FERC's RTO Proposal: A Step Too Timid or a Genie Unleashed?

August/September 1999

© 1999, Elsevier Science Inc., 1040-6190/99/$–see front matter PII S1040-6190(99)00056-1

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FERC’s RTO Proposal: A Step Too Timid or a Genie Unleashed?

Far from containing mostly generic “mush” as skeptics had predicted, the Federal Energy Regulatory Commission’s Notice of Proposed Rulemaking issued in May holds the potential to break real and perceived logjams in the path of reform.

Reinier Lock

I. Introduction: The Building Tide for Change

hen the Federal Energy Reg-ulatory Commission held its

Technical Conference on indepen-dent system operators (ISOs) in April 1998—the first broad-based Commission review of the electric-ity industry since the issuance of Order 888 in February 1996—it soon became clear that something bigger than reviewing the state of ISO development was in the wind.

Industry witnesses surprised the Commission with bold asser-tions of the imminent formation of Transcos. That topic had been raised gingerly by FERC as a

futuristic concept that should not be precluded by entrenched ISO structures that might resist the evolution to a more efficient end state. Several witnesses sought to reassure the Commission on this score by predicting a natural evo-lution from ISOs to Transcos.

FERC then surprised the indus-try by announcing at the end of the conference a series of regional con-ferences, designed, as Chairman James J. Hoecker put it to me immediately afterward, to encour-age voluntary activity toward ISO formation in regions where little had happened to date. If that doesn’t work, he intimated, “we shall see.”

Reinier Lock

is a partner at CameronMcKenna LLP, Washington, DC,where he focuses on electric power

restructuring and power projectdevelopment. Mr. Lock recently hasbeen involved in implementation of

restructurings in California, Ontario,Pennsylvania-New Jersey-Maryland,

India, South Africa, and Zambia.Before returning to private practice in

1989, he served as legal advisor toCommissioner Charles Stalon at the

Federal Energy Regulatory

Commission.

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The Electricity Journal

nderlying the ISO Conference initiatives was a clear FERC

concern that the drive toward ISO formation, at center stage in almost every commissioner’s speeches, had hit a plateau with just four reason-ably complete ISOs in place or under development: California, driven by a strong state legislative mandate, and the three Northeastern tight pools driven by a Commission directive in Order 888 under FERC’s authority over the tight pools. A fifth, the Midwest ISO, while tenta-tively approved by FERC as a step forward, was not viewed by all com-missioners as sufficiently compre-hensive.

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Elsewhere, despite much dialogue, there had been no action.

The regional conferences appar-ently did not generate the hoped-for surge of new activity. Instead, we saw not even a significant accel-eration of existing initiatives and the demise of some, such as Indigo in the Northwest. Then, in Septem-ber, it became clear what Chairman Hoecker had meant in his April comment to me. He boldly announced to the formidable gath-ering in Houston of the Edison Electric Institute and the National Association of Regulatory Utility Commissioners that he planned to institute a major rulemaking on where the industry and FERC’s regulation should be going.

Two terms were quickly coined to help frame the new debate: “regional transmission organiza-tions” (RTOs), a new umbrella con-cept designed to encompass ISOs, Transcos, and anything else any-one might come up with, and “open architecture” to suggest an approach that would permit

regional structures (e.g., ISOs) to evolve to quite different structures (e.g., Transcos).

