Experts debate whether merging the four big Northeast grid groups would create a rational market - or just a larger bureaucracy.

At Philadelphia in mid-March, at a workshop run by the Federal Energy Regulatory Commission to explore the future of electric transmission in the Northeast United States, one executive talked about building what could become the largest, most complex engineering masterpiece in the power industry - or then again, its greatest failure.

Phillip J. Pellegrino, president and chief executive officer at ISO New England, predicted that in the next three to five years, the independent system operators for New England, New York, the PJM Interconnection, and the Canadian province of Ontario would combine to form a super-regional transmission organization in the Northeast. Should that merger occur, the U.S.-based super-RTO region would surpass France to become the largest control area in the world.

Pellegrino believes the merger of the ISOs could help build robust electric commodity markets by creating more consistency in transmission service within the region, while driving down costs by eliminating duplicated functions.

But many in the industry, including Pellegrino, say technical limitations prevent a combined Northeast RTO from becoming a reality in the near term. Still other experts question whether a combined mega-RTO would be too large to ensure reliability and flexibility. Rather than any particular structure, they say, the real issue is how to create a seamless transmission market.

One Market? The Case for Consolidation

In an interview published last year (see , Pellegrino said that a move to combine ISO New England (controlling about 22 gigawatts of power) with PJM (50 GW) and the New York ISO (about 28 GW) would create a control area that would manage 100 GW of peak load.

"This is clearly well beyond the technical or practical limitations of anything that has ever been contemplated," Pellegrino said at the time.

(When quizzed on that claim this spring, Pellegrino replied, "It's like taking the New York Stock Exchange from a daily trading volume of 250,000 shares to a billion. We need faster computers for parallel processing. And then we need to be concerned with hierarchical control of interconnnected transmission networks - to ensure system resiliency and that transfer capability is not impaired.")

Nevertheless, he now maintains that it has never been a question of whether a super-RTO of that size would be built, but a question of when the technological limitations to building it would be overcome. Pellegrino notes that the FERC, through its Order 2000, has encouraged a large, regional footprint for RTOs. And recent plans for RTO formation have not been shy about developing into large control areas, he adds.

Yet the CEO remains cautious: "My view is we have to walk before we run. Never say never, but let us be practical in terms of how we can get there." For Pellegrino, that means solving the interregional inconsistencies, or "seams," that exist among the ISOs before looking to create a super-RTO or ISO.

In fact, the four Northeast ISOs last year signed a memorandum of understanding (MOU), a formal agreement to explore ways in which they can work together to resolve interregional differences. According to the MOU, the ISOs aim to enhance interregional reliability through coordinated operations and planning, facilitate broader competitive markets, and improve the flow of information to market participants and the public.

Phillip G. Harris, chief executive officer at PJM Interconnection L.L.C, says that the MOU is a result of historically close ties among the power pools in the Northeast.

"Every 30 minutes we send 500 points of data amongst ourselves. This has been going on since the late '80s. There is already a lot of operational data that we share," says Harris.

Pellegrino predicts, "Three years or five years from now we [will] overcome the technical hurdles, which I think we can, and more importantly, overcome the political hurdles on an interregional basis, which I think is probably the single-greatest hurdle. I think then we could be in a position to have one large Northeast RTO."

Furthermore, Pellegrino says if the MOU is effective in creating a "virtual ISO or RTO" with seamless markets, it may not be necessary to formally create an RTO.

For instance, to streamline the ISO markets, William J. Museler, chief executive officer at New York ISO, says the ISOs are looking at creating a regional spinning reserve market and day-ahead market that could operate on top of the existing ISOs. These regional markets would still have to interact with the hourly markets of the four ISOs.

Museler says it will take time to develop a single large control center able to manage all the control areas in the Northeast. He says creating one super-RTO in the Northeast immediately would be difficult and potentially dangerous. Those calling for such an RTO really are calling for a regional market, Museler contends.

"I don't think they care whether operationally the four ISOs are operating as one or operating as four. What they want is one market."

The important issues are practical, says Museler: "Could you have a regional day-ahead, spinning reserve and non-spinning reserve market? Can you have regulation regionally? Can you overlay a market on individual operating regimes?"

