The rat must smell the cheese for the power to flow. But utilities still say the market looks "scary."

The Federal Energy Regulatory Commission drew a huge crowd in Philadelphia on March 15 and 16 for its Northeast workshop on regional transmission organizations (RTOs) - so large that the mob itself became part of the story.

The room was packed. You could hardly squeeze through the hallway for a coffee without getting your face smooshed up against somebody's name tag. That's when I noticed that most of those tags contained the initials "I-S-O." Now I know where all the laid-off utility executives end up. They leave their jobs as control area operators to do the same thing at the independent system operator.

The ISOs have a great gig. At a time when the state public utility commissions and even the FERC itself are losing clout, the ISOs are creating a new bureaucracy of their own, of staggering proportions. They have seized a whole new turf - the regulation of electric transmission - that once fell into a sort of no man's land. The field was vacant so they just sort of moved in. Some folks want to know: Are the ISOs making progress? Are they asking the right questions? Do the ISOs answer to anyone? For example:

• Gen-ocide? Do utility transmission owners on some ISO boards interfere with the siting and certification of new merchant generation plants out of fear that the new capacity could increase parallel flows or even "burn out" their transmission lines?
• Fossil Favoritism? Does locational marginal pricing discriminate against renewable energy and distributed generation by forcing up the price of energy at congested transmission interfaces in urban island load pockets, while pushing the price down in other areas where wind farms or solar arrays might likely be located?
• Hidden Conspiracies? And if PJM is working so well, with its Harvard model of ISO combined with power exchange, why aren't prices falling like everyone said they would?

Today the ISOs are on a honeymoon, free from scrutiny by regulators or legislators. But that may change.

"SO FAR IT HASN'T BEEN FUN TO BE IN TRANSMISSION. We need a profit motive. The rat has to smell the cheese."

That was Philip J. Pellegrino, CEO for ISO New England, who opened the workshop on Wednesday morning with an overview of power markets in the Northeastern states and progress reported so far in resolving differences among the ISOs in that region, including the Ontario Independent Market Operator.

Pellegrino made news when he predicted that within 3 to 5 years, we will likely see the PJM, New York and New England ISOs merged into one super-regional RTO, with a binary structure as the most optimal outcome: the RTO would set the standards, while a single, region-wide, utility-owned for-profit transmission company would provide the service.

To make Pellegrino's vision a reality, and to work out the kinks along the seams and borders that separate their respective groups, the PJM, New York and New England ISOs signed a Memorandum of Understanding in August setting out a plan to standardize protocols and operations along the seams between the three groups. The Ontario IMO joined the agreement in December. (For more on the MOU, see www.isomou.com.) So far the MOU has led to four new inter-ISO working groups: (1) Operations, (2) Planning, (3) Business Practices and (4) Public Information. Many people I talked with saw a possible duplication of efforts, in that NERC (the North American Electric Reliability Council) already had formed a "market interface" committee. During the Q&A session, someone asked how much all these working groups will cost:

"Do you recall the pre-ISO cost for dispatch in New England? How much has NEPOOL collected in aggregate uplift charges since it started the new market in May 1999?" (Answer: $100 million.)

Pellegrino's prediction of a super-regional RTO drew no quarrel from William J. Museler, president and CEO of the New York ISO. Nor did it elicit any contradiction from Richard Wodyka, COO and v.p. for system coordination for the PJM Interconnection LLC. But it did spark a revealing comment from David Boguslawsky, v.p. at Northeast Utilities, which owns transmission in the Northeast.

"It will be very difficult to achieve consensus," said Boguslawsky. "It is not easy to balance reliability dispatch with market dispatch. Sometimes Phil [Pellegrino, at the ISO] gets pushed in a direction that looks scary to us, as a former vertically integrated company." (In fact, Northeast Utilities remains the only major investor-owned utility in the Northeast that is still engaged in both energy marketing and the wires business. Boguslawsky emphasized that point in noting how difficult it would prove to ensure that a merged RTO would conform with the FERC's test for independent governance in its Order 2000.)

Richard Bolbrock, v.p. for power markets at Long Island Power Authority, believes that an RTO should have authority to order expansion of the transmission grid not just to aid reliability, but also to aid markets.

Harvey Reed, managing director for Constellation Power Source, urged standardization across ISO boundaries for all multi-regional operations. Added Reed: "RTO administrative costs are escalating in all three regions."

Such consolidation may prove difficult. When policy director Julie Simon (from the Electric Power Supply Association) asked how the ISOs would "make it happen," Pellegrino answered, "When you get there you'll know it."

EVERY PARTY NEEDS AN UNRULY GUEST to make the group uncomfortable. At the Philly workshop, that role was played by Dynegy's Peter Esposito, alternating with the ex-regulator from Pennsylvania, John Hanger, now a consultant at Penn Future. I don't suggest that Esposito or Hanger were impolite - far from it. But they did pose some awkward questions.

Esposito repeatedly asked the ISO experts how their market monitoring committees would respond if a power producer owning a peaking plant guessed right on a price spike and scored a huge profit on a single day. But he never got a good answer. Would the ISO market monitors accuse the power producer of predatory pricing if the accepted bid greatly exceeded the short-run marginal cost of the plant? The consensus seemed to be yes. But how else can plant owners justify those high prices they paid at auction?

Seizing on data offered by other workshop speakers, which showed that markets for capacity and ancillary services in PJM show a very thin volume of trading, Hanger in effect challenged PJM and the other ISOs to prove their mettle. Do they eliminate rate pancaking? Do they encourage green power? Why don't they provide for demand-side bidding of conservation resources? (Later, during one of the Q&A sessions, a representative from PJM said it would put a multi-settlements process into effect in June that would allow for demand-side bidding to some degree.)

But traders still wonder if ISOs really get it.

Lawyer Marjorie Philips from PECO Energy's Power Team said her biggest concern was still open access. As she explained, "The New York ISO does not have any OASIS product for transmission other than the hour-ahead energy contract.

"You can reserve transmission capacity only by reserving an FTR [fixed transmission right] as a hedge against transmission congestion. You can't reserve firm transmission capacity in its own right as a product."

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