II. The NOPR Cometh

Within a little over seven months, on May 12, the Commis-sion acted on Chairman Hoecker’s proposal, despite longstanding rumors of major differences of opinion, one of the most pro-

that a consensus document of this nature would produce a lot of mush and no decisive action. As it happened, even those most skepti-cal about FERC’s desire or ability to take decisive action at this point will have to say “not quite.” True, as some within FERC had pre-dicted, much of the document looks more like a Notice of Inquiry, the first probing stage of a generic initiative that might lead to a rule-making, a genre known for throw-ing out a lot of quite general con-cepts and asking questions about them. But there is a clear general direction to this NOPR, and enough specific action-forcing content, to take it out of the “mush” category.

rue, the NOPR does not pur-port to mandate or force any-

one into RTOs, nor does it pre-scribe or mandate RTO boundaries or, as noted, specify any preferred type of RTO—a departure from FERC’s previous advocacy of what may be fleeting phenomena, first regional transmission groups (RTGs), then ISOs. But it does reopen the debate on the future direction of the industry on several broad fronts, with comments that were due by August 16 and reply comments by September 15. And it does, in this observer’s view, have enough forcing mechanisms to break current real or perceived logjams in the path of reform.

III. The Forcing Mechanisms

The one requirement the Com-mission imposes that may go a long way as a forcing mechanism is what FERC calls its “general rule.” Each FERC-regulated public

Virtually everycommission had

problems with someelements of the NOPR

but on balancesupported the whole as a

necessary step forward.

tracted internal debates ever at the Commission level, and the concern of many stakeholders that there was no clear majority to move deci-sively in any particular direction. The Commission voted out a 243-page notice of proposed rulemak-ing, or NOPR (with a few short appendices), which was issued the next day. Certainly, from the Com-mission meeting discussion prior to voting out the NOPR, it was clear that virtually every commis-sioner had problems with some elements of the NOPR but on bal-ance supported the whole as a necessary step forward.

The concern on the street was

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utility that owns, operates or con-trols interstate transmission facili-ties, and is not currently in an RTO, is required to file a proposal by October 15, 2000, either to join an RTO (by December 15, 2001) or to make “an alternative filing.” The latter is to describe any efforts the utility has made to participate in an RTO, the reasons it has not to date participated, including “exist-ing obstacles” to such participa-tion, and “any plans [it] has for further work toward participa-tion.”

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For any utility already in a FERC-approved “transmission entity,” there is a parallel filing requirement (by January 15, 2001) for an explanation of the extent to which that entity “has the charac-teristics and performs the func-tions of” an RTO and, to the extent it does not, the utility’s plans either to join a qualifying RTO, modify the entity to con-form to the RTO requirements, or to make the “alternative filing” required of utilities who have not participated.

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Hence, while the NOPR does not mandate participation in an RTO in stark terms, it comes quite close to doing so by requiring utilities at a minimum to give “reasons” for not participating; to “identify existing obstacles to,” and to dis-close “plans for further work toward,” participating. The rule does not really suggest that non-participation in the longer term is an option. As Commissioner Wil-liam L. Massey noted in the FERC meeting discussion, “from the tone of this document, from its texture and context, it is clear that the Commission intends RTOs to

form in every appropriate region of the country. By no stretch is this document neutral about RTOs.”

ome on the Commission seek to balance this perception by

stressing the NOPR’s other non-mandatory aspects and its “open architecture” concept. That con-cept, enshrined in the formal FERC Rule, requires that RTO proposals not limit the RTO’s ability to evolve to more efficient

visions are bolstered by a powerful case the Commission makes in the opening 103 pages of the NOPR as to why RTOs are a legitimate response both to the profound changes that have occurred in the industry since Order 888 was issued, and to the two major prob-lem areas that the NOPR elabo-rates at some length: continued, widespread discriminatory use of transmission assets, and growing problems in the operation, plan-ning, and expansion of regional transmission grids.

IV. Undue Discrimination

Relying on a good deal of collo-quial evidence and intuition, and just a few concrete cases, and rein-forced by the arguments of trans-mission “have-not” groups such as industrial users and indepen-dent generators, the Commission concludes that the Order 888 regime of functional unbundling has permitted too much discrimi-natory conduct, actual or per-ceived, by transmission owners in favor of their own affiliated “mer-chant” (power sales or market-ing) functions. This, FERC asserts, has occurred in a variety of ways, most of which build on the superior access to or control of information on the complexity of system operations by inte-grated utilities.

