A special report

on transmission,

power pools, ISOs,

and the fallout from FERC Order 888."WHAT IS NEW IN THE INDUSTRY IS

not the conclusion that coordination in operations is needed to avoid chaos. What is new is that the number of players is much larger and the motivation of many key players, especially generators and large users, will be different from those who influenced grid-use policies and practices in the past."

That comment from Charles Stalon, a former commissioner in Illinois and at the Federal Energy Regulatory Commission (FERC), sums up a conference put together in late June by Alex Henney in San Francisco, CA. A former director of the London Electricity Board, Henney now advises on competitive electric restructurings.

Sponsored by Public Utilities Reports Inc., The Management Exchange, and Henney's EEE Limited, the conference took a West Coast theme: "California Today (em The U.S. Tomorrow? Access-Pools-ISOs." Speakers and attendees debated the developing competitive power markets and the importance of planning at all levels, and came up with as many questions as they did answers.

State/Federal Flashpoints

Potential federal and state clashes can affect the best laid plans, warned Shelton M. Cannon, FERC's deputy director of the Office of Electric Power Regulation.

Cannon spoke on FERC's Order 888 and "cooperative federalism," observing that while there are no clear answers, progress toward solutions would be best promoted by cooperation between state and federal regulators. He foresees five potential state/federal jurisdictional "flashpoints."

s Transmission constraints. Cannon pointed out that although the FERC has authority to order transmission access, states have siting authority over any transmission facilities that need to be built.

s Mergers. While the FERC should issue its merger rulemaking order soon, Cannon observed that many commentors in the merger proceeding felt the FERC should be more rigorous in its analysis of the competitive effects of utility mergers. In the past, the FERC has focused primarily on transmission market power and almost routinely has required open access as a merger prerequisite. But now focus is shifting to transmission constraints and how they affect generation market power. Those are the same issues the California Public Utilities Commission (CPUC) is wrestling with in its restructuring order and, Cannon noted, "it's never easy going first."

s New Institutions. Cannon observed that independent system operators (ISOs) may only mark "the tip of this new institutional iceberg." He queried whether we are creating new institutions faster than we can assimilate them.

s Regional Issues. These have the potential to pit state against state, with the FERC as referee. The top two contentious issues, according to Cannon, are transmission planning and transmission pricing. Creating regional transmission groups (RTGs) or adopting flow-based pricing, for example, will require regional utilities to work together.

s Tariff Design. The FERC's Notice of Proposed Rulemaking on tariff design proposes replacing all pro forma open-access tariffs (due July 9) with capacity reservation tariffs (CRTs) by December 31, 1997. The CRTs would require all transmission users to nominate and reserve firm transmission capacity between specific points of receipt and delivery on the grid. Load-based network service would no longer exist. The transmission provider would still be entitled to recover 100 percent of its fixed costs, but those costs would be allocated among all firm reservation holders.

The CRT proposal goes beyond Order 888 by requiring transmission providers to nominate and reserve transmission capacity on behalf of retail native loads under FERC transmission tariffs, which would require the active involvement of state commissions.

Foreign Power Pools

The key to a successful pool is to develop something that suits the market and let it evolve.

Such was the conclusion reached by Henney, along with Robert Milliner (em an attorney with Mallesons Stephens Jaques of Australia, who worked on the Victoria power pool (em and Lorry Wilson, administrator of the Alberta Power Pool.

Henney compared and contrasted the planning and creation of power pools throughout the world. The amazing thing about the England/Wales pool is that it works, Henney said, explaining that it was put together in six months, and is likely the most complicated civil contract ever created. But problems have arisen. One problem is that the England/ Wales pool is dominated by a scheduler. Henney finds it "unfortunate" that California might use a scheduler to run PoolCo. He pointed out that it is "extraordinarily difficult" to make changes in the contract. Also, the U.K. pool has suffered from the institutional divide between the pool and the National Grid Co.

