Regional Transmission Organizations: The Future of Transmission?

1. Regional Transmission Organizations: The Future of Transmission? Dave Edwards 4/17/2004

2. Overview • Historic Transmission • Early Attempts at Restructuring • The RTO Model Emerges • Midwest ISO – The First RTO

3. Historic Transmission • Vertically Integrated Utilities control the market. • Utility company owns electric generating facility and transmission lines. • Utility or local distributors then pass electricity to consumers with no alternatives.

4. Historic Transmission (cont.) • Generation and Transmission are bundled together when determining the rate. • Rates based on prior operating costs create incentive for unneeded production of generation infrastructure. • The price of construction is passed to consumer as a “cost-of-service.”

5. Historic Transmission (cont.) • Transmission lines are controlled by the large utilities. • Cheaper, more efficient methods of generation are ignored.

6. Early Attempts at Restructuring

7. The California Experiment • CA had a high energy demand. • To combat an insufficient supply and create an incentive for the industry, CA deregulates the energy market. • A Power Exchange is created to foster competition in pricing.

8. The CA Experiment (cont.) • Large generators take advantage of the system by withholding power and selling it at elevated prices levels when the grid cannot meet demand • Price caps favor these generators, while distributors file bankruptcy. • Consumer rate freezes remove inflation incentives to conserve energy.

9. The CA Experiment Fails • Distributor Bankruptcy • Rolling Blackouts • Enron • Need I say more? • Price Caps on generators are issued, ending the crisis and the deregulation.

10. Other Restructuring Attempts • Illinois, Texas and other states have attempted to create a market-based system of moderating energy prices. • IL requires utilities to unbundle generation and transmission costs, provide variable rates for prime time and off-peak energy use, and allow alternative generators to use the transmission lines to benefit consumers.

11. The Energy Policy Act of 1992 • Encourages greater competition in power markets by promoting new generators • The Federal Energy Regulatory Commission (FERC) gets expanded authority to grant access to existing transmission lines.

12. The RTO Model Emerges • ISOs Under FERC Order 888 • Current RTOs • FERC’s Standard Market Design

13. ISOs Under FERC Order 888 • Provide unbiased access to transmission system for all generators • Permitted to charge a tariff set by FERC • Designed to prevent discriminatory access and avoid a problem seen in CA • Estimated Savings for consumers: • $3.8 - $5.4 Billion a Year

14. The Drawbacks of the 888 Model • Lacked a mechanism for broad regional control of the power grid • Did not permit mitigation of unlawful prices • Required creation of Independent Transmission Providers, despite acceptance of ISO’s.

15. Current RTOs • FERC Order 2000 • Characteristics of an RTO • A Total of 12 existing or proposed RTOs in the US and Canada.

17. Order 2000 - RTO’s Can: • “(1) improve efficiencies in transmission grid management; • (2) improve grid reliability; • (3) remove remaining opportunities for discriminatory transmission practices; • (4) improve market performance; and • (5) facilitate lighter handed regulation.”

18. 4 Essential Attributes of an RTO • Independence from market participants • Appropriate scope and regional configuration • Operational authority for all transmission facilities under the RTO's control • Exclusive reliability control of the grid.

19. RTO: Independence • The RTO, its employees, and any non-stakeholder directors must not have any financial interests in any market participants • It must have a decision-making process that is independent of control by any market participant or class of participants • It must have exclusive and independent authority to file changes to its transmission tariff with the Commission

20. RTO: Scope • RTO boundaries should: • facilitate essential RTO functions and goals, • recognize trading patterns, • mitigate the exercise of market power, • not unnecessarily split existing control areas or existing regional transmission entities, • Et cetera.

21. RTO: Operational Authority • real-time monitoring of system conditions • Direct Control of facilities though technology vs. delegation of authority

22. RTO: Reliability • Receiving, confirming and implementing all interchange schedules; • Must have the right to control any generator • Outages of transmission lines must be approved, even if owned by someone other than RTO • RTO must report to commission if some organization places restrictions upon it.

23. To Recap: • RTOs are not a complete restructuring of the energy market. • RTOs are a first step towards that restructure. Reliable and efficient management of the transmission lines is necessary before a deregulated market system would be viable.

24. FERC’s Standard Market Design • (SMD) key features are: the formation of (RTOs); • ensuring that all independent transmission organizations have sound wholesale market rules; and • varying implementation schedules depending on regional needs and regional differences.

25. Midwest ISO

26. The First RTO • Dec. 20, 2001, Midwest ISO became the first FERC-approved RTO in the nation • 100,000 miles of transmission lines and more than 100,000 megawatts of electric generation over approximately 1.1 million square miles. • The regional hub for the flow of electricity in the 15-plus states of its members.

27. Membership • Entry fee of $15,000. Annual fee of $1,000. • Voting rights for the Board of Directors • Access to the Advisory Committee • Transmission Owners Committee has special powers granted by the ISO agreement

29. MISO & PJM Interconnect • “Joint and Common” Market • Each retains individual responsibilities as an RTO • Designed to increase players in the market • Some functions shared between the two • Another benefit is the decreased cost of developing new processes, and R & D together.

30. Conclusion • By assigning responsibility for the regional grid to RTOs, reliability and efficiency are increased. • Removing control of the transmission lines from market actors is the critical first step in a deregulated energy market. • Voluntary initiatives like the “joint and common” market may lead to a coordinated network of RTOs which allow consumers to compete for energy generated nationwide.