Long-Term Firm Transmission Rights in Organized Electricity Markets, 68440-68458 [E6-19999]

Agencies

• DEPARTMENT OF ENERGY
• Federal Energy Regulatory Commission

[Federal Register Volume 71, Number 227 (Monday, November 27, 2006)]
[Rules and Regulations]
[Pages 68440-68458]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-19999]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Part 42

[Docket No. RM06-8-001; Order No. 681-A]


Long-Term Firm Transmission Rights in Organized Electricity 
Markets

November 16, 2006.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Order on Rehearing and Clarification.

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SUMMARY: The Federal Energy Regulatory Commission is issuing an order 
on rehearing and clarification of Long-Term Firm Transmission Rights in 
Organized Electricity Markets, Order No. 681, 71 FR 43564 (Aug. 1, 
2006). The order on rehearing denies rehearing and upholds Order No. 
681 in all respects, and grants certain limited clarifications.

DATES: Effective Date: Order No. 681 became effective on August 31, 
2006.

FOR FURTHER INFORMATION CONTACT: Udi E. Helman (Technical Information), 
Office of Energy Markets and Reliability, Federal Energy Regulatory 
Commission, 888 First Street, NE., Washington, DC 20426, (202) 502-
8080.

Roland Wentworth (Technical Information), Office of Energy Markets and 
Reliability, Federal Energy Regulatory Commission, 888 First Street, 
NE., Washington, DC 20426, (202) 502-8262.
Harry Singh (Technical Information), Office of Enforcement, Division of 
Energy Market Oversight, Federal Energy Regulatory Commission, 888 
First Street, NE., Washington, DC 20426, (202) 502-6341.
Jeffery S. Dennis (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-6027.
Heidi Werntz (Legal Information), Office of the General Counsel, 
Federal Energy Regulatory Commission, 888 First Street, NE., 
Washington, DC 20426, (202) 502-8910.

SUPPLEMENTARY INFORMATION:
Before Commissioners: Joseph T. Kelliher, Chairman; Suedeen G. Kelly, 
Marc Spitzer, Philip D. Moeller, and Jon Wellinghoff.

    1. On July 20, 2006, the Commission issued a Final Rule in this 
proceeding.\1\ In the Final Rule, the Commission amended its 
regulations to require each transmission organization that is a public 
utility with one or more organized electricity markets to make 
available long-term firm transmission rights that satisfy each of the 
guidelines established by the Commission in this Final Rule. We took 
this action pursuant to section 1233 of the Energy Policy Act of 2005 
(EPAct 2005), which added new section 217 to the Federal Power Act 
(FPA).\2\ The Final Rule required each transmission organization 
subject to its requirements to file with the Commission, no later than 
January 29, 2007, either (1) tariff sheets and rate schedules that make 
available long-term firm transmission rights that satisfy each of the 
guidelines set forth in the final regulations, or (2) an explanation of 
how its current tariff and rate schedules already provide for long-term 
firm transmission rights that satisfy each of the guidelines. A 
transmission organization approved by the Commission for operation 
after January 29, 2007 will be required to satisfy the requirements of 
the Final Rule.
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    \1\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Order No. 681, 71 FR 43564 (Aug. 1, 2006), FERC Stats. & 
Regs. ] 31,226 (2006) (Final Rule).
    \2\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 957 (2005) 
(to be codified at 16 U.S.C. Sec.  824q).
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    2. The guidelines adopted in the Final Rule give transmission 
organizations the flexibility to propose designs for long-term firm 
transmission rights that reflect regional preferences and accommodate 
their regional market designs, while also ensuring that the objectives 
of Congress expressed in new section 217(b)(4) of the FPA are met. The 
Commission allowed regional flexibility in setting the terms of the 
rights, but required that long-term firm transmission rights be made 
available with terms (and/or rights to renewal) that are sufficient to 
meet the reasonable needs of load serving entities to support long-term 
power supply arrangements used to satisfy their service obligations.
    3. In this order, the Commission denies rehearing and upholds its 
determinations in the Final Rule. We also offer certain clarifications.

I. Background

A. The Development of ISOs and RTOs

    4. In both our Notice of Proposed Rulemaking (NOPR) \3\ and the 
Final Rule, we discussed the development of Independent System 
Operators (ISOs) and Regional Transmission Organizations (RTOs). In 
Order No. 888, the Commission found that undue discrimination and 
anticompetitive practices existed in the provision of electric 
transmission service in interstate commerce.\4\ Accordingly, the 
Commission required all public utilities that own, control or operate 
facilities used for transmitting electric energy in interstate commerce 
to file open access transmission tariffs (OATTs) containing certain 
non-price terms and conditions and to ``functionally unbundle'' 
wholesale power services from transmission services.\5\ In addition, 
the Commission found in Order No. 888 that ISOs had the potential to 
aid in remedying undue discrimination and accomplishing comparable 
access.\6\
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    \3\ Long-Term Firm Transmission Rights in Organized Electricity 
Markets, Notice of Proposed Rulemaking, 71 FR 6693 (Feb. 9, 2006), 
FERC Stats. & Regs. ] 32,598 (2006) (NOPR).
    \4\ Promoting Wholesale Competition Through Open Access Non-
discriminatory Transmission Services by Public Utilities; Recovery 
of Stranded Costs by Public Utilities and Transmitting Utilities, 
Order No. 888, 61 FR 21540 (May 10, 1996), FERC Stats. & Regs. ] 
31,036 at 31,682 (1996), order on reh'g, Order No. 888-A, 62 FR 
12274 (March 14, 1997), FERC Stats & Regs. ] 31,048 (1997), order on 
reh'g, Order No. 888-B, 81 FERC ] 61,248 (1997), order on reh'g, 
Order No. 888-C, 82 FERC ] 61,046 (1998), aff'd in relevant part sub 
nom. Transmission Access Policy Study Group v. FERC, 225 F.3d 667 
(D.C. Cir. 2000), aff'd sub nom. New York v. FERC, 535 U.S. 1 
(2002).
    \5\ Under functional unbundling, the public utility is required 
to: (1) Take wholesale transmission services under the same tariff 
of general applicability as it offers its customers; (2) state 
separate rates for wholesale generation, transmission and ancillary 
services; and (3) rely on the same electronic information network 
that its transmission customers rely on to obtain information about 
the utility's transmission system. Id. at 31,654.
    \6\ Order No. 888 at 31,655; Order No. 888-A at 30,184.
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    5. In light of the creation of ISOs and other changes in the 
electric industry, the Commission issued Order No. 2000.\7\ In that 
order, the Commission concluded that traditional management of the 
transmission grid by vertically integrated electric utilities was 
inadequate to support the efficient and reliable operation of 
transmission facilities necessary for continued development of 
competitive electricity

