FTC Staff Comment Before the Federal Energy Regulatory Commission Concerning Regional Transmission Organizations

1 This comment represents the views of the staff of the Bureau of Economics of the Federal
Trade Commission. They are not necessarily the views of the Federal Trade Commission or any
individual Commissioner.
Before the
United States of America
Federal Energy Regulatory Commission
Regional Transmission Organizations ) Docket No. RM99-2-000
Comment of the Staff of the
Bureau of Economics
of the Federal Trade Commission1
August 16, 1999

1 This comment represents the views of the staff of the Bureau of Economics of the Federal
Trade Commission. They are not necessarily the views of the Federal Trade Commission or any
individual Commissioner. Inquiries regarding this comment should be directed to John C. Hilke,
Electricity Project Coordinator (303-844-3565 or jhilke@ftc.gov).
2 Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission
Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting
Utilities, FERC Order No. 888, 61 Fed. Reg. 21,540 (1996); Order on Rehearing, Order No.
888-A, 62 Fed. Reg. 12,274 (1997).
Before the
United States of America
Federal Energy Regulatory Commission
Regional Transmission Organizations ) Docket No. RM99-2-000
Comment of the Staff of the
Bureau of Economics
of the Federal Trade Commission1
I. Introduction and Summary
The staff of the Bureau of Economics of the Federal Trade Commission (FTC) appreciates
this opportunity to present its views concerning Regional Transmission Organizations (RTOs) to
the Federal Energy Regulatory Commission (FERC). FERC requests comment on a wide variety
of policy questions regarding RTOs as a possible next step in restructuring wholesale electric
power markets to facilitate competition and improve consumer welfare. This set of proposals
follows FERC’s initial efforts to advance competition in FERC Order No. 8882 and its approval of
Independent System Operators (ISOs) in California, New England, the Mid-Atlantic states
(Pennsylvania, New Jersey and Maryland (PJM), which also includes Delaware and the District of
Columbia), New York, and several Midwest states.
The FTC is an independent administrative agency responsible for maintaining competition
and safeguarding the interests of consumers. The staff of the FTC often analyzes regulatory or

3 The staff of the FTC has commented to FERC on electric power regulation in Docket EL99-
57-000 (May 27, 1999) (Entergy Services Comment); Docket RM98-4-000 (Sept. 11, 1998);
Docket No. PL98-5-000 (May 1, 1998) (ISO Policy Comment); Docket Nos. ER97-237-000 and
ER97-1079-000 (Feb. 6, 1998) (New England ISO Comment); Docket No. RM96-6-000 (May 7,
1996); Docket Nos. RM95-8-000 and RM94-7-001 (Aug. 7, 1995) (Open Access Comment).
The staff of the FTC also has submitted comments to various state agencies, including the Public
Utilities Commission of the State of California, Docket No. R.98-12-015 (distributed generation)
(Mar. 17, 1999) (California Distributed Generation Comment); the Alabama Public Service
Commission, Docket No. 26427 (restructuring in general) (Jan. 11, 1999) (Alabama Competition
Comment); the Louisiana Public Service Commission, Docket No. U-21453 (affiliate
transactions) (Oct. 30, 1998); Public Utility Commission of Nevada, PUCN Docket No. 97-5034
(affiliate transactions) (Sept. 22, 1998); Mississippi Public Service Commission, Docket No. 96-
UA-389 (Transco proposal) (Aug. 28, 1998); Louisiana Public Service Commission, Docket No.
U-21453 (stranded costs) (Aug. 7, 1998); Michigan Public Service Commission, Case No. U-
11290 (electric restructuring) (Aug. 7, 1998); West Virginia Public Service Commission, Case
No. 98-0452-E-GI (electric restructuring) (July 15, 1998); Commonwealth of Virginia, Joint
Subcommittee Studying Electric Industry Restructuring, SJR-91 (July 9, 1998); Public Utility
Commission of Texas, Project Number 17549 (affiliate transactions) (June 19, 1998); Maine
Department of the Attorney General and Public Utilities Commission, “Interim Report on Market
Power in Electricity” (May 29, 1998); and Louisiana Public Service Commission, Docket No. U-
21453 (market power) (May 15, 1998) (Louisiana Market Power Comment). The comments by
the FTC staff are included on the FTC’s website <http://www.ftc.gov/be/advofile.htm>.
2
legislative proposals that may affect competition or the efficiency of the economy. In the course
of this work, as well as in antitrust research, investigation, and litigation, the staff applies
established principles and recent developments in economic theory and empirical analysis to
competition issues.
The staff of the FTC has a longstanding interest in regulation and competition in energy
markets, including proposals to reform regulation of the electric power and natural gas industries.
The staff has submitted comments concerning these issues at both the state and federal levels.3
Moreover, the FTC has reviewed proposed mergers involving electric and gas utility companies.
FERC has tentatively concluded that “continued discrimination in the provision of
transmission services by vertically integrated utilities may [. . .] be impeding fully competitive

4 Notice at 6.
5 Id. at 66-77.
6 Id. at 58-85.
3
electricity markets.”4 This conclusion is consistent with the risks to competition that the staff
cautioned about in its Open Access comment in 1995. In that comment, FTC staff expressed
concern that the behavioral rules approach proposed and adopted in FERC Order Nos. 888 and
889 would leave incentives in place for vertical discrimination in transmission access and that this
would occur in a context in which detection and documentation of discrimination would be
difficult.
Several years of industry experience now appear to confirm this concern that
discrimination remains in the provision of transmission services by utilities that continue to own
both generation and transmission.5 Complaints about -- and actions by FERC to remedy --
discriminatory treatment favoring the generation assets of transmission owners are widespread.6
These complaints allege subtle forms of discrimination, including, for example, biases in posted
assessments of transmission capacity available to serve independent merchant transactions.
Accordingly, we support FERC’s assessment that behavioral rules have not provided the degree
of competitive benefits that FERC sought to engender when it introduced competition in
wholesale electric power markets. The present comment reflects our continued concern about
this issue and our interest in assisting FERC as it moves further toward structural remedies to
address competitive concerns in electric power markets.
FERC proposes to encourage voluntary formation of RTOs in all areas of the Nation to
further competition in wholesale electric power markets. RTOs will facilitate increased wholesale

