Daniel Galaburda

Assistant General Counsel

November 2, 2011

The Honorable Kimberly D. Bose Secretary

Federal Energy Regulatory Commission 888 First Street, N.E.

Washington, DC 20426

Re: Niagara Mohawk Power Corporation, d/b/a National Grid
Docket No. ER12-________________

First Revised Service Agreement No. 1743

Under New York Independent System Operator, Inc., FERC Electric Tariff, Original Volume No. 1

Dear Secretary Bose:

Pursuant to Section 205 of the Federal Power Act (“FPA”) (16 U.S.C. § 824d),
Sections 35.7, 35.9, and 35.10 of the Commission’s regulations (18 C.F.R. §§ 35.7, 35.9,

35.10 (2011)), and Order No. 714 (Electronic Tariff Filings, FERC Stats. & Regs. ¶ 31,276
(2008)), National Grid USA (“National Grid”), on behalf of itself and its affiliate Niagara
Mohawk Power Corporation d/b/a National Grid, hereby submits for Commission
acceptance a First Revised Service Agreement No. 1743 (“SA 1743”) under New York
Independent System Operator, Inc.’s (“NYISO”) Open Access Transmission Tariff
(“OATT”).1

SA 1743, formerly designated Niagara Mohawk Power Corporation Rate Schedule
FERC No. 159 (“RS 159”), is a “grandfathered transmission agreement” under NYISO
OATT Attachment L.2 As discussed below, this filing proposes certain amendments to SA
1743 to implement the Agreement Regarding Treatment of Allocations of New York Power
Authority Expansion Power and Replacement Power Beginning January 1, 2012 and
Thereafter (the “Phase-In Agreement”) between and among National Grid, the Power
Authority of the State of New York (“NYPA”), Power for Economic Prosperity (“PEP”),
and Multiple Intervenors (“MI”). A copy of the Phase-In Agreement is attached hereto as
Attachment A.3

The Honorable Kimberly D. Bose November 2, 2011

Page 2

A primary purpose of the Phase-In Agreement, and of the proposed amendments to
SA 1743 implementing it, is to provide an appropriate transition for retail transmission
services that National Grid currently provides to NYPA for the delivery of certain
allocations of low-cost NYPA hydropower made available to qualifying businesses for
economic development purposes, and a phase-in of the increases in delivery rates that will
result from this transition. The category of low-cost economic development power
addressed in this filing, Expansion Power (“EP”) is delivered to eligible retail customers
connected to National Grid’s delivery system in western New York under a grandfathered
pre-OATT service agreement filed with the Commission as NYISO SA 1743.

As listed in Attachment L of the NYISO OATT, which catalogs grandfathered

transmission agreements, SA 1743 currently expires according to its terms on June 30, 2013.
Upon the expiration of grandfathered service under this agreement, NYPA will receive
delivery service for Existing Allocations of EP under Section 5 of the NYISO OATT and the
provisions of National Grid’s Retail Tariff PSC No. 220, at rates substantially higher than
those currently in effect under SA 1743. Under a settlement agreement that the Commission
approved in 2004, rates for transmission and distribution of EP were frozen through
December 31, 2011.4

The costs associated with delivery of EP are paid by NYPA’s EP customers. Thus,
in the absence of the Phase-In Agreement, costs to customers for the delivery of EP would
increase substantially on July 1, 2013, when this delivery service becomes subject to
standard Commission-jurisdictional retail transmission and NYPSC-jurisdictional local
distribution delivery rates. Under the Phase-In Agreement, and the implementing
amendments to SA 1743 discussed below, these delivery rates will instead increase
gradually over the phase-in period. The Phase-In Agreement also provides for certain other
accommodations intended to simplify billing and settlement processes. The Phase-In
Agreement and this filing are supported by NYPA, which is the transmission customer for
EP service, as well as by two organizations of industrial and commercial customers that
receive the Existing Allocations of EP.

National Grid respectfully requests Commission approval of the amendments to SA 1743 proposed herein effective January 1, 2012, the date on which the Phase-In Agreement is to go into effect.

Existing Allocations of RP and EP through and until the earlier of December 31, 2011 or the date on which the New York Public Service Commission (“New York PSC”) established new rates for Niagara Mohawk in a general rate case. Although new electric delivery rates were established for Niagara Mohawk as of February 1, 2011 in NY PSC Case No. 10-E-0050, in that case the Company, NYPA and Staff of the Department of Public Service entered into a Stipulation and Agreement regarding Rate Design, Customer, and Markets Mandatory Hourly Pricing Issues, which froze the delivery rates for Existing Allocations at the current level during the calendar year 2011. The Commission subsequently approved the Company’s filing to extend the $1.52 per kW-month rate for Existing Allocations of EP and RP through December 31, 2011

The Honorable Kimberly D. Bose November 2, 2011

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I.Background

National Grid is a public utility subject to the Commission’s jurisdiction that owns facilities located in the State of New York. National Grid’s high-voltage New York
transmission facilities have been placed under the operational control of NYISO. National Grid’s local delivery, distribution, and retail sales operations are subject to the jurisdiction of the New York Public Service Commission (“NYPSC”).

