FERC Filings
MOTION TO INTERVENE AND PROTEST OF ELECTRIC POWER SUPPLY ASSOCIATION-Bangor Hydro-Electric Company, Central Maine Power Company, National Grid USA, Northeast Utilities Service Company, The United Illuminating Company, Vermont Electric Power Company, ISO N
II. PROTEST
A. The Commission Should Require Petitioners To Form A Single, Region-wide RTO In Combination With One Or More Adjacent Control Area Organizations.
Petitioners’ proposed RTO does not meet the Commission’s requirement that an RTO serve a region of sufficient scope and configuration to permit the RTO to perform its required functions effectively and to support efficient and nondiscriminatory power markets. While Petitioners detail the interregional activities that they are undertaking to integrate the three northeastern ISOs in a “virtual market,” they nevertheless assert that the New England control area is currently of sufficient scope and configuration to comply with Order No. 2000’s requirements as to regional scope and configuration. EPSA rejects Petitioners’ claim that NERTO meets the Commission’s RTO requirements. NERTO should not be allowed to continue the status quo which it inherited. Rather, the Commission should direct Petitioners to seek actively to create a single, region-wide RTO in combination with one or more adjacent control areas’ organizations. NERTO’s failure to meet the Commission’s requirements of scope and configuration is the Compliance Filing’s fundamental deficiency. A Commission direction to Petitioners to work in an accountable and monitorable manner, with specific milestones and a process to enforce compliance with such milestones, to form a region-wide RTO would resolve most, if not all, of the specific comments that EPSA submits in this Protest.
B. NERTO Does Not Meet The Commission’s Requirement Of Independence from Market Participants (Characteristic No. 1).
1. The Continuing Role of NEPOOL In The Governance Of NERTO Undercuts the Required Independence.
The Commission has stated that independence is the bedrock upon which ISOs and all RTOs must be based. The proposed NERTO fails to meet the Commission’s requirement that RTOs be independent in two important respects. While Petitioners focus on the allocation of RTO responsibilities between NE ITC and ISO NE, at least ISO NE expects NEPOOL to have a continuing role in the development and modification of the rules for the New England markets. NEPOOL, as proposed by ISO NE, would continue to exist and would play a potentially significant role with respect to any change to a market rule or market-related provision of the Restated NEPOOL Agreement. At a minimum, NEPOOL would continue to consider and adopt or modify such changes within 90-days following the ISO NE’s initiation of such a change. While the Compliance Filing does not detail this option, presumably ISO NE would have the option of withdrawing a proposed change and resubmitting it in modified form, particularly in the face of a looming defeat. Thus, the time period during which NEPOOL could effectively contest tariff filings could extend well beyond the prescribed three months. It appears that ISO NE proposes to fix the problem its proposal creates through a reduction in the voting threshold, yet impose a restriction upon minority participants’ ability to challenge flawed rule changes in the NEPOOL forum. In short, a smaller portion of stakeholders will continue to be deeply involved in the decision making of the NERTO through the NEPOOL approval of market rules. If stakeholder market policy decision-making is a problem today, it is unclear how making such decisions less broadly reflective of market interests will improve governance. Such an approach places no accountability on decision-makers to address legitimate issues raised by other market stakeholders. While Petitioners describe their NERTO as “binary,” in reality there are three parties to the proposed NERTO: ISO NE, NE ITC and NEPOOL. Petitioners do not make clear how the proposed NERTO will be able resolve the difficult governance issues NEPOOL and ISO NE have faced for the past two years.
ISO NE’s approach to governance is subject to the same infirmity as is the New York Independent System Operator, Inc.’s (“NYISO”) adoption of shared governance. The Commission required in Order No. 2000 that RTOs:
<sup>. . . must have the independent and exclusive right to make Section 205 filings that apply to the rates, terms and conditions of transmission services over the facilities operated by the RTO. (emphasis added)</sup>
EPSA proposes that the governance of the NERTO be changed to insure the independence of the RTO. In particular, market policy decisions need to be addressed through an independent regional board which holds the associated Section 205 authority and is subject to addressing stakeholder concerns. Stakeholders would be able to provide advice and recommendations to this board in a formal advisory process. As is done in PJM, the stakeholders’ committees and organizations would thus be replaced by advisory committees. ISO NE did not provide detail on its governance proposal with respect to transmission tariff issues. These issues are particularly important as ITC’s profit goals will bias its decisions.
