tucson

UNITED STATES OF AMERICA

FEDERAL ENERGY REGULATORY COMMISSION







REGIONAL TRANSMISSION ) DOCKET NO. RM99-2-000

ORGANIZATIONS )

)

)









COMMENTS OF

TUCSON ELECTRIC POWER COMPANY









August 20, 1999



Tucson Electric Power Company

P.O. Box 711

Tucson, Arizona 85701

(520) 884-3609

I. Introduction



Tucson Electric Power Company (“Tucson”) generally supports the



Commission’s proposal to amend its regulations under the Federal Power Act to facilitate



the formation of Regional Transmission Organizations (“RTO”.) The majority of



Tucson’s comments are general in nature, with the exception of its comments related to



tax exempt financing issues. Additionally, as an overall matter, Tucson emphasizes that



any facilitation should recognize the regional nature of these organizations, especially the



unique nature of the transmission system in the western United States.



II. Concerns Related to Tax Exempt Financing



In the NOPR, the Commission touches on the prospective role of public power in



the formation and administration of RTOs. Specifically, the Commission recognizes the



challenges of these institutions in meeting the “private use” or “two-county” restrictions



promulgated by the Internal Revenue Service which are required to be met to preserve the



tax-exempt status of certain bond financing associated with transmission and other



facilities. The manner in which a tax-exempt financed system is operated and



administered can have a potentially significant impact on the owner of such facilities if



private use or two-county restrictions are breached and the owner is required to redeem



bonds (or a portion thereof) to accommodate a transaction. Many, if not most, owners of



such tax-exempt financed facilities currently address these risks through reliance on the



temporary IRS regulations referred to in the NOPR and/or administration of open access



tariffs under which a transmission service requester is required to cover the cost of any



bond redemption to the extent necessary to accommodate the requester’s transaction.

Tucson appreciates the Commission’s recognition of the complexity of this issue



applicable to a certain segment of the transmitting and public utility universe. However,



Tucson believes it is important to note that the tax-exempt financing challenge is not



unique to public power; there are in fact certain investor-owned utilities, including



Tucson, that have tax-exempt financing in the form of so-called “two-county” bonds.



The considerations for this sub-set of investor-owned utilities are similar to their public



power counterparts in respect of the tax-exempt question and the challenges presented by



RTOs and their administration and operation. Accordingly, Tucson respectfully requests



that the Commission’s ultimate treatment of the tax-exempt issue in the context of RTOs



be clearly directed at all utilities which are beneficiaries of tax-exempt financing, whether



public power or otherwise.



Specifically, it is important that a final rule governing RTOs contain a template



for addressing how transactions can be administered by an RTO if they involve the use of



tax-exempt financed facilities. At a minimum, this template should require an RTO (i) to



operate in a manner that either preserves the tax-exempt status of such facilities or



provides for compensation to the facilities owner to the extent it incurs economic harm in



the form of required bond redemptions (or other IRS-imposed action) because of RTO



operation, and (ii) to develop specific rules governing the operation and administration of



tax-exempt financed facilities within its control (or the control of others in conjunction



with RTO operation).



While transmission facilities are the more obvious facilities potentially affected



by RTO operation, it is important to note that RTO operation which implicates dispatch



of generating facilities can also raise questions of private use or two-county restrictions









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compliance. For a utility with two-county bond financed generating facilities,



compliance could become a problem if generation from those facilities is being



dispatched to address transmission constraints that results in power flowing out of that



utility’s two-county area.



In the area of ratemaking, additional considerations arise that can impact the tax-



exempt financing status of local system facilities. Transmission rates of a local



furnishing utility may currently reflect a cost of financing at lower tax-exempt interest



rates. To the extent that the utility’s native load customers currently pay for the majority



of the transmission facility costs, these customers have the commensurate benefit of the



lower tax-exempt financing costs related to those facilities. If the local furnishing utility



turns over the administration of those facilities to an RTO and a uniform rate



methodology is adopted and administered by the RTO to be applied to all transmission



users of an entire system, this could result in the transfer of the lower cost of tax-exempt



borrowing from the local furnishing system (and its customers) to others outside that



system. This could in turn violate the IRS restrictions associated with tax-exempt



financing.



RTOs that have participants with tax-exempt financing must be given latitude to



develop workable solutions to the challenges posed by IRS restrictions on facilities use.



Tucson respectfully encourages the Commission to adopt a final rule that requires RTOs



to address with particularity the issues surrounding tax-exempt financed facilities and to



develop appropriate regional solutions, consistent with IRS guidelines and laws, which



will help enable public power institutions and applicable investor-owned utilities to



preserve the benefits of tax-exempt financing and avoid to the extent possible deviations









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from the private use or two-county restrictions associated with that financing. In the



alternative, and at a minimum, if an order eventually follows that requires local



furnishing utilities to comply with RTO operational and administrative rules without



regard to private use or other restrictions and compliance results in a violation of those



restrictions, provision should be made to hold harmless such local furnishing utilities.



