Federal Trade Commission Staff Reply Comment to the New York State Public Service Commission on “Reforming the Energy Vision” Project

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STATE OF NEW YORK
PUBLIC SERVICE COMMISSION
Proceeding on the Motion of the Commission 	)
In Regard to Reforming the Energy Vision: DPS Staff 	) 	Case 14-M-0101
Straw Proposal on Track One Issues 	)
REPLY COMMENT OF THE STAFF OF THE FEDERAL TRADE COMMISSION1
October 23, 2014
I. 	Introduction
The Federal Trade Commission (FTC) staff appreciates this opportunity to submit a
comment in reply to certain comments filed last month in this proceeding before the State of
New York Public Service Commission (NY PSC). The NY PSC has requested input concerning
the NY PSC staff’s Straw Proposal on Track One Issues in the Reforming the Energy Vision
(REV) project.2
We commend the NY PSC and its staff for their efforts to rethink the role of the
electricity distribution system in the face a number of key developments. Those developments
include (1) important technical advances in distributed energy resources (DERs); (2) increasing
concerns about the environmental impacts of fossil-fueled generation; and (3) growing evidence
that conventional power supplies may lack the resilience to satisfy electricity customers’
differing preferences for increased reliability. Our comment draws on the FTC’s experience both
in enforcing competition laws and in advising state and federal regulatory agencies about the
competitive effects of an array of regulatory programs focused on the electric power system.
Most fundamentally, the NY PSC staff’s Straw Proposal contemplates a transformation
of the function of the electric distribution system. This transformation would involve the
adoption of a Distributed System Platform (DSP) framework for the distribution stage of the
electric industry. This step, which is akin to creating a separate system operator at the
distribution level of the industry, would be a departure from the historic design and operation of
the electricity distribution stage.
1 This comment expresses the view of the FTC’s Office of the General Counsel, Office of Policy
Planning, and Bureau of Economics. The comment does not necessarily represent the views of
the FTC or of any individual Commissioner. The Commission, however, has voted to authorize
the filing of this comment.
2 State of New York, Department of Public Service, “Developing the REV Market in New York:
DPS Staff Straw Proposal on Track One Issues” (Aug. 22, 2014) (“Straw Proposal”), available
at http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId=%7BCA26764A-
09C8-46BF-9CF6-F5215F63EF62%7D.

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Largely designed and operated as the lower-voltage extension of the transmission system,
the distribution system served historically as the final step in delivery of power to individual
electricity customers from large (and often distant) generators, all owned and operated by heavily
regulated monopoly utilities. As the Straw Proposal describes, however, recent technical
advances in small-scale generators, renewable generation, power system operating technology,
demand response (DR), and (most recently) energy storage devices and electric vehicles have
opened new opportunities for competition between centralized generators and DERs connected
to the distribution system (but often installed on the customer side of the meter).3 DERs
represent an opportunity to better serve the preferences of electricity customers, and DERs can
improve the overall efficiency of the electric power system.
The NY PSC (as well as regulators in other states and nations) must determine how to
respond to these new opportunities for cost-saving efficiencies and customized service for
electricity customers. We agree with the NY PSC staff that the existing regulatory approach is
unlikely to bring customers the full potential benefits offered by advances in DERs and related
technologies.4 We also agree that it is crucial to operate the DSP fairly and objectively in order
to create a setting in which DER investments can flourish and benefit electricity customers.
As the NY PSC moves forward with the REV process, we encourage it to focus on the
lessons learned during the earlier transformation to competition in organized wholesale
electricity markets in New York and other states. Like the local distribution system,
transmission originally developed as a proprietary system for moving power from each utility’s
own generators to customers within its territory (with some relatively weak connections to other
utilities). Over the past 25 years, particularly in areas with organized wholesale power markets,
the transmission system has gradually become a true network that facilitates technical and
organizational innovations, environmental improvements, and greater efficiency through
competition. By rewarding the performance of generators and other energy resources, organized
competitive markets can produce benefits for customers, including improvements in the overall
efficiency, reliability, and resiliency of the power system.
The REV project aims to promote effective competition at the distribution level to benefit
electricity customers and shares the organized wholesale electricity market’s goals of increased
efficiency, transparency, and customer choice.5 Ideally, the NY PSC will design the REV
project to take into account the experience gained from restructuring wholesale electricity
markets.