The NOPR elaborates with con-siderable candor on the relative ineffectiveness of some of the very mechanisms Order 888 estab-lished in order to

curb

affiliate abuses. It also underscores the dif-ficulties FERC has had in policing

The NOPR elaborates with candor on the relative ineffectiveness of mechanisms established in Order 888 to curb affiliate

abuses.

forms as to “organizational [or] market design, geographic scope, ownership arrangements or methods of operational control.”

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However, the “open architecture” provisions, while not mandating action, really go to a quite differ-ent FERC concern that was very evident at the ISO Technical Con-ference: that neither the Commis-sion’s rules, nor their own actions, lock industry partici-pants into ISO structures that become rigid or ossified and incapable of evolution to more efficient structures.

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The mandate in the “general rule” and “alternative filing” pro-

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them: the manipulation of avail-able transmission capacity (ATC) and reliability (capacity benefit margin) postings on the Open Access Same-time Information System (OASIS), non-user-friendly OASIS sites, violations of the FERC Standards of Conduct (designed to prevent marketing arms of utilities from obtaining superior access to information or service from transmission provid-ers), and discriminatory applica-tion of line loading relief and con-gestion management procedures.

he Commission expresses open concern about its future

ability to police these practices more effectively, at least without more resources and detailed regulation. The fear of being drawn into a quasi-judicial quagmire in doing so is consistent with FERC’s expressed desire—to date not very evident in practice—to move to “light-handed regulation” in this area.

It is also reflective of a much more fundamental belief that some of the thinkers on FERC staff have held for years: that the Commis-sion has to move away from its tra-ditional mode of regulating con-duct and rely more on structural separation to reduce the need for regulation, in the manner of restructurings abroad such as that in England and Wales. This belief is based on two perceptions:

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that structural regulation is simply more effective and practical as the industry becomes more dis-aggregated and competitive;

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and

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that FERC will need vastly expanded resources—something a deregulation-prone Congress is not likely to fund—to adequately

police these areas in this new envi-ronment using traditional conduct regulation.

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While the NOPR touts the gen-eral concept of the RTO as the right vehicle to address these problems, this growing skepticism as to the efficacy of traditional conduct reg-ulation does suggest that FERC will in the future lean more toward clean structural separations be-tween the generation/marketing and transmission functions as the

gration and growth of competition in the industry: growing engineer-ing and economic inefficiencies resulting from the traditional grid management structure.

The NOPR contains an almost chilling account of how the tradi-tional system and institutions for maintaining reliable grid opera-tions are being displaced by grow-ing numbers of disparate entities with decreased incentives to share information or coordinate opera-tions to protect reliability. All this is occurring in the face of an explo-sion of transactional trading over wider and wider regions.

Bolstered by the findings of three major North American Electric Reliability Council (NERC) and Department of Energy (DOE) reports over the last year, citing several incidents that came close to large-scale blackouts, FERC makes a powerful case that the current reliability structure is not sustain-able.

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The growing demands for regional coordination simply can-not be achieved by existing forms of interaction between the very proliferation of entities that grow-ing competition has produced.

Predictably, the solution prof-fered by FERC is the RTO acting as the “big picture” independent grid operator, able to manage both the reliability and competition needs of the regional markets.

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Clearly, FERC hopes, the RTO will strad-dle the growing jurisdictional uncertainty as to who will regu-late reliability—NERC or its regional reliability councils, or security coordinators, RTGs, ISOs, or FERC itself.

This may seem like the same

Predictably, thesolution proffered

by FERC is the RTOacting as the “big

picture” independent

grid operator.

industry restructures to enhance competition. There is already some evidence of this in the NOPR. Moreover, while a philosophy of structural separation would have been furiously resisted by inte-grated utilities in the years leading up to Order 888, it is less clear today how much utility resistance there will be.

