FTC Comment Before the Federal Energy Regulatory Commission Concerning Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities (Docket No. RM10-23-000)

us-ftc-advocacy-filings-43d74fe2883eb2ecffc4adea66ba5c1bFTC Comment Before the Federal Energy Regulatory Commission Concerning Transmission Planning and Cost Allocation by Transmission Owning and Operating Public Utilities (Docket No. RM10-23-000)Advocacy Filing

The Federal Register notice established August 30, 2010, as the deadline for comments. In a1
subsequent notice issued on August 10, 2010, FERC extended the deadline to September 29,
2010. Citations to the NOPR will be to the paragraph numbers assigned by FERC, e.g., “NOPR
P #.”
Preventing Undue Discrimination and Preference in Transmission Service, Order No. 890,2
FERC Stats. & Regs. ¶ 31,241, order on reh’g, Order No. 890-A, FERC Stats. & Regs. ¶ 31,261
(2007), order on reh’g, Order No. 890-B, 123 F.E.R.C. ¶ 61,299 (2008), order on reh’g, Order
No. 890-C, 126 F.E.R.C. ¶ 61,228 (2009), order on clarification, Order No. 890-D, 129 F.E.R.C.
¶ 61,126 (2009).
UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Transmission Planning and Cost Allocation )
By Transmission Owning and Operating ) Docket No. RM10-23-000
Public Utilities )
COMMENT OF THE FEDERAL TRADE COMMISSION
September 29, 2010
The Federal Trade Commission (FTC) appreciates the opportunity to comment on the
most recent initiative by the Federal Energy Regulatory Commission (FERC) to encourage
needed transmission construction through clearer, nondiscriminatory rules regarding
transmission planning, investment, and cost allocation. Transmission Planning and Cost
Allocation by Transmission Owning and Operating Public Utilities, Notice of Proposed
Rulemaking (NOPR), Docket No. RM10-23-000, 75 Fed. Reg. 37884 (June 30, 2010), 131
F.E.R.C. ¶ 61,253 (2010). The NOPR proposes that public utility transmission providers,1
pursuant to the transmission planning processes established by Order No. 890, (1) incorporate2
state and federal public policies, such as renewable energy portfolio requirements, as valid
rationales for projects in the transmission planning process; (2) include more explicit
coordination between neighboring transmission planning regions with respect to the construction
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of inter-regional facilities; and (3) eliminate from FERC-approved tariffs and agreements a right
of first refusal (ROFR) that provides incumbent transmission providers with the right to build
transmission projects developed and proposed by other entities. The NOPR also would require
transmission providers to develop and file transmission cost allocation methodologies that
satisfy cost allocation principles for intra-regional and inter-regional transmission projects.
As developed below, the FTC comments on three issues raised by the NOPR:
• The regional and inter-regional joint transmission planning envisioned by the NOPR
likely will result in varying degrees of discussions and collaborations among competitors,
as well as with customers. Although such interactions are not immune from antitrust
scrutiny, the antitrust laws are not a barrier to competitors’ (or competitors’ and
customers’) ability to work together in procompetitive ways.
• Consistent with longstanding antitrust policy disfavoring regulatory barriers to entry
outside of very limited circumstances, the FTC supports elimination of transmission
incumbents’ ROFR, not only for projects proposed through the regional transmission
planning process, but also for transmission planning processes for individual
transmission systems. FERC also should ensure that the standards set for participation in
transmission projects by incumbents and non-incumbents alike are not exclusionary in
favor of the incumbents.
• Regarding the NOPR’s cost allocation proposals, the FTC encourages FERC to seek
broad consensus on cost allocation sooner rather than later. The FTC consistently has
urged Interconnection-wide coordination of transmission policies, because of the broad
dynamic impacts that transmission has on electricity flows and markets. The FTC is
concerned that the multiple cost allocation methodologies envisioned by the NOPR may
hamper the inter-regional transmission investments that can both support effective
competition and minimize the societal costs of complying with state and federal
environmental and energy security initiatives. Consistent transmission cost allocation
policies also can help overcome efforts to protect existing generation investments and
market power from competitive forces and to free-ride on other entities’ transmission
development and planning investments.