NYPA is the nation’s largest state public power authority, and is an instrumentality of the State of New York. Among other functions, NYPA generates low-cost power at its Niagara Hydroelectric Project, and sells it to industrial and commercial customers for
economic development and job retention purposes. NYPA is not subject to the
Commission’s jurisdiction.

PEP is a coalition of large NYPA EP customers.

MI is an unincorporated association of large commercial and industrial consumers with facilities located, inter alia, in National Grid’s New York service territory, and a number of whom receive Existing Allocations of EP.

Expansion Power, or EP, is a category of low-cost NYPA hydropower, allocations of
which are made to qualifying industrial and commercial end-users under criteria established
by New York State law,5 and which are intended to promote economic development in the
state. SA 1743 is a bilateral agreement between NYPA and National Grid governing the
retail transmission portion of delivery service for EP. National Grid has provided delivery
service for EP since February 10, 1961,6 however, in 1989 the provisions under which
Niagara Mohawk provides the retail transmission portion of EP delivery service were
removed from RS 19 (which had theretofore governed both RP and EP delivery), and were
filed with the Commission as Niagara Mohawk Rate Schedule FERC No. 159 (“RS 159”).

The retail transmission service provided under RS 159 predated the formation of the
NYISO, and so was included in the list of grandfathered transmission agreements contained
in Attachment L of the NYISO OATT. Also, attachment K of the NYISO OATT required
the New York utilities to submit certain amendments to these grandfathered agreements in
order to allow the transmission service provided thereunder to be coordinated with the new
NYISO OATT transmission regime. However, NYPA and certain industrial customers

taking delivery of low-cost NYPA power protested the proposed amendments, and the

controversy sparked thereby was resolved in two settlements approved by the Commission.7
The current structure and operation of SA 1743 is largely a product of the latter of these

The Honorable Kimberly D. Bose November 2, 2011

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settlements (the “2004 Settlement”), which applied to RS 159 and certain other rate schedules governing delivery of low-cost NYPA power.8

Among other provisions, the 2004 Settlement divided EP into two categories:

Existing Allocations and New Allocations. Pursuant to the 2004 Settlement, retail

transmission service to New Allocations (allocations of Expansion Power made after

September 1, 2003, the effective date of the settlement) is already provided under Section 5
of the NYISO OATT. By contrast, transmission service for Existing Allocations
(allocations of EP made before the effective date of the settlement) continues to receive
retail transmission service under the grandfathered provisions of SA 1743. The requested
changes to SA 1743 apply differently to Existing and New Allocations of RP, as we discuss
below.

Under SA 1743 and Retail Tariff rates approved by New York PSC, the total charge
for delivery of Existing Allocations of EP is currently $1.52 per kW-month. Corresponding
delivery rates under full NYISO OATT / Retail Tariff rates range from $2.32 per kW-month
to $9.08 per kW-month. An immediate transition to the higher rates has the potential to
cause significant bill impacts for industrial and commercial customers utilizing EP.

Given the fragile condition of the upstate New York economy and the potentially harmful impact of an immediate change to substantially higher rates, NYPA and certain industrial customer groups approached National Grid with a proposal to phase in the higher rates over several years. The parties also discussed making certain other changes to resolve transitional issues and simplify billing and settlement.

To address these issues, the parties negotiated the Phase-In Agreement. National

Grid filed the Phase-In Agreement with the New York PSC for approval of its state-

jurisdictional provisions on September 29, 2011. (This was the latest date on which

National Grid could file with the New York PSC in order to obtain its approval of the PhaseIn Agreement by January 1, 2012.) We are also filing with the Commission the
implementing amendments to SA 1743 proposed herein, with a requested effective date of January 1, 2012.9 The Phase-In Agreement and this filing are supported by NYPA, which is the transmission customer for EP delivery service, as well as by the PEP and MI groups of industrial and commercial customers that receive allocations of EP.

