Southwest Power Trading Forum	

October 10, 2000     					         
Desert STAR Board of Directors
Desert STAR Advisory Committee:

Subject:	Significant Issues in the October 1, 2000 Drafts of the DSTAR Documents

On October 9, members of the Southwest Power Trading Forum met to discuss the October 1 drafts of the DSTAR Tariff and contract documents and the September 27 drafts of the Filing Utilities’ RTO Tariff and contract documents.  The participants in the meeting agreed that there a number of important problems that have not been satisfactorily resolved by DSTAR or the Filing Utilities and that these need to be resolved in order for DSTAR to produce a reasonable draft of the DSTAR documents for its proposed December 2000 filing.  
In reviewing the DSTAR documents, we have identified approximately 50 problems that require resolution.  The Filing Utility documents raise approximately 80 problems (including the 50 problems in the DSTAR drafts).  The purpose of this letter is to briefly describe the most-significant unresolved issues.  These are issues that, if left in their current state, would undermine the basic objectives of the RTO.  These issues fall into five categories:
•	Insufficient Scope of RTO Authority
•	Foreclosure of Meaningful Transmission Access to the DSTAR Grid
•	Undue Discrimination Against Non-Incumbent Uses of the DSTAR Grid
•	Inefficient and Inequitable Pricing Mechanisms
•	Restrictions on RTO Independence.
Because the stated intent of Attachment III of DSTAR’s proposed October 16 transmittal letter to FERC is to lay out the significant unresolved issues, we respectfully request that you give immediate attention to the problems that we have identified.  Attachment III should at a minimum incorporate the five most-significant unresolved issues described in this letter.
By October 11, we will also be prepared to provide to the DSTAR Board a preliminary draft of our more-comprehensive list of problems.  Representatives of our group are also willing to meet with members of the DSTAR Board, the DSTAR legal counsel and the DSTAR consultants to discuss in detail all of the problems and proposed solutions to each of them.

1.  	Insufficient Scope of RTO Authority
The RTO should have the capability and the authority to provide all FERC-jurisdictional services over the TOs’ systems, regardless of the service and regardless of the facilities used to the provide the service.  
•	Nowhere does the RTO Tariff state that DSTAR will provide for all FERC-jurisdictional services, and at all voltage levels. Without this clear mandate, important transmission services (including generation interconnection) will be left in limbo and remain under the control of vertically-integrated market participants - i.e., the Transmission Owners (TOs) - who will have both means and motive to continue the discriminatory practices that Order 2000 is intended to eliminate.
•	Recent statements by the TOs have indicated that some TOs intend to exclude both low-voltage and high-voltage transmission facilities from the RTO’s control.  However, the focus on voltage-level as the basis for facility inclusion in the RTO is misplaced.  The RTO Tariff documents and TCA need to clearly state that the RTO shall exercise: (i) operational authority over all TO facilities whose operation could affect the provision of FERC-jurisdictional services; (ii) access authority (including authority over interconnection policies and procedures) over all TO facilities that are used to provide any FERC-jurisdictional services; (iii) planning authority over all TO facilities related to items (i) or (ii); and (iv) pricing authority over all TO facilities that are used to provide any FERC-jurisdictional services.
In contrast to this, DSTAR’s proposed authorities are very limited.  For example:
•	In the area of generation interconnection, the DSTAR documents provide for very little RTO authority and include neither RTO-defined pricing policies, RTO-defined interconnection processes, nor any RTO role to intervene in the event that the vertically-integrated TOs abuse their roles and unduly restrict generation interconnection.  To the contrary, the DSTAR documents would give each TO far too much reign to determine its own policies for charging for system upgrades and to determine its own interconnection standards and procedures, with no RTO standardization or authority over either.
•	In the area of transmission access, the DSTAR documents state that wheeling services over so-called “Wholesale Distribution Facilities” would be provided by the individual Transmission Owners as necessary to effectuate a transaction under the DSTAR Tariff and that payment for associated direct assignment charges will be under the appropriate tariff of the Transmission Owners for Wholesale Distribution Facilities Wheeling Service.  This is a serious problem because it would leave the TOs in charge of the rates, terms and conditions of service for FERC-jurisdictional services, which should be the province of the RTO.    DSTAR’s role would be limited to a “coordination” role, with no authority, rather than the role of provider of transmission service.  It is not appropriate for the RTO to be trumped by each TO’s tariff or for the marketplace to be subject to the inefficiencies and potential discrimination which this structure would create.
•	In the area of transmission access, the TCA, as well as the Filing Utilities’ draft of Appendix E, would eliminate the very important requirement that transmission contracts between Participating TOs be suspended.  Without this requirement, a large percentage of the grid’s capacity would be grandfathered away from RTO authority and RTO transmission access protocols.
•	In the area of transmission expansion, DSTAR’s proposed authority is also limited.  The RTO documents provide no assurances that all alternatives to transmission facilities will be fairly considered; they include little pricing policy; and while they allow DSTAR to “review” and to “participate,” they do not address the question of DSTAR’s ultimate authority in the planning arena.
•	DSTAR’s enforcement authorities are non-existent.  The proposed ADR procedures are completely meaningless, as arbitration is not mandatory, providing the TOs with the ability to drag out all disputes through FERC litigation. 
DSTAR must play a much greater role in assuring nondiscriminatory and efficient access, operation, pricing and planning of all facilities that are used for all FERC-jurisdictional services.

