Putting together the pieces of the RTO puzzle
Joining a regional transmission organization presents opportunities, challenges and implications.
Basin Electric Power Cooperative
- October 31, 2011
By Andrea Blowers
To say it’s complicated is an understatement. The single most challenging issue facing Basin Electric, its members and partners today is the entangled task of evaluating if and how the cooperative system might fit into a regional transmission organization (RTO).
RTOs are independent transmission system operators created in the early 2000s by the Federal Energy Regulatory Commission (FERC) to ensure reliability and open access to transmission. Basin Electric’s system is adjacent to two RTOs in the region, Midwest Independent Transmission System Operator, or MISO, to the east and Southwest Power Pool, SPP, to the south.
There are potential opportunities and challenges for Basin Electric, its members, and its partners in the Integrated System (IS), Western Area Power Administration and Heartland Consumers Power District (see page 9) in either joining an RTO or continuing to operate status quo.
“We (the IS) commissioned a study in May of this year to get a high-level understanding of some very complex issues,” says Ron Harper, Basin Electric CEO and general manager. A global consulting firm, Charles River Associates, was hired to prepare the study looking at a number of major cost areas, and staff from each of the IS partners developed the assumptions considered in the analysis.
In September, Charles River delivered the preliminary study findings. Because it was a high-level assessment, Harper says it has given certain indications of areas that need further study. Basin Electric, its members and partners have agreed a more in-depth investigation needs to be done. However, there are issues more philosophical in nature that must be addressed if membership in an RTO were to become imminent.
“If Basin Electric were to join an RTO, it would fundamentally change how the cooperative has done business for the last 50 years,” Harper says. The predominate reason is Basin Electric would no longer decide for itself and its members what generation runs and when it runs. Since the cooperative was created in 1961, Basin Electric has favored mine-mouth to meter operations and, generally, has owned, and in many cases, operated its own generation and transmission resources to provide low-cost electricity to its members. As a full participant in an RTO, Basin Electric’s resources would be pooled and dispatched over the entire RTO footprint (see page 13) by the RTO.
“If you are one of three making decisions that affects all of you, like in the relationship Basin Electric, Western and Heartland have had in the IS, you’ve got one-third chance to influence the outcome. But, if you’re one of 100, which is a conservative estimate in the number of members in an RTO, it’s a totally different dynamic,” Harper says. “Your vote has a lot less impact.”
Harper says the relationships Basin Electric and its members have developed and fostered with Western and Heartland through the IS would be tested, and the hydro-thermal relationship Basin Electric and Western have cultivated for almost 50 years would certainly change. “To what degree, we don’t know yet. We’ve got to better understand how those family dynamics might be impacted.”
Though significant, the philosophical issues are only part of a much bigger puzzle that has many layers. It includes pieces from marketing, transmission and co-op members, most of whom are also preference customers. It’s within these pieces where the complexity of RTO membership unfolds, exposing the opportunities and challenges every co-op and organization will collectively face.
Market access
According to Wayne Backman, Basin Electric senior vice president of Generation, an RTO may provide access to the market for both sales and purchases. “We haven’t been able to utilize the output of our generation this summer with the excess hydro, so our power plants have been backed down,” he says. “In the past, we’ve relied on our ability to gain access to surplus markets to sell the generation from our plants. They’re capital-intensive pieces of equipment. Being part of an RTO may allow us to sell the power, surplus to our members’ needs, and get the revenue stream off of them.”
Jody Sundsted, power marketing manager with Western, says the hydropower Western generates varies from year to year. “As we saw this year, we had extra hydro to market beyond what we needed to fulfill our obligations to our preference customers. On the same token, when we’re short on energy and hydro isn’t good, we look to buy energy to fulfill contracts. An organized market, like an RTO, would provide access to markets so we could successfully buy and sell energy when we’re short or long.”
However, there is a question about the final cost of electricity to members and preference customers in a market situation. If generation and transmission resources are fully integrated in an RTO, how is the final cost of electricity calculated for end consumers? Would it still be cost-based, which Basin Electric’s members currently receive as preference customers and co-op members, or would it lead to market-based pricing?
There are issues with allowing the market to dictate price, says Tom Graves, executive director of the Midwest Electric Consumers Association, a regional coalition of federal power customers. “Energy producers, like Basin Electric and Western, may have better access to markets in an RTO, but there is concern the cost-based rates promised to preference customers through the Pick-Sloan program could disappear. It’s not clear, at this point, if we would be able to preserve cost-based rates in the current rate settings.”
Both Basin Electric and Western currently participate in RTOs in a type of hybrid capacity, meaning they’re not fully integrated in any one market, and they still have control over their resources.
