Commission Watch

ISO New England dares to dream, again.
Fortnightly Magazine - December 2003

Commission Watch

ISO New England dares to dream, again.

ISO New England (ISO-NE) wants to become a regional transmission organization (RTO). But just the idea-prior to any official filing at the Federal Energy Regulatory Commission (FERC)-has come under attack. ISO-NE is going to find rough waters ahead, despite a three-year effort aimed at a smooth transition to becoming an RTO. And now with the Oct. 31 filing of the 2,000-plus-page RTO proposal at FERC, the stage is set for these battles to be fought, again.

ISO-NE already has had to answer, albeit informally, to a group of attorneys general and consumer advocates upset by their beliefs that the new structure would raise rates. Connecticut Attorney General Richard Blumenthal and Massachusetts Attorney General Tom Reilly led the attack, arguing that New England consumers could be stuck with an added tab for energy costs of between $40 million and $70 million if the RTO proposal is approved. Blumenthal and Reilly, joined by the Rhode Island attorney general and consumer counsels in Connecticut and New Hampshire, and the public advocate in Maine, commissioned a study by Synapse Energy Economics Inc. to discern the cost impact of the transition to an RTO.

Concerns arose because becoming an RTO allows owners of transmission assets to become eligible for FERC's incentive pricing mechanisms. According to the Synapse study, , incentive pricing would cost $40 million to $70 million annually, but over a 19-year period, that balloons to $850 million to $1.4 billion in added costs. The report snidely refers to such costs as "bonus payments to monopoly service providers, who already have an obligation to build new facilities and already have an RTO-like organization." At the same time, Synapse notes ISO-NE has not quantified the resulting benefits to ratepayers.

Not true, says ISO-NE. Gordon van Welie, ISO-NE president and CEO, responded to the concerns of the six agencies. Welie clarified that the RTO proposal does not "create or authorize any transmission incentives or rates-let alone automatic rate increases." Instead, FERC merely has made transmission incentives available, he says. FERC is as likely to lower or maintain rates as it is to increase rates, van Welie argues.

But ISO-NE may be playing the semantics game. ISO-NE spokeswoman Ellen Foley stressed that ISO-NE wrote the letter to point out that the incentives are not part of the RTO filing but will be dealt with separately at the FERC. "Any kind of incentive that the transmission companies would be eligible for-be it for joining an RTO, building new transmission, or creating an independent transmission company-all of those incentives are separate from the RTO filing," Foley said.

That said, ISO-NE on Oct. 2 released information on the expected impact of the return on equity (ROE) filing, which accompanies the RTO filing. It notes the transmission owners are asking for an ROE of between 12.5 percent and 13.5 percent, but the ISO adds that there is no way to predict the outcome at FERC of any ROE request.

The transmission owners also are asking for incentives, which ISO-NE notes are "in-line" with FERC's national pricing policy associated with joining an RTO. They want a joining adder of 50 basis points or 0.5 percent ROE, plus a new investment adder of 100 basis points, or 1 percent ROE.

ISO-NE translates the impact of a 1 percent ROE increase to be $15 million per year for New England. The impact of a 1 percent ROE on a customer using 500 kWh per month is predicted to be 7 cents per month or 84 cents per year.

Nepool Votes 'No'

The group of six attorneys general and advocates also lobbied the New England Power Pool (Nepool), whose board was slated to vote on the RTO proposal on Oct. 3. The group played up to Nepool's fears that it would lose authority if ISO-NE gains RTO status. They argued that transmission owners would gain significant new authority through the RTO transmission owner's agreement (TOA). The group believes that under the RTO proposal, transmission owners would set rate design of the regional transmission tariffs, designate what facilities are pool transmission facilities with costs paid regionally rather than locally, propose cost allocations for new facilities including generation interconnections, schedule maintenance outages, and control billing and collection procedures. "We are concerned that the TOA, as currently proposed, would be a return to the pre-1998 load-weighted Nepool governance structure that vested substantial authority in a few transmission-owning utilities," the attorneys general and consumer advocates said.