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V. Regional Grids: The Institutional Mismatch

The other fundamental problem FERC sees emerging and in need of decisive action is in fact a fairly natural consequence of the deinte-

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wishful thinking displayed by FERC earlier in the 1990s that RTGs would successfully straddle and transcend both the jurisdic-tional disjunctures in regulating transmission and the almost ideo-logical divisions between different stakeholder groups that for decades had hampered the effort to get more efficient structures. However, as the Commission points out, the potential advantages of regional, market-player-neutral determina-tions by an RTO of troublesome matters such as ATC calculations, congestion management, and the planning of transmission expan-sion, are enormous. The efficiency of each of these exercises, as FERC convincingly argues, is greatly enhanced by the ability of an objec-tive body to carry it out on a broad regional basis. And it is probable that an industry that is increasingly focused on trading, and in wider and wider regions, will under-stand this benefit of RTOs better than it would have five years ago.

owever, to view a move to RTOs as some panacea for

dealing with these matters without tackling the growing confusion as to which institutions will regulate grid control and reliability, and how, would be naïve; and, while the NOPR is not explicit on this point, it is apparently not the view of the Commission that RTOs can do it alone. There is some recogni-tion of this in the NOPR’s discus-sion of “managing congestion.”

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While blasting NERC’s current transmission loading relief (TLR) procedures as “cumbersome, inef-ficient and disruptive to bulk power markets,” and potentially

capable of anticompetitive manip-ulation, the Commission at least recognizes NERC’s ongoing role and encourages NERC “to develop regional market approaches to managing congestion.”

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Of course, the reality is that FERC’s discussion of the potential role of RTOs in managing reliabil-ity, reserve standards, and conges-tion cannot be viewed in isolation from the ongoing restructuring of the major institutions that manage

vis-à-vis NERC and other industry-run organizations such as the regional reliability councils—and perhaps of state agencies—in this arena. As with RTGs, FERC is apparently attempting to design an RTO concept that is sufficiently fungible to absorb these poten-tially major changes in the under-lying institutional structure.

fter discussing the undue dis-crimination and regional

grid management options at some length, the NOPR then proceeds with a relatively succinct summary of the principal concerns raised by state PUCs in the course of FERC’s consultations with the state com-missions. In the interests of reason-able brevity, this article will not attempt to deal with this section of the NOPR, which raises a plethora of state-federal issues. Coinciden-tally, but notably, the day after the Commission issued the NOPR, the U.S. Court of Appeals for the Eighth Circuit remanded to FERC a case involving FERC’s applica-tion of Order 888 to the curtail-ment practices of a utility on the grounds that it encroached upon state regulatory authority over retail transactions.

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VI. Defining the RTO

Apparently anxious not to fall into the trap again of endorsing a regional organization concept as the future panacea, only to find it fade rapidly into obscurity—as clearly happened with RTGs and could happen with ISOs—the Commission has invented an umbrella term, RTOs, to encom-pass whatever specific form of

While blasting NERC’s transmission loading relief procedures, the commission at least recognizes NERC’s

ongoing role.

or regulate reliability. DOE’s redel-egation to FERC of the authority under Section 202(a) of the Federal Power Act (FPA) to divide the country into “regional districts for the voluntary interconnection and coordination of industry facili-ties”

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was one modest step in this enterprise. It will enable the Com-mission on a more global basis to address the interplay of reliability and economic issues, and how to structure regional institutions to meet them. If the North American Electric Reliability Organization (NAERO) concept is enacted by Congress, that will more funda-mentally realign the roles of FERC

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organization might emerge as the preferred option to meet its defined goals. The NOPR then pro-ceeds to lay out four basic “mini-mum characteristics” and seven “minimum functions” (the latter not all required to be immediately operable) in order to pass muster as an FERC-approved RTO. A “properly structured RTO” is defined simply as “an entity that is independent from all generation and power marketing interests, and has exclusive responsibility for grid operations, short-term reli-ability, and transmission service within a region.”

