[BETA] Fortnightly

Do not mistake the FERC's professed neutrality on what works best for regional transmission organizations.

In its final rule on regional transmission organizations, known as Order 2000,[Fn.1] the Federal Energy Regulatory Commission said it would not dictate to the electric utility industry whether and how to form RTOs. Don't be misled. The FERC claims to be agnostic,[Fn.2] but it still has a vision. And that vision leads inexorably to one conclusion. The preferred form for an RTO is the independent system operator, or ISO.

That's the only structure designed to do what the commission clearly wants - to make the transmission network more efficient and more valuable.

Some investor-owned utilities prefer an independent transmission company, or transco.[Fn.3] Economics professor Robert Michaels apparently agrees. He criticized the ISO idea in a journal article published late last year.[Fn.4] Yet no viable transco, gridco or hybrid is now operating. The ISO is the only game in town, forming the unquestioned linchpin of electric restructuring. In fact, without the handful of ISOs already up and running, the FERC's Order 2000 would be little more than a theoretical exercise.

The critics offer two basic arguments. First, they say the profit motive will make transcos more efficient than ISOs. Second, they see ISOs as little more than surrogates for the real stakeholders and thus incapable of neutral administration.[Fn.5] However, these arguments ignore the plain truth of what the FERC sees as important, as revealed in both Order 2000 and in the commission's recent ruling on the proposed Alliance transco.

In reality, the electric transmission grid is a network asset that stands to gain more from efficient design than from a profit motive. The FERC clearly recognizes and endorses that principle in Order 2000. And, lest anyone remain in doubt, it reaffirmed its view last December in its Alliance decision. That decision gave a conditional "approval" to the Alliance transco, but a closer reading proves otherwise. In truth, the Alliance order stands as a clear rejection of the applicants' transco proposal and speaks volumes about the relative advantages of ISOs and transcos in today's industry.

The Transco-ISO Debate

FERC Commissioner Curt Hébert has often urged the presumed advantages of transcos. In a paper published in another journal, Hébert claimed that not-for-profit entities have no place in transmission. In his view the grid is "a private business that requires large expenditures and risk taking."[Fn.6] He suggests that transcos are better able than ISOs to take advantage of performance-based incentives in pricing and ratemaking.

Others also take up this theme. They allege that transcos have an "incentive to increase overall use of the transmission system, whether through upgrades, new facilities or operating efficiencies."[Fn.7] They contrast that case with ISOs, which exercise control over transmission assets without owning the assets. They say that ISOs "must rely on the transmission owners to make any necessary investment in new transmission facilities."[Fn.8]

Does an ISO threaten to abuse monopoly power? Professor Michaels says yes. He contends that an ISO will make its decisions "by counting the votes of heterogeneous interests whose numbers are apportioned on