The Midwest ISO struck a deal with utilities from low-cost states, but it may backfire.

Why should low-cost states get excited about handing over a chunk of their utility assets to an independent system operator (ISO) or other qualifying regional transmission organization (RTO)?

They might buy in if the ISO offers enough of an incentive. And that was the strategy followed in the formation of the Midwest ISO, where the participants agreed that bundled retail load ("native" load) would not be assessed for ISO costs during an initial transition period - and, in fact, would not even take network (grid-wide) service under the ISO tariff during that time. That plan was chosen in part to entice low-cost utilities happy with the status quo and not yet required to offer retail choice to customers. Example: Kentucky Utilities.

Now this plan is set for review at the Federal Energy Regulatory Commission (see Docket No. ER98-1438) and the strategy may be on the ropes. In his initial decision issued in November, administrative law judge Joseph R. Nacy issued a seemingly incongruous ruling: Nacy held that native load still would not take network service from the ISO, yet would be charged an ISO cost adder. That ruling displeased both MISO and Consumers Energy Co. (not a member of MISO).

The Midwest ISO wants native load to remain exempt from the cost adder. By contrast, Consumers Energy wants network service for native load to make transmission service comparable if Michigan should care to buy power from distant MISO members with lower costs. Each may end up a loser, however, as the FERC trial staff endorsed the judge's ruling in a brief on exceptions filed Jan. 18.

UNDER THE PLAN AT THE MIDWEST ISO, network transmission would be available for native load only for transmission-dependent utilities and where state law might require it, as appeared to be the case in Wisconsin. This scheme drew fire from Consumers Energy. It alleged that if native load should lose access to network service, it will end up paying pancaked rates for imported power - first as suppliers pay the MISO tariff for point-to-point transmission, and again as end-users pay for retail transmission and distribution through their own local utilities. Consumers Energy saw native load suffering less-then comparable access, in violation of FERC Order 888:

"Let us assume that Wisconsin Electric Power Co. and another Midwest ISO transmission owner, one that is located much closer to Kentucky Utilities but that is not eligible for network service for power purchased for its bundled load, were both looking for power. KU power could be shipped to WEPCO's retail bundled load in Wisconsin cheaper than it could be shipped to much closer bundled retail load of the nearby Midwest ISO transmission owner that is not eligible for network service.

"[P]articipation in the Midwest ISO allows Kentucky Utilities to sell its generation throughout the Midwest at economical transmission rates [and] transmit that power within the Midwest ISO territory at a base rate that is not dependent on the distance over which the power is shipped.

"It would be hard to imagine a pricing scheme better equipped to encourage inefficient use of transmission facilities, overbuilding of transmission facilities and inefficient location of generation than one which actually results in lower total charges for longer shipments."

Meanwhile, the MISO participants argued that political realities left them with no other choice than to compromise with the low-cost utilities:

"On the other side of this issue were state regulators and utilities from 'low-cost' states, such as Kentucky, that currently enjoy relatively low-cost delivered power. ¼ [They] often are concerned about whether the costs of ISO participation exceed the benefits.

"In this case, adding the utilities from Kentucky to the Midwest ISO extends the ISO's boundaries to interfaces with the Tennessee Valley Administration, which is an additional source of lower-cost power. To resolve this issue, it was agreed that bundled load not served under the ISO tariff would not be charged for the ISO's costs."

MISO saw the fight as just a selfish request from the Michigan utility:

"Consumers Energy dresses up its request as a complaint about a rate pancake. [Instead] it's all about the revenue distribution among the transmission-owner- members of the Midwest ISO."

The ISO continued, "The MISO agreement provides that revenues collected ¼ for network transmission service shall be fully distributed to the host zone. ¼ By contrast, for point-to-point transactions ¼ it was agreed that revenues would be distributed 50 percent on transmission investment and 50 percent on power flows. Therefore, if Consumers Energy joined the Midwest ISO ¼ and could elect network service for its bundled load, it would be able to keep all the revenues."

COSTS ALSO MATTER OUT WEST, where the Mountain West Independent System Administrator (ISA) won approval from the FERC on Jan. 27 (Docket No. ER99-3719, 90 FERC ¶61,067), but now must raise seed money to get started and then figure out how to assure funding for the long term.

As late as Dec. 21, Mountain West had appeared to be going belly-up. Its interim board of directors (a stakeholder board that would be replaced eventually with an RTO-qualifying nonstakeholder board) had voted on Dec. 15 to suspend all activities until the ISA could win approval from the FERC or gain a source of funding for startup costs.

On Feb. 10, when I spoke with Mountain West board member Duane Nelson, from Sierra Pacific Power, the situation seemed no less muddled. Nelson said no source had come forward for seed money. He added that long-term funding was iffy as well, since Nevada's electric restructuring law imposed a price cap on the state's utilities and yet did not authorize securitization of stranded costs. That, Nelson said, left few options for reducing costs and making room under the price cap to support the ISA for the longer term.

Nelson suggested the next step was up to the state PUC: "they have to weigh in on this." One other idea would have the California ISO stepping in to help, but that appeared unlikely.

Kellan Fluckiger, vice president of operations for the California ISO, said his agency had offered to help Mountain West get started "by adopting our rules" and becoming "a piece of us." (Mountain West would still operate its two control areas for Northern and Southern Nevada, which are connected only through the California ISO.)

Fluckiger added that the California ISO had proposed to build and run software for Mountain West. However, as Fluckiger explained, the interim board at Mountain West had taken bids and chosen Automated Power Exchange to help them get going. (But a new round of bidding may be needed later, after the permanent nonstakeholder board is formed, to satisfy FERC rules demanding governance that is independent of stakeholder interests.)

Meanwhile, Nelson said that Mountain West had "no interest" in buying services from California ISO. "We have no inclination," he stressed. So could Mountain West combine with another White Knight?

Nelson acknowledged that Bonneville Power Administration was a participant in ISA meetings, but said that BPA "is contemplating their own RTO." Back in California, Fluckiger kept the door open: "We think the Mountain West ISA can integrate well with us." As for the ISO's own plans, Fluckiger added, "We've had discussions with our neighbors in Arizona [Desert STAR] and our neighbors to the North [BPA] but have not made any concrete proposals."

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