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Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: IssueAlert@SCIENTECH.COM X-To: ISSUEALERTHTML@LISTSERV.SCIENTECH.COM X-cc: X-bcc: X-Folder: \MHAEDIC (Non-Privileged)\Deleted Items X-Origin: Haedicke-M X-FileName: MHAEDIC (Non-Privileged).pst Today's IssueAlert Sponsors:=20 <http://www.westerncoalcouncil.org<; Join us this Autumn in San Antonio as we explore the significant issues now= confronting the utility-coal industry as it gears up to meet our nation's = growing energy demands. The Coal Market Strategies <http://www.westerncoalcouncil.org/events/event1= 015.html< conference is co-sponsored by the Western Coal Council & Edison E= lectric Institute as part of its efforts to advance the marketing and busin= ess management needs of its members. The CMS Conference is renowned for the= strength of its educational program and the level and quality of its atten= dees.=20 Contact Janet Gellici at (303) 431-1456 or info@westcoal.org <mailto:info@w= estcoal.org<.=20 The Center for Public Utilities and The National Association of Regulatory Utility Commissioners present: THE BASICS:=20 <http://cpu.nmsu.edu/<; Hands-on framework that shows the interrelationships of the topics and how = they fit together and provides a set of analytical skills required to understand= the issues.=20 October 14-19, 2001 in Albuquerque, NM Contact Jeanette Walter at=20 jeawalte@nmsu.edu <mailto:jeawalte@nmsu.edu< for more information. <http://secure.scientech.com/rci/wsimages/scientech_logo_small.jpg< <http://secure.scientech.com/rci/wsimages/IssueAlert_Logo_188< September 20, 2001=20 Formation of Northeast RTO=20 Challenged by Structural, Governance Issues=20 By Will McNamara Director, Electric Industry Analysis=20 <http://secure.scientech.com/rci/wsimages/will100border_copy.jpg< [News item from Reuters] An administrative law judge at the Federal Energy = Regulatory Commission (FERC) released a blueprint to establish a single ele= ctricity transmission system for 11 Northeastern states, possibly as early = as the end of 2002, based on the existing PJM Interconnection model. Region= al transmission organizations (RTOs) are a priority for FERC, which is look= ing for ways to make the nation's patchwork transmission grid seamless in m= oving power between regions. An RTO is a combination of individual transmis= sion operations that combine their assets under a common roof. FERC Judge P= eter Young wrote in a 27-page report that there were "difficult substantive= issues" in the path of creating an RTO for the Northeast. Young has held s= ecret talks with the parties since then to prepare a report and business pl= an to FERC commissioners, who are expected to issue a decision by Nov. 1.= =20 Analysis: The complications now surfacing with regard to the formation of a= single RTO in the Northeast are rather symptomatic of larger problems that= may continually arise as the consolidation among transmission entities acr= oss the United States continues. The Northeast region includes three distin= ct transmission entities-the New England Independent System Operator (ISO),= the New York ISO and the Pennsylvania-New Jersey-Maryland (PJM) Interconne= ction-all of which were operating as separate organizations until two month= s ago when they were essentially ordered to conjoin by FERC. The Northeast = region consists of 11 states and the District of Columbia, and combining th= e various markets in the region would reportedly create the largest electri= c power market in the world. Thus, if we look at the Northeast situation as= a national template, conjoining the various RTOs across the country into f= our large regional entities, per FERC's directive, may be an arduous task. = In addition, consolidation could add multiple layers of bureaucracy to what= is already an extremely complex sector of the energy industry.=20 For background, it is important to realize that the current challenges asso= ciated with forming a single transmission entity stem from a FERC order rel= eased last July ordering all of the existing RTOs in the country to explore= consolidation. The contentious order, which has sparked intense controvers= y among certain utilities and existing RTOs, literally lays out the bluepri= nt for how FERC wants the nation's transmission systems to be constructed. = FERC has clearly directed four regional systems (in the Northeast, Southeas= t, Midwest, and West) although no reference was made to the Electric Reliab= ility Council of Texas (ERCOT), which exists outside of FERC's jurisdiction= and essentially operates as its own transmission island. The commission ha= d previously set a deadline of Dec. 15, 2001, for RTOs to become functional= , so most of the transmission entities impacted by the order were in the mi= dst of formulating their operational plans when the order was issued on Jul= y 11.