FERC Filings
MOTION TO INTERVENE AND PROTEST OF U.S. GENERATING COMPANY, USGEN NEW ENGLAND, INC., PG&E ENERGY TRADING-POWER, L.P., DUKE ENERGY POWER SERVICES, L.L.C, CASCO BAY ENERGY COMPANY, L.L.C., AND THE ELECTRIC POWER SUPPLY ASSOCIATION
PROTEST
Introduction
Throughout its consideration of NEPOOL restructuring, the Commission has insisted that NEPOOL adopt fair governance procedures. Indeed, FERC's encouragement, and deference to, the decisions of regional transmission groups such as NEPOOL, and independent system operators ("ISOs") such as ISO-New England, are premised on these restructured organizations establishing fair and non-discriminatory governance.
In NEPOOL I, the Commission rejected NEPOOL's proposed governance procedures and voting rules, because they gave vertically integrated utilities, even those that divested generation, "excess influence" and "excessive voting power." In response to NEPOOL I, NEPOOL filed revised governance provisions on December 31, 1998. On March 11, 1999, the Commission rejected NEPOOL's resubmitted governance procedures, finding that they "continue to allow a select group of utilities to control all actions of the Management Committee," and are "not in accordance with NEPOOL I." Accordingly, the Commission ordered that revised governance procedures be submitted within 60 days and directed that these newly revised procedures "eliminate the control the vertically integrated utilities in NEPOOL now possess." In response to the Commission's "encouragement" that NEPOOL consult with the Director of the Dispute Resolution Service on initiating an alternative dispute resolution process to aid all of the interested parties in formulating a new governance proposal, the members and stakeholders in NEPOOL have been meeting with a settlement judge to attempt to develop a consensus approach to revised governance procedures and voting rules. NEPOOL has until May 10, 1999 to submit its proposal, less than 20 days from the date of this filing.
As Commissioner Massey stated in his opinion dissenting in part in NEPOOL III, "critical decisions" such as a new congestion management system are due to be made by NEPOOL in 1999, but "[a]s long as governance issues remain unresolved, we will lack confidence that all market participants are fully represented in the proposals that NEPOOL files with us." Indeed, Commissioner Massey astutely warned that "[i]f we don't get governance right and soon, we'll be second guessing every filing that NEPOOL makes over the next few months."
Commissioner Massey's warnings were prescient. Acting just weeks after the Commission's order in NEPOOL III, the NEPOOL Executive Committee ("NEC") has attempted to package its CMS submission as if it had been fairly approved pursuant to acceptable governance procedures and as if the NEC's proposal alone were deserving -- as opposed to the other CMS alternatives that the NEC unfairly rejected -- of the Commission's "guidance." Nothing could be less appropriate and more contrary to Commissioner Massey's admonitions than for the Commission to accept, much less respond substantively to, the NEC's premature transmittal of a substantively flawed, one-sided CMS proposal which was adopted and crafted pursuant to a governance and voting process dominated by the very same parties, whose domination this Commission has now unanimously rejected, twice.
The plain fact is that, had an appropriate governance structure been in place, NEPOOL's CMS filing doubtless would have looked materially different. For the Commission to prejudge the CMS issue based on the present filing would prejudice whatever alternative approaches might arise in the future once a revised governance process is in place. To preclude this outcome, the Movants respectfully submit that the Commission must reject the NEC's filing as the product of impermissible governance procedures which demonstrably allowed undue influence to be exerted by the sector which, not surprisingly, is most favored by the proposal. The Commission should also follow its precedent in NEPOOL III and encourage interested parties to utilize the services of the Commission's Dispute Resolution Service to aid in the development of a balanced CMS proposal. Indeed, the Commission should direct that no CMS proposals be resubmitted to the Commission unless they are either the product of a Commission-mediated dispute resolution process or the result of deliberation and voting within NEPOOL under revised and Commission-approved governance procedures.
