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Orders 888 and 889, and wholesale open access transmission: lots of questions (and some answers) for cooperatives.

On April 24, 1996, FERC issued order 888 and 889, which require "public utilities" to file open access tariffs, and to functionally unbundle their generation and transmission operations, and to allow "public utilities" to recover stranded costs. These rules have generated many questions regarding the interpretation of the rules and the impact on G&T and distribution cooperatives. This article addresses many of those questions.

In 1992, Congress in the Energy Policy Act (EPAct) gave the Federal Energy Regulatory Commission (FERC) new powers to order electric utilities to provide wholesale transmission service, kicking off a new era in the electric industry. Then, on April 24, 1996, with great fanfare, FERC issued Orders Nos. 888 and 889[1]. Since then, there has been lots of publicity about these orders and the changes they will undoubtedly bring to the wholesale electric power sector.

But what do these orders really do, and what might they mean for rural electric cooperatives (RECs)? The answers are by no means clear - in some cases, the questions are not yet even clear. In this article, NRECA addresses some of the most common questions RECs have asked NRECA about the potential impacts of these orders on them, and tries to provide as many answers as possible.

INTRODUCTION

1. Exactly what do Order Nos. 888 and 889 do?

Taken together, these orders run to over a thousand typewritten pages of regulations and explanatory material. But simply put, they:

Require "Public Utilities" to File Open Access Tariffs. Those "public utilities" that FERC regulates under Sections 205 and 206 of the Federal Power Act (FPA) which own transmission facilities must file wholesale open access transmission tariffs and rates with FERC by July 9, 1996. The general form of tariff which they must file is set out in an attachment to Order No. 888, but public utilities can propose changes to their form tariffs, so long as the changes result in tariffs that are "as good as" FERC's form tariff, and FERC approves the changes.

Require "Public Utilities" to "Functionally, Unbundle" their operations. Public utilities must separate their wholesale power sale business from their transmission operations. They must use their own open access transmission tariffs to carry out their new wholesale power sales. They must follow a "code of conduct" set out in Order No. 889 designed to prevent their power sales people from taking advantage of commercial information which their transmission operations people obtain from third parties while running the transmission system. They must set up and operate or participate in an Internet-based computer "Open Access Same-time Information System" (OASIS), which must be up and running by November 1, 1996. Third parties can then dial up the OASIS and see the available transmission capacity on the public utility's system. Public utilities must use their OASIS themselves to obtain transmission system information.

FERC is taking these measures because it wants to make sure that the public utility employees running the transmission system do not favor the public utility's own wholesale power transactions over the transaction of third parties.

Allow "Public Utilities" to Recover Stranded Costs. FERC will allow public utilities to charge "stranded costs" to wholesale power customers that decide to purchase their power elsewhere at the close of the the current power supply contracts. This charge will permit these public utilities to recover the costs of facilities they have invested in (primarily generation) which they will not be able to recover in a competitive power sale market.

FERC also claims legal authority to award stranded costs to public utilities in the case of departing "retail-turned-whole-sale" customers (new municipal electric system, for example), and departing retail customers (if the relevant state does not have authority to impose retail stranded cost recovery).

Of course, there is lots more in those thousand pages, but these three things - (1) open access tariffs; (2) "unbundling" of the power sale and transmission functions; and (3) stranded cost recovery - are the "bones" of Order Nos. 888 and 889.

2. Wait a minute. I thought that the FERC already has the legal right to require utilities to provide wholesale transmission service under FPA Sections 211 and 212, because those sections of the FPA were beefed up in EPAct. So why did FERC issue Order Nos. 888 and 889?

You are right about FPA Sections 211 and 212. They were amended in EPAct back in 1992 to give FERC substantial power to require "transmitting utilities" to transmit (or "wheel") electric energy over their transmission facilities for third parties to wholesale transactions. (FERC is explicitly barred from ordering wheeling service directly to end users (retail wheeling) under these sections.) What's more, FERC's powers under these sections play to a group of utilities much broader than FERC can reach under its FPA Section 205 and 206 authority. Those sections apply to "public utilities" (primarily investor-owned utilities), but FPA Sections 211-212 apply to "transmitting utilities," which takes in cooperative and municipal utilities, federal power marketing agencies, TVA, etc.

