PennFuture's E-cubed is a commentary biweekly email publication  concerning 
the current themes and trends in the energy market.  

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October 19, 2000
Vol. 2, No. 21
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North By Southwest
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Allegheny joins PJM, others to follow
In the  1840s, Horace Greeley urged a generation to "go West." One hundred 
sixty years  later, thanks to the cooperation of Allegheny Energy, PJM is 
expanding westward  and increasing the likelihood that a wholesale 
electricity market that is  liquid, transparent, and genuinely competitive 
will stake a claim in western  Pennsylvania and beyond. 
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On October 5th, Allegheny Energy and PJM agreed to develop &PJM West,8 a  
separate entity that should spur reform and substantial expansion of the  
original PJM. PJM West will not utilize the discredited Installed Capacity  
(ICAP) rules now employed by PJM. On ICAP, the biggest consumer rip-off in 
the  wholesale electric marketplace, PJM becomes a house divided, and ICAP,s 
days are  numbered. For this reason alone, PJM West is a welcome sight on 
the  horizon.
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Initially PJM West will contain Allegheny Energy,s service territory, which  
includes parts of Pennsylvania, Maryland, West Virginia, and Ohio. But soon 
more  control areas will follow Allegheny Energy,s trail and &go West.8
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Serving the Pittsburgh area, Duquesne Light Company is also actively  
considering joining PJM West. In its October 16th filing with the Federal 
Energy  Regulatory Commission (FERC), Duquesne states: &If Allegheny,s 
memorandum of  understanding with PJM results in Allegheny,s affiliation with 
PJM, Duquesne  also will be contiguous with PJM. In anticipation of that 
event, Duquesne has  commenced discussions with PJM to discuss the process by 
which PJM might admit  Duquesne to PJM-West.8 
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Although Duquesne states that it is also considering membership in the  
Alliance RTO, we would bet the ranch that PJM West will become a reality and  
that Duquesne will join it. Moreover, not far behind Allegheny Energy and  
Duquesne Light may well be First Energy and some other utilities that are 
now  part of the Alliance RTO proposal. 
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Congratulations to Allegheny Energy for giving the people of its service  
territory access to the existing 58,000 megawatt PJM wholesale market * a 
market  that is much more transparent, liquid, and competitive than its 
present control  area. In turn, the successful integration of Allegheny 
Energy and Duquesne Light  into the PJM market would effectively increase it 
by about 11,000  megawatts.
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PJM West: the proposal
PJM and Allegheny  Energy,s Memorandum of Understanding establishes a vision 
for PJM West.  Allegheny Energy and PJM will form an independent transmission 
company that will  regain from PJM, subject to FERC acceptance, those 
operational and management  functions that are needed for the successful 
operation of an independent  transmission business. 
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PJM West will set up its own office and the PJM West Transmission Owners  
would transfer monitoring and functional control of their transmission 
systems  to PJM. It will also expand the PJM system management concepts 
beyond a single  control area with the potential for a significantly larger 
energy market that  could include Ohio's First Energy Corp.
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Allegheny will adopt PJM,s market operations policies. It will cede  
functional control of its transmission assets to PJM, eliminate &pancaked8  
transmission rates, utilize locational marginal pricing, and work with the 
FERC  and other regional RTOs to develop rate reciprocity agreements and a  
transitional rate structure that will be revenue neutral. PJM will be the 
OASIS  operator for PJM West.
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Allegheny Energy will operate under the existing ECAR rules regarding  
operating reserve requirements, reserve sharing, and other operating 
standards,  and will work with PJM to develop a regime to ensure that PJM 
West receives full  credit for its capacity anywhere within the PJM market. 
ICAP will not be  expanding into PJM West.
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PJM will retain certain functions related to the operation of the energy  
market, including the PJM market, congestion management protocol, and market  
monitoring responsibilities. Allegheny Energy will freely participate in the 
PJM  energy market, including the necessary wholesale price cap. By providing 
access  to PJM,s energy market, PJM West may also give Allegheny Energy a 
means of  meeting the scheduling needs of several proposed wind farms in its 
control areas  and avoiding an unfortunate regulatory battle (see 
&Electricity,s Oktoberfest:  Trouble blowing in the wind,8 PennFuture,s E3, 
Vol. 2, No. 20, Oct. 4, 2000).  
