by Bob Shively, Enerdynamics
President and Lead Instructor

Photo credit: Sigfrid Lundberg

Back in the early 2000s when FERC was pushing Standard Market Design, some in the electric industry believed we would soon transition to four or five uniform wholesale markets in the U.S.: Perhaps the West, the Midwest, Texas, the South, and the Mid-Atlantic/Northeast.  Traders excitedly thought about the prospects of open markets and consumers in high-cost states looked forward to access to cheaper power.  But politics and the physical realities of a limited transmission grid slowed down the development of large inter-regional markets, and FERC has been forced to foster changes through incremental steps rather than broad policy changes.

A new major step in the transition to larger markets occurred when FERC issued Order 1000 titled Transition Planning and Cost Allocation.  The Order was designed to address four issues that have been observed in the marketplace:

• Existing rules did not require regional transmission planning, so each transmission provider tended to develop plans that created local benefits but did not take into account greater regional good. This tended to favor smaller, low-voltage transmission projects.
• Existing rules did not require planning to take into account public policy requirements such as renewable power portfolio requirements.  This tended to hold back development of renewable energy in transmission-short areas.
• Independent transmission owners were discouraged from building projects by rules that gave incumbent transmission owners the right of first refusal on new projects.  This meant that a developer could spend time and money getting a project conceptualized and included in a transmission plan, only to see it built by the incumbent transmission owner.
• Cost allocation methodologies did not provide for regional consideration of costs and benefits.  This meant that a local project that would have regional benefits might not be able to collect revenue from those benefitting, thus making it much less likely that the project would get built.

Initially issued in July 2011 and reaffirmed through a denial of rehearing in May 2012[1], Order 1000 established minimum criteria for the transmission planning process including development of regional plants, consideration of transmission needs driven by public policy requirements, and coordination between neighboring regions.  The order also required regional and interregional cost allocation methods that are “roughly commensurate” with estimated benefits and protect entities that don’t benefit from having to pay.  And lastly, the order encourages non-incumbent transmission owners to build new transmission by removing the right of first refusal given to incumbent transmission owners.

The order is expected to have wide impacts in wholesale markets.  Already, the various ISOs, utilities, and transmission companies are working to develop new rules. Initial compliance filings are due in October 2012 with final filings on regional coordination and cost allocation due in April 2013[2].

Market changes due to the new rules may include increasing investment in transmission construction, significantly more construction of larger high-voltage transmission projects, growth of transmission-only companies (transcos) thus transitioning the transmission construction role from utilities to transcos, growth in transmission projects designed to foster movement of renewable power, and the integration of more regions into wholesale trading markets. Examples of the latter include Entergy’s plan to move into the Midwest ISO by 2013.

And FERC may not be done trying to foster more competitive regional wholesale markets.  We can expect to see more orders addressing other issues as the growing competitive wholesale markets unfold.

References:
[1] See:  http://www.ferc.gov/media/news-releases/2012/2012-2/05-17-12-E-1.asp