FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION IN RESPONSE TO NOTICE INVITING COMMENTS ON ALLOCATION OF REGIONAL TRANSMISSION ORGANIZATION (RTO) CHARACTERISTICS AND FUNCTIONS BETWEEN SEPARATE ORGANIZATIONS WITHIN AN RTO REGION
DISCUSSION
EPSA supports the Commission’s Order No. 2000 and the development of a seamless national power market that depends on natural markets and flows of power. The primary goal of RTOs is to create a framework for robust and transparent competitive electric markets that will provide consumer benefits. The primary responsibility of RTOs is to ensure reliable, non-discriminatory open-access transmission service for all users of the transmission grid. Regardless of ownership structure, EPSA believes transmission should be operated as a business that ensures that existing transmission capability is utilized in the most efficient manner possible and that offers products and services designed to maximize the choices available to transmission customers.
The Commission’s current aim of improving market efficiency and consistency with its Standard Market Design (SMD) effort is critical to market development and successful RTOs. The allocation of functions between RTOs and ITCs will rely significantly on how the SMD is designed and implemented. The Commission’s SMD decisions will often determine how the allocation of a particular function between an RTO and ITC can be done. Consequently, determining the specific allocation of functions can be best addressed subsequent to decisions about the SMD.
EPSA applauds the Commission’s attention to seams issues, evidenced by its technical conference on June 19, 2001. The ultimate responsibility for RTO functions articulated in the matrix is a significant piece of the seams debate. Since the Commission is addressing seams issues in existing markets, it follows that the Commission should not allow the formation of ITCs within an RTO to become a mechanism for creating additional seams within an RTO.
EPSA believes the minimization of seams issues is best achieved, in the context of allocating functions between RTOs and ITCs, by ensuring that the ultimate responsibility and authority rests with the RTO for major market functions. EPSA has identified those functions that it sees as most important to facilitating a competitive wholesale market. These functions generally correlate with those the Commission specified in Order No. 2000. They are:
- Congestion management
- Ancillary services
- Security coordination
- Administration of balancing markets
- Tariff administration and design
- OASIS administration and calculation of Available Transmission Capacity (ATC) and Total Transmission Capacity (TTC)
- Regional transmission facility planning
- Independent market monitoring
EPSA submits that RTOs must retain responsibility for the fulfillment of these key market functions. Only if the RTO remains responsible for these key functions is it feasible to consider having an ITC under its regional umbrella.
EPSA believes that two characteristics, independent governance and operational authority, should guide the Commission’s determination on the proper allocation of functions between RTOs and ITCs. EPSA applied these principles in determining whether each of the above market functions should be the responsibility of the RTO rather than the ITC. Depending on the associated details that govern the relationship between the RTO and ITC, there are certain instances in which functional responsibility could be “shared” between the RTO and the ITC.
A. Characteristics
Independence
In Order No. 2000, the Commission declared that the formation of RTOs was a critical step in the further development of a competitive energy market by creating regional energy markets operated by independent entities. The Commission identified the principle of independence as the “bedrock upon which an RTO must be built.” Specifically, the Commission stated that the RTO decision-making process must be independent of any market participant or class of participants. Moreover, this principle must be applied to an RTO and any ITC that might be under that RTO and that the entity must be “independent in both reality and perception.” While the Commission avoided a “one-size-fits-all” approach to governance, it recognized that RTOs could differ significantly in structure and patterns of ownership. The Commission required that the independence characteristic of Order No. 2000 would only be satisfied if the proposed governance structure results in “independent decision-making by the RTO or the components of the RTO decision making process ... independent of individual market participants and classes of market participants.” The reason for this requirement is that market participants must have confidence that the entity responsible will be truly independent from all market participants or class of market participants to ensure the development of a fair, robust, competitive wholesale transmission and electric energy market.
