It is a pleasure to appear before you
today to talk about Independent System Operators (ISOs) and their
possible role in the restructuring of the electric utility industry.
I know it is an area of intense interest at both the State as
well as the Federal level.
My remarks today are loosely organized
around five general areas:
2. ISO development in the wake of FERC's Open Access Rule for Electric Transmission;
3. The basis for FERC's jurisdiction over ISOs;
4. Why we believe ISOs are a good idea; and
5. Some of the upcoming issues we will face.
A Short History -- Order 888
About two years ago, the FERC issued
an important new regulation designed to bring competition to the
wholesale power market and deal with the problem of stranded costs.
That regulation (Order 888) required all public utilities that
own, control, or operate transmission facilities used in interstate
commerce to file non-discriminatory, open access transmission
tariffs with the FERC.
The Commission was concerned that vertically-integrated
utilities could use their ownership of transmission facilities
to favor their own generation. To prevent this, Order 888 required
"functional unbundling" of wholesale generation and
transmission service.
Functional unbundling requires a utility
to:
2. Take wholesale (and unbundled retail) transmission service under its own transmission tariff;
3. Provide and rely upon same time access to transmission information -- through the OASIS.
The Commission suggested that one way
for existing power pools to comply with the open access requirements
of Order 888 would be through the formation of Independent System
Operators. ISOs provide a way for public utilities to "operationally
unbundle" by transferring operation and control of transmission
assets to an independent entity. In that sense, ISOs represent
somewhat of a middle ground between functional unbundling (as
I described earlier) and corporate divestiture.
The Commission set out eleven principles
for the major power pools to follow in forming ISOs. I have included
those eleven principles as an attachment to my prepared statement.
The eleven principles focus on issues such as ISO governance,
operational control, transmission reliability, and transmission
pricing.
Developments Since 888
Since Order 888, the Commission has
received and acted on ISO filings by each of the three major power
pools -- the Pennsylvania-New Jersey-Maryland Power Pool, the
New England Power Pool, and, most recently, the New York Power
Pool. These were each in the nature of compliance filings to satisfy
the non-discriminatory open access requirements imposed by Order
888.
But we are seeing ISOs continue to develop
in other contexts, as well. For example, some utilities are forming
ISOs at the urging of their state corporation commission or their
state legislature. Texas and California were the first two States
to require their utilities to transfer operational control of
their transmission systems to an ISO.
Other utilities are voluntarily forming
ISOs for a variety of reasons. Some because they see it as making
good business sense in the brave new world of competitive generation.
Others see ISO formation as inevitable and simply hope to play
a greater role in shaping the type of institution that develops.
Whatever the reason, there are on going discussions in almost
every region of the country. In the materials I distributed, I
have included a list (as well as a map) that shows the extent
of ISO activity. In all, FERC has approved four ISOs. The Midwest
proposal is pending. And several other proposals are under discussion
around the country.
FERC Jurisdiction
What is FERC's role in all of this beyond
having encouraged the formation of ISOs in Order 888? FERC's authority
to compel utilities to form ISOs is, at best, unclear. Indeed,
in testimony before Congress, our Chairman specifically asked
the Congress to:
Second, upon formation, an ISO is subject
to rate jurisdiction at the FERC. That is, the rates, terms, and
conditions under which an ISO will provide interstate transmission
service must be filed and approved by the FERC under section 205
of the Federal Power Act (and similarly would be subject to complaint
procedures under section 206 of the Federal Power Act).
Why are we encouraging ISOs?
First and foremost from our perspective,
ISOs have the ability to facilitate good open access transmission.
By placing all of the transmission facilities in a sufficiently
large region under common control, ISOs can unify and standardize
the terms and conditions of transmission service across the region.
More importantly, an ISO can provide a platform for more efficient
pricing of transmission service -- internalizing loop flow problems,
eliminating rate pancaking, and permitting regional management
of congestion. An ISO can even be a forum for identifying and
relieving transmission constraints and recommending needed expansions
to the transmission grid.
