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May 4, 2001

Utilities, FERC At Odds Over RTO Plans 

By Will McNamara
Director, Electric Industry Analysis 

[News item from Energy Info Source] According to a new report from Energy 
Info Source, the Federal Energy Regulatory Commission (FERC) has begun to 
articulate a position regarding regional transmission organizations (RTOs). 
With several approvals, a rejection and ordering changes to another RTO 
application, FERC is shaping RTO participation among investor-owned 
utilities. 

Analysis: The Energy Info Source report makes several conclusions regarding 
current approaches that FERC is taking with regard to pending RTO 
applications, based on decisions that the commission has made up to this 
point. According to Energy Info Source, FERC has concentrated its efforts on 
the Southeast and Western regions. Within the Southeast, FERC has essentially 
rejected Southern Company's SeTrans Gridco, while conditionally approving 
GridSouth and Grid Florida. In the West, the RTO West application-which 
represents an alliance among nine utilities-appears to have received FERC's 
favor and "is the preeminent leader among non-ISO RTO participation efforts." 
However, despite these established trends, FERC still remains at odds with 
many of the leading transmission owners in the nation, which foresee a 
potential conflict between the commission's rulemaking on transmission rates 
and its potential impact on retail rates, which are regulated by individual 
states.  

For background, an RTO is a regional entity that is designed to consolidate 
control and delivery of electricity across various types of transmission 
systems within a particular region. The origins of FERC's RTO policy dates 
back to its December 1999 Order 2000, in which it strongly encouraged all 
transmission-owning utilities to submit plans for joining or forming an RTO 
by Oct. 15, 2000, with actual membership established by December of this 
year. FERC is now sorting through the applications that it has received, and 
its approvals or rejections illuminate certain preferences that some members 
of the commission hold. Over the last year or two, FERC has engaged in an 
ongoing debate between its preference for transco (for-profit) models for 
RTOs, as opposed to independent system operators (non-profit). Chairman Curt 
H&eacutebert has been the most vocal supporter of the transco model, while 
other commissioners such as William Massey have supported ISOs. However, 
moving forward, it is becoming increasingly clear that FERC also seems to 
have other set agendas for how it wants the network of RTOs to operate, 
including the limit of one entity per region. 

As noted, FERC appears to be focusing on applications submitted for the 
Southeast and Western regions. In addition to the obvious need to establish 
stability in the West, another explanation for the commission's dual focus is 
that other regions in the United States (namely, the Midwest and the 
Northeast) already have successfully operating RTOs such as the New York ISO, 
the Alliance RTO and the Midwest ISO. FERC may be focusing on the West and 
Southeast as these are the two regions that arguably have not yet established 
an acceptable level of market independence. 

The Western region contains three separate RTO proposals that are pending 
before FERC. The RTO West, which FERC has referred to as the "anchor" of the 
region, has been generally accepted as a "broad concept." RTO West includes 
nine large transmission operators that are primarily located in the Pacific 
Northwest (Avista, Bonneville Power Administration (BPA), Idaho Power, 
Montana Power, PacifiCorp, Portland General Electric, Puget Sound Energy, and 
the Sierra Pacific units Nevada Power and Sierra Pacific Power). BPA is by 
far the largest of the RTO West members, controlling about 75 percent of the 
transmission system in the region. For the most part, RTO West is an ISO, 
although six of the nine utilities included in this operation have also 
applied to create a transco that would operate under the RTO West umbrella. 
The second western RTO is Desert Star, which includes utilities that are 
located in Arizona, Colorado, New Mexico, and Texas. The third proposed RTO 
for the Western region is the California ISO, which has been operational 
since April 1998 and wishes to remain a stand-alone entity. 

FERC's main point of contention with regard to the Western region is its 
desire for one RTO in the area, instead of three. The primary rationale for 
this position stems from a philosophical belief that one regional RTO will be 
more easily managed than multiple entities. In addition, gaming by power 
generators could more likely occur with multiple RTOs, which would require 
additional market rules to control the gaming (FERC's general approach has 
been to reduce rather than increase the amount of market rules needed). The 
California ISO has tweaked the commission's patience in particular, as this 
solo entity has steadfastly resisted any federal efforts to make it join 
other entities. The commission recently agreed to impose wholesale price caps 
in California whenever reserves fall below 7.5 percent. This has been 
something that the state has long requested, but the price caps come with the 
condition that California must file an application by June 1 to enter into an 
RTO with other Western states. Otherwise, the price caps will be lifted. 
California is currently contesting this condition. 

