energy market consolidation and convergence: seams issues revisited

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© 2001, Elsevier Science Inc., 1040-6190/01/$–see front matter PII S1040-6190(01)00254-8

The Electricity Journal

Energy Market Consolidation and Convergence: SeamsIssues Revisited

Recent orders by FERC on regional transmission organizations signal a consolidation and convergence of energy markets in North America. The impact of this policy shift on configuration and transition “seams issues” is not yet fully appreciated.

Michael Bailey, Michael Ambrosio, and Christopher Eaton

arious sources have demon-strated that structure/

operation seams issues undermine the two primary objectives of com-petitive energy markets: economic efficiency and power system reli-ability. In a previous article, Michael Bailey and Christopher Eaton ana-lyzed seams issues relating to the structure and operations of North-eastern energy markets (i.e., New York, New England, Mid-Atlantic, and Ontario) and their operators (i.e., the New York Independent System Operator [ISO], ISO New England, Pennsylvania-New Jersey-Maryland [PJM] Intercon-nection, and the Ontario Indepen-dent Market Operator [IMO],

respectively), and reviewed policy initiatives aimed at eliminating these seams issues.

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The purpose was to assess the extent to which energy markets in the Northeast were converging toward a seam-less environment and to advance the relevant policy debate. Recent U.S. Federal Energy Regulatory Commission (FERC) orders have indicated that the Commission will adopt a more active role in en-couraging consolidation and con-vergence among regional trans-mission organization (RTO)candidates to form a few, relatively large regional energy markets.

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In this article, we analyze seams issues relating to the configuration

Michael Bailey

is a Partner inDeloitte & Touche’s Global Energy

Markets Group, Chicago. He leads thegroup’s physical market infrastructureteam and provides consulting services

and business solutions to energycompanies to support their

participation in energy marketenvironments. He holds an M.B.A.

from Duke University’s Fuqua Schoolof Business.

Michael Ambrosio

is a Director inDeloitte & Touche’s Regulatory

Consulting Group, Parsippany, NewJersey. He provides consulting services

to utilities, energy companies,regulatory agencies, and other

government entities to support effortsto restructure regulated industries. He

holds an M.S. from Antioch Universityand a B.S. from Rutgers College

of Engineering.

Christopher Eaton

is a SeniorManager in Deloitte & Touche’s GlobalEnergy Markets Group, New York. Heprovides consulting services to energy

companies, system/market operators,and regulatory agencies to support the

development of market operationsand energy transacting capabilites.

He holds a B.B.A. fromSimon Fraser University.

This article draws on concepts andmaterial which first appeared in a paper

titled “North American ElectricityMarkets: Coming Together at the

Seams?” prepared for the 24th AnnualInternational Conference of the

International Association for EnergyEconomics (Houston, Texas, April 25–

27, 2001) and published in the

conference proceedings.

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and transition of four major regions (the Northeast, Southeast, Midwest, and West) using the ana-lytical framework introduced in the previous article. Our purpose here is to assess the impact of RTO consolidation and convergence on high-level “configuration/transition” seams issues and to advance the debate on these com-plex policy challenges.

I. Configuration/Transition Seams Issues

Configuration and transition seams issues present unique chal-lenges in the effort to achieve effi-cient and reliable regional energy markets. This section provides a refresher on seams issues and examines four configuration/transition seams issues: scope and regional configuration, governance and jurisdiction, superregional functions, and transition program.

A. A Seams Issues Refresher

In the earlier article, Bailey and Eaton defined “seams issues” as “

impediments to interregional trade in and delivery of energy and related products and services which result in economic inefficiency and/or a threat to reliability

,”

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cited several refer-ence sources that demonstrate the adverse impacts of seams issues, and acknowledged work that was underway to identify and address these issues. They went on to sug-gest that what has been lacking to date is a rigorous analysis of seams issues and policy initiatives and provide a seams issues frame-work to facilitate such an analysis (

Figure 1

).

determine appropriateness rather than prescribing boundaries for RTOs. Some of these factors include the ability to effectively perform required functions, recog-nition of trading patterns, mitiga-tion of market power, preservation of existing control areas or regional transmission entities, coverage of contiguous geographic areas and highly interconnected transmis-sion areas, and recognition of use-ful existing regional and/or inter-national boundaries.

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Even within these general guidelines, there is a great deal of room for interpreta-tion as to what constitutes an appropriate RTO scope and regional configuration.

ransmission owners, market participants, and other indus-

try stakeholders were requested to submit and comment on proposed RTO configurations through a compliance filing process. The resulting, largely uncoordinated, method of determining scope and regional configuration led to a set of relatively small proposed RTOs (i.e., as many as 12 to 15 based on initial compliance filings). Such a topography would be problematic because the number of RTOs is positively correlated with the number of seams and, quite likely, with the number of structure/operation seams issues. In Order 2000 and later issuances, FERC indicated that an otherwise in-appropriate scope and regional configuration may be overlooked if mechanisms to mitigate seams issues are being actively pursued.

