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E-Notes provides regular briefings on new developments in global energy and
public utility law.

JULY 19, 2001



U.S. Energy Regulators Restructure The
Transmission Grid, Call for Four
Regional Transmission Organizations

Jonathan W. Gottlieb, Esq.
Roger M. Gibian, Esq.

On July 12th, the U.S. Federal Energy Regulatory Commission issued a series
of orders that fundamentally restructures the transmission system in the
United States. In its orders FERC called for the development of one Regional
Transmission Organization for each of the Northeast, Midwest, Southeast, and
Western regions of the country.  An immediate result of these actions is
that FERC directed:  (1) the New York ISO, NEPOOL, PJM, and PJM-West into
mediation proceedings for the formation of a single RTO covering the
Northeast United States from Maryland and West Virginia north to Maine; and
(2) the Southern Companies, Southwest Power Pool, Entergy, and GridSouth
into mediation proceedings for the formation of a single RTO in the
Southeast.  The Commission allowed Southwest Power Pool the option of
instead pursuing involvement in an RTO in the Midwest, and encouraged, but
did not require, the entities comprising the GridFlorida RTO to engage in
the Southeast RTO mediation proceedings.

These orders reflect the ascendancy of a coalition of Commissioners Massey,
Wood, and Brownell, and represent a fundamental shift in FERC's RTO
formation policy.  FERC has sent a clear signal that it is shifting away
from its pattern of supporting maintenance of the status quo and towards a
more actively engaged posture to shape the Nation's energy policy.  These
orders reflect the apparent frustration being felt by many at FERC and the
fact that the agency has clearly run out of patience with the slow pace of
the voluntary RTO formation process.  In a surprising twist, in its orders
the Commission openly expresses its disappointment with the lack of progress
being made in various existing RTO proceedings.  Given the dismissive tone
and far-reaching scope of these orders, it seems safe to assume that FERC
will not hesitate to terminate collaborative processes it perceives to be
unproductive, and will take the extraordinary step of directing parties into
time-limited settlement discussions with the threat of Commission action if
the parties do not work their problems out on their own.  By forcefully
asserting its control over the process and altering the configuration of
RTOs at this late stage in their development, the Commission is showing that
it will aggressively pursue its goal of having large-scale region-wide RTOs
operational by its December 15, 2001 target date.

With the recent addition over the past several months of new Commissioners
Wood and Brownell,  FERC now possesses a reinvigorated political will to
take more aggressive action to ensure the implementation of its regulatory
policy agenda.  Commissioner Wood, a close friend of President Bush and
widely expected to replace Chairman Hebert following the August recess, has
been pursuing an active agenda since arriving at the Commission earlier this
year.  Although recently rebuffed in his efforts to establish numerous new
rulemaking dockets (due to lack of available staff support), Commissioner
Wood's separate concurring statements that renewable resources are an
increasingly important part of the nation's energy mix, that congestion
management must be addressed in a standard format nationally, and that the
$5,000 annual membership fee for voting members of PJM prevents reasonable
inclusion of individual residential and small customers, indicate that a
Commission led by a Chairman Wood would be receptive to creative and
innovative proposals as well as aggressive in its pursuit of the
organizational structure it believes best for competitive markets.

In its orders on July 12th, the Commission indicated its receptiveness
towards adopting standardized generation interconnection agreements and
standardized procedures for the conversion of interconnection agreements,
while Commissioner Wood expressed additional support for the adoption of a
national standardized congestion management scheme and the development of
uniform reliability and market interface practices.  Adopting standardized
procedures in these areas will produce two significant benefits:  (1) it
will promote generation investment and market stability; and (2) it would
promote the efficient use of FERC staff resources, as staff would no longer
be required to process the significant number of filings and pleadings it
presently receives in connection with these issues.  This latter point is
especially important, given that Commissioner Wood has been frustrated in
his attempts to initiate new rulemaking procedures and promote a more active
agenda due to a lack of available staff resources.  Given Commissioner
Massey's explicit mention of the "crushing workload" that staff has been
under and Commissioner Wood's incentive for freeing up staff resources, FERC
should be taking significant steps in the future towards the standardization
of a wide variety of procedures.

Establishing four region-wide RTOs will increase the availability of power
supplies, reduce problems in sending electricity between control areas, and
create a more liquid national electricity market.  Placing large portions of
the Nation's transmission grid under the control of a single operator will
help eliminate transmission constraints, increase reliability, and lower
wholesale prices.  Given the Commission's disposition towards establishing
these large-scale RTOs, it appears inevitable that the Commission will
direct parties in the Midwest and Western regions into mediation proceedings
similar to those convened for the Northeast and Southeast.  Orders
initiating those proceedings will probably be issued after the Southeast and
Northeast proceedings have concluded.

Jonathan W. Gottlieb and Roger M. Gibian are attorneys in the Washington, DC
office of Baker & McKenzie where they specialize in representing clients in
the competitive power markets in the United States and globally.  Mr.
Gottlieb can be reached at 202.452.7084 or
mailto:jonathan.w.gottlieb@bakernet.com;  Mr. Gibian can be reached at
202.452.7002 or mailto:roger.m.gibian@bakernet.com.


____________________________________________________________________________
E-Notes is a publication of Baker & McKenzie.  It does not constitute legal
advice or a legal opinion on any specific facts or circumstances.  The
contents are intended as general information only.  You are urged to consult
your attorney concerning your situation and specific legal questions you may
have.  For further information on the subjects discussed in E-Notes, contact
Michael J. Zimmer, mailto:michael.j.zimmer@bakernet.com or
Jonathan W. Gottlieb, mailto:jonathan.w.gottlieb@bakernet.com.

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