Museler believes creating a regional market encompassing the four ISOs is a better goal than one large RTO.

PJM's Harris notes that work is underway consistent with creating a regional market. For example, he says, "Now that ISO New England has adopted locational marginal pricing (LMP), we do believe there is a common congestion model that can be worked out amongst the Northeast entities."

According to Harris, the MOU group "is working to have four or five meetings this year to develop an LMP model in a multi-regional format." He predicts that if an agreement among all parties is reached, then a robust interregional pricing model could be completed within two years.

The ISOs also are investigating ways to share services and reduce costs to members, he adds. That could be done through a seamless "screen" presentation that could merge all the services of the Northeast ISOs into one offering.

"This would mean a wholesale reduction in cost. It would reduce the cents per megawatt-hour price that it takes to operate as a single ISO," Harris adds.

Getting There: The Battle Over Protocols

Paul Barber, senior vice president at Citizens Power, remains undecided as to whether the Northeast ISOs should merge into one large RTO.

"In a lot of cases [a combined Northeast RTO] will solve some of the problems. I wouldn't go so far that there is one solution that will solve everything. If there was a silver bullet we would have found it three or four years ago."

Barber notes inconsistencies exist between the locational marginal pricing models used by the New York ISO and the PJM Interconnection. (Through LMP, the ISO sets the congestion charge between two points as equal to the difference between the price of electricity at the two points.)

"At the seams, those models have to be consistent. If you go look at the PJM Web site and poke around, you will find a list of LMP pricing nodes," he says.

That list, as Barber explains, shows New York with two pricing nodes, one each for western and eastern New York.

Yet, he adds, "if you examine the New York LMP model as represented on their website, they represent PJM with a single pricing point. This discrepancy in modeling at the seams is disruptive to both the market and the consistency between the LMP price results of the two ISOs," he says.

According to Barber, "if PJM shows two pricing points looking north at New York, then New York should show two pricing points looking south at PJM."

Furthermore, he explains why ancillary services and installed capacity are so thinly traded in Northeast markets: Both products and capacity markets are inconsistently defined by the ISOs.

Although products are inconsistently defined, Barber notes that the ISOs have attempted to clarify the terms. In addition the contract standardization efforts by the Western Systems Power Pool and Edison Electric Institute could help remedy the problem.

But poorly defined capacity markets are more problematic.

"If you examine the different ISOs, they have different names and they list different characteristics for this capacity product. They even break it into pieces - some for short-term, like operating reserves, some of it longer-term, like installed capacity," Barber says.

Peter Esposito, vice president and regulatory counsel at Dynegy, adds that until the ISOs resolve the capacity and flows issues on a super-regional basis, threats to reliability and pricing issues will persist.

"[Furthermore], you have ramping issues - how quickly the plants ramp [up] and how quickly they are recognized as ramping from ISO to ISO," he explains.

"What has to happen at the end of the day is that all the RTOs have to have a consistent protocol for communicating among themselves," notes Esposito.

New York ISO's Museler believes that business practices of the ISOs are pushing towards convergence. In fact, he says he would be open to adopting another ISO's business model in order to streamline markets.

"But before one would adopt the business model of others, they would have to run for awhile and receive empirical evidence," Museler says.

"New York has been up for less than five months, PJM will just start [its congestion market], and New England is a year away. To decide which is the best model you have to let A, B, and C operate for a while," he adds.

When the time comes to ascertain the success of his own market and others, Museler says his measures will be liquidity in the market, satisfaction of the participants, and the ability of the market to respond to the price signals that the LMP system sends them.

Products: Transmission As a Commodity

In the typical ISO, the one product that cannot be bought or sold in a cash spot market is the physical transmission itself. That one great irony undermines efforts to rationalize the transmission business.

Energy is traded, as is capacity in some cases. But traders cannot purchase transmission other than to schedule an energy transaction, or to purchase a financial hedge to insure the energy movement against the likelihood that the grid may be congested. This uncertainty in transmission as a market commodity makes deals inflexible and hinders trading, according to Barber at Citizens Power and Esposito at Dynegy.