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Lack of firm policy in this area has increased uncertainty and length-ened the time necessary to obtain

In the figure, issues along the

configuration/transition

axis are pri-marily related to the ongoing effort to establish regional energy mar-kets to meet efficiency and reliabil-ity objectives. Issues along the

structure/operation

axis are prima-rily related to convergence of mar-ket design, rules, and business practices across regions. This ana-lytical framework is designed to stimulate a balanced debate between strategic or “evolution”-oriented issues (i.e., along the configuration/transition axis) and tactical or “snapshot”-oriented issues (i.e., along the structure/operation axis). It is also designed to help distinguish between seams issues requiring different types of policy responses and to highlight the interrelated nature of these issues.

B. Configuration/Transition Seams Issues

1. Scope and Regional Con-figuration.

Scope and regional configuration—one of the mini-mum characteristics outlined in FERC’s Order 2000 on RTOs—is concerned with determining an appropriate geographic area in which to establish an RTO. Insist-ing that the process was voluntary, FERC opted to provide factors or criteria that would be used to

Figure 1. Seams Issue Analytical Framework

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approval, as RTO compliance fil-ings were rejected at least partially because of inappropriate initial scope and regional configuration.

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2. Governance and Jurisdiction.

Governance and jurisdiction encompass some of the most con-tentious issues associated with the RTO transition. Several new and diverse institutions have been pro-posed by filing entities in order to comply with the minimum RTO characteristics and functions out-lined in Order 2000. Determining an appropriate set of RTO entities that will be able to perform the required functions while meeting FERC’s independence characteris-tic has presented a significant chal-lenge. Filing entities have pro-posed a variety of organizations and governance structures—along with the contractual relationships designed to link them together—to effectively and efficiently split up the required functions. For instance, proposals have been made for independent entities to perform market monitoring and market operations functions as well as several for-profit trans-mission companies (transcos). Significant questions remain as to how existing organizations and their respective governance structures will be incorporated into new RTO entities.

n terms of jurisdiction, FERC envisioned that participation in

RTOs should not be limited topublic utilities under its direct jurisdiction—i.e., jurisdictional entities—but should include inter-national entities (i.e., from Canada and Mexico) as well as nonjurisdic-tional U.S. entities that own or con-

trol transmission facilities (e.g., appropriate public power entities, cooperatives, federal power mar-keting agencies, and state and local entities). Significant legal and reg-ulatory obstacles must be removed before many of these entities can become full participants. Uncer-tainty also exists regarding the extent to which some of the RTO authority and functions conflict with those currently possessed by state regulators (e.g., transmission

vidually or directly; where appro-priate, RTOs may also satisfy func-tional requirements by performing functions jointly or taking advan-tage of out-sourcing opportuni-ties.

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Arrangements to address these “superregional” functions may be justified in terms of effi-cient scope and/or scale (e.g., mar-ket monitoring) or consistent application of business practices across RTO boundaries (e.g., trans-mission administration, transmis-sion planning and expansion, and interregional coordination). Unless development and implementation efforts are coordinated, there is a chance that the function will fail to meet each set of RTO require-ments, or that each RTO will not invest enough time and resources because of a lack of incentive to carry the effort alone. These are essentially examples of the “coor-dination” and “free rider” prob-lems in economics.

ven when RTO candidates have agreed to share respon-

sibility for a superregional func-tion, the parties must work out a specific arrangement that will both satisfy FERC’s requirements and meet their respective business needs. In the case of market moni-toring, for example, RTO partners would have to refine the market monitoring function design, deter-mine whether it will be performed by the RTOs or out-sourced to an independent market monitor, negotiate and approve operating agreements, and develop the nec-essary market monitoring infra-structure or select a candidate. Similar challenges apply to other functions that could be addressed

Uncertainty existsregarding the extent to

which some RTOauthority and functions

conflict with thosepossessed by

state regulators.

planning and expansion and con-trol over retail competition). Per-ceived conflicts in these areas may make it more difficult to gain widespread support for the RTO transition. Finally, questions have arisen regarding the limits of FERC’s authority to require partic-ipation in an RTO.

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FERC avoided this issue initially by indicating that participation was voluntary; however, industry stakeholders have openly challenged its ability to make the process mandatory for jurisdictional entities.

3. Super-Regional Functions.

RTOs are not required to perform all of the minimum functions indi-

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The open architecture provision gives RTOs the flexibility to enhance their organizations

in the future.

on a superregional basis. However, questions remain as to whether this approach duplicates effort and wastes resources and whether it is even relevant in a world com-prised of fewer and larger RTOs.

4. Transition Program.

Transi-tion program seams issues refer to the RTO implementation timeline, the process used to design and implement RTOs, and potential challenges arising from the “open architecture” provision of Order 2000. FERC outlined an aggressive implementation timeline in Order 2000, requiring public utilities to make compliance filings in Octo-ber 2000 or January 2001 and RTOs to be operational by Dec. 15, 2001. Based on evidence from similar transitions and progress to date, this implementation timeline appears overly optimistic, espe-cially for RTO candidates that are not emerging from an existing ISO.

