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October 1, 2001 


FERC Chairman Wood Ups the Ante on RTO Formations,
Outlines Long-Term Objectives for Industry 



By Will McNamara
Director, Electric Industry Analysis 


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[News item from Reuters] The chairman of the Federal Energy Regulatory Commission (FERC) said that all U.S. utilities must submit plans to the agency by Dec. 15 for joining regional transmission organizations (RTOs) or the firms and their affiliates would no longer be able to sell electricity in the wholesale market at market-based rates. Merger approvals for transmission-owning utilities that do not join an RTO might also be restricted. FERC Chairman Pat Wood, speaking at an agency meeting, said he believed there should be four RTOs nationwide: one each covering the Northeast, Southeast, Midwest, and Western markets. "To me at this point, the four RTOs is a good place to land," Wood said. Each RTO would oversee a region's electric grid to ensure all power suppliers had fair and equal access to transmission lines. In addition to the aggressive timetable for RTO formation, Wood also outlined several priorities that are included in FERC's long-term agenda, including steps to reduce market manipulation and improve the industry's infrastructure. 

Analysis: In the transition from the former FERC under the leadership of Curt H?bert to current chairman Pat Wood, it has often been projected that the new commission would become more interventionist and carry a "big stick" to force utilities to comply with federal requirements. Clearly, this new declaration from Chairman Wood, in his first substantial motion since becoming FERC's leader last month, demonstrates just how commanding that stick may become, along with the commission's unwavering commitment to the implementation of its comprehensive RTO plans. Quite unlike his predecessor, who sought to reduce the extent to which FERC would regulate, through his developing agenda Wood reportedly seeks to heighten the commission's role to the level of the Securities and Exchange Commission and the Federal Trade Commission. In other words, Wood wants FERC to create policy for the energy industry and then aggressively implement it, with RTOs being at the top of the list. 

The difference of FERC's new approach to RTOs (i.e., comparing Wood to H?bert) cannot be overstated. For the last several years, FERC has been regularly criticized for developing a policy toward RTOs that on paper called for voluntary participation by the nation's transmission-owning utilities. Wood is carving out a vastly different approach that ups the ante for RTO participation and affixes stiff penalties for those utilities that fail to comply. The new motion makes Wood's position very clear: utilities that own transmission assets must agree to turn those assets over to an RTO by Dec. 15 of this year-just over two months from now-or lose their authority to sell wholesale electricity at market rates. In addition, Wood has said that FERC should condition subsequent merger approvals on whether or not a transmission-owning utility has complied with the commission's RTO order. Interestingly, Wood maintains that FERC's evolving position on RTOs still calls for "voluntary" participation among utilities. However, the new chairman clearly states that if utilities don't join RTOs, they won't have access to the benefits of competitive markets. 

It is important to note that Wood acknowledges that the actual transfer of utility transmission assets may not occur for several years. The new motion from Wood calls only for utilities' agreements and specific plans to transfer their transmission assets by Dec. 15. This proposal changes an earlier FERC order that preceded Wood in which the commission called for RTOs to actually become operational by Dec. 15, which the commission now apparently realizes is not feasible. 

This "big stick" that FERC is now hanging over utilities does offer some benefits as well, as Wood has been quick to reiterate. For instance, FERC has already offered utilities higher regulated rates of return for transmission assets under RTO control. In addition, by turning the transmission assets over to an RTO, utilities will be removed from state regulatory oversight of the assets. Of course, it is important to note that states still control retail rates, which sets up many potential conflicts between federal and state regulatory policies. There is also a separate measure that is coming together in Congress that would eliminate the tax consequences utilities face when transferring their transmission assets to FERC-approved RTOs. Utilities often cite the costs associated with transferring their transmission assets to an RTO when resisting compliance with FERC's order. If this federal legislation is passed, transmission-owning utilities will have one less reason to resist the transfer of their transmission assets over to an independent entity. 

