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ELECTION 2001: THE CALM BEFORE THE STORM
Reapportionment... A new governor... The 2002 election... What's in the fut= ure for Pennsylvania politics? Presentations by Senator Jeffrey Piccola, Senate Majority Whip; Representat= ive Michael Veon, House Minority Whip; Professor G. Terry Madonna, Millersv= ille University Luncheon Program - December 3, 2001 - 11:30 a.m. Harrisburg Hilton and Towers Regular Admission - $25.00/PennFuture Members - $15.00 Event followed by an Open House with refreshments in our Harrisburg Office = from 4:30 - 7 p.m. R.S.V.P. by Nov. 28 or call 1-800-321-7775. You can also register online un= der "Events" at www.pennfuture.org or reply to this email. ------------------------------------------------------------------- November 26, 2001 Vol. 3, No. 22 Governing a Northeast RTO When the Federal Energy Regulatory Commission (FERC) ruled that the three N= ortheastern ISOs - the Pennsylvania-New Jersey-Maryland Independent System = Operator (PJM), the New England ISO (NEISO), and the New York ISO (NYISO) -= should become a Regional Transmission Organization (RTO), some hoped that = these birds of a feather would flock together. After all, PJM, NEISO, and N= YISO are examples for the country, teaching that RTOs are an essential cond= ition for the creation of competitive wholesale markets. The three ISOs als= o individually oversee very small markets that are vulnerable to market pow= er, have higher than necessary transaction costs, and other problems precis= ely because of the scope of their individual markets. Indeed, even once all= three markets are merged, the combined market will account for less than 1= 5 percent of the nation's generation. All these factors would drive rationa= l participants focused on creating genuinely competitive markets toward mer= ger. At least one would think so. Yet so far, an intensive mediation process reveals that nobody is checking = parochial interests at the negotiating-room door. In terms of the new RTO b= oard and membership, participants are haggling about whether 3+3+3=3D1 inde= pendent board or whether 5+3+2 does. Such equations will never balance, no = matter how hard one tries. The greater good is getting lost in turf battles= and worse. If this myopic behavior continues, the result will be that all = regions and all states lose, because they cannot see beyond their own noses= . Consequently, the ball is squarely back in FERC's court to direct the devel= opment of a successful RTO. It now faces some key decisions as it attempts = to make good on the promise of the merger: to improve market efficiency, di= minish market power concerns, improve interconnection rules for renewable e= nergy resources, and reduce costs to consumers. For demand response and ren= ewable energy advocates the stakes are especially high. Indeed the expansio= n of PJM into the Allegheny Energy control area was crucial to resolving in= terconnection issues that allowed development of the Mill Run, Pennsylvania= 15-MW wind farm and enables future wind development in West Virginia that = will in January 2002 be significantly within PJM. The ability of the Northeast RTO to make effective decisions and follow thr= ough on those decisions will determine its eventual success or failure. But= the debate over RTO governance begins and ends with the fact that FERC dir= ected that PJM be the platform for the new organization, utilizing the "bes= t practices" from NYISO and NEISO. PJM has the greatest experience and most= successful track record of the three ISOs and is about the same size as NY= ISO and NEISO combined. At the same time, NYISO and NEISO have performed we= ll and have addressed some issues more successfully than PJM. The recent PJ= M report to the Pennsylvania Public Utility Commission confirming that PJM'= s thoroughly discredited ICAP market was indeed manipulated by a "single ma= rket participant" which exercised undue market power in early 2001 is a tim= ely reminder that PJM does not walk on water. Unfortunately, rather than tackling implementation issues solely on their m= erits, debates have retained the persistent undercurrent of ISO, regional, = stakeholder and corporate turf wars or self-interests. Only FERC can get the process moving swiftly in the right direction by dire= cting that the new RTO be an independent entity with superior board experie= nce and clear decision-making authority responsive to genuine stakeholder i= nput. There is no place for perpetuation of existing ISO self-interests, se= lf-serving stakeholder vetoes, or regional power brokering. Four principles are critical in the formation of any governance structure: = board experience and independence, effective input of all stakeholders, suf= ficient board decision-making authority, and sufficient monitoring of marke= t power. An Independent and Experienced Board Happily, the three proposals which emerged from the mediation process requi= re members of the board to be independent from any of the market participan= ts, precluding working for any of the companies doing business in the North= east RTO markets, owning stock in member companies, or participating on any= affiliated boards. In contrast to this good news is the bad news that the three proposals focu= s too heavily on giving each existing ISO proper representation on the new = RTO board, and what the proper representation would be. This regional focus= undercuts independence and treats the RTO board like the United States Sen= ate where each Senator comes from a state and argues for its interests. Loy= alty to the home ISO becomes the real requirement in such cases, not indepe= ndence. Independence for the new RTO board membership should also mean independence= from the institutional interests of the existing PJM, NYISO, and NEISO. Ev= en if the existing ISOs retain operation for an extended period, it would b= e for practical, technical reasons, not because the ISOs themselves are a n= ecessary constituency. To take a seat on the Northeast RTO board, all new R= TO board members should resign any existing ISO board positions. The only f= iduciary responsibility these board officers should have is to the new orga= nization. The new RTO board should include the most qualified individuals, without un= due emphasis on whether or not they previously served on a particular ISO b= oard. It makes sense that some, but perhaps not all, of the individuals on = the new RTO board will have previously served on ISO boards. Such experienc= e is invaluable. Yet it appears that some parties are stuck in the rut that= ISO experience must bring ISO baggage. If the fiduciary duty of RTO board = members is clearly to the RTO instead of to a prior ISO, it will be easier = to get beyond ISO power issues. To encourage the movement of the most quali= fied ISO board members to the new RTO board, the "transition" board also sh= ould be or