FERC Filings

REPLY COMMENTS OF EPSA ON RTO NOPR

WORKABLY COMPETITIVE BULK POWER MARKETS REQUIRE CONSISTENT FEDERAL REGULATION OF THE INTERSTATE TRANSMISSION SYSTEM

FERC, Not Individual States, Needs to Set RTO Policy

Electric energy is the quintessential interstate commodity. Electricity travels at the speed of light on interstate transmission facilities subject to the jurisdiction of the Commission. Needless to say, electricity respects no state boundaries. In its NOPR comments, the National Association of Regulatory Utility Commissioners (NARUC) suggests that "States, either individually or in concert as a region, should be allowed to best decide how to meet FERC’s goals and objectives." (NARUC Comments, page 3.) NARUC acknowledges FERC’s need to "establish overall policy goals and objectives," (Id., page 4), but asks that FERC defer to "states and their utilities" (Id., page 7) to create the optimum RTOs. While EPSA agrees that state regulatory commissioners have played, and can play, an important role in helping to shape RTO development, FERC cannot simply abdicate its responsibilities to the states and "their" utilities.

One of the major impediments today to robust competitive bulk power markets is the current balkanization of the system with dozens of individual utilities, NERC Regional Councils and security coordinators, and state laws and regulations imposing inconsistent and incompatible rules for the use of the interstate transmission system. The fundamental philosophy underpinning the NOPR is that the current regime perpetuates economic and operational inefficiencies that RTOs are designed to cure. The NOPR maintains, and EPSA agrees, that properly structured RTOs would: improve regional pricing by eliminating pancaked rates; improve congestion management by internalizing loop flows; allow more accurate estimates of ATC by having better access to current and accurate regional usage data; more effectively separate control of the transmission system from market participants; promote more efficient planning over a wider area; reduce transaction costs by administering a single tariff; and, improve reliability by coordinating and sharing responsibilities.

These benefits, all important to promoting competition in the bulk power markets, will be difficult, if not impossible, to achieve if each individual state can insist on imposing significant "local" variations on "their utilities." Rather, with full comparability the needs of market participants for seamless, interregional, well-functioning markets will likely drive to the right number, size and scope of RTOs3. As the national agency charged with overseeing the bulk power system, FERC and only FERC can assure that that goals of the NOPR are implemented in practice. Certainly, coordination and communication with state regulators is appropriate. However, the Commission must carry out the duties entrusted to it to ensure that interstate commerce operates efficiently and in the best interest of the nation as a whole. That responsibility cannot be shifted to the states.

The Uneven Pace of Restructuring Requires Consistent RTO Policy

In addition, the Commission must reject the argument, asserted by NARUC and the Edison Electric Institute (EEI), that RTOs may not be appropriate for all regions. EEI cites to the arguments of state commissioners from several southern states for the proposition that RTOs might not be necessary in all regions. (EEI Comments, page 12, 14.) Similarly, the Southern Company urges the Commission to allow a "voluntary, flexible, State-by-State approach to RTO formation." (Southern Company Comments, page 12.) The operational and economic inefficiencies detailed in the NOPR are not unique to certain regions. In fact, they may well be most pronounced in those regions where competition – both wholesale and retail – has yet to take hold. While southern state commissioners and utilities may be arguing that they don’t "need" RTOs to promote competitive markets, the southeastern United States trails the rest of the nation in proposed merchant plant development as well as in power trading, both hallmarks of robust wholesale competition and workable open access policies4.

Despite being the largest NERC region for both annual net energy load and summer peak demand5, SERC (even when combined with FRCC) represents only 5.2 percent of the wholesale power trades nationwide6. In addition, in the past year, EPSA and its members have filed protests with the public service commissions in Mississippi, Alabama, Georgia, Louisiana, Florida and Virginia objecting to plans of investor-owned utilities to build new generation facilities while new market entrants face insurmountable barriers to entering those markets. Merchant plant development in SERC and FRCC represents only 13,158 announced megawatts, less than 12 percent of the national total of over 116,000 megawatts. It is, in part, the uneven pace of industry change in the United States that underscores the need for Commission action in a Final Rule.

NARUC also argues that, "with regard to the formation of RTOs, one size does not fit all." (NARUC Comments, page 6.) EPSA certainly agrees with this proposition and has, in its initial comments, lauded the flexibility evidenced in the proposed rulemaking. EPSA urges the Commission to adopt in the Final Rule the role for state commissions proposed in the NOPR, which provides adequate opportunity for consultation, input and, where appropriate, deference, while preserving the ultimate responsibility for and authority over acceptable RTO formation.