Interest of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers, both through enforcement
of the antitrust and consumer protection laws and through competition policy research and
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See, e.g., Opening Remarks at the FTC Conference on Energy Markets in the 21 Century:st	3
Competition Policy in Perspective (Apr. 10, 2007), available at
http://www.ftc.gov/speeches/majoras/070410energyconferenceremarks.pdf. FTC merger cases
involving electric power markets have included the DTE Energy/MCN Energy (2001) (consent
order), available at http://www.ftc.gov/os/2001/05/dtemcndo.pdf; and PacifiCorp/Peabody
Holding (1998) (consent agreement), available at
http://www.ftc.gov/os/1998/02/9710091.agr.htm. (The FTC subsequently withdrew the
PacifiCorp settlement when the seller accepted an alternative acquisition offer that did not pose
a threat to competition.)
FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power4
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/elec/electricityreport.pdf; FTC Staff Report, Competition and
Consumer Protection Perspective on Electric Power Regulatory Reform (July 2000), available
at http://www.ftc.gov/be/v000009.htm (compiling previous comments from the FTC staff
provided to various state and federal agencies).
See5 http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-final-rpt.pdf.
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advocacy. The FTC often analyzes regulatory or legislative proposals that may affect
competition or allocative efficiency in the electric power industry. The FTC also reviews
proposed mergers that involve electric and natural gas utility companies, as well as other parts of
the energy industry. In the course of this work, as well as in antitrust and consumer protection
research, investigation, and litigation, the FTC applies established legal and economic principles
and recent developments in economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
antitrust enforcement and competition advocacy. The FTC’s competition advocacy program3
has produced two staff reports on electric power industry restructuring issues at the wholesale
and retail levels. The FTC staff also contributed (as did FERC staff) to the work of the Electric4
Energy Market Competition Task Force, which issued a Report to Congress in 2007. In5
addition, the FTC has held public conferences on energy topics, including Energy Markets in the
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Conference materials available at6
http://www.ftc.gov/bcp/workshops/energymarkets/index.shtml.
Conference materials available at7
http://www.ftc.gov/bcp/workshops/carbonoffsets/index.shtml. Other programs have included
the FTC’s public workshop on Market Power and Consumer Protection Issues Involved with
Encouraging Competition in the U.S. Electric Industry, held on September 13-14, 1999
(workshop materials available at http://www.ftc.gov/bcp/elecworks/index.shtm); and the
Department of Justice and FTC workshop on Electricity Policy, held on April 23, 1996.
Reply Comment of the Federal Trade Commission, Transmission Planning Processes Under8
Order No. 890, Docket No. AD09-08-000 (Dec. 3, 2009) (FTC Reply Comment), available at
http://www.ftc.gov/os/2009/12/V100001ferc.pdf.
This comment is available at9 http://www.ftc.gov/os/2009/12/V100002ferc.pdf.
4
21st Century (April 10-12, 2007) and Carbon Offsets & Renewable Energy Certificates6
(January 8, 2008).7
The FTC and its staff have filed numerous competition advocacy comments with FERC
and participated in FERC technical conferences on market power issues. On December 3, 2009,
the FTC submitted a reply comment in Transmission Planning Processes Under Order No. 890
(Docket No. AD09-08-000), the policy inquiry that led to the current NOPR. Also in December8
2009, the FTC submitted comments in FERC’s proceedings on possible elements of a National
Action Plan on Demand Response (Docket No. AD09-10-000). Other FTC participation in9
FERC’s competition-related inquiries has included the March 2007 appearance by the Deputy
Director for Antitrust in the FTC’s Bureau of Economics as a panelist for a technical conference
on FERC’s merger and acquisition review standards under Federal Power Act (FPA) Section 203
(Docket No. AD07-2-000). The FTC also has commented on FERC’s initiatives to promote
wholesale electricity competition and on various state issues associated with restructuring the
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See, e.g., Federal Trade Commission, Comment before the Federal Energy Regulatory10
Commission on Wholesale Competition in Regions with Organized Electric Markets (Apr. 17,
2008), available at http://www.ftc.gov/be/v070014b.pdf. A listing of FTC and FTC staff
competition advocacy comments to federal and state regulatory agencies (in reverse
chronological order) is available at http://www.ftc.gov/opp/advocacy_date.shtm.
