Apparently frustrated at the pace of restructuring of the electric utility industry, the Federal Energy Regulatory Commission issued rules on December 20, 1999 that are designed to expedite the disaggregation of transmission facilities from vertically-integrated electric utilities. The rules, designated as FERC Order No. 2000, establish a framework for Regional Transmission Organizations which will be responsible for transmission system operation in the future, and provide economic incentives for utilities to participate in timely formation of qualified RTOs. The FERC's goal in issuing Order No. 2000 is to foster development of open and competitive wholesale and retail electric power markets.
Order No. 2000 identifies four characteristics that the FERC believes are essential to a qualified RTO, and eight functions that must be performed by a qualified RTO. These rules are intended to be implemented in a flexible manner so long as these minimum requirements are attained.
Independence
One of the key characteristics of an RTO is that it must be independent of market participants. Unless otherwise authorized by the FERC, no single market participant may have more than a 5% active interest in the RTO, and no class of market participants collectively may have more than a 15% active interest in the RTO. Moreover, the market participants are required to divest any active interests in an RTO within 5 years after its formation. Although market participants are permitted to retain passive interests in RTOs, they will be subject to periodic audits to assure that any continued interest remains passive.
Authority/Short-Term Reliability
In addition to independence, a qualified RTO must serve a region of sufficient scope and configuration to permit the RTO to perform its required functions effectively and to support efficient and nondiscriminatory power markets; it must have operational responsibility for all transmission facilities under its control, and be the security coordinator for all of the transmission facilities that it controls; and it must have exclusive authority for maintaining the short-term reliability of the grid that it operates.
Access
The minimum functions that every qualified RTO must perform are designed to assure that all participants in competitive wholesale bulk power markets will be given non-discriminatory access to the transmission services they need for delivery of electricity over widespread geographic areas at non-pancaked rates. They are also intended to allow the RTO to assure that the transmission grid will be operated efficiently and reliably for the benefit of all transmission system users.
Order No. 2000 applies only to transmission-owning electric utilities that are regulated by the FERC under Parts II and III of the Federal Power Act. Nevertheless the FERC stated in a press release that it "expects public and non-public utilities, in coordination with state officials, Commission staff, and all affected interest groups, to actively work toward the voluntary development of RTOs." Utilities in Canada and Mexico are also encouraged to participate in the development and operation of RTOs. The FERC will hold a series of two-day RTO workshops around the United States in the Spring of 2000, and expects all transmission owners to attend at least one such workshop.
Each transmission-owning public utility that does not presently participate in an Independent System Operator is required to file with the FERC no later than October 15, 2000, either:
- a proposal to establish an RTO to which control over its transmission facilities would be transferred,
- a request for a declaratory order that a proposed form of RTO would be consistent with the FERC's rules, or
- a statement describing the efforts made by the utility to that time to participate in an RTO and its plans for continuing its efforts.
Utilities that presently are participating in ISOs may defer such filings until January 15, 2001. Under Order No. 2000, RTO's throughout the United States are expected to be operational by December 15, 2001.
Although participation in an RTO is voluntary, the FERC has established certain economic incentives to encourage utility participation in RTOs in a timely manner. Among these incentives are the opportunity to propose performance-based ratemaking; grandfathering of existing rates of return on common equity; and levelized rates, and accelerated depreciation and incremental pricing for new transmission investments. The FERC further stated, however, that the rules would not preclude it from ordering utilities to participate in RTOs in the future if it determines that such participation is needed to mitigate market power such as that resulting from a utility merger.
In a related matter, the FERC ruled that the proposal by the Alliance RTO to establish a for-profit transmission-only company did not meet the standards adopted in Order No. 2000.
*article courtesy of William T. Baker, Jr. and James K. Mitchell of Thelen Reid & Priest, wbaker@thelenreid.com / jmitchell@thelenreid.com.