7 Id. at 115.
8 Id. at 115-16.
4
competition, without which state efforts to introduce competition at the retail level may be
stymied. Bringing the full benefits of competition to consumers in the electric power industry
appears to require moving beyond present regulatory and institutional arrangements. Incomplete
utility compliance with FERC Order Nos. 888 and 889, along with the limited number of ISOs
that FERC has approved, does not yet provide sufficient competition so that consumers benefit to
the fullest extent possible.
FERC proposes four minimum characteristics of RTOs that are necessary to ensure robust
wholesale competition. These minimum characteristics include: (1) independence of the RTO
from generation owners, (2) a geographically broad scope and regional configuration, (3)
nondiscriminatory operational authority by the RTO of the transmission grid, and (4) ensuring
short-term reliability.7 In addition, each RTO must be able to perform seven minimum functions.
These functions include: (1) designing and administering tariffs for use of the grid, (2) managing
congestion within the grid, (3) managing parallel path flow, (4) offering ancillary services, (5)
managing OASIS and Total Transmission Capability (TTC) and Available Transmission
Capability (ATC), (6) monitoring market behavior, and (7) planning and expansion of the
transmission grid.8
We agree that these four minimum characteristics and seven minimum functions are
necessary for additional wholesale competition. In addition, we encourage FERC to consider
adding an "efficient operations" minimum characteristic. For at least some of the minimum
characteristics and functions, FERC also may wish to consider identifying benchmarks of best

9 Bringing demand-side price responses into the market may be closely related to FERC’s
conclusion that RTOs should be as large as possible, as discussed in Section III.C, infra.
5
practice that FERC can use in assessing the benefits and costs of individual RTO proposals.
Although we concur that the issues FERC raises in this Notice are critical in facilitating
the growth of competition in electric power markets, we believe that the reform process will be
significantly hampered unless ultimate consumers (businesses, governments, and consumers) are
provided with accurate price signals. In particular, the average pricing faced by many customers
masks the fact that electric power consumed in peak periods is often much more costly than
power consumed in off-peak periods. FERC may wish to consider methods to encourage RTOs
to facilitate conversion to real-time metering as an integral part of the process of increasing
competition in electric power markets.9
First, we agree with FERC that independent and separate control of generation and
transmission (minimum characteristic 1) is essential in bringing competition to electric power
markets. Without independence, the actual and/or perceived threat of vertical discrimination in
access to transmission services may undermine the effectiveness of RTOs. As a potential
benchmark for FERC’s determination of independence, we provide a review of criteria used in
antitrust law enforcement to assess independence of commercial entities. We note that clear-cut
structural independence may leave the RTO least prone to discrimination and raising rivals’cost
concerns. Even with complete independence, FERC and the antitrust agencies must remain alert
for subtle, yet improper, anticompetitive influences that might be exercised indirectly on RTOs.
Second, RTOs should be characterized by a broad geographic scope (minimum
characteristic 2). A broad scope will allow RTOs to take advantage of the potential to increase

10 The Nation’s transmission grid is currently divided into three interconnects: the eastern
states (as far West as Colorado), the western states, and Texas. Portions of Canada and Mexico
also are part of the interconnects serving the U.S.
11 “Comprehensive” in this situation means a fuller degree of interconnection or a denser grid.
6
competition by broadening the relevant geographic market and to enhance reliability by benefitting
from economies of reserves in generation and transmission capacity. FERC may wish to focus on
the underlying physical reality of the existing grid structure as a starting point for consideration of
the scope of RTOs. This is essential because all generation pricing and reliability decisions within
any of the Nation’s three existing interconnects10 are likely to affect directly all of the other
generation and transmission assets within that interconnect during at least some periods of time.
As the transmission grid becomes more comprehensive11 or demand peaks are curtailed by real-
time metering, the frequency of load pockets will diminish and the importance of interconnect-
wide conditions will expand. FERC may wish to establish some significant minimum level of
coordination throughout each interconnect, even if FERC permits multiple RTOs to form within
an interconnect. FERC also may wish to facilitate such coordination to diminish the likelihood of
discrimination in RTO-to-RTO dealings.
Third, RTO management of congestion and management of parallel paths (loop flow)
within the transmission grid operated by the RTO are closely related (minimum functions 2 and
3). We agree that both are essential to efficient operation of the transmission grid. FERC may
wish to sponsor a comparative evaluation of the various congestion and loop flow management
approaches that it has approved in existing ISOs with a locational marginal pricing approach,
mindful of the potential interaction between existing generation market power and congestion
management. We note that efficiency in transmission pricing likely involves removing pancaked

12 Transmission rates typically increase substantially each time a contract transmission path
crosses the boundary of a separate utility. To the extent that these rate increases are not reflective
of costs, pancaking of rates reduces incentives to transmit power and, therefore, may reduce the
number and range of alternative electric power suppliers that a customer economically may turn
to in order to avoid a price increase from one or more local suppliers.
7
rates,12 but that efficient pricing may entail charges that are distance-sensitive to the extent that
costs (short-term or long-term) are related to distance.
Fourth, we concur that RTOs must be concerned about the availability and pricing of
ancillary services (e.g., replacement generation reserves) as part of their reliability responsibilities
(minimum function 4). We note that the California ISO market monitoring report, which analyzed
the ancillary services market in California, provides strong evidence that the rules regarding
ancillary services may produce perverse pricing incentives. FERC may wish to favor RTO
proposals that avoid such incentives and may wish to consider facilitating markets for ancillary
services rather than acting as the sole purchasing entity.
Fifth, although we continue to encourage FERC not to delegate enforcement powers to
market monitoring bodies of RTOs (minimum function 6), it is appropriate to monitor how the
operating rules of the RTO are working in bringing competition to electric power markets. FERC
may wish to assure itself that the market monitoring function is conducted in an objective and
unbiased manner by providing independence from the RTO for the market monitoring function.
Sixth, the RTO’s transmission planning and expansion function (minimum function 7) is
vital to increased competition. This function is intimately tied to the independence characteristic
and to the RTO functions of managing congestion and parallel paths. FERC may wish to be
particularly alert to the implications of the development of distributed generation (DG) in this
regard. DG has the potential to increase the substitutability between generation and transmission

