Issues & Analysis: Electric transmission gridlock

OGJ Online Senior Power Writer Ann de Rouffignac examines the Federal Energy Regulatory Commission’s proposal to make the nation’s transmission operate more efficiently and the industry’s response to it.

California is short of power. The Northwest has little to spare. Wholesale electricity prices are soaring. Insufficient generation is often fingered as the culprit to a growing US power crisis. But the real Achilles heel of the system could be transmission.

Today, experts lay much of the blame for the electricity wholesale market’s failure to thrive on a congested and balkanized transmission system which discourages competitive transactions. And right now many suggest the system, a vast collection of wires under different ownership which grew up in a hodgepodge fashion, is in trouble.

“Every time we look at a power plant, I ask can I get into the local transmission system? Can I move the power around to service the market?” says Ralph Eads, executive vice-president at El Paso Energy Corp.

The Federal Energy Regulatory Commission has proposed a solution to the transmission system’s woes. A clearer picture could begin to emerge in October after owners of the nation’s various transmission systems tell FERC whether they plan to join regional transmission organizations (RTO).

But industry experts are not at all sure FERC’s plan will resolve congestion on the electric grid. Early indications suggest these proposals could quickly become mired in turf wars.

Transmission constraints have amplified California’s summer nightmare. On July 19, the California Independent System Operator (ISO) called a power emergency after capacity on Path 26, the major transmission artery carrying power from northern to southern California, reached its limits. With no more power available, California utilities began shedding voluntary interruptible load.

Even in Texas where there is sufficient generation to weather triple digit temperatures, power flow to certain regions has been restricted. On Aug. 4 for the third day in a row, the Electric Reliability Council of Texas (ERCOT) ISO rejected all unscheduled transmission transactions from Reliant Energy Inc.’s territory into TXU Corp.’s territory to avoid overloading the lines.

New York City, specifically Long Island, cannot import more power during peak demand because of transmission constraints. New York has been spared a crisis so far this summer because blistering heat waves hit the West instead of the Northeast.

“Although the transmission system represents only about 10% of the sector’s assets, it now holds the key to the liberalization of energy markets,” says Mark Smith, associate director of North American Power for Cambridge Energy Research Associates.

In 1999, the Federal Energy Regulatory Commission passed Order 2000-a sweeping mandate to reorganize the nation’s electricity transmission system. The order requires all interstate transmission-owning utilities, not already a part of a working independent system operator (ISO), to submit plans to join or form an RTO by Oct. 15 or explain why they don’t plan to participate. ISO members have until Jan. 15 to file with the FERC.

At this point, FERC says it is not sure how many RTO proposals it will get because participation is not mandatory.

Plenty of talk

“There’s been a lot of talk but not much filed yet,” says Barbara Connors, FERC spokeswoman. Only two filings, one from the Alliance Regional Transmission Organization and another from Entergy Corp. have been submitted so far. Both were sent back for adjustments, she says.

Some large regional utilities such as Southern Co. and the giant federally owned Tennessee Valley Authority (TVA) are talking to neighboring RTOs, but they haven’t announced any intentions to join or form an RTO. With 28,502 Mw of generation and 17,000 miles of transmission in Tennessee, Kentucky, Mississippi, Alabama, and Georgia, TVA is a key player surrounded by several proposed RTOs.

If TVA opts out, then the electricity market and transmission system in the mid-Mississippi Valley area will not be as rational as it could be. This worries FERC.

“We can’t have big chunks of the system out,” says Connors.

TVA is holding discussions with neighboring utilities but has not reached any decisions yet on whether it will participate, says John Moulton, TVA spokesman. The American Public Power Association an industry organization representing municipal utilities and federal power organizations is concerned about the operations and power that the new RTOs will have.

“What if the transmission system is overloaded? Whose load will be cut or redispatched?” says Dave Penn, association deputy executive director.

