Seams, holes, and historic precedent challenge the Midwest ISO's evolution.
In a single sentence, Bill Smith of the Organization of MISO States (OMS) summarizes prevailing concerns about the new-and-improved Midwest ISO: "When it starts, it has to work."
Smith, who serves as executive director of a group representing state regulators in MISO's sprawling footprint, is referring to MISO's provisional start-up of a new market-based electric transmission grid operation. But as the days count down to the March 1, 2005, launch, many people are thinking about a different date-namely, Aug. 14, 2003, on which a series of events (beginning with a mysterious encroaching tree somewhere in Ohio) led to blackouts from the Midwest to Maine. Before utilities managed to fully restore the grid some 72 hours later, the blackout had cost the American economy as much as $10 billion in lost productivity.
"The Aug. 14 outage was a turning event for MISO," says James P. Torgerson, MISO's president and CEO. "It changed the way we look at reliability."
Since last August, the regional transmission organization (RTO) has strengthened its focus on grid reliability by upgrading its information systems and procedures, and by expanding its staff of operators. It also has taken strides to improve the way it interacts with other RTOs and non-MISO utilities. These steps are intended to address deficiencies that contributed to the blackout, and to demonstrate the RTO's capabilities and readiness to operate the largest wholesale power market in North America.
"One of our biggest challenges is regaining trust and making sure people have confidence that MISO knows what it is doing," Torgerson says. MISO clearly has made progress to that end, but many details must be resolved before key stakeholders will feel comfortable launching the new market. Most stakeholders agree with MISO's goals; many differ about how quickly the RTO realistically can achieve them. Or, in Smith's words, "The mandate to get it right is an absolute. We're not sure we've got it right on paper yet."
MISO aspires to create a single, seamless power market across North America's heartland. The goal is to have a system akin to the PJM RTO, in which transmission congestion is managed with market competition, and participants in the market can trade financial transmission rights (FTRs) on a forward basis. At the same time, MISO would assume full responsibility for maintaining the security and reliability of the transmission systems under its purview.
These are not easy tasks, given the fragmented and diverse nature of MISO's footprint, and the fact that the MISO RTO was built from scratch, rather than from an existing entity like PJM or the New York ISO.
"MISO is the only RTO that is trying to be created out of whole cloth," says Dale Landgren, vice president and chief strategic officer for American Transmission Co. in Pewaukee, Wis. "No regional entity is trying to cover the geographic scope that MISO is covering, or to bring together people who have no history of working together on regional issues. By itself, that is daunting."
MISO's geographic footprint covers 15 states, one Canadian province, and three NERC control areas (East Central Area Reliability Coordination Agreement [ECAR], Mid-Continent Area Power Pool [MAPP], and Mid-America Interconnected Network [MAIN]). Its membership includes utilities of all types, serving populations as diverse as Detroit and the Dakotas. And MISO's territory is full of holes, including two gaping craters created by the recent defections of Commonwealth Edison and American Electric Power to the PJM system.
Given MISO's complexity, some stakeholders are concerned about whether the systems and human resources needed to manage this system are obtainable.
"There's a physical limitation to how much information you can process at one point," says Joseph Welch, president and CEO of International Transmission Co. in Novi, Mich. "It's hard to believe MISO will have enough people with the technical and geographic expertise to handle a crisis."
Such issues were identified as a culprit in the Aug. 14 blackout. Various problems, involving software glitches, inadequate systems, and human error prevented MISO from making decisions that might have prevented the blackout from spreading.
"MISO received indications of breaker trips in [First Energy] that registered in MISO's alarms; however, the alarms were missed," states the U.S.-Canada Power System Outage Task Force in its final report.1 Gathering further information required operators to manually cross-reference alarm codes, so the importance of the alarms was not fully understood until it was too late. "MISO operators did not have the capability to click on the on-screen alarm indicator to display the underlying information," the report states.
Finding the people that MISO needs is proving difficult. The RTO began 2004 with hopes to hire about 120 people, expanding its staff by one-third. Halfway through the year, MISO's employment Web site still listed nearly 100 open positions. "There could potentially be a shortage of talent and skill sets," said Mark Griffin, MISO executive director and chief of staff, in an interview in the February 2004 .2 "We've aggressively stepped up to our mandate around reliability, and that puts a tremendous burden on our staff. There is a challenge in finding people with some skills and understanding of local systems and the way they work in geographic regions."
Additionally, MISO faces a challenge in training all those new people and integrating them into the operation. "That is an immense undertaking, and it would amaze me if they can pull it off by day one [of the new market's operation]," Welch says. "Couple that with the fact that MISO is the security coordinator and is running the system reliability, and it's too much to ask."
Torgerson, however, disagrees, asserting that MISO is creating a more reliable network. "We're looking at things that have never been analyzed before," he says. "We do contingency analyses to pick up impacts that you wouldn't see if you were only looking at a particular control area." Additionally, he explains that a larger RTO, with central dispatch responsibilities, provides access to a larger number of generators to serve power loads.
