PennFuture's E-cubed ,
 PennFuture's E-cubed is a commentary biweekly email publication  concerning=
=20
the current themes and trends in the energy market. =20

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October 19, 2000
Vol. 2, No. 21
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North By Southwest
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Allegheny joins PJM, others to follow
In the  1840s, Horace Greeley urged a generation to "go West." One hundred=
=20
sixty years  later, thanks to the cooperation of Allegheny Energy, PJM is=
=20
expanding westward  and increasing the likelihood that a wholesale=20
electricity market that is  liquid, transparent, and genuinely competitive=
=20
will stake a claim in western  Pennsylvania and beyond.=20
?
On October 5th, Allegheny Energy and PJM agreed to develop =01&PJM West,=01=
8 a =20
separate entity that should spur reform and substantial expansion of the =
=20
original PJM. PJM West will not utilize the discredited Installed Capacity =
=20
(ICAP) rules now employed by PJM. On ICAP, the biggest consumer rip-off in=
=20
the  wholesale electric marketplace, PJM becomes a house divided, and ICAP=
=01,s=20
days are  numbered. For this reason alone, PJM West is a welcome sight on=
=20
the  horizon.
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Initially PJM West will contain Allegheny Energy=01,s service territory, wh=
ich =20
includes parts of Pennsylvania, Maryland, West Virginia, and Ohio. But soon=
=20
more  control areas will follow Allegheny Energy=01,s trail and =01&go West=
.=018
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Serving the Pittsburgh area, Duquesne Light Company is also actively =20
considering joining PJM West. In its October 16th filing with the Federal=
=20
Energy  Regulatory Commission (FERC), Duquesne states: =01&If Allegheny=01,=
s=20
memorandum of  understanding with PJM results in Allegheny=01,s affiliation=
 with=20
PJM, Duquesne  also will be contiguous with PJM. In anticipation of that=20
event, Duquesne has  commenced discussions with PJM to discuss the process =
by=20
which PJM might admit  Duquesne to PJM-West.=018=20
?
Although Duquesne states that it is also considering membership in the =20
Alliance RTO, we would bet the ranch that PJM West will become a reality an=
d =20
that Duquesne will join it. Moreover, not far behind Allegheny Energy and =
=20
Duquesne Light may well be First Energy and some other utilities that are=
=20
now  part of the Alliance RTO proposal.=20
?
Congratulations to Allegheny Energy for giving the people of its service =
=20
territory access to the existing 58,000 megawatt PJM wholesale market =01* =
a=20
market  that is much more transparent, liquid, and competitive than its=20
present control  area. In turn, the successful integration of Allegheny=20
Energy and Duquesne Light  into the PJM market would effectively increase i=
t=20
by about 11,000  megawatts.
?
PJM West: the proposal
PJM and Allegheny  Energy=01,s Memorandum of Understanding establishes a vi=
sion=20
for PJM West.  Allegheny Energy and PJM will form an independent transmissi=
on=20
company that will  regain from PJM, subject to FERC acceptance, those=20
operational and management  functions that are needed for the successful=20
operation of an independent  transmission business.=20
?
PJM West will set up its own office and the PJM West Transmission Owners =
=20
would transfer monitoring and functional control of their transmission=20
systems  to PJM. It will also expand the PJM system management concepts=20
beyond a single  control area with the potential for a significantly larger=
=20
energy market that  could include Ohio's First Energy Corp.
?
Allegheny will adopt PJM=01,s market operations policies. It will cede =20
functional control of its transmission assets to PJM, eliminate =01&pancake=
d=018 =20
transmission rates, utilize locational marginal pricing, and work with the=
=20
FERC  and other regional RTOs to develop rate reciprocity agreements and a =
=20
transitional rate structure that will be revenue neutral. PJM will be the=
=20
OASIS  operator for PJM West.
?
Allegheny Energy will operate under the existing ECAR rules regarding =20
operating reserve requirements, reserve sharing, and other operating=20
standards,  and will work with PJM to develop a regime to ensure that PJM=
=20
West receives full  credit for its capacity anywhere within the PJM market.=
=20
ICAP will not be  expanding into PJM West.
?
PJM will retain certain functions related to the operation of the energy =
=20
market, including the PJM market, congestion management protocol, and marke=
t =20
monitoring responsibilities. Allegheny Energy will freely participate in th=
e=20
PJM  energy market, including the necessary wholesale price cap. By providi=
ng=20
access  to PJM=01,s energy market, PJM West may also give Allegheny Energy =
a=20
means of  meeting the scheduling needs of several proposed wind farms in it=
s=20
control areas  and avoiding an unfortunate regulatory battle (see=20
=01&Electricity=01,s Oktoberfest:  Trouble blowing in the wind,=018 PennFut=
ure=01,s E3,=20
Vol. 2, No. 20, Oct. 4, 2000). =20
?
