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Former President George Bush is our Honored Keynote Speaker www.cisconference.org [IMAGE] In an exclusive SCIENTECH PowerHitters interview, Keith Stamm, President and CEO of Aquila, Inc., shares on the dynamics behind the highly successful April IPO and Aquila's view of broadband and other trading markets to watch for in the upcoming months. Read the questions Stamm was asked at: www.scientech.com [IMAGE] [IMAGE] May 4, 2001 Utilities, FERC At Odds Over RTO Plans By Will McNamara Director, Electric Industry Analysis [News item from Energy Info Source] According to a new report from Energy Info Source, the Federal Energy Regulatory Commission (FERC) has begun to articulate a position regarding regional transmission organizations (RTOs). With several approvals, a rejection and ordering changes to another RTO application, FERC is shaping RTO participation among investor-owned utilities. Analysis: The Energy Info Source report makes several conclusions regarding current approaches that FERC is taking with regard to pending RTO applications, based on decisions that the commission has made up to this point. According to Energy Info Source, FERC has concentrated its efforts on the Southeast and Western regions. Within the Southeast, FERC has essentially rejected Southern Company's SeTrans Gridco, while conditionally approving GridSouth and Grid Florida. In the West, the RTO West application-which represents an alliance among nine utilities-appears to have received FERC's favor and "is the preeminent leader among non-ISO RTO participation efforts." However, despite these established trends, FERC still remains at odds with many of the leading transmission owners in the nation, which foresee a potential conflict between the commission's rulemaking on transmission rates and its potential impact on retail rates, which are regulated by individual states. For background, an RTO is a regional entity that is designed to consolidate control and delivery of electricity across various types of transmission systems within a particular region. The origins of FERC's RTO policy dates back to its December 1999 Order 2000, in which it strongly encouraged all transmission-owning utilities to submit plans for joining or forming an RTO by Oct. 15, 2000, with actual membership established by December of this year. FERC is now sorting through the applications that it has received, and its approvals or rejections illuminate certain preferences that some members of the commission hold. Over the last year or two, FERC has engaged in an ongoing debate between its preference for transco (for-profit) models for RTOs, as opposed to independent system operators (non-profit). Chairman Curt Hébert has been the most vocal supporter of the transco model, while other commissioners such as William Massey have supported ISOs. However, moving forward, it is becoming increasingly clear that FERC also seems to have other set agendas for how it wants the network of RTOs to operate, including the limit of one entity per region. As noted, FERC appears to be focusing on applications submitted for the Southeast and Western regions. In addition to the obvious need to establish stability in the West, another explanation for the commission's dual focus is that other regions in the United States (namely, the Midwest and the Northeast) already have successfully operating RTOs such as the New York ISO, the Alliance RTO and the Midwest ISO. FERC may be focusing on the West and Southeast as these are the two regions that arguably have not yet established an acceptable level of market independence. The Western region contains three separate RTO proposals that are pending before FERC. The RTO West, which FERC has referred to as the "anchor" of the region, has been generally accepted as a "broad concept." RTO West includes nine large transmission operators that are primarily located in the Pacific Northwest (Avista, Bonneville Power Administration (BPA), Idaho Power, Montana Power, PacifiCorp, Portland General Electric, Puget Sound Energy, and the Sierra Pacific units Nevada Power and Sierra Pacific Power). BPA is by far the largest of the RTO West members, controlling about 75 percent of the transmission system in the region. For the most part, RTO West is an ISO, although six of the nine utilities included in this operation have also applied to create a transco that would operate under the RTO West umbrella. The second western RTO is Desert Star, which includes utilities that are located in Arizona, Colorado, New Mexico, and Texas. The third proposed RTO for the Western region is the California ISO, which has been operational since April 1998 and wishes to remain a stand-alone entity. FERC's main point of contention with regard to the Western region is its desire for one RTO in the area, instead of three. The primary rationale for this position stems from a philosophical belief that one regional RTO will be more easily managed than multiple entities. In addition, gaming by power generators could more likely occur with multiple RTOs, which would require additional market rules to control the gaming (FERC's general approach has been to reduce rather than increase the amount of market rules needed). The California ISO has tweaked the commission's patience in particular, as this solo entity has steadfastly resisted any federal efforts to make it join other entities. The commission recently agreed to impose wholesale price caps in California whenever reserves fall below 7.5 percent. This has been something that the state has long requested, but the price caps come with the condition that California must file an application by June 1 to enter