8
in relieving transmission congestion. As a result, RTO planning and expansion decision makers
increasingly may have incentives to discriminate against generation remedies for such congestion
if the RTO profits from the higher transmission volume and/or higher transmission rates that
would result from such discrimination. From a policy perspective, bias in the transmission
planning and expansion function may present the strongest challenge to bringing the full benefits
of competition to consumers through an RTO organized as a for-profit transmission company
(Transco).
We suggest adding an "efficient operations" characteristic to the minimum characteristics
and functions of a qualified RTO. With any new institution, there is a risk that "independence"
could devolve into indifference with respect to quality of service, innovation, and responsiveness
to changes in consumer preferences. Providing incentives to perform efficiently is a key concept
that FERC may wish to foster in order to avoid such indifference in the operations of RTOs.
From a policy perspective, the efficient operations function may present the greatest challenge to
bringing the full benefits of competition to consumers through an RTO organized as an ISO.
Because the ISO is a non-profit entity, it lacks profit incentives to perform efficiently and
responsively unless methods of providing such incentives are specifically incorporated into the
ISO structure.
Outside the minimum characteristics and functions of RTOs, we also comment on the
close relationship between increases in competition in wholesale electric markets under FERC’s
authority and competition in retail electric power markets under state authority. We emphasize
the effects of retail competition in the states on competition and efficiency in wholesale electric
power markets. We note that each step toward increased competition by FERC or a state

13 Notice at Sections II.B. and III.A.
9
provides benefits to consumers in other states and in the Nation as a whole. Where FERC is able
to create incentives that help firms and state decision makers to internalize these benefits provided
to other areas of the country, it may be able to enhance competition and improve efficiency for all
consumers. FERC may wish to utilize an economic concept -- an appropriation-of-external-
benefits framework -- in considering incentives to form RTOs. Finally, we note that in evaluating
RTO proposals, FERC may wish to consider whether independent power exchanges and bilateral
trade opportunities are viable alternatives to mandated, centralized power exchanges.
II. Background for the Notice
The Notice provides a broad overview of FERC’s efforts to increase competition in
wholesale electric power markets. Important milestones along this path include early efforts to
require open access to transmission services as a condition for mergers of vertically integrated
electric utilities; FERC’s Open Access Order Nos. 888 and 889, which sought to provide open
access to transmission services of all utilities regulated by FERC; the ISO orders with operational
unbundling of transmission from generation; consideration of individual Transco proposals; and
the present Notice contemplating operational unbundling or divestiture of generation assets from
transmission assets nationwide. The extended review in the Notice concludes that the existing
open access behavioral rules and the scattered ISOs do not constitute a sufficient foundation for
the continued growth of competition in electric power markets.13 This is consistent with our own
perceptions of generation and transmission suppliers’incentives and of events transpiring in
emerging electric power markets that we expressed in 1995 during consideration of Order Nos.

14 Open Access Comment, supra n. 3, at 2-3.
15 This discussion of RTOs takes place within the context of continued rate and service
regulation of transmission because effective transmission competition remains impracticable in
most situations.
10
888 and 889. At that time, we indicated that "[o]perational unbundling would likely be more
effective than functional unbundling; ... [c]ompetition problems in concentrated generation
markets must still be addressed under open access; [and] ...[e]fficient transmission pricing must
accompany open access."14
Development of voluntary, qualified RTOs (those with at least the minimum
characteristics and functions) in all regions of the country is an appropriate step toward increasing
competition in the electric power industry.15 In addition to the potential benefits identified in the
Notice, qualified RTOs can play an important role in improving the viability of retail competition
introduced at the state level. We believe that by broadening geographic markets and increasing
the volume of trades, qualified RTOs can help mitigate potential market power problems that
states face as they open retail electric markets to increased competition.
The four years since FERC was considering Order Nos. 888 and 889 have seen the
development of the Transco concept, a for-profit operator of transmission facilities unbundled
from generation assets. In 1995, divestiture of generation assets by regulated transmission
operators appeared to be problematic because of the projected cost in time and resources of
requiring this form of restructuring. Transcos may facilitate full divestiture at a substantially
lower cost than anticipated earlier. The emergence of a potentially lower-cost path to full
divestiture may warrant focusing more attention on the full divestiture option than appeared to be
practicable earlier.

16 Alabama Competition Comment, supra n.3, at 30-33.
17 As a general proposition, a market power monitoring office within the ISO may not be a
good substitute for up-front divestiture of generation capacity if market power is present. Several
states, including California, have confronted the generation market dominance issue directly and
required divestitures of key generation capacity in conjunction with forming an ISO. Divestiture
that simply replaces one dominant generating firm with another is unlikely to address market
power problems in generation. Divestiture to multiple buyers is likely to be necessary. In
evaluating divestiture proposals, it is important to address potential biases in the divestiture
process as well as partial cross-ownerships of generating plants that may thwart competition. As
noted earlier, antitrust may not be an effective policy tool for addressing existing market power
created under past regulation. Id. at 31.
11
III. Minimum Characteristics and Functions
A. A Competition Perspective on RTO Minimum Characteristics and
Functions
In advising states that have been considering how to initiate retail competition, we have
provided four competition “warning signs” regarding ISO formation and operation: the ISO is
too small; there is no plan for generation restructuring; the ISO is not sufficiently independent;
and the ISO plan does not effectively deal with transmission congestion.16 Although the RTO
concept presented in the Notice encompasses more than merely ISOs (an RTO may be a Transco,
an ISO, or a combination thereof), the competitive concerns we have expressed about ISOs apply
to RTOs as well. Three of the four warning signs that we have raised for the states (size,
independence, and transmission congestion) coincide with minimum characteristics and functions
identified in the Notice. Accordingly, we endorse these minimum characteristics and functions of
an RTO because they will facilitate increased competition in wholesale electric power markets.
Although the remaining warning sign concerning not having a plan for generation restructuring in
order to deal with existing market power is largely a responsibility of the states,17 there are
proposals before Congress to provide FERC with this authority in consultation with the FTC and

18 United States Department of Energy, Comprehensive Electricity Competition Act (1999)
<http://home.doe.gov/policy/ceca.htm>.
19 Illustrative figures developed by Oak Ridge National Laboratory show that a 765 kV
transmission line costs at least 30 percent less than a 500 kV line and at least 85 percent less than
a 138 kV line, on a cost per MW-mile basis. FERC Transmission Task Force, Staff Report, at
215-16 (1989).
12
the U.S. Department of Justice.18
B. Independence Minimum Characteristic
The basic issue underlying why transmission should be independent of generation in a
qualified RTO is the threat of vertical discrimination in access to transmission services. Vertical
discrimination in transmission is a serious concern because transmission technology continues to
exhibit major economies of scale that often preclude effective competition in providing alternative
transmission services between generation sources and loads.19 The perceived threat of vertical
discrimination in transmission raises the risks associated with investments in both generation and
obtaining electricity trading skills (training and experience) in order to compete with generation
assets owned by the operators of transmission assets. This perceived risk discourages entry by
generating firms and traders, making effective competition in generation less likely. Reduced
supply (less generation entry) and thinner markets (less trading) are likely to result in higher prices
for consumers than would exist absent such potential transmission discrimination.
Concerns about vertical discrimination in transmission access are not limited to existing
transmission and generation assets, but rather apply to expansions of generation and transmission
as well. Transmission owners could discriminate in providing grid connections to new generators
and in selecting transmission expansion projects. Discrimination or uncertainty about the terms
and conditions for obtaining connections to the grid will raise the risk of new generation