[[Page 68441]]

markets,\8\ and opportunities for undue discrimination continued to 
exist.\9\ As a result, the Commission adopted rules to facilitate the 
voluntary development of RTOs. The Commission concluded that RTOs would 
provide several benefits, including regional transmission pricing, 
improved congestion management, and more effective management of 
parallel path flows.\10\
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    \7\ Regional Transmission Organizations, Order No. 2000, FERC 
Stats. & Regs. ] 31,089 (1999), order on reh'g, Order No. 2000-A, 
FERC Stats. & Regs. ] 31,092 (2000), aff'd sub nom. Public Utility 
District No. 1 of Snohomish County, Washington v. FERC, 272 F.3d 607 
(D.C. Cir. 2001).
    \8\ Order No. 2000 at 30,992-93 and 31,014-15.
    \9\ Id. at 31,015-17.
    \10\ Id. at 31,024.
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    6. Most of the RTOs and ISOs now operate organized markets for 
energy and/or ancillary services in addition to providing transmission 
service under a single transmission tariff. Under the definitions 
adopted in the Final Rule, these RTOs and ISOs are transmission 
organizations with organized electricity markets subject to the 
regulations adopted in this proceeding.
    7. Most of the organized electricity markets operated by 
transmission organizations utilize a congestion management system based 
on Locational Marginal Pricing (LMP). Congestion is defined as the 
inability to inject and withdraw additional energy at particular 
locations in the network due to the fact that the injections and 
withdrawals would cause power flows over a specific transmission 
facility to violate the reliability limits for that facility. The 
market operator manages congestion by scheduling and dispatching 
generators that can meet load in the presence of congestion. 
Financially, in LMP markets the price of congestion is measured as the 
difference in the cost of energy at two different locations in the 
network. When such price differences occur, a congestion charge is 
assessed to transmission users based on their injections and 
withdrawals at particular locations. These price differences can be 
variable and difficult to predict. In order to manage the risk 
associated with the variability in prices due to transmission 
congestion, these markets use various forms of financial transmission 
rights (FTRs),\11\ which enable market participants who hold the rights 
to protect against such price risks. In most cases, these FTRs have 
terms of one year or less.\12\ In general, load serving entities 
receive FTRs through either direct allocation or through a two-step 
process in which the load serving entity is first allocated auction 
revenue rights (ARRs) and then either uses those rights to purchase 
FTRs, or has the ability under the transmission organization tariff to 
convert them to FTRs.\13\
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    \11\ While ``FTR'' is sometimes used to refer to ``firm 
transmission rights,'' in this Final Rule we use this acronym to 
refer to the various forms of financial transmission rights that 
exist in organized electricity markets. In some markets, these are 
referred to as congestion revenue rights or transmission congestion 
contracts.
    \12\ In May 2005, the Commission released a Staff Paper that 
provided background and solicited comments on whether long-term 
transmission rights were needed in the ISO and RTO markets, and if 
so, how to implement them. Notice Inviting Comments On Establishing 
Long-Term Transmission Rights in Markets With Locational Pricing and 
Staff Paper, Long-Term Transmission Rights Assessment, Docket No. 
AD05-7-000 (May 11, 2005) (Staff Paper). There, the current FTR 
situation was discussed. See id. at 1 (stating that, as of the date 
of issuance ``the longest term FTR offered in any of the RTO or ISO 
markets is one year'').
    \13\ For a more detailed discussion, see NOPR at P 27. As we 
noted in the NOPR, ARRs confer the right to collect revenues from 
the subsequent FTR auction.
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B. Interest in Long-Term Firm Transmission Rights

    8. We noted in the Final Rule that in recent years, interest in 
long-term firm transmission rights in organized electricity markets has 
increased, stemming in large part from a desire of some market 
participants to obtain rights that replicate the transmission service 
that was available to them prior to the formation of the organized 
electricity markets and remains available today in regions without 
organized electricity markets. The principal concern of these market 
participants is the inability to obtain a fixed, long-term level of 
service under pricing arrangements that hedge the congestion cost risk 
that they face in the organized electricity markets.\14\
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    \14\ See Staff Paper at 1-2.
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    9. There are several important differences between transmission 
service under the Order No. 888 pro forma OATT and transmission rights 
in organized electricity markets that use LMP and FTRs.\15\ However, 
the differences that are most relevant for purposes of the Final Rule 
concern the management of congestion, the recovery of congestion costs, 
and the availability of long-term service arrangements. These 
differences are discussed in the Final Rule.\16\
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    \15\ A detailed discussion of transmission rights in traditional 
and organized markets was presented in the NOPR at P 15-33.
    \16\ Final Rule at P 7-10.
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C. Energy Policy Act of 2005

    10. On August 8, 2005, EPAct 2005 \17\ became law. As noted above, 
section 1233 of EPAct 2005 added a new section 217 to the FPA, which 
provides:
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    \17\ Pub. L. No. 109-58, 119 Stat. 594.

    The Commission shall exercise the authority of the Commission 
under this Act 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.\18\
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    \18\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.

