Regional Transmission Organizations: The Future of

Transmission?

Dave Edwards

4/17/2004

Overview

• Historic Transmission

• Early Attempts at Restructuring

• The RTO Model Emerges

• Midwest ISO – The First RTO

Historic Transmission

• Vertically Integrated Utilities control the market.

• Utility company owns electric generating facility and transmission lines.

• Utility or local distributors then pass electricity to consumers with no alternatives.

Historic Transmission (cont.)

• Generation and Transmission are bundled together when determining the rate.

• Rates based on prior operating costs create incentive for unneeded production of generation infrastructure.

• The price of construction is passed to consumer as a “cost-of-service.”

Historic Transmission (cont.)

• Transmission lines are controlled by the large utilities.

• Cheaper, more efficient methods of generation are ignored.

Early Attempts at Restructuring

The California Experiment

• CA had a high energy demand.

• To combat an insufficient supply and create an incentive for the industry, CA deregulates the energy market.

• A Power Exchange is created to foster competition in pricing.

The CA Experiment (cont.)

• Large generators take advantage of the system by withholding power and selling it at elevated prices levels when the grid cannot meet demand

• Price caps favor these generators, while distributors file bankruptcy.

• Consumer rate freezes remove inflation incentives to conserve energy.

The CA Experiment Fails

• Distributor Bankruptcy

• Rolling Blackouts

• Enron

• Need I say more?

• Price Caps on generators are issued, ending the crisis and the deregulation.

Other Restructuring Attempts

• Illinois, Texas and other states have attempted to create a market-based system of moderating energy prices.

• IL requires utilities to unbundle generation and transmission costs, provide variable rates for prime time and off-peak energy use, and allow alternative generators to use the transmission lines to benefit consumers.

The Energy Policy Act of 1992

• Encourages greater competition in power markets by promoting new generators

• The Federal Energy Regulatory Commission (FERC) gets expanded authority to grant access to existing transmission lines.

The RTO Model Emerges

• ISOs Under FERC Order 888

• Current RTOs

• FERC’s Standard Market Design

ISOs Under FERC Order 888

• Provide unbiased access to transmission system for all generators

• Permitted to charge a tariff set by FERC

• Designed to prevent discriminatory access and avoid a problem seen in CA

• Estimated Savings for consumers:

• $3.8 - $5.4 Billion a Year

The Drawbacks of the 888 Model

• Lacked a mechanism for broad regional control of the power grid

• Did not permit mitigation of unlawful prices

• Required creation of Independent Transmission Providers, despite acceptance of ISO’s.

Current RTOs

• FERC Order 2000

• Characteristics of an RTO

• A Total of 12 existing or proposed RTOs in the US and Canada.

Order 2000 - RTO’s Can:

• “(1) improve efficiencies in transmission grid management;

• (2) improve grid reliability;

• (3) remove remaining opportunities for discriminatory transmission practices;

• (4) improve market performance; and

• (5) facilitate lighter handed regulation.”

4 Essential Attributes of an RTO

• Independence from market participants

• Appropriate scope and regional configuration

• Operational authority for all transmission facilities under the RTO's control

• Exclusive reliability control of the grid.

RTO: Independence• The RTO, its employees, and any non-

stakeholder directors must not have any financial interests in any market participants

• It must have a decision-making process that is independent of control by any market participant or class of participants

• It must have exclusive and independent authority to file changes to its transmission tariff with the Commission

RTO: Scope

• RTO boundaries should:

• facilitate essential RTO functions and goals,

• recognize trading patterns,

• mitigate the exercise of market power,

• not unnecessarily split existing control areas or existing regional transmission entities,

• Et cetera.

RTO: Operational Authority

• real-time monitoring of system conditions

• Direct Control of facilities though technology vs. delegation of authority

RTO: Reliability

• Receiving, confirming and implementing all interchange schedules;

• Must have the right to control any generator • Outages of transmission lines must be

approved, even if owned by someone other than RTO

• RTO must report to commission if some organization places restrictions upon it.

To Recap:

• RTOs are not a complete restructuring of the energy market.

• RTOs are a first step towards that restructure. Reliable and efficient management of the transmission lines is necessary before a deregulated market system would be viable.

FERC’s Standard Market Design

• (SMD) key features are: the formation of (RTOs);

• ensuring that all independent transmission organizations have sound wholesale market rules; and

• varying implementation schedules depending on regional needs and regional differences.

Midwest ISO

The First RTO

• Dec. 20, 2001, Midwest ISO became the first FERC-approved RTO in the nation

• 100,000 miles of transmission lines and more than 100,000 megawatts of electric generation over approximately 1.1 million square miles.

• The regional hub for the flow of electricity in the 15-plus states of its members.

Membership

• Entry fee of $15,000. Annual fee of $1,000.

• Voting rights for the Board of Directors

• Access to the Advisory Committee

• Transmission Owners Committee has special powers granted by the ISO agreement

MISO & PJM Interconnect

• “Joint and Common” Market• Each retains individual responsibilities as

an RTO• Designed to increase players in the market• Some functions shared between the two• Another benefit is the decreased cost of

developing new processes, and R & D together.

Conclusion

• By assigning responsibility for the regional grid to RTOs, reliability and efficiency are increased.

• Removing control of the transmission lines from market actors is the critical first step in a deregulated energy market.

• Voluntary initiatives like the “joint and common” market may lead to a coordinated network of RTOs which allow consumers to compete for energy generated nationwide.