R.J. Rudden Associates, Inc. releases results of RTO survey of energy industry professionals

Hauppauge, NY, November 8, 2001 – R.J. Rudden Associates, Inc. released today the results of its survey of energy industry professionals that explores their opinions on the many rapidly evolving issues associated with RTO formation.

The survey targeted a broad cross section of the industry including RTO market participants not necessarily involved in current high profile negotiations.

According to Dr. Matthew Cordaro of Rudden, “The results of the survey in certain ways are not surprising and perhaps predictable. Yet the responses to some of the questions produced some very revealing majority opinions.”

Dr. Cordaro further stated, “Geographically, most of the respondents were from the Northeast, which is understandable when you consider the vintage of the ISO organizations in this part of the country and the nature of the recent FERC mediation process for the region. This may also have some relation to the fact that more than 55% of the respondents chose the independent, not-for-profit operator (RTO/ISO) coming out of the mediation process as the preferred model.”

On the question of transmission asset divestiture, there was a clear preference for retained ownership, either through an ITC or as presently configured. A majority preference was also expressed for allowing transmission owners to implement performance-based rates and to receive incentives for transmission expansion.

Among questions related to pricing structure, there was a strong preference for a hybrid system where some assets are paid for by zone (License Plate) and other assets by aggregation (Postage Stamp). Presuming that a system based on Postage Stamp rates would eventually emerge, the majority felt that 5 years would provide an acceptable transition period. Finally, for the collection of revenue requirements for new construction, the preference was for new assets to be handled through Postage Stamp rates and existing assets phased in.

A majority of respondents agreed that common market rules should be adopted with some allowance for regional conditions. Also, in the question related to balanced schedules, there was a preference shown for letting the market dictate the most appropriate direction on the issue rather than absolutely requiring balanced schedules. In addition, the majority favored requiring all participants to purchase Congestion Rights in an open market.

The final question addressing physical grid security generated a close result between the two options posed. Although a majority favored a distributed control, networked system for RTOs, there was a significant preference also expressed for central control centers with adequate secure back-up.

The full results of this survey are being made available so that all parties can draw their own conclusions. Even though fuel remains for continued debate, the numbers produced by the survey suggest some reasonable consensus in several controversial areas.

R.J. Rudden Associates, Inc. is a strategic, economic and management consulting firm specializing in energy matters. Additional information about the firm is available on Rudden’s web site at www.rjrudden.com.

RTO QUESTIONNAIRE RESULTS

1. Assuming FERC’s stated regions are enacted, which RTO region do you expect to operate within?

58.3% Northeast
11.1% Southeast
8.3% Midwest
13.9% West
2.8% ERCOT
5.6% Canada

2. In the Southeast, the Collaborative Governance Model proposes the creation of an independent for-profit transmission owning company (RTO/Transco) that contracts control of the assets to an independent, third-party market administrator. Transmission owners have the option of transferring assets to the RTO, forming an independent transmission company (ITC) that then joins the RTO, or joining the RTO while retaining ownership of transmission assets. The RTO makes a profit on the assets that it owns or leases and entities that retain ownership of their transmission continue to make profits on those assets.

In the Northeast, participants developed a business plan that proposes the creation of an independent, not-for-profit, system operator RTO/ISO that controls the operational functions of transmission assets owned by others. However, it is important to note that in this model the transmission owners, or any ITC that may be formed within the RTO/ISO, make a profit on their assets.

Which model do you prefer?

36.1% Independent, for-profit, transmission owning company (RTO/Transco)
55.6% Independent, not-for-profit operator (RTO/ISO)
8.3% No preference

3. Some expect that after the regional RTOs are operational many utilities will re-evaluate the role transmission ownership plays in their company. Some will divest to the RTO/Transco, others will divest to an Independent Transmission Company (ITC) who owns the assets but puts them under control of the RTO/Transco or RTO/ISO, and others will choose to join an RTO and continue to own their assets as they do now.

One of the benefits to divestiture could be that the utility might make a greater return by investing the proceeds from a divestiture of transmission assets into areas other than transmission. Another benefit could be a reduction in liability for assets that were owned pre-divestiture, but not controlled.

A benefit to owning transmission assets is that a regulated rate of return with the potential for performance-based rates and other incentives could be a safe haven for operationally savvy companies and for investors who seek moderate, but relatively safe returns.

If you were a Transmission Owner, what would you do?

13.9% Divest to the RTO/Transco
52.8% Divest to an ITC that can grow by investing in assets across RTO regions
33.3% Maintain ownership of assets

4. One of the arguments being put forward for the creation of RTO/Transcos and ITCs is that the assets are better placed in entities that are completely separate from the formerly vertically integrated utilities that might be tempted to use that association to their competitive advantage in the market. As an incentive for divestment, performance-based rates and transmission expansion incentives have been proposed for any new such entity created, but discouraged for existing formerly vertically integrated entities that elect to return ownership.