"In a typical market that is mature, 90 percent [of the contracted commodity] gets booked out [in a financial settlement] and about 10 percent goes to delivery. The effortlessness of delivery supports the whole market," he says.

Existing market devices for hedging against transmission loss do not work well, Esposito adds.

"You have congestion that you pay on top of your access fee. If you have an FTR (a contract for fixed transmission rights), that is supposed to be a hedge against congestion costs. But that forces you to set up a specific transaction and stick to that transaction and not be able to look for more economically efficient sources," Esposito explains.

"There is also a liquidity problem with FTRs. There was a slide shown by a PJM representative in Philadelphia that showed an expanding gap between a number of bids to buy FTRs and offers to sell. So you have at least those issues."

Dynegy would like to see PJM change from its nodal method of pricing to a zonal method to help increase liquidity, he says.

Second, Esposito's company would like PJM and other ISOs to sell physical rights, not just financial rights, to the system. That would allow market participants to use or not use the firm transmission without penalty.

"Right now on the FTR system, if you do not actually perform your transaction in the way it was originally set up, you are at risk for congestion if the hedge doesn't work. It is what they call a swap rather than an option," says Esposito. "We are not saying get rid of the financial but add a physical in parallel with it."

But ISO New England's Pellegrino says offering the physical firm transmission would be problematic for those participants that have contract rights. He recalls the FERC's desire to promote open access while not trampling on existing contracts, and wonders whether the FERC's desire might not require RTOs to allocate a certain share of FTRs to parties holding those grandfathered rights.

"I think in large measure what we have created around [the protection of existing contracts] is a perfect way to give some folks some financial hedging capability on transmission congestion rights," he says.

Pellegrino also notes a dichotomy between (a) the contract path approach commonly used to schedule transactions (which assumes power moves in a straight line between grid segments) and (b) the flow-based approach used by the security coordinator to evaluate the need for curtailments under rules for transmission-loading relief (TLR).

Here Pellegrino supplies a whimsical analogy. "We assume that during rush hour, drivers will use all available roads to exit the city of Boston. But in reality, everyone takes the Mass Pike (I-90 West), and we have gridlock."

Instead, he advises taking a flow-based view from the outset. "We really need to enhance our tools so that when we schedule a transaction, that [deal] is flow-based rather than contract-path. As we expand the bulk transmission system, I firmly believe we are going to have a much firmer base of power electronic devices that enable us to more actively regulate the flow through the transmission system."

Meanwhile, Barber explains how even recent improvements to business practice standards ordered by the FERC for OASIS (the Open Access Same Time Information System) will not remedy these so-called "seams issues."

"OASIS business practice standards do not solve these problems. The standards for the OASIS are more or less cleaning up how a transmission customer communicates with a transmission provider through the OASIS," Barber says.

"I don't think it really helps how one transmission provider interacts with another one. The OASIS is not meant to define that interface," he adds.

Instead, Barber believes the approach used for solving seams issues will depend on the size of the control region and degree of operational control in that region.

"The grid is extensively interconnected. The Eastern Interconnection reaches almost to the Rocky Mountains and comes down and excludes Texas. Anything that goes on in any part of that grid has some affect, sometimes rather miniscule, but still some affect," Barber says.

 

Location Is Everything The asks William J. Museler, CEO at the New York ISO, if congestion pricing cuts profits for renewables and distributed generation. Q. Will distributed generation and renewable generation in rural areas be valued at less than generation near the city as a result of using locational marginal pricing? A. You are right in terms of the location. It doesn't mean that they won't get paid; it just means they won't get paid the very high prices that the people on the constrained side of the interface get paid. But that is not discrimination, because you can have a coal plant or gas plant upstate, and they are in exactly the same situation. It is a locational thing. Power plants, in general, are easier to site in rural areas than in city areas. When the price is up, distributed generation will get paid the high price, and when the price is down, they will get paid the lower price unless they have a bilateral contract with someone. They do get paid the clearing price for their area. For this summer, we are trying to allow [DG owners] to bid into the capacity market to allow them to contract for their capacity - not just their energy. They are unique and have some unique needs.

