Commission Meeting -- October 24, 2001

Henger's summary of the major cases discussed at FERC's October 24th Meetin=
g:
=09

=09JOHN & HENGERER
=09A LAW PARTNERSHIP
=091200 17TH STREET, N.W.
=09SUITE 600
=09WASHINGTON, D.C. 20036-3013

DOUGLAS F. JOHN=09TELEPHONE
EDWARD W. HENGERER=09(202) 429-8815
KEVIN M. SWEENEY
KIM M. CLARK=09TELECOPIER
GORDON J. SMITH=09(202) 429-8805
MATTHEW T. RICK
ELIZABETH A. ZEMBRUSKI

=09October 24, 2001

Via Internet
MEMORANDUM

TO:=09=09Interested Clients

FROM:=09=09John & Hengerer

RE:=09=09Commission Meeting -- October 24, 2001

At today's lengthy Commission meeting, the Commissioners approved the conse=
nt agenda and then discussed the items detailed below.=20

ELECTRIC MATTERS

State Participation in RTO Development Process
In light of comments voiced during last week's RTO workshops, Commissioner =
Brownell
suggested that avenues for participation by the State Commissions in the RT=
O development process need to be explored. She suggested that one option m=
ight be to establish regional panels made up of state commission representa=
tives. Commissioner Brownell further suggested that state commissions, per=
haps through such regional panels, could explore issues related to RTO set-=
up, adequacy of revenue requirements, demand-side management programs, mark=
et monitoring and mitigation, and distributed generation.

The other Commissioners generally echoed Commissioner Brownell's sentiment,=
although Commissioner Massey cautioned that the pace of RTO development sh=
ould not be slowed by excessive or redundant administrative procedures and =
costs. The Commissioners unanimously voted to instruct Staff to develop pr=
oposals for greater state commission involvement, and to present their prop=
osals to the Commissioners at an upcoming agenda meeting. At this point, t=
he initiative appears to be designed to explore alternatives. More concret=
e proposals, however, could be included in the broader RTO strategy the Com=
mission is expected to announce in the near future.

Discussion of RTO Development Process in Southeast, Docket No. EX02-1
Staff began the discussion with a power point presentation on the Southeast=
RTO mediation process, noting that participants had reached a consensus on=
most issues, including market monitoring, operational authority, short-ter=
m reliability, and planning. Staff explained that consensus could not be r=
eached on issues of governance and independence and provided an overview of=
the two competing RTO Models outlined in the Judge McCartney=3Ds mediation=
report. After briefly describing the Collaborative Governance (CG) model =
and Independent System Administrator (ISA) model, Staff identified positive=
s and negatives for both. Staff did not take a position on which model sho=
uld be approved by FERC; rather, it concluded that either model satisfies t=
he requirements of Order No. 2000. Staff also noted that in the Southeast,=
participation by public power is essential to the formation of a functioni=
ng RTO in the region.

After Staff=3Ds presentation, Judge McCartney and Herbert Tate (former New =
Jersey Chairman) discussed the proceeding with the Commissioners. Specific=
issues discussed included: public power participation, concern over indepe=
ndence in the ISA model, whether the ISA was analogous to current ISOs, and=
the allocation of functions in the CG model. Overall, Judge McCartney exp=
ressed support for CG model, citing concerns over independence in the ISA m=
odel as well as, what she viewed as, the experimental nature of the ISA pro=
posal. As a former state commissioner, Mr. Tate outlined the concerns expr=
essed by the state commissions during the mediation period. In their final=
recommendations, both Judge McCartney and Mr. Tate encouraged the Commissi=
on to provide additional guidance as to the essential elements or principle=
s to structure RTOs.