20 For a further discussion of this type of concern, see Scott Harvey and William Hogan,
“Comments on the California ISO’s NewGen Policy” (Aug. 1999).
21 Notice at 124-25. See FTC Staff Entergy Services Comment, supra n. 3; FTC Staff
Comment to the Mississippi Public Service Commission, supra n. 3. Concerns about the
effectiveness of safeguards against discrimination in access to transmission may be particularly
acute where transmission owners have great discretion in reducing ATC (available transmission
capacity) to independent generation entities by claiming that transmission capacity is necessary to
meet native load obligations.
22 Notice at 125-26.
13
investments with respect to their commercial viability and timing. Discrimination in the selection
of future grid expansion projects may disrupt such project by similarly increasing uncertainty
about future revenues of entrants (for example, discriminatory positioning of a new transmission
line may disproportionately reduce demand for power from the entrant). By eliminating or
delaying generation entry, or deflecting it to a different site, a transmission owner may reduce the
competitive pressure on its own generation assets, particularly if the prospective entrant’s assets
are likely to be more efficient.20 As a result of such discrimination, consumers are likely to face
higher electricity prices because more efficient generators fail to enter to displace less efficient
generators.
In addition, we concur with the assessment in the Notice that
affiliated transmission companies . . . may not be trusted by market participants even with
elaborate protections. . . . We believe that market participants are likely to suspect that
the safeguards will be gamed. This, in turn, could affect investment behavior. In
particular, market participants may be reluctant to make needed investments in generation
or marketing of electricity if they believe that the RTO is likely to give favored treatment
to its affiliates.21
We also agree that behavioral codes of conduct are unlikely to solve this problem because of
enforcement costs and uncertainties.22

23 In addition, FERC also may want to consider applying whatever ownership rules it develops
to third parties that have a substantial interest in a generation owner. This concept is analogous
to the “ultimate parent entity” concept embodied in the FTC’s rules governing the submission of
Hart-Scott-Rodino premerger notification filings. 16 C.F.R. Part 801.
14
As described in our Open Access Comment, the alternatives to functional unbundling with
behavioral rules are operational unbundling (ISOs) and divestiture. Divestiture presents the
cleanest type of structural remedy for transmission discrimination by severing the ties that create
the incentive to discriminate.
In order for an RTO to be independent, FERC proposes that generation owners have no
more than a de minimis interest (defined as no greater than one percent ownership) in the RTO.
FERC may wish to distinguish between voting interests and passive investment interests in
defining this one percent ownership interest threshold. To the extent a non-voting, passive
investment interest insulates this type of investor from the RTO’s decisions regarding operations,
planning, and expansions, a non-voting interest is less likely to undermine the independence
minimum characteristic. Although we are reluctant to advocate an inflexible prohibition on voting
rights for owners of generation assets located within the RTO, we note that exceptions to any rule
may grow into a serious breach over time.23 In order to provide FERC with a benchmark for its
consideration of independence criteria, we provide here a brief review of such criteria in the
antitrust enforcement context. We do not view this as definitive with respect to FERC’s
consideration of an appropriate de minimis standard, but merely as informational.
The loss of independent decision-making – whether sacrificed in a collusive arrangement
or destroyed by the anticompetitive unilateral exercise of market power – is an overarching
concern of antitrust enforcement. Two areas in which antitrust law attempts to guard against this

24 15 U.S.C. § 19.
25 The statute provides an exception when there is a de minimis overlap of competing
products and services between the firms.
26 As a remedy for an anticompetitive merger, the FTC sometimes requires parties to divest
competitively overlapping assets or divisions to an existing or newly-created entity. Many of the
considerations mentioned above are examined to determine whether the acquiring entity will
operate those assets or divisions competitively and independently of the merged firm.
15
loss of independence may offer FERC useful perspectives.
First, Section 8 of the Clayton Act24 prohibits interlocking directorates among competing
firms. No person may serve as a director or officer of competing corporations if each firm has an
aggregate total of capital, surplus and undivided profits exceeding $10,000,000.25 Although
FERC’s Notice incorporates a similar provision based on share of control, FERC may also find it
useful to consider whether common directorships in third parties may be used to circumvent the
basic prohibition.
Second, the FTC sometimes permits firms to merge provisionally, subject to a "hold
separate" agreement that maintains each firm’s structural and operational independence while the
FTC completes its review of the transaction. Such temporary hold separate agreements
frequently prohibit the merger partners from mingling the firms’assets or operations; having
common directors, officers or employees; exercising voting rights in each other (other than a de
minimis exercise that may be necessary for tax purposes); attempting to influence each other’s
voting shareholders; and communicating with each other.26 Prohibitions such as these may be
adapted to the electricity market to secure both the complete independence, and the appearance of
independence, of RTOs and market participants.
Even if FERC adopts a specific de minimis standard, it must be alert for potential

27 If FERC elects to allow generators to have a voting interest, it may wish to consider
establishing a cap on the aggregate voting interest of generators and a prohibition on voting pools
of generators.
28 For example, cases have been brought charging firm A with inducing firm B to discriminate
against a firm that competes with firm A. See, e.g., Monsanto Co. v. Spray-Rite Service Corp,
465 U.S. 574 (1984) (a challenge to a manufacturer’s termination of a discounting distributor
initiated by requests of rival distributors); and the FTC’s recent matter Toys "R" Us, Inc., Dkt.
No. 9278 (1998) (respondent pressured manufacturers to limit supplies to growing competitors)
(appealed to the U.S. Court of Appeals for the Seventh Circuit). Another source of concern
occurs if a powerful member of an industry association has the capacity to use the association as
an instrument to injure competition or promote collusion. Recognizing these dangers, the
Supreme Court held in Allied Tube & Conduit Corporation v. Indian Head, Inc., 486 U.S. 492
(1988), that manipulating an industry association’s standard-setting process was subject to
antitrust challenge, even though no association rules were violated. According to the Court, “the
hope of procompetitive benefits [from the standard-setting process] depends upon the existence
of safeguards sufficient to prevent the standard-setting process from being biased by members
with economic interests in restraining competition.” Id. at 509. Since, absent appropriate
safeguards, comparable manipulation of an RTO’s independent decision making process may be
possible, FERC may wish to consider requiring that RTOs and market participants adopt internal
procedures to prevent the exercise of inappropriate influence.
16
coalitions of common interest -- for example, a group of generation owners with similar incentives
and RTO ownership interests that could undermine the independence of an RTO. With an
ownership de minimis standard applied only against individual ownership interests, such a
coalition could make possible the type of vertical discrimination of concern in electric power
markets.27
In addition, even with a low de minimis standard, we alert FERC to possible conduct that
antitrust enforcers confront. Although operational unbundling or divestiture minimizes the
likelihood of discriminatory access to transmission, there are less direct ways in which
anticompetitive influence can be used to foster discrimination. Important antitrust cases have
been decided where indirect pressure or influence has been applied to advance common ownership
interests against structurally independent firms.28 We invite FERC to be alert to this type of

