Report of the Electric Utility Regulation Committee

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I. INTRODUCTION

Over the past year, the Federal Energy Regulatory Commission (FERC or Commission) has issued a number of decisions that have significantly affected the evolution of regional transmission organizations (RTO) in the United States, as well as, decisions and policies that will have a significant impact on how competitive electricity markets continue to evolve. Since this Committee's last Report, the Commission has attempted to bring some order to RTO issues in the Midwest, and offered additional guidance (but no clear mandates) regarding RTO formation in other regions of the country. The Commission has also devoted significant time attempting to address a host of issues stemming from the 2000-2001 California energy crisis. The Commission has increased its emphasis on market monitoring and is in the process of establishing a new Office of Market Oversight and Investigation to perform market monitoring functions.

A number of critical electric utility regulation issues are emerging as of the date of this Report. These issues include the Commission's issuance of its Standard Market Design Notice of Proposed Rulemaking (SMD NOPR), the Commission's investigation into transactions in Western Power Markets during 2000 and 2001, and the Commission's ongoing effort to rationalize RTO development in certain regions of the country. The Committee will address these emerging issues in its next Report.

II. RTO ISSUES

A. Midwest ISO / Alliance

As 2001 began, the Midwest Independent Transmission System Operator, Inc. (Midwest ISO) and the proposed Alliance Regional Transmission Organization (proposed Alliance RTO) both were seeking Commission approval to operate regional wholesale electricity markets alongside one another. The proposed Alliance RTO stretched from Illinois to Northeastern North Carolina originally encompassing a large swath of Midwestern and Mid-Atlantic utilities, including industry behemoths Commonwealth Edison Company and American Electric Power Service Corporation. The Midwest ISO covered the rest of the Midwest and included several Midwestern utilities, including Cinergy Corporation, Wisconsin Electric Power Company, and LG&E Energy Corporation. On August 31, 2001, proposed Alliance RTO member International Transmission Company (International Transmission), the transmission-only affiliate of DTE Energy Company (DTE) respectively, decided to depart the proposed Alliance RTO for the Midwest ISO.1

The FERC attempted to sort out the muddled Midwestern RTO picture in a group of five orders issued on December 20, 2001. In these orders, the Commission determined that the proposed Alliance RTO did not meet the Commission's scope and configuration requirements" and, therefore, rejected the proposed Alliance RTO application.3 Additionally, the Commission approved the Midwest ISO's RTO application, making the Midwest ISO the first fully-approved RTO in the nation. The FERC ordered the companies participating in the proposed Alliance RTO (Alliance Companies) to explore how the Midwest ISO could accommodate their business plan, and left the door open to the Alliance Companies to participate in other RTOs.5

The Commission also approved International Transmission's move to leave the proposed Alliance RTO and join the Midwest ISO.6 International Transmission sought participation in the Midwest ISO as a stand-alone transmission company through Appendix I to the Midwest ISO Agreement. Appendix I allows independent transmission companies, companies unaffiliated with market participant assets such as generation, to participate in an RTO while retaining limited control over RTO functions. The Commission determined that until DTE's divestiture of International Transmission to a completely unaffiliated third party is complete, International Transmission could not take on RTO functions. But, once divestiture is complete, International Transmission will be able to take on responsibility, in coordination with the Midwest ISO, over a few limited RTO functions, such as local transmission planning, maintenance, and outage scheduling. …