The amendments for which Commission approval is sought herein will allow SA

1743 to implement, in part, the initial stage of the transition mechanism contemplated by the Phase-In Agreement.10

The Honorable Kimberly D. Bose November 2, 2011

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II.Discussion

In this filing, National Grid respectfully requests amendments to delivery rates for Existing Allocations of EP in SA 1743, to be effective for the 18 months from January 1, 2012 (the effective date of the amendments for which approval is sought herein) until June 30, 2013 (SA 1743’s termination date).

A.Proposed Amendment.

Paragraph 1 of the Phase-In Agreement sets forth two schedules of rates. Both are intended to gradually phase in delivery rate increases that the transition to NYISO OATT / Retail Tariff rates will cause New York businesses with Existing Allocations of EP. Note that all New Allocations of EP are already delivered at full OATT / Retail Tariff delivery rates, so the phase-in of rates will not apply to them.11

Currently, under SA 1743, customers with Existing Allocations of EP pay a total
delivery rate of $1.52 per kW-month of contract demand. Corresponding delivery rates
under current full NYISO OATT / Retail Tariff rates range from $2.32 per kW-month to
$9.08 per kW-month, depending on customer class and delivery voltage. An immediate
transition to these higher rates has the potential to cause serious bill impacts for these EP
customers. Such impacts could cause hardships to businesses in upstate New York,

particularly under the difficult economic conditions prevailing there. Given New York’s

policy of attempting to ensure competitive power costs to businesses in the state,12 National Grid believes that the rate phase-in for which approval is requested here is a suitably
balanced approach that will both support New York’s economy and businesses at this
difficult time and simultaneously bring the affected customers into the standard NYISO OATT transmission regime over a reasonable transition period.

Phase-In Agreement Paragraph 1) a. sets forth the phase-in schedule applicable to the
large majority of customers with Existing Allocations of EP. Paragraph 1) b. sets forth the
phase-in schedule applicable to a small group of customers to which the increase from SA
1743 to NYISO OATT / Retail Tariff delivery rates could be most disruptive due to their

a NYISO service agreement in its own right, and governs the modified rate regime from the termination of SA 1742 and SA 1743 until expiration of the phase-in provisions. National Grid is requesting this two-phase
implementation of the phase-in to accommodate the parties’ familiarity and comfort level with the existing grandfathered agreements (SA 1742 and SA 1743) to the maximum extent possible, and at the same time work within the current structure of the NYISO OATT, under which grandfathered transmission service agreements expire no later than the grandfathering dates provided in Attachment L.

The Honorable Kimberly D. Bose November 2, 2011

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size, the amount of EP they consume, or other factors.13 For the larger class of customers,
Phase-In Agreement paragraph 1) a. provides for a four-year phase-in during which rates
increase from 80% of full rates in 2012 to full rates by January 1, 2016. For the second,
much smaller class of customers, Phase-In Agreement paragraph 1) b. provides for a six-
year phase-in during which rates increase from 35% of full rates in 2012 to full rates by
January 1, 2018.

As can be seen from these phase-in schedules, the first 18 months of the

contemplated discounted rates take place during the period when SA 1743 is still in effect.
In order to ensure a smooth transition to full standard delivery rates in accordance with the
Phase-In Agreement, National Grid respectfully requests that the Commission approve a
change in the rate provisions of SA 1743: in place of SA 1743’s current retail transmission
rates, National Grid proposes to substitute standard retail transmission rates discounted as
specified in the Phase-In Agreement. More specifically, National Grid proposes to

implement the following rates for SA 1743:

For the period January 1, 2012 through December 31, 2012, customers specified in paragraph 1) a. of the Phase-In Agreement14 will pay 80% of the full standard transmission rate,15 and customers specified in paragraph 1) b. of the Phase-In Agreement16 will pay 35% of the full standard transmission rate.17

For the period January 1, 2013 through June 30, 2013 (i.e., through the termination date of SA 1743), customers specified in paragraph 1) a. will pay 85% of the full standard transmission rate,18 and customers specified in paragraph 1) b. will pay 45% of the full standard transmission rate.19

The Honorable Kimberly D. Bose November 2, 2011

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These rate changes to SA 1743 will implement the first 18 months of the phase-in to full NYISO OATT / Retail Tariff delivery rates for EP customers, while retaining the
service agreement’s non-rate terms and conditions.

National Grid has also filed a request with NYPSC to apply these same percentage discounts to the state-jurisdictional portion of the total delivery rates as part of the transition to full rates contemplated in the Phase-In Agreement.

B.Implementation.

SA 1743, Exhibit I, Schedule A define Niagara Mohawk’s delivery rate for Existing
Allocation of EP, which is currently set at $1.52 per kW-month. To implement the proposed
Phase-In Agreement rates, National Grid respectfully requests that the Commission approve
an amendment to Exhibit I, Schedule A replacing the $1.52 per kWh rate with a reference to
Section 5 of the NYISO OATT (which provides for retail transmission) and the schedule of
applicable discounts under the Phase-In Agreement applicable to the standard tariff rates.

