Message-ID: <18587472.1075852528366.JavaMail.evans@thyme> Date: Mon, 25 Jun 2001 17:42:00 -0700 (PDT) From: steve.walton@enron.com To: james.steffes@enron.com, christi.nicolay@enron.com Subject: RTO Governance Mime-Version: 1.0 Content-Type: text/plain; charset=us-ascii Content-Transfer-Encoding: quoted-printable X-From: Steve Walton X-To: James D Steffes , Christi L Nicolay X-cc: X-bcc: X-Folder: \JSTEFFE (Non-Privileged)\Steffes, James D.\Top 10 Issues 6/1/01 X-Origin: Steffes-J X-FileName: JSTEFFE (Non-Privileged).pst Jim, =09In Denver you asked for our views on RTO Governance, i.e., preference fo= r Stakeholder vs Independent Board. As a basic principle, I believe that t= he key issue is independence energy marketing, generation ownership etc. I= have given each of these a grade from 1-10 based on my preference. For-Profit Transco--Grade 10. The best form of governance is the for-profi= t Transco. It is governed by a independent corporate board and regulated b= y FERC. Independence is a fact of corporate structure and regulatory restr= iction. The Transco can take on delivery risk, building new facilities as = necessary to meet customer demand. The Transco is prohibited from taking a= ny long term position in the energy market, and it is compensated only by s= ystem through flow (total load served and energy wheeled). Unfortunately I= think the likelihood of Transcos forming is remote. The biggest obstacle = is the difficulty of getting around the tax problems. The LLP/LLC structur= es skirts the tax problem, but it also results in converting a sizable inve= stment in to a passive investment with control by a minority owner. I thin= k the only way to get Transcos in the short run is for there to be a short = window (2-3 years) when transmission owners have the ability to sell assets= to a company combining assets, without taxes. Those missing the window wo= uld have to pay taxes on a pre-sale merger transactions as they do now. Th= is would compel owners to determine if they want to be transmission owners = and spin off could occur. Federal assets (TVA, BPA, WAPA) are unlikely to = be spun off for some time, if ever. For-Profit-Gridco-Grade 8.5. I see this as a slight variant from an ISO fo= rm. Like the transco, independence arises from corporate structure and re= gulatory restriction on activities. However, I don't think it can take on = much risk for delivery or congestion cost certainty. The Gridco will be th= inly capitalized in comparison to the cost of the transmission system or th= e value of energy transmitted. As a result its efficiency over the not-for= -profit ISO is some share of operational benefits. Not-For-Profit ISO with Independent Board--Grade 8.0. This is actually ve= ry close tie with the For-Profit Gridco. The best form I have seen is tha= t proposed for RTO West. The members of the ISO (the customers and stakeho= lders) select a nominating committee representing each class of members. T= he nominating committee selects a search firm to proposed candidates who me= et the conflict of interest standard. The nominating committee elects dire= ctors from the slate of candidates. Every member of the nominating committ= ee votes on every director. A majority of the committee must agree to ever= y director selected. Directors must stand for reelection every three years= , with staggered terms for the directors. The Board of Directors is subjec= t to open meeting requirements except for personnel matters. An Advisory C= ommittee is formed of the members, but it is open to participation by all = parties. The Advisory Committee meets periodically by itself and with the = board. However, any party may submit its views to the board on any matter.= The Advisory Committee serves as a forum for discussion but it is not a g= ate keeper determining what the board should be told. There is no voting c= lass structure for the Advisory Committee because it does not make recommen= dations as a group. Individual groups submit their views directly to the b= oard. Not-For-Profit ISO with Stakeholder Board--Grade 5. This is a poor option,= far below the Independent Board. The first CA-ISO board showed it self to= be largely paralyzed by the inability of the various stakeholders to vote = for anything that would harm anyone. As a result, in my view, they never r= eally enforced the file tariff, e.g., forming new zones when it was clearly= needed. However, two worse forms exist. Not-For-Profit ISO with State Appointed Board--Grade 2.1. This is an even = poorer outcome, since state politics will prevent the ISO from ever acting = independently. This kind of board will serve at the Governor's pleasure. = It will discriminate in the interests of a single state. Even if the board= were appointed by multiple governors, it would have no incentive to provid= e an efficient market. To include multiple states, an interstate compact i= s needed with Congressional approval. Similar organizations (Northwest Pow= er Planning Council, Colorado River Commission, Port Authority of New York = and New Jersey, etc.) have slow reaction times and are political driven. Not-For-Profit Transco--Grade 2.0. Lacking an efficiency target imposed by= a profit goal, a not-for-profit transco would tend to maximize the benefit= s for its own staff. The management will want to extend the size of the en= terprise to justify salaries and the staff will have few reasons to care ab= out customer service. This is the DMV. This kind of agency will tend towa= rd condescending, paternalistic approaches to its services, i.e., imposing = the values of the staff on the response to any request for service. Steve