FERC's powers under FPA Sections 211-212, however, require that a wholesale entity seeking transmission service first file a complaint against a particular "transmitting utility" with the FERC. Only then can FERC investigate and order the transmitting utility to provide the wholesale wheeling service.

FERC has processed a number of such cases, but has grown frustrated with the amounts of effort they consume. It does not want to proceed "case by case," as FPA Sections 211-212 require - rather, it wants to get all utilities to provide "up front," "open access" transmission service under tariffs and rate schedules already on file and available to all qualified customers. That is why FERC decided to use FPA Sections 205 and 206 (which have much broader authority) to require "public utilities" regulated under those sections to file open access tariffs.

IMPACT ON NON-RUS-BORROWER-COOPERATIVES

3. Is my co-op a "public utility" as FERC uses that term? Must my co-op comply with these Orders?

It depends. G&T and distribution cooperatives that are RUS borrowers are not considered "public utilities" as that term is used in the Federal Power Act. The FERC's predecessor agency, the Federal Power Commission (FPC) ruled in a 1967 case, Dairyland Power Cooperative[2] that cooperatives that were REAct borrowers should not be regulated as "public utilities" under Sections 205 and 206 of the Federal Power Act. The FPC decided not to exercise legal authority ("assert jurisdiction" in legal parlance) over RECs that were REA borrowers because of the oversight the REA exercises over their operations. This ruling was subsequently affirmed by a court in Salt River Project v. FPC.[3] So, rural electric cooperatives that are RUS borrowers are not directly subject to the FERC's Orders. However, they may be subject to the Orders indirectly under the "reciprocity" provision (discussed below).

If your cooperative is not an RUS borrower, then it may or may not be subject to FERC jurisdiction, depending on its activities. If your non-RUS borrower cooperative is a "typical" distribution cooperative, selling only to your own system's retail end user and operating only low voltage local distribution-facilities, the answer is very likely no. If however, your system makes a "sale for resale" (sale to another wholesale entity, for example, a municipal electric system), or provides wholesale transmission service to third parties, your system is likely a public utility.

If your system operates higher voltage transmission facilities that are part of a larger network over which power flows in "interstate commerce," then FERC might consider your cooperative a "public utility." This area of the law is very complicated - there are many legal cases on what constitutes "transmission in interstate commerce," and courts tend to give FERC wide latitude in these matters, if FERC can show the electrons in question have been traveling in interstate commerce.

Remember the old advertising line about hair coloring - "only her hairdresser knows for sure"? Well, in the case of non-RUS borrower RECs, only an attorney with FERC experience may "know for sure." Remember, FERC does not look at whether a non-RUS borrower REC is a distribution cooperative or a G&T cooperative - FERC looks at the specific activities of the REC.

If it turns out that your REC is a "public utility" as FERC uses that term, and your REC has never made the requisite filings with FERC, you may have legal problems wholly apart from complying with Order Nos. 888 and 889. So if your REC is no longer an RUS borrower, and you did not explore the issue of FERC jurisdiction with legal counsel at the time of the buy-out, now is the time.

The National Rural Utilities Cooperative Finance Corporation (CFC) has put out a booklet written especially for managers and directors about FERC regulation of non-RUS borrowers. It is called "Twenty Questions Regarding FERC Regulation of Electric Cooperatives," and is available by calling Teresa Smallwood of CFC at 1-800-424-2954, ext. 255. If your REC has bought out its RUS debt or is thinking of doing so, you may wish to call and order it.

4. Gee, my cooperative has bought out of RUS, and it does some of the kinds of activities you just discussed (sales for resale to entities such as municipal systems, transmission service for others, operation of transmission facilities in interstate commerce). What should my cooperative do to comply with Order Nos. 888 and 889?

If your non-RUS borrower REC hasn't done so already, it should consult with an attorney experienced in FERC matters immediately. "Public utilities" were to file by July 9, 1996, either the open access tariff and rates required by Order No. 888, or a request for waiver of those filing requirements.

"Public utilities" also have to comply with the OASIS and code of conduct (separation of power supply and transmission function) requirements by November 1, 1996, unless they filed to obtain a waiver by July 9, 1996.[4] If your non-RUS borrower REC is indeed a "public utility," this means you! If you think these deadlines apply to your cooperative, but you missed them, consult with a competent attorney with FERC expertise as soon as possible.