As we explain in Sections III and IV of this comment, our primary concern about the
Straw Proposal is that the NY PSC staff favors an administrative determination that utilities
should serve as their own DSP operators. By contrast, we believe that an open competitive
procurement process should be the means of selecting the DSP operator. Section III discusses
3 Straw Proposal, § III.B.
4 Id. § I.D.
5 Id. at 1-2.

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the advantages of such a selection process that would entail an objective and transparent
evaluation of the costs and benefits associated with different potential DSP operators. Section
IV addresses the issue of potential distribution service discrimination against independent DER
owners by DSP operators that also own DERs. The potential for such discrimination is the
genesis of our recommendation in Section III that the NY PSC institute a competitive selection
process to choose DSP operators – a process that would weigh the associated costs and benefits
of different applicants for the DSP operator role.
In addition, to a considerable extent, the Straw Proposal would allow each incumbent
distribution utility to invest in DERs in its own distribution territory. The Straw Proposal would
thus fail to take full advantage of the lessons learned about vertical market power and associated
transmission discrimination (in the form of lower quality or more costly transmission service)
during the restructuring of wholesale electricity markets.6 The initial comments of NRG Energy
and the National Energy Marketers Association (NEM), among others, also expressed a concern
about the Straw Proposal’s treatment of vertical market power issues.7 As the Federal Energy
Regulatory Commission (FERC) concluded in Order No. 2000, it has been difficult to detect,
document, and prevent violations of behavioral rules against discrimination in transmission
services, and thus behavioral rules have been insufficient to prevent transmission monopolists
from using transmission discrimination to raise the costs and risks of rival centralized
6 See Section IV of this comment.
7 NRG Energy, an independent power producer, asserted: “[A]llowing utilities to own and
operate DERs in competition with competitive entities will result in anti-competitive pricing,
barriers to entry, and bias, and will drive away competitive investment in DERs.” Initial
Comments of NRG Energy, Inc. to the DPS Staff Review Proposal on Track One Issues, at 2
(Sept. 22, 2014), available at
http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={403F3AE0-09F4-
4184-9BB8-755D442CA8F3}. Similarly, NEM contended: “[A]fter nearly two decades of
experience with competitive retail markets, it is abundantly clear that the anti-competitive
impacts of monopoly utility participation in competitive energy markets, be it for commodity
supply or new energy-related value-added services as a DER provider, is poor public policy, is
not in the public interest and deters and discourages the private capital investment and
technology innovation that is necessary to truly realize the REV vision.” Comment of the
National Energy Marketers Ass’n, at 2 (Sept. 22, 2014) available at
http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={929C1EFF-B6C6-
4779-934A-23EDD5DA11D2}. Further, in a comment submitted in August, the New York
Independent System Operator (NYISO) concluded that “vesting the utility with the roles of
market manager, distribution utility, DER provider, and DER developer at the same time may
stifle the competition and technological advancement the PSC seeks to promote in this
proceeding.” Corrected Comment of the New York Independent System Operator, Inc., at 5
(Aug. 18, 2014), available at
http://documents.dps.ny.gov/public/Common/ViewDoc.aspx?DocRefId={B9B3E4DA-4F8E-
47FA-8316-DBD4E096A6F5}.

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generators.8 With regard to the distribution system, we similarly doubt that behavioral rules –
intended to curb distribution service discrimination that could reduce the competition faced by
utility-owned DERs – will be sufficient by themselves to remedy these concerns over
distribution service discrimination. Discrimination in electric system operations at any stage of
moving power from generators (or other DERs) can be very subtle, and even the appearance of
discrimination in the provision of such services can discourage investment in beneficial DERs in
New York by raising the perceived risks and costs facing such investments. To address this
concern, we recommend that the NY PSC and its staff revise the Straw Proposal to include: (1)
an open competitive process to select each DSP operator with selection criteria that include
preventing distribution service discrimination and alleviating perceptions of such discrimination;
and (2) one or more independent DSP market monitors (also selected through a competitive
process) to augment the enforcement and market monitoring efforts of the NY PSC and its staff.
We also encourage the NY PSC staff to consider two related topics for inclusion in the
Straw Proposal, as mentioned in Section V of this comment.