"If you divide up that huge grid into small pieces, then the operation of each of the small pieces is dominated by fringe affects of all their neighbors," he explains.

"If you consolidate the small pieces into sufficiently larger pieces, eventually operations will be affected more by internal matters and less by boundary conditions," Barber says.

A Different Path: Dynegy's Umbrella Concept

Rather than merge ISOs to eliminate seams, Dynegy would create a super-regional oversight board to melt them away. You wouldn't need to wait for the ISOs to perfect their merger to gain the benefits that come with fewer seams, says Esposito. This new agency, described by Dynegy as the interregional transmission systems coordinator, or ITSC, would review and address seams issues, scheduling, curtailment, and related business practices associated with providing transmission service among the RTOs, according to Esposito. Analysts say that having an ITSC would preclude the need for a super-RTO that may be too large, technically unstable, and pose reliability risks.

"Rather than have to get to a bigger RTO, an ITSC would allow much more competition and the industry could have smaller RTOs," Esposito adds.

The ITSC would address the physics of the system by focusing on the capacity capability on a regional basis, he says. Furthermore, an ITSC would allow more RTOs under its umbrella, representing a larger region, because capacity could be determined across the entire interconnection (Eastern, Western, or Texas).

Of course, some analysts see this ITSC concept as supplanting the job description of today's North American Reliability Council (NERC). Esposito in fact acknowledges that some say NERC is the logical party to perform the functions he proposes for the ITSC.

"There are those of us who, while we see merit in that suggestion, we would want to see some changes in the NERC governance structure," he says. "I think you have to have a more representative governance structure at the committee level, more akin to the PJM advisory committees."

Esposito has mixed feelings about combining the Northeast ISOs. He prefers the ITSC structure, under which it would be possible, as he says, "to pull a market out of the south of PJM and the west of Pennsylvania and put them somewhere else."

By that remark, Esposito emphasizes that much of the capacity available for import into the Northeast now resides in areas to the south and west of PJM, as well as in western Pennsylvania, which lies largely outside PJM borders. Some in Philadelphia noted that consolidation in the Northeast would leave those seams still intact, and Esposito agrees. As he explains, "Even if the three northeast ISOs were to merge - not something we oppose, but conversely, not something that needs to be done for the sake of doing - they'd still have seams to the south and west."

Nevertheless, Esposito doubts that business models and practices will ever be completely standardized.

"I don't think you are ever going to get uniformity interconnect-wide in procedures, but you may be able to get uniformity in definitions, communications protocols, and consistency in terms of scheduling time frames," he says. For example, scheduling time frames can be set so they do not conflict despite the fact that different RTOs may have different business models.

"I have a spreadsheet five pages long of the different committees such as NERC, regional reliability councils, different ISOs and RTOs. All impact business processes on how you schedule and how you transmit electric power across the grid," he explains.

Esposito would like his spreadsheet of different committees narrowed down to a page-and-a-half.

But beyond implementing common communication protocols, Esposito questions whether grid-wide standardization is a good idea.

"For example, at one ISO in the Northeast, if you want to change your schedule you have to change it an hour-and-a-half ahead of time and at another one it is an hour ahead of time. If I have one ISO or RTO region-wide, I might be stuck with the hour-and-a-half and not have the ability to say, 'hey we can do this in an hour,'" he says.

He hopes competition will develop the best practices among the RTOs.

PJM's Harris agrees that creating an RTO the size of the Eastern Interconnect is unnecessary because it could stifle competitive advantages among the RTOs.

ISO New England's Pellegrino, on the other hand, remains skeptical of the ITSC idea.

"I want to be objective. I want to learn more about it. But my initial reaction [is that] it appears on first blush to be redundant," he says. "I am concerned about redundancy and I am concerned about bureaucracy. I really feel that it may infringe on the duties and responsibilities of a well-functioning RTO."

Pellegrino worries that between an ITSC, NERC, and FERC, there may be too many layers of bureaucracy. Nevertheless, he says he will keep an open mind.

Says Pellegrino, "I am not going to go out to the bully pulpit and say I will have no part in an ITSC. What do the market participants think we need? It is their interests that we serve. Ultimately, they are our customers and they will have to pay for this."