The Commission Should Reject The NEC's Filing Because It Is Utterly Unrepresentative Of NEPOOL Participants' Views.
The NEC's CMS Proposal Resulted From A One-Sided Process Favoring The Parties With Excessive Voting Power And Unfairly Omits Policy Alternatives That Could Only Have Resulted From A Fair And Balanced Government Structure.
The NEC's transmittal letter acknowledges that, on the contentious but critical issue of allocation of financial congestion rights ("FCRs"), the membership lacked consensus, and the votes reflected sharp sectoral differences. Yet, despite the substantial merit of alternative proposals, demonstrated in Section C, and in spite of the fact that the NEPOOL CMS Subcommittee had considered specific alternative proposals without recommending a position on them, the NEC unjustifiably voted to file the CMS proposal favored by the transmission owners, and not to file along with the transmission owners' proposal so much as a reference to the alternatives being advocated by interests within NEPOOL that have been denied fair participation under the existing, repudiated governance procedures.
The CMS proposal that the NEC voted to submit to the Commission was not the product of consensus. As to the allocation of FCRs, only transmission-owning utilities along with certain publicly-owned utilities voted in favor of the NEC's proposal, and all the generating companies voted against the proposal. The NEC touts its reliance on a straw vote under the Fortieth Amendment of the RNA and other votes taken under the Thirty-third Amendment of the RNA. But there is no escaping the fact that the Commission has rejected the voting procedures embodied in those amendments since the outcome of such voting could not possibly be reflective of the disparate interests within NEPOOL. And it is equally clear that the NEC failed to take any straw votes under any other voting structures, such as sector voting, which the Commission has expressly endorsed as an acceptable model, whereby the different interests within NEPOOL truly could be reflected. The inescapable conclusion, then, is that none of the votes taken or decisions made regarding the CMS proposal were arrived at pursuant to an acceptable, fair and balanced governance procedure. Rather, by voting under the governance rules which this Commission has twice rejected, the NEC eschewed balance and virtually ignored the considerable work product of its CMS Subcommittee which, unlike the NEC, strove to build a true consensus.
Just two days before the NEC's vote, the CMS Subcommittee presented to the NEC two alternative proposals for allocating FCRs - one based principally on allocations to firm transmission customers and the other based principally on allocations to fully integrated generators. There was no consensus among the members of the CMS Subcommittee in favor of either proposal: some subcomittee members favored, and continue to favor, a scheme that reflects physical delivery, rather than financial congestion, rights. Some NEC members, therefore, recommended that NEPOOL should not take a position on any one proposal. Similarly, there was no consensus in favor of one congestion pricing regime: while a number favored a nodal/zonal pricing scheme, other interests favored a zonal/zonal pricing system, to which the Transmittal Letter pays only lip service, and still others favored a nodal/nodal pricing scheme, which is not even mentioned in the Transmittal Letter.
In sum, the NEC's CMS proposal is the spoiled fruit of a rotten governance procedure, a procedure that, as the FERC has recognized, continues to favor those very interests that already have been found to exert excessive voting power, and that unjustifiably precludes, therefore, any possibility of achieving the fair and balanced presentation and consideration of alternatives on key issues, such as the allocation of FCRs, that the Commission must consider before it can provide guidance as to what a fairly representative pool would have proposed. The Commission's prior governance pronouncements cannot stand for the proposition that all that matters is the substantive reasonableness of what was filed no matter how unfairly the filing came to be made. Rather, those prior pronouncements must stand for the proposition that if a non-consensus filing is the product of an unfair and discriminatory governance process then that filing is by definition unreasonable. Hence, the Commission should reject the NEC's one-sided filing if for no other reason than that it is not reflective of a fair and balanced governance structure.
Any Substantive Guidance By FERC On The NEC's CMS Proposal Would Validate The Actions Taken By The Very Parties That Wield Excessive Influence Under The Repudiated Governance Procedures.
