White Paper

Toward Creating a Viable Institutional Framework for Addressing
Commercial Electric Issues in the West

# Introduction

At the December 3, 2004, Western Governors Association ("WGA") Board
meeting, the Governor's adopted the following motion:

> "To ensure adequacy and affordable supplies of electricity, Western
> Governors believe the region must develop and sustain the capability
> to address and resolve regional electric power issues on its own. This
> requires ensuring that states and provinces in the Western
> Interconnection have the capability to help shape solutions
> appropriate to the region. *It also means that the Western electric
> power industry needs to have in place effective institutions to
> address both reliability and commercial regional electric power
> issues.*" (emphasis added).

The Western Governors are concerned that the West may not yet be
prepared to resolve challenges to the region's ability to provide
low-cost, reliable, affordable power supplies. Failure to meet these
challenges could again undermine regional economic growth and create
hardship for Western businesses and citizens.

Thus, the task before electric industry participants in the West is to
respond to the challenge posed by the Western Governors. The purpose of
this paper is to begin discussions among the leaders of the region's
electricity institutions to explore how we can more effectively work
together to facilitate the creation of an improved structure that will
assist entities in the Western Interconnection in addressing commercial
related power issues in a more effective manner.

# 

# Background & Context

### The Evolving Western Electricity Market

The electric market landscape in the West has changed significantly.
Regional Transmission Organizations ("RTOs") have either formed and are
operating ("California ISO") or are proposed ("GridWest" and
"WestConnect"). As a consequence of RTO development and the more general
evolution towards facilitating a competitive electricity market in the
West, the dynamics of the electricity market have changed and, more
importantly, new seams issues have arisen. Pre-existing control areas
have been consolidated and new ones formed. In addition, more
centralized markets have formed, complementing the already robust
bilateral electricity market in the West. These changes have resulted in
the emergence of commercial issues the resolution of which is critical
to facilitating an efficient regional market.

### The West and NAESB

It is important to note here that while the focus of this paper is on
the West, similar issues have arisen nationwide. Subsequent to the 2003
Eastern blackout, the North American Electric Reliability Council
(WECC's parent organization) has renewed its focus on establishing and
furthering nationwide reliability standards. The U.S. Congress and the
Federal Energy Regulatory Commission ("FERC') have also taken up this
issue with the purpose to ensure a reliable nationwide electric grid.
While NERC has reaffirmed its focus on reliability, the North American
Electric Standards Board ("NAESB") has re-focused its activities to
address commercial issues in the electric industry. The outcome of this
effort will bear on the West's collective presence -- and position -
before NAESB on the relevant commercial issues.

##  Past and Present Attempts to Address Commercial Issues

In the past decade several entities were created with the hope that they
would be able to address commercial issues in the region. While, at
times, these entities offered an effective forum for discussing the
commercial issues brought to their attention, none has evolved into a
fully effective forum for addressing commercial issues. At times, the
Western Electricity Coordinating Council ("WECC") and its predecessor
organization, the Western Systems Coordinating Council, have attempted
to address certain commercial issues or, more specifically, reliability
issues that have a commercial impact. However, WECC, as a
reliability-focused organization, remains reluctant to address
commercial issues in general. The Western Market Interface Committee
("WMIC"), created a few years ago under the auspices of WECC, has
attempted to address certain market and commercial issues, but has not
yet achieved sufficient mass or legitimacy to effectively resolve these
issues.

Finally, in 2001, the Seams Steering Group -- Western Interconnection
("SSG-WI") was formed by the three proposed RTOs to address seams issues
-- including commercial issues -- that may arise between the three RTOs.
Since 2001, SSG-WI has made significant strides in addressing, or at
least furthering resolution of, certain critical commercial issues.
First and foremost, SSG-WI created a transmission planning work group
that developed a comprehensive transmission plan or "view" of the West.
This study was and is pivotal in identifying potentially needed
transmission projects the development of which would eliminate congested
areas of the Western transmission system and increase access to
additional supplies across the Western Interconnection. In addition, the
market monitoring work group developed a straw proposal regarding the
creation of a West-wide market monitoring function in the West. At
present, the work group is focused on developing a "pilot program" that
would test the viability of their proposal. Finally, SSG-WI work groups
have also focused on price reciprocity issues between the RTOs (i.e.,
waiving export fees), possible opportunities for shared infrastructure
investment (communications, back-up facilities, system infrastructure,
etc.) and how to possibly align the proposed congestion management
practices of the proposed RTOs.

#### The Need for a Collective Vision

Notwithstanding the laudable efforts of the SSG-WI planning and market
monitoring work groups, it has become evident over the past year that
the larger SSG-WI effort lacks the broad base and legitimacy necessary
to effectively reach a consensus on or "resolve" seams and/or commercial
issues in the West. In part, concerns have been expressed that SSG-WI's
focus on possible seams issues between and among the proposed RTOs is
too conceptual in nature and too far in the future. In other words,
formation of the three RTOs may be years away and there is a pressing
need to focus on *existing* commercial issues. More importantly, the RTO
focus of the SSG-WI efforts has dissuaded certain entities, especially
publicly owned utilities and transmission operators, from participating
in these discussions and resolving the issues. Therefore, going forward,
it is apparent that in order create an institution that is capable of
addressing commercial issues on a West-wide basis, that entity must
identify able to identify a benefit or purpose that is commonly shared
by all industry participants. That is, instead of focusing on the
benefits of eliminating seams issues between proposed RTOs, focus on the
benefits that will accrue to all entities in the West by addressing
seam/commercial issues between, or that impact, *all* entities (public,
private, integrated utilities, load-serving entities, transmission
owners, transmission operators, generators, traders, etc.).