In determining how the enumerated list of responsibilities should be allocated between an RTO and an ITC, the analysis must include whether the proposed responsible entity satisfies the independence requirement. EPSA has thus used the principle of independence to identify only those functions for which an ITC could have responsibility without material concern for partiality in decision-making. If ITCs are allowed to share with an RTO the performance of select market functions outlined above, the Commission should nonetheless continue to require that ITCs satisfy the independence requirement to the maximum extent possible to ensure that even those limited activities are performed in a non-discriminatory manner.
In any event, the ITC’s governance structure should be reviewed in detail to assure that any decision made by the ITC pursuant to an allocation of functions will be, and will be seen by the market to be, fair and non-discriminatory to all market participants. A firm delineation of functions between an RTO and an ITC must be preserved in the governance structure of the RTO so that ITC ownership interests do not compromise the independence and authority of either the RTO or the ITC in their respective spheres of responsibility. An RTO must be independent of any market participant in the broader regional market or adjacent markets. There cannot be competing governance structures or boards within an RTO or between an RTO and an ITC. The RTO structure and rules must clearly delineate authority for functions between it and any ITC to insure the RTO’s independence.
Operational Authority
EPSA submits that operational authority must rest with the RTO and may not be left to ITCs or other entities within the RTO. The RTO must have clear and direct operational authority over local control areas to eliminate seams issues. In the near term, at a minimum, RTOs should coordinate and consolidate control areas so as to function as a single control area. During any transition, a single responsible entity must retain ultimate authority for real-time dispatch.
The Functional Model, developed by the North American Reliability Council (NERC), provides a way of looking at RTO configuration and associated operational authority. The NERC presentation during the technical conference of February 19, 2002, explained the Model and its workings. While the Model can be used as a tool, EPSA cautions the Commission that market participants are still debating aspects of the Model; consequently, the Model is not the ultimate source for distinguishing market function responsibility.
B. Market Functions
Congestion Management
Congestion management is one of the major determinants of how an energy market will develop and operate. Specifically, how congestion is priced and who pays the congestion costs affects not only bilateral transactions but also how a centralized energy market operates. Congestion management is critical for market participants to be able to hedge against the “transportation” risk for contracts into which they may wish to enter. Also, a properly developed congestion management program is key to the efficient use of the regional transmission system because rights to cross-congested interfaces are given a market value as congestion rights. Thus, while congestion management affects usage of the transmission system, its primary effect is on the efficiency of the energy markets.
The development of a regional energy market is predicated on a single integrated energy market and congestion management system. Having separate and distinct congestion management proposals within one area will result in the creation of seams between these areas, and the markets within these areas will be separated and less efficient. This will occur regardless of whether these areas are located within one RTO. For example, if the various ITCs within a regional RTO have separate congestion management systems, the goal of having a single energy market within each RTO region will be frustrated. Given that congestion management is primarily a market mechanism, it is essential that the RTO have sole responsibility over the development and implementation of congestion management. In any one market there should be only one congestion management system.
Ancillary Services
The primary ancillary services -- reserve products, (e.g., ten-minute spinning reserves, ten-minute non-spinning reserves and thirty-minute operating reserves) should be under the control of an RTO, not the ITC, because they are critical to the proper operation of the wholesale energy market. Specifically, these ancillary service products are used in the event of a contingency such as a generating facility tripping off line or the outage of a transmission line that requires the immediate replacement of the energy source. Moreover, in at least one region, New York, the security-constrained dispatch co-optimizes the energy and reserve markets and considers the selection of these ancillary service products in determining energy dispatch. This interrelationship between energy and the reserves means that an RTO should have authority over both energy and the ancillary service products in order to develop a vibrant energy market. If an organization such as an ITC has control over the ancillary services market, and an RTO has control over the energy market, operational complications that may undermine short-term reliability will develop. Further, such an allocation would seem to be at odds with the goal of a seamless regional energy market beyond bilateral transactions, which would be compromised due to inconsistent rules applicable to these interrelated products. Consequently, the RTO, not the ITC, needs to be responsible for ancillary services.