II. 	Interest and Experience of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers. The FTC does so through
law enforcement, policy research, and advocacy. For example, in the field of consumer
protection, the FTC enforces Section 5 of the Federal Trade Commission Act, which prohibits
unfair or deceptive acts or practices. In its competition mission, the FTC enforces antitrust laws
regarding mergers and unfair methods of competition that harm consumers. In addition, the FTC
often analyzes regulatory or legislative proposals that may affect competition, allocative
efficiency, or consumer protection. It also engages in considerable consumer education through
its Division of Consumer and Business Education.9 In the course of all of this work, the FTC
applies established legal and economic principles as well as recent, innovative developments in
economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
merger review and other antitrust enforcement, competition advocacy, and consumer protection
efforts.10 The FTC and its staff have filed numerous comments advocating competition and
8 See the italicized material in the body of Section IV of this comment (presented in a less
abridged form in the Appendix).
9 For an overview of the FTC’s education efforts, see the FTC staff’s comment to the Consumer
Financial Protection Bureau concerning “Request for Information on Effective Financial
Education,” Docket No. CFPB-2012-0030 (Nov. 2, 2012), available at
http://www.ftc.gov/os/2012/11/1211cfpb.pdf.
10 See, e.g., Opening Remarks of the FTC Chairman at the FTC Conference on Energy Markets
in the 21st Century: Competition Policy in Perspective (Apr. 10, 2007), accessible at
http://www.ftc.gov/news-events/events-calendar/2007/04/energy-markets-21st-century-
competition-policy-perspective. FTC merger cases involving electric power markets have
included DTE Energy/MCN Energy (2001) (consent order), accessible at

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consumer protection principles with state utility commissions, state legislatures, the Department
of Energy (DOE), and FERC.11 In particular, we have filed a number of advocacy comments
concerning restructuring of wholesale electricity markets, DR, dynamic pricing, and the
interactions of these developments with retail competition.12 The FTC’s competition advocacy
http://www.ftc.gov/enforcement/cases-and-proceedings/cases/2001/05/dte-energy-company-and-
mcn-energy-group-inc; and PacifiCorp/Peabody Holding (1998) (consent agreement), available
at http://www.ftc.gov/sites/default/files/documents/cases/1998/02/9710091.agr_.htm.
11 A listing, in reverse chronological order, of FTC and FTC staff competition advocacy
comments to federal and state electricity regulatory agencies is available at
http://www.ftc.gov/policy/advocacy/advocacy-
filings?combine=&field_matter_number_value=&field_advocacy_document_terms_tid=5290&f
ield_date_value%5Bmin%5D%5Bdate%5D=&field_date_value%5Bmax%5D%5Bdate%5D=&
=Apply.
12 For example, the FTC or its staff discussed vertical market power in wholesale electricity
markets in the Comment of the Staff of the Bureau of Economics of the Federal Trade
Commission Before the Federal Energy Regulatory Commission, In the Matter of Regional
Transmission Organizations, Docket No. RM99-2-000 (Aug. 16, 1999), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-
federal-energy-regulatory-commission-concerning-regional-transmission/v990011.pdf;
Comment of the Staff of the Bureau of Economics of the Federal Trade Commission Before the
Federal Energy Regulatory Commission, In the Matter of Entergy Services, Inc., Docket No.
EL99-57-000 (May 27, 1999), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-
federal-energy-regulatory-commission-matter-entergy-services-inc.concerning-transco-
proposal/v990007.pdf; and Comment of the Staff of the Bureau of Economics of the Federal
Trade Commission Before The Federal Energy Regulatory Commission, In The Matter of
Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission
Services by Public Utilities, Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities; Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking, Docket Nos.
RM95-8-000 & RM94-7-001 (Aug. 7, 1995), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-
federal-energy-regulatory-commission-matter-promoting-wholesale-competition./v950008.pdf.