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In addition, FERC did not provide guidance on the processes available to design and implement RTOs and will allow certain mini-mum functions to be implemented according to a staggered time-line.

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Such an approach may lead to greater coordination challenges if some RTO candidates reach an impasse in their development efforts or if neighboring RTOs move ahead with the deferred functions at different rates.

inally, the open architecture provision gives RTOs the

flexibility—subject to FERC approval—to enhance their orga-nizations in the future in terms of structure, geographic scope, and market offerings to meet emerging needs. This provision is not

intended to provide RTOs with an unfettered ability to change; rather, it aims to ensure that RTOs do not preclude natural and reasonable evolution. Even with such assur-ances, vagueness around the inter-pretation and potential use of the open architecture provision may result in seams issues. The nega-tive impacts on scope and regional configuration resulting from “switching” between RTOs remain a concern to FERC, transmission

the Northeast, Southeast, Mid-west, and West.

A. FERC’s New Paradigm

FERC’s Order 2000 clearly indi-cates that participation in an RTO by jurisdictional entities is intended to be voluntary. RTO compliance filings submitted in October 2000 and January 2001 largely reflect this principle—i.e., in most cases, RTO candidates sought to maintain the status quo or make relatively minor changes to existing arrangements. Evidence of FERC’s preference for fewer, rel-atively large regional energy mar-kets can be traced to staff reports on bulk power markets released in early November 2000.

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This trend gained further momentum with the FERC-mediated Midwest set-tlement proceedings and FERC’s endorsement of the resulting set-tlement agreement in early May 2001. It was reinforced by FERC’s rejection of several relatively small RTO candidates based primarily on insufficient scope and regional configuration.

On June 19, 2001, FERC held a technical conference on inter-regional coordination to facilitate discussion on various approaches to resolve seams issues.

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Many concerns were raised about the lack of guidance on significant configuration, structure, operation, and transition issues. Then, on July 12, 2001, FERC issued several land-mark orders—together referred to as the “consolidation and conver-gence orders”—aimed at consoli-dating RTOs across North Amer-ica.

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The rationale for these orders was likely based on the perceived

owners, market participants, and other industry stakeholders. Such movement—both actual and potential—increases uncertainty and may threaten the development and ongoing viability of RTOs.

II. Consolidation & Convergence Impacts

Consolidation and convergence of the North American regional energy market should be encour-aged if it serves to promote effi-ciency and reliability. This section examines FERC’s emerging policy direction with respect to RTOs and its impact on four major regions—

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need to resolve seams issues before they became entrenched through diverse RTO implementations. These orders represent a policy shift for FERC and have changed the way industry participants and observers view seams issues in competitive wholesale energy markets in the United States and North America.

FERC’s new policy direction—as outlined in its consolidation and convergence orders—describes a clear preference for a few large, consolidated RTOs:

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The Commission has been attempting to facilitate the development of large, regional transmission organizations reflecting natural markets since we issued Order No. 2000. We favor the development of one RTO for the Northeast, one RTO for the Midwest, one RTO for the Southeast and one RTO for the West. Through their indepen-dence from market participants, RTOs can ensure truly non-discriminatory transmission ser-vice and will instill confidence in the market that will support the billions of dollars of capital investment in generation and demand side projects necessary to support a robust, reliable and competitive electricity market-place. RTOs are the platform upon which our expectations of the substantial generation cost savings to American customers are based.

While there will be “start up” costs in forming a larger RTO, over the longer term, large RTOs will foster market development, will provide increased reliability, and will result in lower wholesale electricity prices. However, these savings will be delayed, perhaps significantly, if RTOs are permit-ted to develop incompatiblestructures and systems, or if we approve RTOs that do not encom-

pass wholesale market trading patterns.

The Commission ordered several entities in the Northeast and Southeast to initiate separate mediation proceedings to encour-age the formation of consolidated RTOs in those regions. It also indi-cated that entities in the Midwest and West regions should work toward a similar objective. Based on FERC’s indications and existing relationships between RTO candi-dates, the consolidated RTO land-scape may ultimately emerge as shown in

Figure 2

.s of this writing, recent policy

discussions and memo-randa

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indicate that FERC will continue along this path by re-

establishing the Dec. 15, 2001, deadline as a target for all jurisdic-tional utilities to join an approved RTO or face revocation of market-based rate privileges, offering to “fast track” mediation and settle-ment filings, and issuing RTO compliance orders by early November 2001. This evidence also suggests that FERC will pro-vide clear guidance to RTOs on achieving minimum characteristics and functions, perhaps through a new pro forma tariff comprised of standardized marketplace design and operation elements.

