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Public utilities making plans for their transmission facilities would like to make those plans without having to wall off the employees who engage in such planning from the rest of the company. They say they need this interaction to effectively and efficiently invest in the United States’ aging electric grid, while also complying with state directives for planning. Utilities aren’t nearly as eager to share their vision for new infrastructure with other participants in wholesale energy markets. But other marketers worry about unchecked communication among utilities’ planning, transmission, and marketing employees. Denying other marketers access to the same critical information, they say, could lead to less efficient transmission planning and possibly even stymie viable transmission projects. The stakes are high as the Federal Energy Regulatory Commission grapples with new standards of conduct regulating how utilities may share information among employees. Whatever FERC decides must encourage utilities to build new facilities before the electric grid suffers another major blackout. The wrong signal from FERC could chill new investment. But the new regime must also foster the kind of transparency that allows wholesale energy markets to thrive. If FERC’s revised standards allow utilities’ planning employees to cross the transmission function with the marketing function, will the commission strictly enforce its regulations governing such interactions so that wholesale energy markets do not suffer? If FERC decides that utilities don’t have to share with everybody, only robust and timely enforcement of its standards of conduct will safeguard wholesale markets. SETTING THE STANDARDS FERC’s current rulemaking seeks to reform the standards of conduct promulgated in Order No. 2004. Last November, the U.S. Court of Appeals for the D.C. Circuit in National Fuel Gas Supply Corp. v. FERC determined that those standards (in the context of natural gas transportation) were not supported by the administrative record. The court ruled that FERC improperly sought to prohibit conduct that it had not found caused problems for wholesale markets. FERC then initiated a new rulemaking to clarify its requirements and, presumably, build a stronger legal foundation should it wish to penalize future noncompliance. FERC’s challenge is to implement and enforce standards of conduct to provide a balanced opportunity for all players. The commission’s market-based approach to wholesale energy regulation works only if all market participants enjoy open access to transmission and if there is no preferential access to information about the transmission grid. FERC first promulgated standards of conduct in 1996 in conjunction with its landmark open-access restructuring efforts. The fundamental premise of the standards then, as now, was to create a functional separation between the transmission and marketing activities of a public utility. The separation-of-function requirements seek to ensure that the marketing function does not have access to vital transmission data that could give the affiliated marketer an undue advantage over its competitors. Knowing current conditions and future plans for the grid can give an affiliate a significant boost. Knowing before the rest of the market that a transmission line has a congestion problem means the affiliate has a unique opportunity to lock in profits. Data about outages can aid an affiliate in purchasing transmission or choosing when to operate generation plants. Information about future developments presents a similar potential for undue preference. In November 2003, FERC revised the standards of conduct through Order No. 2004. The separation-of-function requirements were considerably expanded, and transmission providers were required to implement extensive training and compliance programs. FERC’s revisions also served to create a single set of rules for electric and gas transmission providers. Most significantly, the amendments created a new “energy affiliate” category of covered employees, which was not restricted to those engaged in marketing. This latter expansion appeared to be contrary to the initial intent of the standards of conduct. FERC had first proposed to prohibit contacts between utility employees engaged in transmission operations and employees engaged in all other affiliated activities. The only sharing of transmission information would be through the FERC-mandated Open Access Same-Time Information System, which is open to nonaffiliates. However, in promulgating the final 1996 rules, FERC limited the prohibition to contacts between employees engaged in transmission operations and those engaged in wholesale marketing. When Order No. 2004 sought to expand the category of covered employees, FERC did not develop a record justifying this departure from its prior determination. It was no surprise that the D.C. Circuit declined to accept this greater scope for the standards of conduct. After the court vacated FERC’s order, the commission issued an interim rule implementing the changes required by National Fuel for gas transmission providers. Even though this was not strictly required, FERC also wisely chose to institute a new rulemaking to review the regulations applicable to electric transmission providers. Final action on the rulemaking is expected later this year. PLANNING FOR TOMORROW Among the multiple issues raised by this rulemaking, one of the most noteworthy relates to FERC’s treatment of those employees who engage in integrated resource planning. IRP is the process by which utilities plan for system growth and meet users’ needs for reliable, cost-effective service with limited resources. It requires employees to access both data about transmission, including system constraints and congestion, and information