The NEC's submission of a non-consensual CMS proposal to the Commission for its advisory guidance should be flatly rejected. Had the NEC voted on March 19, 1999, eight days after its governance procedures had been struck down again by the Commission, to present its "informational" CMS proposal as a formal amendment to the RNA and as an amendment to the NEPOOL Tariff, Commission approval clearly would have been inconsistent with the spirit of NEPOOL III. That the NEC has attempted to characterize its filing as being merely a request for guidance, rather than approval, should not entail a different response from the Commission. Critical policy decisions, such as the CMS, should not be crafted through governance processes that lack legitimacy. In light of the Commission's prior rejection of the NEPOOL governance procedures, the Commission must decline to lend any authority to the NEC's transmission owner-dominated CMS proposal.
The distinction that the NEC attempts to make between seeking Commission approval and Commission guidance is a ruse. Nowhere does the NEC commit to revisit fresh the CMS proposal once acceptable revised governance procedures are approved by the Commission. Rather its Transmittal Letter states clearly that it is seeking comments and guidance in order to "develop details and finalize" the proposals on or before September 1, 1999. Thus, as far as the NEC is concerned, the major policy decisions already have been reached, and all that remains is the development of the details incident to the proposal's finalization. The NEC must be stopped from pushing forward proposals, in the guise of seeking the Commission's "guidance," which it surely would not have submitted for formal Commission approval in light of the existing governance mess.
In Light Of NEPOOL III, The Commission Should Not Accept Any Non-Consensual NEC Filing On Any Policy Decisions Until New Governance Procedures Are Approved Or Unless It Can Be Demonstrated That Appropriate Voting Procedures Have Been Followed.
In NEPOOL III, the Commission did not have occasion to limit expressly the authority of the NEC or the NEPOOL Management Committee pending development and implementation of acceptable governance procedures and voting rules. Yet the essential implication of the Commission's order in NEPOOL III is that policies formulated and decisions taken pursuant to impermissible governance procedures and voting rules cannot be given effect by the Commission, at least where such policies are plainly contentious, where interested parties have failed to reach consensus and where those with inordinate voting power are favored at the expense of those with impermissibly circumscribed voting power. Were the Commission presently to consider the NEC's contentious, one-sided CMS proposal, it would be validating actions taken after NEPOOL III which plainly were shaped by the very governance system and voting rules that NEPOOL III rejected.
Again, the concerns eloquently expressed by Commissioner Massey in his partial dissent in NEPOOL III are especially apt in this case:
We should resolve this issue today to ensure that future filings made by NEPOOL and ISO-New England are the result of fair and open decision making. We say time and time again that independence is the bedrock principle upon which the ISO must be built if stakeholders are to have confidence that it will function in a procompetitive manner. . . . If we don't get governance right and soon, we'll be second guessing every filing that NEPOOL makes over the next few months.
The instant filing by the NEC is precisely the kind of filing that needs not only to be second guessed but to be rejected summarily since it is exactly the kind of non-consensual, non-representative filing that the Commission most feared receiving.
It Is Premature For The Commission To Provide Guidance On NEPOOL's CMS Proposal, And The Commission Should Direct The Parties To Utilize The Dispute Resolution Service Prior To Approval Of Revised Governance Procedures.
In the interim period prior to Commission acceptance or prescription of revised NEPOOL governance procedures and voting rules, the Commission should take no action on the submitted CMS policy. Rather, the Commission should follow its precedent in NEPOOL III and direct the parties to utilize the offices of the Commission's Dispute Resolution Service. The Commission has just recently reaffirmed "its policy of promoting consensual resolution of disputes among parties in the first instance." To this end, the Commission has stressed the important role of its Dispute Resolution Service in facilitating parties' "use of alternative dispute resolution in all areas the Commission regulates." The critical CMS issues now before NEPOOL are precisely the type of issues appropriately submitted to the Dispute Resolution Service. This should be an especially promising and efficient approach given that the NEPOOL Participants already are utilizing the Dispute Resolution Service to resolve governance and voting procedures, and have in fact recently settled a slew of tariff disputes with the Commission's assistance. Alternatively, the Commission simply should reject the CMS filing and require that a new filing be submitted at such time as the new governance and voting structure is in place.
