FERC Filings
FERC RTO NOPR COMMENTS
Minimum Characteristics and Functions for RTOs
Minimum Characteristics and Functions for RTOs
to Facilitate the Development Of a Competitive Market
The competitive wholesale bulk power market is growing and states are opening up retail markets to competition. In addition to the reports of increased purchases and sales by utilities, power-marketing companies report sharp increases in trading activities year after year. Indeed, the link between power trading and investment in the merchant power plant business grows ever stronger as the power plant investor relies more and more on the risk management skills, tools and opportunities that the trading function supplies. The emerging pattern is quite clear: a competitive market structure begets competition, which begets market participants (generators, traders, marketers), who then must provide customers with low-cost products and services -- all the while under the primary mandate of maintaining strong system reliability. These goals cannot be realized without the proper physical structure, market signals and investment incentives. During the transition to full wholesale competition, an RTO can provide an organizational linchpin that holds together the elements of this increasingly complex industry structure. Ideally, the RTO can also provide the robust and efficient transmission capabilities needed for a liquid competitive bulk power market to exist.
While it may sound contradictory, growth in power markets is being retarded both by problems with existing ISOs and by limited regional grid management throughout the country. In the following sections, EPSA discusses the Commission's minimum requirements for RTOs with the goal of solving both these problems.
Minimum Characteristics
The NOPR identifies four minimum characteristics for an RTO. EPSA offers the following comments on those characteristics.
A. Independence From Market Participants-
It is virtually a given at this point that RTOs must be independent of market participants so that no market participant should be able to control the activities of the RTO. Independence is, as the Commission has often said, the bedrock foundation of an acceptable RTO. However, "independence" is not an abstraction and it is not, in itself, enough. In the NOPR, the Commission proposes three conditions for RTO independence: a non-stakeholder board whose members and employees have no financial interest in market participants, decision-making that is not controlled by any market participants, and independent authority to file changes in its transmission tariffs. To ensure the independence of the decision-making process, the NOPR suggests that a market participant own no more than a de minimis interest (one percent) in the RTO.
EPSA concurs that independence is a critical aspect of successful RTO formation. EPSA also agrees with the Commission's conclusion that the alternative to independence is a lack of market confidence and/or hard to enforce codes of conduct. The NOPR proposes to resolve this problem with its more detailed definition of independence. While EPSA has no quarrel with the need for independence (assuming sufficient flexibility to adopt Transco alternatives), a more immediate, lasting and effective solution would be to eliminate the incentive to discriminate by requiring comparability between retail and wholesale transmission service.
The NOPR found that:
utilities that control monopoly transmission facilities and also have power marketing interest have poor incentives to provide equal quality transmission service to their power marketing competitors. It is, in fact, in the economic self-interest of transmission-owning utilities to favor their own power marketing interests and frustrate their competitors.
The NOPR also points out that since Order No. 888, "transmission-owning utilities must now resort to more subtle means to frustrate their marketing competitors and favor their own marketing interests." This is to be expected, since as the Commission points out, "[C]ompanies have an obligation to maximize value for shareholders, and it should be no surprise that they will be aggressive in doing so."
Without full comparability for retail and wholesale transmission service, which will go a long way to eliminating the transmission provider's incentive to favor its own generation or marketing affiliate, ISO independence will be difficult to achieve and arduous to maintain. As long as some market sectors can gain unfair competitive advantage over others through control of the RTO and its tariff, those sectors will take all actions possible, both subtle and overt, to ensure that true independence is subverted. To achieve independence, structural incentives for controlling and manipulating the RTO must be eliminated. With incentives in place to encourage transmission providers to operate the transmission as a stand-alone business, all market participants will have the same interest in creating efficient, properly sized RTOs. This approach to truly voluntary RTO formation will eliminate the current need to invest extensive time and resources on independence issues, since market participants will share common goals for the RTO's structure, governance and operational responsibilities.
