1. Electricity Deregulation in the US – Focus on the Alliance RTO
Presentation to the Illinois Commerce Commission Electric Policy Committee 11 July 2001
Electricity Deregulation in the US – Focus on the Alliance RTO

2. Overview… Background – The Macroeconomic Picture. FERC Orders.
Guiding Principles to assist with deregulation.
Comments on the Alliance RTO (“ARTO”).
Summary & Recommendations

3. Background - The Macro Economic Picture
The US economy has grown at unprecedented rates over the last 10 years.
It is not surprising that growth in the competitive segments of the economy has strained electricity infrastructure.
It is heavily regulated*.
In a regulatory environment, parties are incentivised perversely (consumers take equity risk in the utility as once approved, all costs are passed through to consumers. Regulators are forced into a consumer ‘watchdog’ role).
As a result the environment can become highly politicised and confrontational.
Negotiations can be lengthy delaying such investments, even if they are really necessary (the California experience is one that the industry, and regulators, can learn from).
As a result all parties currently involved in the electricity sector (federal govt., state regulators and industry participants) have had to reconsider how they participate and benefit from such growth.
General policy (to a degree forced by the current crisis) has been directed towards utilising competition as a substitute for regulation where possible.
It is also recognised that competition should increase consumer benefit.
These benefits are the same that consumers receive in all other competitive segments of the economy; reducing real prices and increased choice of products/services.
Rather than

4. The concept is to merge the electricity industry into the wider US economy, where possible (this is not a choice, it is a reality).
Currently, change is being driven by federal (FERC Orders 888,889 & 2000) and State regulators (retail deregulation).
Industry participants are loosing the opportunity to manage this change because we are all trying to adopt structures that improve individual positions (i.e. trying to retain our pieces of the pie rather than grow it).
There are massive amounts of literature to guide us and this has been done before, we are not recreating the ‘wheel’.
We can all learn from the Californian experience.
Don’t partially deregulate (i.e wholesale deregulation goes hand in hand with retail deregulation).
Promote choice (i.e Do not force participants into the spot market or alternately the bilateral market).
Other policy decisions (i.e. siting and environmental policies) affect the operation of electricity markets. The general framework must cater for the addition of supply to meet demand in a timely fashion.
Most commodities and financial sectors of the economy have been deregulated and provide examples of how to deregulate markets.

5. FERC Orders…
FERC Orders 888, 889 & 2000 form the basis for deregulation of wholesale electricity markets. After formation each ISO/RTO will hold ‘monopolistic’ decision rights for:
Transmission asset tariff setting.
System operation & reliability (inter & intra control area).
The combined effect of these Orders promote ‘open access’ to transmission networks and thus promote competition for supply of the commodity being electricity.
However, as to be expected the RTO’s have interpreted the Orders marginally differently. As a result RTO filings have been different in areas. In response FERC has not been altogether prescriptive.
To assess each RTO’s interpretation and test its adherence to the objective of the ‘open access’ the first task is to develop some ‘guiding principles’ that support the objective.

6. Guiding Principles to support ‘Open Access’ and competition…
Before developing frameworks for deregulation, a typical first step is to set out a series of guiding principles that support the objective. A standard set is provided below:
Ensure equal access to resources and information, the primary resource being the transmission network.
Support choice rather than incentivise specific outcomes.
Promote transparency including publishing of prices and RTO actions to improve short run production/consumption and long run investment decision making.
Promote best practice governance structures to ensure public confidence in the RTO/ISO’s operations.
A typical second step is to compare these principles to the RTO’s interpretation of the FERC Orders, in this case the Alliance RTO (“ARTO”).

7. Comments on ARTO…
ARTO is a ‘for profit’ company that has responsibility for transmission asset tariff setting and system operation/reliability (inter & intra control area).
Enron supports the ‘for profit’ model as it is consistent with comparable commercially successful models (i.e. the governance structure appears robust).
Note that the current structure, run by the 10 ARTO member companies is temporary, but is not the robust structure that Enron supports.
In making decisions about RTO structure and operation, each RTO had the choice whether to involve all affected participants (I.e. regulators, generators, traders, consumers etc) or exclude them.
ARTO choose to exclude them. Rightly or wrongly, this choice leads to the perception that the insiders (the 10 ARTO member companies) will ‘self deal’.
The way to test for ‘self dealing’ is again to compare the ARTO filings against the guiding principles.