Letter to a Friend: A Study in Cooperation

PJM in early March fired off a letter to the New York ISO complaining of some of the most problematic seams issues it had with its neighboring ISO.

In that letter, PJM's vice president for system operations, Bruce M. Balmat, described a trend of prescheduled contracts being routinely - and in some cases, significantly - curtailed. Balmat said that trend had caused "unacceptable" hardships to PJM operations.

 

Dear Chuck: Your Seam Is Showing PJM tells New York of some "disturbing trends." Mr. Charles King March 6, 2000 Vice President-Market Services New York ISO 5172 Western Turnpike Altamont, NY 12009 Dear Chuck: Historically, PJM and NY have prescheduled transactions between the control areas on a day-ahead basis. Transactions were scheduled to allow each system to better plan and prepare their generation commitments and transmission analysis for the next day. PJM's current scheduling process schedules generation to cover the expected obligations to other control areas and maintains an acceptable ramp for control area interchange based on the prescheduled values. Over the last few weeks, PJM has noticed a disturbing trend of prescheduled contracts being routinely, and in many times significantly, curtailed. This has caused hardships to PJM operations that are unacceptable. PJM understands the curtailments are a result of the structure of the NY market, which subjects contracts scheduled in the day-ahead market to reevaluation again in the hour-ahead market. The reevaluation many times has curtailed prescheduled transactions based on the perceived economic value of the transaction. PJM has no way of predicting these results and many times has had as little as 10 minutes notice to adjust its system to respond to the curtailments. These unexpected curtailments defeat the purpose of the scheduling transactions in order to prepare both of our systems. In fact, it appears many times we are confusing our operators as to the expected operations. PJM requests that we return to the policy of only prescheduling contracts that have a high probability of operating as scheduled and that are not subject to reevaluation. PJM understands you may have the ability to change your procedures to allow day-ahead schedules to be considered "must run" intra day. PJM believes this change would allow us to continue prescheduling contracts if they are considered "must run" by both ISOs. If NY cannot change its policy, PJM will be forced to evaluate how we protect the operations of our system. This may include discontinuing the practice of prescheduling any transactions with NY ISO. Hopefully we can resolve these problems in the short term and continue working with our memberships and through the ISO MOU to further enhance our procedures and market rules to make operations as seamless as possible. Sincerely, Bruce M. Balmat Vice President System Operations Division PJM Interconnection

Some analysts say the letter was an example of squabbling between the ISOs. The ISO chiefs, however, characterize the letter as proof of their efforts to collaborate.

Says PJM's Harris, "I think the letter speaks for itself. ISO New York was being formed. In this particular matter we feel we had to take care of the reliability in the liquid market in PJM. Their actions were having a direct effect upon us. We had to make it very clear [that] that kind of action was having an impact."

New York ISO's Museler says PJM's concerns were legitimate, and his organization has been responsive.

"We are working with them to try to work out those transaction issues. The letter addressed one particular aspect of our transaction issues in which our protocols for external transactions are different because our markets are different," he says.

Museler believes there are several things his organization can do to alleviate the problem.

"The New York market has no choice but to evaluate transactions every hour because that is how our congestion management system works," Museler says. "On the other hand, PJM has a legitimate concern that if we make too many changes on the hour, that may cause things [to] be curtailed that shouldn't have been curtailed."

"We have to reduce the number [of transactions] that are changed on an hourly schedule, and part of that solution is already in the works," Museler says.

Gen Plant Siting: A Border Skirmish

Some generators denied permission to build power plants in one control area are locating on the borders of those areas in order to be dispatched first, say analysts. Such actions could cause reliability problems among the control areas.

"Certainly if they can't go one place, they try to do whatever they can if they think they can still get into the market economically. It looks like in Pennsylvania and New York, plants are still doing that," says Museler.

Museler explains that whether it becomes a reliability problem depends on where the generators locate. For example, two plants have applied for siting at the Ramapo, N.J., substation, a main interconnection point between New York ISO and PJM Interconnection.