Assuring RTO independence from the commodity market is another important step. An RTO should be responsible for the operation of the transmission system only. While the RTO should contract for certain ancillary services in a competitive electricity market, it should not administer those markets or otherwise have an economic stake in the outcome of those markets.
It is also important that the Commission's rules not be unduly restrictive or limiting. The one-percent limitation on ownership, for example, fails to differentiate between beneficial ownership and legal control. If strictly imposed, this requirement will likely doom Transcos to stillbirth. It is more important that the Commission achieve its RTO goals, without stifling creativity and market options, than that some absolute ownership threshold be established for administrative convenience. Financial markets today have devised a host of mechanisms, such as common and preferred stock, to make the distinctions needed to ensure RTO independence. The Commission's rules should focus on ways to support RTO structures that allow Transcos, and the operational separation Transcos represent, without setting overly restrictive, arbitrary limitations.
EPSA is also concerned, however, that the Commission's rules not exclude structural arrangements that can best achieve its goals. For example, one model could include multiple for-profit Transcos operating under the umbrella of an independent not-
for-profit RTO. Under this approach, ISOs and Transcos are not simply two different forms of RTOs, but are rather complementary institutions. Another model is to encourage operational unbundling, with the assumption that the market will quickly drive to an optimal number and size for Transcos. Even Independent Scheduling Administrators (ISAs), which do not meet the Commission's minimum requirements, may be appropriate transitional mechanisms in some regions.
The Commission should be prepared to consider case-by-case proposals to see if they satisfy the underlying goals of the RTO NOPR, not just the strict letter of the requirements set forth. In addition, as the "open architecture" proposal suggests, the Commission must be open to an evolving vision of the ideal RTO role and structure. As industry debate evolves and understanding of the issues matures, the Commission's rules must be flexible enough to consider and accommodate innovative proposals.
With an ISO structure, it is important that an assessment of independent governance not stop with the ISO Board. With an ISO structure, independence must be assured throughout the committee structure as well, where many important decision are made. At this level it is vitally important that no party be able to mandate, or veto, RTO decisions. The RTO's governance must also allow for efficient and effective management.
B.
Appropriate Scope and Regional Configuration
The Commission suggests in the NOPR that "the most important consideration in evaluating the geographic configuration of an RTO is that such configuration permit the RTO to perform its functions effectively." While bigger is generally better, EPSA concurs with the Commission that market forces and operational efficiency requirements should influence the appropriate RTO size; i.e., form should follow function. The existing pattern of transmission ownership, even with the mandates of open access transmission and unbundling of the transmission function resulting from FERC Order Nos. 888 and 889, preserves many of the impediments to competition in the wholesale bulk power marketplace. This pattern has also failed to provide the operational efficiencies that the electric power industry needs if consumers are to realize lower electrical costs. A consolidated transmission operating entity with sufficient size and independence is one of the elements needed in order to realize the full benefits of an efficient competitive electric power business. Like the Commission, EPSA takes no position on the number of or absolute size of RTOs.
FERC addressed the requirement that an ISO possess sufficient size in the ISO Principles set forth in Order No. 888. FERC noted that "the portion of the transmission grid operated by a single ISO should be as large as possible, consistent with the agreement of market participants, ..." and viewed an ISO as a prime way to end the practice of pancaking rates. The NOPR endorses this approach, finding that "RTO boundaries should be drawn so as to facilitate and optimize the competitive, reliability, efficiency, and other benefits that RTOs are intended to achieve, as well as avoid unnecessary disruption to existing institutions." While the Commission's Order No. 888 ISO principles attempted to encourage voluntary ISO participation, it is now evident that the economic incentives for voluntary ISO participation have been lacking. For transmission owners, the benefits of the status quo, including the ability to gain an advantage by having native load customers or to game the system to gain an advantage for their own generation, have outweighed the benefits of the system-wide efficiencies to be gained from ISO participation.
