What FERC Orders Really Mean

The wholesale electricity and transmission industry has changed dramatically in the past several years and will continue to evolve as transmission owners seek to comply with federal orders urging the development and consolidation of competitive wholesale markets. The emerging concept called the regional transmission organization (RTO) is the foundation for continued change.

Historically, the public has not been overly concerned with the status of the U.S. wholesale transmission market. However, when wholesale electricity markets are marked by price spikes, supply shortages, and reliability concerns, as was recently the case in California, energy customers understandably take a much broader interest in electricity markets. RTO developments, beginning with the issuance of FERC Order 888 in 1996, head the list of things the energy consumer needs to understand. These developments will affect end users in the short and long term.

Traditionally, the wholesale electricity market has been dominated by vertically integrated utilities that owned the generation sources, transmission lines, and distribution systems required to produce and transport electricity. Under this system, utilities could restrict access to their private transmission grids and favor their own generation and load when transmission resources were constrained. To facilitate competition in electricity markets, federal regulators took steps to guarantee open access to the transmission grid.

In April 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888, supporting the formation of Independent System Operators (ISOs)-independent entities designated to control the operations of some generators and all transmission facilities. As outlined in Order 888, FERC stated that ISOs should:

A subsequent order, Order 889, required transmission owners to provide transmission information to all transmission users on an Open Access Same-Time Information System (OASIS).

Order 888 resulted in the formation of several ISOs-California ISO, PJM, New York ISO, and ISO New England. All of these ISO were located in regions that were also actively pursing retail competition. ISO initiatives in other regions of the US, however, were either non-existent or mired in stakeholder processes.

In December 1999, FERC issued Order 2000 to further encourage transmission owners to join together into larger Regional Transmission Organizations (RTOs). Order 2000 laid out the general principles around which RTOs should be developed. Four minimum characteristics for RTOs were outlined:

(3)Possession of operational authority for all transmission facilities under the RTO's control

The overall objective of the principles outlined in Order 2000 was to further ensure non-discriminatory access by all market participants to the transmission grid, while maximizing the efficiency of operations by eliminating multiple actors. In addition, the broadly defined guidelines presented by FERC enabled participants to approach compliance utilizing a variety of different models. The most predominant models include non-profit ISOs originally supported by FERC and for-profit transcos.

While Order 2000 did not technically mandate participation in RTOs, the order did require all transmission owners to submit progress reports detailing their plans to participate (or rationale for not participating) in an RTO by the start of 2001.

In October 2000, all transmission-owning utilities that were not previously involved in an ISO were required by Order 2000 to submit filings to FERC describing their activities relating to RTO participation. Six RTOs were proposed in this round of filings: Desert STAR (DSTAR), GridFlorida, GridSouth, Trans Grid Company (Southern Company Transco), Southwest Power Pool RTO (SPP RTO), and RTO West. These proposals include both non-profit ISO and for-profit transco models.

Entities that were already participating in established RTO and ISO efforts were not required to file a response to Order 2000 until January 16, 2001. Established RTO initiatives include Alliance RTO, California ISO (CA-ISO), Electric Reliability Council of Texas (ERCOT), Midwest ISO (MISO), New England Regional Transmission Organization (NERTO), New York ISO (NYISO), and PJM Interconnection (PJM). These initiatives based their RTO plans on their established transmission organization structures. However, most of them proposed significant changes in response to Order 2000. For example, the NERTO filing proposes the formation of the NE ITC that would be responsible for the open access transmission tariff and grid planning. The currently operating ISO New England would still serve as the system operator and market administrator.

Currently two different groups, the Crescent Moon RTE and the East Coast Transmission Organization (ECTO), are discussing the potential of forming RTOs. These initiatives are being formed as alternatives to the current RTO projects developing in the transmission owners' regions.

In addition, two independent system administrators (ISAs), Arizona ISA (AZ ISA) and Northern Maine ISA (NMISA), have maintained their status with the FERC in order to meet the short-term needs of their regions. These organizations are not-for-profit entities that manage regional transmission but do not administer an open access transmission tariff.

Four other entities have proposed forming transcos that will act as transmission owners operating under the umbrella of an RTO. These proposed transcos, including American Transmission Company (ATC), Entergy Transco, International Transmission Company (ITC), and TransConnect Transco, illustrate the hybrid transco-ISO model that is emerging across the country.