"Granted, it requires complex computer models and people who understand the entire system," he says. "It's not easy, but from a reliability standpoint, you're better off with a large area that can be coordinated."
A critical challenge for MISO involves some 300 so-called "grandfathered" service agreements (GSAs) between non-MISO utilities and MISO members that have historically provided them with transmission services. Most of these grandfathered agreements involve electric cooperatives and municipal utilities that lie outside the jurisdiction of the Federal Energy Regulatory Commission (FERC). These agreements are important for MISO, because they involve nearly 40 percent of the RTO's transmission capacity.
The utilities holding grandfathered agreements are concerned that they might bear additional costs as a result of MISO's new market tariffs and policies, without realizing commensurate benefits. Additionally, they worry that MISO will attempt to usurp their authority over transmission assets. "A threshold concern … is a possible MISO intent to use the [electricity market tariff] as a bootstrap to assert jurisdiction over facilities that either are jointly owned with MISO members or are owned exclusively by [non-MISO members] but are subject to regulation control by a MISO member," stated a group of Midwestern public power utilities in a June 2004 FERC filing.3 "Any necessary arrangement … should be the product of mutual agreement achieved through seams negotiations."
The heart of the matter is money; generally speaking, the co-ops and munis have declined to join MISO, and they don't want the costs or terms of their transmission services to change without their consent. For example, James O. Edwards Jr., assistant general manager of operations for East River Electric Power Cooperative Inc., told FERC, "It is NSP [Northern States Power, an operating unit of Xcel Energy], and not East River, that joined MISO and thereby made the [energy markets tariff] applicable to service over NSP's facilities. Therefore, if NSP incurs any costs in connection with service to East River that are not recovered through the charges specified in [East River's contracts with NSP], NSP is responsible for bearing those costs. ... The contracts do not give NSP the right to make any unilateral modification to the rates, terms, or conditions of service."
Indeed, many non-jurisdictional utilities are seeking to carve out their assets and services from the new energy market, in hopes of avoiding the costs and requirements of MISO participation. But at the same time, other market participants don't want to carry more than their share of the freight for the market's development. Given the large scope of transmission assets that are affected by the grandfathered agreements, any degree of inequity could have a large financial impact.
"Although the goal would be to keep the parties financially indifferent, there's a perception that by incorporating the grandfathered agreements into the Midwest energy market platform, different obligations will be imposed on different parties," says Brian Meloy, an attorney with the energy practice at Leonard, Street & Deinard in Minneapolis. "The holders of these agreements feel they must be kept financially whole if they are incorporated into the energy market, while other participants feel there shouldn't be any cost-shifting with respect to the grandfathered agreement."
To make matters worse, the grandfathered agreements are not consistent or well understood by MISO or anyone else, and thus they don't lend themselves to a one-size-fits-all replacement contract. "The agreements are all over the board," Meloy says. "The agreements were entered into before the Midwest ISO assumed operational control over transmission in its footprint, and there are disputes over what the agreements actually require. Some don't even have an apparent termination date."
The fuzzy nature of these agreements cannot stand if MISO is to manage transmission rights across its territory in an effective and reliable way. With that in mind-and with an eye toward the goal of settling as many grandfathered agreements as possible-FERC ordered utilities under its jurisdiction to detail the terms of their agreements with non-MISO entities. FERC also asked non-jurisdictional utilities to voluntarily provide the same information.
"We note that there is very little transparency regarding transactions that take place under the terms of GFAs," FERC states in its May 26 order.4 "The Midwest ISO is unsure how many megawatts of capacity the GFAs represent, or where the source and sink points of the GFA transactions will be. In terms of economic and reliability impact, the lack of information makes it difficult to forecast which parts of the Midwest ISO region will be adversely affected."
The whole situation bears the markings of an irresolvable conflict, but regulators nevertheless are trying. Although FERC doesn't have jurisdictional authority over most of the co-ops and municipal utilities that hold grandfathered agreements, it is attempting to reach a solution that will work for both MISO and the grandfathered utilities. Whether the non-jurisdictional utilities will accede to this plan depends largely on how successful FERC's administrative law judge will be in crafting a satisfactory solution.
"There's so much uncertainty," says Dave Sparby, vice president of government and regulatory affairs for Xcel Energy in Minneapolis. "When you look at all the unresolved elements on 300 contracts and the short time frame for the FERC hearings, there is a lot of uncertainty and potential for regulatory risk in this proceeding. You can't conclude that anybody will be happy with the outcome."
If MISO can settle 300 grandfathered agreements, then its other structural challenges may be relatively easy to overcome. However, these issues must be addressed before the market can launch in earnest.