The FTC staff discussed electricity dynamic pricing, DR, and competition issues in the Reply
Comment Before the District of Columbia Public Service Commission, Formal Case Nos. 1086
and 1109 (Jan. 13, 2014), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-reply-comment-
district-columbia-public-service-commission-concerning-proposed-program.1086-
1109/140117dcdynamicpricing.pdf; Comment Before the Public Service Commission of the
State of Delaware In the Matter of the Adoption of Rules and Regulations To Implement the
Provisions of 26 DEL. C. CH. 10 Relating to the Creation of a Competitive Market for Electric
Supply Service, PSC Regulation Docket No. 49 (Nov. 13, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-public-
service-commission-state-delaware-concerning-its-proposal-revised-its-

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program also has issued two staff reports on electric power industry restructuring issues at the
wholesale and retail levels.13 In addition, the FTC staff (along with staff from FERC, the
Department of Justice, the Department of Agriculture, and DOE) contributed to the work of the
Electric Energy Market Competition Task Force, which issued a Report to Congress in the
spring of 2007.14
III. 	Straw Proposal § III.A: “Identity of the DSP Provider”
The Straw Proposal’s blanket administrative determination that each incumbent
distribution utility should serve as its own DSP operator does not offer potential rival DSP
operators any opportunity to show how they can benefit customers and surpass the distribution
utilities in avoiding the potential distribution service discrimination threats outlined in the Straw
rules/131114delawareretailelectric.pdf; Comment Before the Public Utility Commission of
Texas in the Rulemaking Regarding Demand Response in the Electric Reliability Council of
Texas (ERCOT) Market, Project No. 41061 (Mar. 11, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-public-
utility-commission-texas-concerning-rulemaking-regarding-demand-
response/1303texaspuccomment.pdf; Comment Before the New York State Public Service
Commission in the Proceeding To Assess Certain Aspects of the Residential and Small Non-
residential Retail Energy Markets in New York State, Cases 12-M-0476, 98-M-1343, and 06-M-
0647 (Jan. 24, 2013), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-staff-comment-state-
new-york-public-service-commission-ny-psc-concerning-ny-pscs-
review/130125nypsccomment.pdf; Comment Before the Federal Energy Regulatory Commission
in Matter of Demand Response Compensation in Wholesale Energy Markets, Docket No. RM10-
17-000 (Oct. 13, 2010), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/ftc-comment-federal-
energy-regulatory-commission-concerning-demand-response-compensation-organized.rm10-17-
000/1010wholesaleenegrymarkets.pdf; and Comment Before the Federal Energy Regulatory
Commission in the Matter of Discussion Draft of Possible Elements of a National Action Plan on
Demand Response, Docket No. AD09-10-000 (Dec. 11, 2009), available at
http://www.ftc.gov/sites/default/files/documents/advocacy_documents/federal-trade-
commission-comment-federal-energy-regulatory-commission-concerning-possible-
elements/v100002ferc.pdf.
13 FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/competition-consumer-protection-perspectives-electric-power-
regulatory-reform-focus-retail; FTC Staff Report, Competition and Consumer Protection
Perspective on Electric Power Regulatory Reform (July 2000), available at
http://www.ftc.gov/reports/competition-consumer-protection-perspectives-electric-power-
regulatory-reform (containing edited compendium of excerpts from previous comments that the
FTC and its staff provided to various state and federal agencies).
14 That report is available at http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-final-rpt.pdf.

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Proposal. Nor does it motivate the distribution utilities seeking to serve as their own DSP
operators to think creatively about ways to minimize the actual or perceived risk of distribution
service discrimination. If the REV process lacks a focus on open competition in the selection of
DSP operators, it may fall short of its potential to benefit New York electricity customers, who
generally will be worse off than under a transparent, competitive procurement approach.15
The Straw Proposal’s assignment of each distribution utility to be its own DSP operator
could also preclude the realization of any economies of scale and scope that might follow from
consolidating the territories of DSP operators. The Straw Proposal highlights the costs that
might arise if independent DSP operators were to duplicate the functions already carried out by
distribution utilities.16 The Straw Proposal, however, does not apply the same logic to the ways
in which consolidation of DSP territories can avoid some duplication of operating and set-up
costs. Consolidation of DSP territories also might encourage consideration of inter-area
distribution investments that would reduce overall system costs by increasing the efficiency of
the distribution network.
For example, given what we have learned about opportunities for cost savings involving
dispatch across the seams of transmission systems, could the dispatch of DERs across existing
distribution area seams help reduce New York’s electricity system costs at the distribution level?
Similarly, could much of the concern about coordination between DSP operators and the NYISO
be resolved by retaining the NYISO to serve as the DSP operator in the distribution territories or
having the NYISO’s subsidiaries fill such positions? The proposed administrative designation of
the distribution utilities as their own DSP operators precludes exploration of any benefits that
electric power customers might derive from alternative arrangements. By contrast, an open
competitive DSP operator selection process would allow consideration of the alternative sets of
potential efficiencies and other benefits to customers.