If The Commission Elects To Consider The Merits Of The NEC's CMS Proposal Despite Its Procedural Infirmities, The Proposal Must Be Modified In Order To Be Equitable And Consistent With The Commission's Pro Forma Tariff And Transmission Pricing Policies.
There is an overwhelming case for the Commission not to reach the merits of the NEC's CMS Proposal, as currently constituted. The Movants nevertheless believe that, if the Commission elects to consider the merits of the Proposal, it should find that the Proposal, as currently proposed, is defective under FERC precedent and policy, and as such, should be modified as discussed below.
Allocation Of FCRs Only To Transmission Customers Would Eviscerate The Transmission Rights That Fully Integrated Generators Already Have Under the RNA, Which Are Protected Under The Commission's Pro Forma Tariff and Transmission Pricing Policies.
The NEC's CMS proposal would initially allocate FCRs only to transmission customers that are paying for firm transmission service under the NEPOOL Tariff or to Excepted Transactions. Although limiting the allocation of FCRs to transmission customers would deny generators compensation for the loss of the right to firm delivery of their output built into Sections 18.4 and 18.5 of the RNA and otherwise provides no mechanism to compensate generators for their lost opportunity costs protected by the Commission's pro forma tariff and transmission pricing policy, the NEC completely ignores these rights. Indeed, the NEC proposal does not even mention the impact of the proposal on generators or their rights. Rather, the NEC's sole explanation for its choice of allocation of FCRs is that allocation to transmission customers will "ensure that those entities paying for the costs of the transmission grid receive value in exchange for their payments." This cursory remark falls far short of a coherent rationale for allocation of FCRs, and completely fails to provide a basis for denying to existing firmly interconnected generators, which indisputably would incur the opportunity costs imposed by congestion but clearly would not be the parties that cause congestion, a means to recover their lost opportunity costs in the event they are constrained down.
Without question, the transmission providers which voted to allocate FCRs only to transmission customers are aware that the ability to deliver fully integrated generation to load without being subject to future congestion costs from less integrated generation has been a bedrock element of NEPOOL interconnection approval procedures virtually from the beginning of NEPOOL. The NEC admits as much in the very first sentence of its CMS proposal. Indeed, Sections 18.4 and 18.5 of the RNA require approval of a generator's interconnection to the pool only if it can be shown that such interconnection will not have a "significant adverse effect upon the reliability or operating characteristics of [the applicant Participant's] system or the systems of one or more other Participants." The effect of these sections has been understood to require that all new generation connected to NEPOOL not adversely impact the ability of existing generation to deliver its output, with the further result that the NEPOOL grid has largely been unconstrained.
It is true that the Commission's October 29, 1998 decisions recognized the right of a generator to be interconnected to the NEPOOL grid on the basis of "economic redispatch," without requiring that unit to pay for all those upgrades required to keep the transmission network uncongested. But the Commission did not thereby abandon its policy that cost responsibility follows cost causation, or find that any rights previously held by firmly integrated generators (under Sections 18.4 and 18.5) were abrogated. Rather, the Commission explicitly left open to NEPOOL the "determination about how transmission rights will be allocated among existing and new generators in the future." Indeed, the only fair inference to be drawn from the Commission's requirement that new generation must be allowed to interconnect based on the "use [of] economic redispatch" to alleviate congestion, is that generators who are backed down as a consequence of the congestion must be compensated by those who cause it to occur. Otherwise, there would be no attempt to hold those generators harmless - as required by the Commission's transmission pricing policy - for congestion they did not cause. Nor, as shown below, could failing to hold such generators harmless be reconciled with the Commission's comparability principle because, were they required to absorb these congestion costs, their treatment would not be comparable to how generation owned by vertically integrated utilities, whether in a pool or not, is treated.