29 Notice at 130 n.199.
30 Id. at 131-33.
31 The three separate interconnects in the United States are well recognized, but they are not
immutable. As recently as the early 1970s, the ties between the Eastern and Western
Interconnects were in operation. Los Alamos Resource Pool Power Supply Study," DOE
Contract No. DE-AC04-93AL82990 (July 1, 1994). The possibility of synchronizing ERCOT
with the Eastern Interconnect has recently been reexamined at the direction of the Texas
Legislature as a possible avenue to help reduce concerns about retail market power and reliability
problems. "Feasibility Investigation for AC Interconnection between ERCOT and SPP/SERC,"
Report to the 76th Texas Legislature (1998). A recent reexamination of bringing the Eastern and
Western Interconnects into synchrony was conducted in connection with the merger of Public
Service Company of Colorado and Southwestern Public Service Company in 1997. Submission
of Lundberg, Marshall & Associates on behalf of the Department of Energy Albuquerque
Operations Office (July 30, 1997). The low transmission volumes and high costs of additional ties
envisioned at the time of these reviews combined to discourage synchronization. As retail
competition unfolds with corresponding increases in potential power trades and as improved
transmission technologies emerge, FERC may wish to encourage reconsideration of the option of
17
anticompetitive behavior as well.
C. Minimum Scope Characteristic
The Notice presents a list of benefits of geographically large RTOs and restates FERC’s
conclusion from Order No. 888 that RTOs should be as large as possible.29 We concur that RTOs
should be as large as possible. The Notice also identifies several factors that might limit the scope
of RTOs30 and contemplates utilizing existing geographical configurations as the basis for RTOs.
Basing the scope of RTOs on existing geographic interconnect and reliability configurations takes
advantage of existing coordination investments and relationships that may reduce the costs of
forming RTOs.
We add three observations for FERC’s consideration. First, the fundamental physical
reality of the existing transmission grid is that the configuration factors identified in the Notice
apply on an interconnect-wide basis.31 Anything short of interconnect-wide coordination may

synchronizing the three existing interconnects. Synchronizing two or all three interconnects
would allow additional RTO configurations to be considered.
32 Order No. 889 requires transmission owners to calculate the ATC after obligations to serve
native load (state regulated retail demand) are taken into account.
33 Real-time metering is important because average pricing creates a competitive disconnect
that artificially decreases the price elasticity of demand faced by suppliers. Artificial demand
inelasticity provides inefficient investment and consumption incentives and facilitates the exercise
of market power. Both of these disadvantage customers in the long run by increasing the costs of
supplying power and by preventing customers from saving money by responding to real-time price
signals, as they seek to do in other markets.
18
create gaps that are inconsistent with the basic physics of electricity in available transmission
capacity (ATC) determinations,32 loop flow issues, managing transmission congestion, minimizing
pancaked rates, optimizing allocation of scarce transmission capacity, and planning/coordinating
transmission expansion. Without efficient inclusion of all of the regional configuration factors,
intra-regional competition may be limited and the full benefits of competition will not be available
to consumers. FERC may wish to focus on potential discriminatory relationships among RTOs
within an interconnect.
Although transmission congestion limits the periods when interconnect-wide conditions
are the primary supply and demand considerations in electric power markets, expansions of the
grid under RTOs and increased use of real-time metering33 may reduce periods of transmission
congestion in the future. This also might make more salient the supply and demand conditions in
the broader area of the relevant interconnect. Both expansions of the grid and real-time metering
are likely to be important elements in fulfilling the broad geographic scope minimum
characteristic, and FERC may wish encourage both accordingly.
Second, FERC may wish to review the configuration of an RTO as well as its size. For

34 Notice at 134-35. Prior to the formation of an RTO that creates a potential wall, trades to
wheel electric power between high- and low-cost areas may have several alternative paths
available, thus creating bargaining opportunities to secure the best terms and conditions for the
trade. By creating a wall, this source of competition may be reduced.
35 The Western Interconnect already has an interconnect-wide organization, the Western
States Coordinating Council, because the Western Interconnect is a single NERC region.
19
example, we concur with the potential competitive concern expressed in the Notice about an RTO
that might appear to create a transmission “wall” that raises the cost of transmitting electricity
between low-cost power sources and loads now experiencing relatively high prices within the
same interconnect.34 Similar concerns may arise if major gaps occur within or between RTOs
because, for example, large government-owned transmission facilities are not incorporated into
the RTO system. To avoid such inefficiencies, FERC may wish to encourage federal power
administrations to join RTOs or to consider seeking authority to bring the federal power
administrations within the RTO framework.
Third, FERC may be able to avoid an "either/or" choice in evaluating RTO proposals, by
contemplating two levels of RTO formation for at least a trial period. For example, "tight
coordination RTOs" might be accepted with NERC reliability council or NERC security
coordinator configurations, while umbrella RTOs at the interconnect level would also be
organized.35
D. Congestion and Loop Flow Management Minimum Functions
Congestion management and loop flow management are so closely related that we treat
them together here. Without doubt, loop flow aspects of congestion management are among the
most difficult and complex issues in the electric power industry. Here, as in the discussion of
scope, FERC may wish to go back to first principles -- the physical reality of the electric system.

