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

Abstract

Synopsis: 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 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 a clear affirmation by the FERC that it will not approve market-based pricing for wholesale power transactions in in the absence of an RTO governance structure that adequate to ensure that the RTOs will design, monitor, and manage such transactions to produce and within the meaning of the Federal Power Act's requirements. 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 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, 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. …