2.  	Foreclosure of Meaningful Transmission Access to the DSTAR Grid
Under the proposals in both the DSTAR and Filing Utility, there is absolutely no doubt that the transmission access provided under by DSTAR would be substantially inferior to that currently available under the FERC Order 888 tariffs.
First, the DSTAR “price-taker” mechanism would strip almost all control over transmission access from DSTAR. The mechanism would de facto lock up all transmission access by placing virtually all commercially-significant transmission rights into the hands of the incumbent vertically-integrated incumbents and providing those entities with shields behind which they can conceal anti-competitive behavior.  
•	The “price-taker” concept would eliminate all but the shortest-term open access within the DSTAR grid and make the FTR auction process completely meaningless.  First, all transmission capacity with any commercial value would be pre-allocated to incumbent uses.  Second, the incumbent users may simply - through the “price-taker” mechanism - state that they do not wish to make any capacity available to DSTAR or any other grid users.  To be clear:  the “price-taker”  mechanism is not a bid for transmission rights.  Rather, in the hands of an entity which is pre-allocated FTR auction revenues, it is a statement that the entity refuses to make its rights available to the auction.  Under the “price-taker” mechanism, incumbent users would not have to state an opportunity cost or redispatch cost at which they would make transmission access available (as is the requirement under the Order 888 tariffs).   
•	Further, the “price-taker” concept would remove control over transmission access from the hands of the transmission providers (where it currently resides) and instead place such control into the hands of incumbents’ retail energy merchants, who have every incentive to block access for competitors.  Not only does the “price-taker” concept provide no incentive for incumbents to make any transmission access available, it actually provides a shield through which the incumbent can conceal its anti-competitive behavior (in contrast to an approach in which the incumbent would have to state an explicit price - $100,000/MWH, for example - and thereby expose to DSTAR and to the incumbent’s regulatory body its behavior).  
Thus, the “price-taker” concept would undermine the entire DSTAR transmission access model and take transmission access backwards to the days prior to EPAct, when incumbents had no obligation whatsoever to make transmission access available to any competitors.
Finally, the price-taker mechanism undermines the important economic objectives of the RTO’s congestion management scheme by concealing price information, by not inciting parties to explicitly value transmission vs. alternatives to transmission, etc..
Second, in addition to pre-allocating all transmission rights to incumbents, the DSTAR proposal would allow also inter-PTO contracts to remain intact rather then require their suspension, further reducing whatever capacity might be made available in the FTR auctions.  And DSTAR would then restrict long-term access even further by limiting the annual auction of FTRs to 75% of the available quantities.
Third, the DSTAR proposal would allow vertically-integrated market participants to continue to operate the DSTAR grid, providing them with preferential access to important market information and information regarding the details of their competitors’ operations.  (Note that while the Filing Utilities’ proposal first eliminates this problem by consolidating the control areas, the proposal then reintroduces the problem in another form by preferentially granting large amounts of operating data to the vertically-integrated TOs while also proposing to dramatically reduce the information - in more than a dozen areas - that DSTAR would make available to other market participants through the DSTAR website.)

3.  	Undue Discrimination Against Non-Incumbent Uses of the DSTAR Grid
	In addition to the restrictions on transmission access and generation interconnection for non-incumbents outlined above, the DSTAR documents propose many discriminatory policies:
•	So-called “Historical Uses” would receive preferential allocations of FTR auction revenues, at the expense of other users who would pay the same grid access charges. Such an allocation of transmission service rights based on incumbency rather than price would constitute “impermissible and” pricing.
•	Holders of Existing Contracts would be granted “rollover rights” for up to ten years beyond the expiration date of the Existing Contracts.  This gift would be made at the expense of other entities who want to compete for transmission access.
•	Entities that contribute to the embedded costs of the grid through payment of wheeling charges would not receive the same rights as other entities (since they would not be credited any FTR auction revenues) - again constituting “impermissible and” pricing.  
•	The proposed “OATT” creates unnecessary and discriminatory distinctions between “Resident Load” service and “Wheeling” service. 
•	Incumbent vertically-integrated CAOs (under the DSTAR proposal) and TOs (under the Filing Utility proposal) would be granted preferential access to commercially-important data.  Neither proposal includes any “code of conduct” that would require the CAOs or TOs to operate in the interest of DSTAR (rather than the interests of their affiliated merchant functions).