36 See, e.g., William Hogan, "Nodes and Zones in Electricity Markets: Seeking Simplified
Congestion Pricing," presentation at the 18th Annual North American Conference on the
USAEE/IAEE, San Francisco (Sept. 9, 1997); Paul Joskow, “Restructuring, Competition and
Regulatory Reform in the U.S. Electricity Sector,” 11 J. Econ. Persp, 119-38 (Summer 1997);
Timothy Brennan, et al., A Shock to the System: Restructuring America’s Electricity Industry,
Chapter 4, Resources for the Future (1996).
37 A variety of transmission congestion pricing systems have been approved by FERC for use
by ISOs. California, for example, opted for a "zonal transmission pricing" approach, albeit with
very large zones. The Pennsylvania, [New] Jersey, Maryland (PJM) ISO has chosen to address
transmission congestion problems with much more narrowly defined pricing zones. PJM’s
approach is termed "locational marginal pricing" or "nodal pricing." Locational marginal pricing
is a transmission pricing system that attempts to take full account of transmission loop flows.
Loop flows are a complication of the physics of electricity (electricity follows the path of least
resistance) that results in transmission congestion arising in places and times that are counter to
the intuitive, traditional view of transmission as a point-to-point delivery of electric energy.
Locational marginal pricing assesses congestion charges based on the transmission congestion
caused throughout the transmission system by a particular transaction.
38 Financial transmission rights (FTRs) are financial contracts (or forms of insurance) that can
allow the holder of the right to hedge some of the risk of fluctuating transmission charges. Some
risks, such as de-rating of lines, are not incorporated into this framework. In practice, FTRs
could be awarded by an RTO via an auction process. Proceeds from the auction are used to
offset transmission access charges paid by all users of the grid. Because transmission users have
to pay two charges (the access charge and the congestion charge) to use the grid in an RTO that
uses an LMP system, the RTO would collect the congestion charges for the use of a certain node
and remit the congestion revenue to the entity holding the FTR. In light of this remittance, the
holder of the FTR can hedge the congestion costs of transmission usage as though the power had
flowed according to the transmission congestion contract but free of congestion cost. Scott M.
Harvey, William W. Hogan, and Susan L. Pope, "Transmission Capacity Reservations and
Transmission Congestion Contracts" (1996) (condensed at 9 Elec. J. 42 (1996)); “Transmission
Rights,” 137 Pub. Util. Fortnightly 20 (June 15, 1999). In other words, the holder of the right
can effectively outbid other potential users because it gets back whatever it had to pay to outbid
20
The physical reality is that transmission congestion may arise and be significant between any pair
of nodes in the electric grid.36 To operate the transmission system most efficiently, these
congestion effects must be incorporated in transmission rates. For this reason, we agree with the
Notice that "locational marginal pricing37 [LMP] and financial rights for firm transmission
service38 provide a sound framework for efficient congestion management."39 The reason is that

other potential users of the transmission right. Firm transmission rights provide greater certainty
in transmission transactions than interruptible transmission rights.
39 Notice at 163.
40 The efficiencies of LMP (and zonal pricing) are often contrasted to the inefficiencies of
pancaked rates. Discussion of increased efficiency in transmission pricing often starts with a
commitment to eliminate pancaked rates. There is some danger in this discussion of straying from
the efficiency argument against pancaked rates -- i.e., pancaked rates are inefficient because they
to not accurately reflect transmission costs -- to a more generalized, but inaccurate, assertion that
distance should be irrelevant to transmission rates. The underlying physical reality, however, is
that line losses and long-run marginal costs of construction do have a distance component and
that such transmission cost differences should be efficiently included in transmission rates.
21
LMP is designed to be consistent with the physical reality of the transmission network.40
Accurate signals from LMP for investment to reduce congestion may become even more
important as DG presents opportunities for small-scale, fine-tuned (with respect to both size and
location) generation investments to relieve transmission congestion, in place of large-scale
transmission or generation investments.
Despite the apparent virtues of LMP, we recognize that it may be reasonable to back away
from a full application of an LMP approach if doing so provides benefits to consumers from
increased competition in generation markets. For example, in light of its alleged complexity and
the difficulty that financial markets may have in anticipating congestion charges, LMP reportedly
may inhibit the formation of efficiency-enhancing futures markets in electricity generation and
trading because congestion prices are more uncertain under LMP than under other pricing
approaches (such as zonal transmission congestion pricing). Similarly, FERC may wish to be alert
to the use of an alternative congestion pricing system that could facilitate the exercise of a utility’s
existing market power. At this point, FERC may want to continue to entertain alternatives to
LMP if a reasonable case is made that benefits to consumers are greater under the alternatives

41 As the transmission system comes closer to operating at full capacity for a great proportion
of the time, congestion issues and the relative efficiency of different congestion management
approaches likely will become more economically significant.
42 If one or more systems prove to be superior from a consumer welfare perspective, one
might expect other RTOs to adopt the better system(s). However, FERC review and incentives
are likely to speed the transition and alleviate situations in which a less efficient approach is
entrenched because it benefits one or more special interests.
43 Using California as an example, ancillary services include regulation reserve, spinning
reserve, non-spinning reserve, and replacement reserve. All are elements in the reliability of
electric service. "Report on Redesign of Markets for Ancillary Services and Real-Time Energy"
of the Market Surveillance Committee of the California Independent System Operator (Mar. 25,
1999), Section II (California Market Surveillance Report). The California Market Surveillance
Report was prepared by the Market Surveillance Committee of the California Independent System
Operator to determine how the power markets in California were operating.
22
than under LMP.41
Although experimentation with transmission congestion pricing alternatives to LMP may
be appropriate at present, we do not believe that great uncertainty about the most effective
approach to transmission congestion management need exist indefinitely. FERC may wish to
establish a date in the not-too-distant future when it will undertake a comparative analysis of the
consumer costs and benefits of alternative transmission pricing regimes. If one or more
approaches provide substantially superior results for consumers, FERC may wish to initiate an
eventual rulemaking concerning policies to encourage RTOs to move toward whichever
transmission congestion pricing system(s) provides substantially greater gains in consumer
welfare.42
E. Ancillary Service Minimum Function
FERC’s proposal would require an entity seeing to qualify as an RTO to serve as a
supplier of last resort for ancillary services as described in Order No. 888.43 Serving as a supplier

