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...
IOUs, RTOs duke it out over standardization.
Have regional transmission operators (RTOs) and independent system operators (ISOs) asked for excessive levels of credit from customers, to the extent that the burdensome requirements foreclose full market participation by competitive entities? The Federal Energy Regulatory Commission (FERC) must face that difficult question as it investigates whether to institute a rulemaking on credit-related issues for service provided by ISOs, RTOs, and transmission providers.
Finding the right balance is critical. Higher-than-needed credit requirements imposed on market participants by RTOs/ISOs exacerbate the financial strain on those participants, reducing the amount of participation and liquidity in the market. Lower liquidity then reduces customer choices, transparency, and competitiveness of the market.
RTOs or ISOs currently act as settlement agents between buyers and sellers in electric market transactions. An RTO/ISO determines each customer's risk profile and collects collateral based on that profile to protect against losses from defaults. Bad debt, when it occurs, is spread across all remaining market participants.
FERC notes that transmission providers are entities that provide electric transmission service but are neither ISOs nor RTOs, and credit concerns facing transmission providers and ISOs/RTOs differ. Those differences warrant varying approaches to creditworthiness requirements for those entities ().
The problem not faced by RTOs/ISOs is vagueness. A perceived lack of transparency exists in creditworthiness requirements in the pro forma Open Access Transmission Tariffs (OATT) used by transmission providers. FERC notes that OATTs do not provide specific credit standards and processes but require only that transmission providers use "reasonable credit review procedures" and that such review must be "made in accordance with standard commercial practices."
Because OATT standards are not clear and are not used by RTOs, FERC is trying to determine whether it should consider a similar course for the electric industry as it has taken for the gas industry. In the , FERC contemplates standardizing creditworthiness provisions in the natural gas industry ( ], FERC Stats. & Regs., Notice of Proposed Regulations 32,573 ). FERC believes standardized provisions in general can be beneficial by promoting consistent practices across markets and utilities, while providing customers with an objective and transparent creditworthiness evaluation.
But on the electric side, the standardization issue has pitted utility companies against RTOs. The main concern is over flexibility. At a recent technical conference held at FERC headquarters in Washington, D.C., some participants, especially those from utility companies, were uneasy with the concept of standardization. The RTO and ISO reps, however, appear much more comfortable with it.
At that conference, utility company representatives described their credit policies under the OATT and interactions with transmission customers. They touted the need to account for individual variations that affect credit and to take part in "fuzzy" analyses. Tommy Lee, senior director for credit at Duke Energy, stressed that "maintaining flexibility is an absolute necessity," allowing companies to handle all contingencies that arise.
He said that flexibility is crucial in credit evaluations because within the utility industry risks can vastly differ. He pointed to some of those differences, including varying state regulatory frameworks, reserve margins, fuel costs,