IMPLICATIONS OF ISO-NEW ENGLAND BEING GRANTED RTO STATUS

You asked for a discussion of possible implications of the Federal Energy Regulatory Commission’s (FERC) approval of the application by the Independent System Operator (ISO)-New England to become a Regional Transmission Organization (RTO).

Under federal law, both ISOs and RTOs are responsible for administering regional wholesale power markets and the transmission grids. Federal law imposes additional requirements on an RTO, including a requirement that it be independent from utilities and other participants in wholesale electric markets. FERC had encouraged the formation of a northeastern RTO, covering New England, New York, and the Mid-Atlantic States, in order to achieve greater market efficiencies, but this concept did not come to fruition.

On March 24, 2004, FERC granted an application by ISO-New England and the owners of major transmission facilities in New England to transform ISO-New England into an RTO. FERC largely approved the establishment of the RTO as proposed. But, it rejected several provisions, including those that would have allowed the transmission owners to schedule transmission outages. FERC also ordered ISO-New England to develop an agreement with its counterpart in New York to resolve differences in operating rules and other “seams” issues.

Participants in the FERC proceeding have expressed widely differing views of the implications of the proposal. ISO-New England and other proponents of the RTO believe that FERC’s decision will give the RTO more independence from market participants than ISO-New England currently has. They believe the decision will ensure that New England's wholesale power marketplace will remain efficient and competitive, while maintaining the reliability of the power system. They also believe that the decision will improve transmission planning and reduce trading barriers with neighboring regions. As a result, they believe that the creation of the RTO will deliver significant benefits to all New England consumers.

On the other hand, a number of participants in the FERC proceeding believe that the decision gives too much authority to the owners of transmission facilities, to the extent that the independence of the RTO will be compromised. This could lead to conflicts of interest, since the transmission owners also compete with other market participants. Consumer advocacy agencies in the region and the Connecticut and Massachusetts’ attorneys general believe that the decision will likely to lead to excessive costs to ratepayers without providing offsetting benefits.

Since 1997, ISO-New England has been responsible for administering the wholesale power market and transmission grid for New England (other than northern Maine, which is connected to a Canadian power grid). It is also responsible for regional transmission system planning, among other things. ISO-New England performs its functions under an agreement with NEPOOL, an organization that includes industry and consumer representatives. ISO-New England is a non-profit organization that does not have any financial interest in the wholesale electricity market.

In December 1999, FERC issued Order 2000, which encouraged the establishment of RTOs. Under the order, an ISO, a for-profit transmission company, or a combination of these entities could form an RTO. According to the order, FERC’s goal was to promote efficiency in wholesale electricity markets and to ensure that electricity consumers pay the lowest price possible for reliable service.

The order specified the minimum characteristics and functions that an entity must satisfy in order to be approved as an RTO. FERC required that the RTO must:

1. be independent of any market participant;

2. serve an area large enough to allow it to effectively perform its required functions and support efficient and non-discriminatory power markets;

3. have operational authority for all transmission facilities under its control and serve as the security coordinator to the region;

4. have authority to oversee all requests for scheduled transmission outages and several other functions in order to meet its reliability duties;

5. use a transmission pricing system that will promote efficient use and expansion of transmission and generation facilities;

6. ensure the development and operation of market mechanisms to manage congestion on the transmission system;

7. develop market monitoring procedures to deter market manipulation and to identify ways to remedy flaws in the market;

8. be responsible for planning and directing necessary transmission system expansions and upgrades to provide efficient, reliable, and non-discriminatory transmission services.

Subsequently, FERC encouraged the formation of a northeastern RTO composed of the ISOs serving New England, New York, and the Mid-Atlantic States.

ISO-New England initially applied to FERC to create a New England RTO on January 16, 2001. FERC rejected the application for several reasons, including the proposed RTO’s lack of independence from market participants and limited geographical scope. In 2002, ISO-New England and its New York counterpart pursued the formation of an RTO covering the seven states, as discussed in OLR memo 2002-R-0816. The ISOs withdrew their filing due to stakeholder opposition, the likelihood of significant litigation and uncertainty regarding timing of FERC’s Standard Market Design rulemaking, which among other things set pricing rules for the wholesale market.

