News Analysis

 

 

The ISO forges ahead, with or without its members.

What if you formed a regional transmission organization and nobody joined? That's the question in the Midwest, as one by one, utilities who once were members now say they will leave the Midwest Independent System Operator, even as the ISO ploughs forward, undeterred, with plans to upgrade its design to qualify as a full-fledged RTO under the rules in FERC Order 2000.

In fact, rather than take the defections quietly, the Midwest ISO in its Jan. 16 RTO filing asked the Federal Energy Regulatory Commission to deny the requests to withdraw. The non-profit ISO notes that it is considering structural changes, including adopting the for-profit "transco" model of its rival, the proposed Alliance Regional Transmission Organization-which continues to lure the MISO defectors.

All of this leads many to question whether the Midwest region can or should support two RTOs. And, as MISO's changes blur the differences between the two would-be RTOs, a single composite organization begins to appear more likely.

Tipping his hand as to what the FERC might favor, Commissioner William Massey made clear his support for a merged solution at a Jan. 10 FERC meeting. Noting that he was "chagrined" by the planned withdrawals from the MISO, Massey said, "I believe it's time for the commission to require the stakeholders in the Midwest to attempt to forge a single RTO."

Massey pointed out that since the formation of both Midwest organizations, the FERC had issued guidance on how hybrid organizations with both ISO and transco features might fit into the framework for RTO standards, set forth in FERC's Order 2000. Massey added that participants of the MISO and Alliance had consulted on how their organizations might move forward together.

"I understand that those discussions have found many areas of common ground, but have not yet been successful in forging a single RTO for the region," he said. "I believe those discussions should move forward."

A Troubled Time Line

Year 2000 Sept. 20 Dynegy subsidiary Illinois Power announces intent to withdraw from Midwest ISO, to join proposed Alliance RTO. Oct. 13 Dynegy and Ill. Pwr. file formal application to defect. . Oct. 31 Exelon subsidiary Commonwealth Edison says it will defect to Alliance. Nov. 9 Ameren Corp. says it will do the same. Dec. 4 NASUCA files protest against Dynegy and Ill. Pwr., as does the coalition of Midwest Trans. Customers. Dec. 13 MISO president and CEO Matthew Cordaro resigns. Former CFO James P. Torgerson takes over. Dec. 13 FERC sets agenda to decide on Dynegy request, but concludes meeting without acting on the case. Dec. 15 MISO asks FERC to OK second of two $100 million installments of interest-bearing senior notes, and to require any departing member to honor debt liability. . Dec. 19 Led by Madison Gas & Elec. and Wisconsin Public Power, a group of Wisconsin municipal utilities complains that MISO is faltering, asks FERC to act. Dec. 20 Gang of six—Hoosier Energy, Cinergy, Southern Indiana Gas & Electric, Wabash Valley Power Association, Central Illinois Light Co., and Southern Illinois Power Co-op—seeks authority from FERC to leave MISO if threatened defections occur, saying ISO then couldn't function in that case. . Dec. 22 Exelon and ComEd file formal request at FERC to leave MISO and join Alliance. . Dec. 22 Wisconsin PSC certifies the state-sponsored American Transmission Co. as a stand-alone transmission company. . Year 2001 Jan. 5 Louisville Gas & Elec. Co. and Ky. Utils. Co. file at FERC for withdrawal from the ISO. . Jan. 8 Dynegy and Ill. Pwr. notify FERC of plan to join Alliance. Jan. 8 Cinergy and Central Ill. Light, plus a broad third-party group of some 17 utilities co-ops, and marketers, including Duke Energy, Enron, and Reliant, ask FERC to appoint settlement judge to oversee the "uniting" of MISO and Alliance. . Jan. 11 Five state PUCs—Ohio, West Virginia, Indiana, Michigan, Iowa—file protest against defection by "gang of six," as does MISO. Illinois and Michigan commissions also protest the Exelon defection. Jan. 12 MISO files protest against bid by Exelon and ComEd. Jan. 12 WPS Resources, Wisc. Pub. Serv. Corp., and Upper Peninsula Power oppose Exelon's threatened withdrawal, saying it threatens to balkanize the markets. Jan. 12 ComEd, Ill. Pwr., Union Elec., and Cent. Ill. Pub. Serv. Co. challenge MISO's proposed debt issue, calling it "risky." Jan. 16 MISO files its plans to form RTO and comply with FERC Order 2000, saying it is ready to become a functioning ISO if its members are refused withdrawal. . -R.R.J. & B.W.R.

