Northeast RTO Mediation Report

Yesterday afternoon, September 17, the Judge in the Northeast RTO mediation proceeding issued his report to the Commission on the 45-day mediation session. Although not unexpected, but still disappointing, the Judge endorses the market design proposal of the New York and New England ISOs. This market design proposal encompasses a long, drawn out process for discussing what the Northeast market should look like (minimum 12 months) before work begins to develop the new RTO. The target implementation date of the ISOs is November, 2004, but the proposal clearly states that this time frame is "subject to extension" if new design requirements are introduced. We believe the true intent of the ISOs is to delay indefinitely this process in order to retain the three existing ISO structures. A copy of the Judge's report and the Business Plan are attached.

One good aspect of the Judge's report is that he asks in several areas of the report for Commission guidance. We too believe this is necessary. It became quite evident early in the mediation proceeding that we were not going to agree with the New York entities (or the New England ISO) on market design or governance. We argued that FERC intended the new market design to be primarily the PJM system, with enhancements where possible. Others, relying on the ambiguity in FERC's orders, argued that FERC really intended to create a new system, using PJM as the platform but pulling heavily from the other two ISOs, regardless of time or complication of creating this new market. We need FERC direction on this, and the Judge makes this clear.

Background

The Judge's primary goal of this 45-day mediation process was simply to establish a "business plan" which lays out how and when a single Northeast RTO will be created. Enron, along with many other participants, opposed this approach, arguing that we are wasting the 45 days given to us by the Commission. The Judge acknowledges in his report that there was significant opposition to his approach but he thinks it worked out perfectly. Although the majority of the Judge's report and the business plan focuses mainly on process for creating the business plan, he does discuss two substantive issues: market design and governance.

Market Design

At the beginning of the mediation, PJM, NY and NE submitted a joint proposal for forming a single Northeast RTO. This proposal envisions a time-intensive approached designed to reach agreement by all stakeholders, with an implementation date in 3-4 years ("Option 1-M"of the Business Plan). This proposal is now supported by the New England and New York ISOs - PJM has its own approach (see below). The New York transmission owners also submitted a proposal for implementing the new RTO in 3 years ("Option 2-M" of the Business Plan). PJM submitted an alternative proposal for creating and implementing a single Northeast RTO with a single day-ahead and real-time energy market by November 2003 ("Option 3-M" of the Business Plan).

We took the lead in creating a coalition of marketers, generators, PJM TOs, industrials, and other end use customers (The One RTO Coalition) advocating the creation of a single energy market based on PJM's system by December 2002, but no later than May, 2003. Although we (Enron) believe PJM's November 2003 time frame is too conservative, the coalition supports Option 3-M (PJM's approach) since it achieves the Coalition's goals, albeit on a slower timetable.

As noted above, the Judge endorses Option 1-M, in part because it has a built-in a process for determining "Best Practices." Although PJM also conducted a "best practices" analysis, the other ISOs and NY TOs do not agree with PJM's determinations of what practices from their ISOs are "best practices."

The Judge acknowledges that support for Option 3-M (the PJM plan) "far outstrips" the other options in diversity and extent of stakeholder support. However, the Judge believes that the PJM option assumes the PJM platform can work in New York and New England, even though there are more generation divestiture and load pocket issues in New York and New England than in PJM. The Judge states that "impatience, haste and greed" should not be permitted to drive the RTO process "at the expense of sound policy" and that optimal RTO benefits should not be sacrificed in order to allow some to "exploit more immediate economic opportunity in a sprint." See Report, page 18.

Governance

The other substantive issues we have discussed are governance: interim governance, final governance, board make-up and stakeholder process. The Judge opted to not endorse any one of the options proposed - instead, he discusses the pros and cons of each option. Here again, the Judge strongly urges the Commission to provide guidance to the participants on the Commission's preferred governance approach. The Judge also suggests that a settlement judge may be helpful in assisting stakeholders in finalizing governance procedures.

PJM has stated that in order to meet its deadline of November 2003 (and certainly earlier), PJM has to be in control of the implementation of the new RTO. PJM proposes that the new board be made up of board members from the existing ISOs: 5 from PJM, 3 from New York, and 2 from New England. The Board elects a voting CEO (assumed to be Phil Harris if the PJM proposal wins).

NY ISO, New England ISO, NY PSC, NY TOs and New England TOs, along with other entities (primarily those who are afraid to cross New York PSC) all support equal representation on the new Board. One proposal would have 3 board members from each ISO with a non-voting CEO. The other proposal would have 3 board members from each ISO with 4 additional board members to be elected by stakeholders.

We support the PJM board make-up proposal to ensure a fast transition to a single Northeast RTO and energy market based on the PJM system.

Post Mediation

The Judge in his report recommends that the Commission issue an order resolving as many of the issues in dispute as possible and then establish further proceedings under the auspice of a settlement judge.

The Judge urges the Commission to not accept comments from participants, but he acknowledges that all participants want an opportunity to comment. We are working on two sets of comments now, one on our own and one in conjunction with the One RTO Coalition. We will circulate drafts as soon as they are prepared.

Although we are disappointed that the Judge did not endorse the PJM proposal, we still believe that the Commission is intent on implementing a single northeast RTO as soon as possible and that the PJM proposal provides a well-reasoned (even conservative) approach to reaching that goal. Therefore, even though the Judge sided with New York, we are hopeful that the Commission will stick to its guns and go with the PJM proposal.

Please call any one of us if you have any questions or would like to discuss the Report.

Sarah, Dan, Howard and Tom