While transmission technology and industry economics did not permit efficient long-distance transmission of electric energy until relatively recently, under many circumstances it is now economically feasible to transmit power for many hundreds of miles. Thus, the pancaked rate structure resulting from today's patchwork of utility transmission systems has become an effective economic barrier to long-distance transmission of electric energy. A large RTO with a single tariff can provide a one-stop shopping option for customers seeking transmission over an entire region. Today's fragmented transmission system requires customers to negotiate and/or contract with a number of transmission providers, with the real potential that the customer will be given inconsistent terms or availability information by different transmission providers. By contrast, a large-area RTO could administer a single, unified transmission tariff covering a substantial region, which in turn, could permit development of efficient methods for pricing transmission and the methods and means of providing economic signals and economic response systems for dealing with broad area constraints.
Single-state RTOs operating in smaller, potentially illiquid markets, will reflect the peculiar history of only one state and thus, unacceptably, reflect strictly local commercial, regulatory and legislative interests. State regulatory authorities will retain power over such organizations, thereby potentially constraining market growth and liquidity. The Commission should be wary of RTOs that may be too small to be effective, whether they are ISOs or Transcos. For example, transmission organizations that are spun off by a single utility may be an improvement over the status quo, but may not gain the requisite geographic and economic scope, or independence, to achieve to Commission's goal of improving efficiency and eliminating residual discrimination. In addition, rarely will a single-state RTO incorporate all of the transmission facilities required to service bulk power markets that typically are regional in scope. Fewer participants, especially generators, means fewer trading opportunities. Given a choice, market participants, are for these reasons, not likely to invest the resources and time needed to participate in such limited, parochial markets.
EPSA recognizes that certain ISOs presently operate in only one state. While we recognize that initiating a new process at this time may be difficult, continuing dysfunctional single-state ISOs simply because they exist will be even more difficult. In reviewing the January 15, 2001 filings, FERC should exercise discretion and maintain flexibility on this matter. At a minimum, each existing ISO should be required to explain why its present geographic configuration is appropriate.
In addition to the elimination of pancaked rates, larger RTOs will have other benefits, many of which are identified in the other characteristics and functions FERC has set out. Most notably, a larger RTO will have the ability to manage grid reliability more efficiently, calculate consistent ATC information, manage an OASIS that provides meaningful information, plan transmission upgrades, facilitate interconnection procedures, allocate resources to address system contingencies that result in transmission congestion, manage redispatch costs resulting from congestion, better internalize parallel flows and facilitate appropriate industry responses to operational problems attributable to parallel flows. The reasonableness of an RTO configuration should be evaluated on the basis of several factors, including, but not necessarily limited to, (1) the degree of electrical connectivity; (2) whether the organization is geographically located to minimize loop-flows and other causes of transmission congestion; (3) whether the proposed structure facilitates market liquidity; and (4) whether the proposed structure will sufficiently eliminate pancaked rates.
Thus, EPSA supports forming large RTOs that possess the geographical and economic scope to provide a broad marketplace for buyers and sellers of energy, capacity and other services to enter into transactions pursuant to a single, system-wide tariff. Such an RTO can internalize loop flows, facilitate redispatch of constrained interfaces and report ATC on a regional basis. In order to address fully the operational factors discussed above, consistent with maintaining present standards of reliability, RTOs should be as large as can be operated reliably. Today's reliability organizations may reflect the appropriate size, but are not likely to reflect the precise geographic boundaries for optimal grid management.
Just as important as setting the regional boundaries is the need for the RTO to control and direct the operations of all the transmission facilities within its region. In some regions of the country, significant fragments of the high-voltage transmission system are held by entities that are not subject to the jurisdiction of FERC, including both state and municipal organizations and federal power marketing agencies. Thus, in New York, for example, approximately 18 percent of the high-voltage system is held by non-jurisdictional entities, but it is subject to the control of the ISO. In Washington, the non-jurisdictional share of the system is 38 percent. EPSA recommends that RTOs obtain jurisdiction over these organizations' transmission facilities. When facilities are excluded from the RTO's control, the goal of creating a large, non-discriminatory transmission system for robust wholesale competition will be defeated. While, today, public power authorities voluntarily can participate in an RTO, as some already do, FERC should do everything possible to incorporate non-jurisdictional entities into the abutting RTO.
