SJR 91

Joint Subcommittee Studying Electric Utility Industry Restructuring

July 15, 1998, Richmond

The joint subcommittee met to receive a series of reports on Independent System Operators (ISOs), key ingredients in restructuring legislation enacted by the 1998 General Assembly. Representatives from the Federal Energy Regulatory Commission (FERC), the PJM Interconnection, and the proposed Alliance and Midwest ISOs presented information to the joint subcommittee about the evolution, structure, operation, and regulation of ISOs. A Virginia State Corporation Commission (SCC) consultant reported on the roles of FERC and state public utility regulators in implementing ISOs as part of a state's adoption of electric utility restructuring. The joint subcommittee also received restructuring updates from SCC staff and from a representative of Virginia's unionized electrical workers.

Independent System Operators


Independent System Operators, or ISOs, are key to Virginia's 1998 restructuring legislation (HB 1172), which expressly conditioned restructuring's advent upon the establishment of ISOs and Regional Power Exchanges, or RPXs. The bill calls for ISOs and RPXs to be established by January 1, 2001, in anticipation of a January 1, 2002, kick off to retail competition (to be fully phased in by January 1, 2004).

ISOs are the by-product of FERC's implementation of FERC Order 888, a landmark regulation that brought competition to the wholesale power market. According to the head of the FERC's Office of Electric Power Regulation, Order 888 required the "functional unbundling" of wholesale generation and transmission service in order to prevent vertically integrated utilities from using their ownership of transmission facilities to favor their own generation. Thus, utilities engaged in the wholesale power market must, among other things (i) quote separate rates for wholesale generation and transmission services, (ii) provide and rely upon same-time access to transmission information through the computerized OASIS system, and (iii) take wholesale (and unbundled) transmission service under their own transmission tariffs.

FERC developed ISOs to close a loophole power pools posed in the implementation of Order 888's non-discrimination provisions. Power pools are power sales arrangements in which multiple utilities agree to pool their generating resources. Pooling arrangements also provide pool members favorable transmission rates in connection with electric energy trades with other pool members. FERC addressed this issue by directing (i) existing power pools to reform their agreements to facilitate open membership, and (ii) nondiscriminatory transmission access to all wholesale market participants.

FERC also suggested that existing power pools' public utility members transfer the operation and control of their transmission assets to ISOs. The FERC representative characterized ISOs as a middle ground between functional unbundling and corporate divestiture. Since Order 888, FERC has received and acted upon ISO filings by each of the three major power pools: the Pennsylvania-New Jersey-Maryland, or PJM Power Pool, the New England Power Pool, and the New York Power Pool. He emphasized that these were "compliance filings" to satisfy the nondiscriminatory open access filings.

FERC noted the power pools' ISO compliance filings have been followed by ISO formations not required by federal law or regulations. California--as part of its transition to retail competition--required its utilities to transfer operational control of their transmission systems to an ISO. FERC approved the California ISO by order dated October 30, 1997. Texas, too, has required its utilities to turn over their transmission assets to the operational authority of an ISO. While FERC's authority to mandate ISO formation is not clear, FERC must approve any transfer of transmission asset control to an ISO, and FERC has ISO rate jurisdiction.

The PJM power pool was one of the existing power pools converted to an ISO as a result of FERC's implementation of Order 888. PJM's service territory covers 48,000 square miles, serves 22 million people, and encompasses 540 generating units. It is reportedly the third largest centrally dispatched entity in the world.

PJM's general manager of information systems furnished the joint subcommittee an overview of this ISO's operation, with particular emphasis on the technology PJM employs. He noted that high speed computers plus PJM's ability to disseminate real-time information about transmission conditions and availability via the Internet make PJM's operations possible. One of PJM's important new activities is its participation in pilot programs that are part of Pennsylvania's ongoing restructuring plan.

The Proposed Alliance ISO

FERC is currently reviewing voluntary ISO filings that are pending or planned, including the Midwest (filed) and Alliance (planned) ISOs, which would collectively provide independent system operator control of transmission systems within Virginia owned by Virginia Power, AEP Virginia and Allegheny Power Systems. Virginia Power is a key player in the proposed Alliance ISO, whose discussion participants currently include AEP, Duke Power, Carolina Power & Light and Detroit Edison. The territory covered by these participants includes Virginia, North Carolina, South Carolina, Ohio and Michigan.