Basin Electric and a number of its members have generation and load in MISO and SPP, and Western has load in both MISO and SPP. Having generation in the market means an energy producer is essentially selling the output of that generator into the market. Having load in the market means an energy producer must buy the power to fulfill those load obligations from the market. “Remember, everything in an RTO market is settled financially,” Sundsted says.
Access to markets isn’t the only potential benefit. Basin Electric’s membership is seeing continued growth, particularly with oil development in the Bakken Shale Formation in northwest North Dakota and eastern Montana. “If you look at those rapidly increasing loads, having the ability to purchase power from the market gives us some breathing room,” Backman says.
“Basin Electric is looking at 1,320 megawatts of load growth in the Bakken. With this continuing, we’re going to have to get serious about resource development,” he says. “We can’t build that fast. If we were members of MISO or SPP, with all probability, we’d buy that resource until we could get the generation built. It provides a bridge to help us do something more long-term.” On the same note, Backman adds RTO membership presumably would ensure Basin Electric has adequate operating reserves to provide backup power when one of the cooperative’s large units goes down.
There are, however, challenges on the market side in joining an RTO. Backman says the administration of it would require additional staff and software for Basin Electric. “If we were to join, we’d need to figure out the mechanics of how our resources would operate,” he says. Basin Electric’s baseload resources were built to run for long periods at stable levels. “We would need to have the ability to vary the output of our generators on a pretty short notice, almost on a real-time basis.”
Sundsted adds there is some volatility in the energy market, but normally from generation that’s in and out, like wind farms, or from downed transmission lines creating congestion. In some cases, the market can have negative pricing where the generator actually pays to generate. For Western, that’s of particular concern. “The Corps of Engineers sets water releases through the (dam) turbines to meet other authorized purposes of the federal projects (e.g. navigation, storage evacuation for flood control, etc.). If the RTO market is flush with generation like wind, we’ve seen negative energy prices for certain periods of time and Western could very well be paying to generate hydropower.”
Impact on wheeling transmission
Mike Risan, Basin Electric senior vice president of Transmission, says the challenges with RTO membership may lean more on the transmission side. However, he says an assumed benefit would be a more robust transmission system. “If you have a bigger footprint, being part of an RTO might open the door to options we might not have considered otherwise,” he says. He adds, however, that Basin Electric, Western and Heartland already have a fairly robust system paid for and constructed over many decades.
Risan and Lloyd Linke, Western’s power system operations manager, both say that becoming a transmission-owning member of either MISO or SPP means they would give up control of their transmission facilities to the RTO’s independent board and FERC to decide what to do with them. “You end up placing your transmission assets within the tariff of the RTO, and you’re then subject to the RTO’s tariff,” Linke says.
Risan says that could include a price shift for the cooperative and its members because of the RTO’s pricing structure, which is defined by a participant’s location, often called license-plate pricing. “We may be able to mitigate some impact from that to our members, but it certainly puts significant pressure on how we’ve historically priced transmission.”
Linke says one of the more complex pieces of the overall issue is whether the additional cost for transmission would be more or less than the benefits that could be realized on the market side.
RTOs, particularly MISO, have a cost-sharing allocation component regarding transmission. Risan and Linke agree there are two sides to it that need to be considered.
The cost-sharing allocation means when transmission infrastructure needs to be built or improvements and upgrades need to be made anywhere within the RTO footprint and the infrastructure meets certain criteria, all the members of the RTO pay for some or all of it, whether they benefit directly from it or not. Risan says Basin Electric might have some projects that could qualify for cost sharing. “The 345-kilovolt project (see page 22) in western North Dakota to help serve the oil development might be a candidate. But, our initial assessment is that even if we did get cost sharing, the costs coming in from other areas could completely cancel out the benefit. We need to take both sides in concert with each other,” he says.
Risan adds the collective Basin Electric, Western and Heartland system is a very large system. “We’re unique in our size and location from other organizations that have joined. We’re on the western edge, up against the east-west interconnection, and we’ve got SPP to the south and Canada to the north. We would give up more control than others might by joining,” Risan says.
Regarding the east-west interconnection, that’s another issue. Only the resources and transmission on the eastern side of that interconnect would be considered for RTO membership. The resources and transmission on the western side would remain out. “By slicing it up, we’d need to figure out how we’re going to manage operations and cost for the facilities on the west,” Risan says.
Members at the end of the line
“I think we’ve only begun to put the issues on the table,” says Vic Simmons, CEO and general manager of Rushmore Electric Power Cooperative, Rapid City, SD. Because Basin Electric serves 135 member cooperatives in nine states, the overall impact RTO membership would have on them is probably the most difficult element to define. But, because they own Basin Electric, it’s the most important one, Harper says.