Second, I believe that ISOs are a good
tool for addressing residual vertical market power problems. Transferring
operational control of transmission facilities to a truly independent
system operator can ensure that decisions regarding who gets to
use the transmission system are made in a non-discriminatory fashion
without regard to who owns the generating resource. I would note
that the Commission has received numerous complaints alleging
that some utilities are continuing to use transmission systems
in ways that favor their own sales of generation. In that sense,
ISOs clearly go further than the functional unbundling requirements
of Order 888, simplify issues related to policing standards of
conduct, and limit the opportunity of transmission owners to exclude
competitors in the bulk power market.
Finally, ISOs can help promote fully
competitive power markets, allowing greater reliance on market-based
power rates. ISOs can expand the universe of available generation
suppliers, encourage greater market entry by non-traditional suppliers,
and facilitate trading opportunities. As states continue experimenting
with retail competition, I believe ISOs have the potential to
play a critical role in making retail competition succeed.
Emerging Issues
With regard to emerging issues, let
me assure you that we have more questions than answers at this
point. To begin developing answers to these questions, we have
held a series of technical conferences -- beginning with a two-day
conference at our offices in Washington on April 14-15 -- and
followed up by seven regional conferences held around the country
which we concluded last month -- including one here in Richmond.
The level of interest and participation in these conferences has
been astounding. Transcripts of all of the proceedings are available
on the INTERNET. (I have included directions for how to access
FERC's home page and how to retrieve the transcripts electronically,
if you are interested.)
I'd like to touch briefly on some of
the issues that have been presented which we hope that industry
and market participants can help us solve.
From a regional perspective, just how
big does an ISO need to be? Without the authority to order mandatory
participation, what should we do about ISOs that are too small?
Or where there are "holes" because certain transmission
owners in a region refuse to participate? Are there natural geographic
boundaries for an ISO and should those boundaries necessarily
correspond with the geographic markets for trading power?
Governance Issues
How do we ensure full participation
by all market players in developing ISO rules and protocols while
protecting the legitimate rights of transmission owners? Which
is better, an "interested" ISO governing board of stakeholders
or a disinterested board? We're seeing both models in filings
at the Commission. How should the voting rules be structured to
ensure that future decisions are made in a fair and non-discriminatory
manner?
Pricing Issues
Many of the benefits I have associated
with ISOs are very dependent upon getting the transmission pricing
right. But there are many difficult issues involved in trying
to achieve regional transmission pricing reform, even though ISOs
may be the only way to achieve some of these reforms. Some ISOs
are asking the Commission for additional flexibility with regard
to the terms and conditions of transmission service. Others are
concerned with establishing appropriate incentives for the construction
of new facilities. Still others are focused on minimizing the
disruption associated with cost-shifting.
Control Issues
Clearly, an ISO needs the authority
to operate the transmission system. But does that mean that the
ISO must also dispatch generation? Does effective operation of
an ISO depend on the operation of some form of market clearing
power exchange? What role should ISOs play in ensuring transmission
system reliability? Should they act as security coordinators?
While some ISOs may voluntarily assume some of these responsibilities,
should we require that all ISOs take on such additional responsibilities?
Monitoring Issues
Is it appropriate to have ISOs gather
information to help ensure that markets are functioning well?
Are there market power disputes or issues that an ISO could resolve
in the first instance and avoid having such problems come to the
FERC or to state Commissions for resolution?
"Stepping Stone" Issues
We've heard from some that ISOs are
merely an interesting diversion on the way to a more fundamental
institutional restructuring and that the "end game"
will require some form of corporate divestiture. For example,
a major utility holding company in the South is proposing to spin
off its transmission assets to an affiliated "transco."
Others argue that forming an ISO is just too difficult and that
something less than an ISO, such as formation of an independent
tariff administrator, is appropriate.
In closing, I would add that these are
challenging issues at both the Federal and state level. I appreciate
the opportunity to share a little bit of FERC's perspective on
ISOs. I can assure you that the Commission is committed to an
active partnership with the states on these and other issues.
We clearly have a lot of work ahead of us as we try to get a better
handle on identifying market power problems, resolving areas where
state and Federal jurisdiction overlap, and defining an appropriate
role for ISOs in the restructured electric utility industry.
I'd be happy to address any questions
you may have.
1. A little history about ISO policy at the FERC;
I'd then be happy to address any questions you may have.
