Emotions have run high in the SMD/RTO debate. It's time for cooler heads to prevail.

During my father's long career as practicing attorney and state senator from Kentucky, he has been on both sides of issues involving the federal government. He always said that when opposing the federal government, they should be referred to as the "gov'ment." This reference evokes everyone's visceral distaste for taxes, "pointy head bureaucrats," gasoline additives, etc. But when you are on the side of the federal government, the reference should change to "the United States of America" (said slowly and reverently). This will surely swell the chests of your audience with pride.

The point is, these references are all about emotion. I submit that this emotion is at work as regulators and industry collectively wrestle with the difficult issue of electric industry restructuring. Otherwise, much of what is being said about restructuring and regional transmission organizations (RTOs) would be difficult to understand.

I will not discuss the details of the proposed standard market design but will instead look at some of the concerns raised by the proposed movement to RTOs as the vehicle to ensure non-discriminatory open access and thereby enable competitive wholesale markets.

The Anti-RTO Argument

A catalogue of the concerns being raised in the debate, particularly as they relate to formation of RTOs, would look something like the following:

• Membership in an RTO leads to loss of state jurisdiction over siting of generation and transmission.
• Establishment of an RTO leads to higher prices through the introduction of congestion pricing.
• Establishment of an RTO results in the movement of low-cost generation away from traditional ratepayers to be sold at higher prices.
• Establishment of an RTO may cause reliance on a centralized spot market that will result in California-style price movement and results.

Needless to say, these concerns have not been part of the PJM experience. ¹ To be sure, the manner in which the states interact with the utilities on issues such as planning has changed as PJM has centralized the development of planning options for states to consider. Some other things have changed as well, including the need to consider what tools utilities and load servers use to manage congestion costs. These costs have always existed but were hidden through socialization and averaging over time. However, the last six years that represent the life of the modern PJM market do not bear out these above-listed concerns.

Transmission and Generation Siting

The experience of PJM is very clear: The RTO supports state authority for siting over transmission or generation facilities. In the PJM area, states continue to wield the power to authorize transmission and generation siting. However, PJM has provided a participatory process by which state regulators interact and view electric facility upgrades and builds in the more meaningful regional context. In one particular case, a state in the PJM area used this process to highlight transmission problems associated with its ratepayers that needed to be addressed.

Upgrades to the grid (most require permitting by states) occur one of two ways: 1) as a result of