In particular, stakeholders need to be able to provide input on a standardized interconnection agreement and have confidence that the decision will not be biased against competitive market interests. In such cases, the same independent board and advisory process may provide suitable remedy for those conflicts as well.
The Commission recently rejected the use of a stakeholder board for the California ISO and required that ISO to replace its stakeholder board with a board composed of independent members. The Commission observed, with respect to the California ISO’s Governing Board, that it has difficulty reaching decisions on complex and divisive issues. In addition, the Commission considered the Governing Board to be subject to serious conflicts of interest. These recent Commission decisions on the absence of independence of the California ISO’s Board because of its stakeholder-character speak clearly about the inappropriateness of governing market policy through a stakeholder board. The delegation of authority to the stakeholders, particularly a smaller subset of stakeholder interests, severely limits the efficiency of the NERTO, just as the California ISO’s Governing Board was incapable of moving promptly on controversial decisions. Stakeholders have effective control over the NERTO’s filing of tariff amendments under Section 205. The continuing stakeholder control of NERTO proposed in Petitioners’ RTO filing is particularly inappropriate as it applies only to market rules and not the transmission tariff. Petitioners propose that NE ITC not be subject to stakeholder control and approval.
Sharing of governance control with a stakeholder body, however, retards the ability of the RTO to achieve needed changes in market rules promptly and expeditiously. The Commission is well aware of NEPOOL’s and ISO NE’s slow pace in addressing market design issues. The significant control that the stakeholder committees can exercise over the process to make market rule changes requires the ISO to expend significant resources and time and target the ‘right’ combination of stakeholder support to achieve any change, even if that is not the most efficient outcome.
ISO NE’s proposal calls for changes in the NEPOOL voting procedures. EPSA understands that three changes are proposed: a) a reduction in the threshold needed to pass a typical item, from 66.7 percent to 58 percent; b) the creation of a distinct voting process and threshold for “Constitutional provisions;” and (c) elimination or restriction of the automatic stay provision. These proposed changes are significant changes to NEPOOL’s governance structure which will further threaten the position of market participants that are already regularly outvoted and EPSA opposes them.
2. The Basis For The Allocation Of Responsibilities Between NE ITC and ISO NE Is Unclear.
Petitioners assert that the allocation of RTO responsibilities between ISO NE and NE ITC:
<sup>. . . will be based on which entity has the fundamental attributes that render it best capable of carrying out the specific function in order to provide maximum value to the customers who will rely upon the RTO. </sup>
The allocation of responsibilities identified in Appendix B to the Compliance Filing is not clear in all cases. The following examples illuminate the problem.
These allocations of responsibilities, among others, must be clarified. Resolution of the allocation of responsibilities is essential to the determination of whether NERTO meets the Commission’s independence characteristic. In the event of conflicts of responsibility between the independent ISO NE and the transmission-owner sponsored NE ITC, the Commission should resolve the conflict by assigning the responsibility to ISO NE and removing it from NE ITC. In the event of conflicts between the transmission business profit incentives and tariff decisions, the independent board and advisory committee process employed for market rule changes should be employed here as well.
C. NERTO Does Not Meet The Commission’s Requirements For Scope And Regional Configuration (Characteristic No. 2).
Petitioners’ Compliance Filing does not present a proposal that is consistent with the goal of establishing a single RTO for the entire northeastern region. The Commission’s Staff Report on Bulk Power Markets in the United States recognized the need for a single northeastern RTO and included the requirement of such a northeastern RTO as a policy option for the Commission.