44 The California Market Surveillance Report (at 2) observes that because the same generation
units supply both energy and ancillary services, "poorly designed markets that allow generators to
earn inefficiently high prices create[] high opportunity costs to participating in other markets that
may be otherwise workably competitive. Generators then rationally bid higher prices into other
markets because of these greater opportunity costs."
45 Notice at 181.
23
of last resort, however, does not require the RTO to be the sole buyer of ancillary services.
FERC may wish to consider arrangements in which the RTO’s primary role is to provide a market
mechanism for generators to acquire such services for themselves. This may reduce costs by
allowing generators to customize their purchases of ancillary services to better fit their specific
needs. We encourage FERC to consider the potential for perverse pricing incentives that may
arise in establishing ancillary service bidding rules. The California Market Surveillance Report
makes a good case that this potential problem deserves FERC’s attention.44 Without assessing the
specific findings of that report, we note that the incentive problems identified may have serious
market power effects. Accordingly, we encourage FERC to focus on improving the structure and
performance of ancillary services markets as part of its RTO rulemaking.
F. Market Monitoring Minimum Function
FERC proposes to require that each qualified RTO conduct market monitoring through a
separate market monitoring organization. A market monitoring office of a qualified RTO would
be required to report to FERC about the operation of market rules and the exercise of market
power within the RTO.45 We agree that each of the identified issues is important to ensuring that
markets evolve as competitively as possible. Where a qualified RTO is smaller than an
interconnect, FERC also may wish to encourage market monitoring offices in other RTOs in the
same interconnect to coordinate their efforts to examine the effects of market rules or variations

46 See FTC Staff, New England ISO Comment and ISO Policy Comment, supra n. 3.
24
between RTOs in market rules on the volume and price of inter-RTO transactions.
We have four closely related observations about RTO market monitoring. First, the
market monitoring organization should not be given enforcement powers.46 Granting such
powers could devolve into reregulation. Further, the conflict of interest issues inherent in self-
monitoring by RTOs would be aggravated further if the market monitoring office had enforcement
powers as well.
Second, evaluations of competition questions carried out by the RTO’s market monitoring
office and conclusions of the RTO’s market monitoring office should not shield the RTO or its
members from antitrust enforcement actions. Self-monitoring controlled by RTOs would not
create an antitrust exemption for RTOs. We suggest that FERC make this explicit in any rules
establishing RTO market monitoring organizations.
Third, the independence characteristic that FERC applies to the relationship between
RTOs and owners of generation assets should apply equally to the relationship between RTO
market monitoring offices and RTOs. In order for market participants, as well as FERC and the
public, to have confidence in the integrity of the market monitoring function, it is important to
ensure the independence of the market monitoring function.
Fourth, within the market monitoring function there is a potential conflict between the
efficiency focus and the RTO’s likely focus on reliability. Given the relative size of the RTO and
its monitoring office, it may be difficult for the monitoring office to sustain its designatated focus
on efficiency considerations. For these reasons, FERC may wish to examine whether market
monitoring should be established outside the structure of the RTOs being reviewed. An

47 It may be possible to keep such data confidential, yet allow researchers to have access to it.
See Opportunities for Research with the Federal Trade Commission’s Line of Business Data,
Federal Trade Commission, Bureau of Economics (Sept. 1985). As long as the resulting
academic work is limited to reporting aggregates or statistical relationships, confidentiality can be
maintained while providing some degree of cross-check on market monitoring office research.
One may question, however, whether academic research completed long after the fact represents a
sufficient check on the independence of the market monitoring function.
48 Notice at 189.
25
alternative would be to establish such reviews within FERC itself or to have the market
monitoring office report to an independent market monitoring committee separate from the RTO
board. We note that making generators’otherwise confidential bid data publicly available (so that
the academic community can perform a quality check on the efforts of RTO market monitoring
offices) may raise antitrust concerns about abetting potential collusion or strategic bidding.47
G. Planning and Expansion Minimum Functions
FERC proposes that RTOs be responsible for planning expansions to the transmission grid
that will allow the RTO to provide efficient and non-discriminatory transmission services.48 The
present transmission grid experiences varying degrees of congestion at different points in time and
in different geographic areas. Because transmission expansion may be costly, some degree of
congestion is consistent with efficient operation of the grid. To some extent, present congestion
arises because much of the grid was sited when the industry was organized with a strong reliance
on self-sufficiency in generation and transmission for each traditional vertically integrated local
monopoly. In other respects, present congestion reflects higher growth of demand in some areas
coupled with difficulty in obtaining siting approvals for new transmission. With an appropriate
transmission congestion pricing system in place, price signals will be available to investors to
indicate potentially profitable places for additional transmission (or generation) investments.

49 The intensity of this concern may be reduced if other constraints on transmission expansion,
such as difficulties in obtaining siting permits, make transmission expansion decisions largely
moot.
50 Local generation entry may reduce demand for transmission services because it substitutes
for distant generation brought in to meet local load via transmission lines. By delaying or
blocking access by localized generation entrants to the transmission and distribution system, the
transmission provider may increase its revenues and profits as well as reduce the risk of stranded
transmission costs.
51 For example, a traditional vertically integrated utility with generation assets located
primarily outside a load pocket might have an incentive to overinvest in transmission capacity into
the load pocket in order to preempt DG capacity investments that would otherwise take place
within the load pocket. The regulated vertically integrated utility might be able to add the extra
transmission capacity to its regulated transmission rate base and, thereby, add to the value of its
distant, unregulated generation capacity. Effectively, it would be subsidizing its generation sales
with its additional transmission investment. The result could be higher prices for customers of the
regulated transmission company and higher production costs for the economy as a whole, as the
distant generation capacity displaces DG that would have been the most economical solution
absent the cross-subsidization.
26
We agree with FERC that the key policy goal is to ensure that transmission expansion
decisions are based on efficiency considerations and are not biased. If expansion and siting
decisions are influenced by generation owners, for example, the generation owners will have
incentives to curtail transmission expansions or distort siting decisions in ways that will favor their
own existing generation investments.49 A similar bias in transmission expansion decisions may
arise if the RTO that owns the transmission assets or the transmission owners themselves make
the transmission expansion decisions and if they benefit from transmission congestion or from
blocking new local entry that would compete with transmission.50 This was the central
competitive concern expressed in the Entergy Services Comment.
As we noted in our California Distributed Generation Comment, the development of DG
accentuates potential bias in grid investments.51 FERC may wish to be particularly alert for RTO

52 18 C.F.R. Part 156.
53 In proposing the “Efficient Operations” minimum characteristic, we recognize that
transmission represents a relatively small proportion of the total costs of production and
distribution in electric power markets. To the extent that efficiency increases in transmission
result in inefficiencies at other levels of the industry, we suggest that FERC focus on overall
consumer welfare and not just on efficiencies at one level of the market.
27
incentives to raise the costs of, or to delay, DG connections to the grid. The development of DG,
primarily fueled by natural gas, highlights the difference in the siting authority FERC has for
natural gas transmission pipelines relative to electric power transmission lines. With continued
difficulties in obtaining siting approvals for electric transmission lines at the state and local levels,
DG may become a very important substitute because FERC has broader authority in gas pipeline
siting than in electric power transmission siting.52
Finally, there is a scope aspect to the planning and expansion function. Within an
interconnect, planning and expansion decisions with respect to different sections of the
interconnect are inherently interdependent. If multiple RTOs exist within an interconnect, there
must be coordination between the RTOs in making planning and expansion decisions if the grid is
to develop optimally to serve consumers with lower prices and improved reliability.
IV. The "Efficient Operations" Minimum Characteristic53
FERC may wish to establish an additional minimum characteristic concerning efficient
operations of RTOs. With any new independent institution, there is a risk that independence will
devolve into indifference to the quality of service, the pace of innovation, and changes in customer
preferences. RTOs are unlikely to be an exception. To avoid traveling down such a path, FERC
may wish to identify minimum efficiency incentives that will characterize RTOs.

