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FERC Chief Sees 888 Reforms Ahead; RTOs Aren't the Only Answer

March 6, 2006
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FERC has crossed the "threshold" of concluding that the existing Order 888 allows for undue discrimination in transmission service and that there is a need for the Commission to act, FERC Chairman Joseph Kelliher told an American Public Power Association (APPA) legislative rally held in Washington, DC, last Wednesday.

"What's really the open question is what will be the scope of the reform for the open access rules," Kelliher said. "How large of a scope will it be? How significant an undertaking will that be?"

He underscored the point that FERC is "trying to be careful" in its approach. "This is not a sudden act on our part." The Commission in 2004 held a technical conference where certain questions were asked by the agency related to FERC's open access order.

More recently, FERC in September 2005 launched a notice of inquiry, calling for "high quality comments" on whether it needs to reform the pro forma open access transmission tariff (OATT) under Order 888 in order to prevent undue discrimination and preferential treatment by regulated transmission providers.

"We think the beneficiary of this effort is the transmission customer, including APPA and its members," Kelliher told the gathering of public power officials. "I just want to emphasize that if the Commission is going to propose significant reforms to the open access tariff of a fairly large scope, that our efforts will not be successful without very strong support of APPA and its members."

FERC is "poised later this year to take some additional steps to reform our policy on transmission access," as well as other areas, he said.

Touching upon FERC's regional transmission organization (RTO) policy, the FERC chief noted his support for voluntary RTO formation.

But Kelliher also said there's "a great deal of confusion" over the Commission's RTO policy as a general matter. RTOs are not the goal of Commission policy. "They are viewed as a means towards an end. They are a means of promoting competition in wholesale power markets. Competition in turn is a means of ensuring just and reasonable rates in wholesale power markets." Kelliher noted that RTOs are "by no means the only means to promote effective competition in wholesale power markets."

The key to RTO expansion "will not be decided in the Pacific Northwest or in the Southeast United States, but it really will be decided in the existing RTOs. In my view, the key to RTO expansion is not whether and how the Commission exercises its conditioning authority in a merger or on market-based rate cases, but it will be whether the existing RTOs deliver demonstrable benefits at a reasonable cost to their members."

If RTOs "do prove that they're a demonstrably more efficient way to operate the grid and to operate energy markets, and if they serve their members, I don't see any reason why they won't continue to expand," he added. "But in the meantime, I don't expect RTOs to be established in all regions of the country."

Kelliher said that until recently, when concerns about RTO costs were raised, "I think there was a perception that the Commission's reflexive response was to ignore those protests and instead trumpet the benefits of RTOs. I think that created a perception that the Commission was indifferent to RTO costs and was transfixed by the potential of RTO benefits." If that perception was valid, that's "no longer the case. The Commission has heard the message loud and clear from APPA and others."

The FERC chairman said the attention given to RTO costs may "in fact be a sign of a different problem, perhaps a more important problem -- namely, RTO accountability or governance." Kelliher said "there have been some concerns about RTO governance," in particular that RTO management and boards are not accountable to their membership.

The Commission has started to address this issue, with the first step in this area being a final rule issued last December in which FERC revised its Uniform System of Accounts and financial reporting requirements to provide greater transparency and uniformity regarding costs incurred by public utilities -- including RTOs and independent system operators.

"I do think the Commission will take additional action in this area later this year," he disclosed. "I can't say I know exactly what form that action will take and we've openly asked for ideas, including from APPA, on how we can address the RTO accountability issue and RTO governance issue."

He said one way to answer the question of what shape competitive wholesale markets in the U.S. will take is by reference to the level of transmission access and the organization of the grid in the respective markets.

From that perspective, Kelliher sees three different types of wholesale power markets in the U.S. The first one is the pre-open access market, which is characterized by "very limited access to the transmission grid" by both wholesale customers and independent power producers. "I think TVA [the Tennessee Valley Authority] is probably the only region of the country that really can be characterized as a pre-open access region."

The second type of wholesale market is the open access or Order 888 market. "It's characterized by reasonable access to the transmission grid. But in those regions "there's rising concern by transmission customers about the flaws in Order 888 that allow for an opportunity for undue discrimination in transmission service."

The third type of wholesale power market noted by Kelliher is the RTO market, which is characterized by non-discriminatory access to the transmission grid.

Kelliher said that the fact that there are these three different types of wholesale markets in the U.S. "has a lot of policy implications for the Commission. And I just want to be clear -- very clear -- to avoid any possible confusion that I have no intention of trying to impose any particular market structure on regions. That, in my view, both the open access or 888 market and the RTO markets can serve transmission customers well and can both be equally effective in terms of competitive markets."

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