Among ISO structures under consideration by Alliance participants is the transmission company or "Transco" model. A Transco is a for-profit transmission company that both owns and operates transmission assets but does not own generation assets. A Transco is unlike any ISO in place today in that it links the economic performance of transmission operations to that of transmission ownership. Accordingly, the owners of transmission assets can then be held directly accountable to regulators and the public for safe, reliable and economically efficient operations and planning. Virginia Power has not committed to any ISO at this time, reserving this decision pending its approval of a suitable ISO model.

The Proposed Midwest ISO

An Allegheny Power representative told the joint subcommittee that the proposed Midwest ISO, or MISO, would operate in portions of 13 states, including Illinois, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, and Missouri. Participants include Allegheny Energy, Commonwealth Edison, Cinergy, Illinois Power and LG&E Energy. As proposed, MISO (currently including 12 transmission owners) would oversee 55,000 miles of transmission lines within 204,000 square miles of service territory. MISO filed for FERC approval in January 1998 and hopes for approval as early as September 1998.

MISO's FERC filing proposes a not-for-profit entity with an independent governance structure. It would operate transmission facilities above 100 Kv and would provide such services as ATC calculations, reservations and scheduling. MISO would be responsible for regional transmission planning, while transmission owners would construct plans for local needs. MISO participants project a fully operational ISO by 2000.

AEP also submitted a presentation on MISO, prepared by an AEP representative who emphasized that ISOs can enhance the secure operation of the regional transmission network and that they can mitigate the market power of generation/transmission owners. He cautioned the joint subcommittee that ISOs must be geographically large enough to deal effectively with loop flow issues, assure network security and develop a large generation market.

A critical feature of MISO as proposed is that MISO does not have direct functional control of generation, nor does it eliminate individual control area responsibility for generation/load balancing. Moreover, while it does not create a regional power pool company, or POOLCo, or a regional power exchange (RPX), it does create a single regional transmission control area. AEP's service territories are situated between the proposed Midwest and Alliance ISOs, and AEP's goal is to bring these two proposed ISOs together.

Regulating ISOs

Since ISOs manage the interstate transmission of electrical power, FERC approves their formation and regulates their operation pursuant to the Federal Power Act. While FERC has not mandated ISOs or power exchanges, once FERC approves an ISO proposal, the ISO's operations are federally regulated. However, according to an SCC consultant, there are several areas in which states will have important roles and in which FERC and the states affected must coordinate ISO-related activities.

Approving the transfer or acquisition of operational responsibility of transmission or generation will be a key state function. Additionally, the consultant believes that (i) if generation is transferred, states should verify that states' customers receive an appropriate share of any gain realized from that sale, and (ii) if transmission is transferred, states should verify that customers receive access rights at prices commensurate with the costs they have borne historically. States will also continue to approve construction of generation and transmission facilities in the state--regardless of whether they are proposed by a utility, a new market entrant, an ISO or a power exchange. Additionally, states will license new sellers of retail power and operators of major facilities.

The consultant identified safety and reliability, new construction of generation and transmission, and market power as key ISO state-federal coordination areas. He emphasized that there is legal uncertainty about FERC's authority to implement complete remedies for market power. And, if FERC chooses to defer to the ISOs on market power, critical questions will remain. Among them: questions about ISOs' actual authority to penalize market power-related misconduct.

FERC's ISO regulation will address only some market power issues; states will need to address many of them on their own. These issues include: (i) market power associated with the joint ownership of both generation and distribution, (ii) product diversity, (iii) retail generation sales, (iv) retail marketing sales, (v) metering, billing and customer service, and (vi) interactions between distribution and generation.

SCC Update

The SCC's energy regulation director updated the joint subcommittee concerning recent restructuring-related developments. He reported that the SCC issued an order on July 8, directing Virginia's electric utilities and other restructuring stakeholders and interested parties to address the question of the SCC's authority to develop principles and guidelines concerning the development and operation of ISOs. The order responded to Allegheny Power Systems' contention that an earlier motion filed with the commission proposing SCC-developed ISO standards was inappropriate and that such a proposal should have been made to FERC instead. Responses must be filed by staff and parties to this proceeding by August 17.