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    Section 1233(b) of EPAct 2005 requires:

    Within 1 year after the date of enactment of this section and 
after notice and an opportunity for comment, the Commission shall by 
rule or order, implement section 217(b)(4) of the Federal Power Act 
in Transmission Organizations, as defined by that Act with organized 
electricity markets.\19\
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    \19\ Id. at 960. Transmission organization is defined in EPAct 
2005 as ``a Regional Transmission Organization, Independent System 
Operator, independent transmission provider, or other transmission 
organization finally approved by the Commission for the operation of 
transmission facilities.'' Pub. L. No. 109-58, Sec.  1291, 119 Stat. 
594, 985. In the Final Rule, we adopted this definition with slight 
modifications for the purposes of the Final Rule.
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D. Notice of Proposed Rulemaking

    11. On February 2, 2006, the Commission issued a NOPR that proposed 
to amend its regulations to require each transmission organization that 
is a public utility with one or more organized electricity markets to 
make available long-term firm transmission rights that satisfy 
guidelines established by the Commission.\20\ The NOPR proposed eight 
guidelines, and sought comments on various issues raised by the 
introduction of long-term firm transmission rights in the organized 
electricity markets.
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    \20\ See supra note 3.
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E. Final Rule: Order No. 681

    12. As noted above, in the Final Rule the Commission adopted 
regulations requiring public utilities that are transmission 
organizations with organized electricity markets (as defined in the 
Final Rule) to make available long-term firm transmission rights that 
satisfy each of the seven guidelines established by the Commission, 
which are set forth in the regulations. By adopting guidelines for the 
development of long-term firm transmission rights, the Commission gave 
transmission organizations the flexibility to propose designs for long-
term firm transmission rights that reflect regional preferences and 
accommodate regional market designs, while ensuring that the objectives 
of Congress expressed in new section 217(b)(4) of the FPA are met.\21\
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    \21\ The Commission discussed the possibility that the flexible 
regional approach adopted in the Final Rule could create seams 
issues, and directed each transmission organization to explain in 
its compliance filing how its proposal addresses potential seams 
issues. Final Rule at P 107.

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[[Page 68442]]

    13. In adopting the Final Rule, the Commission explained that it 
sought to provide increased certainty regarding the congestion cost 
risks of long-term firm transmission service in organized electricity 
markets that will help load serving entities and other market 
participants make new investments and other long-term power supply 
arrangements. The Commission also stated that the guidelines adopted in 
the Final Rule are designed and intended primarily to ensure that the 
long-term firm transmission rights that are made available by 
transmission organizations that are subject to the rule have 
characteristics that will support long-term power supply 
arrangements.\22\
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    \22\ Final Rule at P 16.
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    14. Additionally, the Final Rule made clear that, while it 
unequivocally requires transmission organizations to offer long-term 
firm transmission rights with characteristics that will support long-
term power supply arrangements, in most cases, offering such rights 
should not require major changes in allocations or allocation 
procedures.\23\ We noted that our intent with regard to the existing 
transmission system is that load serving entities be able to request 
and obtain transmission rights up to a reasonable amount on a long-term 
firm basis, instead of being limited to obtaining exclusively annual 
rights.\24\ Moreover, we emphasized that offering such rights should 
not force transmission organizations to provide rights to the existing 
system that are infeasible, and that the Final Rule does not 
necessarily guarantee that a load serving entity will be able to obtain 
long-term firm transmission rights to hedge its entire resource 
portfolio or be able to obtain all the long-term firm transmission 
rights it requests.
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    \23\ As we discuss in more detail below, while we do not believe 
major changes to existing allocation procedures will be necessary, 
Congress did not intend to protect existing or future allocation 
methodologies from the implementation of section 217(b)(4) of the 
FPA. See new section 217(c) of the FPA, Pub. L. No. 109-58, Sec.  
1233, 119 Stat. 594, 958-959.
    \24\ Capacity available would be limited to that which is 
generally available and excludes capacity that is the exclusive 
right of a participant, e.g., a participant that paid for such 
capacity and obtained FTRs for that payment.
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    15. The specific guidelines adopted by the Commission in the Final 
Rule, which the long-term firm transmission rights offered by 
transmission organizations must satisfy, 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 (MW).
    (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 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 capacity. The transmission 
organization may propose reasonable limits on the amount of existing 
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.
    (7) The initial allocation of the long-term firm transmission 
rights shall not require recipients to participate in an auction.

    In the preamble to the Final Rule, the Commission discussed each 
guideline in detail.
    16. The Final Rule also required transmission organizations with 
organized electricity markets to explain how their transmission system 
planning and expansion policies will ensure that long-term firm 
transmission rights, once allocated, remain feasible over their entire 
term. Additionally, it required each transmission organization subject 
to the rule to make its planning and expansion practices and procedures 
publicly available, including both the actual plans and any underlying 
information used to develop the plans.

II. Discussion

A. Procedural Matters

    17. Timely requests for rehearing and/or clarification were filed 
by the following entities: American Public Power Association (APPA), BP 
Energy Company (BP), Public Utilities Commission of the State of 
California (CPUC), California Department of Water Resources--State 
Water Project (DWR), Midwest ISO Transmission Owners (Midwest TOs), 
Modesto Irrigation District (Modesto), New York Independent System 
Operator, Inc. (NYISO), City of Santa Clara (Santa Clara), Sacramento 
Municipal Utility District (SMUD), and Transmission Access Policy Study 
Group (TAPS).
    18. On September 13, 2006, Electric Power Supply Association (EPSA) 
filed supplemental comments, and PJM Interconnection, L.L.C. (PJM) 
filed a motion for leave to answer, as well an answer. SMUD and Modesto 
both moved to strike PJM's answer, while APPA and TAPS submitted a 
joint reply to PJM's answer.
    19. Rule 213(a)(2) of the Commission's Rules of Practice and 
Procedure \25\ prohibits an answer to a request for rehearing unless 
otherwise ordered by the decisional authority. We are not persuaded to 
accept PJM's answer, EPSA's supplemental comments (which are in the 
form of an answer), or the responses to those answers, and will, 
therefore, reject them.
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    \25\ 18 CFR 385.213(a)(2) (2006).
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B. Requests for Rehearing and Clarification and Commission Conclusions

1. Definition of Load Serving Entity and Service Obligation
    20. In the Final Rule, as proposed in the NOPR, the Commission 
adopted the definitions of load serving entity and service obligation 
exactly as Congress defined those terms in new section 217 of the FPA. 
Specifically, the Final Rule defines load serving entity as ``a 
distribution utility or electric utility that has a service 
obligation.'' \26\ The term ``service obligation'' is defined as ``a 
requirement applicable to, or the exercise of authority granted to, an 
electric utility under Federal, State, or local law or under long-term 
contracts to provide electric service to end-users or to a distribution 
utility.'' \27\ The Commission reasoned that using the definitions 
provided by Congress would most closely effectuate the intent of 
Congress in enacting section 217(b)(4) of the FPA. The Commission did, 
however, offer several clarifications. For example, the Commission 
clarified that non-public utilities are within the definition of load 
serving entity, provided they

