The Federal Energy Regulatory Commission (FERC) on January 24 held a technical conference on independent system operators (ISOs) and power pools, as part of its electric transmission open-access Notice of Proposed Rulemaking (NOPR). The FERC's question: Is it necessary in a competitive market for utilities to transfer control over transmission facilities to ISOs, and if so, what form should ISOs take? (18 CFR Part 35, Docket Nos. RM95-8-000 and RM94-7-001). Although participants agreed that an ISO must be independent, opinions differed on how to ensure that independence.

Appropriately, California Public Utilities Commission (CPUC) chairman Wm. Daniel Fessler spoke first. Referring to the CPUC's recent restructuring order, Fessler predicted the benefits of an ISO in terms of California electric users:

s Permanent and functional resolution of transmission access disputes between the transmission-owning utilities and those dependent on access

s Lasting efficiency gain resulting in cost savings due to combining the now-distinct control functions of many entities

s Operational efficiency inherent in a transmission network that has no economic interest other than fostering open access and supply

s Consistent pricing for common network facilities that prevents cost shifting and supports the competitive market.

Fessler pointed out that the CPUC's restructuring order separates the ISO from the Power Exchange, and gives the task of facilitating the spot market to the Power Exchange. Transmission assets would remain the property of the participating owners, but control would be ceded to the ISO.

William Hogan, Thornton Bradshaw Professor of Public Policy and Management at Harvard University, believes a separate Power Exchange would either complicate the competitive market or be redundant. At an electric restructuring investigation before the Pennsylvania Public Utility Commission on February 1, Hogan said it is imperative that the ISO administer the wholesale spot market. He sees no conflict, he added, because the Power Exchange is not the same thing as the spot market. Hogan theorized that a Power Exchange might be where buyers and sellers without bilateral contracts meet to buy and sell. He also argued that such exchanges remain separate from a more encompassing definition of the short-term or spot market, which includes all transactions that take place over a few hours or a day.

Hogan believes that any fear of the ISO administering the spot markets is based on a misunderstanding. To clarify, he cited Roy Thilly, general manager and counsel for Wisconsin Public Power System, who spoke at the FERC's technical conference. According to Hogan, Thilly said it would be harmful for the ISO to participate in the spot market as an entity with the dual role of coordinating the buy/sell for its own account as well as for some subset of market participants. Hogan pointed out that Thilley made the critical distinction between "participating" in the spot market and "administering" the spot market, arguing that it would be desirable for the ISO to administer the spot market as do centralized exchanges in other markets.

E. Linn Draper, Jr., chairman, president, and CEO of American Electric Power Co., said ISOs should operate under a single, FERC-filed tariff. Draper envisions ISOs as independent, either nonprofit or for-profit, but with a mechanism to promote efficiency. He sees ISOs establishing pricing policies, collecting revenues, distributing revenues, and coordinating with neighboring ISOs. He also thinks they should be regional, and that all generators should be eligible to participate. Finally, Draper advocates that the FERC offer incentives to transmission owners to join ISOs by allowing a temporary, higher return on equity for joining.

Steven Kean, vice president of Enron Power Marketing, Inc., said that ISO rules should be on file at the FERC to ensure that rules aren't changed midstream. He advocates turning existing power pools into ISOs, and designing ISOs to suit the market. Kean believes everyone should be on the same tariff, and that further corporate unbundling is required to make the system work. He noted that tying unbundling to stranded-cost recovery would make it more attractive.

Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.