"It helps in some ways and hurts in other ways. Clearly, preliminarily both plants can't be there economically because it would affect the transfer capability under certain circumstances," Museler says.

Even if a plant sited at the interface of the ISOs caused no problems within its control area, it may affect the neighboring control region.

Says Museler, "Under the old regime ... if the other control area thought it was being disadvantaged, they would file at FERC and the thing would go on forever."

He says there is no clear answer to the siting issue. The MOU planning group, however, is examining how to coordinate studies so all participants have the same analysis of the cost and effect of putting plants in various locations. Museler admits that it will be some time before such an effort would be completed, but he says these regional studies are good for establishing a common way to evaluate generation proposals.

"The states are still clearly going to be the deciding authorities for power plants, but we can show them the market analysis and the cost of transmission upgrades, which would go a long way towards generators making more logical decisions," he says.

Generation siting is not a big issue in the PJM control area, according to Harris. Interregional siting is another matter.

"PJM has already in place regional expansion planning protocol. It is approved by FERC. We already have in place approved new generation interconnections and how new generation connects to the grid," he says.

The difficulty, according to Harris, is that neither New York ISO nor ISO New England has the siting authority that PJM has. In addition, neither yet complies with the FERC's RTO standards to begin interregional planning.

Harris says that meeting those standards is important for addressing the seams issues involved with generators trying to locate in New York that may or may not have an impact on PJM operations.

Beyond the Fringe: Open Seams to West and South

Irwin A. "Sonny" Popowsky, the Pennsylvania consumer advocate, says he is concerned with seams issues in Pennsylvania.

"If you look at the map, you will realize that Pennsylvania is cut in half. The utilities in eastern and parts of central and northern Pennsylvania are part of PJM, but we also have major utilities that are not part of PJM who are on the western front," he says.

Although he still has strong concerns about high summer prices and installed capacity issues with PJM, Popowsky notes the ISO has made real progress in terms of governance and encouraging consumer participation. But in western Pennsylvania, there seems to be no progress in establishing a framework for competition.

"There will be an enormous amount of work to get the western utilities into a competitive situation," he says.

Popowsky says the industry needs a better way of coordinating transmission to the west and south of PJM.

Dynegy's Esposito recalls a situation where lack of coordination and communication between PJM and Southern generators resulted in an unplanned curtailment.

"I know for a fact that we had power coming out of Florida last summer to PJM and got cut as a result of TLR. That never got communicated all the way back to Florida. If in fact that was a reliability threat, then you could have a reliability threat as a result of people just not understanding and interpreting the communication," he says.

PJM's Harris says the best way to fix interface problems between the Northeast and the players to the west and south is to remedy the seams issues within the Northeast.

"If the Northeast ISOs represent one-fourth of the Eastern Interconnection, then what has to be done with the rest of the pie is to build RTOs and have shared services," he says.

Mike Apprill, vice president, wholesale marketing in the regulated power supply group at UtiliCorp, says many of the seams issues that the Northeast ISOs are wrestling with are the same in the Midwest.

"The biggest concerns are ... pancaking rates, differences in how the regions are addressing the NERC TLR, and congestion-management issues," he explains.

"We are basically looking at three different regional efforts going on: the Southwest Power Pool (SPP), Mid-Continent Area Power Pool (MAPP) regional transmission effort, and the Midwest ISO," says Apprill. "Of course, it appears that MAPP and Midwest ISO will merge."

At this point, Apprill does not see a need for coordination between these three groups and the Northeast on seams issues.

"[The Northeast ISOs] have evolved further in the learning curve. It would help us to look at it and evaluate what they are doing, but I don't think there is a negative impact [from seams issues] that far away," he says.

However, he does see an advantage for the Midwest in learning from the experience of the Northeast ISOs. The difficult things to work through in the Midwest will be matters dealing with reciprocity of the rates and allocation of dollars to transmission, he says.

"In SPP, we sat through years of meetings to develop a regional tariff," he says.

Appril predicts that the Midwest ISO, SPP, and MAPP most probably will have common zonal pricing mechanisms and bilateral markets. Universal LMP models and central dispatch remain a more distant goal, he says.

 

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