Electric Transmission: Do State Regulators Still Have a Voice?

Fortnightly Magazine - November 15 1999

How the FERC's RTO case has split the PUCs into five warring factions.

With momentum building for competition in retail energy markets, and with the real authority seeming to shift to the federal government, do regulators at the state public utility commissions (PUCs) still have a voice in setting policy for the electric transmission grid? After all, the Federal Energy Regulatory Commission enjoys exclusive jurisdiction over interstate transmission service. That's the one major utility sector likely to remain heavily regulated for some time.

Even so, some state PUCs appear to be gaining a measure of turf in the transmission sector. That is occurring as state legislatures pass new restructuring bills that purport to grant authority to PUCs to review the conditions by which utilities may transfer their transmission assets to new grid institutions, such as ISOs (independent system operators) and transcos (independent, for-profit transmission companies).

This surprising trend emerges from comments filed by state PUCs late this summer and in the early fall in Docket RM99-2-000. In that proceeding the FERC set guidelines, structures and functions for regional transmission organizations, also known as RTOs.

Consider the states of Ohio, Virginia and Wisconsin. Each has passed a law requiring jurisdictional electric utilities to transfer control of transmission facilities to a regional transmission entity (RTE), which might operate as an ISO or a transco. These laws are drafted in a way that will require state regulators eventually to pass judgment on the qualification and attributes of the new state-mandated ISOs or transcos, even as the FERC proceeds to set its own benchmarks for federally regulated RTOs.

Conflicts are bound to arise.

The Virginia statute says that state rules must be consistent with FERC requirements. But the law nevertheless contains its own definition of the term "independent system operator." The Virginia law also grants authority to the state commission to compel the RTE to expand grid capacity (or, in the case of a transco, to require such action from the persons owning or controlling the transmission facilities).

The Wisconsin statute says the ISO or transco must control all the state's transmission service. Contrast that requirement with the "Swiss cheese" holes that emerged in the FERC-approved Midwest ISO, where MISO decidedly will not control all transmission service in Ohio, or in other states in which it operates. The Wisconsin ISO also gets authority to direct utility transmission owners to expand the grid. That's a prerogative not seen in the list of four characteristics and seven functions set out for qualifying federal RTOs in the FERC's notice of proposed rulemaking. The Virginia State Corporation Commission highlighted the potential for confusion earlier this year in its decision inviting comments on how it should manage the transfer of transmission control to a state-mandated grid institution:

"In specifying the criteria by which we will evaluate our utilities' compliance with their state law obligations, we will need to address the intersection between these criteria and [the] FERC's eleven ISO principles." The Virginia regulators then added: "[W]e seek comment on how the [Virginia] commission might best integrate its own rules and regulations on RTEs with those issued by the FERC." Case No. PUE99-349, May 26, 1999 (Va.S.C.C.).

This integration of state and federal RTE/RTO rules will not come easy. For proof, consider a situation in which a state commission is asked to approve construction of transmission facilities that will allow an exempt wholesale generator to connect to the grid. Then listen to these RTO comments filed by the New England Conference of Public Utilities Commissioners Inc.

"In the past, findings of necessity for such a connection were based on a finding of economic need for the regulated generation facility to serve native load. [But] in the current environment, new generators may be unregulated, for-profit merchant facilities whose customers may or may not reside within the state in which transmission facilities must be constructed. Unlike the situation posed by utility generation, there is no guarantee that the [merchant] generator will be successful, or [that] it will continue to operate long enough to justify the construction of transmission lines purposely built to bring that generator on line."

The New England commissioners ask how a state would use its eminent domain authority in such a case.

And even if an RTO helps to identify and manage transmission constraints, making congestion costs more transparent, the problem will not go away. The New England commissioners explain:

"Congestion-based costs that are external, from a state's point of view, may increase the hurdle for state authorities that are required by law to show how the proposed addition [to the grid] benefits the state. In such a situation, customers in one state will pay higher generation prices than those in the other. A state siting board in the high-cost state may be able to justify construction of transmission in order to lower generation cost, but how does the [other] state ¼ justify the transmission expansion to its residents?"

