About four months ago, at a conference at Stanford University’s Center for International Development, the economist and utility industry expert Frank Wolak turned heads with a not-so-new but very...
Irregular seams affect ratemaking policies.
In a case that marks the first time the Federal Energy Regulatory Commission eliminated inter-RTO rate pancaking, the commission in late July issued an order terminating regional through-and-out rates (RTORs) charged by two regional transmission owners (RTOs)-Midwest Independent System Operator (MISO) and PJM Interconnection. The decision removes an estimated $250 million in yearly fees collected by those two entities.
But the lost revenue has parties to the proceeding squabbling over many aspects of the case, such as how to make up for the lost money, and whether new revenue recovery mechanisms should be litigated as compliance filings or in new, separate proceedings. Also up for debate: how to make calculations within the new cost-recovery mechanisms that eventually will be adopted.
The flurry of filings resulted from FERC's finding that the RTORs in the MISO and PJM regions perpetuate seams and rate pancaking, preventing realization of more efficient and competitive electric markets when applied to transactions sinking within the proposed MISO ISO/PJM footprint. FERC eliminated them Nov. 1, 2003.
The commission, which created the RTORs to provide revenues when rate pancaking is eliminated (see sidebar, "A History of RTOR"), said it was due to proposed RTO configurations that it finds the MISO and PJM RTORs unjust and unreasonable. FERC has been vexed by the geographically counterintuitive choices being made by utilities in joining either PJM or MISO. For example, Illinois Power, American Electric Power (AEP) and Commonwealth Edison Co. fit better with MISO, yet they intend to join PJM (see sidebar, "A PJM/MISO Primer"). FERC has called such choices "problematic," and it has noted that the resulting configuration could frustrate the goal of RTO formation. FERC said the decision by Illinois Power and the new PJM companies to join PJM results in a "long and irregular RTO border," perpetuates MISO's configuration problems and "would divide a highly interconnected portion of the grid, leaving in place an elongated and irregular seam across which significant trading activity takes place."
In the July 23 order, FERC reversed an initial decision by law judge Hebert Grossman finding that he lacked authority to eliminate the RTORs, and that should the new PJM companies join PJM, no new and irrational seams would be created. (American Electric Power, Commonwealth Edison, and DPL's Dayton Power and Light are the so-called "new PJM companies" that want to join PJM, but Dominion's Virginia Power also intends to join.) Re MISO and PJM Interconnection et al.,
FERC pointed to the former Alliance Companies, which were thwarted in attempts to build their own RTO, noting that accepting the former Alliance Companies' RTO choices unconditionally would result in fewer benefits from one-stop shopping or the elimination of rate pancaking than if, for example, AEP joined MISO. By joining PJM, the Alliance Companies will exacerbate rate pancaking across the proposed seam for transactions within the RTOs, FERC said. It added that rate pancaking across the proposed seam is incorrectly characterized as "inter-RTO" rate pancaking, but it instead constitutes "intra-RTO" rate pancaking, which is prohibited under Order 2000. The solution, FERC