On Friday, FERC announced it will hold a conference on policies regarding ISOs. Here is the notice in its entirety, as taken from the FERC CIPS online system, at
http://208.207.43.2/cips/Library.htm

For future reference, the FERC website is at:

http://www.ferc.fed.us/

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UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION

Inquiry Concerning the )
Commission’s Policy on ) Docket No. PL98-5-000
Independent System Operators )

NOTICE OF CONFERENCE
(March 13, 1998)

The Federal Energy Regulatory Commission (Commission) hereby announces that it will convene a public conference to discuss its policies concerning Independent System Operators (ISOs). The conference will be held on April 15-16, 1998. Primarily, the Commission intends to examine the future of ISOs in administering the electric transmission grid on a regional basis. It wishes to examine whether any changes to the Commission’s policies that affect the development of ISOs are appropriate in order to promote competition and reliability in bulk power markets. The Commission expects to address issues pertaining to the formation and responsibilities of ISOs, whether ISOs can serve as an effective vehicle for further industry reform, and the appropriate roles for federal and state regulators in ISO development.

I. Introduction

In Order Nos. 888 and 889 and their progeny (1) , the Commission established the fundamental principles of non- discriminatory open access transmission services. Nevertheless, many issues remain to be addressed if the Nation is to fully realize the benefits of open access and more competitive electric markets. The formation of regional ISOs may facilitate achievement of the Commission’s pro-competitive goals.

(1) See Promoting Wholesale Competition Through Open Access Nondiscriminatory Transmission Services by Public Utilities; and Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Order No. 888, 61 Fed. Reg. 21,540 (1996), FERC Stats. & Regs. 31,036 (1996), order on reh’g, Order No. 888-A, 62 Fed Reg. 12,274 (1997), FERC Stats. & Regs. 31,048 (1997), order on reh’g, Order No. 888-B, 81 FERC 61,248 (1997), order on reh’g, Order No. 888-C, 82 FERC 61,046 (1998). Open-Access Same-Time Information System and Standards of Conduct, Order No. 889, 61 Fed. Reg. 21,737 (1996), FERC Stats. & Regs. 31,035 (1996), order on reh’g, Order No. 889-A, 62 Fed. Reg. 12,484 (1997), FERC Stats. & Regs. 31,049 (1997), order on reh’g, Order No. 889-B, 81 FERC 61,253 (1997).

In the wake of the unprecedented restructuring taking place in the electric industry, the Commission has received several proposals for forming ISOs and a number of regions are also in the process of developing ISO proposals. The Commission has approved ISOs in California, the Pennsylvania-New Jersey-Maryland Interconnection (PJM), and for the New England Power Pool (New England). In addition, proposals have been filed for creating ISOs in the Midwest and New York. Utilities and other market participants in the Electric Reliability Council of Texas have also formed an independent system administrator. Members of the Mid Continent Area Power Pool and the Southwest Power Pool are discussing respective ISO proposals. In the Pacific Northwest, utilities have been involved in negotiations intended to lead to the formation of an ISO (Indego). Also, utilities in New Mexico, Arizona, and Nevada have agreed to pursue development of an ISO (Desert Star). In addition, 11 investor-owned utilities from Ohio to the District of Columbia have signed a memorandum of understanding to explore the creation of an independent regional transmission entity.

This activity, and the growing popularity of the ISO concept, presents important and even urgent questions involving the appropriate function and organization of an ISO, whether the Commission should be more active or prescriptive in this area, and whether the pro-competition goals of Commission Order Nos. 888 and 889 can be further advanced with ISOs. We note that 11 state commissions have recently filed a petition in Docket No. PL98-3-000 suggesting that the Commission generically address ISO issues.

Although the Commission has not prescribed a single approach to ISOs, it has provided significant guidance regarding the proper formation and functions of ISOs. Given the dramatic changes taking place in both wholesale and retail electric markets and the many proposals under consideration with respect to the creation of ISOs or other transmission entities, such as transmission-only utilities, it is time for the Commission to take stock of its policies in order to determine whether they appropriately support our dual goals of eliminating undue discrimination and promoting competition in electric power markets. Accordingly, the discussion below provides a description of topic areas that we would like to explore at the conference for purposes of refining our ISO policies.

