[Code of Federal Regulations]
[Title 18, Volume 1]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 18CFR35.26]

[Page 284-287]
 
           TITLE 18--CONSERVATION OF POWER AND WATER RESOURCES
 
  CHAPTER I--FEDERAL ENERGY REGULATORY COMMISSION, DEPARTMENT OF ENERGY
 
PART 35_FILING OF RATE SCHEDULES AND TARIFFS--Table of Contents
 
                   Subpart C_Other Filing Requirements
 
Sec. 35.26  Recovery of stranded costs by public utilities and transmitting 
utilities.

    (a) Purpose. This section establishes the standards that a public 
utility or transmitting utility must satisfy in order to recover 
stranded costs.
    (b) Definitions--(1) Wholesale stranded cost means any legitimate, 
prudent and verifiable cost incurred by a public utility or a 
transmitting utility to provide service to:
    (i) A wholesale requirements customer that subsequently becomes, in 
whole or in part, an unbundled wholesale transmission services customer 
of such public utility or transmitting utility; or
    (ii) A retail customer that subsequently becomes, either directly or 
through another wholesale transmission purchaser, an unbundled wholesale 
transmission services customer of such public utility or transmitting 
utility.
    (2) Wholesale requirements customer means a customer for whom a 
public utility or transmitting utility provides by contract any portion 
of its bundled wholesale power requirements.
    (3) Wholesale transmission services means the transmission of 
electric energy sold, or to be sold, at wholesale in interstate commerce 
or ordered pursuant to section 211 of the Federal Power Act (FPA).
    (4) Wholesale requirements contract means a contract under which a 
public utility or transmitting utility provides any portion of a 
customer's bundled wholesale power requirements.
    (5) Retail stranded cost means any legitimate, prudent and 
verifiable cost incurred by a public utility to provide service to a 
retail customer that subsequently becomes, in whole or in part,

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an unbundled retail transmission services customer of that public 
utility.
    (6) Retail transmission services means the transmission of electric 
energy sold, or to be sold, in interstate commerce directly to a retail 
customer.
    (7) New wholesale requirements contract means any wholesale 
requirements contract executed after July 11, 1994, or extended or 
renegotiated to be effective after July 11, 1994.
    (8) Existing wholesale requirements contract means any wholesale 
requirements contract executed on or before July 11, 1994.
    (c) Recovery of wholesale stranded costs--(1) General requirement. A 
public utility or transmitting utility will be allowed to seek recovery 
of wholesale stranded costs only as follows:
    (i) No public utility or transmitting utility may seek recovery of 
wholesale stranded costs if such recovery is explicitly prohibited by a 
contract or settlement agreement, or by any power sales or transmission 
rate schedule or tariff.
    (ii) No public utility or transmitting utility may seek recovery of 
stranded costs associated with a new wholesale requirements contract if 
such contract does not contain an exit fee or other explicit stranded 
cost provision.
    (iii) If wholesale stranded costs are associated with a new 
wholesale requirements contract containing an exit fee or other explicit 
stranded cost provision, and the seller under the contract is a public 
utility, the public utility may seek recovery of such costs, in 
accordance with the contract, through rates for electric energy under 
sections 205-206 of the FPA. The public utility may not seek recovery of 
such costs through any transmission rate for FPA section 205 or 211 
transmission services.
    (iv) If wholesale stranded costs are associated with a new wholesale 
requirements contract, and the seller under the contract is a 
transmitting utility but not also a public utility, the transmitting 
utility may not seek an order from the Commission allowing recovery of 
such costs.
    (v) If wholesale stranded costs are associated with an existing 
wholesale requirements contract, if the seller under such contract is a 
public utility, and if the contract does not contain an exit fee or 
other explicit stranded cost provision, the public utility may seek 
recovery of stranded costs only as follows:
    (A) If either party to the contract seeks a stranded cost amendment 
pursuant to a section 205 or section 206 filing under the FPA made prior 
to the expiration of the contract, and the Commission accepts or 
approves an amendment permitting recovery of stranded costs, the public 
utility may seek recovery of such costs through FPA section 205-206 
rates for electric energy.
    (B) If the contract is not amended to permit recovery of stranded 
costs as described in paragraph (c)(1)(v)(A) of this section, the public 
utility may file a proposal, prior to the expiration of the contract, to 
recover stranded costs through FPA section 205-206 or section 211-212 
rates for wholesale transmission services to the customer.
    (vi) If wholesale stranded costs are associated with an existing 
wholesale requirements contract, if the seller under such contract is a 
transmitting utility but not also a public utility, and if the contract 
does not contain an exit fee or other explicit stranded cost provision, 
the transmitting utility may seek recovery of stranded costs through FPA 
section 211-212 transmission rates.
    (vii) If a retail customer becomes a legitimate wholesale 
transmission customer of a public utility or transmitting utility, e.g., 
through municipalization, and costs are stranded as a result of the 
retail-turned-wholesale customer's access to wholesale transmission, the 
utility may seek recovery of such costs through FPA section 205-206 or 
section 211-212 rates for wholesale transmission services to that 
customer.
    (2) Evidentiary demonstration for wholesale stranded cost recovery. 
A public utility or transmitting utility seeking to recover wholesale 
stranded costs in accordance with paragraphs (c)(1) (v) through (vii) of 
this section must demonstrate that:
    (i) It incurred costs to provide service to a wholesale requirements 
customer or retail customer based on a reasonable expectation that the 
utility would continue to serve the customer;