These questions should help show why the state PUCs now appear energized though divided in their comments on the FERC's RTO initiative.

The Five Factions

The state PUCs have split into five factions in their comments. These factions are defined according to philosophy, but they also tend to coincide roughly (despite some outliers) with basic geographic regions: Northeast, Midwest, Southeast, West and Texas.

The Northeast. State PUCs from the Northeast tend to urge the FERC to grandfather the New York, New England and PJM ISOs, so they won't need to file compliance documents by the deadlines given in the RTO NOPR. PUCs in this region appear wary of suggestions that the three ISOs might prove too small to satisfy the FERC's proposed RTO characteristics for size and scope.

The New York Public Service Commission sums up the mood: "It is not clear that merely combining two or all three of the northeastern ISOs would necessarily make sense economically or from an engineering point of view."

New England PUCs agree: "The existing boundaries of the ISO New England and the New York ISO mirror both the physical characteristics of their respective transmission networks and political boundaries. ¼ Adding to the size or complexity of ISO New England ¼ would be costly and could destabilize the evolving market."

Another problem arises: The New York and New England ISOs appear to fail the FERC's RTO standards because other parties (transmission owners in New York; NEPOOL in New England) can unilaterally modify the ISO transmission tariffs. The New York PSC suggests that the FERC should carve out a safe harbor exemption to allow such changes if utility transmission owners (TOs) have no other choice to collect their embedded-cost revenue requirement. The New England PUCs offer a different solution. Building on ideas noted in other comments, they suggest that TOs would lease their capacity to the RTO. The RTO would repackage the capacity to customers in a sort of submetering arrangement under a single RTO tariff. According to the New England comments, the TOs would still be free to file unilateral tariff changes, with their single customer being the RTO.

The Midwest. The Illinois Commerce Commission typifies the views of many PUCs in the Midwest - that the FERC should mandate RTO participation and perhaps even draw the RTO boundaries. This view has emerged because the Midwest states are caught in the middle of disagreements between the Midwest ISO and the proposed Alliance transco. That schism threatens to balkanize transmission markets in the Midwest with two RTOs, neither of which would cover a fully contiguous area. Even with two RTOs, many sections of the Midwestern grid would likely remain outside of RTO operations.

As Illinois explains, the FERC's voluntary "minimalist approach" is "not sufficient" to obtain RTO objectives. And in Ohio - virtual ground zero for the RTO debate - the PUC appears even less charitable in its evaluation of the FERC's voluntary approach:

"By asking companies to either file RTO proposals or a description of efforts to participate in an RTO, the FERC is begging for companies to game the system."

In Wisconsin, the PSC urges the FERC to devise a very large RTO that would embrace both the MAIN and MAPP reliability councils (the Mid-America Interconnected Network and the Mid-Continent Area Power Pool). Wisconsin stresses that a single broad market would iron out differences between MAPP and MAIN over reliability standards and operational protocols: "[A]n efficient independent market in the Upper Midwest will not and cannot exist until an RTO that incorporates both MAIN and MAPP is formed."

This Wisconsin view reflects concern over the state's isolated peninsular transmission grid, but would place the highly constrained and bottlenecked MAPP/MAIN interface at the heart of the RTO area. Here, Wisconsin seems at odds with the more common view from the Ohio PUC that "congested and bottleneck facilities should be located at the boundary of an RTO."

The Southeast. The Florida PSC appears to have taken the lead for the Southeast PUCs. In its comments, it offers what is essentially a legal brief to argue the case that the FERC lacks jurisdiction to force utilities to cede control of their transmission assets. Florida claims the FERC cannot rely on Federal Power Act sec. 202(a) for authority to mandate RTOs.

"The NOPR appears to require utilities to take actions that extend far beyond the 'interconnection and coordination of facilities' that the FERC is permitted to encourage."

The PSC adds that once an RTO was formed, the FERC policy would force utilities to give up significant rights "normally associated" with transmission ownership, "including section 205 rights to file for changes in rates, terms, and conditions of service."