Note that, other than the rate phase-in discussed above, this filing does not propose or contemplate changing in any respect how retail transmission service in New York is currently structured, provided, or administered.

The specific amendments proposed can be seen in SA 1743 Exhibit I, attached hereto in redline as Attachment B and in a clean version as Attachment C.

C. Standard of Review Applicable to Rate Phase-In.

Paragraph 5) of the Phase-In Agreement provides, in relevant part:

PEP, MI, NYPA . . . agree not to challenge the phase-in to standard tariff

delivery rates or to advocate for a separate delivery rate or service

classification for EP . . . Allocations until after the phase-ins to standard tariff delivery rates . . . are complete (as set forth in Paragraph 1 of this
Agreement), provided that nothing herein shall be read as preventing any Party or the customers from opposing (either during the phase-in period or thereafter) proposed increases to the standard delivery rates to which the
discounts provided for in this Agreement apply.

This provision precludes parties from challenging the phase-in set forth in paragraph 1) of the Phase-In Agreement or seeking a separate delivery rate or service classification for EP. It does not preclude National Grid from amending its standard tariff rates (i.e., the base rates to which Paragraph 1)’s discounts are applied) or the other parties from opposing such a filing by National Grid to increase its standard tariff rates.

The Commission has, in a context similar to the one presented here, recently

interpreted and applied the doctrine set forth in United Gas Pipe Line Co. v. Mobile Gas

Service Corp., 350 U.S. 332 (1956) and Federal Power Commission v. Sierra Pacific Power
Co., 350 U.S. 348 (1956), as clarified in Morgan Stanley Capital Group, Inc. v. Public Util.

The Honorable Kimberly D. Bose November 2, 2011

Page 8

Dist. No. 1 of Snohomish, 554 U.S. 527 (2008) (the “Mobile-Sierra doctrine”). In Devon
Power LLC, 134 FERC ¶ 61208 (2011), the Commission recognized the Supreme Court’s
holding that the Commission must presume “that contract rates freely negotiated between
sophisticated parties meet the just and reasonable standard.”20 Under this doctrine, the
Commission may only modify or set aside such contracts if it concludes that they seriously
harm the public interest.21 The Commission then concluded that it was appropriate to use
the Mobile-Sierra presumption in evaluating a settlement agreement concluded by the
Devon parties, despite the fact that it found that the rates established thereunder were tariff
rather than contract rates.22 The Commission held that application of the presumption was
appropriate because the settlement rates had been arrived at in fair, arms-length negotiations
between sophisticated parties,23 they would promote stability and predictability of rates,24
the rates were transitional, lasting only for a limited time,25 and absent imposition of the
higher standard of review, agreement on the rates among the parties might not have been
possible.26

All of the factors listed above are also present here. The Phase-In Agreement was
concluded as a result of arms’ length negotiations among sophisticated parties: National
Grid (a utility company), NYPA (a state agency), and PEP and MI (industry organizations of
large industrial and commercial customers). The rates will promote the stability and
predictability necessary for the customers to maintain or expand their business operations in
New York, and hire or retain employees. The rates are transitional, set to phase out in most
cases in four years, and in a few cases in six. Finally, because a main purpose of the Phase-
In Agreement is to provide customers with certainty that they will be able to benefit from
the rate phase-in over the prescribed periods, it is very likely that the agreement could not
have been concluded absent the agreement not to challenge the rates. Indeed, the ways in
which the current case differs from Devon Power militate even further in favor of imposition
of the Mobile-Sierra presumption as requested by the parties. For example, in this case,
unlike Devon, the Phase-In Agreement is not a tariff of general application, but applies only
to a limited set of entities, most or all of which were represented by the signatories;27 the
parties concluded and signed an actual contract, bringing the case within the core holding of
Morgan Stanley;28 also unlike Devon, here all the parties to the negotiations agreed to the
Phase-In Agreement.29

Devon Power, P 6, citing Morgan Stanley, p. 699. Id., P 24.

Devon Power, P 2.
Id., PP 10, 16, 19.
Id., P 20.

Id., P 22.
Id., P 23.

See id., PP 12-13. See id., PP 12, 14. See id., P 4.