4.	Inefficient and Inequitable Pricing Mechanisms
	A number of the proposed DSTAR pricing mechanisms - for local generation resources (LGR), for Balancing Energy, for “Unauthorized Use” and for FTR clearing (including the “price-taker” mechanism) - are inconsistent and/or unfair and will create serious impacts on the incentives for efficient scheduling and dispatch, for new generation, and for demand-side elasticity.  As just a few examples:
•	The proposed LGR mechanisms are both confiscatory and inefficient.  They would result in perverse price signals to not build efficient new generation or demand-side management in load pockets, and to not build transmission to alleviate load pocket constraints. They would also perversely incite the construction of gold-plated “white elephants.”   The premise that generation in a load pocket should be paid the lower of the clearing price in the LGR auction or the price of energy outside the load pocket is contrary to both common sense and efficiency.
•	In both the DSTAR and Filing Utility proposals, if the demand for FTRs is less than supply of FTRs, then the marginal clearing price of FTRs should be zero, not the last winning bid.  If a product is not scarce, its value should be zero.
•	Under the Filing Utility proposal, in the event of a tie bid for FTRs (e.g., if 100 MW of FTRs are available and 150 MW of bids are submitted at $2), the FTRs would be preferentially allocated to Existing Contracts and loads, rather than pro rata.  This is both unfair and it undermines the integrity of the entire auction mechanism by creating a situation in which  one entity’s $2 bid is worth more than another entity’s $2 bid.
•	Under the Filing Utility proposal, the Balancing Energy Clearing Price would be calculated differently for incremental generation vs. decremental generation; some imbalances would be settled based on hourly prices, and others based on ten-minute price; and “Generator Imbalance Energy” would be settled using an entirely different price mechanism.  These inconsistent prices will undermine the creation of a clear and rational spot price for energy, a prerequisite for a workable and competitive energy market.
•	The proposed “Unauthorized Use” charges in both the DSTAR and Filing Utility proposals are inconsistent with the RTO scheduling model (in which SCs simply submit schedules and are charged for grid use based on actual demand) and in effect create Draconian penalties if an SC’s demand is greater than estimated.  Such penalties make no sense in a congestion model, and they are unworkable barriers to the implementation of retail competition.
	 
5.	Restrictions on RTO Independence
	The proposed RTO documents would subordinate the RTO Tariff to the TCA and would include important transmission policies in both the TCA and the GIA, both of which would be bilateral agreements which would constrain the RTO’s future actions.
•	Both the DSTAR and Filing Utility versions of the TCA state that the TCA trumps the Tariff (and every other DSTAR agreement) in the event of an inconsistency between documents.  This is a delegation of far too much authority to the TOs (who comprise but one class of market participants)  over both the RTO and all other market participants. Further, the contents of the TCA should be limited to matters directly related to the protection of the TOs’ facilities, and should not include any language that could otherwise allow the TOs to restrict the RTO’s role.  
•	The proposed Generator Interconnection Agreement contains large amounts of language that overlaps, duplicates or is inconsistent with Tariff.  The Generator Interconnection Agreement also specifies many market rules and pricing policies. Provisions governing the payment for various services (must-run, redispatch, energy imbalances) and various RTO authorities (including must-run and redispatch) should not be located in the Generation Interconnection Agreement, a bilateral agreement.  Similarly, terms and conditions regarding transmission access (e.g., the “price-taker” concept) should not be located in the TCA, where it would be impossible for the RTO to independently change them.  These are rules over which the RTO must have full control and they should be specified in the Tariff rather than bilateral agreements in which the counter-parties can thwart the RTO’s ongoing development of such rules.
	Finally, the RTO Bylaws continue to allow for abuse and domination of the RTO stakeholder committees by special interest groups. The Bylaws propose no changes to the poorly-crafted language which resulted in the abuse of the RTO membership categories in November 1999 and can result in the same abuse in the future.  The RTO’s independence is compromised by this and also by the composition of the stakeholder portion of the Governing Board and the structure of the DSTAR advisory committee, both of which can be abused by special interest groups.  The Bylaws should be changed to: (i) make the membership categories orthogonal to one another, (ii) eliminate the stakeholder portion of the Governing Board, and (iii) transform the advisory committee from a closed committee to an open committee in which any entity can participate.

[DSTAR-Issues-101000.rtf]