It would join an RTO but dictate the terms-a dangerous game that has the industry talking.

Fortnightly Magazine - November 1 2003

When I talked a few months ago with AEP President and CEO Linn Draper Jr., he discussed how his company would have joined the PJM RTO in March were it not for the backlash he was getting from certain state regulators.

Today, nothing has really changed. The company promises to participate fully in an RTO by July of next year-but again only if state PUCs raise no objections (hardly likely, since several state commissions have indicated recently that they will oppose PJM membership for AEP in 2004, out of concerns over reliability and market power.)

But do the states protest too much? Should FERC step in, push aside the PUCs and bring AEP to heel? At least one rival company thinks so. Just listen to Exelon Vice President Elizabeth Moler.

"State regulatory proceedings that purport to prohibit AEP from joining PJM are directly and deliberately impeding federal policy over interstate transmission," said Moler, testifying before FERC in early September.

"The actions by the states amount to unconstitutional efforts to burden interstate commerce in favor of the citizens of their own states. … Those state actions … impede reliable interstate transmission service … throughout the PJM-MISO footprint," she added.

Moler, herself a former commissioner and chairman at the Federal Energy Regulatory Commission (FERC), believes the feds have the power to exempt AEP from state compliance with that state action under PURPA. Such power would not threaten Exelon, of course, since its Chicago-area subsidiary, Commonwealth Edison, appears truly committed to RTO membership.

"In section 205 of PURPA," Moler explains, "Congress authorized the commission to exempt utilities from state laws and regulations that purport to prohibit the voluntary coordination of electric utilities." Draper admitted as much when he told the Fortnightly only a few months ago, "FERC is going to have to assert its authority one way or another."

Many believe FERC's fear of Congress as it develops an energy bill has been the chief reason we have not seen a more assertive commission, and also the reason AEP's foot dragging and hack proposals have been tolerated. Conversely, some argue that FERC is to blame for not using a bigger stick.

But AEP, beyond risking instability in energy markets by scuttling a proper functioning market, also sets a bad precedent in its delay of fulfilling a long-ago merger promise. And as utility CEOs begin to look ahead to an improving economy, AEP's stance could interfere with possible mergers that might be planned for the region.

Maneuvering for Advantage

But why be so hard on AEP? Shouldn't it be permitted to chart its own course, as Exelon and Com Ed are doing, with Moler in tow?

Terry S. Harvill, director of regulatory affairs for the Detroit Edison Co., in testimony before FERC, seems to suggest just that.

"Both Com Ed and AEP plainly stated their individual RTO choices," says Harvill. "The conditions they place on RTO participation," he adds, "are based on the individual business interests of their vertically integrated, for-profit companies.

"Com Ed wants its generation to have access to higher- priced PJM markets. … AEP's proposals will eliminate rate-pancaking in the combined region. They must also include both a transitional revenue neutrality mechanism and a long-term solution to the cost-shifting for the full footprint."

And what do these statements by AEP mean? "They simply mean," adds Harvill, "that quite apart from AEP's cost of providing transmission service, AEP wants to maintain the revenue-producing ability of the AEP transmission system to remain as a seam."

As Harvill points out, there is nothing wrong with any utility company pursuing its commercial interests. That's what capitalism is all about. "However, the individual business interests of vertically integrated transmission owners should not be accommodated at the expense of commission RTO policy," he says. And Harvill suggests that AEP's recent proposal is compromising commission RTO policy if the company is allowed to remain on a TLR system, instead of market-based congestion management, as through locational marginal pricing (LMP).

Even FERC showed concern when asking, "If you have TLRs in AEP, but the effectiveness of the TLR system re-quires data from the surrounding area, which is not primarily a TLR system, but a system that uses a real-time market to figure out what transactions are going to take place, and does a security-constrained computer run to determine if it's all simultaneously feasible, can that system work effectively, if that computer run, moments before the hour, say, is being done by an LMP system in which the internal backbone grid [AEP] is not participating?"

Moreover, Harvill isn't the only one who sees problems in letting AEP go its own way on transmission. Reem J. Fahey, regional vice-president for market policy at Edison Mission Energy, has problems with Com Ed joining PJM without AEP. As explained more fully by another of Fahey's colleagues from Mission Energy, "integration of Com Ed into PJM on a stand-alone basis requires reliance on a configuration that has never been implemented before and relies … on a modest virtual path that crosses a utility that will not be a member of either RTO."

Fahey lists more reasons Edison Mission Energy does not support the newest AEP proposal: It gives an unfair market advantage to the AEP generation affiliate, and it fails to create an integrated market across the whole PJM footprint, but instead perpetuates three sets of different rules.

As Fahey sees it, AEP offers a one-sided gambit. "What they [AEP] are saying is, 'Our load is not up for grabs. It's not going to be dispatched by PJM.'

"So this is truly unfair and a market advantage to them."

A Dangerous Game

For its part, AEP says it is complying perfectly well with the promise it gave to join an RTO when it merged with Central & South West. Its recent proposal, the company says, complies with the requirements of that time, even if elements of the standard market design, such as LMP for congestion management, is not part of it.

"Indeed," as one AEP exec has reminded FERC, "a number of elements of SMD were proposed to the commission, but it elected not to accept a prescriptive approach." Thus, at the time of the merger conditions, it was understood that AEP's RTO commitment would involve transfer and control in a manner consistent with the principles of Order 2000, not LMP, generation control, and other attributes seen today as RTO functions.

The testimony continues:

"Though AEP voluntarily [accepted] the merger condition, it only accepted what was on the table at the time, compliance with principles of Order 2000." The witness added, however, that AEP is committed to expanding resources to meet new conditions, such as when congestion emerges in a different way than what might have been known back when the merger condition (to join an RTO) was first agreed to.

Whatever that means, AEP seems to be playing a dangerous game. In trying to protect its dominant position within the region, it exposes itself to further regulatory and financial scrutiny, and derision from its peers. Some may say that FERC is to blame for all of this in not mandating RTOs and SMD standards, and so it may be. But it appears it will take more than a promise to a regulator to get a monopolist to give up its monopoly.