FERC Filings
MOTION FOR LEAVE TO INTERVENE AND PROTEST OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: SeTRANS PETITION
PROTEST
EPSA supports a Southeastern RTO of sufficient scope to encompass the region’s natural markets. Further, EPSA recognizes the Sponsors’ substantial efforts to assemble a filing that appeases the diverse business structures and interests of the many transmission owners that may be part of SeTrans. Indeed, the filing has many elements that EPSA supports, including the use of a locational marginal pricing congestion management system and the eventual establishment of an independent market monitor. We are hopeful that our support of these specific elements will continue as detail is added. Despite positive aspects, however, the Petition still does not address very basic concerns that EPSA and others previously expressed regarding the SeTrans governance structure— during both the Commission-sponsored Southeast mediation in Docket No. RT01-100-000 and during the Setrans Stakeholder process.
First, and most fundamentally, the proposal provides a flawed governance structure wherein the System Administrator (SA) clearly would not be independent from the SeTrans Participating Owners (POs). The System Administrator Retention Agreement (SARA) and Transmission Owners Agreement (TOA) included with the filing have provisions that require the SA to seek the POs’ permission to make decisions that are critical to operate a successful competitive market. Further, there are several TOA and SARA provisions that require the SA to implicitly or explicitly seek approval of the POs before the SA can perform its essential duties that will be discussed herein. These provisions entirely undermine the independence of the SeTrans governance structure. The SA cannot be independent if its decisions and actions are constantly subject to the PO’s approval. Consequently, the governance structure proposed by SeTrans is not independent and does not meet the Commission’s independence standard required under Order No. 2000. As an important first step to a proposed governance structure being able to meet this and other Order No. 2000 standards, the provisions in the organic documents included with the Petition, especially those in the SARA and TOA, must be amended to alleviate the POs’ undue influence over the SA. The Commission needs to seek changes to the provisions that undermine the independence standard of Order No. 2000. In addition, EPSA urges the Commission to direct SeTrans Sponsors to put in place an alternate governance structure that would include an independent Board of Directors as the core of the RTO.
Apart from these independence issues, EPSA has serious concerns with other aspects of the filing, including: i) the manner in which SeTrans proposes to handle grandfathered contracts; ii) Financial Transmission Rights (FTRs) allocations; and iii) proposed generator interconnection procedures.
A. The Commission Should Reject the Proposed SeTrans Governance and Business Model Because it Would Result in a SA That Would Not be Independent from Participating TOs.
An RTO’s independence from all market participants is the fundamental foundation, and primary Order No. 2000 required characteristic, underpinning the success of an RTO with any hope of establishing a robust wholesale electricity market. Independence is critical to a working RTO governance structure, since market participants can trust only an independent RTO that makes unbiased operational, planning and business decisions. However, unbiased decisions will be made only where the RTO is truly independent. An independent RTO would have no financial or other interest in any market participants, have exclusive decision making control with matters that will directly affect the RTO and be the sole administrator of its transmission tariff.
The SeTrans proposal centers on an “independent” SA that, presumably, would operate under its own Board of Directors and corporate management. This is not entirely clear however, as the Sponsors do not provide an adequate explanation of the SA’s organizational structure. The SA’s independence is based on it allegedly having the exclusive authority to reliably operate the grid. This purported independence is belied, however, by the details of the Petition. First, the petition proposes that the SA would operate under the SARA, which among other things, will define the SA’s authorities and responsibilities and will describe the rules under which the SA will exercise functional responsibility over the transmission assets that become part of SeTrans. However, according to the petition, the SARA will be negotiated between the POs and the SA. Second, the currently proposed SARA has rules that are associated with, and would be controlled by, the various TOAs---agreements that will be individually negotiated between each PO and the SA. Third, the Petition provides that the POs will select the SA from a list of candidates that have been developed by the SAC. This will be an ongoing part of the SeTrans process in the coming months.
EPSA has identified multiple problems with the relationship between the POs and the SARA that are listed below. The SeTrans POs contend that since the SA will be independent from any market participant that the analysis ends there. That is not the case. The contractual relationship between the POs and the SA needs to be analyzed closely. If the SA is beholden to the interests of the POs through various contractual provisions, how can this arrangement meet the Commission’s standard of independence?