II. Panels

The Commission will organize the conference according to the following panel discussions. Appended to this notice is an extensive list of questions and topics assembled by Commission staff for each panel discussion. Participants will find it a general indication of the scope of the Commission’s interest in relation to each panel. The Commission also invites interested parties to address their written comments to the questions listed as well as to any related ISO matters of generic interest.

DAY 1

Panel 1 Basic Structure and Role

What will be the significance of the ISO’s role in the evolution of wholesale and retail electric markets? Should the ISO control some or all aspects of grid operations in order to promote competition in wholesale and retail power markets? Must the ISO be a control area operator?

Panel 2 Regulation, Governance, and Independence

How should ISOs be formed, governed, and regulated, given the current and foreseeable restructuring of the electric industry?

DAY 2

Panel 3 Role of States

What is the appropriate role for states in the oversight of single-state and multi-state ISOs?

Panel 4 ISOs and Reliability

Can the formation of regional ISOs promote or enhance the reliability or security of the regional grid?

Panel 5 ISOs and Transmission Pricing

How might ISOs facilitate transmission pricing reform?

Panel 6 ISOs and Market Monitoring

Should ISOs have monitoring and sanctioning functions and, if so, can they be sufficiently independent to enable the Commission to rely upon their processes?

Panel 7 ISOs and FERC Regulation

Should the Commission require, to the extent it has the authority to require, transmission owners to form or join an ISO in the interest of preventing undue discrimination, mitigating market power, completing a nascent regional ISO, or achieving any other benefits?

III. Participation In Conference

The Commission believes that it would be beneficial at this juncture to further explore our transmission policies. To that end, we announce today a conference, as discussed above, to examine our current policies on ISOs and any appropriate changes to those policies to further our pro-competitive goals. The conference will take place on April 15-16, 1998, at the offices of the Federal Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C. 20426. The conference will commence at 1:30 p.m. on April 15 and at 9:30 a.m. on April 16, and will be open to all interested persons.

Persons wishing to speak at the conference must submit a request to make a statement in Docket No. PL98-5-000. The request should clearly specify the name of the person desiring to speak and the party or parties the speaker represents. The request must also include a brief synopsis (not to exceed three pages) of the issue or issues the speaker wishes to address. All requests must be filed with the Office of the Secretary, Federal Energy Regulatory Commission, 888 First Street, N.E., Washington, D.C. 20426, on or before March 31, 1998. The Commission may also contact industry experts to participate in the conference. The Commission will issue a further notice listing the speakers and panels for the conference.
In addition, all interested persons are invited to submit written comments (not to exceed 10 pages) addressing topics to be discussed at the conference. Comments must also be filed on or before March 31, 1998, in Docket No. PL98-5-000. After the conference, interested persons may also submit written comments, with all such comments due on or before May 1, 1998. All comments will be placed in the Commission’s public files and will be available for inspection or copying in the Commission’s Public Reference Room during normal business hours. Comments are also accessible via the Commission’s Records Information Management System (RIMS).

If there is sufficient interest, the Capitol Connection will broadcast the technical conference on April 15-16, 1998, to interested persons. Persons interested in receiving the broadcast for a fee should contact Shirley Al-Jarani at the Capitol Connection (703)993-3100 no later than April 3, 1998.

In addition, National Narrowcast Network’s Hearings-On-the Line service covers all FERC meetings live by telephone so that anyone can listen at their desk, from their homes, or from any phone without special equipment. Call (202) 966-2211 for details. Billing is based on time on-line.

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APPENDIX

Panel 1 Basic Structure and Role

What is the optimal size of an ISO? What factors (e.g., transmission technology, legal/jurisdictional distinctions, reliability councils) should affect the size of an ISO?