8. Support choice rather than incentivise specific outcomes.
Ensure equal access to resources and information, the primary resource being the transmission network.
To meet this test all transmission assets connected to ARTO should be subject to the OATT.
All load other than Bundled Load and Grandfathered Contracts pay charges in accordance with the OATT.
This provision offers an effective mechanism to ‘contract out’ of the OATT.
It could be seen as an attempt to ‘self deal’ if ‘native load’ is determined to be Bundled or parties suddenly write Grandfathered Contracts.
Support choice rather than incentivise specific outcomes.
ARTO propose to use a ‘pay as bid’ mechanism to clear the imbalance market and to only allow balanced schedules. It is likely that these design elements will carry through to day 2 congestion management engine design.
These 2 attributes will incentivise parties to bilaterally contract rather than offer services into the imbalance market. This limits participant choice unnecessarily and may be more evidence of ‘self dealing’.
These provisions also increase uncertainty for owners of incumbent physical assets and make the role of the RTO as system operator difficult. They also increase the barriers for new entrants as they must be able to balance before entering.

9. Promote transparency including publishing of prices and RTO actions to improve short run production/consumption and long run investment decision making.
ARTO recognise that the current ‘contract path’ pricing environment is unsustainable (somewhat absurd when electricity flows according to the laws of physics not contract) as it combines both financial commitment with physical dispatch of resources across a path ignoring the properties of electricity. To remedy this ARTO are:
Separating transmission sunk cost from commodity cost.
Introducing LMP to manage real time dispatch of resources.
Proposing instruments to manage risk in the forward markets.
Separating market monitoring from the RTO.
These are all positive but some of the attributes in on the previous slide reduce the value of this framework somewhat.
Further given ARTO’s current governance structure and the potential for ‘self dealing’ there may be issues that remain unidentified.

10. Promote best practice governance structures to ensure public confidence in the RTO/ISO’s operations.
The current structure where the 10 ARTO member companies make all decisions regarding RTO operation, is less than best practice. Other affected stakeholders have NO decision rights.
Because of the potential for ‘self dealing’, the RTO may cater specifically to the 10 companies incumbent concerns.
Even though all parties are affected the current stakeholder process implemented by ARTO does not allocate any decision making power to stakeholders. This adds to the perception that ‘self dealing’ is occurring.
The proposed structure, where an independent body will make decisions, is less likely to be perceived as facilitating ‘self dealing’.
It is critical that the current ARTO structure does not impose costs or make decisions that bind the proposed independent party.
ARTO member companies need to told to focus specifically on appointing/attracting this independent party.

11. Summary & Recommendations to the ICC…
The electricity industry (wholesale and retail) must be deregulated to cope with increasing demand from the competitive economy.
The process of using competition as a substitute for regulation is complex and requires careful attention.
There are many real world examples of successful deregulation as well as literature to guide us through the process.
We can also learn from the California experience and avoid some of the pitfalls.
The key objective of the FERC Orders is to promote ‘open access’ and competition.
Robust competitive RTO structures should be based on a standard set of ‘guiding principles’.
Enron recommends that in assessing the ARTO, the ICC use these guiding principles to assess the proposed structures.

12. Enron asks the ICC to tell ARTO, or the relevant companies under its jurisdiction, to remove or properly explain why they chose the following provisions from ARTO proposals:
All load other than Bundled Load and Grandfathered Contracts pay charges in accordance with the OATT.
Pay as bid clearing and balanced schedules forming the cornerstones of the imbalance (and the day 2 congestion management engine) market as they incentivise specific outcomes rather than promote choice.
Further Enron asks ICC to tell ARTO to select an independent party for management/ownership of ARTO and discourage behaviour that will lock the independent RTO into particular practices if/when it is chosen/attracted.
If ARTO is unable to find this independent body that it set out its alternate proposal (i.e. an independent board) and show how this ensures independent shareholder decision making.