In fact, on Jan. 8, MISO members Cinergy and Central Illinois Light Co., along with a broad group of utilities (both public and private), co-ops, and marketers, including Enron, Duke Energy, and Reliant, had asked the FERC to appoint a settlement judge to oversee the uniting of MISO with Alliance. They all seek the union of Alliance and MISO to form a single RTO for the Midwest, with the possibility that either Alliance, MISO, or both might function as independent transmission operators or companies within the RTO umbrella.

"It is time for the Commission to take control of the process," said the group. "It is a waste of time and resources of vitally interested stakeholders ... to allow MISO and Alliance to continue to proceed down separate developmental paths when neither can achieve sufficient scope and configuration without the other."

At the same time, the group warned, "While the current situation is dire, it is not hopeless. The process needs to be jump-started."

Massey urged the commission to issue an order as soon as possible requiring the negotiations to continue, with the goal of forming a single RTO for the Midwest. And while those discussions are underway, the FERC must turn its attention to other RTO filings. Massey said he remained committed to having RTOs operating in all regions of the country by Dec. 15, 2001.

Defectors Fall Like Dominos

It took the planned withdrawal of but three companies in the MISO—Illinois Power, Commonwealth Edison, and Ameren Corp.—to give the remaining members cold feet.

Six members announced in December that if the FERC were to grant permission to Dynegy, Exelon, and Ameren to leave MISO, then they would leave too (but not otherwise). In a Dec. 19 filing with FERC, the six-Hoosier Energy, Cinergy, Southern Indiana Gas & Electric, Wabash Valley Power Association, Central Illinois Light Co., and Southern Illinois Power Co-op-asked permission to withdraw from the MISO effective the same day FERC authorizes the separating companies to leave. (.)

Using the same argument, Louisville Gas & Electric Co. and Kentucky Utilities Co. soon followed, filing with FERC a request to withdraw from the ISO and be allowed recovery of related costs. (The merger of the operating utilities' parent companies, LG&E Energy Corp. and KU Energy Corp., was conditioned on participation in the MISO, and in the merger order the FERC said any request to withdraw would be evaluated based on impact on competition in the Kentucky Utilities Co. destination markets.)

But MISO claimed that any member seeking to withdraw should be required to propose mitigation measures to abate any degradation to system reliability and market efficiency. MISO pointed out that if its corporate organization is a factor motivating departure, then its form can be changed. That might be done, said the MISO, through actions such as its transformation into a for-profit entity or an umbrella transmission coordination entity—the Midwest Transmission Coordinating Authority.

According to MISO, Exelon's ComEd subsidiary was the cornerstone. "Blasting a hole in the MISO does not propel the public interest standards forward in the context of scope and configuration," said the ISO. It put the blame squarely on ComEd, stating that its decision to withdraw "has created an environment for many other transmission owners to announce their departures solely as a protective measure for themselves and their customers." MISO also named other utilities it said were reassessing plans to join the ISO due to the uncertainty—Southwestern Public Service Co., UtiliCorp, Dairyland Power Co-op, Great Rivers Energy, Otter Tail Power, and Minnesota Power.

Meanwhile, on Jan. 24, with Commissioner William Massey dissenting in both cases, the FERC by votes of 2-1 issued two orders relevant to MISO. First, it approved a compliance filing by the Alliance companies, finding that Alliance met the scope and configuration requirements under Order No. 2000 (). Second, it deferred action on the request by Illinois Power to leave the MISO (). Instead, FERC wants one last effort for the parties to negotiate a settlement, and allowed them one month before a settlement judge to work things out before FERC issues a ruling. Newly appointed FERC chair Curt HŽbert, when queried after the meeting, made clear that if it were up to him, he would allow Illinois Power to withdraw from MISO because he believes RTO membership should be voluntary.

Commissioner Massey dissented on the scope and configuration of Alliance, calling it "shaped like a stretching snake" and that his "worst fear" had been realized because the order stresses seams management rather than scope and configuration. But Hébert disagreed, and said that the Alliance order "does not find fault with having a single Midwest RTO." In fact, he added that one RTO is the natural evolution of the matter, but that the disagreement really was over how much molding FERC should do.