Moreover, a transmission provider reluctant to join a particular RTO should be encouraged, if not required, to join the RTO, if it is appropriate to require participation from an operational standpoint. FERC should exercise authority to deny a transmission provider's participation in a particular RTO, and further direct its participation in an alternative RTO, if doing so can be justified on operational grounds and is consistent with the public interest.
C.
Possession of Operational Authority for All Transmission Facilities Under the RTO's Control
In the NOPR the Commission concludes that an RTO may directly operate transmission facilities, delegate certain tasks to other entities or combine those two approaches. Noting concerns about "whether it is technically feasible to establish a single traditional control area over a large geographic area," the Commission concluded that it would not require RTOs to operate as a single control area. The NOPR requires that RTOs must be the NERC approved security coordinator for its region. EPSA takes no position on whether RTOs must physically operate facilities or contract with others for that operation. However, EPSA believes that RTOs must be responsible for grid operations within their region, regardless of whether the region contains one or a number of individual control centers.
EPSA recommends that an essential component of an RTO is the responsibility for maintaining reliability as the security coordinator. As noted above in the discussion of an RTO's size, as long as the RTO functions as the security coordinator, with individual control areas under its authority, the Commission's goals can be achieved without the investment required to collapse or consolidate existing control areas.
D.
Exclusive Authority to Maintain Short-term Reliability
The NOPR requires that RTOs have exclusive authority for maintaining short-term reliability of the grid that it operates. Maintenance of adequate reliability is an essential -- indeed, preeminent -- responsibility of any RTO. To the maximum extent practical, reliability standards should be uniform throughout the United States. Reliability standards should be established at the national level through an industry-wide representative organization, subject to review and approval by the Commission. Reliability rules should deviate regionally only if necessary to reflect specific operating conditions that are unique to a particular region. Among the potential benefits of this approach would be avoiding redundant and potentially conflicting reviews of similar reliability issues. Another, less obvious, benefit is reducing the opportunity for entrenched, regulated entities to overwhelm discussions of regional reliability by sending more staff and devoting more resources to committee deliberations than their unregulated counterparts are able to do. Accordingly, FERC-jurisdictional RTOs should replace existing regional reliability councils as the entity responsible for maintaining compliance with nationally established and streamlined reliability standards.
It is undisputed that reliability rules affect the commercial activities in the marketplace. Although maintenance of reliability is of paramount importance, reliability rules must not be allowed to impede market operations. RTOs should be well situated and well suited to document any significant market impacts attributable to the implementation of reliability rules. They should be responsible for maintaining the data and procedures required to monitor such market impacts.
Where existing reliability rules inappropriately intrude into commercial markets, or impose higher than necessary transaction costs, RTOs should be required to work with the national reliability organization to develop less intrusive or lower cost reliability measures that can maintain reliable operations equally well. Such examination of impacts would allow market participants and regulators of RTOs to make a "cost-benefit" assessment of the reliability standards. Where there are alternatives to existing reliability rules, cost-benefit analyses would permit the selection of such lower "cost" alternatives.
Also, reliability cannot be used as a pretext to set or adjust generation prices or otherwise manipulate markets. FERC must continue its scrutiny of RTO decisions that have significant market impacts, such as the declaration of "maximum generation emergency" in PJM during the price spikes last summer or the ISO New England's and the California ISO's recent decisions to revise bid prices. To assure market confidence, RTO development or enforcement of reliability rules can only occur under the Commission's review. While the RTO can gather data, it cannot act in the Commission's stead as an independent arbiter of factual disputes.
Finally, in the absence of adequate uniform national reliability standards, the reliability rules adopted by the RTOs' predecessor utilities and/or pools of utilities, and that initially may be inherited by the RTOs, should be considered carefully by the RTO, and reviewed by the Commission, as to their function and importance. EPSA does not recommend the wholesale abandonment of such rules, but merely that each be examined for its merits in supporting reliable operations with minimum impact on markets and market participants.