& Christopher Clark
The wholesale electric transmission industry has changed dramatically in the past year and is poised to evolve well into the future. In response to Federal Energy Regulatory Commission (FERC) Order 2000, transmission owners from all over the United States outlined their plans to create regional transmission organizations (RTOs). While the structures of the proposed RTOs varied significantly by region, the purpose of each RTO initiative remained consistent with FERC’s vision-to create a reliable, competitive, and open national transmission grid controlled by RTOs.
While transmission owners were strongly influenced by the desired RTO characteristics and functions outlined by FERC in Order 2000, the trend towards competition, and turbulent wholesale electricity markets, such as California, also impacted the developing transmission industry. The California market, once considered to be a prime case study of how to successfully implement electricity deregulation, found itself plagued by price volatility and energy shortages. Energy emergencies and the threat of utility bankruptcy have been a reality in California since fall of 2000. When efforts by FERC and California state regulators failed to produce a short-term solution to the energy crisis, existing and developing transmission organizations across the country sought to prevent similar problems from occurring within their own systems. In response, they identified market-based and policy solutions to problems with potential transmission constraints, faulty market practices, and generation shortages. Many of these concepts were outlined in various FERC 2000 filings.
FERC Order 2000
Issued on December 15, 1999, FERC Order 2000 laid out the general principles around which RTOs should be developed. The Order also outlined four minimum characteristics for RTOs:
- Independence from market participants;
- Appropriate scope and regional configuration;
- Possession of operational authority for all transmission facilities under RTO control; and
- Exclusive authority to maintain short-term reliability of the grid.
These characteristics were intended to ensure non-discriminatory access by all market participants to the transmission grid, while maximizing the efficiency of operations by eliminating multiple actors. In addition, the broadly defined guidelines presented by FERC enabled participants to approach compliance from a variety of perspectives. In addition, seven major RTO functions were laid out in FERC Order 2000:
- Tariff administration and design;
- Congestion management;
- Management of parallel path flows;
- Provision of last resort for ancillary services;
- Development of an open access same-time information system (OASIS);
- Market monitoring; and
- Responsibility for planning and expanding facilities under its control.
Prior to FERC Order 2000, a series of federal and state restructuring regulations and laws incrementally helped to shape competitive bulk power electricity markets. In 1996, FERC issued Order 888, requiring transmission owners to provide non-discriminatory access to their systems. Order 889, issued at the same time, provided specific protocols for ensuring access through the use of an OASIS. Order 888 also proposed the independent system operator (ISO) as a means of fulfilling these requirements.
FERC Order 2000 was meant to build upon the ISO concept by encouraging smaller transmission entities to join together into larger RTOs, and by pushing all transmission operators and regions to develop plans for participation in an RTO. While Order 2000 did not technically mandate participation in an RTO, the Order required all transmission owners to submit progress reports detailing their plans to participate in an RTO by October 16, 2000. The deadline was extended by three months to January 16, 2001 for existing ISOs.
ISO vs. Transco
After initiating a series of RTO workshops throughout the country, FERC saw that two governance structures would predominate the RTO proposals-the ISO and the independent transmission company (ITC, Gridco, or Transco). ISOs have centralized authority over one control area and operate as nonprofit entities. Proposed Transcos/ Gridcos/ ITCs would be for-profit, investor-owned entities that own and operate transmission systems independent of any market participants.
There has been a surge of Transco filings in response to Order 2000. Some Transcos, like TransConnect, Entergy, and the American Transmission Company (ATC), are proposed as subsidiaries and transmission-owning members of larger RTOs. These entities may lead to hybrid structures, in which a Transco operates as a participant in a larger RTO that is administered as an ISO. Other Transcos, GridSouth for example, are proposed as stand-alone RTOs.
Beginning in early October 2000, transmission entities from around the country began to submit compliance filings to FERC in response to Order 2000. Since then, filings for six new large transmission entities have been submitted. Expanded filings for six RTOs built upon existing transmission organizations, for example California ISO (CAISO) and ISO New England (ISO-NE), have also been filed. Eight smaller entities, not meant to qualify as RTOs, also filed with FERC. Several other transmission areas that are not required to file with FERC, like Texas, are pursuing their own approaches.
In October 2000, all transmission-owning utilities that were not previously involved in an ISO were required by Order 2000 to submit filings to FERC describing their activities relating to RTO participation. Six RTOs were proposed in this round of filings: Desert STAR (DSTAR), GridFlorida, GridSouth, Se Trans Grid Company (Southern Company Transco), Southwest Power Pool RTO (SPP RTO), and RTO West. These proposals include both nonprofit ISO and for-profit Transco models.
