file a proposed stranded cost amendment to the contract under section 205 or 206; or (2) a public utility in a section 205 proceeding, or a transmitting utility in a section 211 proceeding, may file a proposal to recover stranded costs associated with any such existing contract through its transmission rates for a customer that uses the utility's transmission system to reach another generation supplier.
We thus reaffirm that if an existing requirements contract is not renegotiated, and the contract permits the seller and/or buyer to seek an amendment to the contract, the authorized party may seek an amendment to add a stranded cost provision. We also adopt our preliminary finding that, even if an existing requirements contract contains an explicit Mobile-Sierra provision, it is in the public interest to permit the public utility to seek a unilateral amendment to add stranded cost provisions if the contract does not already contain exit fees or other explicit stranded cost provisions. In the initial Stranded Cost NOPR, we identified two ways in which a failure to permit public utilities to address stranded costs could harm third parties, and thereby harm the public interest:
First, the inability to seek recovery of stranded costs could impair the financial ability of a utility to continue to provide reliable service. This will depend on the magnitude of stranded costs and the prospect or lack thereof for recovering such costs from ratepayers. The prospect of not recovering from ratepayers significant amounts of stranded costs could seriously erode a utility's access to capital markets, or could drive the utility's cost of capital to unprecedented levels. This high cost of capital could precipitate other customers leaving the system which, in turn, could cause others to leave. Such a spiral could be difficult to stop once begun. Second, if some customers are permitted to leave their suppliers without paying for stranded costs, this may cause an excessive burden on the remaining customers who, for whatever reason, cannot leave and therefore may have to bear those costs. [680/]
The financial community commenters confirm our views in this regard. As they note, a utility's access to financial markets is essential to the continued provision of safe and reliable electric service to customers. However, the prospect of a utility not recovering stranded costs could erode a utility's ability to attract capital and thus imperil its continued financial stability. 681/ As these and other commenters agree, the recovery of stranded costs is critical to the successful transition to more competitive markets.
Moreover, our determination that it is in the public interest to give public utilities a limited opportunity to propose contract changes unilaterally to address stranded costs if their contracts do not already explicitly do so satisfies the public interest standard of the Mobile-Sierra doctrine as recently interpreted by the Northeast Utilities court. In that case, the court affirmed an order of the Commission on remand modifying a contract under the Mobile-Sierra public interest standard. 682/ As the court explained, the Mobile-Sierra doctrine "represents the Supreme Court's attempt to strike a balance between private contractual rights and the regulatory power to modify contracts when necessary to protect the public interest." 683/ The court noted that when the Commission is considering whether a contract rate is too low, protective action by the Commission in the public interest is justified "where the rate might impair the financial ability of the utility to continue to supply electricity, force electricity consumers to bear an excessive burden, or be unduly discriminatory." 684/
The court also explained that "'the most attractive case for affording additional protection [under the public interest standard], despite the presence of a contract, is where the protection is intended to safeguard the interests of third parties. . . .'" 685/ It stated that the Mobile-Sierra doctrine allows the Commission to modify the terms of a private contract "when third parties are threatened by possible 'undu[e] discrimination' or the imposition of an 'excessive burden.'" 686/ The court found that the Commission had met the public interest standard by showing how the contract could harm third parties. 687/
Consistent with the holding in Northeast Utilities, and contrary to the positions of some commenters, we have demonstrated how "third parties may ultimately bear the burden" 688/ if public utilities with Mobile-Sierra contracts are not given any opportunity to propose contract changes to address stranded costs. If the Commission fails to give a public utility this opportunity, and the utility's financial ability to continue the provision of safe and reliable service is impaired, third parties (customers relying on the public utility for their electric service) will be placed at risk. Similarly, if the Commission fails to give a public utility the opportunity to directly assign costs to the customers on whose behalf they were incurred, and some of the utility's customers leave the utility's generation system for that of another supplier without paying such costs, third parties (the utility's remaining customers) will be harmed by having to bear the costs that were not incurred to serve them and that are stranded by the other customers' departures via open access transmission. Moreover, we believe that protective action in the public interest is particularly necessary where, as here, a utility's rates could become insufficient because of fundamental changes in the industry that largely result from legislative or regulatory changes that could not be anticipated.