5. My cooperative is not an RUS borrower, and it does sell power to the municipal electric system down the road, but is pretty small. My cooperative may be a "public utility" in FERC's eyes, but we don't have the money or the people to set up an OASIS, separate our transmission and power supply functions, or prepare a full-scale transmission tariff. I don't think anyone even wants to transmit power over our system! Do I have to make the same filings the big IOUs have to make?

Your cooperative sounds like it may be a good candidate for a waiver of FERC's regulations. In both Order Nos. 888 and 889, FERC says that "small public utilities" may qualify for a waiver of some or all of the open access, OASIS, and code of conduct requirements if they can show that the requirements would be burdensome. For example, FERC does say that if a small public utility is "part of another utility's control area," the utility should be allowed to show that it should be exempted from all or part of the regulations. Even then, however, the utility will have to commit to file open access tariffs if someone later requests wholesale transmission service from it.

The only way to know if your public utility/REC qualifies for a waiver is to apply for one. NRECA has strongly suggested that cooperatives in this situation employ an attorney and/or consultant with FERC experience to prepare the waiver application. The specific facts your cooperative shows FERC will "make or break" your waiver application. Remember - these applications were due by July 9, 1996.

Your cooperative may want to try to lessen the burden by working with other cooperatives in the same boat - your statewide association may be able to help you with this.

6. My distribution co-op has bought out its RUS debt, and I am not sure if it is a public utility or not. Why shouldn't I just apply for a waiver from FERC, to make sure my co-op does not have to comply with the open access requirements?

We do not suggest that you do this. FERC may find that it has jurisdiction over your system, just because it is loathe to say it does not. It may grant you a waiver of the open access requirements for now, but you will then have to live with that jurisdictional finding for a long time to come. Rather, NRECA suggests you first consult a lawyer experienced in FERC matters who can tell you if your cooperative is likely to be considered a public utility or not, and if so, whether you should file for a waiver, or file a tariff.

7. My co-op is a public utility. What if it provides open access transmission service, but ends up losing wholesale loads to third party suppliers as a result? Does my co-op have any recourse?

It depends. Because your REC is a "public utility" as FERC uses that term, your REC can under some circumstances recover stranded costs when a wholesale customer starts to purchase power somewhere else. The stranded cost provisions of Order No. 888, however, are very complicated. (They are discussed further below.) You should definitely consult an experienced FERC attorney to see if your cooperative can claim stranded costs in the event it loses a wholesale load.

IMPACT ON RUS-BORROWER COOPERATIVES (RECIPROCITY)

8. My co-op has RUS debt, so I know that my cooperative is not a "public utility" as FERC uses that term. Does this mean that I don't need to deal with Order Nos. 888 and 889?

In a word, NO. RECs are going to be dealing with the effects of Order Nos. 888 and 889 whether or not they are directly subject to the new regulations. Any REC that buys power in the bulk power market and moves that power over the Interstate grid is going to be affected. Any REC that requests transmission service from an IOU which FERC regulates is going to be affected. Any REC that is a member of a power pool or a Regional Transmission Group (RTG) is going to be affected. Even if you are a "typical" distribution cooperative with no transmission facilities and no sales to or transmission for other wholesale entities, your G & T (or other wholesale power supplier) is going to be affected (which in turn will affect you). So keep reading!

9. You said before that RECs which are not "public utilities" may still be subject to FERC's orders because of the "reciprocity requirement." What's that?

The "reciprocity requirement" is FERC's way of getting non-public utilities which it does not regulate under FPA Sections 205 and 206 (which includes most cooperatives) to "join the transmission party." A bit of background will help better explain the reciprocity requirement, and why FERC has included it in Order Nos. 888 and 889.

As we said previously, FERC already has the legal authority to require any REC, public utility or non-public utility, to transmit power for a wholesale entity under Section 211 of the FPA. Section 211 applies to "transmitting utilities," which is a broader group of utilities than the "public utilities" regulated under Sections 205 and 206 of the FPA. This broader group includes RECs. The problem with Section 211, as FERC sees it, is that it must proceed "case-by-case," which takes a lot of time and resources for all concerned. FERC wants to see non-public utilities have generally available transmission tariffs, so that any prospective customer can simply apply for service and get it - "no muss, no fuss." It can make public utilities file such tariffs under FPA Sections 205 and 206 (although some dispute this point) - but how can it reach non-public utilities not subject to those sections of the FPA?

