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Recovering Stranded Costs: Not "If," But "How"

Fortnightly Magazine - January 15 1997

asserting jurisdiction over jurisdiction over unbundled, retail transmission, the FERC has made a relatively simple process far more demanding.

The FERC has announced that it intends to apply a "functional-technical test" to mark the elusive "bright line" separating "transmission" facilities (where the FERC believes its jurisdiction ends) and "local distribution" facilities (where the FERC believes state jurisdiction begins). Under this test, FERC will employ seven "indicators" to determine whether the utility facilities used to provide retail wheeling are "transmission" or "local distribution."

The Illinois commission and several other PUCs have objected to this test and to FERC's claim of authority over unbundled transmission. The consensus is that under the Federal Power Act, the act of unbundling transmission services should not trigger FERC jurisdiction.

More Than Turf. To an outside observer, these objections are probably seen as nothing more than a turf battle. However, it is important to recognize the implications for state regulators that follow this loss of jurisdiction.

In comments on the proposed FERC Order 888, several parties, including the Illinois Commerce Commission, expressed concern that under certain circumstances, there may not be any distribution facilities upon which states could impose surcharges. Therefore, without transmission jurisdiction, retail wheeling surcharges may be lost as a means for stranded cost recovery.

In an effort to preserve the ability of state PUCs to recover retail stranded costs through distribution surcharges, the FERC responded to these concerns in its final Order 888 by stating that it would give deference to the recommendations by the state PUCs regarding what is transmission and what is distribution. In theory, this sounds reasonable. In practice, the FERC has so far remained true to its word in cases like PG&E and New England Power; however, neither of these cases involves full-scale retail wheeling programs, where the stakes and the level of complexity is expected to be higher. Hence, states that are seeking a uniform mechanism to recover stranded costs may find that they cannot rely exclusively on distribution surcharges.

Voltage-Level Issues. The FERC does not and cannot offer any assurances that the case-by-case application of its "functional-technical test" will produce a finding that "local distribution" facilities are utilized in all retail wheeling scenarios. Without the clear opportunity to employ distribution rate surcharges, the FERC's efforts to preserve a state's ability to recover retail stranded costs through distribution rates will prove meaningless.

Furthermore, some industrial customers throughout the country are currently taking power at what may be considered transmission-level voltages or served by what may be deemed a transmission facility under FERC's functional test. In Illinois, roughly 11% of the four major utilities' total load is served by such facilities. Even if the radial lines connecting some of these customers to the utility grid are deemed "local distribution" facilities, industrial customers may attempt to bypass distribution facilities to avoid paying surcharges.

Exit Fees? Of course, states could employ other recovery mechanisms, such as exit fees. But, unlike wholesale arrangements, there is not always a written contract between retail customers and utilities. In Illinois, for example, residential customers do not have an