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********************************************************************* Energy Exchanges Online - Scottsdale - December 4-6 B2B e-commerce has revolutionized commodity trading, the A&D process and procurement within the energy industry. With heavyweight keynotes and in-de= pth panel discussions this is the first event to bring the major energy compani= es, net markets, venture capitalists, regulatory bodies, investment banks and analysts together to thrash out why its not business as usual but business online. For more information please visit www.eyeforenergy.com/xonline ********************************************************************* =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH IssueAlert, November 9, 2000 Outlook for Midwest ISO Brought into Question By: Will McNamara, Director, Electric Industry Analysis =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Standard & Poor's (S&P) revised the outlook to negative from stable on the Midwest Independent Transmission System (Midwest ISO). S&P also confirm= ed its triple 'B'-plus issues credit on the Midwest ISO, the non-profit=20 independent corporation that will manage the operations of a portion of the transmissio= n assets of utilities across a 12-state region. ANALYSIS: This is the latest in a string of developments that has put into question the future of the Midwest ISO, as the organization continues to sort through the recent announcements of two key members that have decided to depart. The Midwest ISO was organized to ensure that energy suppliers are protected against price instability and discriminatory access to the transmission grid, among other potential problems associated with grid management. For those unaware of the terminology, let me offer a brief explanation. Under the Federal Energy Regulatory Commission (FERC's) Order 2000, utiliti= es that own, control or operate transmission assets were essentially mandated to join a regional transmission organization (RTO), an umbrella term that can include a not-for-profit ISO (independent system operator), for-profit transmission company (transco) or a hybrid of both models. Although roundly considered the favorite ISO model by FERC, the foundation of the Midwest ISO began to shake a bit when two founding members announced they were departing to join a competing RTO. Commonwealth Edison (ComEd) announced just last week that it would be leaving the organization and joining the rival Alliance RTO, a move it expects to complete by Dec. 15, 2001. ComEd's announcement followed a similar decision last September by Illinois Power, also a founding member, to depart and join the Alliance RTO. The Midwest ISO is a not-for-profit model, while the Alliance is a transco model. Although both utilities cited unique reasons for their departure, their move to the Alliance RTO does support a clear preference for the transco model of transmission management, over the ISO model. ComEd contends that since the completion of its merger with PECO Energy=01*forming the new comp= any Exelon=01*it has a significant amount of transmission assets in the=20 Pennsylvania-New Jersey-Maryland (PJM) region, and the Alliance RTO offers a "better fit" for the combined PECO / Unicom transmission assets. Specifically, ComEd argued that the bulk of its customers and suppliers are in the eastern half of the United States, where the Alliance RTO is more prominent. The Midwest ISO, on the other hand, has established its presence to the north and west of ComEd's service territory. From a legal standpoint, ComEd claim= s that it can break its ties with the Midwest ISO because, under a charter agreement, it is allowed to depart since its transmission facilities change= d ownership through the merger. Thinking it might be able to avoid litigation= , ComEd has promised to meet any financial obligations to the Midwest ISO before it officially departs for the Alliance RTO. Illinois Power, one of the original nine participants in the Midwest ISO dating back to January 1998, was the first utility to make its exit from the Midwest ISO. Illinois Power, like ComEd, claimed that its acquisition by Dynegy constituted a change in ownership, freeing itself from the ISO agreement, and that a move to the Alliance RTO would be more appropriate. However, as I've inferred, I believe both utilities have made their attempt= ed moves because of a desire to operate under a for-profit transco model. The impetus for both of their departures probably had less to do with their respective mergers and more to do with the fact that previous talks to form a transco, operating separately under the Midwest ISO, fizzled last summer. Perhaps concluding that the ISO model would be restrictive, Illinoi= s Power has stated that its reasons for the change-in-heart came about becaus= e of greater flexibility and cost savings that would be realized by being a member of the Alliance RTO. These benefits would originate from the RTO's experience in deregulated markets (many members of the Alliance RTO operate in deregulated states as opposed to the members of the Midwest ISO). The Alliance RTO also eliminates pancaked rates and provides price certainty through its "postage stamp" rate for transactions providing power outside of, or through, the