In the current proposal, the POs would have the responsibility and power to make the final selection of the SA, negotiate the SARA with the SA, individually negotiate TOAs with the SA and also terminate the SA. Moreover, under both the TOAs and SARA, the POs would have undue control over the SA’s actions, literally requiring the SA to affirmatively support any PO action under the TOAs. See Section 11.1 of the proposed TOA. Finally, as noted in the transmittal letter to the Petition, the SA will “exercise exclusively the RTO’s Section 205 rights,” but only if the exercise of those rights is “in accordance with the relevant provisions of the SARA and TOA . . . .” Consequently, the proposed governance structure, as implemented under the SARA and TOAs, would give the POs significant influence over the SA and would require the SA to be nothing more than the pawn of the POs. All of the foregoing results in a situation where the POs would have direct and substantial influence over the SA. The SA’s exclusive authority and, in turn, its independence obviously is undermined if the SA’s hiring, terms of employment, administrative and operational actions, not to mention its very existence, are controlled by the POs.
Finally, due to the scant details provided by Sponsors in Article IX of the SARA, the division of responsibility and governance between the SA’s corporate or parent Board of Directors and the RTO SA’s Board remains unclear. Presumably, the SeTrans Petition contemplates a dual governance approach where the SA will form a local board of directors. How can the Commission even begin to evaluate the independence of the SA when there are literally no details provided in the SARA relative to the Board’s structure or responsibilities? The entire reference to the Board of Directors is contained in Section 9.1 (The SeTrans ISA’s Board of Directors shall hold regularly scheduled meetings within the SeTrans ISA footprint.).
In sum, the solely PO-developed, and PO-dominated, governance/business structure does not come near satisfying the independence mandate of Order No. 2000. EPSA thus implores the Commission to reject this objectionable proposal.
1. SARA and TOA Terms Confirm That the Sponsors’ Proposed Business Plan and Governance Model Will Lack Independence.
The SARA and the TOA, as a result of not having been developed through a collaborative process, contain many elements and provisions that would undermine the independence of the SA. The Commission’s response to the SeTrans Petition must address the many sections of the SARA and TOA that impact the governance structure and sacrifice the SA’s independence. Most of these comments, along with comments on other organic documents, will be detailed in the protests of EPSA’s members. Nonetheless, EPSA herein notes some of the more egregious provisions and concepts.
As an initial matter, the SeTrans Sponsors’ proposed structural hierarchy of the organic documents is flawed. The Sponsors would have the various TOAs and SARA serve as the primary governing documents for the RTO, with the terms in the TOAs and SARA trumping every other document, including the OATT. Further, the TOAs would control the SARA. The Commission should reject this proposed hierarchy. However, the OATT, as the primary jurisdictional document establishing non-discriminatory transmission service, should control all other SeTrans protocols and documents should a conflict arise. The SARA and TOA must be in accord with the provisions in the Order No. 888-required OATT—not the other way around. If a hierarchy needs to be established between the SARA and TOA, the SARA should control the TOA. The SARA is the only “governance” document proposed to be signed by all POs. TOAs, on the other hand, would be individual documents negotiated between the respective POs and the SA. Thus, different TOAs could contain differing, and perhaps conflicting, terms and conditions.
Second, and perhaps most prejudicial to the notion of SA independence, the proposed TOA in Section 11.1 affirmatively obligates the SA to support any action contemplated under the TOA. Certainly, this requirement would nullify any shred of independence of the SA.
Third, both the SARA and TOA give the POs decision making authority over responsibilities that should be left to the discretion of an independent RTO. For example, the POs will be able to designate which of their transmission assets will be part of the RTO and which transmission facilities will remain subject to the PO’s separate OATT. The POs should not be able to selectively withhold or withdraw transmission facilities from the SA’s functional control. The SA, as the operator of the SeTrans system, should have the exclusive responsibility to decide which facilities it will need to offer non-discriminatory transmission access in a reliable, efficient and cost effective manner. Additionally, and somewhat apart from independence concerns, such provisions would constantly compromise the continued viability of the SeTrans scope.