B. Regional Analysis

1. Northeast Region.

The North-east represents perhaps the most

Figure 2. Potential Future-State Regional Transmission Organization (RTO) Topography

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mature market region in terms of the implementation and operation of competitive wholesale energy markets. Three FERC-approved ISOs—PJM Interconnection, New York ISO, and ISO New England—reside in the region along with an expansion entity, PJM West. The emerging Ontario IMO, located across the border in Canada, is often considered within the broader Northeast context. While the three U.S.-based ISOs and the Ontario IMO have a history of working together to resolvestructure/operation seams issues, PJM Interconnection, New York ISO, and ISO New England each made separate RTO compliance filings with FERC. On July 12, FERC responded to these filings, conditionally approving PJM Interconnection, rejecting New York ISO and ISO New England, and ordering the relevant parties to participate in a FERC-led mediation session aimed at estab-lishing the foundations of a North-east RTO.

n Sept. 17, 2001, FERC released the report of the

administrative law judge (ALJ) presiding over the Northeast RTO mediation proceedings.

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Parties to the mediation developed a busi-ness plan addressing a wide range of issues—i.e., postmediation pro-cess, governance, market design, operations, technology assess-ment, transmission tariff, regional transmission planning, and inter-regional coordination—to serve as a blueprint for the Northeast RTO. The most significant areas of dis-agreement were related to gover-nance and market design/

implementation. As indicated by FERC, PJM Interconnection’s mar-ket model should be the plat-form;

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however, concerns were raised around the incorporation of “best practices” and the pace of the RTO transition. Rather than pre-senting singular governance and market design/implementation recommendations, the ALJ pre-sented options in the report.

Prior to July 12, it was unclear whether FERC would accept sev-

the U.S.-based regions and entities may be a short-term strategy while PJM Interconnection (including PJM West), New York ISO, and ISO New England sort out their differ-ences and the Ontario IMO becomes operational. The more pressing issue is determining how and when these Canadian entities would be enabled to participate.

overnance remains one of the most contentious issues in

the Northeast. Much of the discus-sion during the Northeast RTO mediation process focused on new governance structures and decision-making mechanisms. Par-ties to the mediation could not agree on governance fundamentals (e.g., composition and transition of the board of directors), resulting in a business plan with three gover-nance options and diverse sup-port. From a jurisdictional per-spective, the Northeast RTO would likely require participation by nonjurisdictional entities, such as the New York Power Authority (NYPA) and the Long Island Power Authority (LIPA), and may include Canadian entities, such as the Ontario IMO. While these enti-ties participated in the mediation process, it is unclear how a North-east RTO would specifically pro-vide for their participation. Also unclear is the relationship the Northeast RTO would have with state regulators with respect to functions with shared authority and roles, such as transmission planning and expansion (primarily RTO) and transmission siting (pri-marily state). Finally, questions remain as to whether stakeholders will test limits of FERC’s authority

eral RTOs in the Northeast. The consolidation and convergence orders and Northeast RTO media-tion process has provided a degree of certainty on scope and regional configuration for the U.S.-based ISOs. It has not, however, addressed whether a Northeast RTO would include relevant Cana-dian regions such as the Ontario, Quebec, and the Maritime prov-inces. Based on the criteria for determining appropriate scope and regional configuration, one could argue that entities in these regions, such as the Ontario IMO, should be included. Limiting par-ticipation in the Northeast RTO to

Governance remains one of the mostcontentious issues in

the Northeast.

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to mandate the formation of a Northeast RTO.

Prior to the consolidation and convergence orders and subse-quent mediation proceedings, the U.S.-based ISOs and the Ontario IMO had made some progress toward developing and imple-menting superregional functions. The ISO Memorandum of Under-standing (MOU) provided a vehi-cle for interregional coordination while other efforts examined the feasibility of shared functions (e.g., regional day-ahead energy mar-ket). Given the recent uncertainty and focus on consolidation in the Northeast, superregional functions seem to have slipped from the pol-icy agenda. This situation may change if and when neighboring entities seek to interact more closely with the Northeast RTO, such as with interregional coordi-nation activities similar to those that existed under the ISO-MOU. The parties could also build on arrangements being developed in the Midwest and West to facilitate participation by Canadian entities.

ssuming that FERC issues an appealing order in response

to the Northeast RTO mediation, the parties could agree to pursue the Northeast RTO in short order, thereby complying with the revised deadline to join an RTO proposed by Chairman Wood. The RTO implementation timeline and approach are potential problem areas. The Northeast RTO media-tion report contained three market design/implementation options, ranging in duration from approxi-mately 24 to 36 months for the overall transition. Questions also

remain as to whether the North-east RTO would be implemented incrementally with existing ISOs operating in parallel. If the parties continue to use a facilitated media-tion process to resolve governance and market design/implementation issues as suggested by the ALJ, an expedited timeline may be feasi-ble. Finally, the Order 2000 open architecture provision could enable entities such as the Ontario

tions. Both SeTrans and SPP/Entergy proposals were rejectedby FERC—mainly because of insufficient scope and regional configuration—while GridSouth and GridFlorida received condi-tional approval. Then, in one of its July 12 consolidation and conver-gence orders, FERC invited the RTO candidates and major non-jurisdictional entities in the region to participate in a mediation pro-ceeding to form a Southeast RTO.

