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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
  • Back in July 2002, in what we can see now as a landmark decision, FERC bowed to the wishes of five utilities-all former Alliance members. But with PJM's borders expanded in this way, creating geographic inconsistencies along the PJM/MISO border, FERC decided that PJM would be rendered nonconforming as an RTO (too many seams, too many pancaked rates). Accordingly, FERC ruled that PJM and MISO markets and tariffs must be unified eventually, to remove seams and create a truly efficient regional market.
  • Ironing Out the Seams. To further mitigate the seams problem, FERC decided last summer to eliminate the regional through-and-out transmission rates (RTORs) imposed by MISO and PJM that would have applied to transactions sinking within the hypothetically combined geographic "footprint" of the two regions. FERC also proposed to eliminate the parallel, company-specific through-and-out (T&O) rates imposed by certain former Alliance members for transactions also sinking in the combined RTO footprint. FERC added that it would consider crafting a hold-harmless cost adjustment scheme so that affected utilities would not lose the revenues otherwise produced by the RTOR and T&O tariffs.
  • Softening the Blow. In a nod to protests from both RTOs and the utilities themselves, FERC devised a labyrinthine tariff known as "SECA" (Seams Elimination Charge/Cost Adjustment). SECA was designed to identify the transmission revenues that the RTOs and utilities would lose through the demise of RTORs and T&Os, and then to allow them (the RTOs and utilities) to recover the identical amount of revenue, as allocated under a classic true-up allowance.

These various elements form a large part of the theory underlying the recent AEP order. But a contradiction looms. On one hand, FERC's plan is founded on economic efficiency as the overarching goal in market design. On the other, the plan apparently saves little, if any, for consumers, since the costs slated for weeding out through RTO and tariff design are matched exactly by new costs reintroduced in rates in the SECA tariffs.

FERC's unsung ally in all of this may be Cinergy Corp., an electric utility with many economic and transactional ties to AEP. Behind the scenes, amidst the piles of paperwork filed in the various dockets involving AEP, MISO, and PJM, Cinergy urged FERC to fix the mess and sponsored testimony from three key expert witnesses-Michael B. Rosenzweig, Peter Fox-Penner, and Richard Tabors-cited by FERC as particularly persuasive in the ultimate formulation of policy.

Rosenzweig, for instance, offered up numerous anecdotes from interviews he had conducted with other utilities regarding pancaking of transmission rates. Tabors, a well-known technical expert of transmission transactions, appeared instrumental in convincing FERC that AEP's protocol of relying on TLR instructions (transmission loading relief) to reconcile grid congestion would be incompatible with PJM's LMP regime. And finally there was Fox-Penner, again sponsored by Cinergy. FERC cited Fox-Penner as authoritative in showing how AEP's historical trading patterns with MISO-member utilities would prove problematic if AEP was not made to join an RTO, even though his testimony was now several years old.

At the heart of it all lies the SMD, and its preference for