15 Competitive selection processes have become part of the mosaic of wholesale electricity
market reforms. As an example of this phenomenon, Congress required FERC to use a
competitive selection process to designate an organization to handle grid security issues.
Ultimately, FERC selected the incumbent organization – the North American Electric Reliability
Corporation (NERC) – but the selection process itself caused FERC and NERC to tighten
procedures and clarify relationships.
A transparent and objective selection process could still result in awarding a DSP
operator contract to the incumbent distribution utility if, for example, the cost of establishing an
independent DSP operator proved to be prohibitive. Whatever the outcome, this process should
increase current and potential DER investors’ confidence that DSP operators were selected based
on the best information about the available alternatives.
16 Just as utilities continue to own most of the transmission systems operated by independent
system operators (ISOs) and regional transmission organizations (RTOs), utilities could continue
to own the distribution systems run by independent DSP operators.

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Conclusion on Competitive Designation of DSP Operators
When a decision is as important to the success of the REV process as the selection of
DSP operators, we encourage the NY PSC and its staff to rely on an open competitive selection
process rather than on an administrative determination. Specifically, we encourage revisions in
the Straw Proposal to incorporate a competitive procurement process to determine the DSP
operator in each distribution territory, leaving open the possibility that applications for the DSP
designations might show that consolidation of two or more DSP territories under a single DSP
operator would provide net benefits for customers.
IV. 	Straw Proposal § VI: “Mitigating Market Power”
Concerned about the prospect of distribution utilities’ vertical and horizontal market
power, New York was one of the jurisdictions that encouraged distribution utilities to divest
most generation facilities. Now, based on several factors described in Section III.A of the Straw
Proposal, there could be a rebundling of distribution and generation by allowing distribution
utilities to invest extensively in DERs. At the same time, the Straw Proposal also acknowledges
a concern that franchise monopoly distribution utilities would have the ability and incentives to
operate the distribution system so as to discriminate against customers and third parties that own
(or might own) independent DERs.17
A review of comments on the Straw Proposal makes it clear that there are concerns about
the merits of distribution utilities’ serving as their own DSP operators, and that those concerns
focus on discriminatory distribution service behavior by utilities serving simultaneously as their
own DSP operators and as major investors in DERs in their own distribution territories.
The open competitive procurement process to select among DSP operator applicants that
we discussed above is a suitable way to gauge the costs and benefits associated with alternative
potential DSP operators and to select an appropriate DSP operator.18 We encourage the NY PSC
17 “These concerns include (1) the potential for a utility-provided platform to maintain barriers,
such as burdensome interconnection requirements and outmoded tariffs, to robust entry into the
market for DER providers; (2) potential reluctance of a utility-provided platform to provide the
system or customer data needed by DER providers to succeed; and (3) the potential for
functional competitive advantage on the part of the utility/platform regardless of utility
behavior.” Straw Proposal at 67. An additional concern could be discrimination against the
dispatch of DERs not owned by the distribution utility. See also James Tong & Jon Wellinghoff,
“Rooftop Parity: Solar for Everyone, Including Utilities,” 152:8 Pub. Util. Fortnightly 18 (Aug.
2014), accessible at http://www.fortnightly.com/fortnightly/2014/08/rooftop-parity; Herman K.
Trabish, “Jon Wellinghoff: Utilities Should Not Operate the Distribution Grid,” Utility Dive
(Aug. 15, 2014), available at http://www.utilitydive.com/news/jon-wellinghoff-utilities-should-
not-operate-the-distribution-grid/298286.
18 Transparency in evaluations and decision-making can itself improve market performance by
providing information to market participants and by assuaging DER investors’ unwarranted
concerns about distribution discrimination.

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and its staff to highlight issues involving possible distribution service discrimination by taking
account of those issues in the competitive procurement criteria for selecting each DSP operator.
We base our recommendation on the lessons learned about transmission service discrimination in
the process of restructuring the wholesale electricity market, as explained below. At a minimum,
a DSP operator applicant should bear the burden to demonstrate that it will not engage in
distribution service discrimination against other DER investors. A DSP operator application
should be downgraded or rejected if it does not effectively address concerns over distribution
service discrimination. A sufficient case would include ways in which the applicant proposes (1)
to eliminate its own incentives to discriminate in providing distribution services and (2) to
facilitate the detection, documentation, and prevention of distribution service discrimination.