Alliance and its "license plate" rate for all transacti= ons that deliver power within the Alliance. Although ComEd and Illinois Power have announced their departures, it's important to note that the Midwest ISO is not going to let them leave witho= ut a fight. Realizing that losing the transmission assets of both utilities severely diminishes the bulk of its organization, the Midwest ISO has=20 submitted a motion with FERC to block the utilities' exit. ComEd, for instance,=20 contributes about 26 percent of the load that was originally scheduled to flow through the Midwest ISO. Thus, the Midwest ISO is arguing that creating a broad RTO, based on widely dispersed transmission assets, is in the best interest of all of its members. In addition, the Midwest ISO contends that allowing utilities to easily switch from one RTO to another would compromise=20 reliability across interconnected transmission grids. Ironically, the departure of ComEd and Illinois Power, along with the FERC investigation of the case, comes at a time when the Midwest ISO appeared to be growing. Just last month, Kansas City-based UtiliCorp and Fergus Falls, Minn.-based Otter Tail Power Co. announced that they were joining the Midwest ISO. The addition of UtiliCorp was a major coup for the Midwest ISO, as the energy company owns about 6,200 miles of electric transmission lines. Wisconsin Public Service Resources and American Transmission recentl= y joined as transmission-owning members and Calpine Corp. joined as a=20 non-transmission member. In addition, the Midwest ISO just announced that it is assuming management responsibility for the operating functions of the Mid-American Interconnected Network (MAIN), which provides electricity to about 19 milli= on people within key Midwest states overseen by the Midwest ISO. The partnersh= ip of the two organizations should help to facilitate a smooth transition for the Midwest ISO to become operational on its target date next December. In any event, it is clear that the S&P downgrading of the Midwest ISO is a direct reaction to the likely departure of ComEd and Illinois Power, something that FERC may not be able to prevent. Specifically, S&P is=20 acknowledging that the departure of ComEd and Illinois Power will result in a "material loss of some load subject to the Midwest ISO cost adder." What this means is that the Midwest ISO's debt repayment obligations are based on a cost adder that is applied to certain transmission loads. The cost adder is capped at 15 cents/MWh during the transition period from the start of=20 operations (fourth quarter 2001) until the fourth-quarter of 2007. As noted, ComEd contributes about 26 percent of the load that is scheduled to flow through the Midwest ISO. If ComEd and Illinois Power actually do leave the Midwest ISO, this could result in a higher cost adder being placed on remaining members. While the Midwest ISO's costs are fully recoverable under its tariff with remaining members, raising its cost adder could have a negative impact on the low-cost economic incentives that the Midwest ISO has used to attract new members. Moreover, the future prospects for the Midwest ISO remain questionable. If ComEd and Illinois Power are allowed to leave, it could spark a mass exodus of other members, which obviously would shrink the organization and cast in doubt its status among other RTOs. Moving forward during this period of upheaval, the central challenge for the Midwest ISO is to identif= y the benefits of joining its not-for-profit model when so many utilities clearly prefer the for-profit transco model. =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH can help you find the answers you need. From simple questions to complex problems, our experts and consultants will get results. Learn more about our six service areas at: http://www.consultrci.com/web/rciweb.nsf/Web+Pages/About_RCI.html =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let us know if we can help you with in-depth analyses or any other SCIENTECH information products. If you would like to refer a colleague to receive our free, daily IssueAlerts, please reply to this email and include their full name and email address or register directly at: http://www.consultrci.com/web/infostore.nsf/Products/IssueAlert Sincerely, Will McNamara Director, Electric Industry Analysis wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D Feedback regarding SCIENTECH's IssueAlert should be sent to=20 wmcnamara@scientech.com =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D= =3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D=3D SCIENTECH's IssueAlerts are compiled based on independent analysis by=20 SCIENTECH consultants. The opinions expressed in SCIENTECH's IssueAlerts are not intended to predict financial performance of companies discussed or to be the basis for investment decisions of any kind. SCIENTECH's sole purpos= e in publishing its IssueAlerts is to offer an independent perspective regard= ing the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy and telecommunications issues. Copyright 2000. SCIENTECH, Inc. If you do not wish to receive any further IssueAlerts from SCIENTECH, pleas= e reply to this message and in the body of the email type "remove."
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