1. Quote separate rates for wholesale generation and transmission service;
But we faced a dilemma of what to do
with power pools. Power pools are complex power sales arrangements
under which multiple utilities agree to share (or pool) their
generating resources. There are many different kinds of power
pools, but, by definition, they generally include favorable transmission
arrangements for members of the power pool to trade electric energy
with one another. We wanted to preserve the substantial benefits
and cost savings associated with existing power pools. But we
also wanted to find a way to ensure that the transmission arrangements
in the pooling agreements did not provide a loophole around the
non-discrimination requirements of Order 888. Accordingly, in
Order 888, the Commission directed that existing power pools reform
their agreements in a manner that would ensure open membership
and non-discriminatory transmission access to all wholesale market
participants.
clarify the Commission's authority to
order establishment of, and participation in, regional transmission
institutions such as ISOs. ISOs clearly are interstate institutions
that can significantly enhance the competitive bulk power market
as well as retail markets. . . . I recommend that any legislation
. . . leave the Commission with sufficient flexibility to take
into account the regional needs and historical structure of the
transmission system in various parts of the country.
However, once the decision is made to
form an ISO, FERC has undisputed authority over two things. First,
under section 203 of the Federal Power Act, the Commission must
approve the transfer of ownership or control over transmission
facilities to another entity. For example, before Virginia Power
could transfer operational control of its transmission grid to
an independent system operator, FERC would have to approve the
transfer of transmission facilities.
Size Issues
I warned you that the Commission had
more questions than answers. For the time being, I believe the
eleven ISO principles from Order 888 are still a relevant starting
point for working our way through many of these difficult issues.
But those principles will undoubtably need to be re-interpreted
and adapted as we learn more -- in particular to accommodate an
ISO which spans multiple utilities that have not operated historically
as a single control area.
1. The ISO's governance should be structured
in a fair and nondiscriminatory manner.
2. An ISO and its employees should have no financial interest in the economic performance of any power market participant. An ISO should adopt and enforce strict conflict of interest standards.
3. An ISO should provide open access to the transmission system and all services under its control at non-pancaked rates pursuant to a single, unbundled, grid-wide tariff that applies to all eligible users in a non-discriminatory manner.
4. An ISO should have the primary responsibility in ensuring short-term reliability of grid operations. Its role in this responsibility should be well defined and comply with applicable standards set by NERC and the regional reliability council.
5. An ISO should have control over the operation of interconnected transmission facilities within its region.
6. An ISO should identify constraints on the system and be able to take operational actions to relieve those constraints within the trading rules established by the governing body. These rules should promote efficient trading.
7. The ISO should have appropriate incentives for efficient management and administration and should procure the services needed for such management and administration in an open competitive market.
8. An ISO's transmission and ancillary services pricing policies should promote the efficient use of investment in generation, transmission, and consumption. An ISO or an RTG of which the ISO is a member should conduct such studies as may be necessary to identify operational problems or appropriate
expansions.
9. An ISO should make transmission system information publicly available on a timely basis via an electronic information network consistent with the Commission's requirements.
10. An ISO should develop mechanisms to coordinate with neighboring control areas.
11. An ISO should establish an alternative dispute resolution (ADR) process to resolve disputes.
*Order No. 888 at 3,730-31; Order No. 888-A at 30,247-48.
| ERCOT | The first ISO in the U.S. and is state regulated.
Began operation in 1996. |
| Approved: | |
| NEPOOL | New England Power Pool, EC97-35-000, (6/25/97).
Operations began 3/31/98. |
| Wepex | California ISO, EC96-19-001,(10/29/97).
Operations began 3/31/98. |
| PJM | Pennsylvania, New Jersey, Maryland, OA97-261-000
(11/15/97). Under new rules operations began 4/1/98. |
| NYPP | New York Power Pool, ER97-1523-000, (6/30/98). |
| Pending at FERC: | |
| MISO | Midwest ISO, EC98-24-000 |
| Planned - Not filed with FERC: | |
| MAPP | Agreement with signature members planned for Summer 1998. |
| Alliance | Plans to file late summer 1998. |
| Desert Star | Plans to file end of 1998. Covers New Mexico, Arizona, southern Nevada. |
| Southwest Power Pool | Could file by end of 1998 with implementation. |
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