=20 In the Northeast region, FERC directed that a new Northeast RTO would be cr= eated for this region and would essentially follow the template that has be= en established by the PJM Interconnection, which as noted operates the whol= esale transmission market in Pennsylvania, New Jersey and Maryland. In fact= , FERC has often commented that PJM represents the most successful RTO that= has been formed in the United States to date. FERC has said that PJM shoul= d serve as the platform (or starting point) for mediation talks in the Nort= heast. Under FERC's new order, the existing New England and New York ISOs w= ould be required to join PJM. From the time that FERC's order was first rel= eased, I suspected that these two entities would resist FERC's mandate to j= oin PJM, as they have previously stated that a substantial amount of time a= nd money has already been spent on forming their ISO entities, and consolid= ation could nullify those efforts.=20 It appears that my projections are now coming true. While sincere efforts a= re being made to consolidate the three transmission entities in the Northea= st, the parties involved are realizing that conjoining three large and sepa= rate transmission organizations is a very complicated process. The main obs= tacles seem to surround structural and governing issues, which I expect wil= l also be stumbling blocks for RTOs in the other three regions of the count= ry as they proceed with their own consolidation efforts.=20 Moving forward, I will attempt to shed some light on the "difficult substan= tive issues" surrounding the Northeast RTO (in the words of the FERC admini= strative law judge). As negotiations continue in this area, various stakeho= lders have been involved in the discourse, including energy companies, fina= ncial investors and companies that seek to be involved in the management of= the transmission assets in the area (namely, National Grid). As noted, gov= ernance of the Northeast RTO board is the "thorniest" issue of all, again i= n the words of Judge Peter Young. There has been little doubt that FERC has= routinely praised the model used by the PJM system and in fact clearly sta= ted in its order that the New England and New York ISOs should adopt the PJ= M model. Now, however, new FERC Chairman Pat Wood has acknowledged that the= commission may have been in error to express such strong support for only = one model out of three. Nevertheless, FERC already has rejected the request= s of the New England and New York ISOs to maintain their status as free-sta= nding entities.=20 For instance, on the issue of how the RTO will be governed, the New England= ISO reportedly believes that all three regions should be equally represent= ed to ensure that the unique needs of each are given fair consideration. In= other words, the New England ISO has expressed concerns, which are reporte= dly shared by the New York ISO as well, that all three of the Northeast's m= ajor grid operators may not get equal billing in a future board of director= s tapped to run the new network. One concession made along these lines is t= hat FERC has allowed the New England ISO to continue developing the Standar= d Market Design, or SMD, for New England. The SMD, based on the PJM Interco= nnection's market design and rules, will provide critical market improvemen= ts in advance of the single Northeast market.=20 The leader of the New York ISO echoed these concerns and reportedly stated = that any missteps in the formation of the single Northeast RTO "could make = California's energy woes look almost insignificant by comparison." Further,= William Museler, the New York ISO's CEO, pointed out that the New York ISO= represents the largest electricity market of the three by far (posting a m= arket value for 2000 of $5.2 billion compared to $1.7 billion for PJM and $= 0.6 billion for ISO New England). However, Museler acknowledges that the Ne= w England ISO and PJM have unique areas in which they lead the Northeast re= gion. For example, PJM leads the region in total load served and ISO New En= gland leads the region in the number of states represented.