Further, notwithstanding the arguments of some commenters supporting a case-by-case (as opposed to a generic) public interest finding, we believe it appropriate that our public interest finding be made on a generic basis given the fact that, by this Rule, we are requiring full open access that could significantly affect historical relationships among traditional utilities and their customers and the ability of utilities to recover prudently incurred costs. We also emphasize that we are not eliminating the need for case-by-case demonstrations that stranded cost recovery should be allowed. Our public interest finding is that utilities be permitted to seek extra-contractual recovery of stranded costs in certain defined circumstances. Utilities seeking recovery of stranded costs will have the burden, on a case-by-case basis, of showing they had a reasonable expectation of continuing to serve the departing generation customer. In summary, we emphasize the limited nature of our Mobile- Sierra public interest finding. First, our holding applies only to wholesale requirements contracts executed on or before July 11, 1994 that do not contain an exit fee or other explicit stranded cost provision. Thus, we will not permit modification of any contract that addresses the stranded cost issue explicitly, unless the contract specifically permits such modifications. Instead, we are simply examining requirements contracts that do not clearly address the issue in the context of the traditional regulatory regime under which they were signed -- a regulatory environment in which it was assumed as a matter of course that the great majority of requirements customers would stay with their original suppliers and that these suppliers had a concomitant obligation to plan to supply these customers' continuing needs.
Second, although we have decided on a generic basis that it is in the public interest to permit public utilities with Mobile- Sierra contracts to make unilateral filings, we are not automatically approving any amendment that a particular utility might file. As we stated in the initial Stranded Cost NOPR, if a public utility unilaterally files a proposed stranded cost amendment under either section 205 or 206 of the FPA, this does not necessarily mean that the Commission ultimately will find it appropriate to allow such amendment. 689/ In addition, customers with Mobile-Sierra contracts that do not explicitly address stranded costs may also file complaints under section 206 of the FPA to propose to address stranded costs in existing requirements contracts. The Commission will analyze any proposed stranded cost amendment to a Mobile-Sierra contract, whether proposed by the utility or by its customer, based on the particular circumstances surrounding that contract. Thus, the case-by-case findings that some commenters seek will, in effect, be made when the Commission determines whether to approve a proposed stranded cost amendment to a particular contract.
As discussed in Section IV.A (Scope), the Commission has concluded that although current conditions in the wholesale power market do not warrant the generic modification of requirements contracts, nonetheless the modification of certain requirements contracts on a case-by-case basis may be appropriate. We have concluded further that, even if customers under such contracts are bound by so-called Mobile-Sierra clauses, they nonetheless ought to have the opportunity to demonstrate that their contracts no longer are just and reasonable.
We have found that it would be against the public interest to permit a Mobile-Sierra clause in an existing wholesale requirements contract to preclude the parties to such a contract from the opportunity to realize the benefits of the competitive wholesale power markets. For purposes of this finding, the Commission defines existing requirements contracts as contracts executed on or before July 11, 1994. 690/ By operation of this finding, a party to a requirements contract containing a Mobile-Sierra clause no longer will have the burden of establishing independently that it is in the public interest to permit the modification of such contract. The party, however, still will have the burden of establishing that such contract no longer is just and reasonable and therefore ought to be modified.
This finding complements the Commission's finding that, notwithstanding a Mobile-Sierra clause in an existing requirements contract, it is in the public interest to permit amendments to add stranded cost provisions to such contracts if the public utility proposing the amendment can meet the evidentiary requirements of this Rule. The Commission's complementary Mobile-Sierra findings are not mutually exclusive. Any contract modification approved under this Section shall provide for the utility's recovery of any costs stranded consistent with the contract modification. The stranded costs must be prudently incurred, legitimate and verifiable. Further, the Commission has concluded that if a customer is permitted to argue for modification of existing contracts that are less favorable to it than other generation alternatives, then the utility should be able to seek modification of contracts that may be beneficial to the customer.
The Commission believes that the most productive way to analyze contract modification issues is to consider simultaneously both the selling public utility's claims, if any, that it had a reasonable expectation of continuing to serve the customer beyond the term of the contract and the customer's claim, if any, that the contract no longer is just and reasonable and therefore ought to be modified. Thus, if the selling public utility intends to claim stranded costs, it must present that claim in any section 206 proceeding brought by the customer to shorten or terminate the contract. Similarly, if the customer intends to claim that the notice or termination provision of its existing requirements contract is unjust and unreasonable, it must present that claim in any proceeding brought by the selling public utility to seek recovery of stranded costs. This will promote administrative efficiency and will permit the Commission to consider how the contracting parties' claims bear on one another.