On Sept. 10, 2001, FERC released the report of the ALJ presiding over the Southeast RTO mediation proceedings.

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Support for a Southeast RTO was essentially split between two groups, one advocating a Collaborative Gover-nance Model (comprised of Grid-South, GridFlorida, Entergy, and several market participants) and the other proposing an Indepen-dent System Administrator Model (comprised of SeTrans and several nonjurisdictional entities). While significant differences abound, the primary area of contention seems to be governance issues relating to for-profit and not-for-profit organi-zations under the RTO umbrella and division of responsibilities. Based on recommendations pro-vided in the mediation report, the ALJ appears to favor the Collabo-rative Governance Model.

he parties went into mediation with a relatively high degree

of uncertainty regarding the appropriate and feasible scope and regional configuration for a South-east RTO. Entities filing under GridSouth, SPP/Entergy, andSeTrans groups were required to participate in the mediation pro-

IMO to become full participants if and when appropriate.

2. Southeast Region.

Several entities in the Southeastern region of the United States indicated an interest in forming stand-alone RTOs during the first round of Order 2000 compliance filings. Among the potential RTO candi-dates were GridSouth, GridFlorida, SeTrans, and a proposed joint organization under Southwest Power Pool (SPP) and Entergy. Several important nonjurisdic-tional entities—e.g., Tennessee Valley Authority and Santee Cooper—were absent from the proposed RTO candidate organiza-

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ceedings, while GridFlorida filing entities and nonjurisdictional enti-ties were encouraged—rather than required—to participate.

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From the outset, this arrangement could have limited the scope and regional configuration of the resulting Southeast RTO. In the midst of the mediation proceed-ings, SPP decided to withdraw and investigate opportunities to join a Midwest RTO entity. Dis-agreement between the two groups on the proper RTO model threatens to further undermine appropriate scope and regional configuration. A Southeast RTO formed without the support of SeTrans and nonjurisdictional entities would be “riddled with holes”

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and would fall short of satisfying FERC’s criterion. Reso-lution of this issue will likely revert to FERC through any orders it issues in response to the mediation report.

Governance and jurisdiction were contentious issues through-out the Southeast RTO mediation process. SeTrans and nonjurisdic-tional entities, concerned about inherent bias a for-profit Transco could introduce into the execution of the RTO’s functions, favor supremacy of a performance-based, incentive-driven, not-for-profit organization—i.e., the inde-pendent system administrator (ISA). GridSouth, GridFlorida, and Entergy acknowledge the potential problem and propose to address it by sharing responsibilities among a for-profit transco and an inde-pendent market administrator (IMA). Differences also exist regarding selection of the RTO’s

board of directors, selection and removal of the ISA and IMA, and contractual relationships between the various entities. State regula-tors also presented a number of concerns, including the potential for cost-shifting under postage stamp rates and loss of authority over transmission asset transfers and retail competition programs. Again, resolution of these issues will likely revert to FERC through

market-based congestion manage-ment, for which separate models based on physical and financial transmission rights were proposed. Unlike the mediation proceeding for the Northeast RTO, this pro-ceeding did not focus on the RTO transition program to any signifi-cant degree. The Southeast RTO mediation report contained few ref-erences to specific milestones and target dates for implementation.

3. Midwest Region.

The Mid-west is currently split among three RTO candidates: Midwest ISO, Alliance RTO, and SPP. Each RTO candidate in the Midwest offers a distinctly different business model.

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The combination of these entities into a single Midwest RTO would create an organization with tremendous scope and scale. The region has also experienced high levels of member “switching” between RTO candidates, creating significant tension among partici-pants. In January 2001, FERC man-dated a settlement proceeding to resolve outstanding filings related to the desire of several major par-ticipants to switch RTOs, as well as the need for both RTOs to resolve seams issues apparent from their proposed models.

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FERC assigned an ALJ to work with Midwest ISO and Alliance RTO to resolve out-standing issues but did not specify that these entities should consoli-date into a single RTO. Subsequent FERC orders directing mediation indicate that failure to direct Mid-west ISO and Alliance RTO into a consolidation proceeding may have been a shortcoming.

A comprehensive settlement agreement was reached among the

any orders it issues in response to the mediation report.

uperregional functions and the overall transition program,

while important, have taken on a secondary role at this point. The majority of the parties to the South-east RTO mediation proceedings agreed on the concept of an inde-pendent market monitor (IMM), although many of the specific details of such an organization were not determined. A similar level of agreement-in-principle emerged for other super-regional functions such as parallel path flow and interregional coordination. One potential area of concern is

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parties on March 20, 2001, certified by the ALJ on April 8, 2001, and accepted by FERC on May 8, 2001. The cornerstones of the settlement agreement include (1) a “super region” with no pancaking of rates for transactions with source and sink within its boundaries, and(2) an Inter-RTO Cooperation Agreement (IRCA) that provides a framework for resolving seams issues between the two RTOs.

