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A Subtle but Clear Preference for ISOs

Fortnightly Magazine - March 1 2000

provided through the dispatch, thus determining the locational marginal costs of additional power and providing the foundation for a non-discriminatory transmission tariff.

* Market Alternatives. Coordinate a voluntary balancing market, allowing participants to choose whether or not to respond to the operator's economic dispatch or to find similar services elsewhere.

In providing these services, Hogan says the grid manager must run the balancing market as a bid-based, security-constrained economic dispatch with voluntary participation by generators and loads. He adds that prices in the system must reflect the marginal cost of meeting load at each location. Whatever its organizational form or name, the RTO must serve as system operator and perform its functions consistent with the public interest in a competitive market.

The mere establishment of a for-profit transco will not dispense with the difficulties of the tasks cited by Professor Hogan. Nor will for-profit status ensure short-term reliability. That turns instead on such factors as the efficacy of market rules and authority of the system operator to arrange energy transfers during emergency conditions.

It is the ISO - not the transco - that has emerged as the practical form of RTO in today's interconnected, unbundled and market-based environment. As the Alliance order shows, transcos cannot readily perform this function without satisfying an array of conceptual, regulatory and organizational concerns. The Final Rule has further articulated that design. There can be little doubt as to FERC's chosen instrument for its implementation.

In fact, any transco will have no choice but to serve network requirements, just like an ISO. It is naive to suppose that the profit incentive will liberate transco management from these requirements or accord it comparative advantage in meeting them. To the contrary: A transco that fits the Hogan criteria may end up looking a lot like today's ISO.

Jeremiah D. Lambert is a partner in Shook, Hardy & Bacon L.L.P., of Washington, D.C. Among other clients, he represents the Pennsylvania-New Jersey-Maryland (PJM) Interconnection, approved by the FERC as independent system operator for the PJM Control Area. He can be reached at 202-783-8400, or by email at

The PJM ISO: A Model for RTOs

The PJM ISO, created by the Pennsylvania-New Jersey-Maryland Interconnection, illustrates how the ISO structure can avoid the potholes identified by the FERC in its Dec. 20 order that found shortcomings with the proposed Alliance transco.

* Independence. As the nation's most fully realized and successful ISO, PJM operates as a limited liability company with an independent board of managers that does not include stakeholders. PJM's board members are not affiliated with or controlled by market participants, whether generation interests or transmission owners.

The PJM Board has demonstrated its independence by taking unilateral action to interpret and amend the PJM Tariff, for example by proposing to add a market monitoring plan without the support of market participants.

* Public Interest Motive. The PJM board undertakes a threefold fiduciary duty: (1) maintain a safe and reliable system; (2) operate competitive and nondiscriminatory markets; and (3) ensure that no member or group of members exercises undue influence.