Today's IssueAlert Sponsors: 

 <http://www.westerncoalcouncil.org>

Join us this Autumn in San Antonio as we explore the significant issues now confronting the utility-coal industry as it gears up to meet our nation's growing energy demands.

The Coal Market Strategies <http://www.westerncoalcouncil.org/events/event1015.html> conference is co-sponsored by the Western Coal Council & Edison Electric Institute as part of its efforts to advance the marketing and business management needs of its members. The CMS Conference is renowned for the strength of its educational program and the level and quality of its attendees. 


Contact Janet Gellici at (303) 431-1456 or info@westcoal.org <mailto:info@westcoal.org>. 


The Center for Public Utilities and The National Association of Regulatory
Utility Commissioners present:


THE BASICS: 

 <http://cpu.nmsu.edu/>

Hands-on framework that shows the interrelationships of the topics and how they
fit together and provides a set of analytical skills required to understand the issues. 
October 14-19, 2001 in Albuquerque, NM Contact Jeanette Walter at 
jeawalte@nmsu.edu <mailto:jeawalte@nmsu.edu> for more information.


  <http://secure.scientech.com/rci/wsimages/scientech_logo_small.jpg>
  <http://secure.scientech.com/rci/wsimages/IssueAlert_Logo_188>




September 20, 2001 



Formation of Northeast RTO 
Challenged by Structural, Governance Issues 



By Will McNamara
Director, Electric Industry Analysis 


  <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg>

[News item from Reuters] An administrative law judge at the Federal Energy Regulatory Commission (FERC) released a blueprint to establish a single electricity transmission system for 11 Northeastern states, possibly as early as the end of 2002, based on the existing PJM Interconnection model. Regional transmission organizations (RTOs) are a priority for FERC, which is looking for ways to make the nation's patchwork transmission grid seamless in moving power between regions. An RTO is a combination of individual transmission operations that combine their assets under a common roof. FERC Judge Peter Young wrote in a 27-page report that there were "difficult substantive issues" in the path of creating an RTO for the Northeast. Young has held secret talks with the parties since then to prepare a report and business plan to FERC commissioners, who are expected to issue a decision by Nov. 1. 

Analysis: The complications now surfacing with regard to the formation of a single RTO in the Northeast are rather symptomatic of larger problems that may continually arise as the consolidation among transmission entities across the United States continues. The Northeast region includes three distinct transmission entities-the New England Independent System Operator (ISO), the New York ISO and the Pennsylvania-New Jersey-Maryland (PJM) Interconnection-all of which were operating as separate organizations until two months ago when they were essentially ordered to conjoin by FERC. The Northeast region consists of 11 states and the District of Columbia, and combining the various markets in the region would reportedly create the largest electric power market in the world. Thus, if we look at the Northeast situation as a national template, conjoining the various RTOs across the country into four large regional entities, per FERC's directive, may be an arduous task. In addition, consolidation could add multiple layers of bureaucracy to what is already an extremely complex sector of the energy industry. 

For background, it is important to realize that the current challenges associated with forming a single transmission entity stem from a FERC order released last July ordering all of the existing RTOs in the country to explore consolidation. The contentious order, which has sparked intense controversy among certain utilities and existing RTOs, literally lays out the blueprint for how FERC wants the nation's transmission systems to be constructed. FERC has clearly directed four regional systems (in the Northeast, Southeast, Midwest, and West) although no reference was made to the Electric Reliability Council of Texas (ERCOT), which exists outside of FERC's jurisdiction and essentially operates as its own transmission island. The commission had previously set a deadline of Dec. 15, 2001, for RTOs to become functional, so most of the transmission entities impacted by the order were in the midst of formulating their operational plans when the order was issued on July 11. 

In the Northeast region, FERC directed that a new Northeast RTO would be created for this region and would essentially follow the template that has been established by the PJM Interconnection, which as noted operates the wholesale transmission market in Pennsylvania, New Jersey and Maryland. In fact, FERC has often commented that PJM represents the most successful RTO that has been formed in the United States to date. FERC has said that PJM should serve as the platform (or starting point) for mediation talks in the Northeast. Under FERC's new order, the existing New England and New York ISOs would be required to join PJM. From the time that FERC's order was first released, I suspected that these two entities would resist FERC's mandate to join PJM, as they have previously stated that a substantial amount of time and money has already been spent on forming their ISO entities, and consolidation could nullify those efforts. 

It appears that my projections are now coming true. While sincere efforts are being made to consolidate the three transmission entities in the Northeast, the parties involved are realizing that conjoining three large and separate transmission organizations is a very complicated process. The main obstacles seem to surround structural and governing issues, which I expect will also be stumbling blocks for RTOs in the other three regions of the country as they proceed with their own consolidation efforts. 

