Final verdict’s not in on RTOs, wholesale electric transmission: Stability or continued confusion?

By Chris Clark, Jonathan Abe, and Ryan Chaytors, XENERGY

May 6, 2002 — Over the past year, the structure of the wholesale electric transmission industry in the United States has continued its dramatic transformation. In the wake of the Federal Energy Regulatory Commission’s (FERC) landmark Order 2000, which outlined the general principles around which Regional Transmission Organizations (RTO’s) should be developed, FERC continued to press for a national transmission grid solely controlled by RTOs. In promoting an RTO-based national transmission grid, FERC has continued its efforts to ensure widespread access to the competitive wholesale market, as well as to promote efficient and reliable market practices.

Although the principles behind the RTO have not changed drastically over the past year, the overall scope of the RTOs envisioned by FERC has expanded. After the issuance of FERC Order 2000, existing and developing transmission entities responded by submitting plans to FERC that would have created several RTOs within each of various regions of the United States. At the time, FERC seemed to envision a transmission landscape dotted by more than a dozen independently functioning RTOs. FERC’s proposed approach changed in July of 2001, when it issued orders to facilitate the development of four larger consolidated RTOs that would administer over the Northeast, Midwest, West, and Southeast U.S. Thus far, of the four entities, only Midwest ISO has received approval from FERC to become a fully operational RTO. The status of the other three regions is shrouded by various levels of uncertainty.

In 2002, FERC will continue its bid to influence the evolution and ultimate shape of the wholesale electric transmission industry. As part of this effort, FERC is currently planning to conduct a series of meetings with Independent System Operators (ISOs), RTOs, and other market participants concerning the implementation of a Standardized Market Design that is expected to become the next significant FERC Order regarding RTOs. FERC is expected to issue the Standardized Market Design rulemaking in the spring of 2002.

Building on the events of the past year, this article provides background on the history of RTO development, beginning with FERC’s Order 888, Order 2000, and upcoming Standardized Market Design Rulemaking. The article also includes a detailed chart that provides a region-by-region synopsis of present RTO developments in the U.S. It concludes with some transmission trends to look for in the coming year and beyond.

FERC Orders 888 & 2000
Issued in July 2000, landmark FERC Order 2000 realigned FERC’s initial thinking on wholesale electricity transmission. The principles in FERC Order 2000 are broadly defined, and market participants have undertaken a variety of approaches to comply with them. Four minimum characteristics for RTOs were outlined in Order 2000:

* Independence from Market Participants;
* Appropriate Scope and Regional Configuration;
* Possession of operational authority for all transmission facilities under the RTO’s control; and
* Exclusive authority to maintain short-term reliability of the grid.

These characteristics are 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, seven major RTO functions were defined in FERC Order 2000:

* Tariff administration and design;
* Congestion management;
* Management of parallel path flow;
* 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 the issuance of FERC Order 2000, a series of federal and state restructuring regulations and laws incrementally helped to shape the competitive bulk power electricity markets. In 1996, FERC issued Order 888, requiring transmission owners to provide non-discriminatory access to their systems. Order 888 also proposed the ISO as a means of fulfilling these requirements. Order 889, issued at the same time as Order 888, provided specific protocols for ensuring access through the use of OASIS-an electronic information system detailing transmission capacity availability. FERC Order 2000 was meant to build upon the ISO concept by encouraging smaller transmission entities to join together into larger RTOs, and by encouraging transmission operators and regions to develop plans for participation in an RTO.

FERC’s forthcoming order
Much like previous orders issued by FERC, the forthcoming Standardized Market Design Rulemaking will have significant impacts on RTO formation throughout the United States. A recent presentation by William Meroney, manager of the Office of Markets, Tariffs, and Rules at FERC, gave a preview of some of the likely elements of the rulemaking:

* The complete unbundling of wholesale energy-related products, such as transmission and power. This will effectively do away with any potential monopoly advantage enjoyed by vertically integrated systems;
* The development of new ways to ensure that market participants are unable to exercise market power in generation or transmission markets;
* Allowing and even encouraging non-investor entities, such as public power companies, to participate in RTO development; and
* The introduction of steps to initiate competition in wholesale markets in states that do not currently provide for retail choice.

Aside from these goals, the Standardized Market Design Order will likely highlight problems in energy markets associated with real-time only, and incremental energy-only bidding. The Order will also likely address a structure for bid protocol in energy trading markets, outlining a three-part financial bid structure. As mentioned earlier, the Order is expected to be issued in the spring of 2002.

RTO initiatives
FERC’s July 12, 2001 Orders requiring the consolidation of RTOs into four regional entities sent shock waves through the transmission industry. To date, only the Midwest ISO has received approval from FERC to become a fully operational RTO representing one of the four regions. The other three regions’ status remains much in question.

The accompanying chart, below, describes all of the latest transmission organization initiatives and developments in detail.

