RTOs: Boon or bane for future generation?

Michael J. Zimmer, Contributing Editor

The march of change continues with the Federal Energy Regulatory Commission (FERC) initiatives governing regional transmission organ-izations (RTOs) and the filings by all affected public utilities with the FERC on October 16. (The existing independent system operators (ISOs) filed on January 15.) The critical market response has been as anticipated-and offers a wide range of views and strategies by the utility industry.

The FERC RTO rules and their implementation create a compound, market dynamic that will be either a boon or bane depending upon your perspective in the marketplace. Either they provide the final chance to “get it right” and place true market competition over the top opening generation competition, new technologies and new growth in transmission capacity, or the RTO rules are the final death knell over competitive power and its quixotic march since 1978 to a market shift to consolidation and concentration.

Let’s take a look at several of those key issues to watch in 2001.

  • New transmission investment: RTOs and the final FERC implementation may not provide sufficient incentives to develop new transmission investments. The gas industry developed and invested in over 20,000 miles of interstate and intrastate pipelines. In almost a decade, the electric utility response is less than 10 percent of that development for electric transmission lines.
  • Voluntary regime: Codes of conduct plus a voluntary regulatory regime to promote pro-competitive market conduct still are not fully effective tools to remove discrimination. They are blunt instruments in a competitive marketplace facing increased market concentration. Virtual implementation and restructuring doesn’t work.
  • Dispute resolution: FERC needs to leave the field of regulating RTOs to stakeholder regulation and alternative dispute resolution (ADR) as the primary means for dispute resolution-i.e., rights without adequate remedies (such as the PURPA enforcement regime with states) and ADR within ISOs impact efficiency, competition and market compliance.
  • IPP stakeholders: Competition places power generators and marketers as a lagging priority stakeholder-after states, ISO, utilities and FERC under the FERC final implementation. The IPP industry cannot long survive in the U.S. if left at the end.
  • Cross-border: The RTO rules could be a strong stimulus with consultation to development of international markets and the achievement of their full potential. For new generation to work, there may be the need for new transmission first in Canada and Mexico.
  • Super-regions: If RTOs require a new form of super-regional regulation, they may end up wedged between FERC and the states. Separate policies, procedures, remedies will need to be monitored with few standardization themes.

  • Enforcement: Lack of enforcement linkages under a voluntary program may prove a fatal flaw, ensuring the demise of a fully voluntary regime. FERC may structure final RTO rules where penalties for failure are vague, amorphous and inconsequential. Minimal compliance features ensure difficulties and incentives are freely granted to promote nominal RTO compliance.
  • Lack of congressional support: FERC has been constrained by this over transmission siting, federal/state retail jurisdiction, public power, and federal government and PMA transmission facilities, which has created regional problems for Southeast and Western states. This artificial dichotomy cannot long be sustained in the quest for national markets with the native load requirement under FERC Order No. 888 and less than 20 percent of national transmission facilities under an open access regime.
  • Passive ownership: Passive ownership should be limited in time as a transitional step for a period not to exceed five years, and traded for real transmission improvements, dollars committed and capacity increased for transmission and not just limited to congestion management. RTO rules will likely favor current generation owners and utilities with cash resources and a linkage to generation through affiliates. However, those rules need to open up opportunity for bond financing between RTOs and additional investment by foreign utilities and deep pocket companies funded by losing tax incentives and returns of tax normalization benefits to shareholders.
  • Inadequacy of market remedies: RTOs create the provision of rights with insufficient remedies. If this continues, two-thirds of current generation, and utilities will be gone within five years and the nation will settle on 10-20 majors for generation, and RTO management in the future under less than 10 regions.

  • Rate pancaking: Multiple section 205 filing rules by RTO and transmission- owning utilities recreate the specter of pancaking rates. It is unclear what controls are in conflict, and mechanics for timely resolution and refunds are left vague by FERC.
  • Reliability: National standards developed by NERC will be adopted for RTOs and utilities to govern reliability. NERC is redeveloping its governance and mission. Look for it to propose a separate contract-based enforcement strategy to uphold reliability. However, no standardization is seen fit for interconnection (the key system reliability issue or equivalent of the power generators). No reasoning has been offered as to why these cross cultural issues are managed differently in the final rules by FERC, and no comprehensive effort to correct this oversight from Order Nos. 888-889 has evolved. Additional standardization may be required for generation imbalances, rates for transmission and interconnection upgrades, behind the meter generation, reactive power, station power and tax gross-ups.

The end results of FERC RTO rules and their implementation will promote major market concentration in power generation, with shrinkage to a smaller number of companies. A smaller number of transcos and RTOs will follow for transmission. That concentration tracks with the emerging consolidation in the fuels, construction, engineering and design, and turbine technology companies serving the power generation industry.

The market response to RTOs will be several-fold. More companies may offer IPOs of generation business units. Wall Street financial restructuring will be applied to RTOs, ISOs and transmission transcos coupled with tax and rate incentives to create new financial products. Escalating risks for municipal and rural cooperative utilities will arise. Flight by the entrepreneurial IPP into e-commerce, distributed generation, international, O&M and support services may occur. Increased M&A with larger utilities, oil companies and foreign utilities could be seen. Divestitures by some utilities in new lines of business could become prominent. Product options and services will become limited.

But will RTOs increase competition for generation and yield new transmission, fixed dollar commitments and transmission capacity increases? This is a job the utilities have managed directly the past 20 years. That answer is no more clear, and may be more amorphous. The FERC cannot manage RTO development divorced from merger policy and transmission ratemaking. There is simply too much at stake.

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