Although DERs and related advances in technology are major developments in the
electric power industry, it remains uncertain how to confer the benefits of these advances on
customers. DERs are a major development, but they are not the first such development in the
electric power industry. In the late 1970s, initial efforts to remove barriers to less fossil-fuel-
dependent types of generation led to regulatory changes (e.g., the Public Utility Regulatory
Policies Act of 1978) as well as to the recognition that the transmission system could be adjusted
to accommodate independent power producers of many types.19
The period preceding FERC’s promulgation of Order No. 2000 saw policy developments
involving experimentation with various ways to unbundle the transmission system from other
utility operations, in order to address concerns over discrimination in transmission service while
preserving economies of vertical integration, scale, and scope. A key impetus for putting grid
operations in the hands of ISOs and RTOs was the realization that simple behavioral rules
against transmission service discrimination would not prevent such discrimination (or the
perception of such discrimination) and could not deliver to customers all of the available
advantages of wholesale competition. At the same time, the decision to create ISOs and RTOs –
rather than to require utilities to divest transmission facilities outright – rested in part on an
understanding that ISOs’ and RTOs’ operation of the transmission grid would not entail as many
lost economies of vertical integration or increased transaction costs as might stem from a change
in transmission ownership patterns or a disruption in the existing arrangements used to build or
maintain transmission lines or connect generators to transmission facilities.20
With respect to FERC Order No. 888, the FTC and its staff repeatedly raised this concern
about relying exclusively on behavioral rules to prevent transmission service discrimination.
19 Electric Energy Market Competition Task Force, Report to Congress, supra note 14, at 19-23.
20 Some utilities eventually decided that it would be worth more to concentrate their business at
the distribution level than to preserve economies of vertical integration between transmission and
distribution. Thus, although they were never required to do so, these utilities sold their
transmission assets to newly formed transmission-only utilities (“Transcos”). The largest
Transco, ITC, owns parts of the transmission grid operated by the Midcontinent (formerly
Midwest) Independent System Operator.

10
FERC subsequently addressed this concern and articulated this key lesson in the following
italicized passage (excerpted from FERC Order No. 2000, with footnotes omitted):21
With respect to continuing opportunities for undue discrimination, the NOPR observed
that, when utilities control monopoly transmission facilities and also have power
marketing interests, they have poor incentives to provide equal quality transmission
service to their power marketing competitors. . . .
In the NOPR, the Commission noted that functional unbundling [that relies on
behavioral rules] does not change the incentives of vertically integrated utilities to
use their transmission assets to favor their own generation, but instead attempt to
reduce the ability of utilities to act on those incentives.
The NOPR expressed concern about continuing indications that transmission service
problems related to discriminatory conduct remain and concluded that these problems
are impeding competitive wholesale power markets. The NOPR also noted that
instances of actual discrimination may be undetectable in a non-transparent market .
. . The Commission expressed concern that the difficulty in determining whether
there has been compliance with our regulations raises the question as to whether
functional unbundling is an appropriate long-term regulatory solution.
The NOPR explained that the Commission considers allegations of discrimination,
even if not reduced to formal findings, to be a serious concern for two reasons. First,
this can be indicative of additional, unreported, discriminatory actions, because there
are significant disincentives to filing and pursuing formal complaints that would result
in definitive findings. . . .
Second, the NOPR explained that allegations of
discrimination are serious because, if nothing else, they represent a perception by
market participants that the market is not working fairly. If market participants
perceive that other participants have an unfair advantage through their ownership or
control of transmission facilities, it can inhibit their willingness to participate in the
market, thus thwarting the development of robust competition. The NOPR added that
such mistrust can also harm reliability. . . .
21 The quoted material appears in FERC, Order No. 2000, at 35-38 (Dec. 20, 1999), available at
http://www.ferc.gov/legal/maj-ord-reg/land-docs/RM99-2A.pdf. The Appendix to this comment
contains the text of the full passage that includes these quotes. In footnote 68 of Order No. 2000,
FERC stated: “As noted in the NOPR [Notice of Proposed Rulemaking], in Order No. 888, the
Commission received and considered numerous comments that functional unbundling was
unlikely to work, and that more drastic restructuring, such as corporate unbundling, was needed.
