Transcos adopt expanded roles

Christopher Clark

Lawrence Alexander

Jonathan Abe

Environmental Futures Inc.

Independent transmission system operators (ITSOs) are adopting diverse strategies for addressing the physical and political needs of their regions. They are entrusted with the complicated tasks of ensuring non-discriminatory and reliable transmission access, administering regional transmission tariffs, and in some cases, operating power exchanges.

Efforts to promote regional ITSOs have produced mixed results thus far. The most successful initiatives (those resulting in actual ITSO formation) have all evolved from single state systems, such as those in California (Cal ISO) and New York (NYISO), and/or from tight power pools as in the case of the New England Power Pool (NEPOOL) and ISO-New England.

In other regions of the country, ITSOs are struggling to build the momentum and consensus necessary for approval by their participants and ultimately by FERC. These efforts face a variety of obstacles, including a continually evolving landscape of rules and practices at the federal, regional and state levels. Presently, FERC is debating whether to mandate the formation of regional transmission organizations (RTOs), which could include ITSOs, to oversee regional transmission operations.

FERC`s Notice of Intent to consult with states on establishing RTOs, issued in October 1998, identifies a number of transmission issues that threaten to interfere with the development of competitive electricity markets:

– insufficient separation between transmission and merchant functions;

– multiple pancaked transmission rates within regions and cost-shifting;

– congestion management problems;

– the potential exercise of market power, especially in congested markets; and

– complexities associated with current transmission planning.

FERC`s rulings will impact significantly the function and character of present and pending ITSOs.

As the concept of the ITSO has gained a foothold under restructuring, a variety of administrative and operational models have been formulated. Initiatives proposed thus far fall under one of the following prototypes:

– ISO-a centralized, neutral not-for profit entity that oversees transmission operations in one or more control areas.

– ISO-lite-a not-for-profit entity that exercises neutral, indirect control over multiple control areas.

– ISA-a not-for-profit entity that manages regional transmission, but does not

administer an open access transmission tariff. ISAs may evolve into ISOs.

– Transco-an independent for-profit entity that both owns and operates the transmission system.

– Transco-lite-an independent for-profit entity that owns a portion of the system that it operates.

Within each of these prototypes, there are diverse approaches to governance, transmission system operations, transmission pricing, congestion management, and in some cases, energy market operations.

Of particular interest and under considerable debate are strategies that various ITSOs have developed for determining transmission pricing. Proposals and practices for pricing transmission service range from zonal or region-based flat per MW rates, to distance and flow sensitive MW-mile rates.

Due in large part to the failure of flat fee approaches to provide market participants with the price signals needed for the market to operate efficiently, a more sophisticated approach has been developed for congestion management. Location-based marginal pricing (LMP) incorporates the marginal costs of both generation and transmission into the total transmission fee, and thereby provides price signals that reflect the true costs associated with wholesale electricity transactions. Adoption of the LMP methodology, which is currently in place at PJM Interconnection L.L.C., is actively being considered for other existing and developing ITSOs, including NYISO and ISO-NE.

Five ITSOs have begun operations or were scheduled to begin operations by April 1999: California ISO, the Electric Reliability Council of Texas ISO, ISO New England, New York ISO, and PJM Interconnection L.L.C. Together these ISOs represent approximately one-third of U.S. generating capacity.

– California ISO (Cal ISO). Cal ISO became fully operational in March 1998 following passage of state restructuring legislation (AB1890). Currently, Cal ISO provides nondiscriminatory transmission access, administers a regional transmission tariff, and operates a market for ancillary services, including regulated capacity and reserves. It administers a fee for transactions that is designed to recover the transmission revenue requirements of transmission owners.

– The Electric Reliability Council of Texas ISO (ERCOT-ISO). ERCOT-ISO evolved from Texas` existing operations council, and is currently operating as an ISO-lite. There are ten separate control areas in ERCOT. It is charged with maintaining the security of the bulk power system, facilitating the transmission market, energy scheduling, and coordinating transmission planning. Transmission costs, as determined by the Public Utilities

Commission of Texas, are allocated to transmission users based on load and the transmission distance between the source of generation and the load obligation.

– ISO New England (ISO-NE). ISO-NE has recently begun operations in six New England states, and has assumed control of the transmission system previously operated by NEPOOL. ISO-NE will administer the transmission system, tariff, and power exchange. It administers a uniform transmission fee for transactions.

– New York ISO (NYISO). Formerly operating as a tight power pool in New York

State, NYISO was scheduled to begin operations in April 1999. In June 1998, FERC approved certain elements of NYISO`s plans; it approved its tariffs (including congestion charges based on locational pricing) and energy market rules in January 1999.