Fourth, the SARA and TOA provide the POs with inordinate control over the SA’s compensation terms (through negotiating such terms in the SARA and implementation and control over a performance incentive factor) and, indeed, the very existence of the SA. Only the POs can determine whether the SARA will be extended for an additional 5 year period. And, only the POs can initiate termination proceedings against the SA.
Finally, the POs reserve unto themselves several mechanisms by which they can withdraw from or terminate the SARA and TOA. Termination under some of these exit provisions, such as those containing “regulatory out” types of clauses, cannot be reviewed by the Commission or any other governmental authority. Moreover, as proposed, the SA has to affirmatively support any PO termination of both the TOAs and SARA. These terms, like the facility withholding/withdrawal provisions, also would serve to severely undermine a viable RTO scope.
During the Stakeholder process, the Sponsors indicated that many of these termination provisions were designed only to facilitate Non-jurisdictional entity participation in the SeTrans RTO, and that the jurisdictional POs likely would not exercise any rights to terminate under these provisions. This is hard to believe, given that the proposal includes both a Non-Jurisdictional Entities (NJEs)-specific and a general PO withdrawal/termination provisions. If these provisions are intended solely for NJEs, the Sponsors should say so. Granting POs the liberal termination provisions they have proposed would undermine the SA’s ability to negotiate changes with the POs to the SARA or TOAs, compromise the RTO’s scope and generally provide the POs with inordinate control over the SA.
2. The Commission Should Recommend That the SeTrans Proponents Pursue Development of an Alternative Governance Structure Based on an Independent RTO Board of Directors.
As a result of the flawed governance structure, as highlighted in the SARA and TOA discussions, infra, the SA cannot be independent. However, many of the terms and non objectionable concepts in both the SARA and TOA—including the concept of an incentive-driven third party independent operator—could be retained if the Sponsors were to adopt an alternate governance proposal that had, at its core, an independent RTO board of directors. The Commission noted in its prior decision on the California Independent System Operator’s (CAISO) governance that independence is compromised when the board is influenced by market participants. The Commission concluded: Board members were coming under “undue pressure from various sources,” and as a result, the Board was not functioning in an independent manner.
The Commission should instruct the SeTrans sponsors to consider a two-tiered governance model similar to that recently recommended by the Federal Trade Commission (FTC) filed in Docket No. RM01-12-000. The FTC advocates a governance structure that would have an independent board that is responsible for developing and enforcing market operation and grid maintenance rules and is not influenced by, or affiliated with, any market participants. This would create an RTO that would not have its rules created by POs or its decisions controlled or affected based on its obligations to those owners. Rather, its actions, operations and decisions would reflect what would be best for the welfare of the market as a whole. It is critical at this juncture in the development of SeTrans that a truly independent board be established to preserve the positive aspects of the current plan and to ensure that implementation and transition to a fully functioning RTO are done in an unbiased manner. This board should be selected by a SAC, with the SAC comprised of members from all market sectors, from a list of candidates provided by an independent search firm.
The independent board would contract directly with the SA to have the SA operate the SeTrans system. In this way, SeTrans could still have an independent, third party, non transmission owning, for profit entity operate the grid. The difference, however, would be that a permanent independent board would be the RTO, which would then provide oversight of the SA and continuity, should the SA need to be replaced. Furthermore, the independent board should have meetings; open to all Stakeholders, such that an unfiltered two-way communication channel can be established. The Board could then establish the kind of trust with its Stakeholders that would promote confidence in the RTO and foster a vibrant, competitive market.
B. Other Concerns With the Sponsors’ Proposal Would Remain Even If the Governance and Business Model Were Modified to Provide for an Independent RTO.
Even if the SeTrans Sponsors were to cure their independent governance flaws, a number of issues still would need to be addressed prior to the Commission declaring that the proposed model satisfied the mandates and spirit of Order No. 2000. EPSA again notes that its members will comment in more detail on these and other issues including SeTrans proposals on participant funding and regional through and out rates. But, for purposes of this protest, EPSA specifically comments on three major issues: grandfathered contracts; financial transmission rights (FTRs); and interconnection procedures.