Massachusetts Attorney General Tom Reilly separately called on Nepool to reject the RTO proposal. Arguing that not only would the RTO proposal raise rates, enrich transmission owners, and reduce ISO-NE's accountability, but it would hurt consumers.

In the end, on Oct. 3, Nepool members voted 80 to 20 against RTO formation. The 20 votes cast in favor were by transmission owners.

ISO-NE was quick to point out that the vote was non-binding. Van Welie called the vote "not surprising," and he cited the "diverse interests represented within the five separate sectors of the New England Power Pool and the breadth of issues covered in over 2,000 pages of the RTO filing." Those five Nepool sectors consist of generation, transmission and distribution, municipals, end-users, and marketers/suppliers. But van Welie held out hope, noting that Nepool supported working through FERC to settle issues.

According to Foley, becoming an RTO would give ISO-NE authority to mandate transmission system improvements. Currently, ISO-NE only can identify transmission problems, but individual companies must decide whether to upgrade-an issue of renewed importance since the August blackout.

In fact, ISO-NE in late September released its draft 2003 Regional Transmission Expansion Plan (RTEP03), which set forth almost 40 transmission projects, costing $14 billion, needed to upgrade the region's power grid for reliability purposes. The RTEP process is in it third year of being used to determine what the New England region needs. It contains an updated system assessment, transmission-planning studies addressing both system-wide and local concerns, plus recommendations to address specific problems.

The RTEP03 concludes that southwest Connecticut, with its well-known congestion, remains the area of most concern. It also finds that reliability is a problem in northwest Vermont, due to lack of power plants and few transmission links to out-of-state power supplies. Emerging reliability problems are cited regarding the ability to export power from southeast Massachusetts and Rhode Island to Connecticut, as well as the ability of Boston and the North Shore to import power. According to ISO New England Senior Vice President and COO Stephen G. Whitley, "The recent Northeast blackout put a spotlight on how interconnected our power grid is."

ISO New England, with little fanfare, filed its RTO proposal at FERC on Oct. 31. Van Welie said, "It is the culmination of a three-year negotiation process, with more than 60 stakeholder meetings held in the past six months."

But despite the best intentions, the state concerns expressed by the attorneys general and the consumer advocates in the New England region are sure to be contentious issues at FERC.

Everything Comes in Threes

ISO-NE applied for RTO status at FERC in January 2001, but FERC rejected the filing for reasons that included lack of independence of market participants.

ISO-NE joined with New York ISO in 2002 to pursue formation of an RTO, but the filing was withdrawn due to stakeholder opposition, anticipated litigation, and uncertainty over timing of FERC's standard market design.

The Oct. 31, 2003, filing represents ISO-NE's third attempt to become an RTO.

In Brief

Merchant Transmission. FERC accepted a proposal by merchant transmission company, Chesapeake Transmission LLC, to makes sales of transmission rights at negotiated rates for the 400-MW Chesapeake Transmission Line project, consisting of an overhead and submarine alternating-current 230-kV line, intended to relieve congestion between the southwest portion of PJM and the Delmarva Peninsula.

California Market Design. FERC accepted California ISO's conceptual plan aimed at redesigning its market within the framework of its Comprehensive Market Design 2002 (MD02). The ISO will implement locational marginal pricing and an Integrated Forward Market in redesigning its congestion management system. .

MISO Tariffs. FERC dismissed a compliance filing by Midwest Independent Transmission System Operator and Potomac Economics Inc., its independent market monitor (IMM), to comply with market mitigation requirements as well as MISO's open access transmission and energy markets tariffs (TEMT), containing terms to implement its day-ahead energy market, real-time energy market, and financial transmission rights. The TEMT is a new market design to govern all services provided by MISO. FERC wants more details on a pro forma system support resources agreement, marginal loss crediting mechanisms, initial FTR allocations, creditworthiness provisions, and market mitigation mechanisms. and


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