FERC Filings
EPSA's Comments on the Financial Reporting and Cost Accounting Oversight and Recovery Practices for RTOs and ISOs
EXECUTIVE SUMMARY
EPSA agrees with the overarching theme of the NOI, that the differences between RTO/ISOs and vertically integrated utilities warrant a reexamination of how to better incorporate RTO/ISO cost accounting into the Uniform System of Accounts (USofA). In its NOI, the Commission observes that the USofA was developed for public utilities providing the bundle of generation, transmission and distribution services within the traditional industry model. As the Commission explains, “meaningful functional business segments or service lines for RTOs and ISOs seem quite different. Meaningful business lines for RTOs might include ‘grid reliability’, ‘ancillary services’, or ‘energy markets to suggest a few possibilities.” EPSA supports the Commission’s objective to develop financial reporting statements and accounting records that address the specific functions carried out by RTO/ISOs, and their associated costs, and then determine how best to apply the similarities and distinctions between RTO/ISO functions and those of transmission-owning utilities to the existing USofA framework.
EPSA believes that the Commission’s central focus should be to identify and eliminate unnecessary duplication between and among an RTO/ISO and the utilities within its footprint, and to ensure transparency and accountability through meaningful oversight and stakeholder input, with ultimate Commission approval. In this regard, it is important for the Commission to adopt some standardized reporting requirements that facilitate useful comparisons between and among entities performing transmission and market related functions, while accommodating the different market designs, software and rate designs that established RTO/ISOs have in place. The NOI provides a framework for the Commission to more clearly distinguish the increasingly important role that RTO/ISOs can play in promoting reliability, operating transmission systems and administering markets, and the costs that they incur in doing so.
In undertaking this task, EPSA urges the Commission to consider that the most critical ultimate goal is to reinforce and promote the ongoing RTO/ISO development process, and the competitive markets they operate. To accomplish this, among other purposes, possible new accounting and reporting requirements should provide a rational and objective means for addressing and resolving criticisms of RTO/ISO developmental and operational expenditures. While EPSA shares the concerns some have expressed regarding RTO/ISO costs, RTOs/ISOs must not be unduly encumbered in their ability to effectively perform their functions, which are to ensure reliable operations and administer competitive markets.
Specifically, EPSA recommends that FERC conduct one or more technical conferences, the purpose of which would be to:
• Review the existing USofA and how they relate to ISO/RTO functions, and whether they need to be modified or expanded in order to achieve improved financial reporting by ISO/RTOs.
• Review each existing RTO’s/ISO’s budgeting process, and examine when and how stakeholders participate in budget development.
• Review each existing RTO’s/ISO’s schedule of when and how each provides a comparison of its budget to actual expenditures, and how and when they review those results with their stakeholders.
• Discuss and determine what represents the best budget development and budget management practices among the RTOs/ISOs.
• Discuss additional means of promoting RTO/ISO cooperation and coordination.
• Discuss what role FERC could have in promoting software standardization by maintaining a database of existing software systems.
A. Accounting and Financial Reporting Issues for RTOs/ISOs
1. Are the individual account descriptions and instructions under the existing USofA adequate for the functions typically performed by RTOs/ISOs? If not, what changes should be made to the account descriptions and instructions under the existing USofA to accommodate the RTO/ISO business model? Should a separate USofA be developed exclusively for RTOs/ISOs?
It has become apparent that the existing rate review mechanisms originally designed for traditional public utilities, including the accounting and financial reporting requirements in quarterly and annual financial reports, do not accurately reflect RTO/ISO operations. The range of functions and operational requirements outlined in Order No. 2000 clearly distinguish RTOs/ISOs from vertically integrated utilities within the traditional model. Indeed, RTOs/ISOs are fundamentally different entities, with their own unique types of expenses, revenues, assets and liabilities, which the current USofA does not adequately reflect. The operational distinctions are underscored by the benefits associated with RTOs/ISOs, including more reliable system operations and the efficiencies competitive markets provide.
Therefore, EPSA supports the development of accounting definitions and categories for RTOs/ISOs that will fit into the existing USofA framework. Clarifying the existing USofA – both account descriptions and instructions – will allow for consistent, standardized reporting by RTOs/ISOs. In this way, the Commission could provide guidance and greater uniformity to RTOs/ISOs through a standardized framework of certain critical activities, assets, liabilities, revenues and expenses that are common to RTOs/ISOs. Additional guidance as to the proper USofA accounts that should be used for RTO/ISO operations would also be provided. In particular, the Commission should concentrate on costs associated with fundamental administrative and operational activities outlined in Order No. 2000.