A recent announcement has indicated that inter-affiliate codes of conduct are about to be extended to exclude the sharing of information between the transmission companies and the distribution companies within a given utility. This would be an expansion of the codes of conduct that currently exist for marketing affiliates.

Assuming the proposed expanded codes of conduct are enacted, how do you believe performance-based rates and other incentives should be treated?

19.4% Rather than rate incentives, stricter codes should be used to accomplish unbundling

27.8% Performance-based rates and transmission expansion incentives should only be extended to new, independent entities

44.4% All transmission owners should be allowed performance-based rates and transmission expansion incentives

8.3% Performance-based rates and transmission expansion incentives should not be allowed in either event because performance and expansion are any owners’ charter and, therefore, are already accounted for in the base rates

5. Several pricing structures for transmission assets have been proposed. These include License Plate rates, where each pricing zone collects the total of its revenue requirements for the load within its territory; Postage Stamp rates, where the aggregate of all revenue requirements is collected from the aggregate load within the RTO’s territory; or a Hybrid, where existing assets are paid for by zone (License Plate) and new assets are paid for by aggregation (Postage Stamp).

Given the RTO region in which you might operate, which do you prefer?

16.7% License Plate
25.0% Postage Stamp
58.3% Hybrid

6. Over the long-term, Postage Stamp rates could apply to all transmission in a given RTO. Transitioning from current transmission pricing structures to an RTO-wide Postage Stamp rate could create some cost shifting between zones with high load factors and low transmission revenue requirements, and zones with low load factors and high transmission revenue requirements.

Presuming that Postage Stamp rates may be enacted and given the RTO your company would operate under, what would you consider a reasonable transition period for phase-in?

22.2% 3 years
58.3% 5 years
13.9% 7 years
5.6% 10 years

7. New transmission construction undertaken after the formation of the RTO creates a unique situation in so far as rates are concerned. Some say that new construction is the responsibility of the zones that are benefited, while others contend that RTOs are all-for-one and one-for-all propositions.

Assuming the RTO in specifying that new transmission assets being built has taken the benefit of the RTO as a whole into account, how do you feel the revenue requirements for new construction be collected?

19.4% Under a License Plate rate even though it could potentially add to cost shifting later
25.0% Under a Postage Stamp rate because RTO wide planning is a new paradigm that should be taken into account for new construction
44.4% All new assets are Postage Stamp, existing assets phase in
11.1% No preference

8. The RTO process has given rise to scores of issues relating to market rules. Across the country, we hear a variety of opinions on the pros and cons of a variety of rules. At a very high level, one overarching question has been put on the table for discussion. This is, should there be common rules covering all RTO markets, or should each region be allowed to develop its own market rules that reflect regional conditions?

Which do you prefer?

27.8% Common market rules covering all RTOs
50.0% Common market rules with some allowance for regional conditions
0.0% Regional market rules
22.2% Regional market rules with some allowance for commonality

9. Some of those expressing opinions feel that all market participants must submit balanced schedules with a predetermined level of generation reserves, while others would like the flexibility of choosing to go unbalanced at any given time.

Balanced schedule proponents argue that unbalanced schedules could create potential opportunities for gaming and also lead to less reliability. If a participant were to take a long-on-generation position, this could have the effect of creating the anticipation of congestion where none would occur. If a participant were to take a short-on-generation position, this could create a situation where a higher percentage of transactions were occurring in the spot market.

Advocates of the flexibility position contend that the market will determine the best profile for covered positions, and that allowing participants to go long or short will encourage the development of financial products in the energy markets.

Which do you prefer?

38.9% Balanced schedules must be submitted
61.1% Flexibility should let the market decide

10. Transmission congestion costs and the rights to use congested transmission paths (Congestion Rights) have been widely discussed. At the center of this issue is the status of congestion rights for the native load of utilities who have built the existing transmission assets in order to fulfill obligations to serve customers. In some instances, other entities such as generators and distributors also have Existing transmission contracts. Whether the ultimate rights are physical or financial, the question of whether Congestion Rights should be granted and to whom is a current topic.

Alternatives presented included granting Congestion Rights to existing utilities versus requiring all participants to purchase Congestion Rights in an open market.

Which do you prefer?

22.2% Granting Congestion Rights to utilities serving native load and other entities having existing contracts
50.0% Requiring all participants to purchase rights in an open market
27.8% Hybrid

11. The tragic events of September 11th give rise to the question of physical grid security. RTOs will now be chartered with a higher level of responsibility for physical security than before. One issue that directly impacts security is the centralization of control center operations. While many options are available to consider in the future, they will most likely fall between two extremes. These are: (1) developing central control centers for each RTO that have adequate secure back-up, and (2) taking advantage of existing control centers to develop a distributed control, networked system that some contend already has adequate back-up systems in place.

Which do you prefer?

44.4% Develop central control centers with adequate secure back up
55.6% Develop a distributed control, networked system

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