[[Page 68443]]

have a service obligation.\28\ The Commission also clarified that 
industrial customers who self-supply their own load are construed to be 
load serving entities under the Final Rule, even though some of these 
entities may not technically ``sell * * * electric energy.'' The 
Commission stated that this would ensure that Congress' objectives 
under the FPA are fulfilled.
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    \26\ Final Rule at P 44; 18 CFR 42.1(b)(2); section 217(a)(2) of 
EPAct.
    \27\ Final Rule at P 44; 18 CFR 42.1(b)(3); section 217(a)(3) of 
EPAct.
    \28\ Final Rule at P 45.
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Rehearing Requests

    21. DWR states that the Commission erred in assuming that a water 
pumping entity under section 217(g) of the FPA necessarily has an 
electric service obligation as defined in section 217(a)(3) of the FPA 
and under 18 CFR 42.1. DWR asserts that the Final Rule misapprehends 
the nature of water pumping entities, who, unlike load serving 
entities, have no ``service obligation'' as defined in section 
217(a)(3) of the FPA and the Final Rule. DWR asserts that new 
regulatory language in 18 CFR 42.1 is necessary to ensure compliance 
with section 217(g) of the FPA. Specifically, DWR argues that section 
217(g) of the FPA expressly distinguishes water pumping entities from 
load serving entities, stating:

    Water Pumping Facilities--The Commission shall ensure that any 
entity described in section 201(f) that owns transmission facilities 
used predominately to support its own water pumping facilities shall 
have, with respect to the facilities, protections for transmission 
service comparable to those provided to load-serving entities 
pursuant to this section.

    Id. (emphasis added). DWR argues that, while the Final Rule clearly 
intends to implement section 217(g), it does so in an erroneous 
fashion, by conflating water pumping facilities--which have no electric 
service obligation--with load serving entities. DWR asserts that the 
Final Rule erroneously states that water pumping facilities, which are 
non-public utilities, already appear to be captured by the definition 
of load serving entity, ``provided of course, that they have a service 
obligation.'' \29\ DWR points out that ``service obligation'' in the 
Final Rule is defined as ``a requirement applicable to, or the exercise 
of authority granted to, an electric utility under Federal, State or 
local law or under long-term contracts to provide electric service to 
end-users or to a distribution utility.\30\ DWR argues that this 
regulatory language makes no mention of the water pumping facilities as 
described by Congress in section 217(g) of the FPA.
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    \29\ Request for Rehearing/Clarification of DWR at 5 (quoting 
Final Rule at P 48).
    \30\ Id. at 6 (citing 18 CFR 42.1(b)(3); section 217(a)(3) of 
EPAct).
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    22. DWR explains that it has put into place long-term transmission 
entitlements used ``to support its own water pumping facilities'' as 
provided in section 217(g). DWR states that, while it self-provides 
power to its own water pumping facilities, it does not provide electric 
service to end-users or to a distribution utility, as it must to 
qualify as a load serving entity under 18 CFR 42.1(b)(3). Rather, DWR 
is a water agency whose pumping facilities provide flood management, 
water deliveries, and other water related services to California. 
Therefore, DWR asks the Commission to revise section 42.1 of the 
regulations to ensure compliance with section 217(g) of the FPA.
    23. BP also requests clarification of the scope of the Final Rule's 
definition of a load serving entity. BP states that it is concerned 
that the Final Rule does not consistently apply its definition of a 
load serving entity eligible for long-term firm transmission rights 
allocation priority. BP argues that the Final Rule discriminates 
against certain entities with binding contractual obligations to 
provide power to load serving entities, by denying them load serving 
entity status, while granting load serving entity status to other 
similarly situated entities. BP points out that Manitoba Hydro had 
argued that the priority allocation of long-term firm transmission 
rights should extend to entities that, through agreement with a load 
serving entity, have ``provided the transmission required by the load-
serving entity to satisfy its service obligation and agreed to assume 
congestion risk.'' \31\ BP states that Manitoba Hydro cited the 
Commission's assertion that it sought to help ``other market 
participants'' as well as load serving entities make new investments 
and other long-term power supply arrangements. BP reiterates Manitoba 
Hydro's example of a load serving entity unable to obtain transmission 
that utilizes another party's transmission rights in exchange for 
assumption of the congestion risk.\32\ BP states that Manitoba Hydro 
requested the Commission to ensure that if a market participant other 
than a load serving entity has a contractual obligation to a load 
serving entity to provide transmission rights and to assume associated 
congestion risk, it too should have priority access to long term firm 
transmission rights in the same manner as a load serving entity.\33\ In 
the same vein, BP similarly requests the Commission to clarify that, 
like those entities that self supply, entities that enter into long-
term obligations to sell electric energy to load serving entities that 
have the option to self supply, be similarly construed as load serving 
entities for purposes of the Final Rule.\34\
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    \31\ Request for Rehearing of BP at 7 (citing Manitoba Hydro 
Comments at 1).
    \32\ Id. (citing Manitoba Hydro Comments at 3).
    \33\ Id. at 8 (citing Manitoba Hydro Comments at 3-4).
    \34\ Id.
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Commission Conclusion
    24. With respect to the issue raised by DWR concerning whether 
water pumping entities fall under the definition of load serving 
entities, we grant clarification. While water pumping entities do not 
come under the definition of load serving entities, we clarify that, to 
effectuate Congressional intent, water pumping entities as described in 
section 217(g) of the FPA should be treated as load serving entities. 
As DWR points out, section 217(g) of the FPA provides that the 
``Commission shall ensure that any entity described in section 201(f) 
[of the FPA] that owns transmission facilities used predominately to 
support its own water pumping facilities shall have, with respect to 
the facilities, protections for transmission service comparable to 
those provided to load-serving entities pursuant to this section.'' 
\35\ From this provision, it is evident that Congress intended water 
pumping entities, such as DWR, to be on par with load serving entities 
with respect to protections for transmission services. Consequently, we 
clarify that water pumping entities and their obligation to provide 
water related services, as described in section 217(g), should be 
construed as meeting the definition of ``service obligation'' in 18 CFR 
42.1(b)(3), and should be treated as load serving entities with service 
obligations for purposes of the Final Rule. This should effectuate 
Congressional intent that water pumping entities receive protections 
for transmission service comparable to those provided to load-serving 
entities.
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    \35\ EPAct 2005, Pub. L. No. 109-58, Sec.  1233, 119 Stat. at 
959.
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    25. Next, we deny BP's request to construe entities that enter into 
long-term obligations to sell electric energy to load serving entities 
that have the option to self supply as load serving entities. As we 
stated in the Final Rule (in the discussion of guideline (5)), we 
cannot allow certain entities that do not meet the strict definition of 
load serving entity to come under the definition of load serving entity 
and, consequently, receive priority in allocation of long-

