Energy Legal Blog

Firm Transmission to Be Available for Terms of 10 Years in Organized Markets

FERC has adopted a final rule requiring organized electricity markets to offer load servers long-term firm transmission rights (FTR) in existing transmission capacity for a minimum of 10 years [Order No. 681].  In the Energy Policy Act of 2005 (EPAct 2005) Congress directed FERC to implement a new § 217(b)(4) of the Federal Power Act, which obligates FERC to use its authority to meet the "reasonable needs" of load serving entities to meet their long-term service obligations.  The new rule answers that directive and will likely become effective in late August.   

FTRs are used to manage the price risk of congestion charges in organized markets that manage congestion using locational marginal pricing (LMP).   The virtue of LMP is that it allows all generation resources in a market (as opposed to only the system operator’s resources) to participate in redispatch to manage congestion.  The disadvantage is that LMPs are ex post and can be volatile.  An FTR hedges volatility and uncertainty by flowing to its holder congestion revenues that largely (if not completely) offset LMP congestion charges.  Until now, however, FTRs have generally been available only for terms up to one year.   As a consequence, transmission customers in organized LMP transmission markets have been denied long-term transmission price certainty that is otherwise available to network and point-to-point customers in open-access markets.  FERC’s new requirement that all organized markets offer long-term FTRs in existing transmission capacity is directed at curing that deficiency.  This is significant since the absence of firm long-term transmission arrangements have deterred many power customers from committing to long-term power supply arrangements.    

While FERC originally proposed eight guidelines for designing and administering long-term FTRs, the final rule adopts only seven.  Long-term FTRs are to   

·        specify a source, a sink, and a quantity;

·        hedge against day-ahead locational marginal pricing congestion charges or other direct assignment of congestion costs for the period covered and quantity specified;

·        be made available to any party that pays for upgrades or expansions that create the underlying transmission capacity;

·        be offered for terms (and/or with renewal rights) sufficiently long to meet the needs of load-serving entities to hedge long-term power supply arrangements entered into in order to meet a service obligation;

·        be allocated to load servers before customers lacking a load service obligation;

·        be assignable to the successor to a load server; and

·        be allocated initially with no requirement that recipients participate in an auction. 

The operator of an organized market required by the rule to offer long-term FTRs is accorded reasonable discretion to determine how many long-term FTRs it will make available and how many it will instead offer for shorter terms. 

In the one jettisoned guideline, FERC had proposed a preference for load servers with long-term power supply arrangements over those with only short-term power supply arrangements.  Many had objected to that preference on the ground that determining what constituted a long-term power supply would impose an unwarranted burden on the market operator.  FERC agreed and eliminated this preference in favor of a more general preference that makes the long-term FTRs available to all load servers before customers lacking a load service obligation.  In the final rule, FERC also maintained its current practice of requiring that FTRs be made available to those who pay for transmission upgrades or expansions that create the capacity underlying the FTRs, regardless of load service obligation.   

RTOs and ISOs must revise their tariffs in accordance with the new rule within 180 days of the rule's publication in the Federal Register, or alternatively explain how their existing tariffs already satisfy the long-term FTR requirement.  As PJM has already submitted to FERC a proposal for offering long-term FTRs [link to blog article on this], it will now need to review that proposal to ensure it conforms to the seven guidelines of the final rule.  [FERC Docket No. RM06-8]