The Commission does not take contract modification lightly. Whether a utility is seeking a contract amendment to permit stranded cost recovery based on expectations beyond the stated term of the contract, or a customer is seeking to shorten or eliminate the term of an existing contract, we believe that each have a heavy burden in demonstrating that the contract ought to be modified. Still, we believe that given the industry circumstances now facing us, both selling utilities and their customers ought to have an opportunity to make the case that their existing requirements contracts ought to be modified. By providing both buyers and sellers this opportunity, the Commission attempts to strike a reasonable balance of the interests of all market participants. The Commission expects that many of the arguments presented by buyers and sellers in such proceedings will be fact specific.
We reaffirm our proposal to allow a public utility or its customer to file a proposed stranded cost amendment, or to allow a public utility or transmitting utility to file a proposal to recover stranded costs through a departing generation customer's transmission rates, at any time prior to the expiration of the contract. There is no uniform time remaining on requirements contracts executed on or before July 11, 1994. Any limitation on the period in which parties could propose amendments covering stranded costs (e.g., 3 years) would thus unequally affect market participants. Those with long terms remaining on their contracts could object that immediately addressing the issue would not be cost effective. For example, a utility with a long remaining term (e.g., 20 years) might not even seek stranded cost recovery depending on the competitive value of its assets near the end of the contract term. 691/ However, such a utility would invariably seek to preserve its option to seek stranded cost recovery if its failure to do so within a short period resulted in a waiver of its right to do so.
In the Supplemental Stranded Cost NOPR, we stated that both this Commission and state commissions have the legal authority to address stranded costs that result from retail customers becoming wholesale customers who then obtain transmission under the open access tariffs. 692/ We proposed that this Commission should be the primary forum for addressing the recovery of stranded costs caused by retail-turned-wholesale customers. We explained that if a retail customer becomes a legitimate wholesale customer (such as through municipalization), it becomes eligible to use the non-discriminatory open access tariffs:
If costs are stranded as a result of this wholesale transmission access, we believe that these costs should be viewed as 'wholesale stranded costs.' But for the ability of the new wholesale entity to reach another generation supplier through the FERC- filed open access transmission tariff, such costs would not be stranded. [693/]
We accordingly proposed to define "wholesale stranded costs" to include stranded costs resulting from unbundled transmission for newly-created wholesale customers and sought comments on this definition.
We proposed to require the same evidentiary demonstration for recovery as that required if recovery were sought from a wholesale requirements customer. We reaffirmed our proposal in the initial Stranded Cost NOPR that a utility will have to show that the stranded costs are not more than the net revenues that the retail-turned-wholesale customer would have contributed to the utility had it remained a retail customer of the utility, and that the utility has taken and will take reasonable steps to mitigate stranded costs. We further proposed to deduct any recovery that a state has permitted from departing retail-turned- wholesale customers from the legitimate stranded costs of which we will allow recovery. In addition, we proposed to apply the same procedures for obtaining an estimate of maximum stranded cost exposure without mitigation to retail customers contemplating becoming wholesale transmission customers as those proposed for wholesale customers. 694/
Some commenters contend that stranded costs that result when a retail customer becomes a wholesale customer should be left to the states as a matter of law and comity. 695/ These commenters argue, among other things, that because the facilities used to provide retail service to these retail customers were subject to state jurisdiction and were included in retail rate base when the service was rendered, the state is the appropriate entity to determine the extent to which those customers should compensate the utility for the stranding of these costs. According to ELCON, "[a] retail customer's new found access to the wholesale market does not provide FERC with authority over costs that originated with the local distribution function." 696/
Commenters assert that stranded costs resulting from the creation of new wholesale entities will occur as a result of state or local decisionmaking. 697/ A number of commenters contend that in states where the state commission has control over municipalization, the Commission has no authority to provide for the recovery of stranded costs due to municipalization. 698/ IL Com asserts that the Commission lacks authority over retail-turned-wholesale stranded costs, even in the absence of any explicit statutory authority for state commissions to address such costs. FL Com argues that the Commission should address the recovery of these stranded costs only upon petition from a state public utility commission.