[[Page 68444]]

term firm transmission rights.\36\ Extending the definition as BP 
requests would likely defeat the purpose of the preference, which is to 
ensure that load serving entities have sufficient protection for 
transmission service. If, as BP requests, we were to construe a 
supplier of a load serving entity, such as a generator, to be a load 
serving entity, this could lead to a situation where multiple load 
serving entities are counting the same load as part of their load 
serving obligation.
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    \36\ See Final Rule at P 326.
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    26. Furthermore, we disagree with BP's contention that the Final 
Rule does not consistently apply the definition of load serving entity. 
In the Final Rule, we construed large industrial customers who self-
supply their own load to be load serving entities for purposes of the 
Final Rule, in order to ensure fulfillment of Congress's objectives in 
section 217 of the FPA.\37\ While a large industrial customer is not 
technically a ``distribution utility'' or an ``electric utility,'' like 
a traditional load serving entity it provides electricity to serve its 
``load,'' i.e., its industrial facilities, on an ongoing basis from 
either its own generation or through a direct purchase from another 
generator. Contrary to BP's assertion, large industrial customers who 
self-supply their own load are not similarly situated to entities, such 
as generators, with contractual obligations to serve load serving 
entities. Entities that enter into long-term obligations to supply load 
serving entities are at least one step removed from load serving 
entities, insofar as they have a contractual obligation to serve an 
entity (the load serving entity) that subsequently has the service 
obligation. Consequently, we deny BP's request to construe as load 
serving entities those entities that enter into long-term obligations 
to supply load serving entities.
---------------------------------------------------------------------------

    \37\ See id.
---------------------------------------------------------------------------

    27. While we reject BP's requested clarification, we nevertheless 
emphasize that, even though suppliers of load serving entities are not 
treated as load serving entities under the statute, this does not mean 
that they will be deprived of long-term firm transmission rights. On 
the contrary, consistent with section 217 of the FPA, once load serving 
entities have received their allocated long-term firm transmission 
rights, those rights and any additional long-term firm transmission 
rights available from existing system capacity can be offered to such 
non-load serving entities (as well as other load serving entities) 
through a secondary auction, bilateral trades or another method of 
allocation.\38\ The load serving entity could sell or otherwise 
transfer its long-term firm transmission rights to its supplier. As 
noted in the Final Rule, a generator or any other entity that has a 
contract with a load serving entity can structure its contract with the 
load serving entity as necessary to attain the desired congestion cost 
risk sharing.\39\
---------------------------------------------------------------------------

    \38\ See id.
    \39\ Id.
---------------------------------------------------------------------------

2. Commission Interpretation of EPAct 2005
    28. In several places in the Final Rule, the Commission offered 
interpretations of new section 217(b)(4) of the FPA and section 1233(b) 
of EPAct 2005. In particular, the Commission interpreted these 
provisions as containing two separate directives: (1) To exercise its 
authority to facilitate planning and expansion of transmission 
facilities; and (2) to enable load serving entities with long-term 
power supply arrangements used to meet their load serving obligations 
to obtain long-term firm transmission rights. We also interpreted these 
statutes to require, when existing capacity is limited, giving a 
preference to load serving entities vis-a-vis non-load serving entities 
to obtain long-term firm transmission rights from existing capacity. 
Further, we disagreed with interpretations of section 217(c) of the FPA 
suggesting that it immunizes existing market designs and transmission 
rights allocations from the effect of section 217(b)(4) of the FPA. 
Also, we disagreed with contentions that transmission organizations 
already provide long-term firm transmission rights consistent with 
section 217(b)(4), or that this section contained no requirement to 
offer transmission rights with longer terms than those that already 
exist.
Rehearing Requests
    29. NYISO argues that the Commission misinterpreted section 
217(b)(4) of the FPA and section 1233(b) of EPAct 2005. First, it 
contends that the Commission read section 217(b)(4) too broadly to 
establish that the existing financial transmission rights offered by 
ISO/RTOs do not provide load serving entities with sufficient price 
certainty and stability over a long enough term. NYISO asserts that 
nothing in section 217(b)(4) or section 1233(b) states that the rules 
for existing financial transmission rights are not sufficient or 
explicitly requires changes to those rules, and notes section 217(b)(4) 
in fact explicitly recognizes that ``tradable'' or ``financial'' rights 
can be equivalent to firm transmission rights. NYISO argues that the 
statute's express references to financial transmission rights 
(particularly in section 217(c)), and the fact that Congress was 
presumably aware of Commission orders finding such rights equivalent to 
firm transmission rights under Order No. 888, imply that Congress 
viewed these existing financial rights as acceptable in their current 
form. NYISO also suggests that since section 217(b)(4) does not define 
``long-term,'' it is reasonable to assume that Congress was aware of 
the Commission's pre-existing definition of one-year or longer. NYISO 
also claims that no legislative history exists to support the 
Commission's interpretations. Further, NYISO describes as 
``unreasonable'' the Commission's ``sweeping'' inference that section 
1233(b)'s direction to implement section 217(b)(4) within one year 
amounts to a statement by Congress that existing transmission 
organizations do not meet the requirements.
    30. NYISO contends that ``[a] more natural reading'' of section 
217(b)(4) is that it only requires the Commission to ensure that the 
financial transmission rights offered by transmission organizations 
provide load serving entities with a reasonable opportunity to meet 
their long-term service obligations, and that the Commission ensure 
that transmission organization planning procedures adequately enable 
load serving entities to meet their reasonable needs. In short, NYISO 
argues, section 217(b)(4) leaves open the possibility that transmission 
organizations already satisfy its requirements. It contends that this 
reading is more in line with the entirety of section 217 than the 
Commission's reading.
    31. Further, NYISO asserts that the Commission's interpretation of 
section 217(b)(4) of the FPA as requiring changes in existing 
transmission organization market design is erroneous because it 
nullifies section 217(c) of that statute. Section 217(c) provides, in 
pertinent part:

    Allocation of Transmission Rights-Nothing in subsections (b)(1), 
(b)(2), and (b)(3) of this section shall affect any existing or 
future methodology employed by a Transmission Organization for 
allocating or auctioning transmission rights if such Transmission 
Organization was authorized by the Commission to allocate or auction 
financial transmission rights on its system as of January 1, 2005, 
and the Commission determines that any future allocation is just, 
reasonable, and not unduly discriminatory or preferential. * * *

    32. NYISO contends that the Commission's interpretation of section 
217(b)(4) effectively reads section 217(c) out of the FPA because it 
nullifies the

[[Page 68445]]

protections that the latter provision provides for previously-approved 
transmission organization rules concerning the auction and allocation 
of transmission rights. As a result of this conflict, NYISO posits, the 
Commission must abandon its premise that section 217(b)(4) requires 
modifications to existing transmission organization auction and 
allocation rules.\40\
---------------------------------------------------------------------------

    \40\ NYISO notes that abandoning this interpretation would not 
nullify section 217(b)(4), as some have claimed, because that 
section would still require the Commission to assess whether 
transmission organizations were fulfilling their planning 
obligations and adequately supporting long-term power supply 
arrangements.
---------------------------------------------------------------------------

    33. Given what NYISO views as the Commission's incorrect 
interpretation of section 217(b)(4), NYISO argues that the Commission 
should revise the Final Rule to eliminate certain features, including: 
(1) The requirement that existing transmission capacity be set aside to 
create new long-term firm transmission rights different from existing 
transmission rights; (2) the preference to existing capacity for load-
serving entities with service obligations; (3) the prohibition on 
allocation of long-term firm transmission rights by auction; (4) the 
requirement that long-term firm transmission rights ``follow load'' and 
that tradable rights be ``recallable;'' and (5) any future requirement 
under the Final Rule that conflicts with section 217(c). Finally, NYISO 
argues that because the Commission lacked a statutory mandate to modify 
existing transmission organization rules for financial transmission 
rights, it could only require such modifications on the basis of 
substantial evidence under section 206 of the FPA. The Commission 
neither built a record to support its requirements nor invoked section 
206, NYISO concludes.
Commission Conclusion
    34. We deny NYISO's rehearing request regarding our interpretation 
of section 217(b)(4) of the FPA and section 1233(b) of EPAct 2005. 
NYISO argues first that nothing in section 217(b)(4) or section 1233 
states that existing transmission organizations' financial transmission 
rights are deficient. While NYISO is correct that these sections do not 
explicitly declare that existing transmission rights are insufficient, 
Congress did direct explicitly that the Commission implement section 
217(b)(4) within one year in transmission organizations with organized 
electricity markets. As we reasoned in the Final Rule, this explicit 
direction to a specific segment of the industry strongly suggests that 
Congress believed the existing transmission rights offered by 
transmission organizations with organized electricity markets may not 
be of a sufficient length to be ``long-term'' and support long-term 
power supply arrangements. Under this direction, we concluded that the 
current one-year financial rights offered by transmission 
organizations, which are subject to financial proration during their 
term, did not meet the requirement of section 217(b)(4) that the 
Commission enable load-serving entities to secure long-term firm 
transmission rights to support long-term power supply arrangements. As 
a result, we acted in the Final Rule as directed by Congress in section 
1233(b) of EPAct 2005, and issued regulations requiring transmission 
organizations with organized electricity markets to make available 
long-term firm transmission rights.
    35. The references to ``equivalent tradable or financial rights'' 
in section 217(b)(4) and the references to financial transmission 
rights in other parts of section 217 do not lead to the conclusion that 
the existing financial transmission rights offered by transmission 
organizations are sufficient. These references only suggest that 
financial transmission rights can satisfy the requirements of the 
statute if, in this instance, they are sufficiently long-term and 
sufficiently firm to support long-term power supply arrangements. This 
is particularly true under section 217(b)(4), where Congress referred 
to financial rights in comparison to ``firm transmission rights.'' 
Moreover, we again reiterate that if Congress believed the existing 
financial rights offered by transmission organizations were sufficient, 
it is unclear why Congress would have made such an explicit direction 
to the Commission to act within one year in transmission organizations 
with organized electricity markets. Likewise, with regard to NYISO's 
argument that Congress was surely aware of the Commission's existing 
definition of ``long-term,'' we are unclear why Congress would have 
acted in the manner it did and with specific direction to the 
Commission if it believed all the current transmission organizations 
offered sufficient transmission rights to meet the requirements of 
section 217(b)(4).
    36. NYISO posits that a better reading of the statute at issue here 
is that it ``requires the Commission to ensure that the rules governing 
financial rights in [transmission organization] markets provide [load 
serving entities] with a reasonable opportunity to meet their `long-
term' service obligation,'' and that it leaves open the possibility 
that transmission organizations already comply.\41\ We disagree with 
NYISO's reading that section 217(b)(4) only requires that we ensure 
that the current financial transmission rights give load serving 
entities a reasonable opportunity to meet their long-term service 
obligations; the statute says directly that the Commission must 
exercise its authority in a manner that ``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 service obligations.\42\ This language in 
the statute does not comport with NYISO's reading. We agree with NYISO, 
however, that section 217(b)(4) leaves open the possibility that the 
transmission rights offered by an existing transmission organization 
already comply. The regulations adopted in the Final Rule recognize 
this, in fact, and provide that a transmission organization may submit 
a compliance filing explaining ``how its current tariff and rate 
schedules already provide for long-term firm transmission rights that 
satisfy each of the guidelines'' set forth.\43\ As we have noted 
elsewhere, the guidelines we adopted in the Final Rule are intended to 
ensure that long-term firm transmission rights will support long-term 
power supply arrangements used to satisfy native load service 
obligations, as Congress directed. The guidelines and the discussion of 
them in the Final Rule focus on the current short-term transmission 
rights predominately offered by transmission organizations, but do not 
rule out the possibility that an existing transmission organization 
might currently offer rights that already satisfy the guidelines.
---------------------------------------------------------------------------