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This approach is creative in try-ing to strike a balance between the need to put some minimum definition on what FERC should accept as a legitimate RTO and yet leave maximum flexibility as to the structure and corporate form the RTO takes. It certainly lends itself to inviting the contin-ued evolution of industry-led efforts to break new ground, and with the recent filings of the Entergy and Alliance proposals, there will be ample early oppor-tunity to test the efficacy of FERC’s guiding principles in applying them to widely varying specific proposals.

hat the Commission’s RTO approach masks, however,

is that Transcos will be fundamen-tally different entities from the pre-vailing norm of nonprofit ISOs. The latter have specifically defined operational functions (usually emerging from stakeholder con-sensus processes and Commis-sion proceedings) and are gov-erned by some combination of

FERC-approved stakeholder and independent governing boards. Transcos will probably be for-profit entities concerned with providing an economically competitive ser-vice in rapidly evolving markets.

The economic incentives will be very different. Transcos will pri-marily be concerned with a trans-mission pricing regime that will accommodate the risks and rewards of substantial invest-

VII. Minimum Characteristics

How far do FERC’s four “mini-mum characteristics” go in addressing these differences or some of the other challenges facing RTO formation?

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Independence.

Stressed by Commissioner Massey as the “bedrock” requirement, FERC’s principal focus here is to separate RTO decisionmaking from control by any market participant (defined as “any entity that buys or sells electric energy” in the RTO’s or affected neighboring regions, “or any affiliate of such entity”).

his characteristic will be met by an RTO with a non-

stakeholder governing board and a prohibition on market participants having more than a

de minimis

(defined as 1 percent) ownership interest in the RTO, a standard to be applied to both for-profit and nonprofit entities. FERC justifies this apparently strict standard by arguing that RTOs with more sub-stantial stakeholder interests will simply not be trusted by other mar-ket participants, even if they use devices such as voting trusts or inde-pendent trustees to separate deci-sionmaking from ownership. This may reflect a hardening of opinion evident at the Commission level on the need for strict independence of the RTO. This standard will not be uncontroversial, and the issue may be joined quite soon in individual cases, such as the Entergy petition.

FERC’s “independence” standard also includes a requirement that an RTO have the unfettered right to file its own tariff changes without prior approval of transmission owners, a clear response to the problems some

ments, past and future, in trans-mission assets. The major eco-nomic concern of ISOs will be to pass through the relatively mod-est administrative costs of operat-ing the system, and amortizing the largely sunk costs of setting it up, without unduly upsetting stakeholder/intervenors or regu-lators. Moreover, Transco accountability to shareholders will differ dramatically from ISOs’ accountability to their gov-erning boards, and FERC’s regu-lation of the governance function will face new challenges in the case of Transcos, already evident in cases such as Entergy.

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of the tight-pool ISOs have had in weaning themselves of the old utility-dominated structures.

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Regional scope and configu-ration.

Any anticipation arising out of FERC’s acquisition of FPA sec-tion 202(a) authority that the com-mission would specifically define RTO regions is certainly not met in this NOPR. Despite a protracted discussion, the NOPR provides only the most general guidance that an RTO region needs to be of sufficient “scope and configuration” to perform its functions efficiently. FERC’s general theme is that larger is better in dealing with the issues identified as the driving force for the NOPR (discussed above) such as ATC determinations, loop flow, congestion management, pancaked rates, OASIS operations and trans-mission planning. However, FERC also lists a series of possible con-straints on size. The NOPR reflects the fundamental tension between the economic advantages of large regions and some of the technical and management factors that mili-tate against them getting too large, an area on which views in the industry differ widely.

ne firm requirement is that the RTO should operate all

or a sufficiently large portion of transmission facilities in the region to give it effective control. Big gaps due to nonparticipation by trans-mission owners in a region (the “hole-in-the-doughnut problem”) would cause FERC problems under both this standard and its general “scope and configuration” standard.

