INTERSTATE POWER MARKETS – THE MIDWEST VIEW A PRESENTATION FOR THE NATIONAL GOVERNOR’S ASSOCIATION EXECUTIVE POLICY FORUM

I.Background A.Need for regional wholesale market – no matter how well your state structures retail access, without a robust wholesale market, it won’t work – compare CA with PA. B.FERC Order 888 – creating open access transmission grid. To be taken up by U.S. Supreme Court in Challenge to FERC authority by various states. If reversed, the ability to foster regional markets may be in jeopardy.

C.FERC Order 2000 – need for stronger hammer. FERC noted it could exercise greater authority but chose not to. Voluntary compliance is no compliance at all. Sharp contrast to 888. D.History of Midwest/Alliance RTO – MISO and Alliance used different models (profit v. non-profit). MISO spent more than $120 million in reliance on FERC orders. FERC then favored (thru approval of ITC rate proposal) Alliance in subsequent orders. Merger talks were fruitless. Settlement of IL. Power withdrawal allowed for preservation of MISO. Creation of virtual RTO. All RTO functions performed by “virtual” RTO.

II.Functions of Virtual (or real) RTO – from Order 2000 A.Market Monitoring – one problem with CA is that nothing was done after market monitoring revealed a coming storm – 1999 – not just an environmental thing – no one entity could act on information. B.Congestion Management – is there incentive to deal with needed upgrades? Dumont transormer in IN would, if upgraded, benefit MI retail access program. AEP would not benefit. RTO will help.

C.Security Coordination – Congressional attempts to give more federal authority have thus far failed. NERC may contract out this function. Important that RTO is responsible for reliability (unlike CA). D.Rate Administration – single rate (with ZTA) throughout region established by settlement. E.Inter-Regional Coordination – coordinating the planning and expansion of grid.

III.Role of States in Development of Interstate Power Markets A.Less Parochial – states realize need for federal oversight. Need to delineate federal/state roles. B.States, by unifying in region, were able to direct negotiations toward single rate in Midwest.

C.Like generation, states must create incentives for building new transmission, “sell” public on need. D.Effect of state rate caps on transmission pricing – need for competitive transmission rates.