Commission Watch

Irregular seams affect ratemaking policies.
Fortnightly Magazine - November 1 2003

Commission Watch

Irregular seams affect ratemaking policies.

In a case that marks the first time the Federal Energy Regulatory Commission eliminated inter-RTO rate pancaking, the commission in late July issued an order terminating regional through-and-out rates (RTORs) charged by two regional transmission owners (RTOs)-Midwest Independent System Operator (MISO) and PJM Interconnection. The decision removes an estimated $250 million in yearly fees collected by those two entities.

But the lost revenue has parties to the proceeding squabbling over many aspects of the case, such as how to make up for the lost money, and whether new revenue recovery mechanisms should be litigated as compliance filings or in new, separate proceedings. Also up for debate: how to make calculations within the new cost-recovery mechanisms that eventually will be adopted.

The flurry of filings resulted from FERC's finding that the RTORs in the MISO and PJM regions perpetuate seams and rate pancaking, preventing realization of more efficient and competitive electric markets when applied to transactions sinking within the proposed MISO ISO/PJM footprint. FERC eliminated them Nov. 1, 2003.

The commission, which created the RTORs to provide revenues when rate pancaking is eliminated (see sidebar, "A History of RTOR"), said it was due to proposed RTO configurations that it finds the MISO and PJM RTORs unjust and unreasonable. FERC has been vexed by the geographically counterintuitive choices being made by utilities in joining either PJM or MISO. For example, Illinois Power, American Electric Power (AEP) and Commonwealth Edison Co. fit better with MISO, yet they intend to join PJM (see sidebar, "A PJM/MISO Primer"). FERC has called such choices "problematic," and it has noted that the resulting configuration could frustrate the goal of RTO formation. FERC said the decision by Illinois Power and the new PJM companies to join PJM results in a "long and irregular RTO border," perpetuates MISO's configuration problems and "would divide a highly interconnected portion of the grid, leaving in place an elongated and irregular seam across which significant trading activity takes place."

In the July 23 order, FERC reversed an initial decision by law judge Hebert Grossman finding that he lacked authority to eliminate the RTORs, and that should the new PJM companies join PJM, no new and irrational seams would be created. (American Electric Power, Commonwealth Edison, and DPL's Dayton Power and Light are the so-called "new PJM companies" that want to join PJM, but Dominion's Virginia Power also intends to join.) Re MISO and PJM Interconnection et al.,

FERC pointed to the former Alliance Companies, which were thwarted in attempts to build their own RTO, noting that accepting the former Alliance Companies' RTO choices unconditionally would result in fewer benefits from one-stop shopping or the elimination of rate pancaking than if, for example, AEP joined MISO. By joining PJM, the Alliance Companies will exacerbate rate pancaking across the proposed seam for transactions within the RTOs, FERC said. It added that rate pancaking across the proposed seam is incorrectly characterized as "inter-RTO" rate pancaking, but it instead constitutes "intra-RTO" rate pancaking, which is prohibited under Order 2000. The solution, FERC concludes, is to eliminate RTORs, which are the through-and-out rates that constitute the rate pancaking and "in a very real sense constitute the seam."

Still, FERC lamented that even with elimination of the MISO and PJM RTORs, "in the near-term the region still will be riddled with seams," with the through-and-out rates under the individual-company tariffs "acting as toll gates that impede the realization of more efficient and competitive electricity markets in the region and that preserve a competitive advantage for the non-RTO participants' merchant functions." FERC specifically pointed to AEP, Ameren Services Companies on behalf of affiliates, Union Electric Co. and Central Illinois Public Service Co., ComEd, First Energy Corp., Illinois Power, Northern Indiana Public Service Co., and DP&L. "We find that the through-and-out rates under the tariffs of these individual former Alliance Companies, for transactions sinking in the proposed MISO/PJM footprint, may be unjust," FERC said. It initiated a separate investigation into their RTORs in and . They believe that because the tariffs of all transmission providers within the proposed PJM-MISO footprint are the subject of Federal Power Act (FPA) Section 206 investigations in those two dockets, it would be administratively efficient to permit filings to support lost revenue recovery and to propose transition rate mechanisms (and actual rates) to be presented as filings for review in Phase II proceedings in these dockets.

The new PJM companies argue that FERC has not found the RTORs to be unjust and unreasonable per se, because it is leaving them in place as just and reasonable rates applicable to transactions outside the PJM/MISO footprint. But they further argue that if the investigation of individual RTORs in results in a finding that application of those rates within the proposed PJM/MISO footprint is unreasonable, it would be appropriate to consider transition rate design issues in phase II of that proceeding.

Meanwhile, GridAmerica had two out of three members begin operations under MISO on Oct. 1, 2003. Grid-America LLC is a for-profit independent transmission company, and its transmission facilities are owned by GridAmerica Co. members, including American Transmission System Inc., a FirstEnergy Corp. subsidiary; and NIPSCO, a NiSource subsidiary. Pending Missouri and Indiana state regulatory approval, it also includes Ameren.

GridAmerica disagrees with the new PJM companies. The company wants FERC to clarify that parties seeking to increase rates or file transitional rate mechanisms must do so through fresh section 205 rate filings, and not as phase II compliance filings in Ameren argues, "It is not clear how interested parties would be permitted to comment on any SECA-type mechanisms proposed by a transmission owner if that proposal is submitted on compliance."

But parties also are fighting over how to eliminate RTORs and the method of calculation of the new cost recovery mechanism to replace the RTORs.

GridAmerica asked FERC to require that both MISO and PJM RTORs should continue to apply to any transaction involving a company located in the MISO/PJM Super Region that has not eliminated its individual through-and-out rate, and to conditionally accept MISO's filing. It also wants FERC to reject PJM's proposal to eliminate its RTOR for all of the former Alliance Companies, regardless of whether those companies have eliminated individual through-and-out rates. Finally, it asked FERC to condition the elimination of MISO and PJM RTORs on the adoption of a lost revenue recovery mechanism, such as SECA.

A History of RTORs

When FERC initially approved MISO's fixed-rate surcharge for through-and-out transmission service (RTOR), it was designed to recover revenue losses otherwise incurred by transmission owners after elimination of rate pancaking. The original RTOR was pegged at $0.78 per kW-month and was to apply during a six-year transition period. It was added on top of existing license-plate zonal rates imposed across the region. MISO allocated 50 percent of RTOR revenues to transmission owners based on relative share of the would-be lost revenues. The other 50 percent was spread out based on relative power flows carried by transmission owner member systems to provide through-and-out service. . -L.B.


The proposed MISO/PJM Super Region is the footprint made up of the service territories that will comprise MISO, including NIPSCO, Ameren, and First Energy, which comprise the GridAmerica Cos., and PJM, including the former Alliance companies that have announced plans to join PJM. The former Alliance companies unsuccessfully attempted to form the Alliance RTO. These include: Ameren, American Electric Power Co., Commonwealth Edison Co., Dayton Power and Light Co., FirstEnergy, Illinois Power Co., and Northern Indiana Public Service Co. Two other former Alliance companies, Detroit Edison Co. and Consumers Energy Co., previously left Alliance and joined MISO.-L.B.


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