In result, the “scope” standard leaves the field wide open for dif-ferent configurations and reflects a

probable lack of consensus within the Commission on mandating anything too specific on geo-graphic scope. That is probably favorable to the distinctive needs of Transco development. For one thing, the challenge of acquiring enough transmission assets over large enough regions to justify RTO status, and of getting trans-mission owners to wean them-selves from associated generation

rity coordinator,” fulfilling the function of coordinating reliability across control areas.

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As with the scope standard, this “characteris-tic” does not seem to present any formidable problems for Transcos; indeed, Transcos should find it easier to comply with some aspects of it than will ISOs.

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Short-term reliability.

Predict-ably, FERC insists that the RTO have exclusive authority for main-taining the short-term reliability of the grid, including the authority to manage interchange schedules, to order generator redispatch, and to approve all requests for sched-uled outages.

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These require-ments, too, would not seem to pose any special challenge for the appropriately-sized Transco. The Commission does, however, note the potential for RTOs to run into problems with existing reliability council standards in meeting their new FERC obligations; and pre-scribes simply that the RTO report this to FERC.

The NOPR’s minimum charac-teristics, then, while they do not explicitly address the distinctive characteristics of Transcos, and seem mostly directed at the experi-ence to date with ISOs, in most respects accommodate the Transco notion quite comfortably and, in some respects, more easily. The only major sticking point for cur-rent Transco proposals may be the strictness of the independence requirement.

VIII. Minimum Functions

Building on the experience of handling ISO filings to date, the

assets, is far more formidable than the challenges of establishing ISOs (which are not inconsiderable in their own right).

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Operational authority.

Build-ing on its insistence that RTOs con-trol all or most transmission facili-ties in its region, FERC requires that RTOs have effective opera-tional control over those facilities, either by directly operating them, or by delegation to others with enough oversight to ensure reli-able grid operation and nondis-criminatory access.

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While not insisting that RTOs operate a single control area, FERC does require that the RTO be the “secu-

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Commission sets forth seven basic “minimum functions” for RTOs, with some significant discussion of each. In the interest of space and time constraints, I will provide only the most selective discussion of these functions. Several can be noted briefly and will be familiar to most who have followed the restructuring debate:

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Loop flow.

RTOs are to develop and implement proce-dures for dealing with loop flow within three years. For more than a decade, FERC has been begging the industry to file creative solu-tions to the loop flow problem (and ducked taking the issue head-on itself), with minimal results. By imposing this as a requirement on the RTO, FERC clearly hopes to break the logjam on new approaches to this prob-lem area.

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Ancillary services.

While encouraging self-supply and com-petitive markets for ancillary ser-vices, the RTO is to be the ulti-mate controller and supplier of last resort and is to ensure that transmission customers have access to a real-time balancing market. These requirements are clearly based on the experience of ISO markets to date, such as California’s, in the provision of ancillary services.

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OASIS.

The RTO is to be the single OASIS administrator for all transmission facilities it controls, and to make independent (and hence more credible) calculations of ATC and TTC. As discussed above, problems in these areas provide part of FERC’s justifica-tion for the broad focus of the RTO

NOPR. FERC notes that it has received few complaints about the ATC calculations of operating ISOs.

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Market monitoring.

Predict-ably, FERC imposes on the RTO, as it has done with the California and “tight-pool” ISOs (and the California Power Exchange) a requirement to monitor all the major FERC-regulated markets that the RTO would operate in its region (transmission, ancillary ser-

justify, and, as I have visited the subject before in these pages,

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it may be useful to do so again.

IX. Transmission Pricing and Congestion Management

Noting that it did not break new ground under Order 888 on trans-mission pricing and that some of the most innovative proposals in this area to date have come from ISOs, FERC in the NOPR imposes a broad-ranging and explicit set of obligations on the RTO to act as:

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the sole provider of transmis-sion service under its control;

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the sole administrator of the FERC-approved open access tariff; and

•

the sole authority to handle transmission requests, and to review and approve new interconnections.