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The scope of the IRCA is especially notable as many of the structure/operation seams issues are addressed through a specific com-mitment to develop procedures and protocols to address seams issues.

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Many details regarding these procedures and protocols are under development.

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he largest single impact of the settlement agreement was

the transfer of Illinois Power, Com-monwealth Edison, and Ameren from Midwest ISO to Alliance RTO and the resulting effect on Midwest ISO’s scope and configuration. The departure of these companies cre-ated a large hole in the middle of Midwest ISO and led to increased uncertainty regarding the appro-priateness of Midwest ISO’s regional configuration. The poten-tial addition of several new entities to Midwest ISO’s area—including SPP and Mid-Continent Area Power Pool (MAPP) neighbors such as Manitoba—and effective implementation of the settlement agreement and IRCA will likely allow the Midwest ISO to comply with Order 2000. FERC has indi-cated that it will rule soon on Mid-west ISO’s updated filing. Scope and configuration have not been an

issue for Alliance RTO, with FERC confirming its acceptance of Alli-ance RTO’s scope and configura-tion in the July 12 Order.

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Governance and jurisdictional issues have been a challenge for Alliance RTO, particularly inde-pendence of the proposed corpo-rate governance structure. In a July 12 Order, FERC directed the Alli-ance RTO to select a business model within 45 days of the order

them nonjurisdictional—and expansion of its scope. It is work-ing to integrate SPP, Manitoba Hydro, U.S.-based MAPP entities, and two independent transmission companies (i.e., DTE Energy’s Inter-national Transmission Com-pany and TRANSLink).

The Midwest RTO candidates are providing the first tangible examples of superregional func-tions through the selection of a sin-gle independent market monitor (IMM) and the implementation of the settlement agreement. To date, Midwest ISO, Alliance RTO, and SPP have agreed to use the same IMM and monitoring program to comply with Order 2000.

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In addi-tion, through the implementation of the settlement agreement, these entities will implement protocols and procedures to further harmo-nize the remaining Order 2000 functions across the entire Mid-west. Some progress has been made to develop and circulate planned procedures and protocols, but a significant effort remains to implement these drafts by theDec. 15, 2001, deadline.

Constant change in the Midwest virtually ensures that the transi-tion program for each will con-tinue to be challenging and diver-gent. RTO candidates assert that Dec. 15, 2001 is still a viable “go-live” date and are still working dil-igently to meet this target. As of this writing, however, a consider-able amount of work still remains to implement the provisions of the settlement agreement and IRCA, and FERC has yet to rule defini-tively on compliance with Order 2000. In addition, questions remain

and install an interim independent board to alleviate concern over the current decision-making power of the Alliance Companies.

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The Alliance Companies submitted a revised business plan indicating that National Grid Company will likely become the independent investor and manager of the Alli-ance Transco. FERC has yet to rule on this business plan and its impact on the Alliance RTO’s com-pliance with Order 2000’s indepen-dence requirement. The Midwest ISO’s governance structure has been less problematic. Key chal-lenges have included the addition of new participants—many of

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as to whether a follow-on order will be issued to require Alliance RTO, Midwest ISO, and SPP to enter into a mediation proceeding aimed at consolidation. Recent comments by FERC on the imple-mentation of its July 12 orders and uncertainty as to its final position on the appropriate scope and regional configuration of the Mid-west may ultimately lead to a sig-nificant revision of the implemen-tation timeline in the near future.

4. West Region.

Three major entities would likely be involved in forming the West RTO: RTO West, California ISO, and West-Connect. While each of these orga-nizations has taken steps toward the formation of an RTO, they are all at very different stages of the process. California ISO has been operational since March 1998 and maintains that it satisfies most of the minimum characteristics and functions required under Order 2000 and is in the process of imple-menting enhancements to bring it into full compliance.

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RTO West has received a favorable response from FERC in several orders which, when considered as a whole, provide a certain level of approval. WestConnect has initi-ated the RTO development pro-cess, but has not yet made a com-pliance filing with FERC.

s early as April 2001, FERC indicated that the RTO West

scope and regional configuration was acceptable but that it wanted to encourage the development of a West RTO to encompass other regions in the West, including Cali-fornia (under California ISO) and the Southwest (then Desert STAR).

To this end, FERC ordered RTO West to “file a status report no later than Dec. 1, 2001, detailing, among other things, (1) resolutions of seams issues, (2) plans for partici-pation in RTO West by Canadian entities, (3) a framework for forma-tion of a West-wide RTO, and (4) a timetable for achieving a West-wide RTO end state which could resolve issues internal to the West.”

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Several parties have inter-

vened, asserting that the ratio-nale behind such a large RTO has not been fully developed. FERC maintains its original position that the parties should explore the possibility and report on any viable opportunities.

