On January 1, 1998, California will "deregulate" the state's electric utilities. The Western Power Exchange (WEPEX) and the independent system operator (ISO) will start up, creating an open market...
THE MIDWEST INDEPENDENT SYSTEM OPERATOR PROposal raises the lingering question of whether the ISO model represents a "stepping stone" or a final form of electric industry transmission management. Many players are split on which model would best serve an open electric market: an ISO, or financial separation of the transmission and distribution system from electric generation.
Within the generalized ISO framework, individual members would retain ownership and operate and maintain transmission assets. Under such a system, individual members hold power and influence over the day-to-day operation of the entire transmission system. The ISO format is intended to mitigate market power. However, if members retain influence over the corporate structure, provide the initial personnel to the ISO and maintain the physical infrastructure, they could possibly receive some market advantage.
Most ISO plans propose a "code of conduct" that prohibits advantage in transmission allocation and does not allow agents to own generation assets. However, ISO rules regarding posting and availability of transmission capacity remain under development, and information flow could remain selectively open to members while excluding other parties. Whether such a code can compel former employees, and current corporate cousins, to pursue ISO objectives to the exclusion of generation objectives remains to be seen.
Other industry analysts argue that companies should divest themselves entirely of transmission and distribution functions. Such a system would create two companies: one for electric generation and another for transmission and distribution. Such a divestiture could take the form of an outright sale of either generation or T&D assets. However, companies might also choose to functionally divide company assets into two groups and distribute the assets to shareholders.
In this model, geographically broad transmission-only companies could provide the benefits claimed by large ISOs and the added benefits of financial separation. The T&D company would maintain and operate the grid, exclusively. With revenue sources and ownership of transmission assets, as well as operation and maintenance costs clearly defined during the divestiture process, regulators would direct simplified rate-of-return regulation, or performance-based ratemaking, over a fully regulated enterprise. This model might ease some difficulties associated with fully and accurately dissecting the costs of operating and maintaining the grid under a multi-owner ISO model. By operating independently, the divestiture model would mitigate the possibility of cross-subsidization of unregulated activities, protectionism, and inside dealing that is possible between linked organizations.
For electricity deregulation to achieve its goals of lower costs and improved service, T&D system operators must ensure system reliability while encouraging the development and use of least-cost power supplies.
Jon Ludwigson is a Senior Analyst with Resource Data International Inc.
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