Entities that were already participating in established RTO and ISO efforts were not required to file a response to Order 2000 until January 16, 2001. Established RTO initiatives include Alliance RTO, CAISO, Electric Reliability Council of Texas (ERCOT), Midwest ISO (MISO), New England Regional Transmission Organization (NERTO), New York ISO (NYISO), and PJM Interconnection (PJM). These initiatives based their RTO plans on their established transmission organization structures. However, most proposed significant changes in response to Order 2000. For example, the NERTO filing proposes the formation of the NE ITC that would be responsible for the open access transmission tariff and grid planning. ISO-NE would still serve as the system operator, and market administrator.
Currently two different groups, the Crescent Moon RTE and the East Coast Transmission Organization (ECTO), are discussing the potential of forming RTOs. These initiatives are being formed as alternatives to the current RTO projects developing in the transmission owners’ regions.
In addition, two independent system administrators (ISAs), Arizona ISA (Az ISA) and Northern Maine ISA (NMISA), have maintained their status with FERC in order to meet the short-term needs of their regions. These organizations are not-for-profit entities that manage regional transmission but do not administer an open access transmission tariff.
Four other entities have proposed forming Transcos that will act as transmission owners operating under the umbrella of an RTO. These proposed Transcos, including American Transmission Company (ATC), Entergy Transco, International Transmission Company (ITC), and TransConnect Transco, illustrate the hybrid Transco-ISO model that is emerging across the country. The table describes these transmission organizations in more detail.
In the year 2001, the electricity industry will continue to evolve as it adjusts and adapts to the many important occurrences of 2000. While it is highly unlikely that FERC will issue any order as significant as Orders 888, 889, or 2000, this year will be anything but stagnant for the electricity industry. Changes will be seen in the composition of FERC, the RTO proposals already on the table, and the RTOs that are still largely in formation. The new Administration will also impact the way FERC does its job, including the decisions it makes with regard to the RTO compliance filings.
A changing and divided FERC
The scope of RTOs and electricity restructuring in general will be strongly shaped by the positions and roles that FERC takes. The Bush Administration, through its power to appoint Commissioners, has the ability to significantly influence these policies and, as is becoming increasingly important, the relationship of FERC to the states and their respective regulatory bodies. At stake is whether FERC decides to take a more powerful stance in determining the direction of restructuring, or prefers to simply guide its formation, letting states, markets, and the industry work within parameters set by FERC. The price-cap debate currently raging within FERC is an example of the division between Commissioners. FERC Chairman Hebert is strongly opposed to wholesale electricity price caps in the Western United States and has stated his intention block any vote for the caps. The recent nominations of Nora Mead Brownell and Patrick Wood may increase the divide in FERC further as both come from states with wholesale price caps in place. The changing composition of FERC has resulted in an ambiguous FERC philosophy. The resultant lack of direction from FERC will place increasing responsibility on RTO stakeholder groups and individual states to determine how to comply with FERC Order 2000.
There will be a continuing push for larger, more inclusive, more flexible organizations. In response, RTOs may take the form of umbrella organizations coordinating member transmission operators. The agreement reached between Alliance RTO and MISO establishing a single pricing structure and an inter-RTO coordination agreement is the best example of the trend toward umbrella organizations and regional cooperation. In addition, changes will likely be made to facilitate the inclusion of public power authorities.
As transmission owners grapple with pricing, return on investment, reliability, and planning issues, as well as the need to comply with FERC Order 2000, the formation of for-profit Transcos is emerging as a desirable option. The next step will be to implement Transco market and governance structures in a manner that ensures that these for-profit entities can operate independently of other market participants. Incentive-based pricing mechanisms, ideally designed to prompt efficient operations and investment in grid infrastructure, will also become more sophisticated and widespread.
RTO development is often a very political process that involves diverse stakeholder groups. As a result, many of the proposed transmission pricing schemes are very complex, as they seek to address key issues such as cost shifting among transmission owners. Over the long-term, RTOs will seek to develop simpler pricing schemes.
Impacts of California
One of the most important effects of the California situation is that it could increase public wariness about electricity restructuring. Already, the issue of adequate generation capacity has risen to the forefront of concern in a number of wholesale markets. As California continues to struggle with rolling blackouts, states and RTOs are cautiously evaluating their own market rules and generation and transmission resources. As a result, restructuring efforts have already been delayed in many states including New Mexico and Nevada, and many other states are re-evaluating their deregulation plans. Despite this debate over retail competition, the legacy of FERC Order 2000 will continue to drive the creation and refinement of RTOs, and in turn their ability to facilitate competitive, efficient, and open wholesale markets-which ultimately provide the backbone for robust retail electricity markets.
This article is based upon EFI’s recently completed 2001 U.S. Regional Transmission Organization Study. The 350+ RTO Study details over 20 RTO initiatives in the United States. EFI is a management and market research consulting firm specializing in the energy and environmental sectors. For more information, please contact EFI’s Jon Abe at (617) 443-1308 or email@example.com. To order online, please visit www.efinc.com.