In what is hopefully just a politically necessary fig leaf, the Memorandum =
=20
of Understanding states that Allegheny Energy will remain a distinct contro=
l =20
area from PJM. The purpose of this language is not clear and appears? =20
inconsistent with the whole purpose of PJM. This point needs clarification=
=20
and  bears watching.
?
The timeline set out in the agreement includes negotiation for a definitive=
 =20
contract to be completed by February 1, 2001, execution prior to March 1,=
=20
2001,  and implementation by December 15, 2001.
?
PJM West unravels Alliance
The rise of PJM West  spells the demise of the market-balkanizing Alliance=
=20
RTO proposal. With its  proven record of competency and governance=20
independence, PJM offers a much  better vehicle for bringing RTO services t=
o=20
the service territories that would  be served with the untested, unknown=20
Alliance start up. To us, the only  certainty about the Alliance proposal i=
s=20
that it will create one otherwise  avoidable transmission rate tollbooth an=
d=20
constrain the size of the wholesale  market.=20
?
With the alternative of PJM West, FERC and state utility commissions should=
 =20
now use their authority to shoot down the Alliance RTO proposal. Placing RT=
O =20
conditions that protect the public interest on the proposed merger of First=
 =20
Energy and GPU would be a good start down that road. First Energy should be=
 =20
given no choice but to leave the Alliance and join PJM, at least if they wa=
nt=20
to  merge with GPU. First Energy itself has reportedly signaled to its=20
Alliance  partners that the merger with GPU comes before the Alliance.=20
?
First Energy=01,s departure from the Alliance RTO, the principal strategic =
=20
purpose of which appears to be keeping its member utilities out of PJM and=
=20
the  Midwest ISO and to fracture the wholesale market between Philadelphia=
=20
and  Chicago, would help unravel that counterproductive proposal and have=
=20
several  benefits. All of Orion=01,s generation that was purchased from Duq=
uesne=20
and still  serves Duquesne=01,s customers would be within one RTO. Converse=
ly,=20
if First Energy  were to remain in the Alliance, some of Orion=01,s generat=
ion=20
would be located in  the Alliance and some in PJM West (assuming Duquesne=
=20
joins PJM West). Requiring  First Energy to join PJM West would not only de=
al=20
with that seams issue, but  would also further expand the size and liquidit=
y=20
of the wholesale market in the  eastern United States.=20
?
First Energy's ISO games
While the agreement  between Allegheny and PJM paves the way for Duquesne t=
o=20
join PJM, what about  PennPower, the subsidiary of First Energy that serves=
=20
some suburbs of Pittsburgh  and up to the New Castle area of the=20
Commonwealth? Is there any hope for  PennPower customers, or worse, might=
=20
First Energy try to balkanize PJM by taking  GPU out of PJM?=20
?
Moving GPU out of PJM would be the electric utility equivalent of  suggesti=
ng=20
that one of the 50 states should secede from the Union and join  Mexico. Ye=
t=20
First Energy may well have planned to remove GPU from PJM and  collapse it=
=20
into the Alliance or simply a larger First Energy. Such a bold move  would=
=20
undoubtedly be vigorously opposed by the Pennsylvania and New Jersey  Publi=
c=20
Utility Commissions.=20
?
The state commissions have great leverage while the merger is pending, but =
=20
once the merger is approved, the state commissions' power to protect the=20
public  interest diminishes. Moreover, as a result of the Centerior and Fir=
st=20
Energy  merger, First Energy has a track record with RTOs and mergers that=
=20
does not  inspire confidence. It brings to mind the saying, =01&Fool me onc=
e,=20
shame on you;  fool me twice, shame on me.=018=20
?
Consequently, the only way to make sure that First Energy will not remove =
=20
GPU from PJM is for the commissions of Pennsylvania and New Jersey to craft=
=20
a  set of conditions on the merger that make any such decision impossibly=
=20
painful.  Those conditions must also be effectively =01&securitized=018 by =
the=20
equivalent of a  liquidated damages clause that would compensate Pennsylvan=
ia=20
and New Jersey were  First Energy subsequently to renege on its agreement n=
ot=20
to withdraw GPU from  PJM.=20
?
The public interest must be guaranteed. With the creation of PJM West by =
=20
Allegheny Energy and PJM, it can and should. =20

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