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June 21, 2001

The Southeast RTO: 
The "Backstory" Behind the Press Release 

By Will McNamara
Director, Electric Industry Analysis 

[IMAGE]Owners of transmission systems across Alabama, Florida, Georgia, 
Mississippi, and South Carolina have announced the signing of a memorandum of 
understanding (MOU) to develop a regional transmission organization (RTO) for 
the Southeast. A full list of the Southeast RTO members appears at the end of 
this article. Two of the largest members of this new organization are 
Southern Company (NYSE: SO) and Santee Cooper. If the transmission owners 
prove successful in their efforts to develop this transmission entity, the 
RTO would be one of the nation's largest, covering more than 39,000 miles of 
transmission with an investment in assets in excess of $6 billion. 

Analysis: The dynamics behind this announcement create a backstory that is 
not readily available in the press materials being circulated by Southern 
Company. However, the development of this much-anticipated RTO illustrates 
how transmission infrastructure in the Southeast is assimilating, answers 
questions about how Southern Company will comply with federal directives, and 
raises speculation about possible impact on the region's already-established 
RTO, GridSouth. Further, as FERC has encouraged RTOs to form across the 
country, much of the commission's focus has been placed on the Southeastern 
United States (along with the West). The Southeast is dominated by large IOUs 
that control massive transmission assets. Thus, seeing that Southeastern 
transmission systems are ultimately conjoined has been a key priority for 
FERC. 

You may recall that a few months ago Southern Company applied to FERC to form 
its own RTO (the organization that will manage a transmission network within 
a particular region). FERC rejected the SeTrans Gridco concept because 
Southern Company planned to funnel certain rate incentives to companies other 
than the RTO operator, which violated FERC policy. In addition, it is FERC's 
general policy to consolidate operating RTOs across the country, and the 
commission was concerned that Southern Company would remain too autonomous if 
it was the only utility involved in a transmission entity. Thus, FERC 
unequivocally told Southern Company to not re-apply for RTO status until it 
had explored joining forces with neighboring companies. 

Simultaneously, FERC gave conditional approval to GridSouth, an RTO formed by 
Carolina Power & Light, Duke Energy and South Carolina Electric & Gas 
(SCANA), Southern Company's neighbors to the north. The conditional approval 
came with the instruction that GridSouth should engage in dialogue with the 
SeTrans Gridco, Santee Cooper and Tennessee Valley Authority (TVA) about 
joining GridSouth. Again, FERC sent the message that it ultimately hopes to 
see a single, large RTO serving the entire Southeast region. 

Nevertheless, now Southern Company and Santee Cooper have joined forces with 
seven other companies to form a new RTO that will be a completely separate 
entity from GridSouth. I contacted GridSouth for a response regarding what 
impact (if any) the formation of the new Southeast RTO might have on 
GridSouth. However, as of press time, representatives for GridSouth had not 
prepared a public statement regarding the proposed transmission entity.  

I spoke with John Sell, a Southern Company spokesperson on June 19. Sell 
informed me that Southern Company had indeed engaged in negotiations with 
GridSouth upon FERC's directive, but determined that GridSouth was "too far 
down the road" in terms of its development, and that Southern Company planned 
on taking a different approach toward its transmission assets. For instance, 
while both entities are for-profit operations, the new Southeast RTO plans to 
hire an independent third party to oversee its operations. Further, although 
the term "Southeast RTO" is being used in the press release, Sell told me 
that among the companies involved the RTO is actually being referred to as 
SeTrans (the name of Southern Company's rejected entity). Sell stressed that 
the name SeTrans was chosen only because it had been previously established 
by Southern Company and should not be seen as any indication that Southern 
has majority power over the RTO. In fact, the name will be changed to 
something else later this year. 

On a related note, one statement that I found particularly interesting in the 
press release about the new RTO is that "the companies have also made it 
clear that the process is not being controlled by any individual transmission 
owner, but rather all participants will help establish the rules by which 
they will operate and make decisions." This is clearly a veiled reference to 
Southern Company, which was criticized by FERC for being too autonomous in 
its original RTO filing. When I spoke with John Sell, he volunteered that 
Southern "is not the driver behind this RTO." 

Santee Cooper's involvement in the SeTrans RTO also came about in a somewhat 
precarious fashion. As noted, FERC specifically asked GridSouth to find a way 
to incorporate Santee Cooper, a state-owned utility located in South 
Carolina, into its RTO. As Santee Cooper controls about 4,200 miles of 
transmission lines covering 75 percent of South Carolina, it is no wonder 
that the commission would want to make sure that the public utility was 
conjoined in some way to developing RTOs. There was just one problem with 
this plan: the South Carolina constitution prohibits Santee Cooper from 
joining for-profit enterprises.  

The case was closely followed throughout the energy industry as other public 
power agencies across the country are also involved in pending negotiations 
to join RTOs. New reports indicate that, if the SeTrans RTO is approved by 
FERC, it will be the largest RTO in the country to include a public power 
entity. However, it is important to note that Desert Star, an RTO based in 
Phoenix that connects transmission assets of seven Western states, includes 
the Western Area Power Administration (WAPA), which owns about one-third of 
the transmission system that serves Colorado and provides power to 28 of 29 
of the state's municipal electric systems.  