Such compensation is in fact required by the pro forma tariff. Under the pro forma tariff, if a transmission provider can accommodate the requesting party by redispatching its system, the costs of redispatch (including lost opportunity costs) must be paid for by that party. This is no less true in a restructured pool and where the affected generation is owned by a non-utility. Thus, the Commission has recognized that redispatch costs can be incurred not only by transmission providers but by any party that must, as a result of a third party's request for new service or interconnection, either be backed down (thereby incurring lost opportunity costs), or run out-of-merit generation (thereby incurring incremental purchase costs to meet supply obligations).
For example, in approving locational marginal pricing for the PJM Interconnection, the Commission noted that:
Transmission congestion costs are opportunity costs consisting of the following: (1) redispatch costs, i.e., the increase in operating costs associated with dispatching generating sources out of merit order as a result of transmission constraints; and (2) foregone savings or profits, i.e., the economy purchase savings or power sale profits that are foregone when a transmission customer transfers its right to use constrained transmission to another transmission customer.
Thus, the Commission has recognized that a generator that holds the right to use transmission may (as does any firmly interconnected generator) incur lost opportunity costs for which it is entitled to be compensated. Such a holder of transmission rights is in a position analogous to the native load customer or the firm point-to-point customer who has paid for the right, or the upgrades necessary, to receive service and who should be protected from harm when a third-party transmission customer seeks service. Similarly, when a firm transmission customer or a party holding transmission rights effectively transfers those rights to another customer, that transfer should be compensated.
Indeed, the Commission's transmission pricing principles of comparability, fairness and cost-causation require that if a transmission provider must be compensated when it incurs the costs associated with redispatch of the system, a generator which incurs precisely the same costs must also be compensated. Therefore, if NEPOOL adopts a system of financial transmission rights and jettisons existing, physical transmission rights, there must be a mechanism to compensate the fully integrated generator which is backed down as a result of redispatch of the system, either by allocating congestion rights to the generator or by otherwise compensating the generator for its congestion-related costs. There should be no doubt that generators in fact have these rights under both the NEPOOL Agreement (in Sections 18.4/18.5 and their predecessors) and under the FERC's pro forma tariff. There is no basis for their abrogation.
In fact, in its October 29, 1998 orders, the Commission left to NEPOOL the task of reconfiguring its generation interconnection, transmission expansion and congestion pricing policies to work compatibly with competitive wholesale electric markets and Commission transmission pricing principles. But this mandate requires a mechanism that protects all parties, not just transmission customers, that, having acquired certain transmission-related rights, are harmed by new uses, but in a way that does not unduly burden new entry. Indeed, an allocation of FCRs is the most practical mechanism for recognizing existing and paid-for rights to use the existing system. Specifically, FCRs can and are to be used to determine (although there is no precise dollar for dollar correlation) who gets compensated, and in what amounts, for the redispatch costs incurred when the most efficient use of the transmission system means that some generation units will be turned down or off ("constrained down" or "constrained off") and other generation units will be turned up or on ("constrained up" or "constrained on") to assure delivery of electricity under existing contractual arrangements and spot market transactions.
Under the NEC's CMS proposal, congestion rents would be paid as part of the energy clearing price in the zone of delivery. Where a new generating unit or a new load does not assure maintenance of unconstrained dispatch, but relies on redispatch, that new entrant nevertheless causes costs to be incurred and should, consistent with Commission policy, pay those who, as a result of such use, incur additional incremental costs. Existing generation does not cause such congestion, and should not be required to pay for it. Yet the NEC's CMS proposal, by allocating FCRs only to transmission customers (and providing no other alternative means of compensation), would do just that. By contrast, an initial allocation of FCRs to generators instead would provide a mechanism, as the pool moves from an essentially unconstrained system to a system which allows congestion to occur, by which a generator that is fully integrated under NEPOOL rules may be compensated when that congestion forces the generator to be backed down, thereby incurring lost opportunity costs, or otherwise increases the costs the generator must bear to satisfy its delivery obligations. This is the approach that would be most consistent with the FERC's cost-causation principle. It would also provide an incentive to sustain the largest unconstrained market that is economically practicable.