What are appropriate ISO operational responsibilities? Should the ISO operate SCADA (supervisory control and data acquisition) systems, switches, reactive power devices, transformer switching, phase shifters, and other transmission control equipment? Should the ISO control transmission facility maintenance schedules? Should the ISO control generation facilities that provide ancillary services, such as reactive power from generation, regulation and operating reserves? Should the ISO be able to direct the generation dispatch decisions of control area operators if the ISO itself is not a control area operator? Should the Commission further define the operational features of an ISO (i.e., should the Commission specify additional standards that define what is meant by an effective system operation and control), or should we allow substantial regional variation? What is the appropriate role for an ISO with regard to grid planning and expansion?
To ensure non-discriminatory transmission access, must an ISO be a control area operator? If there is a requirement that an ISO be a single control area operator and that is not feasible or cost-effective over a large area, would the result be an ISO that is too small to achieve other efficiencies like the elimination of pancaked transmission rates? Would a requirement that an ISO be a control area operator enhance competition and lower barriers to entry in the generation market? Does an ISO member that is also a control area operator have access to information that gives it an unfair advantage if it is also a market participant?

Some industry participants question whether ISOs will be permanent institutions or whether they are only transitional. Are ISOs merely part of a transitional phase for the electric industry or will ISOs be a permanent fixture in the industry structure for the foreseeable future? Is an ISO a stepping-stone to the independent regional transmission grid company? Should ISOs be designed consistent with the possible evolution to a regional gridco (i.e., a company that both owns and operates the high voltage grid)? Are there features of ISOs (e.g., stakeholder boards, not-for-profit status, ISOs serving as the operator of the PX) that will either enhance or inhibit their possible evolution into gridcos? What changes in ISO structure would be necessary to enable an ISO to more easily evolve into a gridco? Is a gridco (either for-profit or non-profit) preferable to a non-profit ISO that does not own transmission facilities?

Should the Commission encourage the formation of other transmission entities, i.e., private for-profit or government owned transmission entities? Would other types of transmission entities be better suited to sustain competition?

Panel 2 Regulation, Governance, and Independence

The Commission has not mandated a specific form of ISO governance, although it has emphasized that independence of the ISO “is the bedrock upon which the ISO must be built if stakeholders are to have confidence that it will function in a manner consistent with this Commission’s pro-competitive goals.” (2) In addition, the Commission has stressed that expertise is also critical, since transmission owners would be understandably reluctant to turn over control of their transmission assets to an operator that lacks the necessary operational expertise.

(2) Atlantic City Electric Company, et al., 77 FERC 61,148 at 61,574 (1996).

The recent trend has been toward a two-tiered form of governance: an independent non-stakeholder board, whose members are not affiliated with market participants, advised by committees of stakeholders. Within the ISO, the independent non- stakeholder board has the ultimate decision-making authority. Some have suggested that the two-tiered approach seems to have the advantage of combining independence with expertise. The two- tiered approach has been adopted in New England and PJM.

Should the Commission encourage or define a particular form of ISO governance beyond the independence principle? Should the Commission establish additional standards in the area of governance, but allow reasonable variations on a regional basis? Because transmission system owners do not have a controlling vote in an ISO, should the owners be allowed to establish any ISO rules that cannot be changed by vote of the ISO Board, as a condition for the owners to join the ISO? Should the ISO have the authority to modify transmission tariffs and operating rules without seeking the approval of the transmission owners? Should the Commission require more specificity on the division of liability between the transmission owners and the ISO? If the Commission is satisfied that an ISO’s governance arrangements ensure independence (i.e., are neutral relative to the economic interests of different classes of market participants and to different states), should the Commission give more deference to the decisions made by the ISO governing board? The experience in other countries suggests that ISOs need to make many adjustments in their early stages of development. The ability of ISOs to make necessary changes in their rules may be slowed down if the Commission employs the same review processes that have historically been applied to the rate filings of traditional vertically integrated public utilities and to power pools with governance structures dominated by transmission owners. Are there streamlined or light-handed regulatory processes that would allow independently governed ISOs to make needed rule changes while still ensuring that the Commission can function as a “backstop” to protect the public interest?

