FERC Filings
SOUTHERN COMPANY SERVICES GENERATION BACKUP TARIFF, DOCKET NO. ER99-4384-000
IV
In its September 8th filing, Southern states that "an increasing number of independent generators are seeking to interconnect their generation facilities with Southern Companies' transmission system without any specific plans or contracts to serve territorial load." In addition to transmission service, Southern posits that these generators also require back-up service to cover any shortfall between actual and scheduled generation.
While EPSA agrees that generators may need to make arrangements for back-up power, the Commission must make clear that the tariff proposed by Southern is not mandatory. As with energy imbalance service in connection with transmission service, generators must be free to make arrangements with other suppliers to obtain this service. The Commission must ensure that Southern does not improperly "tie" back-up and transmission services, requiring new generators to take back-up service in order to receive transmission service.
However, EPSA also has concerns about the terms of the proposed tariff. While generators must be free to obtain back-up services from alternative sources, few generators, other than Southern, may as a practical matter be available to provide this service. Statistical evidence shows that, overall, the SERC Reliability Region is lagging behind much of the rest of the country when it comes to wholesale competition. Thus, new generators may find it necessary to accept back-up services from Southern.
A review of the proposed tariff, consisting mainly of a proposed Generator Backup Service Agreement, shows an onerous, one-sided contract that is likely to chill investment in new competitive generation. Competitive generation, in the form of new or expanded merchant facilities, provides important benefits to consumers through the development of competitive wholesale electricity markets. New projects inject competition into pricing for power, promote diversity in products and services offered to the market, and mitigate the vertical market power of incumbent utilities. Fair, workable and well-established back-up rules are needed to support investment in new generation. Proposals like the one made by Southern in this proceeding represent a major step in the wrong direction.
EPSA has several specific concerns about Southern's proposed Agreement, which will be addressed sequentially herein. Most specifically, EPSA is concerned that the Agreement contains several open-ended and asymmetrical provisions. Overall, EPSA's concerns focus in three areas. First, if adopted, the Backup Service Tariff contains onerous provisions that will chill investment needed for competitive supply markets to develop. Second, the back-up Service Tariff contains numerous provisions that appear designed to give Southern's own generation a competitive advantage. Several of the proposed provisions could unnecessarily increase the cost and decrease the reliability of new generation, encouraging customers to obtain the power supply from Southern. Finally, there appears to be no administrative appeal or dispute resolution procedure applicable to many of these provisions, thus leaving Generators trying to compete with Southern at its mercy.
For example, Section 4.2 permits Southern, at the Generator's expense, to install, maintain, repair and replace metering and telemetering equipment and associated software necessary to implement the Agreement if it determines the Generator's equipment is inadequate. This provision is totally open-ended. The applicable standards are not defined, nor are they tied to objective criteria, such as national reliability standards, electrical or other codes, or limited to situations creating emergencies or danger. This provision could allow Southern to subject Generators to huge and unreasonable costs.
Similarly, Section 4.4 of the Agreement allows Southern, at its sole discretion, to immediately adjust or curtail a Generator's schedule and provide back-up service instead. The provision raises several concerns. First, no objective criteria, such as emergency circumstances, are defined for the conditions under which Southern may take this potentially onerous step. Nor are any notice provisions established whereby Southern will provide Generators with adequate notice of its intent to take action under this section so that Generators can react appropriately. Finally, this provision, when coupled with Section 7.4, creates an absurd situation where Southern can unilaterally and without notice have a huge impact on the price and reliability of any power sold by its competitors. By exercising its options under one or both of these sections, Southern will be able to preclude its competitors from offering reliable service at a firm price. Clearly this creates a significant market advantage for Southern.
The pricing provisions in Sections 5.2 and 5.3, together with the Operating Contingency Fee in Schedule A, are extremely confusing and appear excessively punitive. As the Commission pointed out with respect to a generator imbalance service proposal by Entergy Services, Inc., which, like the Southern proposal was couched in terms of providing "incentives" for efficient generator scheduling, the utility has the burden of showing that the rates are "sufficient to discourage inappropriate practices without being exorbitant or exploitative." Entergy Services, Inc., 88 FERC 61,098 (1999).
While the goal is to minimize use of the back-up service and encourage Generators to efficiently match scheduled and actual generation, Southern should not be permitted to use this proposed tariff to bolster its dominant market position and create barriers to entry by competitive generators. In addition, to the extent the Commission finds that, because Southern is the dominant supplier of back-up service, there is little or no alternative market for this service, Southern should not be enriched by any punitive, above-market costs it recovers for these services. Rather, Southern should be required to segregate any funds collected under this tariff and provide pro rata rebates to its transmission customers.
Sections 5.5. and 5.6 are also troubling. Southern is requiring Generators to reimburse it for all costs incurred in implementing and administering the Agreements. Again, no definitions or objective criteria are spelled out for these fees, leaving competitive generators faced with substantial uncertainty and risk. In addition, it is unclear whether these administrative and general expenses are already included in Southern's rates, or what type of accountability and audit will be conducted to ensure that only appropriate costs will be collected under this provision.
The Commission should also take note of Section 7.4, in which Southern reserves the unilateral right to not provide service under the Agreement. Failure to supply Backup Services, or any deficiency in the quality of the supply, is deemed not to be a breach of the Agreement by Southern, creating essentially interruptible service. This type of one-sided approach to the responsibilities and liabilities of the parties under the Agreement is untenable. In addition, the consequences associated with this interruptible service are not well spelled out. Will customer purchases be interrupted if Southern chooses not to provide back-up services? Will Southern's own customers be interrupted on a pro rata basis with the customers of other generators? As noted above, the market power implications of this provision are significant.
Similarly, in Section 9.6(a) Southern reserves the right to unilaterally apply to the Commission for changes to the Agreement. Seeking changes to cost-based rates, where an opportunity to participate in the proceeding exists, is one thing. However, unilaterally seeking changes to essential terms and conditions of an essential service is another. Generation developers, who made huge financial investments, are being asked to assume all the regulatory risk associated with back-up service. Southern can repeatedly and regularly require Generators to litigate these issues, with the attendant risk and cost.
Finally, the credit provisions suggested by Southern, in Section 9.8, are unduly onerous. Companies are required to have extremely high credit ratings or to provide an unconditional and irrevocable letter of credit for $1,000,000, which Southern can raise at its discretion. There are very real costs associated with meeting this unnecessary requirement. Left in place, the proposed credit requirements will bar new entry into the market, limiting the benefits wholesale competition can provide. In addition, given the essentially interruptible nature of the Backup Service being proposed, the asymmetrical risks are particularly troubling. Generators whose service is discontinued on little or no notice have no opportunity to seek similar protections from Southern. At a minimum, Southern should be required to fully justify its credit requirements.
The Commission needs to carefully review and analyze Southern's proposals in this proceeding. To encourage robust, competitive wholesale markets, new generators must be able to enter the market and offer products to customers. If Southern is able to unfairly tie back-up generation and transmission services or to impose onerous conditions on the services generators are, as a practical matter, required to obtain from Southern, the development of a competitive market will be slowed and customers will lose the benefits they would otherwise see.