According to some commenters, the availability of open access transmission tariffs does not convert the character of the costs of stranded generation that was built to serve retail customers from retail to wholesale. 699/ CA Com argues that this reasoning could require the Commission to act as the primary forum for stranded costs resulting from retail wheeling if the Commission's jurisdiction over retail transmission is upheld. It argues that in such a case, there also would be a relationship between the Commission-jurisdictional transmission and stranded costs.
Some commenters also submit that the potential for retail customers to become wholesale customers has existed since the beginning of the industry and that utilities have had ample opportunity to adjust to this risk. 700/ A number of commenters submit that state commissions are in a better position than the Commission to address the recovery of costs that were incurred to serve retail customers and to take into consideration local concerns. 701/
NARUC recognizes that a "practical regulatory gap may exist that prevents [state commission] consideration of recovery of . . . potentially stranded costs" in certain instances "such as municipalization and cooperatives, where retail customers become wholesale customers under a FERC-approved open access tariff, [and] costs of the utility which served the customer at retail may become stranded." 702/ NARUC proposes that the affected states and the Commission collaboratively develop mechanisms (which may involve amendments to the FPA, state statutes, or both) to eliminate these regulatory gaps.
Some commenters object that the Commission's proposal to be the primary forum for recovery of stranded costs caused by retail-turned-wholesale customers would make municipalization more expensive and therefore would discourage municipalities from seeking alternative sources of electricity. 703/ Some argue that different treatment of stranded costs between federal and state authorities may lead to forum-shopping as a primary determinant in the decision to municipalize. 704/
A number of commenters also suggest that the NOPR is inconsistent with prior Commission treatment of municipalization because the Commission has historically promoted franchise competition between municipalities and utilities and has never before suggested that utilities could "penalize" municipalization decisions through generation cost add-ons to transmission rates. 705/ VT DPS states: "By the Commission's logic, there would never have been an Otter Tail case. If Otter Tail could have made a stranded cost claim against the municipal utility Elbow Lake planned to create, Otter Tail would never have needed to refuse to wheel." 706/
Suffolk County states that the Commission already considered stranded costs in the context of retail-turned-wholesale customers in United Illuminating Company, 707/ where the Commission required United Illuminating to remove a provision in its proposed transmission tariff that would have allowed it to recover stranded costs associated with former retail loads served by new municipal systems. Suffolk County states that the Commission made clear that stranded cost matters, including those caused by municipalization, properly would be raised before state regulatory authorities. It objects that the Open Access NOPR ignores this case. Suffolk County also submits that the Commission's adoption of the settlement approved by the Massachusetts DPU in the Massachusetts Bay Transportation Authority case should serve as an example of proper jurisdictional deference with respect to local issues. 708/
However, many other commenters support the Commission's proposal to be the primary forum for retail-turned-wholesale stranded costs. 709/ These commenters submit, among other things, that the Commission's jurisdiction over such costs is clear. 710/ Coalition for Economic Competition states that when a utility's costs are stranded through the availability of Commission-jurisdictional transmission service, the Commission must address those costs. It argues that commenters opposing the Commission's jurisdiction fail to analyze the Commission's duty to establish just and reasonable rates for Commission-jurisdictional transmission service.
A number of commenters support the Commission's proposal to address retail-turned-wholesale stranded costs on the basis that many state commissions either lack authority to address costs that are stranded because of expanding or newly-created municipal systems, or have failed to address such costs. 711/ El Paso adds that any protection offered by state judicial condemnation proceedings does not obviate the need for the Commission's involvement in this issue, noting that condemnation awards may not provide full stranded investment recovery under the Commission's standards. In addition, El Paso suggests that municipalization may occur through means other than condemnation of the distribution systems of electric utilities, such as when a municipality constructs its own, duplicative distribution facilities.
Several commenters also indicate that by forthrightly addressing this issue, the Commission has removed a cloud of uncertainty that would have taken years to resolve through litigation. 712/ El Paso states that the proposed rule is needed because utilities may be subject to stranded costs resulting from municipalization in two separate state jurisdictions.