FERC's answer is the "reciprocity" requirement. Under this requirement, if a non-public utility with transmission facilities asks a public utility for open access transmission service, that public utility can in turn ask for "reciprocal" transmission service over the transmission facilities of the non-public utility. The reciprocal transmission service has to be "comparable" in quality to the transmission service that the non-public utility "provides" itself, and at "comparable" rates. FERC wants non-public utilities providing reciprocal transmission service to separate their transmission and power supply functions, to abide by the code of conduct in Order No. 889, and to have an OASIS - in short, FERC wants non-public utilities providing reciprocal service to do all of the same things that public utilities have to do.[5]

10. Wait a minute. Isn't FERC's reciprocity requirement illegal? You just told me FERC does not have the same legal authority over non-public utilities as it does over public utilities. How can FERC require non-public utilities to do all of these things?

Good questions. FERC says that it isn't requiring non-public utilities to provide reciprocal transmission service - rather, non-public utilities are agreeing to the requirements "voluntarily" when they themselves ask for open access transmission service. NRECA disagrees with FERC on this point - without access to the interstate transmission grid, the typical transmission-dependent REC would not be able to serve its own consumer-members, so seeking access is not "voluntary." But at least for the moment, the reciprocity requirement is a fact of life. And a REC can be hit by a Section 211 complaint filed by a transmission provider at any time, in which FERC could probably impose these same requirements. RECs with substantial transmission facilities should therefore start revamping and upgrading their operations to comply with FERC's new standards in any event, just to stay up with changes in the industry.

11. If my cooperative asks for open access transmission from a public utility, and the public utility seeks reciprocal service from my cooperative, do I have to provide transmission service just to that public utility, or to every other prospective wholesale customer as well?

As things stand now, just to the public utility from whom your cooperative is seeking transmission. FERC has said in Order No. 888, however, that it may reconsider this issue at some future time. It clearly would like to see non-public utilities have open access tariffs available to all wholesale customers.

If your cooperative is a member of a power pool or RTG, the answer is a bit different - your cooperative is then required to provide reciprocal service to all of the other members of the RTG or power pool.

12. The G&T from which my distribution cooperative buys its power would probably be the one that asks for open access transmission service, not my distribution cooperative. Does my distribution cooperative have to provide reciprocal service if its G&T makes such a service request of a public utility?

No. FERC ruled in Order No. 888 that G&T cooperatives and their distribution cooperatives are not "corporate affiliates." If the G&T applies for transmission service, only the G&T must provide reciprocal service (to the extent it can). If the distribution cooperative itself applies for transmission service, than it must offer reciprocal transmission service (the G&T cooperative however, does not have to). Note, however, that this ruling has been challenged in reheating, so it is not final.

13. Can my cooperative do an "end run" around the reciprocity requirement by having a third party (such as a marketer) make the transmission request instead?

No. You cannot avoid the reciprocity requirement by using a marketer or other intermediary to obtain open access transmission. FERC would regard your cooperative as the entity that benefits from the transmission service, so it would have to meet the reciprocity requirement.

14. My cooperative does not have any transmission facilities to speak of. Does it have to provide reciprocal transmission service?

If your cooperative does not own or operate any transmission facilities, it should not have to. If, however, a public utility refuses to provide open access transmission service to your cooperative, on the ground that you have not satisfied the reciprocity requirement, you may have to obtain a ruling from the FERC that says so.

We should also note here that what FERC says constitutes a "transmission facility" and what you think constitutes a transmission facility may not be the same. FERC in Order No. 888 sets out a seven-part test to distinguish transmission and distribution facilities, and looks in part to the use that the utility makes of the facility. If your cooperative has only 34.5 kV lines, but uses them to provide wholesale transmission service to a nearby municipal utility, FERC would probably consider them to be transmission facilities. Again, consult an attorney experienced in FERC matters if you have any doubts.

15. My cooperative does have transmission facilities, and we do want to get open access transmission service from our neighboring IOU. We are working on a transmission tariff which we can use to provide reciprocal service. But how will we know if the tariff is "good enough" to meet the FERC's standards for "comparable" transmission service?

