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A Subtle but Clear Preference for ISOs

Fortnightly Magazine - March 1 2000

non-economic criteria."

Michaels cites grid expansion as an example. He sees the ISO facing problems in fostering grid investment, since generation owners may wish to foreclose new grid construction and may have "the votes to carry the day." As do other critics, Michaels views the ISO as a political institution, dominated by interests that will "impede competition, shift costs, and operate inefficiently." Thus he concludes that an ISO is a more likely transmission monopolist than a transco - "since regulation may be unable to reach or even estimate the profits earned by non-utilities that succeed in bending policy to favor themselves."

ISOs are not necessarily organized for profit but are intended instead to foster competition. They address problems in the electric industry arising from vertical and horizontal market power. Also, in certain instances, they coordinate a spot market in wholesale power.

In the words of one industry commentator, "[w]ithout regional ISOs . . ., the performance of wholesale markets will be plagued by a combination of self-dealing and suspicions of self-dealing between owners of transmission lines and their generating, distributing, and power marketing affiliates."[Fn.9] Vertically integrated utilities that control transmission can favor their interests in generation, resulting in abuses of native load preference and manipulation of posted available transmission capacity. They may also exercise horizontal market power through rate pancaking and high transaction costs.

The present debate therefore cannot mask an essential truth: A transco is a monopoly enterprise. It owns essential facilities. Meanwhile, it owes a fiduciary obligation to maximize profits for shareholders, whether or not that will lower costs for transmission and generation. This situation is inherently untenable, as was pointed out last year by the nation's utility consumer advocates in comments on the FERC's initial RTO proposal. They noted that a transco could choose not to upgrade a transmission line to relieve a constraint if that strategy would allow it to reap additional revenues through monopoly pricing of transmission services. That would put the transco's financial self-interest ahead of economic efficiency or costs to society. It could therefore cost ratepayers "significantly more than would be the case if the RTO was not controlled by such self-interested parties."[Fn.10]

The Trouble With Alliance

The advantages of the ISO structure can be seen clearly in the FERC's order[Fn.11] of late last year in response to the application of the Alliance companies to form a for-profit transco. On the surface, the FERC granted "conditional approval." On closer review, however, the ruling reveals the nearly intractable problems that will affect any transco application. It represents nothing less than a repudiation of the Alliance proposal and fair warning to any other would-be transco.

The FERC saw key problems in the ownership structure proposed for the Alliance transco. The plan entailed formation of two companies, Alliance Publico and Alliance Transco. The members[Fn.12] could transfer their high-voltage transmission facilities to Alliance Transco. No Alliance company would own more than 5 percent of Alliance Transco's stock. Alliance Publico, a registered public utility holding company with publicly traded shares and a board of directors unaffiliated with the Alliance companies,