In response to the argument that stranded costs are exclusively subject to state jurisdiction, SoCal Edison asserts that whether the costs are retail or wholesale is irrelevant because the issue is how and where these costs should be recovered. According to SoCal Edison, if the Commission finds that these costs are just and reasonable costs associated with providing open access transmission service, the Commission may allow utilities to recover them in Commission-regulated rates.
Coalition for Economic Competition notes that while utilities are aware of state laws allowing municipalities to condemn electric facilities and to form utilities, in recent decades, it has not happened on most systems. Moreover, it argues that merely being on notice that municipalization is a possibility does not relieve utilities of their state-imposed obligation to serve all customers in their franchise areas. It asserts that utilities had to continue to invest in plant to satisfy their duty to serve. In addition, it submits that utilities had a reasonable expectation that they would continue to serve retail load because, among other things, state regulators set long amortization periods of 30-40 years for depreciation rates.
Some commenters state that the Commission also should ensure that stranded costs are recovered when a municipal utility annexes territory served by another utility or otherwise expands its service territory. 713/ A number of commenters also urge the Commission to ensure recovery of costs that are stranded if a municipal utility or a newly-formed wholesale or municipal utility physically interconnects to another utility or builds new transmission or distribution facilities to the municipal system. 714/
Several commenters believe that close coordination between the Commission and state regulators as to the calculation of stranded costs is important in the case of municipalization. 715/ A number of state commissions suggest that the Commission allow the states to set the level of retail-turned- wholesale stranded costs to be recovered in wholesale transmission rates set by the Commission. 716/ They submit that this approach would respect state interests in controlling the rate impact of stranded costs, while allowing the Commission to design cost recovery, and would address the needs of industrial customers and other stakeholders by providing a forum before state regulators who will be more aware of their particular needs. Further, they contend that this approach would prevent relitigation of issues, minimize forum-shopping, and prevent legitimate and verifiable costs from falling through the cracks or being double-recovered. 717/ NY Industrials asks the Commission to clarify that utilities will not be allowed to seek cost recovery at both the Commission and state commissions.
We reaffirm our preliminary determination that this Commission should be the primary forum for addressing the recovery of stranded costs caused by retail-turned-wholesale customers. If such a customer is able to reach a new generation supplier because of the new open access (through the use of a FERC-filed open access transmission tariff or through transmission services ordered pursuant to section 211 of the FPA), we believe that any costs stranded as a result of this wholesale transmission access should be viewed as "wholesale stranded costs." Such costs would not be stranded but for the action of this Commission (either through a mandatory FPA section 205-206 open access tariff or an order under FPA section 211) in permitting the new wholesale entity to become an unbundled transmission services customer of the utility and thereby to obtain power from a new supplier. 718/ There is a clear nexus between the FERC-jurisdictional transmission access requirement and the exposure to non-recovery of prudently incurred costs. In these circumstances, we believe that this Commission should be the primary forum for addressing recovery of such costs. To avoid forum-shopping and duplicative litigation of the issue, we expect parties to raise claims before this Commission in the first instance. 719/
Some commenters have asked us also to be the primary forum for stranded cost recovery in situations in which an existing municipal utility annexes territory served by another utility or otherwise expands its service territory. We decline to do so because in these situations there is no direct nexus between the FERC-jurisdictional transmission access requirement and the exposure to non-recovery of prudently incurred costs. The risk of an existing municipal utility expanding its territory was a risk prior to the Energy Policy Act and prior to any open access requirement.
Nevertheless, we are concerned that there may be circumstances in which customers and/or utilities could attempt, through indirect use of open access transmission, to circumvent the ability of any regulatory commission -- either this Commission or state commissions -- to address recovery of stranded costs. 720/ We reserve the right to address such situations on a case-by-case basis.
As we indicated in the Supplemental Stranded Cost NOPR, if the state has permitted any recovery from departing retail- turned-wholesale customers (for example, if it imposed an exit fee prior to, or as a condition of, creating the wholesale entity), that amount will not, in fact, be stranded, and we will deduct that amount from the legitimate stranded costs for which we will allow recovery.
As discussed in Sections IV.J.8-IV.J.9, we will require the same evidentiary demonstration for recovery of stranded costs from a retail-turned-wholesale customer, and will apply the same procedures for determining stranded cost obligation, as that required in the case of a wholesale requirements customer.