Pool Governance

"When systems interconnect, someone loses sovereignty."

Stalon, now an independent consultant, talked about market governance (em specifically, the problem created when two utilities or generators interconnect so that each loses its sovereign control over its economic performance. "There are, in the language of economics, rampant externalities involved in operating within interconnections," Stalon noted. He called for replacing the myth of "voluntary cooperation" with an orderly system of governance that uses fines and penalties.

Stalon warned that planners must confront two difficult tasks when interconnecting several control areas: 1) creating efficient transmission service pricing when buyers and sellers are free to trade, and 2) devising rules for trading within each control area that produce the desired systemic results.

Stalon proposed a solution that would satisfy the standards of short-run efficiency: 1) all control areas operate as mandatory PoolCos, 2) each area uses locational, marginal-cost pricing for transmission services, and 3) only ISOs are permitted to trade across area boundaries. He added that an interconnection between flexible Poolcos and bilateral contract areas should satisfy short-run efficiency standards if all transmission services are priced by locational, marginal cost.

Midwestern ISO

Who now has the obligation under section 211 of the Federal Power Act to build transmission facilities?

A lengthy debate produced no consensus. Charles A. Falcone, senior vice president of system power markets for American Electric Power Service Corp., argued that the obligation would lie with the ISO, but added that the local transmission owner may well have to facilitate construction.

Falcone spoke about the process of creating an ISO and regional power exchange in the Midwest, setting forth the 13 principles that have been agreed to by 21 IOUs, cooperatives, and municipal utilities (see sidebar).

Nevertheless, some of the principles could prove problematic. For example, Falcone predicted a lot of "drop outs" if utilities were required to merge their control areas, because they do not want to give up their independence entirely (see Principle #3). Also, while they agree on the need for a planning function (see Principle #11), the utilities are still debating the extent of that function. Falcone said that one side believes ISOs should be able to override plans made by transmission owners; the other side believes ISOs should only coordinate the planning function and concede to owners.

Large Industrial Customers

"Residential customers are not going to save any money. It's a lot of nonsense. It's a fiction of the British regulator and the British government."

That comment came from Henney during a discussion over how to put the California restructuring together in 18 months.

Barbara Barkovich, principal at Barkovich and Yap, looked at the other side: what the large industrial customers want from restructuring. First, they want fair, comparable, open-access to the transmission grid without preferential treatment. Second, they want the functions of the power exchange and the ISO separated. Forcing the two to work together will allow the market to decide which method works best. Barkovich also noted that large customers like bilateral transactions, because that's how they are used to doing business.

In addition, stranded cost recovery or rate design changes to achieve unbundling should not involve cost-shifting. Customers should not be allowed to shift their responsibility onto other customers, Barkovich said. Also, industrial customers crave

certainty as to when customers will stop paying for stranded-cost recovery.

Fair and expeditious phase-in of direct access is another goal of industrial customers, although a one-time implementation is preferred. And aggregation strategies must be worked out. For example, is each McDonald's a separate customer? Barkovich noted it will be a challenge to work out a phase-in schedule fair enough to escape challenges in the legislature.

Metering issues have also become extremely important, because meters tend to be unsophisticated. This has created a call for load profiling, which makes large customers nervous because of spill-over effects, Barkovich observed.

California's Restructuring

California's electric rates are 150 percent of the national average, but seem worse because the state is located next to states with below-average rates, lamented Daniel Fessler, CPUC Commissioner.

He said the California restructuring is "on track and on target." However, he noted that the process is "fraught with risks," because CPUC's staff have decided that the implementation strategies must be designed and employed by the stakeholders. In addition, Fessler said that disagreement among California utilities has led municipal and public power utilities to assume nonfiling status. Further, the three investor-owned utilities disagree on transmission pricing. t

Lori A. Burkhart is an associate legal editor of PUBLIC UTILITIES FORTNIGHTLY.

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