Remedies might include, without limitation, ratemaking structures that cover the cost of a



bond redemption or defeasance that a utility is required to undertake.



III. Open Architecture



Tucson supports the concept of open architecture in the design of RTO’s. It is



especially important in an evolving competitive market that the Commission allows



creative configuration of the RTO’s. For example, in Arizona, several entities might be



involved in the creation of an RTO. DesertStar is being formed as an Independent



System Operator (“ISO”.) DesertStar would operate but not own transmission facilities.



The Arizona Independent Scheduling Administrator, (“AISA”) as required by the Electric



Competition Rules as docketed in “In the Matter of the Competition in the Provision of



Electric Services Throughout the State of Arizona” at the Arizona Corporation



Commission (“ACC”) provides oversight of scheduling, within Arizona, and might also



have a function within an RTO. Finally, discussions related to creation of a transmission



company (“Transco”) were part of early settlement efforts in Tucson’s stranded cost



proceeding at the ACC. A combination of some or all of these entities might best



facilitate creation of an RTO in the Southwest region. Thus, permissive oversight of the



nature of the entity would best facilitate its creation. If the Commission’s review and









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approval process for RTO’s simplified filing requirements and provided for periodic



updates as to the entity’s development, creation of the entity could be eased.



IV. Minimum Characteristics



Scope and Regional Configuration



The Commission has proposed that all RTO proposals identify a region of



appropriate scope and configuration. Tucson believes that the “appropriateness” of each



proposal should be determined on an individual basis. Given the unique nature of the



transmission systems throughout the United States, each proposal should be evaluated



individually. Such evaluation should focus on the size of the system, the “seams”



inherent in the system and the ease of doing business across the “seams.” Again, Tucson



believes flexibility in this characteristic is paramount.



Regional Configuration Factors



Tucson has concerns over the Commissions comments that an RTO needs to be a



control area operator. In Tucson’s view, if the RTO is responsible for acceptance,



approval and implementation of transmission schedules on a day ahead basis, and the



control area operator (“CAO”) is responsible for real-time transmission, the issue of



control between the RTO and the CAO is unclear. This situation does not alleviate the



concern of preferential treatment during real-time operations if the CAO is making



decisions on transmission real-time. At a minimum the RTO should be responsible for



all transmission schedules at all times. The RTO is in position to see the "bigger picture"



and can make coordinated decisions that cannot be made by a CAO in isolation.









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Short-Term Reliability



Tucson requests further definition of short-term reliability. A time period (one



month, six month or a year long ) would be helpful in evaluating this characteristic and



the RTO’s authority.



V. Minimum Functions



Generally, Tucson supports the functions identified by the Commission. Tucson’s



comments on the functions are general in nature and raise broad issues for the



Commission to consider.



As stated in earlier comments, Tucson would like the Commission to clarify the



segregation of functions between an RTO and a CAO.



Parallel path loop flow must be addressed on an interconnection basis. Currently



there is a FERC approved Unscheduled Flow Mitigation Plan in use within the Western



Interconnection - The Eastern Interconnection is implementing refinements to TLR



(Transmission Loading Relief) procedures. In order to be effective, both of these



procedures, or any others which may be developed in the future, must include the entire



Interconnection. RTOs should be required to encourage the development and participate



in the implementation of such parallel path procedures. But each RTO cannot be



responsible for independently developing a procedure for only their RTO.



Market monitoring needs to be flexible given the open architecture perspective



and the costs involved in such function.



Tucson would like further clarification on the planning function. Given that an



RTO does not own transmission assets, how would it perform planning?









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VI. Ratemaking



Tucson endorses the Commission’s use of performance based rates in regulation



of transmission pricing and encourages the Commission to permit the recovery of



incentive payments that would promote the formation of RTOs.



VII. Other Issues



Tucson believes that existing contracts should be honored and should not be



automatically required to be abrogated. Tucson believes required abrogation of all



existing contracts would be a disincentive to joining an RTO. Again, each RTO proposal



should be looked at individually with respect to treatment of existing contracts.



Filing requirements should be kept simple and flexible for the reasons stated in



these comments.



Tucson does not believe that PX’s should be required for the acceptance of



RTO’s.



RESPECTFULLY SUBMITTED this ___ day of August 1999.





TUCSON ELECTRIC POWER COMPANY



By: _________________________________

Catherine A. Nichols

Manager, Legal Services and Corporate Secretary

220 West Sixth Street

P.O. Box 711

Tucson, Arizona 85701

(520) 884-3609









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