FERC Rethinks RTO Role

US FERC Rethinks RTO Role Of For-Profit Transmission Cos

Oct. 25, 2001
Dow Jones Energy Service
(Copyright © 2001, Dow Jones & Company, Inc.)

(This article was originally published Wednesday) By Bryan Lee OF DOW JONES NEWSWIRES

WASHINGTON (Dow Jones)--Federal energy regulators said Wednesday they are reconsidering the role of for-profit transmission companies in regional transmission organizations as part of changes eyed to address concerns of unregulated public utilities and state utility regulators.

In a freewheeling discussion of pending cases involving consolidation of power-grid assets under large RTOs in the Northeast, Southeast and Midwest, the U.S. Federal Energy Regulatory Commission said it would rethink how much RTO authority it would allow for-profit transmission companies, or transcos.

The revelation came as FERC discussed concerns publicly owned utilities have regarding joining an RTO with a for-profit transco as the primary organizing feature. Similar concerns have been voiced by state utility regulators, who like public utilities prefer a nonprofit independent system administrator to govern RTO operations.

The apparent policy retrenchment met with immediate concern, both within FERC and without.

Commissioner Linda Key Breathitt warned that it would be interpreted as "the death knell rung for independent, stand-alone transmission companies."

Former FERC Chairman Elizabeth Moler, who now heads the Washington office of Exelon Corp. (EXC), was only slightly less pessimistic.

"I think transcos are on life support," said Moler, whose company is involved in the Alliance Regional Transmission Organization, the most developed transco proposal before FERC.

Wednesday's FERC discussion marked a potentially significant reversal of former FERC Chairman Curt Hebert's key accomplishment at the commission: advancing transcos as a viable business model for RTOs.

"To raise capital, you have to go to Wall Street, and they must have the confidence to invest in those (RTO) structures. Everyone agrees nonprofit systems won't get the capital to build out the grid of tomorrow," Hebert said.

After leaving FERC in August, Hebert now heads governmental affairs for Entergy Corp. (ETR), another utility company pursuing spinning off its transmission assets to a for-profit transco.

At a fundamental level, the commission is going back to the drawing board on a key non-profit versus for-profit debate FERC resolved in its original 1999 rules calling for establishment of RTOs.

FERC Chairman Pat Wood III voiced concern about the 1999 rule's provisions allowing for-profit transcos to have responsibility for all core functions of an RTO.

Given the profit-driven agenda of a transco, its governing board's decisions may not be "coincident" with the public-interest goals of FERC in establishing RTOs, Wood said.

"Transcos have some things that scare people off," Wood said. FERC, in its "rush to get the transco model out there, may not have thought through all that."

Balancing the interests of those who advocate for-profit and nonprofit approaches to RTO development was a key theme of FERC's discussion Wednesday.

For several hours, the four sitting commissioners probed the results of two orders FERC issued in July directing talks toward establishing single RTOs in the Northeast and Southeast. FERC also discussed grid consolidation in the Midwest.

The nonprofit-versus-profit debate contributed to a schism that ultimately resulted in two competing RTO proposals in the Midwest.

While FERC hasn't acted yet, it is contemplating an order that may upset a previously approved settlement allowing the two Midwest entities to remain separate while operating under a single transmission-access tariff and rates.

In the Southeast, municipal utilities and rural electric cooperatives are balking in the face of FERC's directive to form a single RTO based on a for-profit model called GridSouth, which has received FERC's approval contingent upon becoming a larger-sized entity.

The public utilities and state regulators lean toward a competing RTO proposal advanced by the Southern Co. (SO), which is framed around an independent system administrator, rather than a transco.

Bobbie McCartney, the FERC administrative law judge who oversaw the consolidation talks, urged FERC to act to break the impasse. "Now would be an optimum time to look to the commission for guidance," she said.

Addressing the concerns of public power companies is "a critical element in the Southeast," said Herb Tate, the former New Jersey utility regulator hired by FERC as a consultant during the consolidation talks.

The FERC regulators appeared to be wrestling with how best to craft a hybrid RTO incorporating both nonprofit and for-profit elements. They mulled whether the nonprofit model should be dominant while accounting for transcos, or whether the transco should be dominant while incorporating features of the nonprofit model.

Commissioner William Massey, who lost the debate in favor of the nonprofit model when FERC first framed its RTO rules, called developing a satisfactory hybrid a "very important issue" as the commission seeks to implement RTOs.

FERC must "divide up," or apportion, the RTO functions along nonprofit and for-profit lines, Massey said.

"We need to make that cut," agreed Wood, rejecting Breathitt's suggestion that withdrawing key RTO functions could mark the end of independent transmission companies.

Splitting core RTO responsibilities between for-profit and nonprofit entities will leave transcos "a very viable business plan," Wood said.

It may not be in the public interest to leave to a "profit-driven entity" issues such as managing power-grid congestion and reliability, calculating available transmission capacity and interconnecting new power plants, Wood said.

"Some duties ... should be dealt with in a more public ... way," Wood said. "Leaving some of these things under a single entity may not be best for wholesale power markets," Wood said.

But Exelon's Moler protested Wood's assertions. The RTO duties Wood called for withdrawing from transcos "are fundamental to having a functional, economically viable business," she said.

"It's clear, based upon the discussion today, that the commission is reconsidering whether transcos can be RTOs," Moler said.

At a press conference following Wednesday's FERC meeting, Wood agreed that a fully independent transco could have responsibility for all RTO functions. But, he said, "We're not really to that world yet."

The commission could take up the issues again at its next meeting Nov. 7. By then, the commission directed FERC staff to provide further analysis of the profit-versus-nonprofit issues, and to reassess the active and passive ownership limits for transcos in FERC's original 1999 RTO mandate.

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