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electric power industry.10
Comment on Transmission Planning
The NOPR addresses what FERC characterizes as “deficiencies in the transmission
planning and cost allocation processes so that the transmission grid can better support wholesale
power markets and thereby ensure that Commission-jurisdictional services are provided at rates,
terms and conditions that are just and reasonable and not unduly discriminatory or preferential.”
NOPR P 33. Among the deficiencies identified by the NOPR are the lack of a requirement for a
regional transmission plan and the relative lack of inter-regional transmission planning. NOPR
PP 35, 39. Regional planning and inter-regional planning are necessary because the highly
interconnected nature of the transmission grid and of the interstate markets it supports means
that many – perhaps most – transmission projects will have effects beyond the boundaries of a
single transmission entity.
The FTC observed in its comment of December 3, 2009, in AD09-08-000 that
transmission planning should reflect the geographic scope of power flows so that it incorporates
relevant congestion, reliability, and environmental considerations. Ideally, the scope would be
as broad as each Interconnection in the United States, because “the physical reality is that, within
the three interconnection grids, any action taken by one transmission provider can have major
and nearly instantaneous effects on the transmission facilities of all other transmission
providers.” Regional Transmission Organizations, Notice of Proposed Rulemaking, Docket No.
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RM99-2-000, 64 Fed. Reg. 31390, 31398 (June 10, 1999). The most obvious examples are
blackouts that spread between areas and threaten reliability over even larger areas.
Not only does broad regional planning reflect the physical flows on the grid, but also it
captures the economic and policy developments in wholesale and retail electricity markets. For
example, areas producing renewable energy, which are often located far from areas of
consumption, will need to be integrated into the grid. Demand response and dynamic pricing
initiatives can be more effective and valuable if, for example, air conditioning loads in one area
can respond to a reduction in wind energy generated thousands of miles away. Although the
NOPR does not explicitly require Interconnection-wide transmission planning, the FTC
recommends that FERC lead efforts to institutionalize transmission planning on an
Interconnection-wide scale. Even broader-scale transmission planning is likely to be efficacious
as ties between Interconnections are strengthened.
FERC’s policy proposal to require additional regional and inter-regional planning
necessarily will require market participants – often competitors – to collaborate with each other
(and with customers) not only in transmission planning, but also in transmission construction,
ownership, and operation. Competitor collaborations are not immune from antitrust scrutiny.
American Needle, Inc. v. National Football League, et al., 560 U.S. ___, 130 S. Ct. 2201 (2010).
At the same time, such collaborations can be, and often are, procompetitive. The antitrust
agencies provide considerable guidance to market participants to structure their collaborations in
ways that are lawful and efficiency-enhancing. See, e.g., Federal Trade Commission and the
U.S. Department of Justice, Antitrust Guidelines for Collaborations Among Competitors (June
2000), available at http://www.ftc.gov/os/2000/04/ftcdojguidelines.pdf. With this guidance and
the advice of antitrust counsel, participants in collaborative transmission planning and cost
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allocation processes should not view the antitrust laws as an impediment to their participation.
Comments on Remedying Discrimination against Non-incumbents
Another deficiency identified in the NOPR is the opportunity for undue discrimination
against non-incumbent developers of transmission projects. NOPR P 38. To address this
deficiency, the NOPR proposes the “removal from a transmission provider’s OATT [open access
transmission tariff] or agreements subject to the Commission’s jurisdiction of provisions that
establish a federal right of first refusal for an incumbent transmission provider.” NOPR P 93.
The NOPR explains: “Where an incumbent transmission provider has a right of first refusal, a
nonincumbent transmission developer risks losing its investment in developing a proposal for
submittal to the regional transmission planning process, even if the proposal is selected for
inclusion in the regional transmission plan.” NOPR P 87. Further, “such a planning process
may not result in a cost-effective solution to regional transmission needs and projects that are
included in a transmission plan therefore may be developed at a higher cost than necessary.”