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In what is hopefully just a politically necessary fig leaf, the Memorandum  
of Understanding states that Allegheny Energy will remain a distinct control  
area from PJM. The purpose of this language is not clear and appears?  
inconsistent with the whole purpose of PJM. This point needs clarification 
and  bears watching.
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The timeline set out in the agreement includes negotiation for a definitive  
contract to be completed by February 1, 2001, execution prior to March 1, 
2001,  and implementation by December 15, 2001.
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PJM West unravels Alliance
The rise of PJM West  spells the demise of the market-balkanizing Alliance 
RTO proposal. With its  proven record of competency and governance 
independence, PJM offers a much  better vehicle for bringing RTO services to 
the service territories that would  be served with the untested, unknown 
Alliance start up. To us, the only  certainty about the Alliance proposal is 
that it will create one otherwise  avoidable transmission rate tollbooth and 
constrain the size of the wholesale  market. 
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With the alternative of PJM West, FERC and state utility commissions should  
now use their authority to shoot down the Alliance RTO proposal. Placing RTO  
conditions that protect the public interest on the proposed merger of First  
Energy and GPU would be a good start down that road. First Energy should be  
given no choice but to leave the Alliance and join PJM, at least if they want 
to  merge with GPU. First Energy itself has reportedly signaled to its 
Alliance  partners that the merger with GPU comes before the Alliance. 
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First Energy,s departure from the Alliance RTO, the principal strategic  
purpose of which appears to be keeping its member utilities out of PJM and 
the  Midwest ISO and to fracture the wholesale market between Philadelphia 
and  Chicago, would help unravel that counterproductive proposal and have 
several  benefits. All of Orion,s generation that was purchased from Duquesne 
and still  serves Duquesne,s customers would be within one RTO. Conversely, 
if First Energy  were to remain in the Alliance, some of Orion,s generation 
would be located in  the Alliance and some in PJM West (assuming Duquesne 
joins PJM West). Requiring  First Energy to join PJM West would not only deal 
with that seams issue, but  would also further expand the size and liquidity 
of the wholesale market in the  eastern United States. 
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First Energy's ISO games
While the agreement  between Allegheny and PJM paves the way for Duquesne to 
join PJM, what about  PennPower, the subsidiary of First Energy that serves 
some suburbs of Pittsburgh  and up to the New Castle area of the 
Commonwealth? Is there any hope for  PennPower customers, or worse, might 
First Energy try to balkanize PJM by taking  GPU out of PJM? 
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Moving GPU out of PJM would be the electric utility equivalent of  suggesting 
that one of the 50 states should secede from the Union and join  Mexico. Yet 
First Energy may well have planned to remove GPU from PJM and  collapse it 
into the Alliance or simply a larger First Energy. Such a bold move  would 
undoubtedly be vigorously opposed by the Pennsylvania and New Jersey  Public 
Utility Commissions. 
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The state commissions have great leverage while the merger is pending, but  
once the merger is approved, the state commissions' power to protect the 
public  interest diminishes. Moreover, as a result of the Centerior and First 
Energy  merger, First Energy has a track record with RTOs and mergers that 
does not  inspire confidence. It brings to mind the saying, &Fool me once, 
shame on you;  fool me twice, shame on me.8 
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Consequently, the only way to make sure that First Energy will not remove  
GPU from PJM is for the commissions of Pennsylvania and New Jersey to craft 
a  set of conditions on the merger that make any such decision impossibly 
painful.  Those conditions must also be effectively &securitized8 by the 
equivalent of a  liquidated damages clause that would compensate Pennsylvania 
and New Jersey were  First Energy subsequently to renege on its agreement not 
to withdraw GPU from  PJM. 
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The public interest must be guaranteed. With the creation of PJM West by  
Allegheny Energy and PJM, it can and should.  

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 - vol2no21_101800.doc