The West RTO concept presents a number of governance and juris-dictional challenges. First, RTO West has proposed to include Canadian entities (i.e., from British Columbia and Alberta) and non-jurisdictional entities (e.g., Bonne-ville Power Administration) among its founding members. The legal and regulatory arrangements that would enable these entities to

participate as members have not yet been fully developed. Based on the recent Northeast and Southeast RTO mediation proceedings, gov-ernance issues could also hinder a successful union between RTO West, California ISO, and West-Connect. Details on superregional functions also lack definition. It is unclear, for example, how func-tions such as market monitoring, parallel path flow, market-based congestion management, and interregional coordination would be executed by a West RTO to take advantage of economies of scale. Presumably these details will be provided as part of the status update mentioned above.

inally, the transition program to a West RTO has not yet been

fully addressed. While RTO West has received some approvals from FERC, it has also deferred compli-ance filings on several RTO mini-mum characteristics and functions. RTO West’s Dec. 1, 2001, status report filing should include a framework and timetable for achieving a West RTO, but it appears that discussions on these topics are lagging. Certainly the very different stages of develop-ment among the three main parties—RTO West, California ISO, and WestConnect—will present a significant challengefor any effort to develop and implement a West RTO in thenear future.

III. Conclusions

Despite recent progress, seams issues continue to hinder the development of competitive

F

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wholesale energy markets. It is widely acknowledged that these issues—at both the “configuration/transition” and “structure/opera-tion” levels—undermine the effi-ciency and reliability of regional energy markets. The purpose of this article was to assess the impact of RTO consolidation and conver-gence on high-level “configura-tion/transition” seams issues and to advance the debate on these complex policy challenges. So, how has RTO consolidation and convergence affected configura-tion and transition issues? Much policy-level progress has been made by FERC and other entities to effectively address these issues, especially during the most recent six months of the transition; how-ever, the remaining scope of work is significant and several of the most challenging issues remain unresolved. From an overall tran-sition perspective, FERC’s recent move toward a consolidation and convergence policy was a positive

and necessary first step. But it was merely another important step in the journey toward seamless energy markets. FERC, federal and state authorities, RTO candidates, market participants, and other industry stakeholders must take a more active role in resolving the configuration and transition seams issues raised here. Our primary concern is that the complexity of the issues and vested interests will needlessly hinder the overall tran-sition program. Nonetheless, we believe the movement toward consolidation and convergence has had a positive impact on the resolution of outstanding config-uration and transition seams issues. If FERC is able to maintain its current policy direction by using the policy tools at its dis-posal, and if work to resolve the most significant configuration/transition seams issues continues, a seamless energy marketplace may be achieved within the next few years.

j

Endnotes:

1.

Michael Bailey and Christopher Eaton,

Moving Toward Seamless Energy Markets: Evidence from the Northeast

,

Elec. J.

, July 2001, at 35–46.

2.

The formation of RTOs across the United States was initiated by the issu-ance of U.S. Federal Energy Regulatory Commission, Regional Transmission Organizations, Order No. 2000, Docket No. RM99-2-000, Washington, DC,Dec. 20, 1999. This order outlined four minimum RTO characteristics—independence, scope and regional con-figuration, operational authority, and shortterm reliability—and eight mini-mum RTO functions—tariff administra-tion and design, congestion manage-ment, parallel path flow, ancillary services, open-access transmission administration, market monitoring, planning and expansion, and interre-gional coordination. It also specified an open architecture requirement and filing and implementation timelines.

3.

Supra

note 1, at 36.

4.

Supra

note 2, at 238.

5.

Supra

note 2, at 258 and FERC, Order on Compliance Filing and Providing Further Guidance, Denying Requests for Rehearing, and Rejecting Filing on Alter-native Governance Structure, Docket Nos. ER99-3144-003

et al.

, Washington, DC, Jan. 24, 2001, at 15.

6.

For example, Southwest Power Pool (SPP)/Entergy, SeTrans, New York ISO, and ISO New England compliance filings were all rejected based partly on inade-quate scope and regional configuration.

7.

Order 2000 (

supra

note 2, at 246) con-tains the following language on point:“. . . Section 202(a) of the FPA does give [FERC] the authority, after consultation with state commissions, to fix and mod-ify boundaries for regional districts for the voluntary interconnection andcoordination of facilities.”

8.

For example, Order 2000 (

supra

note 2, at 462) provides for the performance of market monitoring by an independent entity, presumably with some form of contractual relationship with one or more RTO(s).However, many of the most challenging issues remain unresolved.

December 2001


65

9.

Efforts to develop and implement comparable power system and market operation infrastructure for the Mid-Atlantic region (PJM), California, the New England region, and New York have spanned several years.

10.

Supra note 2. The implementation deadline for a market-based congestion management is Dec. 15, 2002; the dead-line for a functional parallel path flow regime and planning and expansion capabilities is Dec. 15, 2004.

