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FERC Gives Major Push to Electric Utility RTOs

FERC Gives Major Push to Electric Utility RTOs

FERC took a major step Wednesday towards regional operation of the electric transmission grid by issuing a notice of proposed rulemaking (NOPR) that seeks to promote the formation of regional transmission organizations (RTOs) nationwide.

By 5-0, the Commission voted out a proposal that seeks to encourage public transmission-owning utilities - as well non-public municipal and cooperative power groups - to either voluntarily join or form RTOs in an effort to resolve a number of second-generation Order 888 issues that are impeding competition, such as congestion management, pancaked ratemaking and reliability problems. The move towards RTOs on a widespread basis could save end-use customers "billions of dollars annually," said Chairman James Hoecker.

FERC stressed the NOPR doesn't mandate utility participation in RTOs, but some believe it comes pretty close to that. Commissioner Vicky Bailey referred to a possible "lurking phantom menace" of an implied mandate in the proposed rule, while Commissioner William Massey said the "tone of this document," as well as its "texture and content," make it "clear that the Commission intends for an RTO to form in every appropriate region of the country." He added the proposed rule was "by no stretch neutral" on this score.

But Hoecker rejected any reference to a mandate - implied or otherwise. Although the NOPR is "based on clear rules of the road," he said "public utilities are not being told what road to take, they're not being told what car to drive or even what the destination will look like exactly." He said the proposed rule simply provides the signposts for electric utilities to move towards more efficient regional bulk power markets.

Under the RTO concept, transmission-owning utilities would turn over the operation and control of their transmission facilities to either independent system operators (ISOs), transcos, combined ISO-transco entities or "anything else" that meets the eleven minimum "characteristics and functions" for RTOs that the Commission spelled out in the proposed rulemaking.

With respect to the characteristics, the Commission says RTOs must be independent of market participants, regional in size and scope, have total operational control of the transmission facilities in their region, and have exclusive operational authority for maintaining reliability. As for RTO functions, these should include tariff administration and design, congestion management, parallel path flow, ancillary services, OASIS and calculation of total and available transfer capability, market monitoring, and planning and expansion. FERC noted that the RTO requirements would greatly reduce the need for regulatory oversight of the power grid.

Although the NOPR requires RTOs to satisfy all of the characteristics and functions, it does give utilities the latitude to propose alternatives for complying with six of the functions and it gives some additional time for utilities to comply with three functions. Furthermore, FERC noted the characteristics and functions were crafted to accommodate all types of RTOs, including ISOs, transcos, combined ISO-transco entities and alternatives. And, the proposed standards "do not invalidate any of the already approved ISOs or compel rejection of other recently proposed regional model[s]," Bailey said. They also would allow for both profit and non-profit RTOs.

To encourage the formation of RTOs, Commissioner Curt Hebert said FERC will consider performance-based rates for fully operational groups and other rate incentives, such as increases in rates of return on equity for utilities incurring increased risks in transferring to RTOs, acquisition adjustments for utilities buying facilities to form or expand RTOs, incremental pricing for expansion of the grid by utilities joining RTOs, flexible treatment for depreciation if necessary to form RTOs, and the opportunity to offset gains from sales against stranded costs.

The NOPR proposes that all public utilities that own, operate or control interstate transmission facilities file with FERC by Oct. 15, 2000 plans to join or form an RTO, or submit alternative filings that describe efforts made to join an RTO and/or the reasons (obstacles) for remaining outside an RTO structure. Existing RTOs that satisfy the 11 principles would have until Jan. 15, 2001 to file. Hebert called the deadlines "ambitious and perhaps unrealistic."

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