THE FEDERAL AND REGIONAL ELECTRICITY INDUSTRY STRUCTURE AND ISSUES FOR THE MIDWESTERN UNITED STATES Randy Rismiller Manager, Federal Energy Program Illinois Commerce Commission

GOVERNANCE STRUCTURE The United States uses a federal system of governance. Governments at the national, state, and local level have a role in overseeing the electricity industry. The roles of the national, state, and local governments in overseeing the electricity industry are often complementary. Sometimes, however, disagreements arise. Such disagreements may ultimately be resolved by the judicial system. 2

THE FEDERAL ENERGY REGULATORY COMMISSION The Federal Energy Regulatory Commission (FERC) is an independent agency that regulates the interstate transmission of natural gas, oil, and electricity. With respect to electricity, FERC has jurisdiction over the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce. The FERC allows rates for wholesale sales of electricity in interstate commerce to be set by market forces, provided that a prospective seller is able to demonstrate that it does not possess market power and that the market will operate competitively. The FERC has responsibility for establishing the rates for use of transmission facilities, but state regulators generally have authority for the siting and certification of new transmission facilities. With respect to siting of transmission facilities, local government officials have some role in land use and similar issues. The FERC also sets rates for transmission ancillary services. These ancillary services include such things as reactive power/voltage control, regulation service/frequency control, spinning reserves, and non-spinning reserves. The rates for these services are either cost-based or market-based depending on whether sufficient competition exists to maintain a competitive market in these services. 3

REGIONAL TRANSMISSION OPERATORS (RTOS) There are currently six independent transmission operators in the United States. In the Midwestern U.S., transmission system operations are conducted by two different regional transmission operators --the Midwest Independent System Operator (Midwest ISO) and the PJM Interconnection. The Midwest ISO generally operates in a region stretching from western Pennsylvania to eastern Montana and from northern Kentucky north into and including the province of Manitoba in Canada (a fourteen state region plus Manitoba). PJM (Pennsylvania, New Jersey and Maryland) generally operates in a region stretching from the Atlantic Ocean to northern Illinois and from New Jersey south to Virginia. Both PJM and the Midwest ISO operate in Illinois. 4

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RTO FACTS Midwest ISO Serves over 40 million people. Approximately 280 market participants. Peak demand of 129,647 MW (reliability – set July 31st, 2006). 93,600 miles of transmission lines (150,635 kilometers). $2.6 billion average monthly settlement (Day-ahead, cleared w virtuals, 2007). PJM Serves over 51 million people. Approximately 500 members/customers. 1,271 generating sources with capacity of 164,905 MW Peak demand of 144,644 MW 56,250 miles of transmission lines (90,453 kilometers). $71 billion in energy and energy-service trades (since the regional markets opened in 1997). 6

GENERAL RTO OPERATIONS Neither PJM nor the Midwest ISO own transmission facilities. The transmission facilities are owned by transmission owning utilities, which may be investor-owned companies, municipally-owned companies or co-operatively owned companies. PJM and the Midwest ISO charge the companies and other customers that use the transmission system and remit the money to the transmission owning utilities. The rates that PJM and the Midwest ISO charge for access to the transmission grid are established on a zonal basis in accordance with rate cases that the transmission owning utilities file with FERC. PJM and the Midwest ISO each operate a real-time and day-ahead energy market. PJM and the Midwest ISO use the locational marginal energy prices (LMP) established in these markets to manage the congestion on the transmission system. 7

LONG-TERM RESOURCE ADEQUACY Although FERC has asserted jurisdiction to ensure long-term resource adequacy, FERC does not have the authority to order the construction of generation facilities or transmission facilities. Nor does FERC have any direct jurisdiction over demand side resource programs. FERC’s policy is to attempt to induce the development of needed generation and transmission infrastructure (and demand side resources) through rate incentives and other market-based mechanisms. For example, one method that FERC uses to assist resource adequacy is to require the load-serving entities to maintain resources (owned generation, purchase power contracts, or demand side resources) equal to their forecasted load plus an established reserve margin. Imposition of this resource adequacy requirement has led to the development of various types of market mechanisms for buying and selling capacity. 8

REGIONAL STATE ADVISORY COMMITTEES The state commissions in the Midwestern U.S. have formed organizations to facilitate their efforts to collectively provide advice to FERC, PJM, and the Midwest ISO. These organizations are the Organization of MISO States (OMS) and the Organization of PJM States Inc. (OPSI). The OMS: OPSI: The OMS and OPSI work to facilitate cooperation and consensus among the state commissions that are affected by FERC’s decisions and the implementation of those decisions by PJM and the Midwest ISO. The OMS and OPSI each have a Board of Directors made up of one commissioner from each of the member state commissions. Both organizations have an Executive Director to oversee day-to-day operations. 9

