Marketers Welcome FERC Move To Merge NE Power Grid Opers

 By Kristen McNamara - DOW JONES NEWSWIRES - 07/12/2001

NEW YORK -(Dow Jones)- Federal regulators ordering consolidation of the Northeast power grid Wednesday surprised and pleased a number of market participants and energy experts, who said the move should improve competition and reliability in the region.

The Federal Energy Regulatory Commission ordered the three independent system operators in New England, New York and the Mid-Atlantic to combine into one regional transmission organization that will control access to high-voltage power lines in a dozen states from Washington, D.C., to Maine.

"It's a milestone in the restructuring of the electricity market," said Craig Goodman, president of the National Energy Marketers Association, which represents power marketers.

Combining large geographical areas, both in the Northeast and throughout the U.S., will increase availability of power supplies, reduce problems in sending electricity between areas and lead to a more liquid market, said power marketers, generators, traders and researchers. Putting large swaths of the grid under the control of individual operators could also help eliminate transmission constraints, increase reliability and lower wholesale prices and retail rates, they said.

In late 1999, FERC told utilities to come up with plans for voluntarily handing their      transmission systems over to independent regional transmission organizations, a      process criticized by some as too hands off. With Wednesday's order, FERC became more active.

Mid-Atlantic Could Lead  - FERC provisionally accepted a filing by Mid-Atlantic grid operator PJM Interconnection LLC to serve as a model for consolidating the Northeast.

"We are encouraged with FERC's recognition of PJM's model as a platform for            discussions," PJM spokeswoman Beth Foley said.

The New York Independent System Operator and ISO New England, the grid             operators in those areas, declined to comment on the order until they had a              chance to review it. But New England's grid operator said it was disappointed            FERC didn't accept its request to be considered a regional transmission    organization unto itself.

"We believe our filing satisfied all criteria and characteristics of an RTO,                     including the scope," the grid operator said in a statement. "In addition, we               believe our filing was in the best interest of New England consumers."                      

FERC in June twice delayed rulings on RTO filings from the three Northeast ISOs. sources said the regulators were deciding whether to order the grid operators to merge.

The ISOs had asked the commission not to order them to consolidate immediately, because they were still determining how their combined operations would work.

A New York power trader who attended a meeting Monday with market participants from the three Northeast ISOs said he was surprised by FERC's order. The meeting's attendees, who have been working for two years to eliminate problems in moving power between the regions, were treating FERC's acceptance of the grid operators' RTO proposals as a "foregone conclusion," the trader said.

Coordination Under Way - The three Northeast grid operators signed a memorandum of understanding with Ontario's grid operator in 1999 and made improving the flow of power between their regions their highest priority.

Efforts to that end have allowed the ISOs to become familiar with each other's systems and are likely to help smooth their consolidation, said David Clement, associate director of the Cambridge Energy Research Associates.

The Northeast grid operators will likely lose money they had invested in developing separate computer systems and equipment, and they will incur new costs when they combine, but the long-term benefits of having a single grid operator should outweigh the losses, Clement said.

Wednesday's order raised questions among market participants as to how the         new organization would operate.

New York's market rules and software are "convoluted" and "vastly different"               from PJM's, a power trader said.

Gerry Norlander, executive director of the Public Utility Law Project, wondered how improved transmission would affect power prices in areas neighboring the grid operator's territory.

Despite these lingering questions, consolidating the three regions seems realistic, said Peter Esposito, vice president and regulatory counsel for Dynegy Corp. (DYN).

Because the Northeast ISOs are established and functional, they shouldn't have a problem consolidating, he said. FERC's order will "force them to focus" on the problems they've been grappling with for the past couple of years, he added.

"It's entirely doable," Esposito said "It's all political, which CEO, which staff will survive."