Ensuring Consideration of the Public Interest in the Governance and Accountability of Regional Transmission Organizations

Summary

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Regional Transmission Organizations (RTOs) have become an integral element of the Federal Energy Regulatory Commission's (FERC) encouragement of wholesale electricity markets. These organizations operate regional electricity transmission systems for two-thirds of the load in the United States. Yet years after the first RTOs were approved by the FERC, the adequacy of their governance structures and the ways in which they are held accountable for their actions are significant areas of debate and controversy. Using ISO New England (ISO-NE) as a primary example, we begin by outlining the current RTO governance structure and highlighting some pitfalls inherent in that structure. We go on to more closely question to whom RTOs are held accountable. Finding severe limitations in how the current structures protect the "public interest," we outline several strategic and tactical recommendations to ensure that considerations of the public interest are reflected in RTO governance. The most important of these is a clear affirmation by the FERC that it will not approve market-based pricing for wholesale power transactions in organized markets in the absence of an RTO governance structure that is adequate to ensure that the RTOs will design, monitor, and manage such transactions to produce just and reasonable rates within the meaning of the Federal Power Act's requirements.

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Ensuring Consideration of the Public Interest in the Governance and Accountability of Regional Transmission Organizations

I. INTRODUCTION

A. Public Interest Accountability

The sale of electricity in wholesale transactions has vital implications for the security, the economic stability, and the environmental health of the United States. Those transactions were important even in the 20th century, when sales for resale made up a relatively small portion of America's energy system.3 They have become essential in the 21st century, as bulk transmission increases and "approximately 2/3 of U.S. electricity flows through grids managed by six RTOs."4

Our nation relies upon the FERC to ensure that tiiose wholesale transactions will lead to "just and reasonable rates" that further the public interest.5 As the United States Supreme Court held more than thirty years ago, the reference to the public interest in the Federal Power Act "is not a broad license to promote the general public welfare," but it does give the FERC the authority, and the duty, to consider some matters going beyond me direct financial interests of buyers and sellers in wholesale transactions.6 As the Court said, "[f]or example, the Commission has authority to consider conservation, environmental, and antitrust questions."7 In addition, the FERC may consider other national policies, such as the prevention of employment discrimination and unfair labor practices, not in an effort to eradicate diem, but to the extent necessary to ensure that such bad acts are not reflected in rates, terms, and conditions set out in the tariffs filed by parties regulated by the FERC.8 The FERC, in current proceedings such as its future-capacity dockets, is considering other matters beyond the direct interests of buyers and sellers in wholesale transactions. These include long-term reliability and future capacity, environmental impacts, and the economic concerns of non-participants who are indirectly, but heavily, affected by wholesale power and transmission transactions.9

For most of the 20th century, the FERC relied on cost-of-service regulation to determine whether wholesale power transactions met the statutory standard. However, for well over a decade, the FERC has increasingly relied on market forces rather than cost-of-service regulation to provide the "just and reasonable" rates, terms, and conditions of service that the Federal Power Act requires it to enforce in wholesale electricity and transmission markets.10 In doing this, the FERC has relied on a two-part strategy: allowing bilateral wholesale power transactions in some parts of our nation, and encouraging the growth of "organized markets" in most of the United States.

In both cases the FERC has recognized that open access to transmission facilities is an essential part of healthy wholesale markets. In areas with organized markets, it has relied significantly on RTOs to provide the market rules, the market monitoring, the transmission terms, and recently the resource planning functions necessary to support a conclusion that cost-of-service regulation is not needed to ensure "just and reasonable" rates and terms that promote the public interest.11 The FERC's orders have now recognized RTO status for several regional organizations. Indeed, "[m]ore than half the United States' load is now served by RTOs or ISOs" and tens of billions of dollars are now paid and received under the rules that the RTOs design, file at the FERC, and administer.12

Almost a decade after the opening of multi-state pooled markets, critiques of RTOs still abound.13 Indeed, their overall effectiveness and value are still far from fully accepted (both beyond and within the parts of the United States where they have been established).14 The FERC is well aware of these concerns and has suggested some paths toward progress on the matter in its July 2, 2007 advance notice of proposed rulemaking on Wholesale Competition in Regions with Organized Electric Markets (ANOPR).15

As the recommendations in this article suggest, we believe that the FERC is entirely correct in designating wholesale competition in regions with organized electric markets as an important matter. In addition, for the reasons set out below, we believe that several of the specific suggestions that the FERC has mentioned in the ANOPR warrant recommendation of adoption.16 However, one concept-the Hybrid Board upon which the ANOPR seeks comments-may well be a case in which the cure is worse than the disease.

Fundamentally, there are two specific concepts the FERC has not addressed in the ANOPR that are particularly important for it to explicitly recognize. The first is that the administration of wholesale markets and transmission should routinely consider the larger public interest, in addition to the direct financial interests of those that buy, sell, and transmit power under each RTO's rules. 17 The second is that the FERC make clear that, because it relies on each RTO's rules to ensure that wholesale markets produce just and reasonable results, it is prepared to withdraw its approval of market-b...

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