The Alabama PSC fully endorses the Florida argument. South Carolina reiterates many of the same concerns.

The West. RTO formation in the Western Interconnection is complicated by the presence of federal and other public power marketing agencies, like the Bonneville Power Administration, that are not subject to FERC jurisdiction.

These agencies appear sensitive to the transmission cost shifting that may flow from postage-stamp pricing that assigns a single transmission access price to a broad region. Thus, state PUCs in the West tend to favor zonal license-plant access fees, whereby users pay rates reflecting embedded-cost investment in their own control areas. The Washington Utilities and Transportation Commission typifies this view:

"Coming from a state with both high- and low-cost transmission providers, we are concerned about the self-serving recommendations of those parties who stand to gain the most from advocating mandatory RTOs that ignore historical net transmission costs and the way the system was developed."

In fact, the Wyoming PSC goes so far as to suggest that benefits of RTO formation are uncertain at best because the West already is integrated into a single wholesale market.

Several Western PUCs, including Nevada, Idaho and Washington, urge the FERC to clarify that it will accept a so-called "RTO-Lite," such as an independent scheduling administrator (ISA). (An ISA simply monitors the scheduling decisions of current TOs and offers dispute resolution service.) In fact, the Nevada PUC set out standards for a grid ISA in an order it issued last winter. The Nevada PUC adds that as of early fall, it was reviewing the Mountain West ISA proposal filed with the FERC by Nevada Power Co. and Sierra Pacific Power. See Nev. PSC Docket 97-8001, Feb. 1, 1999 (setting ISA standards), and FERC Docket EC99-100-000, filed July 29, 1999 (the proposed Mountain West ISA).

Meanwhile, the heavy dependence on hydroelectric power in the West colors the view of PUCs, as their states rely more heavily on transmission systems to import power during low-water years. Thus, PUCs in the West tend to favor more protection of native load rights.

In its RTO comments, the Idaho PUC complains that the FERC rarely mentions the term "native load" in the RTO NOPR, and even then sometimes in a dismissive manner. Idaho urges the FERC to remember the May 14 decision in Northern States Power v. FERC (8th Circuit, 176 F.3d 1090).

Idaho acknowledges that utilities should not "glibly" cite native load needs when denying transmission service, but then warns that "certain states clearly still feel the burden of paying close attention to the needs of native customers."

Texas. The Lone Star State stands as a region unto itself. The state PUC shares some of the philosophy of the Southeast (no mandates). But it also voices a concern about how to handle interfaces among regional ISOs - a problem noted often by regulators in the Northeast and Midwest.

Can Texas forever remain a FERC-free zone? Only time will tell.

Outlook: A Real Collaboration?

Overall, the state PUCs seem most concerned over the question of whether transmission restructuring will proceed voluntarily, with real collaboration with state regulators, or whether the FERC simply will follow its own prerogatives.

In particular, the Michigan PSC criticizes the FERC for its July 30 decision in the Entergy transco case (Docket No. ER99-57-000), which stated that passive ownership by TOs can satisfy the ISO standard for independent governance. Michigan regulators note that the FERC acted despite concerns raised by state regulators in Mississippi, Arkansas and Louisiana.

Said Michigan, "This FERC order creates doubt that it will really follow through on its stated intentions to give deference to states."

Meanwhile, the major deadline for non-ISO regions is Oct. 15, 2000. They must either file a concrete RTO proposal or explain their RTO efforts to date along with any future plans. But some state regulators remain skeptical, as shown by this last comment:

"The Wyoming PSC must admit it is somewhat puzzled concerning the inclusion of filing deadlines in an otherwise voluntary proposal.

"Although the FERC speaks of possible quick action and incentives for ¼ meeting or beating the Oct. 15, 2000 deadline [for RTO proposals] ¼ it is disturbingly unclear as to what happens to those entities who file an explanation instead."

Bruce W. Radford is editor-in-chief of Public Utilities Fortnightly.


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