In the months following the Order 2000 compliance filings, FERC issued several responses that further clarified its objectives. FERC sought the implementation of a few large RTOs throughout the United States, especially pushing for a single RTO in the West and Southeast, regions that had not previously been involved with an established transmission entity. For example, while FERC conditionally approved both GridSouth and GridFlorida, the Southern Company Transco was rejected outright. In fact, Southern Company was told not to re-apply and instead to explore opportunities for joining one of the neighboring RTOs. In the West, RTO West was described as the "most promising" RTO development, a cornerstone for the region.

While FERC's reaction to the RTO proposals from the West and Southeast did indicate a movement toward fewer entities controlling the entire US transmission system, the established ISOs and transcos in the Midwest and Northeast did not anticipate rejection as RTOs. As ordered by FERC, Midwest and Alliance reached an agreement to reduce friction between the two transmission organizations by establishing a single transmission rate throughout the region and further inter-RTO coordination. The Northeastern transmission organizations, PJM, NYISO, and ISO-NE, continued work on seams issues and regional coordination.

On July 12, 2001, the RTO landscape dramatically changed again when FERC issued several new orders that essentially created four regional wholesale power markets in the United States. In these orders, FERC specifically required utilities in the Northeast and Southeast to enter into mediation to form a single RTO for each region. The Entergy Transco was required to join the Southern RTO, or GridSouth, but the SPP RTO was allowed to join either GridSouth or the RTO to be formed in the Midwest. The orders also indicated that the FERC would eventually issue similar orders for utilities in the Midwest and the West. GridFlorida was permitted to remain independent due to the isolated nature of the transmission system in peninsular Florida. In addition, because the FERC has no jurisdiction over ERCOT (as referenced in the table), it also was allowed to remain separate.

To date, the establishment of four regional RTOs has met with much resistance, especially from the existing ISOs and transcos. These entities have invested significant time and capital into the development of individual transmission system operators. In addition, both the existing and proposed RTO initiatives are hesitant to relinquish control over their transmission assets to a larger regional entity. Transmission owners that have had significant input into the development of each RTO proposal will now have to conform to existing RTO structures. While these short-term concerns may cloud the eventual outcome, the reasoning behind the FERC orders is clear: a reduction in the number of entities involved in transmission transactions should increase operational efficiency and market liquidity and reduce transactions costs for generators, suppliers, and energy consumers.

While RTO implementation activities have not exactly made front-page news, the restructuring of the U.S. transmission system ultimately will affect all electricity market participants. The recent California situation provides an extreme example of how wholesale market structure can affect the general public. The impact of recent RTO activities will most likely not be as dramatic. However, in both the short and long term, the development of RTOs will alter the retail market for electricity, including how consumers purchase electricity, the cost of electricity, and from whom electricity is purchased.

In the short term, the challenge of forming four RTOs from the numerous and different entities that are currently operating or under development could give rise to new difficulties in evolving transmission markets. For example, in the Northeast, ISO-NE, NYISO, and PJM ISO all have similar but different systems for operating the transmission grid and administering wholesale electricity markets. Although the FERC directive to base the Northeast RTO on the current PJM ISO provides some guidance, it is unlikely that NYISO and ISO-NE will completely abandon the various systems in which they have invested time and funds in favor of a new PJM system. Similar situations will occur in the Southeast, Midwest, and West, where the various RTO initiatives have distinctly different views on the structure, governance, and market procedures that are ideal for an RTO. As entities attempt to combine and compromise, transmission system operations may become challenging in the short term.

Increased complexity could also introduce a greater potential for system errors. In a worst-case scenario, such errors could give rise to fluctuating energy prices and uncertain system reliability. Utilities might eventually increase rates in order to cover costs incurred during this period.

Ongoing changes in wholesale transmission markets may also undermine FERC's efforts to encourage competition in electricity markets. Potential market participants may become reluctant to enter changing wholesale markets, thereby reducing competition in existing deregulated markets and delaying restructuring in regulated markets.

Independent power producers provide electricity for markets; uncertainty in transmission markets may further hamper the US market, which is already plagued by insufficient generation capacity in some regions.

While the short-term affects of the changing wholesale market are not particularly positive, in the long-term, the U.S. RTO system has the potential to fulfill FERC's objective of developing a smoother, more efficient, and competitive wholesale electricity and transmission grid in the U.S.