    \41\ Request for Rehearing of NYISO at 7-8.
    \42\ Pub. L. No. 109-58, Sec.  1233, 119 Stat. 594, 958.
    \43\ 18 CFR 42.1(c)(1)(ii) (2006).
---------------------------------------------------------------------------

    37. NYISO also asserts that our reading of section 217(b)(4) 
nullifies section 217(c). We disagree. First, we must reiterate that 
section 217(c) expressly, and quite starkly, omits reference to section 
217(b)(4), while referencing all other provisions of section 217(b). 
This express omission strongly suggests that Congress did not intend 
for the protections of section 217(c) to trump implementation of 
section 217(b)(4). Further, the Final Rule does not require that 
transmission organizations ignore the protections of section 217(c) or 
any other part of section 217 when implementing section 217(b)(4), and 
repeatedly states the Commission's belief that section 217(b)(4) can be 
implemented within

[[Page 68446]]

existing allocation and auction mechanisms. The Final Rule 
appropriately recognizes, however, Congress's decision, in enacting 
section 217, to omit reference to section 217(b)(4) when providing the 
protections of section 217(c). As a result, we explained in the Final 
Rule that if implementing long-term firm transmission rights cannot be 
accomplished without changes to existing allocation or auction 
methodologies, section 217(c) does not bar such changes.
    38. For all of these reasons, we believe our interpretation of 
section 217(b)(4) of the FPA is reasonable and comports with Congress's 
intent. Accordingly, we will not modify or eliminate the features 
identified by NYISO as conflicting with its interpretation of the 
statute. Moreover, we reject NYISO's claim that we have not acted in 
accordance with the FPA in requiring transmission organizations to 
comply with the Final Rule. Contrary to NYISO's claim, the Commission 
is not overturning its existing precedents accepting transmission 
organization allocation and auction rules. Instead, we are requiring, 
consistent with the dictates of section 217(b)(4) of the FPA and 
section 1233(b) of EPAct 2005, that transmission organizations offer 
long-term firm transmission rights. The Final Rule explains why certain 
existing transmission organization rules for allocating transmission 
rights may not be compatible with long-term rights, but does not find 
those rules (or the short-term rights that are currently available) 
unjust and unreasonable. It simply explains what it will take to comply 
with section 217(b)(4), now included in the FPA (which it was not when 
the current rules were approved), and establishes guidelines to ensure 
that long-term firm transmission rights have properties that will allow 
them to support long-term power supply arrangements used to satisfy 
service obligations, as section 217(b)(4) requires. Finally, we 
reiterate, as noted above, that under the regulations adopted in the 
Final Rule, a transmission organization may seek to support its current 
allocation and auction rules as satisfying each of the guidelines in 
the Final Rule. The regulations specifically allow a transmission 
organization to explain ``how its current tariff and rate schedules 
already provide for long-term firm transmission rights that satisfy 
each of the guidelines'' set forth.\44\
---------------------------------------------------------------------------

    \44\ Id.
---------------------------------------------------------------------------

3. Seams Issues
    39. In the Final Rule, the Commission addressed comments on the 
NOPR that noted the potential for the flexible approach proposed by the 
Commission to create seams issues both between transmission 
organizations, as well as between transmission organization regions and 
non-transmission organization regions. The Commission agreed with 
commenters that transmission organizations should consider these issues 
when complying with the Final Rule, and directed each transmission 
organization to explain in its compliance filing how its proposal 
addresses potential seams issues, particularly with regard to the term 
of the long-term rights offered and the procedures and timelines for 
obtaining such rights.\45\ Concerning potential seams between 
transmission organizations, the Commission directed each transmission 
organization to explain why it has or has not elected to revise any 
seams agreement it has with another transmission organization.\46\
---------------------------------------------------------------------------

    \45\ Final Rule at P 107.
    \46\ Id.
---------------------------------------------------------------------------

Request for Rehearing
    40. APPA notes that the Commission, in requiring transmission 
organizations to address potential seams issues in their compliance 
filings, primarily discusses seams between transmission organizations, 
within the context of existing seams agreements between transmission 
organizations. It states that the Commission, in an apparent unintended 
oversight, makes no mention of seams issues arising between 
transmission organizations and non-transmission organizations. It asks 
the Commission to explicitly require transmission organizations, in 
their compliance filings, to address seams issues between transmission 
organizations and non-transmission organizations on their borders, in 
addition to addressing seams between neighboring transmission 
organizations.
Commission Conclusion
    41. In response to APPA's seams concerns, we clarify that each 
transmission organization should explain in its compliance filing how 
its proposal addresses potential seams issues between itself and 
neighboring non-transmission organization transmission providers, as 
well as between itself and neighboring transmission organizations. 
While our discussion in the Final Rule focused in particular on 
existing seams agreements between transmission organizations, it was 
our intent, consistent with the comments received, that transmission 
organizations would consider both types of potential seams. As we 
stated in the Final Rule, in both cases, transmission organizations 
should, in particular, explain how their proposals address seams issues 
with regard to the term of the long-term rights offered and the 
procedures and timelines for obtaining such rights.\47\
---------------------------------------------------------------------------

    \47\ Id.
---------------------------------------------------------------------------

4. Full Funding of Long-Term Firm Transmission Rights
    42. As adopted in the Final Rule, guideline (2) provides in part 
that ``once allocated, the financial coverage provided by a financial 
long-term transmission 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.'' \48\ We determined that the 
full funding requirement was necessary to satisfy Congress' directive 
in section 217(b)(4) that load serving entities with service 
obligations be able to obtain ``firm'' transmission rights or their 
equivalent on a long-term basis.\49\ We explained that full funding 
provided one aspect of such firmness, increased certainty in the 
revenue stream from the rights over time. The Final Rule did not 
require a particular method to provide for full funding, thus allowing 
transmission organizations and their stakeholders discretion to 
determine methods appropriate to regional circumstances.\50\ However, 
we did note that certain approaches could lead to unreasonable 
outcomes, and we discussed those approaches.\51\
---------------------------------------------------------------------------

    \48\ Id. at P 169.
    \49\ Id. at P 170.
    \50\ Id. at P 175.
    \51\ See id. at P 171, 176-77.
---------------------------------------------------------------------------