Under the leadership of Chairman H&eacutebert, it is clearly FERC's goal to 
establish only one RTO for the entire Western region, which puts the federal 
agency at odds with the California government once again. The Department of 
Energy Secretary Spencer Abraham shares H&eacutebert's belief that one 
regional RTO is the best strategy for the West, but also has said that 
proceeding without California for the time being may be necessary to get the 
new organization up and running. Other western governors have stood in unity 
that FERC should issue a decision on the three RTOs presently and postpone 
its effort to force a single western RTO for the time being. 

Across the country, there are similar issues facing the RTOs in the 
Southeast. For instance, Chairman H&eacutebert's preference for minimal RTOs 
within one region appears to be a national viewpoint. Yet, there are unique 
questions related to the formation of Southeast RTOs that have not emerged in 
the West. The status in the Southeast is that FERC has approved GridFlorida 
RTO-which includes Florida Power & Light, Florida Power Corp. and Tampa 
Electric-and GridSouth RTO, which includes Progress Energy, Duke Energy and 
South Carolina Electric & Gas. However, FERC rejected Southern Company's 
SeTrans GridCo because the gridco planned to funnel certain rate incentives 
to companies other than the RTO operator, which violated FERC policy. The 
commission not only rejected SeTransGridCo, but told Southern Company not to 
re-apply and to "explore joining neighboring utilities in an RTO." In 
addition, FERC only gave conditional approval to the Southwest Power Pool / 
Entergy Hybrid RTO because many of its members have not formally turned over 
control of their generation assets. The rejection and conditional approval 
from FERC, which followed the approvals of GridFlorida and GridSouth, have 
been perceived as a message from the commission that remaining utilities in 
the region should join the already-approved entities. In fact, FERC 
reportedly gave approval to GridSouth only with the agreement that it would 
engage in dialogue with Tennessee Valley Authority, Santee Cooper and SeTrans 
GridCo so that they might also join. Some reports indicate that, because the 
Southeast region does not presently have an ISO model (such as the one in 
California), FERC has high hopes for molding the region in accordance with 
its own long-term goals, which include a single RTO for the area. 

Nevertheless, despite receiving approval from FERC, GridSouth is taking issue 
with two aspects of the commission's approval. First, GridSouth questions 
FERC's jurisdiction over bundled retail service, and specifically wants the 
commission to determine whether or not it will exert control over bundled 
transmission rates. GridSouth is concerned that FERC is pushing for a 
contract with the approved RTO that would put retail rates, including the 
charge for transmission service, under FERC jurisdiction, which would allow 
the commission to change the rates in the future. FERC's Order 888, which 
essentially outlined electric deregulation in the United States, clearly 
states that FERC does not have jurisdiction over bundled retail service. 
GridSouth has asked for a rehearing of its RTO proposal in which FERC would 
agree to GridSouth's interpretation of state jurisdiction over bundled 
transmission rates.  

Despite these isolated disputes, the formation of RTOs across the United 
States appears to be coming together. While the industry awaits for further 
FERC action on pending RTO applications, it is clear that certain trends are 
emerging. FERC's long-standing preference for the transco model over the ISO 
model appears to be diminishing, as evidenced by the commission's approval of 
RTO West and apparent support of non-profit operations such as the New York 
ISO and the Midwest ISO. Rather, FERC has demonstrated a more primary 
preference for solitary RTO entities within a region, regardless of whether 
the entity operates as a transco or an ISO. From a philosophical perspective, 
establishing one RTO rather than several within a particular region arguably 
will help to reduce certain inefficiencies that might result from multiple 
entities. Further, a single RTO entity may help to avoid certain inter-tie 
problems that could occur between multiple RTOs within a region. However, it 
will be no easy task for FERC to convince utilities that are involved in 
independent RTOs (such as California) to relinquish their autonomy and join 
forces with other utilities that may have divergent philosophies regarding 
the operation of a transmission system.  

An archive list of previous IssueAlerts is available at
www.scientech.com


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