#### The Need for Coordination with the States and WECC

Finally, while the Western Governors have requested that industry
participants step up and create an institutional framework for
addressing commercial issues in the West, we acknowledge here that that
cannot be done in isolation. In particular, the WGA, Western Interstate
Energy Board ("WIEB") and the Committee on Regional Electric Power
Cooperation ("CREPC") currently focus on coordination of state energy
and public policy issues. Their input to and guidance on the resolution
of commercial issues will be critical. In addition, WECC is the
recognized institution for addressing West-wide reliability issues. The
distinction between what is a reliability issue and what is a commercial
issue is often blurred, if not arbitrary. Today, informal coordination
occurs among and between the above existing institutions on an ad hoc
basis. If the institution created to address commercial issues is to be
successful, coordination between that entity and WGA, CREPC, WIEB and
WECC must be close and timely. Therefore, as part of this discussion, we
ask all participants to consider how best to structure a more formal
coordination process between the states (as represented by the WGA,
CREPC and/or WIEB), WECC (the reliability organization), and an
institutional designed to address commercial issues.

**[Discussion]{.underline}**

*Mission Statement -- Roles and Responsibilities*

In order to establish a viable institutional framework for resolving
commercial issues we must clearly identify the benefit of participation
in such an organization. As a general matter, the foundational
legitimacy of any organization must either be statutorily established or
based on a mission statement agreed to and supported by all
participants. It is not likely that there will ever be sufficient
legislative and/or Congressional support for formally creating and
codifying in law an entity to address commercial electricity issues in
the West. Therefore, we believe the focus of these discussions should be
on creating an organization whose mission is supported by all who
participate, i.e., all or most entities see a benefit to participation
in the organization. Similar to WECC, such an organization would be
voluntary, but one in which its members have a vested interest in the
organization. In the case of WECC, that interest is to maintain
reliability. In the case of an entity charged with addressing commercial
issues, defining its mission will be critical and more challenging.

Support varies and the debate continues as to whether introducing
competition in the electric industry was and is a good thing.
Notwithstanding any concerns regarding competitive markets, most if not
all entities in the West support continued facilitation of bilateral
trading across the West. The bilateral market in the West supports the
active seasonal trading that allows all entities take advantage of the
West's diversity.

A key lesson from the 2000-2001 electricity crisis is that there must be
adequate *infrastructure* to support both reliability as well as trading
and markets. Such infrastructure includes both the supply resources
necessary to serve load (plus reserves), but also the transmission
necessary to deliver it to load and support the historical seasonal
trading so important to the West.

*Resource Adequacy*

Resource adequacy can generally be defined as ensuring that sufficient
resources are built and available to serve load on the system.
Typically, that means ensuring that there is enough supply resources to
serve the peak load on the system, plus enough reserve capacity to cover
certain contingencies. In addition, a companion requirement is that such
resources be deliverable to load on the system. That is, ensure that
there is sufficient transmission to deliver power from supply resources
to load on the system.

WECC is currently in the process of developing a process to establish
(re-re-establish) "resource adequacy" criteria for the Western
Interconnection. The establishment of such criteria appropriately falls
within WECC's purview as it relates to the reliability of the Western
Interconnection. Notwithstanding WECC's efforts, it is likely that, for
the foreseeable future, individual systems or sub-regions will continue
to have or establish unique rules or requirements regarding resource
adequacy. While it is entirely appropriate for individual states,
provinces and other jurisdictions to establish their own resource
adequacy requirements, there is a need to ensure that such rules or
requirements do not create barriers to interregional transfers and
trading. In fact, one would hope that all resource adequacy rules and
requirements are designed to accommodate and take advantage of the
diversity that exists in the West.

*Transmission Adequacy (Transmission Planning, Expansion and
Implementation)*

As noted above, the SSG-WI transmission planning group has done a good
job of furthering development of a truly regional transmission plan.
While the SSG-WI planning group's efforts have been instrumental in
furthering regional planning, an important and key next step in this
effort is ensuring that the identified "needed" projects are actually
built. This requires resolution of certain difficult issues, including
funding/cost responsibility for new transmission facilities and the
siting, by states, of those facilities. Success in addressing these
decisions will require a broad base of support, i.e., broad
participation in the effort and the larger organization. In addition, if
the effort is to be successful, the states must buy into and support the
process. In the end, the best and most meaningful expression of support
for the recommendations of the proposed organization is for states to
defer to the "need" assessment prepared by the proposed organization and
siting (approving) the proposed projects despite objections.

*Market Monitoring*

It is important to establish a West-wide market monitoring function so
as to establish a "early warning system" and prevent future market
dysfunctions. The SSG-WI market monitoring work group has done a lot of
the groundwork necessary to establish such an entity. However, much work
remains to be done. First, the roles and responsibilities of the
organization have to be defined in a manner that respects and is aligned
with the existing federal (FERC), state, provincial and public
(municipal) authority. Second, the market monitoring entity needs to be
empowered with the tools necessary to do its job and succeed. Thos tools
include, among others, access to information and funding. Centralized
and transparent markets do not exist outside of California. Therefore,
the market monitoring entity will need access to bilateral market
information; information that today is not readily available and only on
a voluntary basis.