B. Cost Management
2. Should the Commission revisit the means by which RTO/ISO rates are reviewed, particularly with respect to cost incurrence? If so, what means should the Commission employ to ensure that RTOs’/ISOs’ expenditures are prudent and their rates are just and reasonable? Would a “best practices” or “benchmark” approach be sufficient?
EPSA believes that RTO/ISO costs can be made more transparent and successfully managed by focusing on improvements to the existing collaborative approach that exists at most RTOs/ISOs with respect to budget preparation. For RTOs/ISOs that don’t already have one, the governance process could be improved by assigning budget oversight functions to specifically designated committees of RTO/ISO boards. Also, the stakeholder advisory process could be improved by increasing RTO accountability by: (1) ensuring a more open and transparent budget review and analysis process; and (2) creating meaningful opportunities for stakeholder input early in the budget development process. Further improvements will come from more transparent cost reporting mechanisms designed to facilitate the ongoing ability to compare budgeted costs to actual expenditures.
“Best practices,” or “benchmarking,” are useful with respect to certain critical activities for which specific performance measures can be objectively quantified. Further, benchmarking may be useful in regard to the development of common definitions and descriptions for the activities that RTOs/ISOs are responsible for, and for reporting the costs associated with those activities. This would be helpful to new, emerging RTOs/ISOs, but also as a frame of reference for comparative evaluation of existing RTOs/ISOs. Benchmarking should be professionally developed and judiciously applied, lest it be misused as a performance measurement instrument.
3. What is the appropriate role for the Commission with respect to overseeing RTO/ISO software costs? Should an RTO/ISO be required to justify contracting for the development of new software rather than using or modifying “off the shelf” software developed for a comparable application for or by another RTO/ISO? To what extent would the use of standardized or at least compatible software in neighboring RTO/ISO markets reduce the cost of doing business across RTO/ISO boundaries? How would such standardization be accomplished?
Subject to special needs and requirements associated with an RTO's/ISO's specific market design elements and protocols, EPSA encourages the Commission to direct developing RTOs/ISOs to employ all means reasonably available to avoid incurring costs for new software when existing software exists for equivalent or comparable purposes. The adaptive use of existing software will help contain costs, as well as prevent or eliminate seams between and among RTOs/ISOs. Moreover, greater uniformity across RTOs/ISOs regarding the technical means of performing their functions will promote useful cost performance comparisons.
Existing software that produces equivalent results should be standardized across neighboring RTOs/ISOs, especially where doing so reduces the cost of doing business. Among other ways, standardization could be facilitated as part of the ongoing collaborative effort to develop and implement joint operating agreements. Particularly, RTOs/ISOs should work with stakeholders to discuss their specific needs and formally assess the feasibility of utilizing existing software. Also, inter-RTO technical committees could be created to ensure maximum consistency with the on-going effort to establish and operate IT and IS systems. Finally, EPSA urges the Commission to maintain a database catalog, free of preference or bias, of the existing software systems used by RTOs/ISOs and available from vendors that other RTOs/ISOs could access for evaluative purposes.
4. To what degree should an RTO/ISO’s stakeholder/advisory committee be involved in reviewing or shaping the RTO/ISO’s budget and spending decisions? Are there independence considerations that should prevent or limit such review by market participants?
EPSA believes that RTO/ISO accountability must be based upon meaningful stakeholder participation in all RTO/ISO processes, including the budgetary process, and in the ability to track actual expenditures to budgeted expenditures. Standardization of the USofA to guide RTO/ISO budget development and track budgeted expenditures to actual costs will ensure that such participation is possible. Once FERC has ensured that this information is readily available, FERC should then require that RTOs/ISOs make cost and expenditure information available to stakeholders during the early stages of the budget process, and regularly provide financial reports to stakeholders throughout the budget year via web site postings and regularly scheduled meetings.
RTO/ISO budgets should be developed in a fair and transparent process with input from all stakeholders to ensure that the RTOs/ISOs can adequately and efficiently perform their operational and market functions. In sum, RTOs/ISOs must be both effective and efficient. However, the budget process should not be an opportunity for any party to unjustifiably delay or obstruct the effort to establish well-functioning RTOs/ISOs with robust, liquid competitive markets.