ON OCT. 31, 1997, ENTERGY CORP. AND 16 OTHER MEMBERS
announced their intention to withdraw from the Southwest Power Pool regional reliability council and join the neighboring Southeastern Electric Reliability Council. The announcement shocked the SPP and its members, plus other industry observers and stakeholders.
While significant in number, the withdrawals do not necessarily signal widespread displeasure with SPP's initiatives and performance. Of the members leaving the SPP, nine indicated they were leaving on account of mergers, high costs or that their affiliates would still belong to the SPP. Five of the nine were Entergy operating companies. St. Joseph Power & Light Co. had announced its intention to withdraw in September, a month earlier. The potential financial uncertainty caused by Entergy's exit may have spooked the remaining six.
Events of this nature do not occur often in the electric power industry. They carry strategic implications (em both for utilities and for industry institutions, including the regional councils that make up the North American Electric Reliability Council, or NERC. They may also expose conflicts between utilities and regional councils. On the surface, such conflicts may appear benign, involving nominal issues such as trading patterns or degree of interconnection. Underneath it all, however, may lie more important issues, such as who will retain control over (or earn a profit from) the operation of electric transmission lines.
Prologue: NERC Strategy, Pool Politics
Recognizing the imminent arrival of open access, unbundling and competition, the senior industry executives who constitute the NERC leadership had already taken initiatives to encourage broader participation and set reliability, performance and monitoring standards with "teeth."
The apparent goal of NERC's strategies has been to place the organization and its regional councils in a meaningful position before policymakers become prescriptive about reliability issues in a restructured environment. But this goal has sent the regional councils on their own paths (em giving choices to utilities.
Some important NERC initiatives, with implications for the changes under way in the SPP, have required each region to establish either a security monitor, a security center, or an independent system operator to coordinate emergency operating procedures among multiple control areas. The three options differ in the amount of authority relinquished by the member utilities and control areas involved. The first option (em a security monitor (em would have utilities relinquish the least amount of control. The third option (em the ISO (em would find utilities relinquishing the greatest amount of control. The security center approach represents an intermediate point in the spectrum of delegating authority to a security coordinator.
As a result of these guidelines, SERC members opted to establish four security monitors using the infrastructures at Duke Power, Virginia Power, The Southern Company and the Tennessee Valley Authority. The SPP, on the other hand, began working toward a more concentrated approach by establishing a security center located at the SPP office in Little Rock, Ark. More recently, the SPP staff has been developing procedures and adding the staff and equipment needed to move towards the creation of an ISO.
However, even while NERC itself was advocating structural and operational changes from the top down, the regional councils themselves had begun to explore their own options. In September 1996, the utilities in peninsular Florida, who had been part of the Southeastern Electric Reliability Council (SERC), broke away to form a new NERC regional council known as the Florida Reliability Coordinating Council (FRCC). The change appears perfectly sensible from the perspective of geography and electric system operations.
Then, in October of last year, the Mid-Continent Area Power Pool and SPP began to consider the possibility of merging to form a single NERC region. Both MAPP and SPP had been working in similar directions regarding the creation of ISOs and regional pricing initiatives within their respective boundaries. The recent resignation of the MAPP executive director also created a convenient opportunity for the two regional councils to consider the option of merging.
By the end of the year, after Entergy had declared its intention to withdraw from SPP, neither MAPP nor SPP had announced a formal merger agreement. On Dec. 19, however, SPP confirmed that it had filed an open-access transmission tariff with the Federal Energy Regulatory Commission with a pricing approach similar that under development at MAPP. (See sidebar, SPP's Transmission Pricing.)
The Story Line: Entergy's Withdrawal
Entergy gave three nominal reasons for withdrawing from the SPP: (1) increased involvement with SERC; (2) displeasure with SPP's proposed pricing plan; and (3) redundant security coordination costs.
For the record, Entergy stated that in recent months, its involvement with SERC had increased because of a higher number of wholesale transactions, complicating the operation of the interconnected transmission systems linking it with SERC. It said its interests in addressing loop flow, reliability and security were more closely aligned with SERC than with the other members of the SPP. Entergy argued that the SPP was more concerned with loop-flow issues associated with MAPP. It cited the SPP's possible merger with MAPP as an example of that northern preference.