<sup>A single [northeastern] RTO is best equipped to deal with the narrow, business process type issues such as scheduling and interchange flexibility as well as the more significant issues such as regional transmission expansion. . . . This would help strengthen interties, possibly reduce market power (lessen incentives to flee from one ISO to another), and would result in a harmonized market without competing ISO interests or goals. The likely benefit of this approach is that market enhancements would be made more readily than if the ISOs were to remain as separate RTOs with seams agreements to address coordination issues. Thus far, the ISOs have made little significant progress on inter-ISO issues; there is really no motivation for the ISOs to do so. </sup>
The Commission Staff supported this policy option with substantial comments about the inward focus of the three northeastern ISOs, that the ISOs are not structured to enhance northeast regional coordination and may, in fact, be deterring trade across the northeast and the advantages that would accrue to the competitive market if institutional barriers were eliminated. The Staff Report concluded, with respect to market coordination, with an invitation to the Commission to take a more active role in enhancing northeastern regional coordination:
<sup> It might be more effective to devote the resources of all market segments and regulators to the potential for northeastern regional solutions to issues such as transmission planning or congestion management than to perfect separate ISO-administered markets. Synergies that will further the Commission’s goal of broader regional coordination may be lost, at a minimum, in the near term and quite possibly longer term once NYISO and ISO-New England have made considerable investments in fixing or enhancing their separate markets. To prevent the possibility of continued internal changes by ISOs that do not also enhance, and may hinder, further trade across the Northeast, the Commission may want to take a more active role in the coordination and standardization process begun with the MOU. </sup>
Petitioners nevertheless assert that the New England control area is of sufficient scope and configuration to qualify as an RTO. Thus, Petitioners apparently believe that merger of the existing New England control area with one or more other control areas is not necessary. This contention, however, overlooks the substantial question of whether the boundaries of the existing ISO NE are best-suited to an RTO intended to support the growth of fully competitive bulk power markets, while allowing continued reliable operation. While the three northeastern ISOs currently operate separate markets, there are an increasing number of inter-regional trading and hedging transactions. Just as the era when each public utility operated an independent system within a distinct service territory was replaced by bulk power transactions that cover ISO-wide regions, bulk power transactions in the competitive market regularly cross ISO boundaries and the administrative entity needs to be larger to match this growth in region-wide power transactions. When the natural market is divided by arbitrary, non-market-driven boundaries the result is a patchwork of market rules and administrative procedures that defeats economic competition. Petitioners have not addressed the correct question—but rather chosen to defend the status quo. In short, Petitioners appear to rely more on historical regional boundaries rather than upon analysis to justify the continuance of the New England control area’s boundaries.
The three regional ISOs are unlikely to accomplish regional integration without strong encouragement by the Commission, and it is certain that any such integration will not be undertaken promptly in the absence of Commission oversight. EPSA suggests two ways in which the Commission could support regional integration:
First, the Commission should direct the three northeastern ISOs to adopt the best market rules, best business practices and best software to be applied across all three northeastern ISOs. This approach to regional scope and integration of ISOs addresses market functions first followed by consideration of the structure of the ISOs. Starting with functional changes will produce immediate benefits for market participants and for customers throughout the region. Structural issues (including matters such as governance, corporate form and the formation of a transco) will neither be easy to resolve nor will they produce immediate payoffs for market participants and customers.
Second, the Commission should direct its ADR unit to assist the three northeastern ISOs and market participants in adopting common market rules, business practices and software across the three ISOs. Specific deadlines must be established for implementing solutions, that will encourage the ISOs and interested market participants to assign the needed priority to the integration process. In addition, a settlement judge should be designated who will hold periodic settlement meetings to encourage consensus on issues that seem in dispute. Finally, the Commission should establish a date certain, no later than December 31, 2002, for this process to be completed. This would allow the resulting region-wide RTO to be established by Summer 2003.
This integration process should involve all three regional ISOs, not just the NYISO and ISO New England, Inc. The Commission should issue an order immediately directing that this regional integration effort begin. There are significant benefits to be realized promptly from the integration of market rules, business practices and software. There is, therefore, no reason for the Commission to delay the encouragement to integration until it has resolved other issues concerning Order No. 2000.
