FERC Order 888

On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Order No. 888, which required public utilities to provide open access transmission service on a comparable basis to the transmission service they provide themselves. Key provisions in the Order did the following:

• Required that all transmission owners subject to FERC jurisdiction provide wholesale transmission services to all parties under the same terms and conditions that they provide service to their own generation, with the exception that utilities were able to reserve transmission for service to their own native loads (meaning end users of the utility).
• Required utilities to functionally separate generation, transmission, power control, and distribution activities.
• Identified six ancillary services that utilities must provide in adjunct with transmission service and allowed utilities to develop rates for these services.
• Found that if stranded costs are caused by departing wholesale customers, the utility could recoup these costs from the departing customers so long as the utility first tried to mitigate them (e.g., finding new customers to replace the costs).
• Encouraged, but did not require, utilities to create Independent System Operators (ISOs) and laid out criteria for FERC approval of them.

FERC’s goal in issuing the Order was to remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower-cost power to the nation's electricity consumers. Order 888 put in place a number of key conventions that still drive the way the electricity industry operates today. The order required open access transmission tariffs (often called OAT tariffs) whereby utilities must treat other parties’ transactions in the same manner they treat power transactions performed internally. It required the utilities to functionally create separation among their generation, transmission, power control, and distribution departments (although FERC did not have the authority to order the actual breakup of the vertical utility).

It also introduced the concept of ancillary services as separate and distinct and allowed utilities to charge for providing them. And, much to the relief of the utilities, it embraced the concept that stranded costs should be recoverable. Although this applied only to wholesale issues, it gave utilities a good precedent to quote when the discussion came up later in state restructuring proceedings. Order 888 also encouraged, though it did not require, the formation of ISOs to create “organized wholesale markets” and laid out 11 principles required for approval of ISO tariffs (see list below).

Wholesale trading grew quickly after Order 888 was issued — from approximately 100 million kWh in 1996 to close to 4.5 billion kWh in 2002. However, until states began restructuring, the only buyers were still the utilities. Restructuring in some key states including California, New York, and Pennsylvania began in the late 1990s, opening the door for marketers and generators to sell directly to end-use customers.

Order 888 Principles for Approval of ISOs

The ISO:

1. must have a fair and non-discriminatory governance structure.
2. may not have financial interests in any market participants.
3. must have a single, open-access tariff for the entire area served by the ISO.
4. is responsible for system security.
5. may control system dispatch for pool or bilateral arrangements.
6. can manage transmission constraints.
7. has incentives for efficiency.
8. has pricing mechanisms for transmission and ancillary services that promote market efficiency.
9. must post transmission availability in real time on electronic bulletin boards.
10. must coordinate with adjacent control areas.
11. must have a dispute resolution process.