The Stakeholder Process at the Federal Energy Regulatory Commission, the Midwest Independent System Operator, and PJM Interconnection LLC FERC The Federal Energy Regulatory Commission (FERC) has jurisdiction over the transmission of electric energy in interstate commerce and the sale of electric energy at wholesale in interstate commerce. FERC is the regulator at the federal level in the U.S. government structure. FERC has a set of filing requirements that have been established by statute or developed through the rulemaking process or case history. FERC has an established process for any interested person, organization, or company to formally intervene in docketed FERC cases to become a party. Generally, after a company or other entity makes a formal filing at FERC to initiate a docket or sub-docket, any interested entity will have twenty-one (21) days to submit a request for intervention, comments, or protest. 10

FERC uses the submitted comments and protests to help decide the matter that is before FERC in the case. FERC may rule on the matter based on the comments and protests in the record. Alternatively, FERC may use a number of other mechanisms to gather facts to assist its decision-making process. For example, FERC may follow-up with an information request to the filer. FERC may also initiate a technical conference to gather information. As a formal means of establishing facts, FERC may initiate a formal hearing process administered by an administrative law judge. After the formal fact-finding process (if any) is completed, FERC will issue a formal Order on the matter. Parties that feel aggrieved by FERC’s decision have thirty (30) days to request rehearing or clarification. If any such requests are filed, FERC will issue an Order on the requests. FERC may maintain its position or make changes and issue a final decision. Parties that feel aggrieved by FERC’s final decision generally have recourse to the judicial system. 11

PJM and the Midwest ISO The regional transmission organizations (the Midwest ISO and PJM) have developed extensive stakeholder processes to assist in developing policy, overseeing operations, and advising on budgets and other financial matters. Each RTO has an extensive hierarchy of committees, subcommittees, working groups, and task forces that allow stakeholders to debate policy/operations on specific issues prior to any decisions or implementation. For example, in the Midwest ISO, the Interconnection Process Task Force would report to the Planning Advisory Committee. The Planning Advisory Committee reports to the Advisory Committee. The Advisory Committee reports to the Midwest ISO Board of Directors. In sum, there are 23 subcommittees and working groups that report to the Advisory Committee. PJM has an analogous arrangement. With the exception of individual sector meetings and meetings discussing confidential or proprietary information, all meetings of the Midwest ISO and PJM stakeholder groups are open to the public. Meeting minutes or notes are generally taken and are publicly posted on the RTOs’ website. 12

Wholesale Market Power Monitoring The Independent Market Monitor (IMM) for the RTO is responsible for evaluating the competitive performance, design, and operation of the wholesale electricity markets operated by the RTO. PJM and the Midwest ISO use separate market monitors. A combination of physical characteristics of electricity generation and transmission make the exercise of market power by market participants a concern in electricity markets. Specifically: Electric power must be delivered over a constrained transmission grid; Instantaneous balance of supply and demand; Storage of electricity is limited, inefficient and expensive; Generator concentration; Repeating bid structure of markets facilitates tacit collusion among market participants; Market entry is difficult; and Limited demand response 13

In Order 2000, FERC highlighted the need for RTO independence from market participants to ensure that the wholesale electricity markets and the associated transmission service would not be subject to manipulation or undue influence from entities engaged in profit-making activities. The logic behind the independence requirement is that a truly independent RTO would create confidence among market participants that there was a level playing field and would also encourage new entrants into both the market and transmission functions of the wholesale regional marketplace. Order 2000 also identified market monitoring as one of the core functions that an RTO must provide. Since Order 888, FERC has moved toward a more active approach with regard to the need for and benefits of market monitoring. However, FERC still maintains a very flexible approach to market monitoring by allowing RTO participants to identify appropriate market monitoring activities that would meet certain broad standards. This flexibility is not always beneficial. 14

There are numerous provisions in the tariffs of the Midwest ISO (Module D) and PJM (Attachment M) that pertain to market monitoring. While not an exhaustive list, an effective market monitor will generally possess the following traits and authorities: The market monitor must be independent of both the RTO and the market participants. The market monitor should have all the tools and resources necessary to monitor all RTO markets as well as related energy markets. This includes staff, data, funding, etc. The market monitor should identify market problems and recommend necessary rule changes to the RTO Board of Directors. The market monitor should monitor all wholesale markets administered or facilitated by the RTO, including the spot and energy, ancillary-services, capacity and transmission markets. The market monitor should have the authority to participate in stakeholder discussions, proceedings at the state commissions, etc. The market monitor should have the authority to file comments and reports with both the FERC and the relevant state commissions. 15