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

• Author: Tillman, Wallace

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...