become the initial "permanent" Northeast RTO board. Rather than on representation, selection of RTO board members should focus = primarily on the breadth of issues that will be facing the new RTO. A well-= rounded set of board experience and skills is essential to addressing such = important issues as demand response, interconnection of generators, cost re= covery mechanisms, system planning, and reliability. The new RTO board should have members with regulatory, financial, environme= ntal, consumer and reliability backgrounds. Besides providing voices genuin= ely without the baggage of prior ISO affiliation, the initial RTO board sho= uld probably, for example, include someone with substantial experience in m= erging organizations. The search process for new board members should be do= ne in an open manner with input from all stakeholders to ensure adequate ex= pertise in the diversity of issues that will face the new RTO. Stakeholder Input Meaningful stakeholder input is crucial because the RTO will be fundamental= ly charged with serving the public interest in an industry that is at the h= eart of our economy, security, and environment. Moreover, no board or manag= ement team can adequately predict all of the impacts brought on by rule cha= nges without close coordination with market participants. The RTO will ulti= mately survive only if it maintains its credibility and the confidence of t= he public. The three existing ISOs have made a substantial transition from a narrow co= nception of stakeholders as "transmission owners" to encompass "market part= icipants" and even to include public representatives. PJM has recently expa= nded the types of parties that can participate in the process by facilitati= ng the ability of State Consumer Advocates to join and be voting members. O= ther ISOs have gone even further by specifying specific categories for envi= ronmental agencies and individual consumers (and minimizing the costs of jo= ining.) Of course, many stakeholder processes require so much time and expe= nse that it is difficult or even impossible for such stakeholders to meanin= gfully participate. But while opportunities for genuine and appropriate stakeholder input are e= ssential, stakeholder processes cannot become an excuse or a means to avoid= problem solving. There is a fine line between genuine stakeholder input an= d de facto special interest veto power. Over the past four years, PJM relie= d heavily on its membership to make improvements to market rules and has th= e best (though still flawed) wholesale energy market in the country. Yet it= is equally clear that stakeholder input can impede positive changes, such = as eliminating the ICAP requirements or implementing demand-response propos= als. These concerns are balanced by having stakeholder opportunities for input b= uilt into RTO problem solving, without allowing stakeholder processes to ha= ve a life of their own or the pretense of being the board. Stakeholders sho= uld not only be able to comment on proposed changes but also should constan= tly look for ways to improve the market and be able to communicate these su= ggestions to the RTO board. In turn, the board should take these suggestion= s seriously. This healthy relationship is hard to reduce to rules and rules= alone cannot create it. Ultimately only a combination of rules, incentives= , and personal leadership can make it happen. Decision-Making Authority Ultimately, the RTO board should be able to file changes with FERC on all m= arket rule changes and reliability changes, with stakeholder input but with= out specific stakeholder approval. The RTO board must have the ability to f= ile under the more broadly defined Section 205 of the FPA. One example of the effective use of this type of intervention came earlier = this spring. After months of negotiation on an economic demand-response pro= gram, several PJM market participants chose to block passage. The PJM board= reviewed the results of the various votes on the demand-response programs,= determined that the programs were justified and important, and filed the p= roposed rule changes, which FERC approved. Since individual ISO boards will likely remain during a transition phase, a= ll FERC filings should be made through the RTO board, which would have fina= l decision-making authority. Market Monitoring Effective, independent market monitoring is essential to identifying market= power problems and fixing them. But an effective market monitoring presenc= e also requires close observation from inside the RTO. PJM's Market Monitor= ing Unit (MMU) works for and reports to PJM. As more parties attempt to merge and contractually control more assets, mon= itoring market power will become more important. The market would be better= served if the MMU were more independent of PJM, perhaps reporting directly= to FERC and the board. The MMU must have both the ability to identify mark= et flaws and the authority to make corrections in a timely manner, without = being subjected to a committee process that could delay or avoid effective = responses. Next Steps Since the mediation process, FERC has been working to incorporate state reg= ulatory agencies into the development of the RTO. But as with other stakeho= lders, too many states are allowing parochial interests to interfere. To keep the process moving, an independent search firm should review existi= ng board members and potential new candidates to determine what would make = for an effective RTO board which meets the criteria outlined above. FERC sh= ould then direct the new RTO Board to start the long process of creating a = fully functional and effective RTO. The first task of the RTO board is to c= ommission an implementation team and set out the overall direction. Second, FERC should establish an inclusive stakeholder process that can eff= ectively communicate to the board. Finally, FERC should empower a Market Monitoring Unit that reports directly= to the Commission as well as the board. With these steps, the birds of a feather that PJM, NYISO, and NEISO really = are could finally flock together. ------------------------------------------------------------------- E-Cubed is available for reprint in newspapers and other publications. Auth= ors are available for print or broadcast. PennFuture (www.pennfuture.org), with offices in Harrisburg, Philadelphia a= nd Pittsburgh, is a statewide public interest membership organization, whic= h advances policies to protect and improve the state's environment and econ= omy. PennFuture's activities include litigating cases before regulatory bod= ies and in local, state and federal courts, advocating and advancing legisl= ative action on a state and federal level, public education and assisting c= itizens in public advocacy. To unsubscribe, simply reply to this email with "unsubscribe" in the subjec= t. - vol3no22_112601.doc
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