FERC Issues Final Rule Requiring Organized Markets to Offer Long-Term Transmission Rights

On July 20, 2006, the Federal Energy Regulatory Commission (FERC) issued Order No. 681, a final rule requiring that Regional Transmission Organizations (RTOs), Independent System Operators (ISOs), or any other "Transmission Organization" that operates organized day-ahead and real-time markets in which congestion is managed through financial rights to offer long-term firm transmission rights (LTTRs) to market participants.

Implementation of New Statutory Requirement Plan

Section 1233(b) of the Energy Policy Act of 2005 (EPAct 2005) requires FERC to adopt a rule or order implementing Section 217(b)(4) of the Federal Power Act in organized electricity markets. Section 217(b)(4) requires that FERC exercise its authority:

in a manner that facilitates the planning and expansion of transmission facilities to meet the reasonable needs of load serving entities to satisfy the service obligations of the load-serving entities, and enables load-serving entities to secure firm transmission rights (or equivalent tradable or financial rights) on a long-term basis for long-term power supply arrangements made, or planned, to meet such needs.

Compliance Requirements

Order No. 681 requires each Transmission Organization subject to the rule to file, by the end of February 2007, tariff sheets providing for LTTRs that comport with the directives in Order No. 681. Transmission Organizations currently subject to the rule are the New York Independent System Operator, ISO-New England, PJM Interconnection, LLC, and Midwest Independent Transmission System Operator. The California Independent System Operator Corporation will be subject to the rule once it implements a day-ahead market. Any RTO developed in the future that adopts both day-ahead and real-time markets and manages congestion through financial rights must incorporate LTTRs into its market design.

Guidelines for LTTRs

Transmission Organizations must develop LTTRs that are consistent with seven guidelines set forth in Order No. 681, but otherwise have the flexibility to develop individual approaches to LTTR implementation. The seven guidelines are:

1. The long-term firm transmission right should specify a source (injection node or nodes) and sink (withdrawal node or nodes), and a quantity;

2. The long-term firm transmission right must provide a hedge against day-ahead locational marginal pricing congestion charges or other direct assignment of congestion costs for the period covered and quantity specified. Once allocated, the financial coverage provided by a financial long-term right should not be modified during its term (the "full funding" requirement) except in the case of extraordinary circumstances or through voluntary agreement of both the holder of the right and the transmission organization;

3. Long-term firm transmission rights made feasible by transmission upgrades or expansions must be made available upon request to any party that pays for such upgrades or expansions in accordance with the transmission organization's prevailing cost allocation methods for upgrades or expansions;

4. Long-term firm transmission rights must be made available with term lengths (and/or rights to renewal) that are sufficient to meet the needs of load serving entities to hedge long-term power supply arrangements made or planned to satisfy a service obligation. The length of term of renewals may be different from the original term. Transmission organizations may propose rules specifying the length of terms and use of renewal rights to provide long-term coverage, but must be able to offer firm coverage for at least a 10 year period;

5. Load-serving entities must have priority over non-load serving entities in the allocation of long-term firm transmission rights that are supported by existing transmission capacity. The transmission organization may propose reasonable limits on the amount of existing transmission capacity used to support long-term firm transmission rights;

6. A long-term transmission right held by a load-serving entity to support a service obligation should be re-assignable to another entity that acquires that service obligation; and

7. The initial allocation of the long-term firm transmission rights shall not require recipients to participate in an auction.

In addition to issuing LTTRs that comport with these requirements, Order No. 681 requires each Transmission Organization subject to the rule to engage in planning and expansion processes that ensure that LTTRs will remain feasible over their entire terms.

###