The issue of regional scope is particularly important because the two existing inter-regional cooperation efforts among northeastern ISOs are proceeding with glacial speed. Thus, Petitioners foresee a two-to-four year period during which “seams will be reduced.” The joint resolution between ISO NE and the NYISO, which was concluded on the eve of the Compliance Filing’s deadline, does not emphasize the elimination of seams nor does it promise a rapid integration of the two markets. While the parties to the joint resolution “believe that the markets of New York and New England . . . should be aligned,” the joint resolution is replete with hopes, but not specific deadlines. In fact, Petitioners note that even now ISO NE proposes to retain its own Market Advisor for the purpose of market monitoring issues, a step that will increase the separateness of the two neighboring ISOs. Petitioners provide no explanation why one Market Advisor or some other form of market monitoring unit could not be selected for both the New York and the New England ISOs. When a key requirement for interregional coordination is the establishment of consistent market monitoring practices – including particularly establishing a consistent definition of market power – the selection of a Market Advisor specifically for ISO NE is a step backwards.
If the Commission is serious about its desire to create truly regional transmission organizations, rubber stamping existing ISOs is the wrong approach. State-wide, or power pool-based, ISOs may have made sense in the context of the Commission’s issuance of Order No. 888, but the Commission must recognize that simply approving the scope and configuration of existing ISOs will likely perpetuate the current balkanization of the electrical grid. Large, seamless, regional markets are essential to the development of robust, competitive electric markets. The ultimate goal should be a single northeastern RTO. It is doubtful whether if any of three existing northeastern ISOs can ever meet the Commission’s RTO requirements as a stand-alone organization.
As discussed above, the Commission’s Staff has clearly identified the need for a merger of at least ISO NE and the NYISO. The Compliance Filing does not address this need, but relies on lists of activities commenced under the three-ISO memorandum of understanding and the recent agreement between ISO NE and NYISO. The existing, already-entrenched ISOs, with parochial interests and political constraints, are unlikely to accept voluntarily the difficult compromises necessary to become more geographically diverse. The strong control that stakeholders, particularly the transmission owners, extend over New England-oriented institutions such as ISO NE and NEPOOL makes the likelihood that they will voluntarily agree to a merger of the northeastern ISOs even slighter.
If the Commission approves NERTO as a separate, stand-alone RTO, there will almost inevitably be three separate RTOs in the northeast for the foreseeable future. Inter-RTO relations will be treated as “seams issues,” to be resolved on a low priority basis, rather than as a fundamental competitive market issue. The Commission will have to take a leadership role in the integration of the three northeastern ISOs into a single market. While EPSA supports the merger of the three northeastern ISOs, EPSA recognizes that such a merger will require a lengthy period of negotiation and effort. As an interim goal, therefore, EPSA urges the Commission to require actions by ISO NE and NEPOOL that will support a single, northeastern market in energy and other products and services that are associated with the energy market.
EPSA understands that the PJM ISO has offered to the other two northeastern ISOs to make available certain of PJM’s procedures and computer-based programs that support its market administration. Since PJM has been the most successful in operating its energy market, NERTO should consider accepting PJM’s offer and that the Commission should require NYISO and NERTO to adopt best practices that lead to consistent and comparable market rules, market monitoring and other practices. Finally, such an enlarged market should include all market participants, including cooperatives and municipal utilities.
EPSA supports the proposal by the Coalition for Competitive Markets in the proceeding addressing the RTO filing by ISO New England, Inc. and six transmission owners that the Commission adopt a Regional Markets Board and an Independent Market Monitoring Unit. The Coalition is composed of power suppliers, exchanges and customers that are active in New England. The Regional Markets Board would replace existing stakeholder decision-making in the New England Power Pool and would be responsible for establishing market policies, rules and procedures. The Independent Market Monitoring Unit would monitor market participant behavior, as well as auditing the performance of the ISO New England, Inc. and the proposed Independent Transmission Company. Such institutions would not only address their specific respective assigned responsibilities, the design and submission of market rules and the monitoring of market performance and mitigation of market power abuse, but they would be designed using an “open architecture” structure that would allow their integration with neighboring regions’ RTOs.
D. Giving NE ITC Exclusive Authority Over Interconnections Of New Generators Is Inconsistent With Order No. 2000 (Function No. 1).