The Honorable Kimberly D. Bose November 2, 2011

Page 9

While under the Commission’s precedents the Mobile-Sierra presumption is the

default standard for an agreement like the Phase-In Agreement, the parties can also specify a
less stringent standard of review for certain portions.30 In view of this and the precedents
and discussion set forthabove, National Grid respectfully requests that the Commission
implement Paragraph 5) of the Phase-In Agreement as written, and approve the following
application of the standard of review with respect to any future filings regarding SA 1743:

(i) if National Grid makes filings seeking to modify the standard

tariff rates to which the discounts in Paragraph 1) of the

Phase-In Agreement apply, the Commission will apply its just and reasonable standard of review under FPA Section 205 without application of the Mobile-Sierra presumption;

(ii) filings made by parties other than National Grid opposing or

responding to filings made by National Grid to modify its

standard tariff rates will be reviewed using the just and

reasonable standard of review under FPA Section 205 without application of the Mobile-Sierra presumption;

(iii) the Commission will apply the just and reasonable standard of

review under FPA Section 205 with application of the MobileSierra presumption to filings by any party seeking to modify Paragraph 1) of the Phase-In Agreement or the phase-in
schedule of discounts, or seeking a separate delivery rate or service classification for RP or EP.

In order to implement the application of the Commission’s just and reasonable

standard with the Mobile-Sierra presumption to the phase-in schedule and standard tariff

rates as described above, National Grid proposes to amend SA 1743, Section P. to detail the standards of review that shall apply to each aspect of the discounted rates set forth in Exhibit I, Schedule A. The specific language proposed is set forth in Section P. of the amended SA 1743 provided in Attachments B and C hereto in redlined and clean format.31

III.Effective Date and Commission Regulations

Pursuant to Section 35.3 of the Commissions Rules and Regulations (18 C.F.R. §

35.3), National Grid respectfully requests an effective date for the amendments to SA 1743

described herein of January 1, 2012.

(2008).

See e.g. Standard of Review for Modifications to Jurisdictional Agreements, 125 FERC ¶ 61,310, P 4

While the Phase-In Agreement’s prohibition of challenges to these provisions expires upon

The Honorable Kimberly D. Bose November 2, 2011

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This filing substantially complies with the requirements of Part 35 applicable to

filings of this kind. National Grid requests waiver of any applicable requirement of part 35 for which it has not specifically requested waiver or supplied data so that this filing may become effective as proposed.

IV. Service Agreement Designation of the Amended SA 1743

Pursuant to the Commission’s directives in Electronic Tariff Filings, Order No. 714, FERC Stats. & Regs. ¶ 31,276 (2008), and consistent with NYISO practice, the amended SA 1743 shall continue to be designated NYISO Service Agreement 1743.

V.Attachments

In addition to this transmittal letter, the instant filing includes the following attachments:

Attachment A Agreement Regarding Treatment of Allocations of New York Power

Authority Expansion Power and Replacement Power Beginning
January 1, 2012 and Thereafter, dated September 29, 2011.

Attachment BBlacklined version of Amended and Restated Agreement for The

Retail Transmission of Expansion Power Between National Grid Power Corporation and the Power Authority Of The State Of New York - First Revised Service Agreement No. 1743 - showing
proposed amendments.

Attachment C Clean version of Amended and Restated Agreement for The Retail

Transmission of Expansion Power Between National Grid Power
Corporation and the Power Authority Of The State Of New York -
First Revised Service Agreement No. 1743 - incorporating
amendments and formatted as required under Order No. 714.

VI.Communications and Service

Communications regarding this filing should be addressed to the following

individuals, whose names should be entered on the official service list maintained by the

Secretary with respect to this docket:

The Honorable Kimberly D. Bose November 2, 2011

Page 11

William Malee

Director of Transmission Commercial Services National Grid USA

Service Company, Inc.

40 Sylvan Road

Waltham, MA 02451 (781) 907-2422

bill.malee@us.ngrid.com

* Designated to receive service.

Copies of this filing have been served upon the parties to the Phase-In Agreement, the NYPSC, NYPA and the NYISO.

VII. Conclusion

For the foregoing reasons, National Grid respectfully requests that the Commission accept the amendments to SA 1743 described herein, as well as an effective date for these amendments of January 1, 2012.

Respectfully submitted,

/s/ Sean A. Atkins/s/ Daniel Galaburda

Sean A. AtkinsDaniel Galaburda

Jamil NasirAssistant General Counsel and Director

Alston & Bird LLPNational Grid

The Atlantic Building40 Sylvan Road

950 F Street, NWWaltham, MA 02451

Washington, DC 20004Tel: (781) 907-1847

Tel: (202) 239-3300Daniel.Galaburda@us.ngrid.com

sean.atkins@alston.com
jamil.nasir@alston.com

Counsel for Niagara Mohawk Power
Corporation d/b/a National Grid