The proposal, which would cen-tralize some of the most crucial functions in the business in the hands of the RTO, in most cases exclusively, is likely to draw con-siderable comment and may become one of the focal points of a debate which space does not per-mit to be entered here. Less contro-versial is a related NOPR require-ment that the RTO tariff eliminate rate pancaking.

ikely to receive more positive attention is the required

“function” that the RTO “ensure the development and operation of market mechanisms to manage transmission congestion.”

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The Commission is clearly open-minded and flexible as to what RTOs develop to manage congestion, encouraging market approaches and requiring only that they allow

vices, and bulk power) for evi-dence of market power or design flaws; and to periodically assess how behavior in other markets (e.g., bilateral power sales or pri-vate exchange markets) interacts with the RTO-administered mar-kets. This area is viewed as enor-mously important by the Commis-sion staff, which has taken an intense interest in the monitoring programs established to date. With the experience of these programs starting to yield some hard lessons on the challenges of this not-uncontroversial form of front-line self-regulation, a far deeper analy-sis is necessary than this article can

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“broad participation by all market participants,” and efficient price signals as to transmission usage. The area appears one of the most promising for fostering creative new approaches to transmission pricing, with the potential to build on approaches adopted in Califor-nia and other ISO jurisdictions.

X. Transmission Expansion and Pricing Methodology

In a surprisingly short discus-sion of the difficult problem of creating an effective framework for transmission expansion, the Commission advocates an inter-esting combination: encouraging market-driven operating and investment actions for preventing or relieving congestion

and

requir-ing that the RTO have

ultimate

responsibility for both transmis-sion planning and expansion within its region.

How these two seemingly dis-parate concepts are to be recon-ciled is likely to be the subject of a number of comments on the NOPR, which does not elaborate on the subject. Predictably, the NOPR requires that the planning process is to be coordinated with state PUCs, and with RTGs where they exist. RTOs are given three years to meet the requirement, explaining perhaps the Commis-sion’s brevity on the subject and its recognition of the need for more analysis (which will not be attempted here).

The long-awaited Commission pronouncement on transmission pricing or “ratemaking treatment for transmission facilities under

RTO control” is also surprisingly cryptic but does impose the obliga-tion on RTOs “to reform transmis-sion pricing” and promises RTOs “greater flexibility in designing pricing proposals.”

While apparently still quite tra-ditional in how it views the trans-mission function for ratemaking purposes, the Commission does, as anticipated, put on the table a wide range of “performance-based reg-ulation” (PBR) concepts (price/revenue caps, price incentives, and performance standards) and “incentive pricing” concepts (higher ROEs, sharing of cost savings, non-levelized rates, and accelerated cost recovery schedules) and “non-

traditional methods for valuing transmission assets” (replacement cost and even acquisition premi-ums)—all potentially to be consid-ered on a “case-by-case basis.”

ther than asking some ques-tions, the Commission does

not elaborate further on these con-cepts or their potential application (and space certainly does not per-mit that this article do so). Nota-bly, however, the Commission clearly sees these incentives as the potential carrot for encouraging RTOs to form and comply with the minimum “characteristics” and “functions”; and the NOPR conditions qualification for most of these incentives on the RTO doing

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The long-awaited Commission pronouncement is surprisingly cryptic.

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so. (“Innovative treatments” for “non-pancaked” rates and regional congestion management proposals, however, are not so conditioned.) Prior conversations with Commissioners indicate that they see this “carrot” as necessary or at least useful in light of the absence of a clear “stick” in the “general rule,” discussed above.

