B. Independent Transmission and Markets

1. Another form of undue discrimination is the lack of independence of the transmission provider in many regions of the country. As discussed in Section III.B.1, remaining corporate ties between generation and transmission within public utilities are problematic since they allow the vertically integrated utility to exercise market power to advantage its affiliated generation.

1. Independent Transmission Providers

2. To remedy this undue discrimination, transmission service must be provided by an independent entity. Therefore, we propose to require all public utilities that own, control or operate facilities used for the transmission of electric energy in interstate commerce to: (1) meet the definition of Independent Transmission Provider, (2) turn over the operation of its transmission facilities to an RTO that meets the definition of Independent Transmission Provider, or (3) contract with an entity that meets the definition of Independent Transmission Provider to operate its transmission facilities.

3. An Independent Transmission Provider is any public utility that owns, controls or operates facilities used for the transmission of electric energy in interstate commerce, that administers the day-ahead and real-time energy and ancillary services markets in connection with its provision of transmission services pursuant to the SMD Tariff, and that is independent (i.e., has no financial interest, either directly or through an affiliate, in any market participant in the region in which it provides transmission services or in neighboring regions).

4. We propose that affected public utilities must inform the Commission which Independent Transmission Provider will operate the public utility's transmission facilities no later than July 31, 2003. However, a public utility that is a member of an approved RTO or ISO or other entity that meets the definition of Independent Transmission Provider may file a request for a waiver of the filing requirements of this paragraph on the ground that it has already complied with the requirement.

5. Any entity meeting the definition of Independent Transmission Provider would file the SMD Tariff to provide transmission services, including ancillary services, and to administer the day-ahead and real-time energy and ancillary services markets. As discussed further below, an Independent Transmission Provider would also perform market monitoring and market power mitigation, long-term resource adequacy and transmission planning and expansion on a regional basis.

6. An Independent Transmission Provider would also file under section 205 any changes to transmission rates necessary to implement Standard Market Design, no later than 60 days prior to the date on which it proposes to implement Standard Market Design.

7. In addition, one or more public utilities may jointly file an application to meet the requirements of Standard Market Design. Also, an Independent Transmission Provider may make necessary filings on behalf of public utilities required to meet the requirements of this paragraph.

8. We seek comment on whether this remedy is adequate to remove the potential for unduly discriminatory behavior on the part of a vertically integrated transmission provider. Can the requirements of Standard Market Design be satisfied either by performing the function through an RTO or contracting with an independent entity to perform them? Given that most transmission providers have filed proposals to join an RTO, is a non-RTO compliance option necessary to cure undue discrimination and produce just and reasonable rates for transmission service and the sale of electric energy?

2. Role of Independent Transmission Companies in Standard Market Design

9. We have long recognized that the Independent Transmission Company (ITC) business model can bring significant benefits to the industry. Their for-profit nature with a focus on the transmission business is ideally suited to bring about: (1) improved asset management including increased investment; (2) improved access to capital markets given a more focused business model than that of vertically integrated utilities; (3) development of innovative services; and (4) additional independence from market participants. We believe that these characteristics of ITCs can have significant benefits for the implementation of Standard Market Design, particularly in the areas of development of transmission infrastructure and structural independence from market participants.

10. The Commission recently approved a proposal by several transmission owners to form an ITC, TRANSLink Transmission Company, LLC (TRANSLink), to share responsibility with the Midwest ISO Regional Transmission Organization (the Midwest ISO) ⁸2 and other regions for the RTO functions prescribed in Order No. 2000. In that proceeding, the Commission approved a hybrid RTO formation under which specific RTO functions were delegated to either the RTO or the ITC. Regarding the delegation of functions we stated:

Our rulings on the allocation of functions issues are based on our belief that for effective RTO operations, regional trading, and one-stop shopping, a single transmission provider must have overall authority and ultimate responsibility for transmission service in the region. We further believe that the security-constrained, economic dispatch needed for an efficient and reliable market is best operated by an independent regional transmission provider. However, we believe that it is acceptable for some functions with predominantly local characteristics to be delegated to an ITC so long as the RTO has oversight authority in the event that local actions have a regional impact. We find that this is critical to successful RTO development and especially important given the characteristics of the interstate transmission grid. It has become increasingly evident in recent years that even seemingly local issues, such as generator location or isolated transmission bottlenecks, can and do impact the larger grid, and that is why we believe that centralized RTO oversight is needed.

We also remain concerned that vesting control into sub-regional entities may create seams which could easily lead to re-balkanization. These difficult delegation decisions are made with our firm belief that ITCs can flourish under the RTO umbrella and that in performing certain delegated functions, ITCs will be able to effectively manage their assets, protect their value, and bring their expertise to increase efficiencies and enhance the value of their business. Nevertheless, these delegation decisions should not prevent ITCs from seeking additional authority, subject to Commission approval, at a later date after ITCs have gained experience under RTO operations.⁸3 We are also guided by the premise that any delegation of functions to an ITC must be consistent with and further the Commission's goals in the SMD Proceeding. We assume in this order that the Midwest ISO will be the transmission provider in the TRANSLink area and will operate a real-time and day-ahead market, or any functions that are required under the SMD final rule.[⁸4]

11. We seek comment on the functions that an ITC should perform under Standard Market Design. Should the Commission retain the same delegation of functions that was approved in TRANSLink? Are there elements of the proposed Standard Market Design that would justify a different delegation of functions? Should an ITC qualify as an Independent Transmission Provider?

We seek comment on whether an ITC that has no ties to a Market Participant, as defined in this proposal, is sufficiently independent to act as the Independent Transmission Provider. The ITC may hold grid assets such as transmission facilities and Congestion Revenue Rights and may be allowed a performance-based ratemaking program. Thus the Commission is concerned that the ITC may unduly discriminate in favor of its own transmission interests when carrying out operational and planning decisions in its role as Independent Transmission Provider. We seek comment on whether such ITC interests in transmission investment may cause the ITC to unduly discriminate in day ahead or real time markets operations or to discount generation, demand response, and other transmission owners' (e.g., merchant transmission) solutions to grid problems. On the other hand, generation and demand response solutions are likely to have the first opportunity to respond to LMPs if it makes economic sense to do so, given the difficulty in siting transmission. Given the planning process and stakeholder input, as well as the Commission's authority to set rates, we seek comment on what specific ways an ITC could make such unduly discriminatory decisions? The Commission is convinced that, if its role is appropriately defined, and opportunities for undue discrimination are addressed, the ITC shows great promise to address grid problems through profit driven activities. One such activity could be reducing congestion where an ITC with properly structured performance based rates would have an incentive. What is the appropriate role for the ITC?

8²TRANSLink Transmission Company, L.L.C., et al., 99 FERC ¶ 61,106 (2002).

8³We recognize that as the Midwest ISO and ITCs gain experience, they should, from time to time, reassess the assignment of the functions and reevaluate whether some that have been delegated to a local level need to be performed at a regional level and vice versa. Likewise, after SMD is implemented, the assignment of functions may need to be reassessed. (Footnote 37 in original).