related to energy marketing, such as load growth. Given the risks to consumers if utilities did not make long-term strategic plans, many states don’t just encourage utilities to engage in IRP — they mandate it. In other states, prudent utilities engage in similar planning processes. The problem is that the activities of IRP employees often include both energy marketing functions and transmission-related responsibilities. The issue of how to classify such employees percolated long before the latest rulemaking. It took center-stage at FERC’s April 2006 technical conference largely due to the risks of conducting IRP under the expanded standards of conduct in Order No. 2004. Much uncertainty has surrounded how FERC would treat these employees in a compliance audit or investigation. At the conference, the industry asked FERC for clarity. Chairman Joseph Kelliher responded that the commission has an obligation to provide such clarity in light of the enhanced civil penalties for noncompliance under the Energy Policy Act of 2005. Kelliher elaborated,”There is ample temptation on the part of the regulator to actually prefer shades of gray, to maintain your discretion to some extent, to be flexible down the road. But it seems shades of gray are fundamentally unfair when the regulated community is looking at some very significant civil penalties, so we are trying to eliminate the gray, trying to reduce the gray.” The current rulemaking seeks to address this issue by creating an exception to the standards of conduct for those utilities required by state law to engage in IRP, as long as such planning is aimed at procuring the energy supply needed to serve the utility’s bundled retail demands. Market participants have reacted strongly, but not favorably, to this proposal. GETTING IT RIGHT Most public utilities and their industry group, the Edison Electric Institute, argue that employees engaging in IRP need access to data not provided to all wholesale market participants. Utilities claim that effective planning cannot take place based solely on the information available on OASIS. They argue that allowing these employees access to nonpublic data accords with FERC’s recent final rule on open-access transmission reform: According to the industry group, that rule recognizes “implicitly” that openness and transparency requirements for transmission planning can be met by means other than conducting the process through OASIS. Moreover, the Edison Electric Institute has stated that FERC’s proposal to limit the exception for planning personnel to those who plan solely for bundled retail load is “illogical and effectively unworkable” because utilities cannot practicably separate planning for their retail loads from planning for their other service obligations, including last-resort load and wholesale requirements. Additionally, utilities say that the state-mandate exception ignores those states that do not explicitly use the words “integrated resource planning” but require utilities to engage in substantially similar processes. Even in states where IRP is not mandated, utilities argue, they are required to engage in least-cost planning and to undergo prudency reviews for rate recovery, which effectively imposes a function similar to IRP. And such planning, utilities contend, advances public goals even if the state does not mandate IRP. In short, the long-term interests of the electric grid demand that utilities receive greater protection for IRP under FERC’s revised standards of conduct. Still, wholesale market participants that do not control transmission facilities want equal access for all potential suppliers to the types of transmission information needed to realistically assess the economic merits of new energy projects. They oppose allowing utilities’ planning employees to have unique access to critical data, fearing that access will harm the ability of other wholesale market participants to develop solutions to future generation and transmission needs. Many argue that the regime currently proposed by FERC is tantamount to a “blank check” for those utilities. Non-utility market participants stress the benefits of increased transparency about transmission: Greater access to data, they say, will lead to more competitive procurement and more robust market participation. In short, they urge FERC to require that any information made available to utility planners be made available to all market participants. In revising the standards of conduct, FERC has a tough job. The commission must strike the appropriate balance between the blank-check approach sought by utilities and the full-transparency approach endorsed by other wholesale marketers. FERC’s rulemaking and enforcement actions will affect new development for years to come. It is undeniable that the aging condition of our electric grid and the growing demands for more energy require utilities to plan for new generation and transmission to meet even near-term predictions. Then again, increased transparency about energy needs should make it easier for markets to attract new capital ready to invest in those additional generation and transmission facilities. At this point, it’s up to FERC to strike the proper balance. In our view, the commission should not let a select few have access to forward-looking data about transmission planning. Full transparency will allow a wider array of market participants to offer up the capital and the know-how needed to solve this country’s looming energy challenges.
Kenneth Irvin and Michael Yuffee are partners in the energy and derivatives markets group in the D.C. office of McDermott, Will & Emery. The firm represents wholesale energy marketers and filed comments on FERC’s standards-of-conduct rulemaking. The views expressed here are solely those of the authors.

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