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The Rules of the Grid: Transmission Policy and Motives Gehind It

Making sense of RTO Week, the mediation talks, and FERC's promised new rulemaking.
Fortnightly Magazine - December 2001

the final analysis, the paramount obligation of the FERC is not to bring about treaties among warring parties ... but rather to establish markets."

Market Design: The Debate Over Best Practice

As Judge Young had defined the mediation process, the right and responsibility to identify, nominate, and define "best practices" in design and operation of markets and market oversight institutions belonged only to the three regional ISOs. Stakeholder groups complained vehemently, but to no avail, of being shut out of the process.

John Anderson's ELCON group, in particular, had argued that best practices could come not only from among the three Northeast ISOs, but also from other regions. For instance, ELCON touted a congestion management system under development in a collaborative process in the Southwest Power Pool as a possible best practice for a Northeast RTO. That system, said ELCON, was based on a "flexible set of financial transmission rights known as 'financial congestion hedges' (FHCs)." As ELCON explained, "these FHCs are designed to promote a liquid and transparent forward market for transmission rights."

New England's Frustration. Another irony lay in the fact that when the FERC in July had called for mediation talks to fashion a consolidated Northeast RTO, the New England ISO had only recently elected to adopt the PJM standard market design (SMD), including locational marginal pricing (LMP) for congestion management.

Thus, it had warned FERC early on that the mediation process might not "produce a timetable" for a single market any earlier than 2003, as under New England's own SMD plan. (Indeed, the New England Conference of Public Utilities Commissioners, known as NECPUC, had said the same thing in August, when it sought to overturn a FERC order that dismissed NEPOOL's proposed SMD plan as "moot," in light of the Northeast mediation process.) Thus, with New England having chosen the PJM design, but having as yet gained no operating experience with it, the battle over market design and the mantle of "best practice" evolved largely into a fight between PJM and the New York ISO.

A Pre-emptory Strike. The One RTO Coalition, led by Mirant, struck the first blow in this battle when it published a study in the utility trade press citing inefficiencies in trading patterns between the New York, New England and PJM ISOs, and claiming over $400 million in potential annual market savings through the creation of a single, consolidated Northeast RTO. ()

The Coalition then made its study a matter of public record by adding it to comments it filed on Judge Young's mediation report. PJM followed suit, filing comments on the same day to which it attached a copy of its own in-house analysis, entitled "Accommodation of ISO-Nominated Best Practices By the Regional Networked Market Model." (The title refers to the "Regional Networked Market Concept," or RNMC, proposed by PJM as a plan to build a market for a single, combined Northeast RTO, included in Judge Young's report as Appendix D. Previously, Judge Young had asked the mediation parties to concentrate on process, and to keep clear of endorsing specific market or operating