With greater coordination and fewer transmission operators, intra- and inter-regional electricity trading will be simplified, and operational efficiency should be increased. Retail electricity providers will be capable of obtaining electricity from a greater number of sources throughout the region, while only having to deal with one transmission system and avoiding multiple transmission fees. Electricity purchases made out of the region will also be simplified because electricity involved in inter-regional trades will have to pass through fewer systems before reaching the point of delivery. This added simplicity in trading is likely to result in a decrease in transmission system user fees.

Over the long term, the formation of a few large RTOs should provide energy consumers with access to more supply options and potentially lower rates. However, if FERC's objective of establishing four large RTOs is to be realized, a number of hurdles need to be addressed. Among these hurdles is the complex stakeholder process involved in combining existing ISOs and developing new RTOs. Until this obstacle is addressed, the uncertainty of a wholesale market in flux will put the development of robust retail markets on hold in many regions of the country.

In my trade journal magazines, I saw the following article and thought that it was a good overview of the various FERC orders which dictate where FERC is pushing utilities and what is shaping the next phase of Power Deregulation. Consider this background for the CALPOWERCRISIS and for the battles between FERC and the state of California over how the transmission within California will be operated. It is posted for academic interest only. Please go to the source for any full or other uses of the information.

Nothing spices up a story like a conflict with some villains...

Are we making a movie here.....? LOL!!!

I put the article on calpowergate because of the Villain Theme

By the way anyone heard from or seen the pair of ex-Gore advisors that Davis hired to manage his PR?

We are seeing "Lets re-elect Governor Gray Davis " commercials down here in Southern California so I suppose they are still working for him!

Thanks for posting some great educational material!

There was an article in the LA Times regarding the impact of the California power crisis and the Enron bankruptcy on the pace of utility expansion and deregulation.

I'll get the link on here and maybe we can get some comments on it.

Forgot the direct link to calpowercrisis:

Go to the above link at post #4 for calpowergate link!

To find all articles tagged or indexed using calpowercrisis

Click here: calpowercrisis

The LA Times has quite a good article on the impact of Enron's demise on the utilty industry and the implications of consumer cost of energy in the years ahead.

But deregulation in California led to ballooning energy prices, which so far have been paid for by bankrupt or crippled utilities and by the state government. In deregulation's wake, California is burdened with electricity prices that are far more than what neighboring states pay for power.

California's failure stalled the deregulation experiment's progress in other states. Now with the bankruptcy of Enron, deregulation will be put off for years, experts say. The experiment has lost its champion. "Enron lobbied in every state for deregulation," Unisource's Pignatelli said. "No other company is going to do that."

Full article here:

Enron Is Proving Costly to Economy

Subtitle: Bankruptcy: Energy projects valued at $12 billion are on hold as financial markets make it tougher to raise capital. Any shortages would fall heavily on consumers.

In deregulation's wake, California is burdened with electricity prices that are far more than what neighboring states pay for power.

The California press and spin makers have a very selective and short memory. I know I am preaching to the choir, but please forgive me.

First, up in Washington State, a lot of electric utilities raised their rates anywhere from 25 to 90% a year ago because of the problem that California caused in the west coast spot market. None of the utilities I am familiar with has dropped their retail rates.

What you saw in Nov-Dec 2000 and early 2001 was a lot of "neighboring state's utilities" raising their rates so they could immediately cover the high cost of power. California officials on the other hand, made a decision not to immediately raise rates. An immediate decision (as can be seen by what happened at San Diego Gas & Electric) would have reduced the demand for high priced electric power.

Again, California's political leadership choose to avoid raising retail rates. That decision is why California will have to pay higher power prices than its neighbors! It's neighbors managed the problem and California tried to avoid the problem.

This long term high rates problem is not a problem of deregulation, it is a problem of bad political leadership. The LA Times is trying to paint California as a victim of circumstances as opposed to having to pay for stupid ballot box decisions.

Great find. Thanks for posting it.

As outlined in Order 888, FERC stated that ISOs should: Operate independently of all market participants

I have been boring people with this fact for almost a year now, but this is why Davis's threats to "sieze" power plants and also his plans for a "California Power Authority" are doomed.

California can't own power plants and be an RTO at the same time.

Well the power plant owners (read that transmission users) are suppose to be at arms length from the RTO/ISO/Transmission operators, rules and laws have never stopped democrats from the going for the control over things that they want.

You are right the arm's length transaction thing, should keep California from owning and operating transmission for the state.

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