Second, Entergy cited displeasure with the SPP's intention to file a regional pricing tariff with the FERC. Among other issues, the company said it believed the tariff would not properly recover costs from users. The tariff, expected to go into place in April 1998, had been designed to recover not only the cost of service of transmission owners, but also 65 percent of the SPP's tariff administration costs.
Third, Entergy claimed that the costs associated with security coordination for the SPP region were redundant to existing Entergy investments and questioned its 25-percent cost share, which it said would be recovered unnecessarily from its own ratepayers. The SPP had announced plans to double its existing staff, and increase its annual budget by approximately $2 million, to meet its expanded responsibilities as the SPP regional security coordinator and regional pricing tariff administrator. Entergy's proportion of these costs would amount to an increase of about $500,000 per year, or 21 cents per customer per year.
The Subplot: An Eye on Profits
An obvious, yet implicit reason for the Entergy withdrawal from the SPP appears to rest with a reluctance to relinquish control over operational decisions. Companies like Entergy could benefit from the SERC approach, which allows the large utilities to use their existing infrastructures and retain more control over system operations. This approach is dramatically different from the procedures established in the SPP.
For example, after the issuance of NERC security guidelines, the SPP had developed procedures to accomplish line-loading relief by terminating scheduled power transactions. More recently, the SPP began to consider generation redispatch options. At its November board meeting, the SPP approved a proposal to move forward with the creation of an ISO. An ISO task force is currently developing a proposed ISO plan, which will be presented to the board of directors in May 1998.
Now, however, with the filing of a transmission tariff at the FERC, the SPP model represents an additional problem for Entergy, particularly in light of the existing security control arrangements in the SPP. The SPP tariff, expected to be in place by April 1998, would set a region-wide price for transmission service with a cost-of-service cap. The tariff's goal would be to reduce the pancaking of intra-region tariffs.
However, with a cost-of-service cap it becomes difficult for transmission owners to recoup any economic rents from transmission line congestion. Line congestion, like any other market lacking a price mechanism for allocating a scarce resource, is determined by nonmarket rules carried out by the security coordinator at the SPP. There lies the problem: If large transmission owners (like Entergy) cannot earn economic rents on congested lines, and if they also do not have the ability to determine themselves which transactions will be cut in case of line load relief, they are subject to the independence of the regional security coordinator. Given SPP's movement toward establishing an ISO, it is not at all surprising that a large utility like Entergy would move away from the more centralized SPP and toward the more decentralized SERC.
Of course, we do not mean to suggest that Entergy does not have any mutual interest with SERC. Certainly, the statements by Entergy about the need for a better alignment with SERC are important. However, it stands to reason that such conclusions are true for all utilities located on the fringes of any given NERC region. It seems doubtful that a few months of greater interaction with SERC overwhelmingly outlined the need to break with a decades-long relationship with the SPP and its member utilities.
The concern over an imminent merger between SPP and MAPP also appears to make for convenient timing. Entergy claims that a potential merger between SPP and MAPP would carry greater benefits for the northern members of the SPP. However, these sub-regional benefits and preferences are at least debatable, since St. Joseph Power & Light, located in the northern part of the SPP, recently announced its intentions to leave the SPP because it felt that MAPP better met its interests. What is not debatable is the simple fact that a merger between SPP and MAPP would further diffuse the concentration of power that any one utility has in the region.
Overall, one can see a striking difference between the Entergy split, on one hand, and the spinoff of FRCC from SERC, or the prospect of a merger between SPP and MAPP, on the other. The last two represent friendly transactions, with economic benefits promised for all parties. The Entergy withdrawal, however, is more appears analogous to a corporate downsizing. It may cause the SPP to tighten its belt in terms of expenses (em to attempt make up a portion of the lost Entergy revenues through higher dues to the remaining SPP members.
David E. Dismukes is an assistant professor at the Center for Energy Studies, Louisiana State University. Fred I. Denny is an associate professor in the Department of Electrical and Computer
Engineering, Louisiana State University.
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