=20 The other issue that is complicating the formation of a single Northeast RT= O is of a structural nature. Specifically, complex software is needed to se= t up a single entity in the region (and in other regions that are presently= attempting to conjoin various entities). In fact, the selection and instal= lation of this software may actually delay the formation of the Northeast R= TO until the fourth quarter of 2004, according to Judge Young. In addition,= Young reportedly said the software and technology needed to set up an RTO = to keep electricity smoothly moving throughout the Northeast will rank seco= nd only to that used by the banking industry.=20 While much of the debate surrounding the formation of a single RTO in the N= ortheast may seem like policy minutia, it does have a very critical impact = on real-world operations in the region. The problem may be particularly acu= te in New England, a region where deficiencies in the transmission system h= ave already begun to cause reliability problems. As I've discussed in previ= ous columns (see the 8/23/01 IssueAlert, available at "< www.scientech.com/= rci, for more information) New England has maintained an adequate supply of= power generation but is suffering from a strained transmission system. The= six-state region of New England covers about 8,000 miles of high-voltage t= ransmission lines. As a whole, the region is capable of generating about 26= ,000 MW of electricity, and during the heat wave of the last few weeks cons= umption peaked at 25,102 MW, creating an extremely tight situation for util= ities such as NStar.=20 Leaders at the New England ISO, for instance, have acknowledged that transm= ission constraints in the region have caused inefficient operation. Without= necessary upgrades to the system, they say, electricity transmission to ar= eas of short supply could add $125 million to $600 million per year to the = price of delivering power through the region from 2002 through 2006. Power = outages that occurred in the Boston area this summer highlighted fundamenta= l deficiencies in the region's transmission and distribution systems, the i= mprovements for which are dependent on large sums of capital investment and= a conducive political environment. The bottom line may be that, without a = comprehensive and functioning RTO in the region, investments to upgrade the= transmission system in the area may be delayed, exposing the region to fur= ther reliability problems.=20 Moreover, the challenges associated with forming one RTO in the Northeast m= ay support the argument against consolidating RTOs, which comes mostly from= the existing transmission entities and utility owners who argue that milli= ons of dollars in start-up costs and infrastructure investment will be lost= if their independent systems are nullified. In addition, these entities ha= ve a real problem with losing their current autonomy and independent contro= l over their own transmission systems. Thus, the FERC order regarding conso= lidation will continue to be challenged and its implementation may be a lon= g and involved process.=20 An archive list of previous IssueAlerts is available at www.scientech.com <http://secure.scientech.com/issuealert/<;=20 We encourage our readers to contact us with their comments. We look forward= to hearing from you. Nancy Spring <mailto:nspring@scientech.com< Reach thousands of utility analysts and decision makers every day. Your com= pany can schedule a sponsorship of IssueAlert by contacting Jane Pelz <mai= lto:jpelz@scientech.com<. Advertising opportunities are also available on o= ur Website.=20 SCIENTECH is pleased to provide you with your free, daily IssueAlert. Let u= s know if we can help you with in-depth analyses or any other SCIENTECH inf= ormation products. If you would like to refer a colleague to receive our fr= ee, daily IssueAlerts, please reply to this e-mail and include their full n= ame and e-mail address or register directly on our site.=20 If you no longer wish to receive this daily e-mail, and you are currently a= registered subscriber to IssueAlert via SCIENTECH's website, please visit = <http://secure.scientech.com/account/<; to unsubscribe. Otherwise, please se= nd an e-mail to to IssueAlert <mailto:IssueAlert@scientech.com<, with "Dele= te IA Subscription" in the subject line.=20 SCIENTECH's IssueAlerts(SM) are compiled based on the independent analysis = of 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 p= urpose in publishing its IssueAlerts is to offer an independent perspective= regarding the key events occurring in the energy industry, based on its lo= ng-standing reputation as an expert on energy issues.=20 Copyright 2001. SCIENTECH, Inc. All rights reserved. <http://infostore.consultrci.com/spacerdot.gif?IssueAlert=3D9/20/2001<;
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