Moving forward, I will attempt to shed some light on the "difficult substantive issues" surrounding the Northeast RTO (in the words of the FERC administrative law judge). As negotiations continue in this area, various stakeholders have been involved in the discourse, including energy companies, financial investors and companies that seek to be involved in the management of the transmission assets in the area (namely, National Grid). As noted, governance of the Northeast RTO board is the "thorniest" issue of all, again in the words of Judge Peter Young. There has been little doubt that FERC has routinely praised the model used by the PJM system and in fact clearly stated in its order that the New England and New York ISOs should adopt the PJM model. Now, however, new FERC Chairman Pat Wood has acknowledged that the commission may have been in error to express such strong support for only one model out of three. Nevertheless, FERC already has rejected the requests of the New England and New York ISOs to maintain their status as free-standing entities. 

For instance, on the issue of how the RTO will be governed, the New England ISO reportedly believes that all three regions should be equally represented to ensure that the unique needs of each are given fair consideration. In other words, the New England ISO has expressed concerns, which are reportedly shared by the New York ISO as well, that all three of the Northeast's major grid operators may not get equal billing in a future board of directors tapped to run the new network. One concession made along these lines is that FERC has allowed the New England ISO to continue developing the Standard Market Design, or SMD, for New England. The SMD, based on the PJM Interconnection's market design and rules, will provide critical market improvements in advance of the single Northeast market. 

The leader of the New York ISO echoed these concerns and reportedly stated that any missteps in the formation of the single Northeast RTO "could make California's energy woes look almost insignificant by comparison." Further, William Museler, the New York ISO's CEO, pointed out that the New York ISO represents the largest electricity market of the three by far (posting a market value for 2000 of $5.2 billion compared to $1.7 billion for PJM and $0.6 billion for ISO New England). However, Museler acknowledges that the New England ISO and PJM have unique areas in which they lead the Northeast region. For example, PJM leads the region in total load served and ISO New England leads the region in the number of states represented. 

The other issue that is complicating the formation of a single Northeast RTO is of a structural nature. Specifically, complex software is needed to set up a single entity in the region (and in other regions that are presently attempting to conjoin various entities). In fact, the selection and installation of this software may actually delay the formation of the Northeast RTO until the fourth quarter of 2004, according to Judge Young. In addition, Young reportedly said the software and technology needed to set up an RTO to keep electricity smoothly moving throughout the Northeast will rank second only to that used by the banking industry. 

While much of the debate surrounding the formation of a single RTO in the Northeast may seem like policy minutia, it does have a very critical impact on real-world operations in the region. The problem may be particularly acute in New England, a region where deficiencies in the transmission system have already begun to cause reliability problems. As I've discussed in previous columns (see the 8/23/01 IssueAlert, available at "> www.scientech.com/rci, for more information) New England has maintained an adequate supply of power generation but is suffering from a strained transmission system. The six-state region of New England covers about 8,000 miles of high-voltage transmission lines. As a whole, the region is capable of generating about 26,000 MW of electricity, and during the heat wave of the last few weeks consumption peaked at 25,102 MW, creating an extremely tight situation for utilities such as NStar. 

Leaders at the New England ISO, for instance, have acknowledged that transmission constraints in the region have caused inefficient operation. Without necessary upgrades to the system, they say, electricity transmission to areas of short supply could add $125 million to $600 million per year to the price of delivering power through the region from 2002 through 2006. Power outages that occurred in the Boston area this summer highlighted fundamental deficiencies in the region's transmission and distribution systems, the improvements for which are dependent on large sums of capital investment and a conducive political environment. The bottom line may be that, without a comprehensive and functioning RTO in the region, investments to upgrade the transmission system in the area may be delayed, exposing the region to further reliability problems. 

Moreover, the challenges associated with forming one RTO in the Northeast may support the argument against consolidating RTOs, which comes mostly from the existing transmission entities and utility owners who argue that millions of dollars in start-up costs and infrastructure investment will be lost if their independent systems are nullified. In addition, these entities have a real problem with losing their current autonomy and independent control over their own transmission systems. Thus, the FERC order regarding consolidation will continue to be challenged and its implementation may be a long and involved process. 


An archive list of previous IssueAlerts is available at
www.scientech.com <http://secure.scientech.com/issuealert/> 


We encourage our readers to contact us with their comments. We look forward to hearing from you. Nancy Spring  <mailto:nspring@scientech.com>

Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Jane Pelz  <mailto:jpelz@scientech.com>. Advertising opportunities are also available on our Website. 
SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this e-mail and include their full name and e-mail address or register directly on our site. 

If you no longer wish to receive this daily e-mail, and you are currently a registered subscriber to IssueAlert via SCIENTECH's website, please visit <http://secure.scientech.com/account/> to unsubscribe. Otherwise, please send an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com>, with "Delete IA Subscription" in the subject line. 
SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis of SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed, or to be the basis for investment decisions of any kind. SCIENTECH's sole purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. 



Copyright 2001. SCIENTECH, Inc. All rights reserved.


  <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=9/20/2001>