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Exposing Myths on what the FERC Really Wants

Fortnightly Magazine - March 1 2000

the locations of the meetings, Order 2000 said the FERC would choose the five cities only for convenience and how they fit the budget. The RTO Rule says that more than one gathering may result in more than one RTO (or, we add, none).

Just as with joining an RTO, Order 2000 does not mandate any particular result from the collaborative process. Here, again, the industry reads too much into the phrase "we expect." With the incentives placed on the table, and the opportunity for investors to make profits from transmission, the FERC only "expects" that transmission owners will attend at least one meeting.

Myth No. 3: Passive Owners Face "Tough" Rules

Reality: Entergy Didn't See It that Way

The next five myths turn to the merits of RTOs. Thus, having conceded that RTOs truly are voluntary, some critics interpret Order 2000 as setting impossibly high hurdles for those who might prefer a for-profit transmission company (transco) instead of a not-for-profit independent system operator (ISO).

This and the next myth have a ring of truth to them. Unfortunately, it's the ring of half-truth.

Yes, any buyer of transmission without a lot of money must give the seller (an integrated utility) at least some stake in the enterprise, whether it be a financial interest (passive) or minority voting rights (active). And these ownership interests bear close examination. But most of the information requirements set down for passive RTO owners in Order 2000 come from the list the FERC majority put together last year in a declaratory ruling granted to Entergy. And no one at that time, including the company itself, called that burden difficult. Indeed, the dissenting opinion in that case considered the requirements to be too lax. (See Entergy Services Inc., 88 FERC ¶ 61,149.)

The Preamble to Order 2000 has sections on passive and active ownership and a thorough discussion of each. Order 2000 sets information requirements for passive owners to file as part of an application for approval as an RTO. A transco can show that it raises capital and makes investment independently of owners that have no votes and that it owes no fiduciary duty to the generator-passive owners. Any company with passive ownership, such as bondholders, works that way. Transcos, as corporations, should do so, too.

While the passive owners must show the "extent" of control over a number of functions (ratesetting, board removal, admittance of new members and access to information not publicly available) this requirement is a far cry from a prohibition against "any" control over operations. In Entergy, a majority of the commission accepted provisions for removal of directors for cause (such as malfeasance and creating harm to financial integrity of the company). Thus, Order 2000 expressly allows access to confidential information "necessary to protect the passive owner's capital investment." (footnote 308.)

The RTO Rule adds that the definition of "passive ownership" used by the Securities and Exchange Commission may serve as a model for the FERC. That definition speaks of a financial interest or a long-term lease that establishes payments independent of profits. As