Discussion of RTO Developments in the Northeast, Docket No. EX02-2
Staff began this discussion item with a presentation on the Northeast RTO m=
ediation process. Staff explained that a Business Plan was issued to imple=
ment the Northeast RTO. The Business Plan consists of eight sections: post=
-mediation process, governance, market design, operations, technology asses=
sment, transmission tariff-related issues, regional transmission planning, =
and interregional coordination. Staff did not detail the content of the Bu=
siness Plan, but noted that in the two areas where there was disagreement B=
governance and market design options B the plan included three alternative=
s for each.

Staff=3Ds presentation was followed by a discussion with Judge Young and Jo=
e Garcia (former Florida Commissioner). Judge Young explained that the Bus=
iness Plan provides a viable blueprint for the formation of the Northeast R=
TO. He noted that several issues must still be resolved, including: govern=
ance, market design, and shareholder process. Judge Young reiterated his r=
ecommendation that a independent, non-vendor expert should analyze the tech=
nology of the three ISOs to assess whether entirely new software will be ne=
cessary to implement the Northeast RTO. In response to Commissioner Breath=
itt, Staff explained that software is one of the biggest hurdles in the Nor=
theast RTO. Mr. Garcia expressed some concern that the ALJ and participant=
s could waste too must time attempting to achieve the perfect RTO.

Chairman Wood noted that the Commission=3Ds intention is to leave the regio=
n better, not worse off, than pre-RTO. He also explained that the Northeas=
t is in a better position to form a viable RTO than the other regions becau=
se of the maturity of its markets. Commissioner Brownell noted that incons=
istencies between the existing ISOs are working against retail competition =
programs in the Northeast region. She cautioned against proceeding too slo=
wly with regard to RTO formation. Commissioner Wood noted that there are s=
ome issues that can be resolved relatively quickly, for example, regional t=
ransmission planning, real-time imbalance market software.

In response to Chairman Wood, the Judge Young and Mr. Garcia provided recom=
mendations. Mr. Garcia explained that the Business Plan provided participa=
nts with a basic plan and asked the Commission to provide guidance in the a=
reas were there was divergence. He also encouraged the Commission to issue=
a decision in the near future, noting that the Commission should let parti=
es litigate jurisdictional issues so that RTO issues could be resolved soon=
er rather than later. Judge Young encouraged the Commission to take the ti=
me to assess market design in order to prevent a further waste of time and =
money in the likelihood that the chosen market design proves unworkable. J=
udge Young also requested that the Commission provide additional guidance o=
n the parameters of Abest practices,@ governance structure, market design, =
and stakeholder process.
Discussion of RTO Developments in the Midwest, Docket No. EX02-3
Staff provided an update of recent developments in the Midwest. A settleme=
nt agreement between Alliance and MISO, approved by the Commission earlier =
this year, provides the basis for developing a seamless market in the regio=
n that will be served by the two groups. Under the terms of the Illinois p=
ower settlement, the financial viability of MISO is guaranteed, the Allianc=
e business model is preserved, and seams issues between MISO and Alliance a=
re addressed. Staff explained that the seams agreement provides for one-s=
top shopping, congestion information on a joint bulletin board, an imbalanc=
e market, transmission planning, and market monitoring. =20

Staff explained that both MISO and Alliance recently filed status reports w=
ith the Commission addressing their ability to be functional and the seams =
agreement included in the settlement previously approved by the Commission.=
Alliance noted that a proposal by National Grid USA (EL01-80-01) to manag=
e the Alliance RTO, along with Alliance's's proposed Business Plan, are cri=
tical to the RTO's start-up. Alliance reports that it would take up to 120=
days to initiate operations once it has received final Commission approval=
. =20

In response to Commissioner Brownell, Staff maintained that both MISO and A=
lliance have made progress in addressing seams issues. Staff expressed sat=
isfaction with both the substance and timing of the entities filings.

There was some discussion over the division of functions between MISO and A=
lliance. Chairman Wood noted that, if there is going to be one regional en=
tity with not for-profit and for-profit entities, the Commission will have =
to address how the functions should be split. Chairman Wood also expressed=
concern that a viable wholesale market may not result if all the functions=
were delegated to the for-profit entity.