FERC has anticipated this problem. In Order No. 888, it says that cooperatives in your shoes can file a petition for a "declaratory order" with FERC, asking FERC to find that your transmission tariff and rates are "good enough" to meet the reciprocity requirement.[6] If FERC agrees that they are, then any public utility your cooperative seeks open access transmission service from must provide it. While the petition is awaiting FERC action, public utilities that you seek open access transmission service from must provide it. There is no deadline for the filing of such petitions.

16. Is FERC requiring my cooperative to file such a petition?

No, at least not in theory. FERC calls the declaratory order procedure a "voluntary safe harbor." Even if your system does not seek such a ruling from FERC, a public utility can deny your cooperative transmission service only if it believes in "good faith" that the reciprocal transmission service your cooperative is offering is not comparable. But as we know from past experience, one person's "good faith denial" could well be another's "anticompetitive refusal to wheel"!

17. Do you have any idea what FERC will require in a reciprocal transmission tariff?

Not really. NRECA has pressed for details on this issue in its reheating application, but it is still awaiting FERC action. On May 29, 1996, however, FERC issued an order finding that a reciprocal transmission service tariff filed by the South Carolina Public Service Authority (Santee Cooper) did meet the reciprocity requirement, although Santee Cooper's proposed tariff departed from the FERC's form tariff in a few respects.

In so doing, FERC rejected IOU arguments that non-public utilities reciprocity tariffs must be exactly the same as the open access tariffs IOUs must file with FERC. Santee Cooper's tariff, however, was actually very close to the FERC's proposed form tariff. We have no real idea how many departures FERC will allow, or in what area. FERC also found Santee Cooper's rates to be "comparable" without requiring Santee Cooper to go through the equivalent of a full-blown FERC rate case. This is an encouraging sign.

If your cooperative asks for a FERC finding that the cooperative's reciprocal transmission offer meets the standard for comparable service, and FERC declines to make that finding, your cooperative is not going to be hauled off to federal court. FERC will simply decline to find that your offer of reciprocal transmission service meets its standards. Your cooperative will then have to decide, however, if it needs open access transmission service from public utilities so much that it is wiling to modify its own reciprocal transmission tariff to meet FERC's standards. If your cooperative does not do so, then it will be unable to get open access service from public utilities, which could create real problems.

18. My cooperative has some transmission facilities, but they are very minor. We do not have the resources to operate an OASIS, separate our transmission and power sales personnel under the FERC's code of conduct, and do many of the other things FERC appears to want us to do if we provide reciprocal service to our neighboring IOU. Do we really have to do all of these things just to get open access transmission service from the IOU?

FERC has offered the option to "small non-public utilities" of applying for a waiver of some or all of the reciprocal service requirements (OASIS, code of conduct, separation of functions, etc.), just as it has offered a waiver option to "small public utilities." (See discussion in question 5.) The standards it will use to decide whether and when to grant such waivers are not very clear - FERC says only that it will apply the same standards to non-public and small public utilities that seek waivers.

Unlike the waivers applicable to small "public utilities" (discussed above), there is no deadline for the filing of waivers by small "non-public utilities." While small public utilities must file their waiver request by July 9, 1996 (or sixty days before they otherwise would have to comply with the open access, OASIS and code of conduct requirements), small non-public utilities can file their waiver requests whenever it becomes necessary.[7]

We do not know, however, what fact showing your cooperative will have to make to get a waiver from FERC. If you are going to apply for a waiver, we strongly suggest you hire at the outset an attorney and/or consultant experienced in FERC matters to help prepare your cooperative's waiver application. There could be a lot riding on the outcome.

19. My cooperative is not a "public utility" but is a member of an RTG (or a power pool). We have been preparing an open access tariff because everyone else in the RTG (power pool) is doing one. Do we have to do a separate reciprocity tariff as well?

No. FERC says that if a non-public utility has an open access transmission tariff on file with an RTG Administrator, it will be deemed to meet the requirement of offering comparable transmission service. Similarly, a non-public utility that is a member of a power pool can meet the requirement if the power pool adopts a "joint pool-wide open access tariff."

20. What if my cooperative provides reciprocal transmission service to its IOU transmission provider, and my cooperative loses a wholesale power supply customer which my cooperative currently serves to that IOU as a result? Can my cooperative collect any stranded costs it incurs due to the loss of that wholesale customer's power purchases?