The relationship between an ISO and any power exchange (PX) is also an important issue to consider pertaining to ISO formation. The relationship between an ISO and PX can take on different forms: in California, the ISO will be the control area operator and the PX mandated by State restructuring legislation will be operated independently of the ISO as one of several possible exchanges; in PJM, the ISO operates the PX; and the Midwest ISO does not propose to be either a control area operator or to administer any centralized power exchange. Do the operational features of power systems require that the ISO and PX be one and the same in order for the marketplace to operate efficiently, or can efficiencies be maximized if such institutions operate independently? Should we require that an ISO be associated with a PX? If so, under what conditions?

DAY 2

Panel 3 Role of States

Panel 4 ISOs and Reliability

One purpose of an ISO that is a control area operator is to make an independent party, the ISO, responsible for at least short-term reliability. Increased competition in wholesale electricity markets has resulted in many new market participants, and has fostered a great increase in the number and variety of wholesale transmission and power sale arrangements, including ancillary services needed to accomplish transmission service. As the number of power sales continues to increase, the Nation’s high voltage transmission system is being used more extensively and in ways that differ from its original design. Recent experience indicates that line loading is increasingly problematic. As usage grows, it is increasingly important for regional stability that transmission providers have access to greater information in order to maintain the reliability of the grid.

The Commission is committed to ensuring that the rules and practices for reliable operation of the grid are compatible with open, non-discriminatory use of transmission systems. Regional ISOs would be aware of power flows over a broader geographic region and would be independent of the competitive pressures affecting market participants engaged in power sales and purchases. Are there opportunities for regional ISOs to address reliability concerns and thereby maintain, and even enhance, the reliability of the transmission grid in an open access environment? Should an ISO have a special relationship with regional reliability authorities or should it establish its own mandatory reliability rules? If so, should the rules be determined on a regional or national basis? What is necessary to ensure that regional ISOs will have access to all information required for them to determine power flows in their region? Should the ISO be responsible for both calculating and posting regional ATC values, along with the method and data used to determine these values? Should the ISO be allowed to implement voluntary redispatching of resources for transmission loading relief, before pro-rata curtailment? Would a regional ISO, as compared to an individual transmission owner, be able to manage congested interfaces and loop flow issues in a more efficient and non-discriminatory manner?

The North American Electric Reliability Council has encouraged the development of security coordinators. What rules should apply so that the ISOs’ responsibilities for maintaining reliability appropriately complement utilities’ obligations to maintain reliability at the retail level? Would it be preferable for the ISO to be the security coordinator in its region?

Would other entities through entrepreneurial efforts provide better reliability?

Panel 5 ISOs and Transmission Pricing
Regional ISOs can serve as a vehicle for making transmission pricing more efficient and thereby promote competition in electric markets. Pancaked transmission rates are a barrier to efficient trading because they add an embedded cost charge every time a transaction crosses a corporate boundary. A non-pancaked rate gives buyers and sellers of electricity greater access over a broader geographic market and thereby can remove one of the greatest barriers to trade. Further, regional ISOs may be able to take account of loop flows and price transmission congestion efficiently. Should the Commission establish a uniform method for transmission pricing in regional ISOs, or should transmission pricing be considered on a region-by-region basis? Is it more appropriate for a customer to pay an access charge based on the costs of the transmission owner where the load is located? Or, should the Commission require that access charges be set using a single, uniform rate? Should the Commission consider providing for incentive rates of return to the ISO or transmission owners? If so, how should such incentives be structured? Should they be designed to maximize throughput on the grid or more general measures of efficiency? Should the Commission encourage a uniform model for pricing transmission congestion? Could other transmission entities provide adequate pricing alternatives?