In the Supplemental Stranded Cost NOPR, we stated that both this Commission and state commissions have the legal authority to address stranded costs that result from retail customers who obtain retail wheeling from public utilities in order to reach a different generation supplier. 721/ Because the vast majority of commenters urged the Commission not to assume responsibility for retail stranded costs, except in certain circumstances, we preliminarily concluded that it is appropriate to leave it to state regulatory authorities to deal with any stranded costs occasioned by retail wheeling. We proposed to entertain requests to recover stranded costs caused by retail wheeling only when the state regulatory authority does not have authority under state law to address stranded costs at the time when the retail wheeling is required. 722/ In so doing, we preliminarily accepted the view that stranded costs caused by retail wheeling are primarily a matter of local or state concern and thus, with the limited exception discussed above, generally must be recovered through retail charges.
We noted that the states have a number of mechanisms for addressing stranded costs caused by retail wheeling, one of which is a surcharge to state-jurisdictional rates for local distribution. 723/ We encouraged the states to use the mechanisms available to them to address stranded costs. 724/ We also noted that the states may use their jurisdiction over local distribution facilities to address "stranded benefits," such as environmental benefits associated with conservation, load management, and other demand side management programs. 725/
A number of commenters support the Commission's proposal for addressing stranded costs caused by retail wheeling. 726/ Other commenters urge the Commission to take a greater role in retail stranded cost recovery and to entertain requests to recover stranded costs as a backstop where: (1) state regulatory authorities have the authority to address stranded costs but either choose not to exercise that authority or fail to permit full stranded cost recovery; 727/ or (2) the state commission's authority is unclear. 728/
Commenters that support a greater Commission backstop role argue, among other things, that because the Commission has exclusive ratemaking jurisdiction over any stranded cost charges imposed "for or in connection with" interstate transmission service by public utilities, the Commission has an obligation to regulate the recovery of stranded costs from interstate retail transmission customers. 729/ A number of these commenters argue that the determining factor is who has the jurisdiction to review the rates for the service, not who has the jurisdiction to order the service. 730/ They explain that the Commission has jurisdiction over generating facilities and associated costs to the extent appropriate to establish just and reasonable rates for jurisdictional services. They disagree with other commenters who argue that only the jurisdiction under whose authority the costs were incurred and initially recovered should have authority to order recovery of stranded costs. 731/
These commenters contend that the Commission cannot abdicate its regulatory responsibilities by either deferring to the state commissions or otherwise failing to independently address the issue. 732/ EEI and the Coalition for Economic Competition refer to "a long line of cases [where] the courts have held that where a federal regulatory agency . . . is charged with implementing a statutory framework, that agency is without authority to deviate from or abdicate its statutory responsibilities." 733/ According to Coalition for Economic Competition, for example, the Commission could satisfy its obligation to address stranded costs that arise from retail wheeling by allowing states to determine retail stranded cost charges in the first instance; to the extent that the state allows full recovery, Coalition for Economic Competition submits that the Commission's obligation would be satisfied.
EEI asserts that it would be unduly discriminatory and preferential for the Commission to refuse to address all stranded costs arising from retail wheeling. According to EEI, the same arguments that support the Commission's decision to address costs that are stranded where retail load municipalizes and where the state regulatory authority, at the time retail wheeling is required, lacks authority to act, apply with equal force to all other retail stranded costs. EEI submits that the nexus in these cases is that Commission-jurisdictional transmission service is the means by which the costs are stranded. 734/
Utility Working Group argues that the NOPR inappropriately characterizes the Commission's jurisdiction over retail stranded costs and that this could later be used against the Commission's exercise of its full authority. According to Utility Working Group, the NOPR depicts the Commission's jurisdiction as being derived from state law (in other words, the Commission will act where state regulatory authorities have no authority over retail stranded costs and will not act where state regulatory authorities have such authority). If the Commission desires to afford substantial deference to the states regarding retail stranded costs, Utility Working Group contends that the final rule should reflect that policy determination; however, the rule should not confuse policy with jurisdiction by purporting to place limits on, or attempting to waive, the Commission's jurisdiction over such costs.