Outlook 2002 and beyond
In the coming year and beyond, the new FERC position will continue to affect the U.S. transmission industry as RTOs evolve in response to the push for inter-regional coordination, standardization, and consolidation. RTOs will be impacted by state interests, the owners or potential owners of transmission assets, and the concerns of other energy industry stakeholders.

However, FERC’s aggressive efforts to regionalize and/or standardize RTOs will dominate the scene. Some key things to watch for in the following year include:

* New leadership-With the appointment of Republican Pat Wood as the Chairman of FERC in September 2001, the position of the Commission regarding the intervention of FERC in RTO development changed dramatically. The July 12, 2001 Orders issued under Chairman Wood illustrate a distinct difference in the Commission relative to under the previous leadership. FERC’s new “big stick” approach to RTO development puts pressure on all investor-owned utilities to participate in RTOs. Consistent with this theme, FERC’s present Commissioners have urged Congress to enact new laws to enable further FERC intervention into RTO development by giving FERC the authority to mandate RTO formation and participation.

* Jurisdictional issues: states’ rights-Some state regulators see the new FERC movement toward mandatory participation in large, regional RTOs as overstepping the bounds of FERC jurisdiction. Several state regulators, particularly those in the Southeast and West, have also questioned FERC’s authority. States have the potential to significantly delay the RTO implementation process because they can refuse to allow utilities to transfer control of their transmission assets to an RTO. To address the concerns of state regulators, FERC has created “state-federal RTO panels as a forum for constructive dialogue”. The additional issues raised through the state-federal panels may serve to further bog down the RTO process. However, for FERC, the panels are an essential measure to help ensure the inclusion and thus potential cooperation of states.

* Consolidation vs. standardization-Ultimately, FERC’s goal for the development of four large RTOs is to promote standardization. The Commission believes that, through inter- and intra-regional standardization, system operations will be simplified and markets will become more efficient.

Since the issuance of Order 888, FERC has maintained that standardized market rules and pricing mechanisms are necessary to eliminate seams issues between individual transmission entities. FERC has not, however, provided very specific guidelines for standardization, and in the absence of FERC intervention, stakeholders have been unable to effectively initiate standardization. However, the threat of FERC mandates has prompted stakeholders in the West and Southeast to begin development of a single market design. Regardless of these initiatives, FERC’s next big order, expected to be issued this spring, will likely provide clear guidelines for standardized market design.

* Regional structure-Standardization will be FERC’s next strategic push for reaching its goals. And for the time being, at least in certain regions, FERC will allow some flexibility with regard to regional consolidation mandated by the July 2001 Orders. FERC’s apparent flexibility in these matters may be a sign that FERC will encourage standardization of design first, and consolidation second. This does not mean, however, that FERC is willing to concede the consolidation battle. FERC’s Dec. 20, 2001 Order approving Midwest ISO (MISO) also required Alliance to consolidate its business plan with that of MISO, indicating that FERC still believes that consolidation, at least in certain regions, is the ideal model for RTO development.

* The future of the transmission industry-While FERC has been aggressive about regional consolidation and standardization, it has not yet aligned with any singular RTO ownership model, i.e. for-profit Transco or not for-profit ISO. This leaves open several options for companies aiming to develop an RTO.

Meanwhile, many utilities are exploring their options to sell or divest their transmission assets, working under the principle that this is a prerequisite for ensuring competitive markets and that it is the best way for investors in transmission assets to realize a competitive return. However, some utilities and investors continue to explore options for forming for-profit Transcos.

Interestingly, the formation of for-profit transmission companies and their participation in RTOs has been most active in regions where FERC has clearly addressed the consolidation issue. For example, in the Midwest, where the MISO has been essentially anointed as the region’s RTO, several for-profit transmission companies are already operating or planning to operate under the jurisdiction of the not for-profit RTO. Transco initiatives are far less developed in other regions where the direction of RTO development is less clear, for example, the Northeast.

One of FERC’s main arguments behind exercising more authority over RTO development is that FERC mandates stabilize the market and provide potential investors with a clear view of the future. Whether FERC’s regional consolidation and market standardization efforts will lead to stability or continued confusion is yet to be seen.

Abe, a senior consultant at XENERGY, provides policy and regulatory analysis to clients in the energy and environmental industries. His work focuses on evolving energy markets and the state and federal policies that support them (jabe@xenergy.com, 781 273-5700 ext 232).

Chaytors, an energy analyst at XENERGY, provides policy, financial, and market research and analysis for energy clients and research product lines. His areas of specialty include energy markets, renewable energy, and alternative transportation technologies (rchaytors@ xenergy.com, 781 273-5700 ext 246).

Clark, a senior consultant at XENERGY, provides market research and analytical expertise in the energy industry. He specializes in energy issues related to electricity restructuring, renewables, and distributed generation (cclark@xenergy.com, 781 273-5700 ext 314).

For additional information, visit www.xenergy.com.

This article is scheduled to appear in Electric Light & Power Magazine, April 2002. To read more, visit http://elp.pennnet.com/Articles/Print_TOC.cfm?Section=Articles&SubSection=CurrentIssue.


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