NOPR P 88.
The FTC concurs with FERC’s proposed elimination of the ROFR. Consumers benefit
from market competition that often takes the form of new entry. “The assumption that
competition is the best method of allocating resources in a free market recognizes that all
elements of a bargain – quality, service, safety, and durability – and not just the immediate cost,
are favorably affected by the free opportunity to select among alternative offers.” Nat’l Soc’y of
Prof’l Eng’rs v. United States, 435 U.S. 679, 695 (1978); accord FTC v. Superior Court Trial
Lawyers Ass’n, 493 U.S. 411, 423 (1990). In general, sound competition policy calls for
competition to be restricted only when necessary to protect the public from significant
demonstrated harm, and for the restriction to be drawn narrowly to minimize its anticompetitive
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The ROFR that the NOPR would eliminate appears to play a role different from the ROFR11
sometimes agreed to by parties to a private contract. In private contracting, one party may wish
to control the identity of the other party to the contractual relationship, such as where the lessee
of a property seeks a say over who owns the property that it is leasing. If the lessor decides to
sell the property, the ROFR might give the lessee the opportunity to purchase the property by
matching the terms of the proposed sale. See, e.g., David I. Walker, Rethinking Rights of First
Refusal, 5 Stan. J.L. Bus. & Fin. 1, 8 (1999). The ROFR in that case affects the rights of the
parties to the contract. By contrast, the ROFR at issue in the NOPR does not affect the rights of
private contracting parties; rather, it provides incumbents with property rights over third parties
with which the incumbents have no contractual relationship. The ROFR thus may prevent new
entry, to the detriment of competition.
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impact. Thus, an inquiry into the public interest involves an assessment of the effects of new
entry on consumers and competition and whether there are likely to be any significant
countervailing impacts. The existing federal right of first refusal increases risk for potential
entrants, without any countervailing incentives, and encourages free riding by incumbent
transmission owners on the investments of potential entrants in developing transmission project
proposals.
The antitrust agencies have long criticized mechanisms by which incumbents may
impede new entry that can improve market performance. For example, the agencies frequently
identify certificates of necessity (CON) as entry barriers and generally oppose statutory or
regulatory requirements for CONs in the absence of a compelling justification for restricting
entry. See Joint Statement of the Antitrust Division of the U.S. Department of Justice and the
Federal Trade Commission before the Illinois Task Force on Health Planning Reform (Sept. 15,
2008), available at http://www.ftc.gov/os/2008/09/V080018illconlaws.pdf. CON requirements
can increase the costs of entry by more efficient firms, provide incentives and opportunities for
incumbents to thwart or delay new entry, and protect incumbent market power. Id. at 5-8. The
NOPR associates similar concerns with the ROFR. NOPR PP 79-80.11
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18 C.F.R. Part 40; Mandatory Reliability Standards for the Bulk-Power System, Order No.12
693, FERC Stats. & Regs. ¶ 31,242, order on reh’g, Order No. 693-A, 120 F.E.R.C. ¶ 61,053
(2007).
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Objections to elimination of the ROFR, as described in the NOPR, do not appear to be
well-founded. One objection is that incumbents may be obligated to build transmission facilities
identified through the transmission planning process and should have a right to own them.
NOPR P 77. Elimination of the ROFR, however, should not cause incumbents to lose the right
to own any transmission facilities that they build pursuant to their construction obligation, so the
status quo would not change in such circumstances. Rather, pursuant to the NOPR, the ROFR
simply would not extend to facilities that non-incumbents seek to build and that are approved in
the recognized transmission planning process. Another objection is that incumbents may have
obligations to ensure reliable service, including obligations pursuant to mandatory reliability
rules developed by the North American Electric Reliability Corporation and enforced by FERC.