First, MISO needs to reach seams agreements with neighboring utilities and systems to ensure that power can flow smoothly across control areas. Already MISO has reached a joint operating agreement with PJM and a draft agreement with the Southwest Power Pool. Negotiations are proceeding with the Tennessee Valley Authority and the Mid-Continent Area Power Pool (MAPP), but additional seams with utility systems to the west of MISO's territory remain largely unaddressed.
Additionally, MISO must resolve the details of its FTR and day-ahead market mechanisms, many of which have been sketchy so far. MISO has argued that these details will be resolved during the market's dry-run phase, beginning Dec. 1. Between that date and March 1, MISO plans to operate a simulated market for the stated purpose of working through the issues. But such plans depend largely on how the grandfathered agreements and seams issues get resolved.
"The outcome from the grandfathered contracts will have a significant impact on what we do," Torgerson says. "FTRs are directly related to who has the responsibility for grandfathered contracts and who will be nominating for those rights. They are tied together."
MISO's ultimate goal may not be to achieve a perfect consensus; the best it may be able to achieve is a stable detent. And while MISO and its members will face critical decisions in the coming months, lawmakers now play the biggest role. "With something of this complexity, it is unrealistic to suggest that consensus can be reached on every issue," Meloy says. "There are varied interests in the energy markets for different reasons, but to move forward with the market design, regulators will need to decide what the market will look like in the future."
- , U.S.-Canada Power System Outage Task Force, April 2004; https://reports.energy.gov.
- Burr, Michael T. "The Talent Bubble," , February 2004, p.51.
- "The Crescent Moon Utilities' Protest, Petition to Intervene, Comments and Request for Hearing," Federal Energy Regulatory Commission , May 2004.
- "Order Accepting and Suspending Tariff Sheets, Rejecting Tariff Sheets, Setting Timelines and Establishing Procedures for Certain Grandfathered Contracts," 107 .
Utilities go shopping for deals.
The Midwest ISO (MISO), like all regional transmission organizations (RTOs), is a voluntary organization. The Federal Energy Regulatory Commission (FERC) does not require utilities to join an RTO, except sometimes as part of a market-power mitigation settlement. However, in its April 2003 white paper, FERC indicated that its final rule on RTOs likely would require all transmission utilities with wholesale customers to join an RTO.
In the meantime, joining an RTO is still voluntary, but this brings advantages and drawbacks. For example, by making a commitment to work together on structuring the organization, members become vested in the RTO. In theory, this will result in an RTO that is optimally suited to the needs of the industry it serves. But like any democratic process, RTOs' consensual nature also creates its share of difficulties.
"When you have a voluntary organization, each member is giving something up to join," says Dale Landgren, vice president and chief strategic officer for American Transmission Co. in Pewaukee, Wis. "By joining, companies give up some control of their systems, and they have to weigh that against what they get out of it."
Because RTOs can't force utilities to join, they've encountered difficulties in integrating some major transmission owners into their systems. In MISO's case, this has left some significant gaps in its territory. A few major examples include MidAmerican Energy in Iowa; Commonwealth Edison (ComEd) in Illinois; and American Electric Power (AEP), based in Ohio.
AEP and ComEd have opted to join the PJM system, even though both companies are based within the MISO footprint. MidAmerican Energy thus far has remained on the sidelines, participating in MISO only indirectly through its membership in the Mid-Continent Area Power Pool (MAPP)-one of three NERC regions overlapping MISO's footprint.
"The only large [investor-owned utility] in the Midwest not in an RTO now is MidAmerican. Otherwise they're pretty much spoken for," says James Torgerson, president and CEO of MISO. "People are always going to look at their options to see if there is a better alternative. It's up to us to ensure that we are providing the services and products that companies need, at the lowest cost."
In some sense, then, RTOs are competing for members, especially large utilities that bring strategic assets into the organization. Moreover, having utilities withdraw from an RTO in the middle of its development creates uncertainty that complicates the RTO's ability to raise financing and attract other members. Thus, competition for major transmission utilities is an inevitable by-product of RTOs' voluntary nature. Some stakeholders are asking, however, whether competition among RTOs might create unfair biases in their structures.
"In the Midwest you see utilities RTO-shopping," says Joseph Welch, president and CEO of International Transmission Co. in Novi, Mich. "RTOs will make special deals to get big utilities to join them, and the rules are being shaped to favor the hometown crowd."
As an example, Welch cites the joint operating agreement between MISO and PJM, which FERC has cited as a condition of approval for some companies (including AEP) to join PJM. "The joint operating agreement institutionalizes large amounts of loop flow through the Michigan system, such that it is starting to impair reliability," Welch says.
Torgerson asserts he's not aware of any deals being made that would affect RTO rules, but he acknowledges that RTOs will work with companies to bring them into the fold. "Did we work on the ITC [independent transmission company agreement] for Grid America? Sure. Did we agree to reimburse them for some costs? Yes, we did that based on what FERC said RTOs should be doing [to ensure financial neutrality]."
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