X. Conclusion

In some respects, as noted, the NOPR is really a broad-ranging Notice of Inquiry (inviting comment and asking provocative questions in a number of major areas without any clear sense of prescription other than some general principles or pref-erences). However, in some areas, the Commission is clearly quite prescriptive—some will doubtless argue too much so.

f the “general rule” proves effec-tive in galvanizing most of the

non-ISO-administered industry into moving towards RTOs, there is enough in this NOPR to help set direction in certain areas. In others, more development of Commis-sion thinking and public debate is clearly necessary. In reality, how-ever, much of the definition needed in both these sets of areas is likely to be developed and intensely debated in cases surrounding proposals recently filed at FERC or in the pipeline. Some of this might even be occurring before comments are due in late summer, or certainly before any Final Rule emerges.

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Endnotes:

1.

Midwest Independent Transmission System Operator, Inc., 84 FERC ¶

61,231 at 62,184, Commr. Massey concurring.

2.

Notice of Proposed Rulemaking (NOPR), 87 FERC ¶

61,173, Slip Opinion at 217, 230–232.

3.

NOPR s

upra

note 2, at 232.

4.

NOPR

supra

note 2, at 242–243.

5.

While the term “open architecture” is used by commissioners as a current slo-gan, the Rule is not explicit as to exactly how it will work to curb the natural tendency of new nonprofit institutions such as ISOs to perpetuate their own existence.

6.

See, e.g., Tenenbaum, Lock, and Barker,

Electricity Privatization: Struc-tural, Competitive and Regulatory Options

,

Energy Policy

, Dec. 1992.

7.

I recall Steve Herod, one of the most thoughtful and effective Department of Energy and FERC reform-oriented staffers in the 1980s and early 1990s, recounting that he would need to hire 25 expert load-flow analysts to even begin to do the job properly.

8.

The California experience is instruc-tive here. When the California Public Utilities Commission first advanced the notion of structural reform of the Cali-fornia industry, about the same time that the Order 888 debate was underway, the investor-owned utilities (IOUs) were adamant about retaining ownership of both generation and transmission facili-ties. That led to the basic notion of sepa-

rating the control of transmission and related functions from its ownership. This thinking ultimately spawned the ISO. It was only after FERC began to redirect its regulatory concerns in Cali-fornia to horizontal market power in generation in late 1997 that a basic change in integrated utility thinking occurred, signaled by the three IOUs announcing large-scale planned divesti-tures of generation assets to allay FERC’s market power concerns. See Reinier Lock,

Managing California’s “Big Middle”: Options for Unbundling, Challenges for Regulation

,

Elec. J.,

July 1997, at 28. It did not take long for utility corporate strat-egy in many regions to openly contem-plate, and in some cases already carry out, large-scale deintegrations by selling off generation or transmission assets.

9.

FERC is certainly not alone in this analysis. Recent Senate hearings on the area produced similar concerns. See, e.g., Statement of Charles G. Stalon,

Federal Legislation Urgently Needed to Ensure that Competitive Electricity Markets Are Efficient and Reliable

, before Subcommittee on Energy and Power, Committee on Com-merce, U.S. House of Representatives, March 18, 1999.

10.

NOPR, supra note 2, at 66.

11. NOPR supra note 2, at 49–53.

12. NOPR supra note 2, at 51.

13. 16 U.S.C. § 824a(a).

14. Northern States Power Company, 1999 U.S. App. LEXIS 9096, May 14, 1999.

15. NOPR supra note 2, at 86. The Rule itself is hardly more specific. The RTO is defined as “an entity” that “satisfies the minimum characteristics,” “performs the minimum functions” and “accom-modates the open architecture require-ment” set forth in the proposed Rule. NOPR supra note 2, at 230.


17. NOPR supra note 2, at 141, 144–145.


19. Reinier Lock, Surveillance of Competi-tive Electricity Markets: A New Paradigm in Antitrust Regulation? Elec. J., March 1998.


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Documents

FERC's RTO Proposal: A Step Too Timid or a Genie Unleashed?