11. See, for example, FERC, Investigation of Bulk Power Markets—Northeast Region, Washington, DC, Nov. 1, 2000.

12. For details, refer to the technical con-ference proceedings in FERC, In the Mat-ter of Interregional Coordination, Docket No. PL01-5-000, Washington, DC, June 19, 2001.

13. Including FERC, Order on RTOFiling, Docket Nos. RT01-88-000 et al.; Order on Compliance Filing and Status Report, Docket Nos. RT01-74-002 and RT01-74-003; Order Granting, in Part, and Denying, in Part, Petition for Declar-atory Order, Docket Nos. RT01-86-000 and RT01-94-000; Order Initiating Medi-ation, Docket No. RT01-99-000; Order on RTO Compliance Filing, Docket No. RT01-95-000; Order Provisionally Grant-ing RTO Status, Docket No. RT01-2-000; Order Provisionally Approving RTO Participation Agreements and Tariff Changes, as Modified, and Deferring Consideration of Proposed Rate Changes and Disposition of Facilities, Docket Nos. RT01-98-000 and RT01-10-000; Order Granting Rehearing, in Part, and Granting Clarification, in Part, Docket Nos. RT01-35-001 and RT01-15-001; Order Initiating Mediation, Docket No. RT01-100-000; Order on Status Report, Docket No. RT01-77-000; and Order Rejecting RTO Filings, Docket Nos. RT01-34-000 et al., Washington, DC, July 12, 2001.

14. This language is contained in several of FERC’s July 12th consolidation and convergence orders.

15. Refer to Pat Wood, III, Discussion of RTO Progress, FERC Docket No. EX01-3, Washington, DC, Sept. 26, 2001.

16. The mediation report consisted of two documents: FERC, Administrative Law Judge Mediator’s Report to the Commis-sion, Docket No. RT01-99-000, and Busi-ness Plan for the Development and Implementation of a Single Regional Transmission Organization for the North-eastern United States, Docket No. RT01-99-000, Washington, DC, Sept. 17, 2001.

17. FERC, Order Provisionally Granting RTO Status, Docket No. RT01-2-000, Washington, DC, July 12, 2001.

18. FERC, Mediation Report for the Southeast RTO, Docket No. RT01-100-000, Washington, DC, Sept. 10, 2001.

19. Refer to FERC, Order Initiating Medi-ation, Docket No. RT01-100-000, Wash-ington, DC, July 12, 2001.

20. Supra note 18, at 58.

21. The Midwest ISO has proposed to become a not-for-profit entity while the Alliance RTO has filed to become a for-profit transco. Any potential company formed as a result of the integration of Midwest ISO and SPP would also become a not-for-profit entity according to the recent Draft Term Sheet.

22. On Jan. 24, 2001, FERC directed the companies of the Alliance RTO to enter into settlement proceedings to negotiate “seams” agreements with neighboring entities, mainly the Midwest ISO. See FERC, Order on Compliance Filing and Providing Further Guidance, Denying Requests for Rehearing, and Rejecting Filing on Alternative Governance Struc-

ture, Docket Nos. ER99-3144-003 et al., Washington, DC, Jan. 24, 2001.

23. FERC, Outline of Remarks of James P. Torgerson, President and CEO of MISO, Docket No. PL01-5-000, Washington, DC, June 19, 2001.

24. Procedures and protocols are to be developed for (1) coordinated transmis-sion planning, (2) security coordination, (3) congestion management, (4) indepen-dent market monitoring, (5) accommoda-tion of one-stop shopping, (6) compatible real-time balancing markets, (7) common generation interconnection agreement,(8) compatible business practices, and (9) dispute resolution procedures. Detailed arrangement on each of these will be reached on a staggered schedule. See FERC, Settlement Agreement Involving the Midwest Independant Transmission System Operation, Inc., Certain Transmis-sion Owners in the Midwest ISO, the Alli-ance Companies and Other Parties, Docket Nos. ER01-123-000 et al., Washing-ton, DC, March 20, 2001.

25. In FERC Docket No. PL01-5-000, Sup-plemental Comments of James P. Torger-son, President and CEO of MISO, June 19, 2001, the issue of differing imbalance market protocols posted by the Alliance RTO and Midwest ISO is highlighted as evidence of the challenging nature of the IRCA implementation.

26. FERC, Order on RTO Filing, Docket Nos. RT01-88-000 et al., Washington, DC, July 12, 2001.

27. Id.

28. FERC, Order No. 2000 Supplemental Compliance Filing, Docket No. RT01-87-001, Washington, DC, Aug. 31, 2001.

29. FERC, Submission of the California Independent System Operator Corpora-tion Describing Progress Toward Forma-tion of Regional Transmission Organiza-tion, Docket No. RT01-85-000, Washington, DC, Jan. 16, 2001.

30. FERC, Order Granting, with Modifi-cation, RTO West Petition for Declara-tory Order and Granting TransConnect Petition for Declaratory Order, Docket Nos. RT01-35-000 and RT01-15-000, Washington, DC, April 26, at 18.

energy market consolidation and convergence: seams issues revisited

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