The Commission provided in Order No. 2000 that the RTO, not transmission owners, be the sole provider of transmission service and that, as a part of that authority, the RTO have the sole authority for the evaluation and approval of all requests for transmission service and requests for new interconnections. Specifically, the Commission rejected comments urging it to limit the RTOs’ authority over requests for new interconnections.
Petitioners’ Compliance Filing, however, fails to meet this standard. The Compliance Filing states that the NE ITC will possess exclusive authority over interconnection of new generators. While Petitioners detail the governance provisions for NE ITC that suggest that it will be independent from the transmission owners, Petitioners cannot obscure that NE ITC will be owned and strongly influenced—if not controlled—by New England transmission owners. And in any event, the NE ITC will be in direct competition with non-wire solutions.
The degree of transmission owners’ formal, or effective, control over the interconnection process is of crucial importance. EPSA’s members’ experience in the transmission study processes of other ISOs has not been positive when transmission owners play a major role. Feasibility studies take much longer than they should, and transmission owners have too much say concerning the nature and costs of interconnection. Thus, the interconnection procedures must be explicit. The transmission owners have their own interests at stake when evaluating the nature of transmission reinforcements required to interconnect. The Commission should reject Petitioners’ proposal and direct Petitioners to prepare interconnection procedures that (1) place ISO NE – not NE ITC – as ultimately responsible for determining what transmission reinforcements are required and (2) ensure that ISO NE – not NE ITC – is responsible for ensuring timely completion of studies and negotiations of transmission upgrades.
Petitioners propose that the Commission approve an arrangement under which NE ITC will receive incentives payments for the increased transmission system efficiency and for construction of new transmission facilities. While incentive rate making may have a beneficial role in rewarding transmission owners for overall improvement in system operation, it is inappropriate for NERTO to consider such incentives in connection with the construction of transmission upgrades and expansions without clarifying how such incentives will be calculated. To the extent that such incentives will be based upon award of congestion rights for improvement in congestion volume, particularly when petitioners propose that the NE ITC will control determining TTC, such a program requires a clearly-stated baseline against which any improvements can be measured. Petitioners’ proposal of a transmission congestion program that is in addition to ISO NE’s congestion management system, must be carefully considered for its potential for interfering with ISO NE’s congestion management system. Considering incentives poses a serious conflict of interest for this stakeholder group.
E. Authorizing NE ITC to Calculate TTC and ATC Constitutes a Conflict Of Interest (Function No. 5).
Petitioners propose that NE ITC will calculate long-term TTC for transmission interfaces posted on NERTO’s OASIS site and for all inter-control-area interfaces. Essential system parameters such as facility rating inputs and inter-control-area transfer capability limitations will be conducted by a joint committee of NE ITC and ISO NE.
At the same time, Petitioners appear to propose to establish incentive compensation measures that are based on just the matters that NE ITC is calculating and reporting. Thus, NE ITC will both calculate TTC and seek financial incentives arising from NE ITC’s performance in managing TTC. This situation has a strong potential for conflict of interest and should be rejected by the Commission.
F. NERTO Does Not Meet The Commission’s Requirements With Regard To Market Monitoring (Function No. 6).
Order No. 2000 declares that one of an RTO’s functions is to monitor markets for transmission services, ancillary services and bulk power to identify design flaws and market power. While an RTO’s market monitoring should further the Commission’s overarching goal for the formation of RTOs – the facilitation of robust, competitive wholesale electricity markets on a regional basis – some existing ISOs are choosing to define their market monitoring role as providing input and support to the ISO in the latter’s often arbitrary effort to reduce wholesale price movements.
Market monitoring should not be used as a substitute for structuring the RTO rules properly to begin with. Properly structured, well-functioning bulk power markets will produce consumer benefits. RTO rules must be structured to ensure fair and open access to transmission, reliability, and effective competition. There are key tasks that a market monitoring unit “(MMU”) should accomplish.
Enforcement should be left to the Commission or the Department of Justice.
It is imperative that the MMU role be carefully prescribed and clarified so that market design corrections, in the guise of market monitoring, not do more harm than good.
