ISO squabbling provokes FERC

April C. Murelio

Associate Editor

As the Midwest Independent System Operator (MISO) leadership works to patch the transmission entity`s holes, others are eagerly pursuing new models for moving power through the region.

Intended to create a 15-state market giving electricity companies equal access to the transmission system, utilities and regulators have lamented MISO`s lack of cohesiveness since its approval in mid-September.

William Massey, Federal Energy Regulatory Commission (FERC) commissioner, even compared MISO to Swiss cheese.

“It`s full of holes,” he said shortly after MISO`s inception. “Our main concern is that it is not one control area, as all the others are. Instead, 13 control area operators will continue their functions. This split control structure leaves unfinished business.”

Approving MISO and then publicly voicing concerns about its structure sends mixed signals that make any “unfinished business” hard to resolve, said John Procario, chairman of MISO`s transmission owner`s committee and electric operations vice president for Cinergy Systems. Also, such statements seem to fuel the formation of alternative regional transmission organizations (RTOs) now being proposed.

“Size and timing are everything when you need to solve issues of reliability,” Procario said. “FERC needs to define the regions, identify the electric service areas that those should cover, and require mandatory participation. If not, we`re going to have RTOs of inadequate size scattered throughout and realizing the ultimate vision for the Eastern Interconnect could take many, many years.”

Based on recent public comments, FERC Chairman James J. Hoecker seems to agree with Procario`s assessment. “The commission must more forcefully promote the many benefits regional transmission organizations can provide and decide whether to make participation in an independent system operator or other regional transmission organizations mandatory in the future,” Hoecker said during a November teleconference with trade press representatives.

In January, FERC-which hardly presents a united front on this issue-started a series of meetings with state utility commissioners, giving them an opportunity to present their views and make recommendations on how FERC should proceed. Specific issues being discussed include the criteria and policy considerations to be used in establishing the boundaries for effective RTOs and the states` role in forming and governing these entities.

ISO evolution

For Procario and others at MISO, the “ultimate vision” for the Midwest transmission systems involves one, large regional entity ensuring improved reliability, non-discriminatory access to the grid and the end to pancaked rates or accumulated access fees resulting from transferring power over several systems.

Procario supports the ISO model, which allows utilities to maintain ownership of their transmission assets and establishes the ISO as a not-for-profit, third-party operator, because it is a relatively easy entity to set up.

However, he remains open to the possibility that an ISO could eventually evolve into a TransCo, a for-profit structure that, as it`s most often described, requires full transmission asset divestiture. “If we truly believe in competition and reliability, then we should develop the ISOs now, address those issues preventing competition, and then, if it is in the public interest, let those ISOs evolve into TransCos,” Procario said. “Considering the problems we had last summer, I don`t think we have the luxury to develop TransCos now and solicit voluntary participation. That`s not a competitive approach.”

Yet like all free-market proponents, Procario knows that compromise and cooperation remain key to sorting out the nation`s transmission problems and dealing with the challenges of a deregulated market.

Alliance TransCo

Recently, MISO and the Transmission Alliance-a proposed RTO initiated by American Electric Power, FirstEnergy and Virginia Power-started discussions centered on merger possibilities and coordination between the existing and proposed transmission entities.

Although a merger doesn`t seem likely, coordination is a must. “We are more in favor of a TransCo because we believe it is a more efficient model and a better way to manage transmission assets,” said Ellen Raines of FirstEnergy. “However, these organizations will need to work together.”

Work continues on the alliance`s RTO proposal, which includes governance and organizational structures for an ISO and a TransCo or TransCo Lite-a hybrid organization that would allow some utilities to own their transmission assets as the ISO model does. A FERC filing could occur as early as March.

In September 1998, the alliance completed its Phase II review, a cooperative effort of nine investor-owned electric companies, regulatory staff members, transmission customers and public power representatives designed to garner support for the RTO proposal and gather feedback.

For Phase III, Raines said, the alliance has retained Vinson & Elkins as outside counsel and Arthur Andersen as project manager to finalize the details of its pending FERC filing. Betsy Moler, a Vinson & Elkins partner who also served as deputy secretary of the Department of Energy and former FERC chair, will serve as lead advisor to the alliance.

Consumers Energy of Jackson, Mich., recently joined the Transmission Alliance and discussions continue with other electric companies throughout the region.

NSP`s ITC

Minneapolis-based Northern States Power also plans to pursue an alternative RTO, which it dubs an Independent Transmission Company (ITC). The ITC model proposes a for-profit entity with its own corporate officers and shareholders, who would have “a vested interest in transmission and a passion for reliability,” said Tony Schuster, NSP`s transmission system vice president.

NSP decided to pursue the ITC option after the proposed Mid-Continent Area Power Pool (MAPP) ISO failed to meet NSP`s expectations. Unable to achieve approval by two-thirds of MAPP`s membership, the ISO proposal never made it to FERC for review.

“We worked to create the best ISO we could think of, but despite those efforts, the final proposal was bad for transmission owners and customers,” Schuster said. “We feel the ITC is a more flexible approach that enhances commerce, and that`s what this discussion is really about.”

Under the ITC structure, which is still fine tuning, participants have a variety of options. They could completely divest their transmission assets; they could lease those assets to the ITC; or they could enter into tariff arrangements. In contrast, he said, the MAPP-ISO proposal lacked that type of flexibility, which would have worsened instead of improved the region`s constraint problems.

Schuster, who described the ISO model as “something between a traffic cop and a passive observer,” said it wouldn`t go far in addressing the need for new transmission capacity. However, spurred by profit motive and focused only on transmission, he said an ITC would build new lines if construction proved a prudent business decision.

NSP`s alternative to the MAPP-ISO proposal has drawn enthusiastic support from some and criticism from others. Alliant Energy of Madison, Wisc., a current member of MISO, has expressed interest in the ITC model, Schuster said.

However, Duluth-based Minnesota Power in December 1998 filed a com-plaint with FERC against NSP, claiming NSP breached an agreement by refusing to support the MAPP-ISO and “actively campaigned to scuttle the ISO proposal.”

The filing contends that in 1996, NSP agreed to support a large, regional ISO, if Minnesota Power wouldn`t oppose NSP`s planned merger with Wisconsin Electric. The merger failed, but Minnesota Power claims the agreement wasn`t contingent on the merger`s success. Although Minnesota Power itself isn`t a member, the filing asks FERC to order NSP`s participation in MISO.

“Despite its obligation to provide open access to its transmission lines, as required by FERC, NSP continues to have the ability to act as gatekeeper to limit or exclude transactions by others in favor of its self interests,” said Steve Sherner, vice president of energy sourcing for Minnesota Power`s electric operations.

Schuster said NSP hasn`t responded formally to the filing, but denies Minnesota Power`s allegations. “There wasn`t anything negative about our stance on the MAPP-ISO. We just simply and clearly defined why we couldn`t support the final product,” Schuster said. “I`m always careful not to criticize those who worked on that proposal because some of them are my most trusted staff.”

Although geographically isolated, Schuster said NSP remains in conceptual alignment with the Transmission Alliance, and as it better defines the ITC proposal, the utility plans to continue preliminary discussions that occurred late last year.

The formation of alternative RTOs proves a useful case study as deregulation unfolds and utilities, marketers, regulators and consumers sort through the issues and uncertainty. For now at least one thing seems clear: the California ISO model-that solid chunk of brie-doesn`t necessarily transfer to all regions. The Midwest, it appears, prefers its Swiss.

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