Discussion of Western Infrastructure Adequacy Conference, Docket No. AD01-2
First in a series of regional meetings on infrastructure, the Western Infra=
structure Adequacy Conference will be held in Seattle on November 2, 2001. =
Staff identified three main questions to be addressed at the meeting: (i)=
whether the current infrastructure is adequate; (ii) the infrastructure ne=
eds of the region, and (iii) the factors that are inhibiting adequate inves=
tment in infrastructure. Such questions will be addressed within the conte=
xt of the outlook for growth and population increases in the region as well=
as the outlook for future energy needs. The Commission hopes to determine=
what the states and the federal government can do to encourage infrastruct=
ure investment. =20

Next, Staff gave a power point presentation on the infrastructure throughou=
t the United States. This presentation, which breaks down energy infrastru=
cture by fuel use and price-responsive demand, can be accessed by the publi=
c on the Commission=3Ds website under AFERC Discussion Papers.@ Staff note=
d that gas is the primary fuel in West and that use of gas continues to ris=
e within the region. In a separate presentation, Staff then presented its =
findings on its western infrastructure assessment which began in August. S=
taff has collected data and analyzed information on Western infrastructure,=
with a final assessment available Friday, October 26, 2001. =20

The western infrastructure assessment was broken into three sections: deman=
d, supply, markets, and transmission. With regard to demand, Staff traced =
the population and consumption differences over past few years in the West.=
Staff noted that the Southwest started to consume larger amounts of gas a=
nd electricity because of population and economic growth. Staff traced gas=
uses, growth, total capacity, and peak loads within Western region, as wel=
l as projections for demand, capacity, use, and infrastructure. Next, Staf=
f provided an overview of the supply of electricity, hydropower and gas in =
the United States. Staff asserted that proven and potential gas reverses i=
n United States could provide supply for next 50 years. In the portion of =
the presentation on markets, Staff identified the primary trading hubs in t=
he West and the average monthly spot market prices and monthly trading volu=
mes in the region. Staff also noted that recently, there has been a downwar=
d shift in the gas futures market for the West which it attributed to lower=
temperatures, more capacity, lower gas prices and the Commission=3Ds price=
mitigation plan. Finally, Staff provided an overview of transmission proj=
ects in the Western region.

New York Independent System Operator, Inc., Docket No. ER01-2967
Cinergy Services, Inc., Docket Nos. ER01-2984 and ER01-3022
Commonwealth Edison Company, Docket ER01-2985
American Electric Power Service Corp., ER01-2163
In a July 2001 order in Docket No. ER01-2163, the Commission denied a trans=
mission provider=3Ds request to receive interest on system upgrade payments=
. In this draft order, the Commission issued an interim order which granti=
ng rehearing on this issue. =20

The Commission will address the issue of interest on system upgrade payment=
s in the generic proceeding addressing transmission interconnection. Commi=
ssioner Breathitt dissented in part, maintaining that the Commission should=
not issue an interim order, but, instead should address the issue in the t=
ransmission interconnection proceeding where the ramifications can be more =
fully explored. Commissioner Massey and Wood voiced their support for the =
order, noting that if generators are treated as banks, they should receive =
interest. However, Commission Massey explained that as a long-term issue, =
he has an open mind as to how the generation costs should be allocated.=20

Kern River Gas Transmission Company, Docket Nos. CP01-70 and CP01-31 =20
There was no Staff presentation on these two items which were placed on the=
discussion agenda by Commissioner Breathitt. Although she concurred with =
the decision, Commissioner Breathitt expressed concern over intervenors all=
egations that the pipeline expansion would negatively impact the availabili=
ty of take-away capacity on the Kern River system. Commissioner Breathitt =
noted that in determining whether pipeline expansions are in the public con=
venience and necessity, the Commission must address concerns that there wil=
l be a degradation of existing shippers firm rights. =20

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