The practice of MMUs in other ISOs of continually reviewing and changing bid prices is particularly injurious to the development of a market. When focused on commodity energy markets, the MMU should not intrude into or try to “make” the market, but should:
(a)Evaluate the operation of the market to detect either design flaws in the operating rules, standards, procedures, or practices as set forth in the tariff, manuals and other prevailing documents or to detect structural problems in the market that may need to be addressed in future collaborative efforts;
(b) Monitor and report on issues relating to the operation of the market, including the determination of transmission congestion costs or the potential of any market participant(s) to exercise market power within the specific control area;
(c) Evaluate any proposed additional monitoring and reporting mechanisms that are necessary to assure compliance with market rules; and
(d) Facilitate a monitoring program in an independent and objective manner. Market monitors should not attempt (nor have the authority or capability) to artificially adjust prices )high or low), but rather should recommend to the RTO and its market participants long-term structural solutions that remedy identified problems so as to avoid after-the-fact adjustments.
Although the market monitor must rely on RTO systems and data, the market monitor must be independent from the RTO and the transparency and confidentiality of any analysis should be assured. The NERTO MMU should be made independent of any element of NERTO.
Due to the need to expand regional markets, the Commission should encourage the development of regional independent market monitors to support the development of large seamless regional trading markets. An independent regional entity would be free from any local political or market sector interests, therefore allowing better integration among neighboring regions. Indeed, reasoned and efficient decisions made by fully independent entities that lack bias and are not captive to one administrative structure will improve confidence in the process and in the market rules themselves.
The primary role of the market monitor should be to provide the diagnostic analysis and, when needed, to recommend rule changes to the RTO’s Board of Directors in a collaborative manner to address anti-competitive behavior. The MMU cannot unilaterally impose rule changes on the market, and the Commission cannot delegate enforcement and rate changing authority to the MMU. That process should be a collaboration among the RTO, stakeholder participants, administered by the Commission. The MMU cannot have authority to change or dictate prices or to enforce sanctions on market participants.
Enforcement of any relevant laws, including correction of abuses of market power, must be left to the Commission and the Department of Justice, depending on the circumstances at hand and on the specifics of the case. The MMU should not be empowered to take enforcement action and should only recommend that enforcement action is needed if market power abuse is demonstrated.
The Commission must clearly state and consistently apply standards to identify and remedy anti-competitive behavior. Although Order No. 2000 did allow market monitoring proposals to vary with RTO structure, one fundamentally important detail was left undecided in the rule – the definition of market power and abuse thereof.
The Commission must provide direction to the industry by clearly defining market power, what constitutes an acceptable definition of a market in terms of geographic scope and product type, and how market power should be measured. Within the appropriately defined markets, the Commission should then employ EPSA’s two proposed stages of market power assessment to assure accurate market power measurement.
The issue of market measurement is important, yet it has nonetheless not received adequate attention from the Commission. EPSA has submitted White Papers on Market Monitoring in two Commission proceedings which address the subject of market power measurement in detail.
G. NERTO Does Not Meet The Commission’s Interregional Coordination Requirements (Function No. 8).
While Petitioners refer to certain actions they are taking to improve interregional coordination, these proposals do not have definitive, implementation schedules with enforceable deadlines. Thus, petitioners refer to a “plan for a transition to broader conformed markets” and observe that:
<sup>[t]he proposal builds on existing coordination efforts in the northeast, including quarterly meetings among the chief executives of the northeastern independent system operators.”</sup>
These statements, however, lack detail and lack a sense of urgency. Petitioners’ discussion of formal merger of ISOs is vague and unenthusiastic and leaves open the question whether improved interregional coordination will ever happen.
Such strengthening of interregional coordination should be a very high priority. While the ISO NE has signed coordination agreements with adjacent ISOs, the efforts a coordination of the three markets to date appear to be too little, too late. The expected time frame for realization of results is too far in the future. The most recent agreement between NYISO and ISO NE simply layers a new, ineffective process on top of the existing, ineffective process. For example, it is not possible now to sell New England installed capacity into the NYISO market. This most basic issue should be resolved immediately.
The Commission should provide Petitioners with specific guidance on the appropriate schedule for accomplishing the integration of the northeastern markets.