The SCC director also reported that new energy load peaks were set by Virginia's electric utilities during the week of June 21. Only AEP failed to set a new summer record due to unit outages during this period. He also noted that wholesale power prices in the Midwest increased sharply during that period. The SCC received reports of wholesale power reaching a verified level of $7 per kilowatt hour during peak periods, and unverified reports of $10. The SCC had learned of instances in which power marketers had failed to deliver power during this period--apparently due to their unwillingness to pay these record wholesale prices. Historically, wholesale prices during peak periods reach 10 to 18 cents per kilowatt hour. A number of utilities have petitioned FERC to investigate these price spikes, and the Ohio Public Service Commission plans an investigation as well.

Utility Production Workers' Perspectives

A representative the International Brotherhood of Electrical Workers, or IBEW in Virginia, told the joint subcommittee that the IBEW supports electric utility restructuring if it is beneficial to residential customers, business and industry, the environment, economic growth and electric system reliability. According to the IBEW, many utilities are preparing for retail competition by reducing workers and worker training. Virginia Power, for example, has reduced its utility production workforce by over 1,000 in the past five years, principally through attrition. Nationally, this workforce has been reduced by 25 percent (or about 46,000). The IBEW has significant concerns about worker safety and system reliability that are influenced by many current developments, including utility merger and acquisition-related stagnation in new utility worker hiring.

The IBEW proposes that several steps be taken during restructuring to avert system failures and worker injuries. It proposes industry-wide maintenance standards and inspection plans to avoid improper cutbacks in utility maintenance efforts. In the case of utility mergers or acquisitions, the IBEW believes that worker familiarity with affected systems is crucial and that to ensure system and plant reliability, new owners should be required to retain current employees for a minimum period of three years. Other remedies and safeguards were proposed in a IBEW restructuring draft provided to the joint subcommittee and staff.

Other Presentations

Several other presentations were made to the joint subcommittee, including a brief statement to the joint subcommittee by a Virginia Citizens Consumer Council (VCCC) and Consumer Federation of America representative. She alerted the joint subcommittee to the recent release of a report on residential ratepayer economics and restructuring prepared for the Consumers Union and the Consumer Federation of America. A link to that report is included in the joint subcommittee's web site.

Additionally, Delegate Gladys Keating (Co-Chairman of the House Corporations, Insurance and Banking Committee) advised the joint subcommittee that at the meeting of the National Conference of State Legislatures (NCSL) in Las Vegas, the NCSL Energy Committee would be reviewing a draft policy on electric utility restructuring and asked for comments. The draft's overall theme: the majority of issues associated with restructuring should be within the purview of the states; there should be no federal mandate to restructure.

The deputy secretary of Commerce and Trade appeared before the joint subcommittee to express the Gilmore Administration's view that restructuring can be beneficial to the Commonwealth if done correctly. He noted that care should be taken in determining stranded costs and margins and asked the joint subcommittee to ensure that an undue amount of authority over Virginia's utilities is not transferred to the federal government. The Gilmore Administration also supports the inclusion of a universal service component in any Virginia restructuring plan.

Finally, updates on ongoing task force activities were provided by Delegate Chip Woodrum (the Structure and Transition Task Force) and by Senator John Watkins (the Stranded Costs Task Force). Summaries of task force activities are available on the joint subcommittee's web site.

Future Meetings

The joint subcommittee will meet next in Richmond on August 18 at 10 a.m. to review consumer, education and environmental issues. That meeting will be followed by a 2 p.m. meeting the same day by the Task Force on Consumer, Education and Environmental issues. A meeting is planned for September in Roanoke, the date to be announced. Also scheduled is a November 10 joint subcommittee meeting in Reston in connection with a restructuring and technology conference associated with Virginia's Center for Innovative Technology.

The Stranded Costs Task Force will meet on July 30, while the Structure and Transition Task Force will meet on August 12. Additional information about the joint subcommittee and its task forces can be found at the SJR-91 web site:

The Honorable Jackson E. Reasor, Jr., Chairman
Legislative Services contact: Arlen Bolstad