For example, the Federal Trade Commission advised the Commission that a functional
unbundling approach ‘. . . would leave in place the incentive and opportunity for some utilities to
exercise market power in the regulated system. Preventing them from doing so by enforcing
regulations to control their behavior may prove difficult.’ However, the Commission decided at
the time to adopt the less intrusive and less costly remedy of functional unbundling.”

11
Also, a system that attempts to control behavior that is motivated by economic self-
interest through the use of standards of conduct will require constant and extensive
policing and requires the Commission to regulate detailed aspects of internal company
policy and communication. . . . The NOPR stated that the perception that many
entities that operate the transmission system cannot be trusted is not a good
foundation on which to build a competitive power market, and it created needless
uncertainty and risk for new investments in generation.
We believe that the NY PSC can apply the valuable learning from FERC’s experience
and can avoid over-reliance on behavioral rules to prevent distribution service discrimination in
the REV project. We do not know of any attribute of the distribution level of the electricity
industry in New York State that would protect against vertical market power in the form of
distribution system service discrimination (or make it less susceptible to discrimination than the
wholesale level).22 Indeed, the threat of discrimination in the provision of service may be greater
at the distribution level than at the transmission level because of greater information asymmetries
between the distribution utility/DSP operator and the customer. The distribution utilities know
the technology and regulations, while most residential and small commercial (or industrial)
customers considering investing in DERs are likely to be unsophisticated regarding distribution
service discrimination.23
Recommendation for DSP Market Monitors and Their Selection
One additional institutional arrangement – the establishment of DSP market monitors –
could also prove useful in addressing potential DER investors’ concerns about potential
distribution service discrimination. The addition of market monitors to the REV project’s Track
One Straw Proposal could also help reduce the perceived risk of distribution service
discrimination among customers and third-party owners of existing DER facilities. Again, the
experience gained in restructuring wholesale power markets can provide useful guidance. In
implementing transmission restructuring, FERC encouraged ISOs and RTOs to contract for
expert help to monitor market performance, identify potential rules changes to improve market
performance, analyze the likely impacts of stakeholder proposals, and undertake other tasks to
protect competition. The resulting independent market monitors provide a valuable added
perspective and contribute expertise to the resolution of many issues in organized wholesale
markets (including the important topic of interactions between retail and wholesale power
markets). NY PSC staff may wish to add to the Straw Proposal a recommendation for
independent market monitors for the DSP operators. As with the designation of DSP operators,
we recommend using a competitive procurement process to select the market monitors.
22 If the NY PSC staff knows of any features of the distribution level in New York State that
would protect against distribution service discrimination, it would be helpful to revise the Straw
Proposal by detailing those features in order to reassure potential DER investors.
23 At least at the transmission level, many independent power producers that could be subject to
transmission service discrimination are relatively sophisticated about transmission technology
and regulations, and some are even affiliates of transmission-owning utilities. This would better
equip them to detect, document, and challenge transmission service discrimination.

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Moreover, as we observed above regarding the scope of DSP operations, we recommend further
consideration of whether consolidation of DSP areas for market monitoring would be a better
way to deliver benefits to electricity customers.24
V. 	Additional Considerations
We encourage the PSC staff to address the following questions as additions to the Straw
Proposal, particularly if distribution utilities serve as DSP operators and invest in DERs within
their respective distribution territories:
• 	If distribution utility/DSP operators start investing in DERs, this will create incentives to
discriminate in the provision of electricity distribution services against rival DER
investments owned by customers or third parties. With respect to this conflict of interest
between a distribution utility’s role as DSP operator and its role as DER owner, what
disclosure is appropriate and necessary to avoid deception of electricity customers and
third parties contemplating new or expanded DER investments in New York State?
• 	If distribution utilities are to serve as their own DSP operators, would it be appropriate to
prescribe the adoption of performance-based rates that include incentives to connect
independent DER facilities to the distribution system? Would this approach add
significantly to the portfolio of measures that the Straw Proposal recommends in order to
discourage distribution service discrimination by distribution utilities/DSP operators?
VI. 	Conclusion
The FTC staff appreciates the opportunity to provide this reply comment. If you have
any questions or comments, please contact John H. Seesel, Office of the General Counsel, at
(202) 326-2702.
