RTOs--to join or not to join? CRN research zeros in on RTO costs, benefits and co-op experiences.

• Author: Dunn, William Jr., H.
• Position: Regional Transmission Organizations, Cooperative Research Network

The march of regional transmission organizations (RTOs) across the country is placing big decisions with far-reaching implications before G&T cooperatives. Are RTOs--the traffic cops for the grid useful and suitable for coops? Some co-ops have already joined RTOs and others are looking into membership. But reports from the field have indicated that while there are benefits, there are also problems with RTOs and hidden costs for many co-op members.

NRECA's Cooperative Research Network (CRN) commissioned a research project to survey co-op executives on their experiences with RTOs and to identify key organizational, technical, financial and legal issues that co-ops must be aware of as they evaluate,joining an RTO. To gather the most relevant information possible, CRN interviewed 17 co-ops, mostly G&Ts, about their experiences with RTOs. These interviews provide important insights into the decision-making process required for determining the merits and potential pitfalls of RTO membership. The full results of the CRN research have been made available to all NRECA member co-ops through cooperative.com and via CD-ROM that will be mailed to all systems in January 2006.

The process of determining whether to join an RTO is very specific to the RTO being considered and the unique situation of the cooperative. Each RTO has its own set of policies and characteristics, even if they operate in similar electricity markets. What is right for one co-op is not necessarily the right course of action for another co-op.

A cooperative that finds itself in the situation of joining an RTO or participating in the development of an RTO (or RTO-like organization) will need to undertake a through examination of several factors. This article attempts to provide an overview of the key factors that a co-op should consider when weighing the decision to join an RTO.

RTOs Are Evolving Organizations

The FERC initially created RTOs by encouraging utilities to voluntarily form regional entities to help administer power supply transactions in the newly evolving regional power markets. The goal was to make those transactions more efficient, help ensure reliability, and remove any remaining discrimination in the provision of transmission services. An RTO controls the operation and use of the transmission system instead of the local transmission owners, and it sets the terms and conditions for use of the transmission system in the region. The RTO is also responsible for regional planning for new transmission and for allocating the costs associated with new transmission. Figure 1 identifies the existing and currently proposed Regional Transmission Organizations.

One of the fundamental underlying characteristics of RTOs is that they are not static organizations. RTOs are very dynamic, with rules and procedures continually changing. For example, during the preparation of the CRN report, the Federal Energy Regulatory Commission (FERC) issued rulings that delayed implementation of a revised capacity market in New England and rejected the Southwest Power Pool's (SPP) Energy Imbalance Service market proposal, and the Pennsylvania--New Jersey--Maryland Interconnection (PJM) filed a new capacity market proposal. In other regions, two RTOs--the Electric Reliability Council of Texas (ERCOT) (which is not FERC regulated) and the California Independent System Operator (CAISO)--are in the process of totally changing their market designs. Also, subsequent to the preparation of the report, RTO efforts in the Pacific Northwest, Grid West, have collapsed yet again.

Most co-ops east of the Rockies and north of the Tennessee Valley are affected one way or another by an RTO (Figure 2). Each RTO has its own set of characteristics (Figure 3), even if" they are operating similar electricity markets.

[FIGURE 2 OMITTED]

RTO Costs Are Significant

The costs of establishing and operating an RTO is a major issue that is receiving increasing visibility and attention at FERC. Start-up costs, annual operating costs, and per-unit operating costs for some of the existing RTOs and projected for Grid West for their existing market designs are highlighted in Figure 4.

Power supply is a major expense for co-ops, and transmission is becoming a significantly larger part of power supply. It is the duty of every co-op director, manager and senior cooperative staff person to understand as much as possible about what drives those costs so that they can make informed decisions about transmission and RTO membership and be able to communicate with members about the results of those decisions.

Transmission Access, Pricing, and Transmission Rights

Prior to changes in the regulation of wholesale power markets and the establishment of RTOs, the seller of bulk power often had to pay additional transmission charges wherever the contract path for the energy passed corporate boundaries onto the lines of another utility. This pile-up of charges is called "pancaking". RTOs provide market participants with one-stop shopping for transmission access to broad regions without being required to pay pancaked transmission rates. While perceived as a benefit, there are circumstances unique to some cooperatives that may cause concern. For example, cooperatives owning transmission facilities may have concerns about whether joining an RTO will make them FERC-jurisdictional for their transmission revenue requirements and whether they will lose transmission revenues previously received for providing wheeling services.

Transmission access and pricing issues are complex and evolving. Due to the potentially considerable financial impact upon their systems, it is important that the cooperative board and senior management are knowledgable of some key concepts and terminology. Most RTOs use, at least initially, "license plate" pricing under which each load-serving entity (LSE) pays a rate that is derived from the costs of the transmission facilities of the transmission owner (TO) to which the LSE is connected--unless they qualify as a TO in their own right, in which case they pay their own tariff rate. While most RTOs initially begin using license plate rates, some--such as ISO-WE--have moved to a "postage stamp" rate under which all LSEs pay the same rate for use of the higher-voltage transmission system. Even those RTOs with postage stamp pricing still use license-plate rates for the lower voltage transmission. Each cooperative must analyze its own situation and the transmission rates it would have to pay for access to the RTO in its region.

In addition to transmission access and pricing, another major issue is that of transmission rights. These are the financial transmission rights (FTRs) and/or auction revenue rights (ARRs) that are used in the locational marginal price (LMP) markets adopted by most operating RTOs (ISO-WE, NYISO, PJM, and MISO) and...