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    (ii) The stranded costs are not more than the customer would have 
contributed to the utility had the customer remained a wholesale 
requirements customer of the utility, or, in the case of a retail-
turned-wholesale customer, had the customer remained a retail customer 
of the utility; and
    (iii) The stranded costs are derived using the following formula: 
Stranded Cost Obligation = (Revenue Stream Estimate--Competitive Market 
Value Estimate) x Length of Obligation (reasonable expectation period).
    (3) Rebuttable presumption. If a public utility or transmitting 
utility seeks recovery of wholesale stranded costs associated with an 
existing wholesale requirements contract, as permitted in paragraph 
(c)(1) of this section, and the existing wholesale requirements contract 
contains a notice provision, there will be a rebuttable presumption that 
the utility had no reasonable expectation of continuing to serve the 
customer beyond the term of the notice provision.
    (4) Procedure for customer to obtain stranded cost estimate. A 
customer under an existing wholesale requirements contract with a public 
utility seller may obtain from the seller an estimate of the customer's 
stranded cost obligation if it were to leave the public utility's 
generation supply system by filing with the public utility a request for 
an estimate at any time prior to the termination date specified in its 
contract.
    (i) The public utility must provide a response within 30 days of 
receiving the request. The response must include:
    (A) An estimate of the customer's stranded cost obligation based on 
the formula in paragraph (c)(2)(iii) of this section;
    (B) Supporting detail indicating how each element in the formula was 
derived;
    (C) A detailed rationale justifying the basis for the utility's 
reasonable expectation of continuing to serve the customer beyond the 
termination date in the contract;
    (D) An estimate of the amount of released capacity and associated 
energy that would result from the customer's departure; and
    (E) The utility's proposal for any contract amendment needed to 
implement the customer's payment of stranded costs.
    (ii) If the customer disagrees with the utility's response, it must 
respond to the utility within 30 days explaining why it disagrees. If 
the parties cannot work out a mutually agreeable resolution, they may 
exercise their rights to Commission resolution under the FPA.
    (5) A customer must be given the option to market or broker a 
portion or all of the capacity and energy associated with any stranded 
costs claimed by the public utility.
    (i) To exercise the option, the customer must so notify the utility 
in writing no later than 30 days after the public utility files its 
estimate of stranded costs for the customer with the Commission.
    (A) Before marketing or brokering can begin, the utility and 
customer must execute an agreement identifying, at a minimum, the amount 
and the price of capacity and associated energy the customer is entitled 
to schedule, and the duration of the customer's marketing or brokering 
of such capacity and energy.
    (ii) If agreement over marketing or brokering cannot be reached, and 
the parties seek Commission resolution of disputed issues, upon issuance 
of a Commission order resolving the disputed issues, the customer may 
reevaluate its decision in paragraph (c)(5)(i) of this section to 
exercise the marketing or brokering option. The customer must notify the 
utility in writing within 30 days of issuance of the Commission's order 
resolving the disputed issues whether the customer will market or broker 
a portion or all of the capacity and energy associated with stranded 
costs allowed by the Commission.
    (iii) If a customer undertakes the brokering option, and the 
customer's brokering efforts fail to produce a buyer within 60 days of 
the date of the brokering agreement entered into between the customer 
and the utility, the customer shall relinquish all rights to broker the 
released capacity and associated energy and will pay stranded costs as 
determined by the formula in paragraph (c)(2)(iii) of this section.

[[Page 287]]

    (d) Recovery of retail stranded costs--(1) General requirement. A 
public utility may seek to recover retail stranded costs through rates 
for retail transmission services only if the state regulatory authority 
does not have authority under state law to address stranded costs at the 
time the retail wheeling is required.
    (2) Evidentiary demonstration necessary for retail stranded cost 
recovery. A public utility seeking to recover retail stranded costs in 
accordance with paragraph (d)(1) of this section must demonstrate that:
    (i) It incurred costs to provide service to a retail customer that 
obtains retail wheeling based on a reasonable expectation that the 
utility would continue to serve the customer; and
    (ii) The stranded costs are not more than the customer would have 
contributed to the utility had the customer remained a retail customer 
of the utility.

[Order 888-A, 62 FR 12460, Mar. 14, 1997]