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The Aftermath of Alliance

What can we learn from its failure?
Fortnightly Magazine - February 15 2002

externalities to deal with-Sept. 11, Enron's collapse, and the California market. Those externalities, he says, made it clear to the commission that the issue was markets, not structure. "Alliance was all about structure," he says. What FERC says in the Alliance/MISO decisions, according to Harris, is that there can be independent transmission companies, but not as an RTO. There is plenty of room for large transcos, in Harris' view. As a result of the FERC decision, he says, Alliance's business model will be matured.

Perhaps, as Chairman Wood himself put it, "the hidden big story" of Dec. 19 was not the Alliance/MISO decisions, but rather the approval of International Transmission Co. as an independent transco. At the meeting, Wood remarked that "an independent transmission company . . . is not only possible but very welcome. . . . I think we gave in these orders some very strong guidance that you can move forward into a for-profit model in the context of a broad regional umbrella organization, such as MISO, and set up markets that work and set up a transmission business plan that will try [to attract] capital."

According to Peter Esposito, senior vice-president and regulatory counsel at Dynegy, the issue of investment for transmission goes well beyond the Alliance order. Because there's a lot of uncertainty about where FERC is going, he says, there need to be incentives in capital markets. "If we have uncertainty over revenue stream, then there's hesitation to invest," he says, so that an increased rate of return is necessary to compensate for that uncertainty. It's good that FERC wants to get to establishing RTOs quickly, Esposito says. He doesn't see resolve wavering in either the industry or FERC to accomplish the opening of the transmission market.

Fahey says, "[w]hat's critical is to send proper price signals for short- and long-term investment. MISO is on the right track to achieve that."

James P. Torgerson, president and CEO of MISO, says that MISO didn't do much to persuade FERC to make it the Midwest RTO. "The agency got input from the state [commissions] in November, which basically said they wanted one RTO, and that they liked the stakeholder involvement" that MISO has.

Perhaps FERC also was persuaded by merger plans between MISO and Southwest Power Pool (SPP), which would give MISO a range stretching from Michigan to Louisiana. Torgerson says "the merger with SPP is going to happen."

Both those in favor of Alliance's RTO application, and those who were opposed to it, point to Chairman Wood as the primary reason for FERC's reversal in policy. As Fahey points out, the decision "was primarily predicated on change of chairman. Wood tries to work with state commissions." Moler says that while Hébert was clearly a transco advocate, there's not evidence yet that Wood is one.

Many cautioned against extrapolating the MISO/Alliance decision outside the Midwest. Esposito says, "I wouldn't take the Alliance decision beyond face value. It's a unique situation, with the Midwest split in two, and state commissions arguing strongly for one RTO." Indeed, he says that