It is important to note that Wood's new proposals related to RTO formation are an adjunct to FERC's order from last July that mandated consolidation among existing RTOs, with the stated goal of creating four large national entities (Northeast, Southeast, Midwest and West). The Electric Reliability Council of Texas (ERCOT), which already exists, is outside of FERC's jurisdiction. Four large RTOs is still the vision that FERC has in mind, and as noted Wood agrees that "four is a good place to land." However, the mandate on consolidation appears to be softening, at least in some regions. For instance, in the Western region, presently three separate transmission entities exist (the California ISO in California, RTO West among the Northwestern states and Desert Star among the Southwestern states). In its July order, FERC had clearly stated that it wanted to see these three entities consolidate, a point that has caused a great deal of conflict with the California ISO, which wants to remain independent. Now, Wood appears to be backing away from forcing the consolidation issue in the West and has said that FERC's stance will be "not as aggressive" for integrating the existing RTOs in the West. Further, Wood now says that having a single Western RTO is not imperative at this time. 

Consolidation among the existing RTOs in the Northeast appears to be moving forward. In fact, consolidation among the PJM Power Pool, the New York ISO and the New England ISO could take place as soon as the end of next year. This progress comes somewhat as a surprise, considering that the last report out of this region was that the New York ISO and New England ISO resisted the preference that had been shown for PJM's model. In the Midwest, two entities still exist (the Midwest ISO and the Alliance RTO), and Wood has said that FERC is working toward a revised agreement between the two entities that would encourage them to merge. Just recently, six investor- and public-owned power companies in the Midwest applied to FERC to form a new company to merge their electric transmission systems. Translink Transmission Co. would be a for-profit entity. It is not presently known if or how Translink may be required to conjoin with the Midwest ISO and the Alliance RTO. 

As noted, Wood has also set out a long-term agenda for FERC, covering other points beyond RTO formation. For instance, another critical issue for the commission will be potential market manipulation that might take place by various participants in deregulated environments. One of the ongoing debates related to the failure of California's deregulated market was whether or not out-of-state generators or state-affiliated entities such as the California ISO and the Department of Water Resources intentionally manipulated the state's market to impact power prices. Wood has indicated that FERC will soon release a formal policy for policing companies authorized to sell power at market rates and utilities that use transmission services bundled into state-regulated retail rates to thwart wholesale power competition. In addition, Wood has said that FERC will establish new policies related to the information that energy companies can share with their affiliates. This is a direct reference to a pending case involving El Paso Corp., in which the company has been accused of sharing market-sensitive information with one of its unregulated affiliates to gain a market edge in the natural-gas market of California. 

The other key focus area for Wood is upgrading the electricity infrastructure in the United States, which he says has not even remotely kept pace with the tremendous growth in the economy over the last 15 years. Instead of building new power lines, however, it appears that Wood supports the development of new technologies that would boost capacity on existing lines. Toward that end, FERC and the Department of Energy will hold a forum on innovative but unused energy technologies in January. Also along these lines are plans to develop uniform strategies for hooking up existing and new power plants to the transmission grid. 

Moreover, as we head toward the end of 2001, we are fast approaching the four-year anniversary of the start of electric competition in the United States (California, the first state to implement direct access, opened its market in March 1998). Four years later, the industry is still caught in somewhat of a limbo between the old structure of monopoly control and the new structure of full deregulation. Chairman Wood has assumed leadership over FERC at a time when the commission has been heavily criticized for not doing enough to limit the amount of market abuse that has arisen as a result of deregulation. At the same time, the extent to which the commission should provide regulatory oversight in a deregulated marketplace has also come under question, even by the commissioners themselves. Thus, Chairman Wood's challenge will be to push electric competition forward while taking steps to reduce the potential for market manipulation. Clearly, RTOs continue to play an integral role in these objectives and remain a top priority for FERC under the new leadership of Pat Wood. 


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