“Fundamentally, we’re really talking about a change in the heart and soul of what launched co-ops in this region,” says Jeff Nelson, general manager of East River Electric Power Cooperative, Madison, SD. “All of us are concerned about – and I know Basin Electric is as well – the legal rights of preference customers and how RTO membership might affect access to and the cost of federal hydropower.”
“After hearing from Charles River, there are still so many questions that need to be answered with regard to the impact on members,” Simmons says. “One of the biggest questions is, how would members who participate in load management be able to continue doing so? Will they be able to?”
Nelson adds that many of Basin Electric’s members own and operate their own transmission networks separate from Basin Electric. “These members will need to consider the consequences of what such a change may have on their own transmission assets. This is another class of transmission assets within the ownership of Basin Electric members that need to be analyzed, member by member,” Nelson says.
Even with all the questions and unknowns, one thing rings true. “Each of us, collectively and separately, has multiple layers of analysis and evaluation that needs to be done, but we’ve got to go through it to better understand the implications of joining a regional transmission organization,” Harper says. “We’re really only scratching the surface on addressing the issue. It is incumbent upon us to educate, inform and communicate with members and our partners so we get this right.”
All the organizations involved agree operating in their current hybrid arrangements with the RTOs has been working well. “Because we’re so interconnected – Basin Electric and its members, Western and Heartland – we understand if we were to join an RTO, we would all need to do it together,” Harper says. “However, we’ve got to be careful as we move down this path to more understanding. We shouldn’t make any major decisions because of short-term challenges, like the economy and excess water. We’ve got to look at it under average circumstances.
“And, when the day is done, our primary focus must be on the member at the end of the line,” Harper adds. “What’s the best decision to continue providing the lowest cost, most reliable electricity to the cooperative members we serve. We don’t know it yet, but we’ll hopefully understand it better once we get through this process.”
What are regional transmission organizations?
In North America, there are nine regional transmission organizations (RTO) mandated by FERC. They are still relatively young, most getting started in 2001.
The two RTOs bordering Basin Electric’s service area are Midwest Independent Transmission System Operator (MISO) and Southwest Power Pool (SPP).
MISO is the nation’s largest geographical regional transmission organization of its kind. MISO’s headquarters are in Carmel, IN, and its operations are shared between Carmel and St. Paul, MN. MISO’s footprint is spread over 12 states from Montana on the west to Michigan on the east, from Canada to the southern-most tip of Missouri.
SPP is based in Little Rock, AR, and has members in nine states. Its footprint stretches from the northern border of Nebraska to the middle of Texas, and the eastern edge of Louisiana west to New Mexico. FERC approved SPP as an RTO in 2004.
Integrated System
The Integrated System (IS) of Basin Electric, Western and Heartland is the backbone of the high-voltage transmission grid in the upper Great Plains region of eastern Montana, North Dakota and South Dakota. This jointly developed transmission system evolved from the 1962 Joint Transmission System (JTS) agreement of the Bureau of Reclamation with Basin Electric and 103 cooperative and municipal preference customers in the region.
This agreement was a crucial component in making Basin Electric a reality. It enabled Basin Electric to lease capacity on the federal transmission system and deliver output from its first power plant to members throughout the region by building only 12 miles of high-voltage transmission line. Under the JTS agreement, the parties planned, constructed and operated transmission facilities needed to serve the customers of the region on an integrated single-system basis. In 1977, the U.S. Congress transferred the power marketing functions of the Bureau to Western, and Western assumed the responsibility f or the operation of the JTS.
In response to the FERC open-access transmission orders 888 and 889 in the 1990s, which set forth billing methodologies inconsistent with the JTS methodology, the JTS agreements were terminated. The IS agreement between Basin Electric, Western and Heartland replaced the JTS agreements and provides open access transmission service to customers in the region.
The integration of Western’s hydropower and Basin Electric’s thermal resources and shared use of dispatching staff and transmission facilities have saved consumers millions of dollars over the years.
Annual meeting pre-conference to address RTO issues
Basin Electric will host a pre-conference Wednesday, Nov. 9, titled “Joining Regional Transmission Organizations – Issues, Considerations, Implications.” There will be two panel discussions. The first will begin at 8 a.m.
Ron Harper, Basin Electric CEO and general manager, will moderate that discussion, which will include:
- Chuck Callies, vice president of Power Delivery, Dairyland Power Cooperative
- Wayne Backman, senior vice president of Generation, Basin Electric
- Mike Risan, senior vice president of Transmission, Basin Electric
- Bob Harris, Upper Great Plains regional manager, Western Area Power Administration
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- Jeff Nelson, general manager, East River Electric Power Cooperative
- Tom Meland, general manager, Central Power Electric Cooperative
- Ken Kuyper, executive vice president and general manager, Corn Belt Power Cooperative
- Vic Simmons, general manager, Rushmore Electric Power Cooperative
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