We are not yet sure. FERC says in Order No. 888 that it does not have the authority to award non-public utilities stranded cost recovery outside of a Section 211 case. (Of course, FERC does not have authority to require non-public utilities to provide transmission service outside of Section 211, but it is doing that through the reciprocity requirement.) In the Santee Cooper case we discussed earlier, however, FERC did allow Santee Cooper to include in its reciprocal tariff a provision that references stranded costs and their recovery. NRECA asked in its reheating application of Order No. 888 for explicit clarification that stranded cost recovery provisions can be included in the reciprocity service offers of non-public utilities.

EFFECT OF ORDERS ON FUTURE TRANSMISSION SERVICE FROM IOUs

21. Let's talk now about cooperatives in their role as purchasers of power and transmission service from IOU public utilities. My cooperative buys power from our neighboring IOU under a "full requirements" power supply agreement that ends in a few more years. What is going to happen to that agreement under Order No. 888?

Probably not much. FERC chose in Order No. 888 not to break on an industry-wide basis the current requirements-type wholesale power supply agreements between public utilities and their wholesale customers. (There are exceptions in the case of certain coordination and power pool agreements, but that is outside the scope of this discussion.) FERC will generally let the wholesale power supply agreements which IOUs now have with cooperatives and municipalities run their natural course.

However, a customer with a "requirements" type wholesale power supply agreement entered into on or before July 11, 1994, can go to FERC and try to prove that the agreement is unjust, unreasonable, and discriminatory. If the customer can convince FERC that it is, then FERC may terminate the agreement early or modify it. But the customer will bear a "heavy burden" to show that the agreement requires modification. The public utility seller will also have an opportunity in that same proceeding to show FERC that the customer, as a departing customer, should have to pay the costs "stranded" as a result of its departure. So asking for a contract modification or termination is definitely no "sure thing," and may come with a substantial stranded cost price tag.

FERC, however, required public utility sellers of wholesale power to make "informational filings" by July 9, 1996, that split the rates for "bundled" sales into the separate transmission and power components.

22. What kind of service will I be able to get from my cooperative's current IOU power/transmission supplier when the current requirements' power supply agreement terminates or rolls over?

This is not entirely clear. FERC says that at the close of their current agreements, all firm wholesale requirements (and transmission-only) customers will have the right to continue to take transmission service from their existing transmission provider. But to obtain this transmission service, such a customer must agree to "match" the best offer that another customer or prospective customer might make for the transmission service. Current customers will have to match the highest rate (up to the transmission provider's maximum rate) and the longest contract term offered by another customer or potential customer for the capacity/service. FERC calls this matching requirement the "right of first refusal."

NRECA is very concerned about the right of first refusal provision, and has asked FERC to modify it. We are concerned that captive co-op customers who must have transmission service will end up having to match marginal cost-based, long term transmission contract bids from power marketers and other potential transmission customer with much deeper pockets.

Your cooperative will also have to separately procure "ancillary services" to go along with its new "stand-alone" transmission service. Order No. 888 requires public utility transmission providers to "unbundle" the various components of their transmission service that until now were supplied on a "rolled in" basis. This means that your cooperative will have to separately arrange for such ancillary services as reactive power/VAR support, energy imbalance service, scheduling service, etc.

FERC is going to allow substantial flexibility to public utility transmission providers in how they price such ancillary services, so it is not yet clear how this unbundling will affect transmission customers' overall rates. If your cooperative can provide some of these services itself, it may save some money.

STRANDED COST RECOVERY ISSUES

23. Assuming that my cooperative can obtain a new open access transmission agreement from its current IOU power supplier when the current requirements power purchase agreement ends, can my cooperative then go out and shop the market for the best wholesale power deal?

Yes, but be prepared for the possibility that your old power supplier/new transmission provider will hit you with a bill for stranded costs it claims it will incur if you quit purchasing power from it.

24. Wait a minute. Isn't the agreement over? How can my power supplier still collect stranded costs from me if the agreement has expired?

Under FERC's Order No. 888 stranded cost recovery provision, a public utility that loses a wholesale power sales load because that wholesale customer becomes a transmission-only customer can in some cases recover stranded costs even though the agreement is finished. If your agreement was entered into on or before July 11, 1994, and it has no provision dealing with stranded costs, your public utility power supplier/transmission provider can claim stranded costs against your cooperative. FERC says that if the public utility can show that it had a "reasonable expectation" of providing power to your cooperative past the end of the contract term, and the costs it seeks to recover are legitimate and prudently incurred, then your cooperative will have to pay them.