Penn fears for-profit RTOs owned by transmission companies will not treat participants that don’t own an equity stake fairly. Still, he argues RTOs are necessary.

“We strongly believe in independent RTO institutions,” he says. “But Order 2000 hasn’t done it.”

Pancakes, seams and turf

He says FERC needs to develop RTOs that will make nondiscriminatory transmission decisions and eliminate rate ‘pancaking’-multiple transmission charges for power transactions crossing multiple control areas. Pancaking reduces liquidity and is considered a major deterrent to developing an efficient regional wholesale energy market.

Penn points out that Alliance, a for-profit transmission company that has filed as an RTO, is of such a shape and scope that it might hinder development of a competitive market.

“The Alliance is shaped like a Russian scimitar,” says Penn. “They will whack anybody who tries to make a transaction west to east. It looks more like a barrier.”

While Order 2000 sets out the guidelines for the RTOs, it does not specify what type of organization must be formed. The RTO can be a for-profit transmission company like Alliance, an independent nonprofit system operator like the PJM and California ISOs, or an independent transmission organization like the Northwest Regional Transmission Organization whose members will be utilities, a large public power entity, and a for-profit transmission company formed by several other utilities.

An RTO could also be formed by a National Electric Reliability Council region and a for-profit transmission company. Southwest Power Pool, a NERC region, and its participating utilities are talking with Entergy about an RTO. Entergy intends to form a for-profit independent transmission company.

FERC has repeatedly encouraged the parties announcing plans to form RTOs to get bigger. The agency would like to see The Southwest Power Pool (SPP) seek “broader participation” in its plans to form an RTO, says SPP spokesman John Marschewski. While SPP is trying to abide by the suggestions, merger talks with neighboring Midwest Independent System Operator (MISO) have stalled, he says.

Alliance, a for-profit RTO will be set up as a transmission company (transco) rather than a nonprofit independent system operator, says Craig Baker, senior vice-president for public policy at AEP, one of the founding members.

“Members can divest their assets into it or not divest or just take operating services,” he says. The Alliance is formed by the operating utilities belonging to American Electric Power Co. Inc., Consumers Energy Corp., Detroit Edison Co., FirstEnergy Corp., and Virginia Electric & Power Co.

It was the first RTO to file with FERC. In a letter to FERC in June, Alliance agreed to some changes. Alliance will now allow new members to participate in the same way as the owner/members. It also agreed not to allow one passive owner to act alone and control Alliance actions.

Active ownership interest in Alliance would be limited to 15% for each class of market participants, including transmission owners. The RTO also pledged to pursue seams agreements with adjoining RTOs and eliminate rate pancaking.

Alliance will decide where transmission upgrades or projects are needed, says Baker.

“The transmission owners have the first right to build the suggested transmission projects. If they don’t choose to do so, the transco picks up the option, builds the project, and then rolls the costs into its own rate base,” he says.

Baker explains the option for the transco to build transmission frees up the utility members to pursue other interests. He says the transco will have the economic incentive to build transmission and relieve congestion.

Alliance is considering market-based rates that will give price signals to the transco and the member/owners to ante up and solve the congestion problems.

Because the Alliance can make a higher rate of return on building transmission, there is more incentive to do so. It is also considering issuing rights-physical or financial-to the builder of the new transmission path created. The transmission owner could auction these, he says.

“The basic difference between a transco and an independent system operator is today’s independent operator transfers wealth to the marketers, customers, or generators but not to the transmission owners,” Baker says.

Northwest solution

In the Northwest, eight utilities including government-owned Bonneville Power Administration (BPA), say they will file an application to form an RTO to be called Northwest Regional Transmission Operator. The RTO will operate as an independent system operator. One of its members will be an independent for-profit transmission company comprised of Avista Corp., Montana Power Co., Portland General Electric Co., Puget Sound Energy Inc., and Sierra Pacific Resources.