1. Grandfathered Contracts
SeTrans can establish a competitive, comparable market that will facilitate reliable operation of its transmission market only if it treats all transmission customers equally. However, in the SeTrans Petition, the POs provide favorable treatment toward their native load customers by perpetually grandfathering physical transmission rights to existing customers and not offering sufficient incentives to encourage existing customers to convert.
Physical rights holders, either individually or collectively, will be able to preclude other network customers from gaining access to more economic generation alternatives, since physical rights schedules take priority in the scheduling process. This would set up situations for POs with generation assets to disadvantage other competing generators. In other aspects of the Petition, the POs use grandfathered agreements to carve out exclusions from the SeTrans tariff and other protocols, thus ensuring that discriminatory practices of withholding transmission capacity and preferential treatment for PO affiliated market participants continues.
The SeTrans sponsors need to recognize the Commission’s Standard Market Design (SMD) efforts and not attempt to preempt those efforts. The Commission has repeatedly recognized that the ability of transmission owners to favor their own generation creates an irresistible incentive to discriminate in the management and operation of the transmission grid. EPSA has consistently endorsed a single tariff for all transmission service as the only effective way to eliminate this discrimination. EPSA also has supported Option 1 to Question 4 in the Commission SMD Options Paper. Ultimately, the elimination of residual discrimination will occur only when all users of the transmission grid are under the same rate schedules, terms and conditions.
Clearly, grandfathered contracts can limit competition but, in the case of SeTrans, the question becomes how much. The number and duration of the grandfathered contracts contemplated by the SeTrans sponsors has not yet been disclosed even though Stakeholders have continually asked for such disclosure since the initiation of the Stakeholder process. If these contracts already control significant amounts of existing transmission service, and there is no contemplation of a transition period, the grandfathered contracts will preclude competitive suppliers from entering the market and thus prevent the establishment of a competitive wholesale electric market in the Southeast.
The Commission well knows that significant benefits will accrue to consumers from a robust competitive electricity market. Moreover, the significance of the current problem with unequal transmission access cannot be underestimated. In the original RTO filing made by the Southwest Power Pool (Docket No. RT01-34-000), as much as 92% of existing transmission service, mostly for native load service, would have been exempt from the RTO’s OATT. A competitive market cannot emerge if such a significant amount of the transmission capacity is not available to the market. Hopefully this is not the case with SeTrans, as continued delays in establishing a competitive market costs customers in the Southeast money every day. EPSA thus urges the Commission to send a clear signal to the SeTrans sponsors that a prolonged transition to a system of truly open access transmission is unacceptable. All transmission service must take place under a single tariff, as is contemplated in the SMD.
2. Financial Transmission Rights
SeTrans Sponsors propose to grant preferential treatment to existing contracts and native load with respect to allocation of financial transmission rights (FTRs) as a hedge against congestion costs. Existing native load resources would be guaranteed allocation of current and future FTRs for the purpose of serving native load, including incremental load growth. Residual FTRs left after such allocation (if any) would be auctioned in the secondary market. Here, again, EPSA asserts that the SeTrans proposal should not preempt SMD decisions contemplated by the Commission.
The Commission has recognized the importance of FTRs as evidenced by their careful consideration of the critical issues associated with transmission rights in general throughout the SMD process. FTRs used as a hedge against congestion costs—as contemplated in the SeTrans Proposal—would be a valuable component of a successful and efficient congestion management system and should be used as a way to help send the right signals for new infrastructure and for price. Ultimately, FTRs, when allocated fairly, fit with the Commission’s goal of providing a level playing field for all transmission customers.
The only way to allocate FTRs fairly, however, would be to initially allocate FTRs to existing users of the system, but require the existing users to make the FTRs immediately available for auction in the secondary market by the RTO. The auction revenues (auction revenue rights) received for the FTRs would be returned to the FTR holders.
