FERC took a major step last week toward regional operation ofthe electric transmission grid by issuing a notice of proposedrulemaking (NOPR) that seeks to promote the formation of regionaltransmission organizations (RTOs) nationwide.

By 5-0, the Commission voted out a proposal that seeks toencourage public transmission-owning utilities – as well asnon-public municipal and cooperative power groups – to eithervoluntarily join or form RTOs in an effort to resolve a number ofsecond-generation Order 888 issues that are impeding competition,such as congestion management, pancaked ratemaking and reliabilityproblems [RM99-2]. The move towards RTOs on a widespread basiscould save end-use customers “billions of dollars annually,” saidChairman James Hoecker.

FERC stressed the NOPR doesn’t mandate utility participation inRTOs, but some believe it comes pretty close to that. CommissionerVicky Bailey referred to a possible “lurking phantom menace” of animplied mandate in the proposed rule, while Commissioner WilliamMassey said the “tone of this document,” as well as its “textureand content,” make it “clear that the Commission intends for an RTOto form in every appropriate region of the country.” He added theproposed rule was “by no stretch neutral” on this score.

But Hoecker rejected any reference to a mandate – implied orotherwise. 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 thedestination will look like exactly.” He said the proposed rulesimply provides the signposts for electric utilities to movetowards more efficient regional bulk power markets.

Some believe RTOs should be considered for gas pipelines also.”It’s surprising that the gas pipelines have not moved towardsregional transmission groups similar to what’s occurring on theelectric side,” said David D’Allesandro, an attorney representingstate commissions, at NGI’s GasMart/Power ’99 in Dallas last week.

Under the RTO concept, transmission-owning utilities would turnover the operation and control of their transmission facilities toeither independent system operators (ISOs), transcos, combinedISO-transco entities or “anything else” that meets the elevenminimum “characteristics and functions” for RTOs that theCommission spelled out in the proposed rulemaking.

With respect to the characteristics, the Commission says RTOsmust be independent of market participants, regional in size andscope, have total operational control of the transmissionfacilities in its region, and have exclusive operational authorityfor maintaining reliability. As for RTO functions, these shouldinclude tariff administration and design, congestion management,parallel path flow, ancillary services, OASIS and calculation oftotal and available transfer capability, market monitoring, andplanning and expansion. FERC noted that the RTO requirements wouldgreatly reduce the need for federal regulatory oversight of thepower grid.

Although the NOPR requires RTOs to satisfy all of thecharacteristics and functions, it does give utilities the latitudeto propose alternatives for complying with six of the functions andit gives some additional time for compliance. Furthermore, FERCnoted the characteristics and functions were crafted to accommodateall types of RTOs, including ISOs, transcos, combined ISO-transcoentities and alternatives. And, they “do not invalidate any of thealready approved ISOs or compel rejection of other recentlyproposed regional model[s],” Bailey said. They also would allow forboth profit and non-profit RTOs.

To encourage the formation of RTOs, Commissioner Curt Hebertsaid FERC will consider performance-based rates for fullyoperational groups and other rate incentives, such as increases inrates of return on equity for utilities incurring increased risksin transferring to RTOs, acquisition adjustments for utilitiesbuying facilities to form or expand RTOs, incremental pricing forexpansion of grid by utilities joining RTOs, flexible treatment fordepreciation if necessary to form RTOs, and the opportunity tooffset gains from sales against stranded costs.

The NOPR proposes that all public utilities that own, operate orcontrol interstate transmission facilities file with FERC by Oct.15, 2000 plans to join or form an RTO, or submit alternativefilings that describe efforts made to join an RTO and/or thereasons (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 andperhaps unrealistic.”

Upon approval of a final rule, FERC proposes that utilities -both public and non public – engage in a collaborative process withstate regulators and legislators to facilitate the formation ofRTOs in their respective regions. Also, the Commission said itwould hold regional workshops, along with state authorities, forelectric utilities that own or operate transmission facilities.Susan Parker

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