NOPR P 77. But as we understand it, the new entrants also would be subject to the mandatory,
FERC-enforced reliability rules, violations of which carry substantial penalties. Consequently,12
entrants’ transmission investments should not threaten reliability. Moreover, the Supreme Court
has rejected similar arguments that competition routinely must be restrained in the name of
public safety, stating that such a claim is “a frontal assault on the basic policy of the Sherman
Act.” Prof’l Eng’rs, 435 U.S. at 695.
State ratemaking – for example, a requirement that retail customers receive credits for
revenues earned by utilities that operate and maintain a co-owned transmission system – is
identified as another ground for continuing the ROFR. NOPR P 77. Yet the transmission
systems owned by multiple entities that are successfully operated by just one owner (usually the
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For example, the Integrated Transmission System in Georgia is owned by municipal,13
cooperative, and investor-owned utilities but operated by the state-regulated investor-owned
utility, Southern Companies. In Indiana, the Joint Transmission System is owned by municipal,
cooperative, and investor-owned utilities but operated by the state-regulated investor-owned
utility, Duke Energy.
The FTC recognizes that other obstacles to new entry may need to be overcome, such as14
claims that any required state eminent domain authority may be exercised only on behalf of
franchised utilities. Such issues, however, should not keep FERC from adopting procompetitive
policies.
10
regulated utility subject to state law requirements to provide reliable service at the lowest
reasonable cost) demonstrate that such requirements are not an insurmountable obstacle to
competitive ownership and investment in the transmission grid. Similarly, successful examples13
of transmission systems that are owned by multiple entities, but operated by a third party (for
instance, a regional transmission organization or an independent system operator), further
undermine this ROFR rationale.
The procompetitive, efficiency-enhancing grounds for eliminating the ROFR are not
limited to transmission projects included in regional or inter-regional transmission plans. On a
single system, the incumbent may have incentives to maintain a less than robust transmission
system to discourage new generation entry and competition from distant generators, or it may
simply have made a decision not to invest in transmission. In the former case, FERC’s allowing
the incumbent to shield itself from generation competition would be clearly contrary to federal
policy promoting competitive, geographically broad generation markets. In the latter case, the
incumbent loses no investment opportunity if it would not have built new transmission in any
event. In both cases, FERC-jurisdictional policies should not prevent willing, qualified non-
incumbents from building transmission projects that have proceeded through the planning
process.14
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Rambus Inc., Docket No. 9302 (docket entries available at15
http://www.ftc.gov/os/adjpro/d9302/index.shtm); Union Oil Co. of California, Docket No. 9305
(docket entries available at http://www.ftc.gov/os/adjpro/d9305/index.shtm); see also Dell
Computer Corp., Docket No. C-3658 (FTC press release available at
http://www.ftc.gov/opa/1996/06/dell2.shtm).
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Another of the NOPR’s proposals for addressing undue discrimination in favor of
incumbent transmission owners is a requirement that each public utility transmission provider, in
cooperation with customers and other stakeholders, participate in a regional transmission
planning process that “establishe[s] appropriate qualification criteria for determining an entity’s
eligibility to propose a project in the regional transmission planning process, whether that entity
is an incumbent transmission owner or a nonincumbent transmission developer.” NOPR P 90.
In effect, the NOPR requires a form of standard setting. Standards have long played an
important role in ensuring the introduction of new technologies and facilitating interoperability,
which makes them procompetitive. The FTC, however, has brought a number of cases in which
the standard-setting process was impaired by one or more participants and led to an
anticompetitive result. Accordingly, the FTC urges FERC to enforce vigilantly the NOPR’s15
requirement that the qualification criteria not be unduly discriminatory or preferential (NOPR
P 90), so as not to diminish or lose the procompetitive benefits of eliminating the ROFR.
Comment on Cost Allocation
FERC is concerned that “existing cost allocation methods may not appropriately account
for benefits associated with new transmission facilities and, thus, may result in rates that are not
just and reasonable or are unduly discriminatory or preferential.” NOPR P 154. FERC identifies
a number of industry developments giving rise to these concerns. One is expanded regional
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For example, “participant funding” requires only the project sponsors to bear the costs of new16
facilities, even when other grid users need (and benefit from) the investment.