So the parties have one month to hammer out an agreement, despite the Jan. 8 notice by Dynegy to FERC that it had negotiated an agreement for Illinois Power to join the Alliance group.

In the Dynegy case, the issue appeared to turn on whether Dynegy's takeover of Illinois Power, completed after the utility had joined MISO, should be treated as a change of ownership of transmission facilities sufficient to trigger a "contractual right" to allow Dynegy to pull its subsidiary from the ISO. Taking the opposite view was Ohio consumers' counsel Robert Tongren, protesting on behalf of the National Association of State Utility Consumer Advocates:

"It is true that the Midwest ISO transmission owners, including Illinois Power, attempted to give themselves a contractual right of withdrawal. The commission, however, wisely rejected the notion that transmission owners should have the right to withdraw from an RTO, even one they had joined voluntarily."

Another important question was whether the ultimate fate of MISO should play a part in any decision by the FERC on any single member request to withdraw.

On that score, Dynegy and Illinois Power urged that any decision in their case should proceed in isolation. Illinois Power drew an analogy between its withdrawal from MISO and a run-of-the-mill termination of a transmission service agreement or wholesale requirements contract. But others disagreed, such as attorney Samuel Randazzo, arguing on behalf of the Coalition of Midwest Transmission Customers:

"The commission's disposition of Illinois Power's attempt to withdraw from MISO affects Order 2000, MISO's long-term vitality and, most importantly, the desired end-result of truly competitive electric markets in the Midwest."

In Search of Funds

Back at the ISO, the subject turned to finances, internal structure, and sustaining the organization.

As the would-be defectors announced their intentions, the credit rating companies Standard & Poor's and Moody's downgraded their credit outlooks on MISO's bonds from stable to negative. The key to raising the ratings, they said, would be the FERC's decision on whether to allow the withdrawals.

On Dec. 15, however, MISO gave notice that it wanted to return to the capital markets, saying that by the end of the first quarter of 2001 it would "exhaust" the funds it raised back in June 1, 2000 from an issuance of $100 million in 8.75 percent senior notes (rated triple-B+)—the first half of a planned, two-stage $200 million financing. (The FERC had OK'd the first $100 million tranche back on May 4, but not the second. .)

MISO said it was working with Wall Street advisors, but that Merrill Lynch had advised it that before the second bond issue could proceed, the market would require the FERC to acknowledge that departing MISO members would continue to be obligated to pay their allocated share of debt, plus any premium resulting from calling that debt that MISO had incurred to fund startup costs. MISO urged the FERC to OK the second tranche of debt and to include the requested language in its order as the sine qua non of any prospective debt financing.

However, this new request for funds has spawned opposition from some of the would-be MISO defectors.

On Jan. 12, Illinois Power, ComEd, Union Electric, and Central Illinois Public Service Co. opposed the request for funding, citing general FERC authority to deny securities issues "where the proceeds would be used to finance an overly risky enterprise."

Citing the obvious threats to MISO's integrity (their own and others' intentions to withdraw) the four utilities (in two separate motions) charged that MISO's proposal to sell additional debt was "incompatible" with FERC criteria to determine the public interest. And because they would want to protect themselves from liability for MISO debt after leaving the group (recall the sine qua non condition), they warned that any new debt issue by MISO would only "provoke litigation." They urged the FERC to defer action on the request "until such time as the composition and future plans of [MISO] are known with more certainty."

The RTO Future

On Jan. 16, the Midwest ISO proceeded anyway to file the documents required under FERC 2000 to declare its intentions on how it would comply with Order 2000, governing the formation of RTOs.

To comply with the minimum set of eight functions required for RTOs, MISO claimed that its existing protocols for congestion management satisfied the technical requirements of Order 2000, and that it planned to implement a market monitoring function. On the question of size and scope, MISO claimed that "given the pending addition of many of the transmission-owning entities with MAPP" (the Mid-Continent Area Power Pool), that its size would allow it to internalize "most, if not all" of the effects of parallel path flow from its scheduling activities.

MISO added that if the FERC should refuse to allow members to withdraw, it is ready to become a functioning RTO and asked the FERC to issue an order no later that 30 days from the filing date recognizing the MISO as an RTO. But MISO admits that it, too, is suffering from the uncertainty of the situation. The ISO notes that while its headquarters building in Carmel, Ind., is 85 percent complete, its staffing hires have been frozen at about 80 employees of an expected 190.

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