The Federal Energy Regulatory Commission (FERC) has issued its comprehensive notice of proposed rulemaking (NOPR) designed to move the wholesale electric industry to a more competitive marketplace. The order, Open Access Non-discriminatory Transmission Services by Public Utilities and Recovery of Stranded Costs by Public and Transmitting Utilities, weighs in at over 300 pages (Docket Nos. RM95-8-000 and RM94-7-001).

The NOPR requires all electric utilities to file open-access transmission tariffs available to all wholesale sellers and buyers of electricity. The service must be "comparable" to the service the utilities provide to themselves, and they must take service under the same tariffs. (The FERC said it believes 137 utilities will be required to open their lines; only 21 utilities currently maintain any form of open access.)

The NOPR requires that transmission utilities offer point-to-point and network transmission services, including ancillary services, such as scheduling and dispatch. Two pro forma tariffs set forth the minimum requirements. Utilities must enlarge transmission capacity if necessary to provide a requested transmission service. The transmission owner cannot give its own activities any unfair advantages over those of competitors. When evaluating tariffs, the FERC will require that 1) the terms and conditions of service be clear and specific, and 2) any limitations apply only to verifiable technical and operational needs.

The NOPR does require functional unbundling, but only for transmission services under new requirements and coordination contracts. Functional unbundling requires a single tariff for all parties, separately stated rates for all tariff components, and reliance on the same electronic networks. When final, the rule would be implemented in two stages. The first stage would introduce the generic pro forma tariffs. In the second, utilities and their customers could file to modify the tariffs and rates within the limits of nondiscriminatory open access. (In a related docket, the FERC announced a technical conference on electronic networks. Re Real-time Information Networks, Docket No. RM95-9-0000).

The FERC also issued a supplemental NOPR on stranded costs, which it consolidated with its stranded cost NOPR of last June. This NOPR sets forth the principle that utilities are entitled to full recovery of "legitimate and verifiable" stranded costs at both the state and federal level. It also gives the states jurisdiction to deal with any stranded costs resulting from retail wheeling. The FERC, however, will step in:

s If the state commission has no authority to deal with stranded costs

s When municipalization occurs

s When customers go from retail to wholesale.

Stranded costs resulting from wholesale contracts executed after July 11, 1994, may be recovered only if the contracts explicitly provided for their recovery. For contracts executed before that date, the utility may seek recovery of stranded costs if the contract does not address their recovery and the utility can show it had a "reasonable expectation" of continuing to serve the customer beyond the contract term.

The FERC also set forth the difference between its jurisdiction over transmission in interstate commerce and state jurisdiction over local distribution. The distinction will determine which facilities are subject to open-access requirements, and when the states may assess stranded costs. Commissioner William L. Massey found the position too narrow. He said the FERC should step in when a state commission will not address the issue, not merely when it lacks authority.

Commenting on the NOPR, the Edison Electric Institute (EEI) pointed to an earlier filing it made to the FERC on the issue of stranded costs. That filing included a paper written by three economists (Alfred Kahn, William Baumol, and Paul Joskow), The Challenge for Federal and State Regulators: Transition from Regulation to Efficient Competition in Electric Power. The authors' premise is that the goal of a transition from a regulated to a competitive industry is to promote an environment that will provide the lowest total cost of providing electricity to society as a whole, rather than reducing costs to some customers while raising them for others. The economists believe that during the transition, every consumer must be responsible for, and pay an appropriate share of, costs incurred in its service under traditional regulation. t

Lori A. Burkhart is an associate legal editor of PUBLIC UTILITIES FORTNIGHTLY.

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