In short, the NEC's simple assertion that its CMS proposal "assign[s] congestion costs related to transmission constraints to those who cause the constraints" is simply wrong. If that were the case, new minimally interconnected generators would bear the burden of congestion rents, period. NEPOOL has not shown how assigning FCRs to a transmission customer which purchases the output from a "minimally interconnected" generator - that is, a generator that relies on economic redispatch, rather than system enhancements, and thus is responsible for creating congestion - will result in assigning the costs of congestion to such generator. Indeed, it cannot make this showing, because the purchaser in this situation, if assigned FCRs to cover its purchases from the spot market or contract purchases, will be fully reimbursed for any congestion rents which result from the transactions, and the party that causes the congestion will have no obligation to pay for the resultant costs.
The NEC's CMS Proposal Fails The "Hold Harmless" Test.
By allocating all FCRs to transmission customers and otherwise denying firmly interconnected generators compensation for their lost opportunity costs, the NEC's proposal would deny generators the ability to be made whole. In the hands of a transmission customer, the FCR would assure that the customer would pay the price it would have paid had there not been any congestion. Principles of comparability and fairness require that a generator which has, under Section 18.4, been interconnected with an assurance of deliverability of its output (or, at a minimum, on a basis that provided the maximum assurance of deliverability) receive comparable protection; that is, it should receive the price it would have been paid had there been no congestion.
Accordingly, the NEC's proposal violates the fundamental principle of holding harmless existing transmission uses. Indeed, in its arguments supporting the CMS Proposal, the NEC has argued that FCRs will be the financial equivalent of the physical delivery rights currently enjoyed by NEPOOL Participants. But if generators interconnected under Section 18.4, who currently enjoy guaranteed rights of delivery, are not allocated FCRs, it is clear that their rights would not then be preserved and that, as proposed by the NEC, the FCR allocation has no relationship at all to physical rights of delivery.
An Allocation of FCRs To Generators Recognizes Existing Uses Consistent With Commission Precedents.
An allocation of FCRs to generators is nothing more than a non-discriminatory application of the Commission's policy of recognizing the priority of existing transmission uses. The Commission in fact has endorsed the allocation of FCRs in order to recognize existing uses of the transmission system and to afford certain protection for those uses. Specifically, in its January 27, 1999 order approving the New York Independent System Operator tariff's congestion management system, the Commission stated:
The initial [Transmission Congestion Contract] allocation simply reflects the current firm usage and does not create any new benefit for use of the transmission system that was not already in place under the Member Systems' individual open access tariffs.
As described above, generators that have been fully integrated into NEPOOL have, in fact, been accorded "firm usage" of an unconstrained system, since, pursuant to Sections 18.4 and 18.5 of the RNA, their rights to operate on the NEPOOL system have been assured even though their utility owner did not separately purchase transmission for deliveries from those units. As a result, they should receive an allocation of FCRs.
Indeed, the Commission, in approving the sale of CMP's generating assets to FPL Energy Maine, recognized that existing generators within NEPOOL hold valuable transmission access rights. The Commission there stated that the transferred generation assets would continue to be treated as "existing facilities for purposes of transmission in NEPOOL." And the Commission surely did not intend that the transfer of generation assets from an integrated utility to a separate generation company would alter or diminish the interconnection rights of the transferred assets. Hence, the Commission specifically found that allowing existing units to maintain their priority did not grant the new owner "unduly preferential access to Central Maine's and NEPOOL's transmission." It further stated that:
FPL Energy Maine is stepping into the shoes of Central Maine. We do not believe it is unreasonable to allow the new owner to maintain the existing access to the transmission grid as an integral part of the acquisition.
