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Fortnightly Magazine - January 1 1998

hand, if Congress should go searching for "clamor," it need look no further than the rush by utilities within a given geographic area to form a voluntary regional ISOs, and how that move is undercut by the private-use restrictions imposed on tax-exempt debt used by cooperative associations, municipal utilities and the federal power marketing administrations. These tax rules slow the nationwide reform of transmission access and pricing.

In contrast to a federal restructuring bill, it has proven relatively easy to sell electric utilities on the idea of handing over control of their transmission lines to a regional ISO, while retaining ownership of the asset itself. The latest word, however, is that utilities favor ISOs because they don't expect them to work. Some say that if ISOs should ever achieve true independence - that is, if they actually work - then they would be doomed to failure.

In theory, a truly independent ISO would eliminate all generation market power from transmission markets. That would squeeze out all excess margin, guaranteeing a pure, regulated rate of return for electric transmission assets. Few presume that a utility would stand by and let others control its assets, or push return down so low that rates recover costs and not much more. Instead, many believe that a utility in that case would divest itself of its transmission assets. Ironically, the lines would likely pass to competitive power producers, who would retain a real monetary incentive to upgrade or build lines under most of the schemes now being proposed for congestion pricing at the ISOs. Of course, new "transcos" could form that would own only transmission. ISOs would disappear. Power producers building new lines could trade the capacity to the transcos for transmission congestion rights.

Does that mean that ISOs represent only a transition phase: a half-way step in electricity evolution?

Roy Thilly, of Wisconsin Public Power, questions whether ISOs represent only the appearance of a solution. Is it reasonable, he asks, that transmission owners will give over control of transmission assets to ISOs? He takes little comfort from the fact that ISOs are forming voluntarily. How different, he asks, would ISOs look if formation was mandatory and if the FERC could impose conditions?

Commissioner Massey responds simply that the FERC is doing the best it can with what it's got.

"Are ISOs the ultimate end game?" he asks. "I don't know of anyone who is discouraging a transco. We're simply working with the authority that we have. We're counting on the industry to act on a voluntary basis.

"If Congress wants to have regional transcos, it needs to say so," adds Massey.

Ironically, the most serious challenge to voluntary ISOs has come from Congress - from the joint committee on taxation. Last fall, the joint committee advised that government-owned utilities who cede control over their transmission assets violate the private-use restriction on tax-exempt debt. That advice has discouraged much of the public power industry from joining voluntary ISOs, producing patchwork structures that cover only a portion of the grid.

California Commissioner Gregory Conlon points out that municipal