On October 31, 2003 ISO-New England and the owners of major transmission facilities in New England (including Northeast Utilities and United Illuminating) submitted a proposal to establish an RTO for New England. Under the proposal, the RTO would become the successor organization to ISO-New England and would become the provider of regional transmission services. Under the Transmission Operating Agreement component of the proposal, the transmission owners would transfer operational authority over their facilities to the RTO, subject to certain reserved rights. The proposal was submitted under section 205 of the Federal Power Act, which governs the wholesale power market.

The proposal prompted controversy within NEPOOL. The NEPOOL participants (with the exception of the transmission owners) voted to reject the RTO proposal. In December 2003, NEPOOL petitioned FERC to reject the proposal plan and order new talks between the transmission owners and other groups to work out a more acceptable plan. A threshold issue for FERC was whether ISO-New England and the transmission owners could apply for RTO status without NEPOOL’s consent. In its decision, FERC ruled that they could. It found that the agreement under which NEPOOL operates does not prohibit the transmission owners from withdrawing from the organization. FERC also found that neither the NEPOOL agreement nor the agreement that formed ISO-New England bar it, together with the transmission-owning utilities, from forming an RTO.

ISO-New England and the transmission owners have argued that the creation of the RTO will:

1. provide the RTO, as the operator of the transmission system, with greater independence from market participants than ISO-New England currently has, while preserving a robust stakeholder process;

2. create a more stable organizational structure for the system operator;

3. strengthen operational control and authority over the transmission system, including scheduling of maintenance on the system;

4. offer a unified tariff that will provide “one-stop shopping” for regional and local transmission services;

5. allow the system operator to more effectively work with neighboring regions on “seams” issues; and

6. encourage increased investments in transmission and the deployment of new technologies.

According to the proponents, the RTO will have greater independence because the market participants will no longer have a vote, as they currently have under the agreement between ISO-New England and NEPOOL. The decision provides greater stability because it involves a five-year agreement between the RTO and the transmission owners, rather than the existing one-year agreement between ISO-New England and NEPOOL.

The proponents also believe that the RTO will provide the New England power markets with accountability and transparency. They argue that New England is a large enough region to maintain system reliability and to support efficient and non-discriminatory power markets.

Several of the participants in the FERC proceeding objected strongly to the RTO proposal. A major concern was that the proposed structure of the RTO gave the transmission facility owners too much authority, so that the independence of the RTO would be compromised. This concern was raised by the region’s utility regulators, represented by the New England Conference of Public Utility Commissioners (NECPUC), consumer advocacy agencies, groups representing municipal utilities and non-utility generators, the Connecticut and Massachusetts attorneys general, and others. NECPUC also argued that the proposal would "adversely affect competitive markets. " Similarly, the Electric Power Supply Association, which represents non-utility generators, argued that limited independence of the RTO would likely result in disparate treatment for different sectors of market participants.

According to these intervenors, the transmission owners would have largely unfettered authority to propose transmission rates and rate designs to FERC, even while retaining substantial interests in the generation market. In their view, this would not further the institutional independence that Order 2000 requires. Instead, the proposal would provide for less independence than ISO-New England currently has with regard to the design of the market, its administration, and the transmission grid infrastructure.

The brief filed by the Connecticut Office of Consumer Counsel, its counterpart agencies in Maine and New Hampshire, and the Massachusetts attorney general argued that the proposal would increase transmission costs for consumers. They noted that the only benefits identified in the proposal flow to the transmission owners, “who would receive a substantial increase in profits. ”

In his brief opposing the proposal, the Connecticut attorney general argued that the proposal:

1. failed to satisfy Order 2000’s minimum characteristics and functions in significant respects;

2. inappropriately skewed the incentives and structure of the market to the benefit of the transmission owners; and

3. subjected the market to substantial “policy churn,” which can harm consumers.

He asserted that proposal RTO would likely to lead to excessive costs to ratepayers without providing offsetting benefits, contrary to the requirements of the Federal Power Act. In a March 24, 2004 press release, following FERC’s approval of the proposal, he asserted that the decision will impose “an immediate $ 40 million price tag on consumers. ”

As noted above, FERC’s decision largely approves the proposal. Several of the intervenors have indicated that they will move to have FERC reconsider its decision and may appeal the decision if FERC does not reconsider.


April 20, 2004		2004-R-0390
IMPLICATIONS OF ISO-NEW ENGLAND BEING GRANTED RTO STATUS

By: Kevin E. McCarthy, Principal Analyst