Requests for Rehearing and/or Clarification
    43. Midwest TOs argue that the Commission erred first by 
interpreting section 217(b)(4) to require that long-term firm 
transmission rights be fully funded, and second by then suggesting that 
allocation of uplift to support full funding could be done in ways 
that, in their view, violate cost causation principles. On the first 
issue, Midwest TOs make several arguments. First, Midwest TOs assert 
that the Commission has not justified its interpretation of section 
217(b)(4) as requiring full funding. Midwest TOs argue that the 
statutory language does not provide ``absolute guarantees'' for long-
term firm transmission rights, but

[[Page 68447]]

provides instead for ``reasonable needs,'' which suggests no guarantee 
of full funding.\52\ Second, the Commission concluded in the Final Rule 
that full funding would assist in financing of generation 
investments,\53\ but Midwest TOs argue that there are other means of 
assisting in financing, such as consumers hedging risks. Also, Midwest 
TOs posit, the Final Rule provides no evidence that full funding is 
necessary to obtain financing. Third, Midwest TOs insist that the Final 
Rule does not adequately address the potential negative incentives from 
full funding. Nor, in their opinion, does the Final Rule adequately 
reflect the difficulties in planning for full funding of the rights 
over the long-term. Fourth, Midwest TOs argue that the full funding 
requirement runs contrary to principles of hedging energy costs, which 
are reflected in LMP-based congestion prices, and which require parties 
to pay for a hedge. Midwest TOs state that the Final Rule did not 
explain why holders of long-term rights should not, therefore, be 
required to pay a premium for the rights.
---------------------------------------------------------------------------

    \52\ Request for Rehearing of Midwest TOs at 7.
    \53\ See Final Rule at P 171.
---------------------------------------------------------------------------

    44. The Midwest TOs' second general argument is that the Final Rule 
violates principles of cost causation because it does not also require 
full funding of short-term rights, and because it appears to endorse 
the prospect that holders of long-term rights would not always be fully 
responsible for all uplift charges associated with full funding. Hence, 
holders of short-term rights could be required to pay uplift to support 
full funding of long-term rights that they do not benefit from. This 
creates a substantial potential future exposure, as it is difficult to 
accurately project events over the long term.
    45. BP supports full funding of long-term firm transmission rights 
and suggests that the methodology for such funding should be set by 
stakeholder groups. It also supports extension of full funding to 
short-term transmission rights. However, it seeks clarification that 
the Commission's findings in the Final Rule--that full funding of both 
durations of firm transmission rights is permissible under the law, and 
that any shortfall should be uplifted to all firm transmission rights 
holders--set a baseline for what is fair, equitable, and 
nondiscriminatory, and that anything less is impermissible and will be 
rejected by the Commission. BP is particularly concerned that, due to 
biases in the stakeholder processes, any uplift rules for full funding 
not result in outcomes that create subsidies, preferences or 
competitive advantages. As a result, BP argues that the Commission 
acted arbitrarily and capriciously and failed to engage in reasoned 
decision-making by failing to mandate explicitly that stakeholders 
follow the Commission's methodologies for full funding of firm 
transmission rights. BP asserts that, in the event that the Commission 
fails to grant its requested clarifications, the Commission erred in 
its Final Rule.
Commission Conclusion
    46. We disagree with Midwest TOs' assertion that the Commission 
incorrectly interpreted section 217(b)(4) to require full funding. As 
we noted in the Final Rule, while section 217(b)(4) does not explicitly 
use the term ``full funding,'' it does state that the long-term 
transmission rights must be firm.\54\ We considered what the equivalent 
of the term ``firm'' (in a physical rights context) would mean in the 
context of the financial transmission rights found in organized 
electricity markets, and found that it corresponded to (a) the 
expectation that once allocated, the quantity of rights allocated would 
remain constant for the term of the right, and (b) the expectation 
that, once assigned or acquired, transmission rights do not experience 
volatility in the actual financial coverage that they provide relative 
to congestion charges associated with the same points of injection and 
withdrawal (although there might be some volatility experienced in the 
uplift charges that support full funding).\55\ Midwest TOs have not 
offered an alternative interpretation of section 217(b)(4)'s 
requirement that the rights be firm. Instead, they focus on section 
217(b)(4)'s requirement of ``reasonable needs.'' We have interpreted 
that requirement in the Final Rule as pertaining to the quantity of 
long-term rights that a load-serving entity is entitled to receive, 
rather than relating to their firmness.\56\ Hence, Midwest TOs have not 
provided an alternative interpretation of section 217(b)(4) that 
considers both statutory requirements--firmness and reasonable needs--
and we do not find their argument sufficiently persuasive to merit 
granting rehearing and eliminating the full funding requirement.
---------------------------------------------------------------------------

    \54\ Id. at P 170.
    \55\ Id.
    \56\ See id. at P 323 (discussing guideline (5)); see also id. 
at P 273 and 318.
---------------------------------------------------------------------------

    47. Next, we disagree with Midwest TOs' assertion that we did not 
consider the prospect of having parties that are allocated long-term 
rights pay more for such rights. Indeed, we expressly noted that such 
rights may command a premium.\57\ Midwest TOs argue that we did not 
explain why we did not require additional payment for long-term rights, 
since, according to them, requiring such a premium would be consistent 
with cost causation. We conclude, however, that requiring a premium may 
or may not be consistent with cost causation, depending on the source 
and scope of the revenue insufficiency. For example, it would not be 
consistent with cost causation principles to require load serving 
entities that hold long-term rights to pay a premium to cover revenue 
insufficiency caused by another utility, such as by a transmission 
owner that does not adequately maintain its transmission system. For 
this reason, we chose not to simply impose a blanket premium payment 
requirement, but rather pointed out that there could be justification 
for imposing such a premium, based on stakeholder agreement and 
consistency with regional preferences for transmission pricing.\58\
---------------------------------------------------------------------------

    \57\ See id. at P 172.
    \58\ Id.
---------------------------------------------------------------------------

    48. Finally, with regard to Midwest TOs' concern that parties 
holding short-term rights could be unfairly exposed to uplift charges 
that support full funding for long-term rights if both types of rights 
are not put on equal footing with regard to full funding, we agree 
that, under some conditions, such concerns may be justified