Naturally, as the SeTrans RTO is also classified as a for-profit entity, the 
question has been raised of how Santee Cooper will be allowed to join as a 
member given the South Carolina law. I spoke with Stephen Pelcher, associate 
general counsel of rates and regulations for Santee Cooper, about this 
conundrum. There is an important distinction that should be understood. 
GridSouth is a wholly owned company under its three utility parents (Carolina 
Power & Light, Duke and SCANA). The obstacle facing Santee Cooper's 
participation in GridSouth was that the company could not be a shareholder in 
a private corporation. Under the SeTrans RTO, in which Santee Cooper is now a 
participant, none of the participating companies will have ownership over the 
transmission entity. As noted, this was one of Southern Company's main 
interests in forming its own RTO as the company intends to hire an 
independent third party to oversee its operations. Pelcher told me that the 
SeTrans RTO is still in a "preliminary stage" and thus it appears at this 
time that participants in the SeTrans RTO will retain ownership of their 
transmission assets and only turn over operational control to the independent 
third party. Interestingly, Pelcher also told me that Santee Cooper (and, by 
extension, the SeTrans RTO) remains in consultation with GridSouth for a 
"coordination and implementation service agreement" that would in some way 
interconnect the two entities. 

One issue that will continue to impact RTOs throughout the country is how 
electricity will be transported across independent transmission systems. 
Specifically, FERC has been concerned about how power will be traded from one 
RTO to another and the possibility that boundaries between two separate RTOs 
could become "speed bumps" in the flow of electricity. In fact, the 
commission met this week on the issue and continues to formulate policy 
related to these "seam issues." Part of the reason that Southern Company's 
original, independent RTO plan was rejected was FERC's concern that the 
utility was resisting efforts to form a cohesive, interconnected system in 
the region. At this point, it appears that FERC favors standardization in how 
adjacent RTOs will relate to each other, and thus has instructed developing 
RTOs to consult with each other on seam agreements. FERC reportedly is 
planning to have a formal policy on the subject ready by the end of this 
year. Related to the development of this policy is the debate over whether or 
not FERC should take a more active role in forcing consolidation among 
developing RTOs so that only a limited number of separate entities exist. 

Thus, as the SeTrans RTO continues to grow, it will need to determine how it 
will be connected to GridSouth and GridFlorida (and any other adjacent RTOs). 
In addition, Southern Company's John Sell disclosed to me that the SeTrans 
RTO has formed an MOU with TVA for a seam agreement. At this point, TVA has 
made no announcement that it is planning to join the new Southeast RTO and in 
fact, as a federal agency, is under no obligation to join an RTO. 

The SeTrans RTO plans to file an application with FERC and is preparing for 
the commission's deadline of being formed by Dec. 15 of this year. If the 
SeTrans RTO (or whatever it is ultimately called) gains FERC's approval, it 
will represent a significant part of the Southeast's development into a 
functionally competitive electric market. If FERC's stated policy of 
consolidating RTOs is effectively applied, ultimately we could see that 
GridSouth becomes conjoined to this new RTO, which now includes Southern 
Company, Santee Cooper and (through a seam agreement) TVA. Moreover, the 
development of the new Southeastern RTO illustrates the complexities of 
conjoining companies that transcend federal, state and municipal levels, 
along with the challenges of ensuring that adjacent RTOs form synergistic 
policies regarding the flow of power. 

Members of the Southeast (SeTrans) RTO: 

Alabama Electric Cooperative-generation and transmission cooperative 
providing wholesale electricity to 21-member distribution systems*17 in 
Alabama and four in Florida. 

City of Dalton (Ga.) Utilities-full-service utility providing electric, 
water, wastewater, natural gas and telecommunications services to the city of 
Dalton and portions of Whitfield, Murray, Gordon, Floyd, and Catoosa counties 
in Georgia. 

City of Tallahassee (Fla.)&#151maintains more than 2,200 miles of 
transmission and distribution lines, serving some 98,000 homes and businesses 
in the Tallahassee area. 

Georgia Transmission Corporation-not-for-profit cooperative owned by 39 
electric membership corporations in Georgia. GTC owns approximately $910 
million in assets, including more than 2,400 miles of transmission lines and 
500 substations across the state. 

JEA&#151Formerly known as Jacksonville Electric Authority, a municipally 
owned electric supplier serving 35,000 customers in four-county area in 
northeast Florida. 

Municipal Electricity Authority of Georgia-joint-action state authority 
providing wholesale electric generation and transmission to 48 city- or 
county-owned electric systems in Georgia. 

Santee Cooper&#151South Carolina's state-owned electric and waste water 
utility and the state's largest seller of power. The utility is the direct 
and indirect source of power for 1.6 million South Carolinians and maintains 
4,223 miles of transmission lines. 

South Mississippi Electric Power Association-non-profit wholesale electric 
power cooperative serving the power requirements of the 350,000 retail 
customers of its 11-member distribution cooperatives in the state of 
Mississippi. 

Southern Company-super-regional energy company with more than 32,000 MW of 
electric generating capacity in the Southeast and 26,000 miles of 
transmission lines. 

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


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