Sources close to the RTO say Bonneville would not have participated if ScottishPower PLC unit PacifiCorp had joined the for-profit transmission company. And without Bonneville, which owns about 75% of the high voltage transmission in the RTO’s area, the RTO could not work.

PacifiCorp and BPA are members of the Northwest RTO but not part of the transmission company. The independent transmission company (ITC) (exact name to be determined) will be a wires company only and be completely independent from the generation interests of the utilities contributing the transmission. Participants say the incentive to divest transmission into the transmission company is a judgment call for each utility.

At this point, the transmission company has no commitments from its member utilities to divest their transmission assets, says Carolyn Cowan, director of transition business development for Sierra Pacific Power.

While the independent transmission company will have an incentive to remedy congestion, the big questions of how the RTO will handle investment to relieve congestion is still being debated.

“Whatever the RTO comes up with for congestion management, we will take those signals and build the transmission,” says Cowan. “As a for-profit ITC we can raise the capital easier to build the transmission.”

But a BPA spokesman says the agency is still unsure of the answer to these issues.

“We are struggling to answer how the RTO will fund improvements or allocate investment,” says Ed Mosey, Bonneville’s spokesman. “Will it be pro-rata of allocating costs among members or will the organization absorb the costs?”

Mosey suggests federal legislation may be the only solution to permitting federal entities such as Bonneville to participate in an RTO. Bond covenants require control of the assets rest with the public entity.

“We will have to relinquish control of (transmission) assets even though we still own them,” he says.

MISO largest

So far, the largest RTO to be formed is MISO, headquartered in Indianapolis. When fully operational, utilities with more than 52,000 miles of transmission lines and 78,000 Mw of generation will belong. Members consist of 16 transmission owners, including utilities, coops, and American Transmission Co., (ATC) a for-profit transco.

ATC was formed earlier this year when the Wisconsin lawmakers required the state’s utilities to turn over their transmission assets to an ISO. Its members include Alliant Energy Corp., Madison Gas & Electric Co., Wisconsin Electric Power Co., Wisconsin Public Power Inc., and Wisconsin Public Service Resources Corp.

The members have informally committed to transfer their transmission assets to the company. Participating companies will own a stake in ATC based on their individual asset contribution to the transco.

Investments in the transmission facilities will be managed by ATC and will support competition without favoring one member over another, ATC management says. Presumed higher rates of return are expected to give ATC an incentive to respond to congestion and market signals with appropriate investments in transmission.

MISO is still contemplating what approach it will use to attack congestion on a regional level and give transmission owners the incentive to build new transmission. Members are considering a locational marginal pricing proposal similar to one used in PJM Interconnection LLC, as well as other arrangements, says Mary Lynn Webster, spokesperson for MISO. Locational marginal pricing means that power prices will vary at a given time and point, according to the level of demand.

But the MISO will not own the transmission assets nor be operated by a stakeholder board. The question of incentive remains.

“The ideas of locational marginal pricing and independent boards are very elegant farsighted provisions,” says Judah Rose senior vice-president of ICF Consulting, Fairfax, Va.

But he says they stop short of getting to the root of the congestion problems. The industry is simply moving faster than the regulators can respond, he says.

PJM Interconnection will file as an RTO. “We think we meet most of the criteria.” says Melissa Josef, spokesperson for PJM.

PJM, an independent system operator with one of the most liquid markets in the US, is also the largest single control area, spanning New Jersey, most of Pennsylvania, Maryland, Delaware, Washington DC, and parts of Virginia.

Rick Drom, general counsel of PJM, says locational marginal prices allow generators to charge what the congestion is worth and that provides the proper signals to identify where congestion needs to be relieved.

Transmission owners will use these signals to propose projects. PJM also has developed an expansion and congestion management plan. If PJM’s independent board agrees that a project dovetails with the overall plan for the region, then the transmission owner can go forward with it. PJM can also order transmission owners to make certain investments.

“The transmission owners agreed voluntarily to be bound by this expansion plan,” Drom says.