Such allocation and auction would allow FTR holders who wish to retain certain, or all, of their FTRs to keep them by bidding an extremely high price. The FTR holder would then “pay” itself the amount it had bid for the FTR in the auction. In this way, FTR holders could be sure of retaining those rights they value and actually intend to use. Other market participants would likely purchase those FTRs that the current users do not value as highly. This process would create a liquid secondary market resulting in a more efficient allocation of FTRs.
EPSA recognizes that SeTrans Sponsors, in developing their proposal, were faced with competing goals: ensuring that existing customers receive the same level and quality of service they’ve always had (and paid for) and promoting an efficient marketplace that allocates transmission to those who value it the most. The use of the auction revenue rights model just described would best achieve both of these goals.
EPSA notes that the experience of financial congestion rights in NYISO and PJM has demonstrated that an auction process is preferable to allocation. Even PJM’s representative acknowledged during one of the Commission’s technical conferences on SMD, that if PJM had to do its initial assignment of FTRs again, it would have done this by auctioning the rights, rather than allocating them to existing users. SeTrans should be directed to examine those experiences and also defer to the Commission’s impending SMD issuance for final guidance on this issue.
3. Interconnection
The SeTrans Petition and organic documents contain aspects that potentially will conflict with the Commission’s final order on Standardization of Generator Interconnection Agreements and Procedures. That said, the Commission should direct Sponsors to modify their organic documents to reflect a commitment to implementing the standardized generation interconnection final rule.
The Commission’s process leading to the interconnection rule has been deliberate and strived to ensure that all Stakeholder views were considered. The Commission embarked on the ANOPR process to develop consensus among diverse Stakeholders on various provisions of the interconnection agreement and procedures. During that process, significant time and resources were expended to hammer out a consensual solution and to produce results that struck a balance between various positions. The give-and-take discussions during the ANOPR process provided all participants, including Commission staff, with an opportunity to have alternative positions tested by other parties with different viewpoints. The result was that consensus was reached on a majority of issues and, as such, no alternatives to the consensus proposals were presented to the Commission. Indeed, EPSA members, acting alone, might not have drafted the same consensus provisions; but that is the nature of consensus and a true collaborative process. Nevertheless, EPSA supports the consensus reached on various provisions that were incorporated into the NOPR.
Given the progress made on standardizing interconnection during this process, it is not necessary to consider further alternatives that would have best been raised during the past year’s interconnection rule process. Consequently, aspects of the SeTrans Petition and organic documents that represent alternatives to provisions of the interconnection rule should be changed to comply with the rule when issued.
C. Stakeholder Process
EPSA submits that many of the governance and other objectionable provisions in the Petition and the organic documents could have been avoided if there had been a true collaborative process at any time during the six-month Stakeholder process. The Stakeholder process was anything but collaborative. This was especially true with respect to development of the governance/business model structure.
EPSA, Williams and the Texas Public Utilities Commission have all written letters to the Commission on the so-called collaborative SeTrans Stakeholder process. EPSA appreciates that the Commission responded to this input with Commission presence at certain SeTrans meetings. As the Commission may have observed, however, the Stakeholder process never had the earmarks of anything “collaborative.” First, and most importantly, there was absolutely no Stakeholder input on the governance structure. In fact, when questioned why this key area was off limits to Stakeholder input or discussion, the answer that the Sponsors gave was “because that was the deal that was struck” between the Sponsors. Moreover, while the development of the organic documents included many sponsor presentations and meetings, much of the process did not include an adequate feedback channel for Stakeholders. Without that channel, Stakeholders have been left to guess as to why much of their input was excluded from revisions to the organic documents on which the Stakeholders were allowed to comment. Consequently, EPSA feels compelled to comment again on the suggestion that the Stakeholder process was collaborative.
Given the apparent lack of Sponsor consideration of Stakeholder input during this process, EPSA remains concerned that the PO selected SA could inherit hard wired rules and protocols that are unworkable and which fail to reflect the concerns of significant market participants regarding critical aspects of the “organic” documents. EPSA thus urges the Commission to mandate that the Sponsors engage in a truly collaborative process going forward.