– PJM Interconnection L.L.C. (PJM). Operating in Pennsylvania, New Jersey, and Maryland, PJM assumed control of the largest centrally-dispatched electric system in North America in April 1998. PJM provides nondiscriminatory access, administers a regional transmission tariff with congestion charges established by locational pricing, and operates a power exchange.

Six regions have ITSOs in varied stages of development:

– Alliance ISO (Alliance). Transmission operators from six Midwestern and mid-Atlantic states are participating in Alliance discussions. So far, Alliance participants have discussed a full range of operational models (including an ISO or

Transco-lite) and tariff proposals (including locational pricing).

– Desert Southwest Transmission and Reliability Operator (Desert STAR). Desert STAR was initiated by six control areas in the southwestern US and is working toward becoming an ISA. A study group is presently analyzing reliability, open access, and independent governance issues. Desert STAR proposes to administer transmission access fees that are unique to each of ten access areas and are based on cost of service. The target date for a FERC ISO filing has been delayed to December 1999.

– Independent Grid Operator (IndeGO) and Rocky Mountain ISO. Efforts to create IndeGO out of control areas in northwestern and Rocky Mountain states stalled in February 1998, primarily because of cost-shifting concerns associated with a proposed transmission pricing plan. These issues are still being analyzed. Participants are also pursuing development of the Rocky Mountain ISO. Most likely, further action from FERC will be required to encourage the continued development of a regional transmission tariff and IndeGO.

– Mid-Continental Area Power Pool ISO (MAPP ISO). MAPP ISO would provide transmission-related functions to eight western and midwestern states and parts of Canada. In November 1998, MAPP members rejected a comprehensive MAPP ISO proposal. The proposal had contained provisions for a zonal pricing scheme. The MAPP Executive Committee is currently deciding whether to proceed with a modified ISO.

– Midwest ISO. Midwest ISO includes 13 transmission-owning utilities from 13 states in the Midwest. Midwest ISO received conditional approval from FERC in September 1998, elected a Board of Directors in December 1998, and is currently setting a date to begin operations. Unlike other ISOs, Midwest ISO has a noncontiguous service area. Midwest ISO will operate a zonal pricing scheme based on existing service areas.

– Southwest Power Pool ISO (SPP ISO). SPP is developing an ISO proposal to provide transmission-related functions in parts of six southwestern states. In June 1998, FERC approved SPP`s filing to administer a regional open access transmission tariff for non-firm and short-term firm point-to-point transmission service across the systems of SPP`s members. Compensation for the tariff is calculated according to a flat-rate, MW-mile-based charge.

In addition, several entities are developing proposals for for-profit Transcos:

– FirstEnergy Corp. FirstEnergy formed a transmission company subsidiary, American Transmission Company, Inc. (ATC), to own and operate FirstEnergy`s transmission facilities in northeastern Ohio and western Pennsylvania. FirstEnergy plans to transfer operational control of its transmission systems to ATC and finalize the transfer of transmission asset ownership by the end of 1999. ATC would provide transmission service, including scheduling, ancillary services, and settlement under the terms of the existing FirstEnergy transmission tariff.

– Entergy Corp. In June 1998, Entergy proposed a regional transmission company that would own and operate Entergy transmission facilities in portions of

Louisiana, Arkansas, Mississippi, and Texas. Entergy`s plan calls for the company to retain the voting rights of Transco ownership stock, while transferring the stock to a trust administered by an independent trustee. The FTC has challenged the proposal for posing potential vertical and horizontal threats to competition.

– Northern States Power Co. (NSP). In June 1998, NSP proposed an independent transmission company that would own and operate NSP transmission facilities in portions of Minnesota, Wisconsin, the Dakotas, and Michigan. In November

1998, Alliant Energy, which covers portions of Iowa, Illinois, Minnesota, and Wisconsin, announced it would lease its transmission facilities to this Transco. Sharing an overlapping system, the Transco would pose a direct challenge to the proposed MAPP ISO. NSP expects to complete regulatory filings by spring 1999, with operations tentatively scheduled to begin in April 2000.

Regions associated with the Southeast Reliability Council and the Florida Reliability Coordinating Council have thus far chosen not to move forward on developing an ISO. Although primarily occurring at a regional level, ITSO development will continue to be driven by federal initiatives. As the electricity industry evolves in response to restructuring initiatives, decisions made by Congress and FERC will profoundly impact the future character of the U.S. electricity transmission system.

Environmental Futures, Inc. has just completed a detailed report on all existing and developing U.S. ITSOs. Call 617-443-1381 or e-mail

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