On July 21, 2011, the Federal Energy Regulatory Commission ("FERC" or the "Commission") issued a final rule ("Order No. 1000" or the "Order") amending transmission planning and cost allocation rules affecting public utility transmission providers. As explained below, while Order No. 1000 builds upon principles established in Order No. 890 (Preventing Undue Discrimination and Preference in Transmission Service) it also departs from them in several respects. By directly addressing controversial topics such as interregional cost allocation, the federal right of first refusal ("ROFR") and public policy considerations in transmission planning, Order No. 1000 is sure to spark continued debate in the ensuing months. The newly imposed rules are significant but largely process-driven, and thus, the true extent of the Order's impact will be revealed in the responsive compliance filings.

Transmission Planning

Order No. 1000 imposes a series of requirements on public utility transmission providers which will impact the Open Access Transmission Tariffs ("OATTs") of the various Independent System Operators ("ISOs") and Regional Transmission Operators ("RTOs") as well as the OATTS of those transmission providers that do not belong to an ISO/RTO. The Order requires that public utility transmission providers participate in a regional transmission planning process that produces a regional transmission plan. Although Order No. 890 already required regional coordination, Order No. 1000 strengthens existing policies by mandating the affirmative obligation to develop a regional transmission plan that reflects the evaluation of whether a regional solution may be more efficient or cost-effective than those identified in existing local transmission planning processes.

Importantly, Order No. 1000 also requires that each public utility transmission provider implement procedures that include local and regional public policy considerations in their transmission planning process. Now public policy requirements will be considered alongside the more traditional reliability and economic planning factors. In addition, regional plans must consider non-transmission solutions on a comparable basis to transmission solutions. As noted below, non-transmission solutions are not the subject of the Order's cost allocation principles.

One of the most hotly debated issues in Order No. 1000's underlying Notice of Proposed Rulemaking was the issue of the federal ROFR. Commenters supporting the removal of the ROFR argued that it would promote competition by placing incumbent and non-incumbent transmission developers on an equal playing field. They argued that customers would realize the benefits of such competition in lowered costs for transmission projects. Those who supported the retention of the ROFR contended that its removal was unnecessary and the evidence does not suggest that it impeded transmission development. Moreover, opponents argued that incumbents are in the best position to develop transmission because they know their system best and removing the ROFR could make transmission planning inefficient and potentially less reliable.

In the final rule, the Commission ordered the removal of the federal ROFR for certain new transmission facilities from FERC-jurisdictional tariffs and agreements. Only transmission facilities evaluated in the regional transmission planning process and selected for cost allocation under the regional plan would be subject to these new rules. In other words, the Commission does not require the elimination of the ROFR from tariffs and agreements applicable to local transmission facilities.

With respect to non-incumbent transmission developers, the Commission acknowledged that there may be circumstances where an incumbent transmission provider is called upon to complete a transmission project that another entity has abandoned. There could also be situations in which an incumbent transmission provider has an obligation to build a project that is selected in the regional transmission plan for purposes of cost allocation but has not been sponsored by another transmission developer. In the Order, FERC clarifies that under both of these scenarios, the incumbent transmission providers would have a basis to request and receive abandoned plant recovery for that transmission facility, upon the filing of a petition for declaratory order or a Federal Power Act ("FPA") section 205 filing at the Commission.

Cost Allocation

The regional and interregional transmission planning processes in Order No. 1000 must also incorporate a cost allocation method that applies to the costs of certain new transmission facilities selected in the regional or interregional transmission plan for purposes of cost allocation. The Commission adopted a "beneficiaries pay" approach surmised in the following principle: "The cost of transmission facilities must be allocated to those within the transmission planning region that benefit from those facilities in a manner that is at least roughly commensurate with estimated benefits. In determining the beneficiaries of transmission facilities, a regional transmission planning process may consider benefits including, but not limited to, the extent to which transmission facilities, individually or in the aggregate, provide for maintaining reliability and sharing reserves, production cost savings and congestion relief, and/or meeting Public Policy Requirements." The Commission established a nearly identical principle for interregional projects. In total, Order No. 1000 enumerated six new cost allocation principles including another which clarifies that non-beneficiaries of transmission projects must not be required to contribute to their costs.

Consistent with the rest of the Order, the Commission set forth a principles-based approach with respect to regional and interregional cost allocation. As such, Order No. 1000 does not specifically define "benefits" or "beneficiaries." The Commission believes that public utility transmission providers should define these (presumably with stakeholder input) and propose them in their respective compliance filings. It is under that context that the FERC will review such proposed definitions in detail. The Commission's intent is to provide flexibility to accommodate a variety of approaches across regions rather than mandating a uniform rule.

Electric Reliability

While not a focus of the Order, certain of FERC's new rules do trigger reliability-related questions and concerns. For example, with respect to the removal of the federal ROFR, incumbent transmission providers may rely on transmission facilities selected in a regional transmission plan for purposes of cost allocation to comply with their reliability and service obligations such that delays in the development of those facilities could negatively impact its ability to meet such obligations. In response to this concern, Order No. 1000 requires each public utility transmission provider to amend its OATT to describe the circumstances and procedures under which public utility transmission providers in the regional transmission planning process will reevaluate the regional transmission plan to determine if delays in the development of a transmission facility require evaluation of alternative solutions, including those the incumbent transmission provider proposes, to ensure the incumbent can meet its reliability needs or service obligations.

Moreover, in response to concerns that increasing the number of asset owners (i.e., non-incumbent transmission developers) would lead to reliability concerns, the Commission noted that a proposed transmission facility's impact on reliability is an important factor that is considered during the evaluation of a proposed transmission facility. Furthermore, when a non-incumbent transmission developer becomes subject to the requirements of section 215 of the FPA, it will have to comply with all applicable reliability standards and obligations, as every other registered entity is required. Notably, Commissioner Moeller argued in his dissent that the Order should have included the right of a utility to build a project within its franchised service territory in order to maintain the reliability of its existing network, regardless of whether the cost of that project is allocated on a regional basis.

Next Steps

Each public utility transmission provider is required to submit its compliance filing no later than twelve months from Order No. 1000's effective date (i.e., 60 days from its publication in the Federal Register). While the Commission's new transmission planning and cost allocation rules are far reaching, the true extent of their impact will only become clear after the compliance filings are submitted. However, interested stakeholders should, to the extent allowable, participate in any compliance-related discussions held by public utility transmission providers to maximize their impact on the final tariff rules and requirements.