RTO Governance

Jim,

=09In Denver you asked for our views on RTO Governance, i.e., preference fo=
r Stakeholder vs Independent Board. As a basic principle, I believe that t=
he key issue is independence energy marketing, generation ownership etc. I=
have given each of these a grade from 1-10 based on my preference.

For-Profit Transco--Grade 10. The best form of governance is the for-profi=
t Transco. It is governed by a independent corporate board and regulated b=
y FERC. Independence is a fact of corporate structure and regulatory restr=
iction. The Transco can take on delivery risk, building new facilities as =
necessary to meet customer demand. The Transco is prohibited from taking a=
ny long term position in the energy market, and it is compensated only by s=
ystem through flow (total load served and energy wheeled). Unfortunately I=
think the likelihood of Transcos forming is remote. The biggest obstacle =
is the difficulty of getting around the tax problems. The LLP/LLC structur=
es skirts the tax problem, but it also results in converting a sizable inve=
stment in to a passive investment with control by a minority owner. I thin=
k the only way to get Transcos in the short run is for there to be a short =
window (2-3 years) when transmission owners have the ability to sell assets=
to a company combining assets, without taxes. Those missing the window wo=
uld have to pay taxes on a pre-sale merger transactions as they do now. Th=
is would compel owners to determine if they want to be transmission owners =
and spin off could occur. Federal assets (TVA, BPA, WAPA) are unlikely to =
be spun off for some time, if ever.
For-Profit-Gridco-Grade 8.5. I see this as a slight variant from an ISO fo=
rm. Like the transco, independence arises from corporate structure and re=
gulatory restriction on activities. However, I don't think it can take on =
much risk for delivery or congestion cost certainty. The Gridco will be th=
inly capitalized in comparison to the cost of the transmission system or th=
e value of energy transmitted. As a result its efficiency over the not-for=
-profit ISO is some share of operational benefits.
Not-For-Profit ISO with Independent Board--Grade 8.0. This is actually ve=
ry close tie with the For-Profit Gridco. The best form I have seen is tha=
t proposed for RTO West. The members of the ISO (the customers and stakeho=
lders) select a nominating committee representing each class of members. T=
he nominating committee selects a search firm to proposed candidates who me=
et the conflict of interest standard. The nominating committee elects dire=
ctors from the slate of candidates. Every member of the nominating committ=
ee votes on every director. A majority of the committee must agree to ever=
y director selected. Directors must stand for reelection every three years=
, with staggered terms for the directors. The Board of Directors is subjec=
t to open meeting requirements except for personnel matters. An Advisory C=
ommittee is formed of the members, but it is open to participation by all =
parties. The Advisory Committee meets periodically by itself and with the =
board. However, any party may submit its views to the board on any matter.=
The Advisory Committee serves as a forum for discussion but it is not a g=
ate keeper determining what the board should be told. There is no voting c=
lass structure for the Advisory Committee because it does not make recommen=
dations as a group. Individual groups submit their views directly to the b=
oard.
Not-For-Profit ISO with Stakeholder Board--Grade 5. This is a poor option,=
far below the Independent Board. The first CA-ISO board showed it self to=
be largely paralyzed by the inability of the various stakeholders to vote =
for anything that would harm anyone. As a result, in my view, they never r=
eally enforced the file tariff, e.g., forming new zones when it was clearly=
needed. However, two worse forms exist.
Not-For-Profit ISO with State Appointed Board--Grade 2.1. This is an even =
poorer outcome, since state politics will prevent the ISO from ever acting =
independently. This kind of board will serve at the Governor's pleasure. =
It will discriminate in the interests of a single state. Even if the board=
were appointed by multiple governors, it would have no incentive to provid=
e an efficient market. To include multiple states, an interstate compact i=
s needed with Congressional approval. Similar organizations (Northwest Pow=
er Planning Council, Colorado River Commission, Port Authority of New York =
and New Jersey, etc.) have slow reaction times and are political driven.
Not-For-Profit Transco--Grade 2.0. Lacking an efficiency target imposed by=
a profit goal, a not-for-profit transco would tend to maximize the benefit=
s for its own staff. The management will want to extend the size of the en=
terprise to justify salaries and the staff will have few reasons to care ab=
out customer service. This is the DMV. This kind of agency will tend towa=
rd condescending, paternalistic approaches to its services, i.e., imposing =
the values of the staff on the response to any request for service.

Steve