into an RTO with other Western states. Otherwise, the price caps will be lifted. California is currently contesting this condition. Under the leadership of Chairman Hébert, it is clearly FERC's goal to establish only one RTO for the entire Western region, which puts the federal agency at odds with the California government once again. The Department of Energy Secretary Spencer Abraham shares Hébert's belief that one regional RTO is the best strategy for the West, but also has said that proceeding without California for the time being may be necessary to get the new organization up and running. Other western governors have stood in unity that FERC should issue a decision on the three RTOs presently and postpone its effort to force a single western RTO for the time being. Across the country, there are similar issues facing the RTOs in the Southeast. For instance, Chairman Hébert's preference for minimal RTOs within one region appears to be a national viewpoint. Yet, there are unique questions related to the formation of Southeast RTOs that have not emerged in the West. The status in the Southeast is that FERC has approved GridFlorida RTO-which includes Florida Power & Light, Florida Power Corp. and Tampa Electric-and GridSouth RTO, which includes Progress Energy, Duke Energy and South Carolina Electric & Gas. However, FERC rejected Southern Company's SeTrans GridCo because the gridco planned to funnel certain rate incentives to companies other than the RTO operator, which violated FERC policy. The commission not only rejected SeTransGridCo, but told Southern Company not to re-apply and to "explore joining neighboring utilities in an RTO." In addition, FERC only gave conditional approval to the Southwest Power Pool / Entergy Hybrid RTO because many of its members have not formally turned over control of their generation assets. The rejection and conditional approval from FERC, which followed the approvals of GridFlorida and GridSouth, have been perceived as a message from the commission that remaining utilities in the region should join the already-approved entities. In fact, FERC reportedly gave approval to GridSouth only with the agreement that it would engage in dialogue with Tennessee Valley Authority, Santee Cooper and SeTrans GridCo so that they might also join. Some reports indicate that, because the Southeast region does not presently have an ISO model (such as the one in California), FERC has high hopes for molding the region in accordance with its own long-term goals, which include a single RTO for the area. Nevertheless, despite receiving approval from FERC, GridSouth is taking issue with two aspects of the commission's approval. First, GridSouth questions FERC's jurisdiction over bundled retail service, and specifically wants the commission to determine whether or not it will exert control over bundled transmission rates. GridSouth is concerned that FERC is pushing for a contract with the approved RTO that would put retail rates, including the charge for transmission service, under FERC jurisdiction, which would allow the commission to change the rates in the future. FERC's Order 888, which essentially outlined electric deregulation in the United States, clearly states that FERC does not have jurisdiction over bundled retail service. GridSouth has asked for a rehearing of its RTO proposal in which FERC would agree to GridSouth's interpretation of state jurisdiction over bundled transmission rates. Despite these isolated disputes, the formation of RTOs across the United States appears to be coming together. While the industry awaits for further FERC action on pending RTO applications, it is clear that certain trends are emerging. FERC's long-standing preference for the transco model over the ISO model appears to be diminishing, as evidenced by the commission's approval of RTO West and apparent support of non-profit operations such as the New York ISO and the Midwest ISO. Rather, FERC has demonstrated a more primary preference for solitary RTO entities within a region, regardless of whether the entity operates as a transco or an ISO. From a philosophical perspective, establishing one RTO rather than several within a particular region arguably will help to reduce certain inefficiencies that might result from multiple entities. Further, a single RTO entity may help to avoid certain inter-tie problems that could occur between multiple RTOs within a region. However, it will be no easy task for FERC to convince utilities that are involved in independent RTOs (such as California) to relinquish their autonomy and join forces with other utilities that may have divergent philosophies regarding the operation of a transmission system. An archive list of previous IssueAlerts is available at www.scientech.com [IMAGE] The most comprehensive, up-to-date map of the North American Power System by RDI/FT Energy is now available from SCIENTECH. Reach thousands of utility analysts and decision makers every day. Your company can schedule a sponsorship of IssueAlert by contacting Nancy Spring via e-mail or calling (505)244-7613. Advertising opportunities are also available on our website. 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 on our site. If you no longer wish to receive this daily email, send a message to IssueAlert, and include the word "delete" in the subject line. 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 purpose in publishing its IssueAlerts is to offer an independent perspective regarding the key events occurring in the energy industry, based on its long-standing reputation as an expert on energy issues. Copyright 2001. SCIENTECH, Inc. All rights reserved.
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