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power markets, which have “led to a growing need for new transmission facilities that cross
several utility, RTO, ISO or other regions.” NOPR P 150. Broader markets lead to a “broader
diffusion of the benefits associated with transmission upgrades and new transmission facilities.”
Id. In addition, compliance with state resource policies at the lowest societal cost to customers is
likely to necessitate the integration of distant, poorly connected renewable energy sources with
loads. NOPR P 151. We observed in our comment of December 3, 2009, that transmission also
may be needed to integrate distributed generation and demand response resources with other
generation and loads at the lowest societal cost. FTC Reply Comment at 10. We agree that the
lack of rate structures to allocate the costs of needed transmission, and the free-rider problem
that arises when project beneficiaries seek to shift transmission construction costs onto others,16
add uncertainty and conflict to the debate over what transmission to build and how to pay for it.
To address these concerns, the NOPR proposes that every public utility transmission
provider adopt cost allocation rules for various kinds of transmission facilities, which the NOPR
categorizes by need and area served. The needs identified are reliability, economics, and public
policy (e.g., supporting renewable energy resources). The areas identified are inter-regional
projects (facilities that cross more than one neighboring transmission planning region) and intra-
regional projects (facilities confined to a single planning region). The NOPR states that a
transmission provider must propose a cost allocation methodology for each need and each area.
This could mean six different methodologies (one for each category), a single methodology
applied to all categories, or some number in between. NOPR P 160. The NOPR also outlines
cost allocation principles that the methodologies must reflect. NOPR PP 164-76.
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The FTC’s comment in Information Requirements for Available Transmission Capability,17
Docket No. RM05-17-000 (Aug. 22, 2005) (available at
http://www.ftc.gov/os/2005/08/050823availtranscapab.pdf), focused on inefficiencies associated
with the lack of ATC standardization.
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The FTC agrees that FERC should take steps, such as the NOPR, to bring certainty to
transmission cost allocation rules. At least for now, it appears that FERC does not anticipate
consensus on a single cost allocation methodology or a uniform set of methodologies. Instead,
FERC will look to transmission providers, their customers, and other stakeholders to develop
such methodologies in the first instance, with the hope that there will be ready coordination of
methodologies for projects that span areas with disparate cost allocation methods. We
encourage FERC to consider providing stronger guidance regarding transmission cost allocation
principles. We are concerned that unnecessary variance in transmission allocation methods will
have a disruptive effect on multi-area transmission proposals, akin to the disruptive effects that
unnecessary diversity in methods for calculating available transmission capability (ATC) had on
transmission services spanning multiple areas.17
As FERC is aware, transmission investment can involve considerable sums of money,
which can intensify efforts to advance narrow interests at the expense of the public. We
encourage FERC to consider whether stronger guidance could promote consensus sooner and
avoid creating and entrenching a patchwork of transmission cost allocation methodologies that
may not support broad, efficient regional markets and low-cost compliance with environmental
and energy security policy initiatives. FERC’s goal should be to establish consistent, reasonably
uniform cost allocation rules that govern an entire Interconnection. Barring proof to the
contrary, the manner in which new transmission – whether built for reliability, economic, or
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The specific customers benefitted could vary depending on the nature of the project, but that18
result should arise from differences in transmission system topography, not from differences
among cost allocation methodologies for the same kinds of projects.
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public policy purposes – benefits grid users is not likely to vary greatly within an
Interconnection. Therefore, neither should cost allocation methods – which are to be based on18
the pattern of present and future benefits – vary substantially.
Based upon comments filed by parties in Docket No. AD09-8, we note that some cost
allocation methodologies seem to have obtained reasonably widespread acceptance and are
succeeding at supporting robust levels of transmission investment. FERC may wish to consider
using the NOPR’s compliance stage to determine which methodologies are more likely to
succeed or are succeeding. For example, FERC could require proponents of a particular
methodology to demonstrate why it has worked or would work better than other methodologies.
FERC could use the successful methodologies as the framework for transmission cost allocation
methodologies applied in regions where consensus has not formed or where it appears that
proposed methodologies are not likely to overcome current conflicts over cost allocations.
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