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Date: Wed, 18 Oct 2000 08:34:02 -0500
From: "Tracey Bradley" <tbradley@bracepatt.com>
To: "Ronald Carroll" <rcarroll@bracepatt.com>
Subject: PowerPlus  - CA Munis Propose State-Run, Non-Profit Transco For 
Market Woe
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PowerPlus
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In effort to regain state authority?
CA Munis Propose State-Run, Non-Profit Transco For Market Woes

A recent proposal by municipal utilities in California to turn the California 
Independent System Operator (Cal-ISO) into a state-run transmission company 
(transco) has piqued the interest of some industry officials who claim it 
will start an effective dialog on the future of the state's energy markets 
and the organization responsible for access to the grid, the Cal-ISO.

However, the ISO argues the proposal is a non-solution and will only delay 
constructive discussions over the fate of restructuring in California. Others 
say the concept is a concerted effort by state agencies to regain control 
over the transmission system that California lost when the ISO was approved 
by federal regulators.

The California Municipal Utilities Association (CMUA) proposed the concept in 
a statement when the organization delivered a filing to FERC seeking a return 
to cost-based rates in the state. CMUA filed the petition with the commission 
earlier this month, but FERC action on any filing regarding California's 
electricity markets will likely have to wait until the commission issues the 
results of its investigation into the state's wholesale power markets - due 
later this fall.

While a return to cost-based rates in FERC's hands, CMUA has initiated an 
innovative discussion on the status of the Cal-ISO, the entity many 
California officials fault for some of the problems resulting from the energy 
crisis which plagued the state - and indeed the West - much of this past 
summer. CMUA claims the current ISO model and governance structure contains 
too much red tape which only adds unnecessary delay in crisis situations when 
quick action is needed.

CMUA says the biggest fault with the ISO is its connection to the marketplace 
it oversees. Ideally, regional transmission organizations (RTOs) should not 
have any responsibility over markets and only needs to concentrate on 
managing the grid in an independent manner. By forcing the ISO to operate 
both the market - the ISO is responsible for managing the ancillary services 
markets - and the grid, it cannot be expected to run either efficiently, a 
CMUA source says.

"The market here doesn't work," the CMUA source says. "The ISO by default has 
been embroiled in the market. The new transco wouldn't be involved with 
ancillary services."

"This gets the ISO out of the market," another public power source says. "It 
was never envisioned to be a part of [procuring] energy supplies."

Exact details of the structure of the state-run transco have yet to be 
resolved because any changes to the ISO will have to come from legislative 
and regulatory mandates, the CMUA source says. The group is considering 
legislation to initiate the changes, and says the concept resolves what many 
officials claim to be a major flaw with the ISO: its stakeholder board.

Currently, the ISO is managed by a board made up of industry representatives 
and meets regularly each month. At the monthly board meetings, the ISO makes 
most of its crucial decisions on management, governance, and price caps. The 
CMUA source contends that the ISO does a suspect job in getting materials to 
board members before meetings and if the organization is state-run, it will 
be forced to open all executive meetings to the public. "[The transco] would 
be non-profit and a government agency so you have open meetings," the source 
says. "[The ISO] has not been good at getting material to board members 
before meetings."

A state-run transco also would have eminent domain authority to site new 
transmission lines, something which the ISO currently lacks. And because the 
transco would both own and operate the system, it would have the necessary 
incentives to build more transmission, the CMUA source says. "The public 
agency will have the power of eminent domain," the source says.

Some industry officials say the idea is part of a concerted effort among 
California executives and lawmakers to retain as much control as possible 
over the ISO. In numerous reports issued this past summer in response to the 
energy crisis, the ISO and its regulator FERC were seen as two of the main 
culprits. By making the ISO an official state agency that owns the system, 
California retains its authority over the grid. "This may very well play as a 
part of a state strategy to get more control back to California," an ISO 
board member says. "If it's a state agency, [the state is] going to have a 
much bigger role."

The concept has not been well-received by the ISO, where an official there 
calls the idea "a solution to a non-problem." This source says the ISO has 
done a laudable job in maintaining the efficiency of the transmission grid 
and has spent nearly $800 million in transmission expansion. "This is a 
curious solution to a non-problem," this official says. "The market operation 
of the ISO is a non-issue. . . . The transmission system is being utilized 
much more efficiently now than it was before."

The official also says that it is unclear whether a state-owned transco would 
meet FERC's RTO requirements and such an entity would further cloud the line 
between state and federal jurisdiction. "If it is a public owner, it is not 
clear if its federally- or state-owned," this source says. "It solves a 
non-problem. I don't know how easily it would be to integrate it into an 
interstate market."