24 As mentioned in Section III of this comment, the independent market monitor for the NYISO
– a position tasked with evaluating and encouraging transmission-level market performance in
New York State – could be a good candidate for concurrent appointment as monitor over one or
more distribution-level markets throughout the state.

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APPENDIX
Excerpt from FERC Order No. 2000
Regarding Transmission Discrimination25
Continuing Opportunities for Undue Discrimination
With respect to continuing opportunities for undue discrimination, the NOPR observed
that, when utilities control monopoly transmission facilities and also have power marketing
interests, they have poor incentives to provide equal quality transmission service to their power
marketing competitors. The NOPR explained that the Commission had made this point in Order
No. 888:
It is in the economic self-interest of transmission monopolists, particularly
those with high-cost generation assets, to deny transmission or to offer
transmission on a basis that is inferior to that which they provide themselves. The
inherent characteristics of monopolists make it inevitable that they will act in their
own self-interest to the detriment of others by refusing transmission and/or
providing inferior transmission to competitors in the bulk power markets to favor
their own generation, and it is our duty to eradicate unduly discriminatory
practices.
In the NOPR, the Commission noted that functional unbundling does not change the incentives
of vertically integrated utilities to use their transmission assets to favor their own generation, but
instead attempt to reduce the ability of utilities to act on those incentives.
The NOPR expressed concern about continuing indications that transmission service
problems related to discriminatory conduct remain and concluded that these problems are
impeding competitive wholesale power markets.26 The NOPR also noted that instances of actual
discrimination may be undetectable in a non-transparent market and, in any event, it is often hard
to determine, on an after-the-fact basis, whether an action was motivated by an intent to favor
affiliates or simply reflected the impartial application of operating or technical requirement. The
NOPR added that, while continued discrimination may be deliberate, it could also result from the
failure to make sufficient efforts to change the way integrated utilities have done business for
many years. The Commission expressed concern that the difficulty in determining whether there
has been compliance with our regulations raises the question as to whether functional unbundling
is an appropriate long-term regulatory solution.
25 We have omitted some footnotes from this excerpt.
26 At this point, footnote 69 of Order No. 2000 reads in pertinent part: “The NOPR described
specific examples of undue discrimination that had been brought to its attention through formal
complaints, informal complaints made to the Commission's enforcement hotline, oral and written
comments made in conjunction with public conferences held by the Commission, and pleadings
filed with the Commission in various dockets. . . .”

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The NOPR explained that the Commission considers allegations of discrimination, even
if not reduced to formal findings, to be a serious concern for two reasons. First, this can be
indicative of additional, unreported, discriminatory actions, because there are significant
disincentives to filing and pursuing formal complaints that would result in definitive findings.27
The NOPR expressed a concern that actual problems with functional unbundling may be more
pervasive than formally adjudicated complaints would suggest. Second, the NOPR explained
that allegations of discrimination are serious because, if nothing else, they represent a perception
by market participants that the market is not working fairly. If market participants perceive that
other participants have an unfair advantage through their ownership or control of transmission
facilities, it can inhibit their willingness to participate in the market, thus thwarting the
development of robust competition. The NOPR added that such mistrust can also harm
reliability.
The NOPR explained the potential for undue discrimination increases in a competitive
environment unless the market can be made structurally efficient and transparent with respect to
information, and equitable in its treatment of competing participants. Also, a system that
attempts to control behavior that is motivated by economic self-interest through the use of
standards of conduct will require constant and extensive policing and requires the Commission to
regulate detailed aspects of internal company policy and communication. The NOPR added that
functional unbundling does not necessarily promote light-handed regulation and undoubtedly
imposes a cost on those entities that have to comply with the standards of conduct and abide by
rules that limit the flexibility of their internal management activities. The NOPR stated that the
perception that many entities that operate the transmission system cannot be trusted is not a good
foundation on which to build a competitive power market, and it created needless uncertainty
and risk for new investments in generation.
27 Here, footnote 70 of Order No. 2000 reads: “As noted in the NOPR, transmission customers
are reluctant to make even informal complaints because they fear retribution by their
transmission supplier; the complaint process is costly and time-consuming; the Commission's
remedies for violations do not impose sufficient financial consequences on the transmission
provider to act as a significant deterrent; and, in the fast-paced business of power marketing,
there may be no adequate remedy for the lost short-term sales opportunities in after-the-fact
enforcement.” (Citation omitted.)