Entergy asserts that the Commission's jurisdiction over multi-state utilities provides further support for our jurisdiction over retail stranded costs in certain contexts. Entergy states that most of the eleven multi-state registered holding company systems have some form of Commission- jurisdictional agreement that allocates production and transmission costs among the systems' affiliated operating companies. It asserts that these agreements by their very nature allocate costs among jurisdictions (that is, between states). Many of these agreements equalize the cost of generating reserves among affiliated operating companies, and such reserve equalization formulas can shift retail stranded costs among states unless the Commission provides a regulatory forum to address cost-shifting. Citing Middle South Energy, 735/ and City of New Orleans v. FERC, 736/ Entergy submits that the Commission cannot sit on the sidelines when it comes to stranded retail costs on the Entergy system. According to Entergy, Commission and judicial precedent place on the Commission the responsibility to ensure that federally-approved costs and cost allocations are not undermined by state action.
Commenters also express concern that it will not be possible to be sure that a state regulatory authority has authority over retail stranded costs until after years of litigation. If the Commission waits for the resolution of challenges to state authority and a court holds that the state regulatory authority is without authority, these commenters assert that the bar on retroactive ratemaking could leave the states and the Commission without a remedy to compensate utilities for stranded costs. 737/ A number of commenters suggest that while the states should be allowed to set retail wheeling stranded cost charges in the first instance, the Commission should accept filings to preserve a utility's ability to recover retail stranded costs from the time the customer departs if the state-authorized charges are not upheld in court. They submit that this would put customers on notice of the potential for Commission action and thereby avoid the retroactivity problem. 738/
Some commenters express concern that if the Commission does not take more decisive action on retail wheeling stranded costs, the result will be wasteful litigation that will discourage competition by causing financial uncertainty and higher financing costs for investor-owned utilities and higher rates for consumers. 739/ Coalition for Economic Competition also asserts that stranded cost charges would be greatest at the start of a retail wheeling program, thereby making the years during which the state-authorized charges are subject to appeal more important for recovery purposes.
A number of commenters support Commission-established uniform standards for, and uniform recovery of, costs stranded as a result of open access to the interstate transmission system. 740/ They argue that disparate state treatment of stranded costs would be economically inefficient and discriminatory and would burden interstate commerce. 741/ Several commenters support state involvement in the establishment of uniform standards. 742/
In contrast to the commenters that support a greater Commission role in retail stranded cost recovery, NARUC and a number of other commenters oppose any Commission involvement in retail stranded costs. 743/ These commenters contend, among other things, that the Commission lacks authority over these costs. Even if the Commission could assert such jurisdiction, they argue that as a policy matter it would be inappropriate for the Commission to delve into complicated legal and policy issues governed by varying state regulatory regimes.
According to some of these commenters, 744/ section 201(a) of the FPA precludes an exercise of federal jurisdiction over retail stranded cost recovery because the Commission's jurisdiction extends "only to those matters which are not subject to regulation by the States." 745/ NM Industrials argues that a lack of state commission authority is an affirmative state determination, either by act or omission, that stranded costs must be dealt with in a particular manner. It submits that the Commission also lacks authority over retail stranded costs when states either decide not to address such costs or, in the Commission's opinion, grant insufficient recovery of stranded costs. NM Industrials asserts that the language of the FPA and its legislative history indicate that Congress wanted to preclude Commission jurisdiction in those areas where states could exercise effective control, and that this limitation covers all matters which are or can be regulated by the states, including the recovery of stranded investment. NM Industrials also suggests that assertion of Commission jurisdiction would violate the provision of section 212 of the FPA that prohibits the Commission from interfering with the states' authority over the transmission of energy directly to an ultimate consumer. 746/
Other commenters argue that the Commission's proposed treatment of retail stranded costs infringes on the states' jurisdiction over the allocation of costs that were under their jurisdiction when the costs were incurred. According to these commenters, the question of whether these costs should be recovered from other retail ratepayers, eliminated as excess capacity, or billed in some fashion to the customer now receiving wheeling service are purely questions of state ratemaking law. 747/ Some commenters assert that, as a matter of policy, the Commission should stay out of retail stranded costs because only the states have sufficient knowledge and expertise regarding utility planning, investment, and forecasting to address these costs adequately. 748/
Commenters also express concern that the possibility of Commission involvement in retail stranded cost recovery will encourage forum-shopping whenever state commission action is unfavorable, even when states have proced