25. But my cooperative's agreement has a "notice of termination"provision in it that says the cooperative can quit purchasing after a period of time if it gives notice of its intent to do so. How can the public utility claim it had a reasonable expectation of providing service after the close of the agreement when it knew my cooperative could "pull the plug" on the agreement, so long as it gave proper notice?

Good point. FERC says such a "notice of termination" provision creates a "rebuttable" presumption that the public utility could not have had a reasonable expectation of serving past the contract term. But the public utility can still attempt to show that it had other reasons for so thinking, and thus "rebut" the presumption. FERC has said that it will look at the facts of each such case individually, which means that cooperatives with such contracts that want to diversify their power supply arrangements can expect a long, drawn-out evidentiary hearing at FERC, unless they can reach a settlement with their traditional IOU power supplier. NRECA has argued to FERC in NRECA's rehearing application that there should be no stranded cost recovery under contracts with such "notice of termination" clauses in them.

26. How will the stranded costs be calculated, and by whom?

Order No. 888 sets out procedures to determine the stranded cost liability of departing wholesale customers. If your cooperative and its public utility power supplier/transmission provider cannot agree on an amount, FERC will decide it. FERC will use a formula to calculate stranded costs based on the revenues the public utility would lose. (FERC calls this the "revenues lost" method.) The "revenues lost" formula is set out in Order No. 888. If your cooperative may be facing a stranded cost bill, you should discuss these aspects of Order No. 888 with your consultants/ attorneys.

27. What if my cooperative's requirements power agreement with its current IOU provider expires, and my cooperative decides to buy power from another supplier and have the power transmitted to our system over the transmission system of a different transmission provider? Can the current IOU power supply provider collect stranded costs from my cooperative?

No, it can't. If your cooperative can use another entity's transmission system to bring the power to your system, then FERC says the stranded costs were not incurred by your current power supply provider as a result of the open access requirements of Order No. 888. Since the loss of your cooperative as a power supply customer is not a result of Order No. 888, stranded cost recovery is not allowed outside of the agreement's terms.

28. My distribution cooperative does not have a power supply agreement directly with an IOU public utility. Rather, my cooperative has an "all requirements" contract with its G&T. Does Order No. 888 affect my cooperative's "all requirements" contract?

Generally, no.

If your G&T is an RUS borrower, then it is not a "public utility" because of the Dairyland case discussed in question No. 3. FERC has no jurisdiction over the wholesale contracts of a non-jurisdictional G&T and its distribution cooperatives.

If your G&T has bought out its RUS debt (and a few have), then it is a "public utility" and your all requirements contract is subject to FERC's jurisdiction. Conceivably, your distribution cooperative could go to FERC and try to convince FERC to modify the agreement, but you would face a very uphill battle.

It would be hard to prove that a contract between a distribution cooperative and its own G&T (which the distribution cooperative helped found, which it voluntarily entered into a power supply agreement with, and in whose management it has a voice) was unjust and unreasonable. It would be even harder to show that your distribution cooperative should not have to pay its fair share of costs stranded if the contract were modified, when the parties that would have to pick up the costs, if your cooperative did not, would be your fellow distribution cooperatives, your G&T, its private lenders, and RUS (if it continues to finance the other member distribution cooperatives).

As we have already explained, FERC's philosophy in Order No. 888 is to set aside wholesale requirements power supply agreements only if a buyer can meet a "heavy burden" of showing that the agreement is unjust, unreasonable, and discriminatory. Even if this burden is met, FERC has set out a cost recovery framework that generally requires departing customers to pay their traditional power supplier the stranded costs associated with their departure, even if the relevant contract (executed on or before July 11, 1994) is terminated. FERC has concluded that "it is appropriate that the departing generation customer, and not the remaining generation transmission customer . . . bear its fair share of the legitimate and prudent obligations that the utility undertook on the customer's behalf."[8] FERC shows every sign of intending to "stick to its guns" on this issue, despite a near-certain court challenge on this issue.

References

1 These orders can be found in Volume 61 of the Federal Register (Fed. Reg.) at pages 21540-21736 and 21737-21854 (May 10, 1996 issue).

2 37 F.P.C., 12, 37 F.P.C. 495 (1967).

3 391 F2d 470 (D.C. Cir.) cert. denied, 393 U.S. 857 (1968).