Administration of Balancing Markets
The administration of a balancing market should clearly be under the control of an RTO because it is simply an extension of the spot market itself. Energy transactions in the forward market should not be limited to balanced schedules and thus energy imbalance services in the real-time market are integral to the development of a vibrant spot market that limits the need for traditional tariff-based imbalance services. The development of regionalized energy markets requires that the administration of the balancing market and its companion, energy imbalance service, be under the control of an RTO. Leaving these services to an ITC will frustrate the development of a robust wholesale energy market.
Security Coordination
Security coordination involves two major functions: first, ensuring that energy dispatch will maintain reliability; and second, determining when to permit a transmission or generation resource to go off line. Although these functions may appear to be solely related to the operation and administration of the grid, they have direct impact on the markets and should therefore be the province of the RTO. Separating the security coordination function from other critical market functions will eventually be harmful to the development of an energy market and raise reliability concerns. Market dispatch must be consistent with reliability in order for the energy markets to survive in the long run. Thus, this aspect of security coordination must lie with the RTO as an indispensable part of its market activities.
Tariff Administration
RTOs must have authority over tariff administration to eliminate pancaking and to facilitate an efficiently priced competitive market. Allowing an entity with interest in the outcome to have responsibility for setting a tariff within a larger RTO’s tariff raises the strong appearance (if not the reality) of a lack of independence and structural pricing inefficiencies. An ITC’s Open Access Transmission Tariffs (OATT) should fall within the associated RTO’s tariff, rather than being filed separately. The Commission’s conditional approval of Appendix I for the Midwest ISO was specifically based on establishing one regional tariff to eliminate seams issues. The individual ITCs may develop specific rates within the RTO Tariff, but there needs to be one tariff with one tariff administrator.
Market Monitoring
EPSA believes that market monitoring should be fundamentally the same in every RTO market to provide consistency in monitoring the actions of an RTO or an ITC. The Market Monitoring Unit (MMU) should be independent of the RTO management and should serve as an early warning system. The MMU must have transparent procedures in place to monitor transmission owners, market participants and the RTO itself. Consequently, the MMU will serve the goals of not only the Commission, but the RTO and ITC as well. The MMU should audit RTO functions on a regular basis to ensure compliance with RTO tariffs and procedures and to ensure non-discrimination and adequate stakeholder participation. The MMU, through periodic market reviews and reports should raise concerns and suggestions for improvement of market rules. When appropriate, the MMU should work with market participants to recommend changes to market rules or the RTO tariff to allow the market to operate more efficiently. The MMU should file its regular reports with the Commission, but leave market mitigation and enforcement to the Commission. The MMU must assure transparency and confidentiality in its processes and allow for due process.
OASIS Administration
The RTO should be solely responsible for OASIS administration. The calculation of TTC and ATC should be administered by the RTO, but in operational reality, the RTO would be dependent on transmission owners and ITCs within its jurisdiction for information from which to make calculations. However, depending on the associated details and structural relationship between the RTO and the ITC, TTC and ATC calculations could possibly be shared with an ITC, but in accordance with methodologies approved by, and under the monitoring of, the RTO. This approach will ensure that TTC and ATC will be calculated in a consistent and non-discriminatory fashion across the entire region. Specifically, assumptions and other variables in the calculations must be consistent within the same region or RTO, as must the underlying methodology for determining transmission capacity and its availability. Consistency in this area will ensure comparability for all market participants in assessing and reserving transmission capacity and will also enhance the accuracy and usefulness of TTC, ATC and related measures.
Planning and Expansion
The RTO should coordinate the regional plan that should be focused on identifying the least costly alternatives to resolving constraints. All market participants, including transmission owners, should have the same right to participate in the planning process because transmission planning will have a dramatic effect on the market in the long-term. Consequently, the ITC could play a part in developing the local plan and implementing expansion (if needed) subject to final approval by the RTO, so that potential impact on the markets is protected by the agency responsible for the market related issues, namely the RTO.