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Idea of RTOs Serving as New Regional Reliability Entities Gets Thumbs Down

The idea of allowing regional transmission organizations (RTOs) to also serve as regional reliability entities that would be formed under pending comprehensive energy legislation on Capitol Hill drew several negative reviews from power industry participants at a gathering in Washington, DC, on Tuesday.

"I think my answer is no," said Allen Mosher, director of policy analysis at the American Public Power Association (APPA), in commenting on whether it would be appropriate to allow RTOs to also serve as the new regional entities under the legislation.

"I want the separation of RTOs from the regional entity," Mosher said. He noted that a regional reliability entity would serve as an "enforcer" of reliability rules, while an RTO is a transmission grid operator. The idea of an RTO "being both the user of the road and the traffic cop for the road just strikes me as a conflict of interest."

Mosher made his comments at a workshop held at the Canadian Embassy in Washington, DC, examining issues related to the formation of an electricity reliability organization (ERO), as called for in a comprehensive energy bill pending in the U.S. Congress. The workshop brought together a wide variety of association, industry and Canadian and U.S. government officials.

A bilateral ERO Oversight Group, which includes representatives from various U.S. and Canadian government agencies, is addressing key issues for the transition from the current North American Electric Reliability Council (NERC) to an ERO that can work on an international basis.

Ten voluntary regional reliability councils created NERC, and today 10 councils comprise the sole membership of NERC. Under the proposed legislation, the ERO would be formed and develop and enforce all reliability standards unless it enters into an agreement to delegate these responsibilities to a regional entity.

The transition from today's regional councils to the legislation's regional entities could be affected by ERO policies, FERC rules, policies in Canada and changes in the power industry, such as growth of RTOs.

Mosher participated in a panel that examined policies related to the formation of the new regional entities. "For the simple question -- can an RTO be a regional entity? I think the answer is that's a pretty bad idea," the APPA official said.

Ed Schwerdt, executive director of the Northeast Power Coordinating Council (NPCC), agreed with Mosher, saying the idea of an RTO also serving as a regional entity is a "very bad idea." The NPCC official said that "there are different functions, different focuses for the two organizations."

Specifically, Schwerdt noted that RTOs "have the enormous responsibility of both operating the system and administrating a market and that's not to be trivialized at all. That's a large job." A regional entity would be responsible for implementing continent-wide standards, establishing regionally specific standards and monitoring and enforcing related compliance, he noted.

Earlier, David Cook, vice president and general counsel at NERC, was asked to comment on what he sees as the overlap or interplay between RTOs and the proposed regional entities.

"There would clearly need to be sort of an assessment of who's doing what," Cook responded. "You certainly don't want both of them doing the same thing." The NERC official went on to say that "fundamentally, the RTOs are system operators and the RTOs are the ones that have to follow the rules. They may have other functions. But that's -- from my narrow perspective...their function. They've got to follow the rules." He said that "in a sense, the regional entity would be the compliance monitor for the RTO."

In his presentation, Cook provided an in-depth look at how the proposed legislation would be put into effect should it become law.

Under the measure, an independent, self-regulatory organization would be instituted to set and enforce reliability standards, with FERC oversight in the U.S. "The legislation contemplates that enforcement would be delegated to regional entities," Cook noted.

"As we were drafting the legislation, we chose the term regional entities specifically so as not to preordain the result of having a simple carryover of the regional councils, but it's clear that the councils are the logical candidates for the functions that this talks about," the NERC official said.

The legislation also makes general allocations of responsibility. "The standard setting would happen at the ERO level," Cook noted. "There's an opportunity for regional differences. There is an opportunity for region-specific standards."

Compliance and enforcement would occur primarily at the regional level. "If there is no regional entity for a particular part of the country, compliance and enforcement would be the responsibility of the electric reliability organization itself," Cook told the workshop.

The ERO would have oversight of the regional compliance and enforcement programs "and then there would be government oversight on top of the whole operation."

The legislation offers a "very simple definition" of a regional entity, Cook said. "It's the entity which has been designated to have enforcement authority. That can be either delegated by the ERO in an agreement or the legislation says that the Commission [FERC] itself may assign the enforcement function to a regional entity."

In either case, the regional entity receiving this delegation of enforcement authority has to meet certain criteria. "Most of the criteria are the same as applied to the ERO itself, with the exception of governance," Cook noted. "The ERO is required to have an independent board of directors or board of trustees. For the regional entity, the statute specifically says that the board of directors can be independent or a balanced stakeholder board or a hybrid."

The measure sets certain criteria related to enforcement. Specifically, the ERO and regions must be able to enforce standards "and I take that to mean they've got to have the rules and the processes and procedures in place to do that," Cook said.

Also, the legislation allows the ERO and the regions to assess penalties and sanctions. "Under the legislation, the penalties and sanctions can take effect only after the ERO files them with the Commission," the NERC official said. "The legislation also indicates that FERC may take direct enforcement action itself without using the ERO provisions."

As for next steps, Cook said "we need to register all of the owners, operators and users of the system so that we and the regional entities know who they are. That process has begun, but that will be a continuing process for a few years."

He also said that the regional entities will need to satisfy the criteria laid out in the legislation in terms of governance, allocation of costs, standards development, among other things.

Also, "we need to develop the delegation agreements themselves between the ERO and the regions and then we'll need to secure FERC approval of the delegation agreements," Cook noted. "That last step, at least, we'll need to await the legislation." The full House passed the energy bill on Thursday (see related story). All eyes are now on the U.S. Senate for further action by that chamber on its version of comprehensive energy legislation.

Last week's workshop follows on the heels of a similar gathering on Dec. 8, 2004 in Toronto, which explored the international aspects of implementing an ERO.

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