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Commission Watch

FERC's AEP ruling begs the question: Can the feds bypass states that block transmission reform?
Fortnightly Magazine - January 2004

the benefits that FERC claims are offered not only by organizing the grid into RTOs, as envisioned by FERC's Order 2000, but by imposing market protocols that go beyond that, including a day-ahead energy market, a market reconciliation of transmission congestion through locational marginal pricing (LMP), and a bid-based, security-constrained dispatch of generating and other energy resources.

Efficiency: Forging a New Footprint

Early on in the AEP saga, Cinergy Services had joined with Commonwealth Edison Co. (ComEd) to sponsor the testimony of Dr. Peter Fox-Penner, principal of the Brattle Group, regarding the merger of AEP and CSW (see AEP timeline). Showing that despite the passage of time, Fox-Penner's testimony (filed in April 1999) was still relevant, FERC cited Fox-Penner in its Nov. 25 AEP ruling. In FERC's eyes, Fox-Penner's evidence had shown why it was essential that AEP should participate in all of PJM's market structures, or else its post-merger control of transmission could be used to frustrate competitors' access to relevant markets.

In addition, however, and perhaps more important in terms of FERC's generic policy on transmission and RTOs, Fox-Penner's testimony appeared to be crucial in leading FERC to conclude that if it had to allow many of the former Alliance group companies to join PJM instead of MISO, then the commission ought to mitigate that apparent "mistake" by creating a virtual, combined MISO/PJM RTO that would integrate the markets. By creating a combined footprint, FERC would undo much of the damage (unneeded seams) created in the first instance by AEP and other former Alliance companies, by insisting on joining the "wrong" RTO.

In his testimony, for example, Fox-Penner had noted that 91 percent of merger-related power flows between the pre-merger AEP and CSW traveled on transmission systems owned by MISO members. By contrast, only 21 percent of power flows between and among other former Alliance group members would transit MISO member systems. The lesson here was that of the various former Alliance group members thinking about joining a substitute RTO, it was the post-merger AEP that showed the greatest degree of kinship with the MISO footprint, in terms of trading patterns.

As Fox-Penner put it, "If AEP joins the Midwest ISO, the Midwest ISO will have a significantly greater ability to mitigate problems associated with merger-related power flows than, for example, a potential future Alliance RTO with AEP as a member."

Left unsaid (who could know at that time?) was that a potential future PJM RTO with AEP as a member would fare even worse than a future Alliance RTO (versus MISO) in terms of dealing with problems arising from AEP power flows.

Fox-Penner continued on how many of the benefits promised by Order 2000 and RTO formation could be achieved "through AEP's membership in the Midwest ISO, even if other ECAR utilities should not immediately follow AEP's lead." In his view, AEP was clearly critical to the achievement of economic efficiency in power transfers in the Midwest, and the logical home for AEP was MISO.

In fact, Fox-Penner anticipated FERC's concern, not only with AEP's choice of RTO, to