B. Inadequate Regulation to Prevent Abuses of the Transmission Grid

Several market participants have argued to Staff that the current regulatory environment has not kept up with the new challenges of the Open Access era, in which there are economic incentives for transmission providers to misuse the transmission grid to benefit their own load. As discussed in Section 4, the Commission has deferred to NERC the responsibility for setting standards for operating the transmission grid, including the standards and procedures for calling TLRs.

NERC's guidelines and procedures for maintaining system reliability in control areas are voluntary. Thus, the NERC guidelines and procedures are not enforced by remedies such as penalties or refunds. Although the Commission has required utilities to place certain of the NERC standards and procedures into their respective OATTs, the Commission has generally deferred to NERC on transmission reliability questions, including the propriety of TLRs called by transmission providers and Security Coordinators. As a result, in the rare instance that regulatory action has been taken, it has been reactive rather than pro-active, with only prospective impact in localized areas.

For example, during a price spike in July 1999, Cinergy, a Midwest utility, declared that a force majeure situation prevented it from performing its contractual obligations under power supply contracts. However, at the same time, Cinergy pulled more than 1,500 MW of power from the grid that it did not own to service part of its obligations (sometimes known as "leaning on the system"). In December 1999, ECAR sent a letter of reprimand to Cinergy for intentionally using the Eastern Interconnection as a supply resource during July 22, 23 and 29, 1999, thereby decreasing the frequency of the entire Interconnection and jeopardizing its reliability. However, there was no regulatory mechanism in place to remedy the violation or to effectively deter such conduct in the future. On May 31, 2000, the Commission approved a settlement adding a provision to ECAR's tariff that requires a party that draws power from the grid to compensate the parties that made up the shortfall under certain circumstances. However, this is a localized prospective response, limited to ECAR, and does not address similar actions in other NERC regions.

While a Cinergy-type situation is a cause for concern, market participants in the Midwest appear to be more concerned with setting and enforcing uniform standards for calling TLRs, and providing an effective remedial mechanism when TLRs are improperly implemented. TLRs are not called uniformly and consistently over this big physical area (four regions, 61 control areas with six Security Coordinators). For example, a Level 5 TLR in SPP on May 12, and again on May 16, 2000, did not curtail network services or reduce native load, it only curtailed firm point-to-point transactions. NERC procedures call for a pro rata reduction of firm point-to-point, network services and native load during a Level 5 TLR event.

The lack of uniform standards for implementing TLRs creates an uncertainty for public power market participants as to the likelihood that their transmission schedules will be curtailed. Moreover, Staff was unable to analyze, because of inadequate existing information, whether TLRs have been implemented to advantage a transmission provider's generation resources. The lack of adequate remedial measures if this occurs appears to have created an atmosphere of skepticism among public power market participants, who question whether transmission providers have any incentive not to use TLRs to favor their own generation.