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Transmission Tariffs: Still Pro Forma? Locational Pricing and the Federal Power Act

Fortnightly Magazine - May 1 1996

reasonable." Granted, the court accepted the market price as a relevant consideration in ratemaking, but on balance the opinion buttresses those who argue that the "just and reasonable standard" mandates active regulatory supervision.

In Farmers Union the court held that a regulatory regime that could allow jurisdictional entities to earn "creamy returns" was incompatible with a congressional mandate to ensure "just and reasonable" utility rates. It found costs the most useful and reliable starting point to determine whether a rate is "less than compensatory" or "excessive." To the extent that noncost factors are considered, the court charged the FERC to articulate the nexus between the object to be served by the noncost consideration and its overarching responsibility to protect the public interest: "Ratemaking principles that permit 'profits too huge to be reconciled with the legislative command' cannot produce just and reasonable rates."9

Undaunted, the FERC has read Farmers Union as an indictment of its failure to demonstrate empirically the existence of adequate competition, as opposed to a directive that competition is merely a factor to consider in adjusting a cost-determined rate. The current FERC view holds that "light-handed" regulation may be warranted where a utility's market share is too low to permit it to withhold or restrict services to help boost the price by a significant amount for a significant period of time.10

Locational pricing for electric transmission goes well beyond the "light-handed" regulatory concept of Farmers Union; it would divorce rates entirely from historic costs. But if the FERC is correct in assuming the power to suspend the rules if competition is adequate, then "locational pricing" may well satisfy many of the FERC's transmission pricing goals. Yet the courts have never reviewed the FERC's interpretation of Farmers Union.

Back in its 1994 policy statement on electric transmission, the FERC cited section 212(a) of the FPA to support the idea that, to the extent practicable, transmission rates should reflect marginal costs rather than embedded costs.11 The FERC also observed that, as a matter of equity, incumbent customers should not pay for costs incurred in providing transmission services to new customers. Nevertheless, the FERC stopped short of abandoning cost-based rates, or even suggesting the possibility of "light-handed" regulation:

"Although the FERC has been willing, under appropriate circumstances, to permit market-based pricing for sales of generation, the FERC intends to treat market-based transmission rate proposals as nonconforming. Such rates obviously are not cost-based and the FERC does not believe market-based transmission pricing is appropriate at this time."12

At the same time, the commission left the door ajar for power pools and regional transmission groups to alleviate concerns that transmission might prove to be a natural monopoly.

In the past the FERC has relied heavily on embedded-cost rates, but it has also recognized the decidedly economic concept of opportunity costs in existing transmission tariffs. As the commission has noted, an electric utility incurs opportunity costs whenever it accommodates a third-party's request for transmission services to the economic detriment of its native-load customers.13 Thus, the FERC has accepted transmission tariffs that provide a rate that equals