I. Allegations of Market Power and/or Non-Competitive Behavior

Some marketers and Independent Power Producers alleged to Staff that transmission owners provide themselves or their merchant affiliates with competitive advantages. The allegations fall into two areas: general advantages allowed under current Commission regulations, and specific instances of non-competitive behavior by individual transmission providers in accepting requests, scheduling service, and in the conduct of studies.

1. Network vs. Non-Network Service

Entities with network service have built-in advantages to service their native load over non-network (point-to-point) service. The advantages that network service have over point-to-point service are priority of service under the OATT (which has separate provisions for network service and point-to-point service), lack of curtailment until a TLR Level 5 is called, and the lack of source/sink requirements. The Commission recognized that network service provides a flexibility that can confer a competitive advantage over point-to-point service. This places any NUG at a competitive disadvantage vis-a-vis the vertically integrated utilities.

2. Specific Instances of Non-Competitive Behavior

In addition to the inherent advantages for transmission providers relating to network service under the current regulations, several market participants raised allegations of incidences in which individual transmission providers engaged in non-competitive discriminatory conduct.

One market participant raised specific allegations concerning two utilities in the Midwest, alleging that they had discriminated against it by approving or confirming later affiliate requests before the market participant's own requests, and provided supporting documentation. Three other market participants also raised allegations of transmission providers favoring their merchant affiliates. Enforcement staff is evaluating the information presented with these allegations.

While the allegations discussed above suggest that there may be isolated instances of non-competitive behavior involving transmission providers in the Midwest, we lack enough information to determine if there is a systemic pattern of such behavior, at least within the framework of the current regulations. In addition to the allegations raised to Staff for this investigation, the Commission's Enforcement Hotline handled seven complaints between January 1, 1999, and October 1, 2000, alleging non-competitive behavior by Midwest transmission providers, three of which resulted in Staff concluding that the transmission provider acted properly. As discussed earlier, Hotline matters are confidential, however the general issues raised included: refusing to disconnect customers until they paid stranded rate cost charges; not responding quickly enough to a request for an interconnection study for competitive reasons; denying a request for transmission of electricity purchased from a foreign utility while the transmission provider did same; withholding capacity; bumping a transmission request in favor of an affiliate's; requesting a letter of credit for a large amount and suggesting that the complainant use the transmission provider's marketing affiliate instead; and refusing to allow the complainant to participate in a program under the transmission provider's tariff. As stated above, Staff concluded that the transmission providers acted properly in three of the seven complaints. Two of the seven complaints were eventually resolved by the parties, and Staff determined that state law issues governed the remaining two complaints.

In addition to the informal complaints investigated by the Hotline, during the last two years the Commission has dismissed two complaints alleging anti-competitive behavior by Midwest utilities. Wisconsin Public Power Inc. v. Wisconsin Power & Light and Alliant Energy, Inc., 91 FERC 61,086 (2000) (Commission found that the dispute involved the interpretation of the transmission provider's tariff and a Power Supply Agreement and agreed with the transmission provider's interpretation) and Nordic Electric, L.L.C. v. Detroit Edison Company et al., 91 FERC 61,139, (2000) (Commission found that the transmission provider's reservation of capacity was proper to meet native load). The Commission currently has one complaint pending alleging non-competitive conduct regarding rollover rights. Dynegy Power Marketing, Inc. v. Ameren Services Company, Docket No. EL00?114?000. In conclusion, the Commission has generally relied on passively receiving formal and informal complaints to determine if discriminatory behavior has occurred in the Midwest, rather than actively canvassing market participants to determine whether this is a systemic problem. Because time constraints allowed Staff to only canvass a limited number of market participants while preparing this Report, we cannot conclude whether there is a systemic problem of discriminatory behavior involving Midwest transmission providers. However, there appears to be evidence that some isolated instances of discrimination may have occurred and that several market participants believe that discriminatory behavior by transmission providers is a problem in the Midwest market. It is unclear whether the perception of non-competitive behavior would be better addressed through revising regulations dealing with areas in which the allegations are most prevalent, or by the Commission taking a more pro-active enforcement role, such as through compliance audits, rather than waiting to receive complaints either formally or informally through the Hotline.

6. Policy Options

This section provides some of the options available to the Commission to address the issues for the Midwest market discussed in Section 5.

A. Standardize Protocols and Procedures

The Commission might require all RTOs, by a date certain, to submit the basis and methods for calculating ATC and TTC, as well as specific, standardized criteria for curtailment.

Standardized procedures and criteria for multiple control areas might not get to the root of the problem (i.e., while it would make procedures and criteria consistent within a control area, there would still be the possibility of dozens of different procedures and criteria in other control areas; control areas would still control generation assets), the Commission could require that each RTO set a date certain by which it will take over all control area functions, thereby creating one control area for the entire area covered by the RTO.

Regardless of the first two options, to avoid uncertainty during the interim period before RTOs become effective, the Commission could undertake to standardize methodologies for calculating ATC and TTC. The Commission could do this by requesting proposed standards, either from industry participants or NERC. The Commission could also direct NERC to develop procedures to ensure industry-wide dissemination of TLR information to market participants.

B. Improve Information on Market Performance

Recognizing the difficulty in obtaining real-time transmission-related data on market functions, the Commission could require, on an ongoing basis, that all transmission providers retain, for a period of three years, all information pertaining to daily load, internal generation to meet that load, and imports and exports into its control area.

C. Standardize Procedures for System Impact Studies and Interconnection Requests

Recognizing the uncertainty that may exist in getting generation interconnected to the transmission grid, the Commission could require transmission providers to submit tariff provisions containing a pro forma interconnection process that could be used by the Commission as a template for regions that do not, as yet, have an agreed upon interconnection process. These procedures would be specific to interconnection requests, as opposed to using the existing tariff provisions for transmission requests as is currently required under Tennessee Power.

Alternatively, rather than using a pro forma interconnection provision, the Commission could require all transmission providers to submit tariff provisions of their own design for Commission approval.

D. Investigate Allegations of Market Abuses and Discriminatory Conduct

While the Commission's Enforcement Hotline remains a productive option for resolving individual complaints concerning market abuses and discriminatory conduct, the Commission may choose to direct Staff to conduct formal investigations into entities about which a pattern of complaints has emerged.

E. Improve the Incentives for Open Access Transmission

Reduce the advantages of network service over point-to-point service by requiring that native load be served under the same tariff provisions as other transmission services. Given that all transactions serve load of one sort or another, all load would be treated in the same manner. This would eliminate the current incentives that vertically integrated transmission owners have to favor their native load through the manner and method of calculating ATC and handling interconnection requests. It would also restore confidence among market participants that transmission owners were not calling TLRs to favor native load, because they