4 See 18 C.F.R. Section 3528(d), 61 Fed. Reg. 21694 (May 10, 1996).

5 Public utilities are also subject to the reciprocity requirements. If, however, a public utility has complied with the open access tariff, code of conduct, and OASIS provisions of Order Nos. 888 and 889 (or obtained the necessary waivers of these provisions from FERC), then FERC considers the public utility to have met the reciprocity requirement. Thus, reciprocity is more of an issue for non-public utilities.

6 See 18 C.F.R. Section 35.28(e)(1).

7 18 C.F.R. Section 35.28(e)(2).

8 61 Fed. Reg. 21634.

Editor's Note: Please understand that publishing and printing deadlines may result in the resolution of certain issues not being reflected in this article, and that certain key dates in the Implementation Timetable may have passed.

RELATED ARTICLE: IMPLEMENTATION TIMETABLE (PARTIAL)

FERC ORDER NOS. 888 & 889

FERC issues Order Nos. 888 and 889 April 24, 1996

Orders printed in the Federal Register May 10, 1996

"Public utilities" subject to FERC's orders must file open access tariffs and rates (if not already on file) or requests for waivers of the Order No. 888 open access requirements On or before July 9, 1996

"Public utilities" subject to FERC's orders must file requests for waivers of the Code of Conduct and OASIS requirements of Order No. 889 On or before July 9, 1996

Parties interested in the open access tariff and rate filings of public utilities must file their motions to intervene/protests at FERC 15 days after filings made (July 24 if filings made on July 9)

"Public utilities" subject to Order No. 889 must comply with OASIS Phase I and Code of Conduct requirements unless waiver has been obtained from FERC November 1, 1996

Filings by non-public utilities for waiver of the reciprocity requirement No deadline

Filings by non-public utilities of petitions for declaratory order finding offer of reciprocal transmission service "comparable" No deadline

Wallace Tillman is currently chief counsel and director of the Energy Policy Department of the National Rural Electric Cooperative Association. Prior to a recent reorganization within NRECA, he served as executive director of the Energy & Environmental Policy Division for five years, and before that served as Senior Regulatory Counsel in E&EP and as a Legislative Representative in the Government Relations Department. Before joining NRECA in 1975, Mr. Tillman was a trial attorney for the Federal Trade Commission's Division of Marketing Practices, Bureau of Consumer Protection in Washington, D.C.

Mr. Tillman is chair of the Publications Committee of the Section, serves as a vice-chair of the Electricity Committee, and is a member of the Council Group of the American Bar Association Section of Public Utility, Communication and Transportation Law.

Mr. Tillman received his LL.B. degree in June 1968 from the Walter F. George School of Law, Mercer University, Macon, Georgia; and his undergraduate degree from Emory University, Atlanta, Georgia, in 1965. A native of Baxley, Georgia, Mr. Tillman and his family now reside in Washington, D.C.

Susan N. Kelly attended high school and college in Missouri, earning her A.B. degree in interdisciplinary studies and economics, magna cum laude, in 1977 from the University of Missouri-Columbia. She earned her J.D. degree with high honors from the George Washington University in Washington, D.C., in 1980.

After graduating from law school, Ms. Kelly associated with the Washington, D.C., law firm of Crowell and Moring, where she specialized early in the energy field. In 1982 she joined Miller, Balls and O'Neil, P.C., and in 1987 became a shareholder in the firm. At Miller, Balis and O'Neil, P.C., she continued her energy practice, representing publicly-owned natural gas distribution systems. She represented numerous clients in FERC and appellate proceedings, and in contract negotiations with gas suppliers and transporters.

In March 1995, Ms. Kelly left private law practice, joining NRECA as its regulatory counsel. Ms. Kelly monitors events affecting NRECA's members at the FERC, SEC and state public utility commissions, and assists NRECA in formulating its positions on issues such as the restructuring of the electric industry.

Ms. Kelly has given presentations on energy issues to many organizations. She is active in the Federal Energy Bar Association, serving on its board of directors. She is also a member of numerous bars, including the United States Court of Appeals for the District of Columbia Circuit and the Supreme Court of the United States.
COPYRIGHT 1996 National Rural Electric Cooperative Association
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

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Author:Tillman, Wallace; Kelly, Susan
Publication:Management Quarterly
Date:Jun 22, 1996
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