Panel 6 ISOs and Market Monitoring

An ISO is a regulated public utility. However, it is not a traditional public utility because it is typically a non-profit organization that provides services to all market participants and is not directly controlled by any single participant or class of participants. Because the ISO will be involved in the day-to- day operation of the grid, it will know more about the grid and perhaps market operations than any other regional organization. While the Commission cannot abdicate its responsibilities to ensure just and reasonable rates and non-discriminatory terms and conditions of jurisdictional services, ISOs have the potential to monitor the competitiveness of regional bulk power markets and assess the availability of non-discriminatory access to transmission and ancillary services. In orders issued in the California and PJM restructuring proceedings, the Commission (3) required the ISOs to develop market monitoring plans.
(3) See Pacific Gas and Electric Company, et al., 77 FERC 61,265 at 62,087 (1996); Pacific Gas and Electric Company, et al., 81 FERC 61,122 at 61,548-54 (1997); Pennsylvania-New Jersey-Maryland Interconnection, et al., 81 FERC 61,257 at 62,282 (1997).

As explained in PJM, a market monitoring function must be conducted in an independent and objective manner. Should the Commission require every ISO to have a market monitoring plan? Should a market monitoring plan allow the ISO to detect and report market power abuses (vertical and horizontal), assess undue discrimination in the provision of transmission and ancillary services, and assure compliance with the ISO’s rules? Would it be appropriate to include enforcement mechanisms (e.g., sanctions and mitigation actions) with a monitoring function? Must the Commission review any ISO-imposed sanction or would it be appropriate to act only upon complaint? Are there any limitations on the Commission’s authority to permit initial market monitoring to be conducted by ISOs? Should the Commission rely in the first instance on the ISO to monitor discriminatory behavior?

Is it necessary and feasible for ISOs to monitor bilateral markets? Are the potential remedies available to ISOs (e.g., price caps, bidding caps, loss of bidding privileges) likely to be effective if the underlying problem is structural? Should there be different market monitoring requirements for ISOs that do not operate centralized energy markets?

Panel 7 ISOs and FERC Regulation

In Order Nos. 888 and 888-A, the Commission elected not to mandate the formation of ISOs. We stated, however, that if it becomes apparent that functional unbundling is inadequate or unworkable in assuring non-discriminatory open access transmission, we would reevaluate our position and decide whether other mechanisms, such as ISOs, should be required. In Order No. 888-A, we recognized that it would be appropriate to allow some time to confirm whether the functional unbundling mandated by Order Nos. 888 and 889 will remedy undue discrimination before reconsidering our decision that ISO formation should be (4) voluntary. Given that the industry has now operated under the Order No. 888 open access regime for almost two years, the question now before us is whether we should go beyond our current policy of merely encouraging regional ISOs.

(4) Order No. 888-A at 30,249.

The Commission would also like to consider the related issue of whether all public utilities in a region should be required to participate in an ISO when an ISO proposal is geographically fractured. Should the Commission be concerned if some public utility transmission owners in a region refuse to join the ISO? Will a patchwork ISO within a region raise issues of undue discrimination? What should the Commission’s response be to a proposal that has so many geographic holes that it does not permit effective regional competition and may hinder assurance of reliability? Should the Commission define appropriate geographic boundaries for ISOs?

Should the Commission require membership in an ISO in order to remedy undue discrimination under Sections 205 and 206 of the Federal Power Act (FPA)? Would our authority to remedy undue discrimination be broader if an ISO proposal is geographically incomplete (e.g., if similarly situated customers were paying different transmission service rates — one pancaked and one not)? What is the Commission’s authority in these matters over transmitting utilities that are not public utilities?

The Commission has strongly encouraged merger applicants to join an appropriate ISO. Would it be appropriate for the Commission to generically find that a merger applicant’s participation in an appropriately structured ISO is necessary to find that a merger of jurisdictional facilities is consistent 5 with the public interest under FPA Section 203? Should the Commission continue considering whether ISO membership is necessary in individual merger proceedings?

FPA Section 202(a) provides that “the Commission is empowered and directed to divide the country into regional districts for the voluntary interconnection and coordination of facilities for the generation, transmission, and sale of electric energy.” This authority currently resides with the Department of Energy (DOE). If DOE were to use its authority, or delegate that authority to the Commission, should Section 202(a) be used to enhance the development of ISOs in a rational, comprehensive manner? Would Section 202(a) empower DOE or the Commission to define appropriate geographic boundaries for ISOs?