On the brink of the new millennium the Federal Energy RegulatoryCommission issued Order 2000 to take the bulk power market the nextstep toward a competitive grid with a final rule setting theparameters for independent Regional Transmission Organizations(RTOs). The vote was 4-0 with Commissioner Vicky Bailey recusingherself.

“This is a very important order for the bulk power market andfor the structure of this industry, which is traditionallycharacterized by a high degree of vertical integration. That, thisorder says, must change,” Chairman James Hoecker announced. “Todaywe have blazed a trail through a new competitive paradigm forwholesale electricity markets.”

Under the rule RTOs “will operate independent of marketparticipants, eliminating the self-dealing incentive inherent invertical integration,” Commissioner William Massey said. The rulefollows the pattern laid out in the Notice of Proposed Rulemakinglast May. While it does not order utilities to participate in RTOs,it makes clear FERC has the power to order participation “on a caseby case basis to remedy undue discrimination or market power.”TheCommission also could make participation a prerequisite for amerger approval.

On the issue of independence the rule sets a safe harbor limiton a market participant’s active ownership share in an RTO to 5% ofoutstanding stock. A target limit for a “class” of active ownerswho are market participants is 25%. Massey said that limit could behigher or lower, depending on how widely the rest of the ownershipis dispersed and the power of the shareholders. Market participantscould have a larger share if they are “passive” owners operatingthrough a blind trust or some other mechanism that would allow themno power to influence decisions made by the RTO operators. Thepassive status would adhere to certain rules and be validated byindependent audits.

FERC’s design would have active owners who are marketparticipants phase out their ownership interests over five years.

Using this standard the Commission voted 3-1 with Baileyrecusing and Commissioner Curt Hebert Jr. opposing, to conditionson an application for an RTO stretching from Michigan to Virginia,sponsored by the utilities, AEP, Consumers Energy, DTE (DetroitEdison), FirstEnergy and Virginia Electric & Power. TheAlliance RTO, which it was noted could obstruct West-to-Easttransmission “and isolate PJM” if it restricted access, was sentback to the drawing boards to conform with the new rule. It wasnoted the Alliance RTO owners could remove the ISO board or vetonew members. In addition it provided for pancaked rates, which alsoare prohibited under the new rule.

Under Order 2000 RTOs may be set up as Transcos, ISOs or take”any corporate form.” While FERC does not prescribe a particularregion, the RTOs must serve a region of “sufficient scope.”

The rule provides for pricing reforms. The RTOs may apply forperformance-based rates and risk-adjusted rates of return fordemonstrated risk.

The set-up of FERC-approved RTOs will “dramatically improve gridmanagement efficiencies through tools such as regional congestionmanagement, transmission pricing reform and one-stop shopping fortransmission services,” Massey said.

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