On September 20, 2010, the Federal Energy Regulatory Commission (“FERC” or the “Commission”) issued a Final Rule, Promoting a Competitive Market for Capacity Reassignment.  This Order No. 739 lifts the price cap for all electric transmission customers reassigning transmission capacity, and the new rule is an attempt to develop a market for capacity reassignment in lieu of direct acquisitions of capacity from a transmission owner. 

In Order No. 888, FERC mandated that transmission providers allow reassignment of firm capacity rights to any customer as long as a price cap was implemented.  In Order No. 890-A, FERC temporarily removed those price caps and commissioned a study on the effects of removing the price caps. 

On April 15, 2010, the Commission released the results of a two-year study which looked at electric point-to-point transmission capacity reassignment from the second quarter of 2007 to the fourth quarter of 2009 (the “Staff Report”).  This regional and national analysis examined nearly 35,000 transactions and 65 TWh of total transferred volume.  Staff examined prices of reassignments and compared them to the energy market spread (described as the differential in prices between the two locations) over the same time period.  After the release of the Staff Report, the Commission issued a Notice of Proposed Rulemaking (“NOPR”) proposing to remove the price cap for all electric transmission customers reassigning transmission capacity after October 1, 2010. 

After the NOPR was issued, commenters suggested that the Commission and the Staff Report did not provide evidence that market forces could adequately protect customers.  In its Final Rule, the Commission responded that the Staff Report did not support a finding of affiliate abuse or exercise of market power, the main focus of comments.  The Commission also rejected suggestions that a market power study or empirical competition analyses are required to lift the price cap.

In Order No. 739, FERC stated that removal of the price cap will help develop the secondary market for transmission capacity and promote construction of new capacity; thus, transmission customers will be more willing to resell service in response to the higher demand and prices.  The prices signals will indicate where capacity shortages exist and construction can be done most profitably and efficiently.  However, the price for reassigned capacity cannot exceed the cost of new transmission.  The Commission also assured commenters that regulatory oversight will limit the ability of transmission providers to exert market power, and transmission providers will still be required to provide available transfer capability to their customers.  Also, transmission providers will still be obligated to build new construction if they cannot honor service requests using existing capacity, and transmission providers will still only be able to charge cost-of-service rates, unless it can prove no market power exists.

Pursuant to Order 739, transmission providers will have to revise section 23 of the pro forma Open Access Transmission Tariff.  The Commission directed transmission providers to file these changes within 30 days of the publication of Order 739 in the Federal Register. 

A copy of the Commission’s Order 739 is available on www.ferc.gov under Docket No. RM10-22-000 and here.