"Everyone Is Somebody’s Native Load"

It is also important for the Commission to realize that individual state actions to protect their own local interests can have a detrimental affect on other states. While some tout each state’s "right" to protect its native load customers, in fact some actions taken to date under this banner actually disadvantage adjoining state’s retail customers or participants in the bulk power markets. For example, the decision to declare a "maximum generation emergency" (which limits power exports) should be made only for operational reasons, not to manage markets when generation prices begin to rise.

An action to limit exports for economic reasons is likely to have an adverse affect on the adjoining service territory where power deliveries are suddenly curtailed, causing new shortages. This situation is even more problematic when the "reliability emergency" turns out the have an economic root. EEI, at page 16-17, asks the Commission to address how RTOs will affect individual states’ native load customers. However, as former FERC Chairman Allday pointed out, "everyone is somebody’s native load." As retail markets begin to open, native load is increasingly being served by aggregators who depend on the wholesale market to acquire and deliver supply. The Commission, not individual state commissions or public utilities, is the only entity situated to ensure that all customers are treated fairly and comparably.

As EPSA argued strenuously in its initial comments, the solution to this fundamental problem with the current regime is to ensure that all users of the transmission system take service under the same rates, terms and conditions of service. Only full comparability will assure that retail customers of all states, whether they are served by traditional utilities or new market entrants, received the same service. Without full comparability, individual states will retain the opportunity, incentive and motive to disadvantage each other, while individual utilities will retain the opportunity, incentive and motive to disadvantage other market participants. To solve the problems identified at the root of the NOPR, EPSA urges FERC to move ahead with a rulemaking to require all users of the transmission system to take service of a uniform set of rules.

State Refunctionalization Cannot Undermine Federal Jurisdiction

EPSA is also troubled by recent efforts of some transmission providers and state public utility commissions to "refunctionalize" existing transmission assets to distribution status. To achieve the goals identified in the NOPR, the Commission’s jurisdiction over interstate transmission facilities must be as broad as possible. If state commissions allow public utilities to reclassify transmission facilities, those assets will be removed from FERC’s jurisdiction and from any RTO, effectively undermining FERC’s efforts to assure seamless regional competitive markets. The Commission must be vigilant to ensure that assets currently under its jurisdiction are not allowed to slip away.

The American Public Power Association (APPA) recently released a report by Whitfield Russell Associates with some troubling statistical information on this new trend. According to this report, Commonwealth Edison of Chicago recently refunctionalized 40 percent of its net transmission plant, almost all of it to distribution, including some 345 kV facilities. Sierra Pacific Power has refunctionalized 50 percent of its transmission system, while Wisconsin Public Service Corporation (WPS) recently filed with the state public service commission to classify virtually all of its transmission assets as distribution. If accepted by the Wisconsin Public Service Commission, only 124 pole miles of facilities, out of 1,474 pole miles reported on WPS’s 1998 FERC Form 1, will remain subject to the Commission’s open access tariff.

As documented in the Whitfield Russell Report, the anticompetitive effects of this trend are extremely troubling. Not only will delivered costs increase and access be limited, but important safeguards contained in Order No. 888, with respect to OASIS posting, ATC calculation and CBM treatment, will be lost. The implications for the RTO rulemaking are also worrisome. The NOPR’s goal of promoting efficient regional markets will be largely dissipated if large amounts of the interstate transmission are removed from the Commission’s jurisdiction and control.

The deference to state commissions envisioned by Order No. 888 cannot result in a gutting of the Commission’s seven-part test. Facilities integral to providing interstate service must remain subject to the Commission’s jurisdiction.
3. As noted in its initial comments, EPSA supports the Commission’s belief in open architecture that allows for industry evolution and development of RTO structures. While EPSA supports the filing deadlines and the two-year timeframe for initial RTO development, this deadline should not foreclose further developments. The Commission should be prepared to entertain well-designed interim proposals that solve the problems identified in the NOPR and permit additional developments beyond the initial operational date.

4. The comments of the Alabama Public Service Commission, for example, go to great lengths to refute any claim that retail competition will benefit Alabama consumers. While EPSA strongly disputes this claim, and Department of Energy studies have shown that all regions of the country will benefit from retail competition, this issue is irrelevant to the RTO debate. In Order No. 888, the Commission established, as a matter of national policy, that all consumers should enjoy the benefits of wholesale competition through open access transmission service. Whether and how an RTO will improve efficient transmission grid operations in the southeastern United States is an issue for this Commission, not individual state commissions, to decide.

5. Reliability Assessment, 1998-2007, NERC; 1998 Annual Energy Review, Energy Information Administration, July, 1999.

6. 1999 Power Marketers Yearbook, EEI.