The Commission expressly recognized that FPL Energy Maine would acquire "those transmission access rights previously held by Central Maine for those same generating units." For the Commission's statement not to have been entirely hollow, those rights had to exist. But if they do exist, surely they cannot be abrogated any more than any other rights.
Under the CMS proposed for NEPOOL, FCRs should provide the equivalent of these rights. Therefore, the Commission's decision in Central Maine Power Company can only mean that (i) existing fully integrated generators are entitled to FCRs and (ii) allocating such rights provides no undue preference to such generators. Thus, the NEC's failure to allocate FCRs to generators is inconsistent with this decision, and would improperly deny fully integrated generators the "existing access to the transmission grid" that was assured at the time they complied with the requirements associated with being firmly interconnected in NEPOOL.
In addition, in the context of a divestiture transaction, an allocation of FCRs to the purchasers of divested generation assets is fair to both the purchasing generator and to the selling utility's load. On the one hand, the purchasing generator had a reasonable expectation that, if the purchased assets were fully interconnected to NEPOOL, they would have at least been physically deliverable under NEPOOL rules, and this expectation presumably was reflected in the purchase price. An allocation to the generator of the FCRs attributable to this investment would reflect this expectation.
On the other hand, whether or not the acquiring generator reasonably expected that the divested units would retain the right of physical delivery, the purchase price for the divested assets in fact was based on the assumption that the generation being divested would generally not be constrained, that is, as if the right to deliverability was transferred. As a result, the divesting utility in fact received the value for that right and the utility's load received the financial benefit of the transmission rights through a reduction in the divesting utility's stranded costs for which the load otherwise would be responsible. Were the transmission customer to receive not only the value of these rights, but also the FCRs reflecting the financial equivalent of those rights, this would result in the load receiving the value of the rights twice. Such a result surely would not be equitable.
The single rationale offered by NEPOOL for allocating FCRs only to transmission customers is built on the fallacy that because transmission customers have paid for the existing system, they therefore should "receive value in exchange for their payments." However, congestion costs are not costs of the embedded system, but rather reflect the absence of transmission capability in the existing system and the need for certain parties to take additional actions to alleviate the congestion and accommodate additional uses. Load should not in the future be paid for, or receive any credit associated with something it no longer is doing, namely, continuing to maintain an unconstrained transmission system. And while transmission customers may pay for congestion as part of the LBMP, they are not the parties that experience the lost opportunity costs. Rather, these costs are borne by generators only; hence, it is the generators that are "out of pocket," not the load. Thus, the rationale that transmission customers have paid for the embedded system is misplaced and it simply advantages one group with transmission rights over another group which formerly held the same transmission rights. A CMS proposal should equitably allocate FCRs among all rights holders who experience such congestion-related costs.
Finally, the NEC's FCR proposal is inconsistent with the region-wide non-pancaked transmission rate design encouraged by the Commission and adopted by NEPOOL. The average embedded cost rate approach is premised on the provision of broad based benefits to regional load. These benefits are best achieved on the basis of incentives that minimize congestion or on the assignment of redispatch costs and lost opportunity costs resulting from congestion to those who cause them to be incurred. The NEC's CMS proposal achieves none of these goals. Indeed, creation of an option to interconnect in a manner which creates congestion, provision of an unfettered opportunity for load to buy directly from those causing congestion (i.e., new generation interconnecting under minimum criteria) and encouragement of a shift of congestion costs to those who do not cause them creates perverse siting signals. The NEC's proposal sends a signal to new generators to site their units in locations where the difference between local siting costs and projected location price-based revenues is maximized, irrespective of intervening transmission constraints. Very low local siting costs can provide sufficient incentive to build even if higher locational prices are available in other areas of the system where, presumably, new transmission or generation investment is most needed. As a result of this incentive, new generation would not produce the broad-based benefits to all of those paying for the embedded system.