54 Some efficiency incentives have been an element in regulating for-profit monopolies. For
example, regulated firms may have incentives to reduce costs if rates are adjusted infrequently.
By reducing operating costs, the firm increases profits until such time as the rates of return are
recalibrated to incorporate new cost conditions. Similarly, rate caps may provide incentives for
regulated firms to reduce costs, so as to increase profits.
55 See, e.g., F.M. Scherer and David Ross, Industrial Market Structure and Economic
Performance, Ch. 18 (3d ed. 1990); John Vickers and George Yarrow, Privatization: An
Economic Perspective, Ch. 2 (1988).
28
For example, an RTO is more likely to operate efficiently and be responsive to customer
preferences if the RTO (or its employees) gain by reducing costs and increasing the volume of
wholesale transmission. Similarly, efficiency may be enhanced by providing a mechanism for
displacing management and the board of directors if either or both fail to operate and manage the
RTO efficiently or fail to respond to customer preferences.54 A Transco completely separated
from generation might serve as the benchmark for FERC’s consideration of an efficient operations
minimum characteristic. From a policy perspective, the efficient operations functions may present
the greatest challenge to an RTO organized as an ISO. ISOs are non-profit entities and,
therefore, lack profit incentives to perform efficiently and responsively unless methods to provide
such incentives are specifically incorporated into the ISO structure.
Although economists typically begin with the assumption that organizations act to
minimize costs and produce efficiently in order to maximize profits, this assumption has been
severely challenged in cases where managers are not the owners and cannot be displaced, where
profits are not the organizing principle of the organization, or where monopoly conditions
prevail.55 Indeed, the rise of privatization is due in part to the perception that the lack of
efficiency incentives leads to higher prices, lower quality, and lack of innovation in both goods
and services. Within the electric industry, there is strong evidence from abroad that introducing

56 See, e.g., Barry Spicer, et al., The Power to Manage, Ch. 7 (1992).
57 FTC Staff, Comment to the Louisiana Public Service Commission (May 15, 1998), supra n.
3.
58 For example, the same type of argument is used in explaining patent protection. Without
patent protection (against free-riding imitators or copiers), inventors may not earn enough profits
29
the profit motive into utility operations can produce major efficiencies.56 Accordingly, FERC
may wish to concern itself with operating efficiency in transmission in order to maximize
consumer welfare in the reform of the electric industry. FERC can signal its recognition of the
importance of operating efficiency by making it one of the minimum characteristics. As we noted
in our Louisiana Market Power Comment, operating efficiency may be a particular challenge to
ISOs because they do not have a profit incentive to spur efficiency considerations.57 FERC may
wish to focus the attention of existing and proposed ISOs on developing employee incentives that
reward efficiency and customer responsiveness and on mechanisms to provide contested board
elections.
V. Other Issues
A. Incentives to Organize RTOs
The Notice provides a general discussion of the possibility of using various incentives to
encourage the formation of RTOs. Although we do not take a position on the appropriateness of
such incentives, there may be circumstances under which such incentives are efficiency-enhancing.
The efficiency rationale for granting such incentives flows from a general economic
concern about potential market failures associated with positive externalities.58 In this instance,

to undertake the research and development investments necessary to develop new goods and
services with large benefits to consumers. This is because the imitators appropriate much of the
consumer demand, reducing the amount of demand available to the innovator. The demand lost
to imitators becomes external to the investment cost/benefit decision of the prospective innovator.
See Scherer and Ross, Industrial Market Structure and Economic Performance, supra n. 55, at
622-23.
30
the positive externality occurs because organizing an RTO may provide incidental benefits to
consumers (i.e., lower prices and improved reliability), both inside and outside the RTO, that the
RTO organizers might not capture. These benefits may include all the various efficiencies that are
described in the Notice. To the extent that these social benefits are not captured by the RTO
organizers, they are external to the investment decisions regarding organizing an RTO. To the
extent that substantial benefits are external to the investment decision to organize an RTO, there
may be underinvestment in establishing an RTO. One solution to this potential underinvestment is
to provide incentives that allow the RTO organizers to capture more of the benefits they are
creating by forming the RTO. If FERC elects to offer incentives to form RTOs, it may wish to
utilize the externalities framework of analysis to assess the form and magnitude of those
efficiency-enhancing incentives.
B. Power Exchange Competition
To the extent that RTO proposals incorporate exchange functions -- e.g., creating a
trading institution (a power exchange, or “PX”) where buyers and sellers interact -- FERC may
wish to consider whether competition is feasible in performing that function. Although we
recognize that organizers of RTOs may feel compelled to grant some exclusivity in the PX
function in order to assure that some entity provides this function when an RTO begins
operations, FERC may wish to reassess from time to time whether enough exchange service

59 In its simplest terms, the Noerr-Pennington doctrine shields private parties from antitrust
liability when they engage in concerted and genuine efforts to influence governmental action, even
though the conduct is undertaken with an anticompetitive intent and purpose. Eastern Railroad
Presidents Conference v. Noerr Motor Freight, Inc., 315 U.S. 127 (1961); United Mine Workers
of America v. Pennington, 381 U.S. 657 (1965). The doctrine is significant because it seeks to
accommodate two rights that are important in guaranteeing personal liberty: the right to petition
government, and the right to an economic system driven by free and unfettered competition.
31
providers are available to avoid awarding a monopoly franchise for this function.
C. Anticompetitive Agreements Reached During RTO Formation Discussions
The process of forming RTOs necessarily involves meetings among competing generation
and transmission owners in each region. Because the RTO formation results in a request that
government (FERC) approve various organizational and structural changes, RTO formation
discussions are protected generally from antitrust enforcement under the Noerr-Pennington
doctrine.59 Agreements among competitors concerning prices, services, policies toward entrants,
and other commercial matters (other than formation of an RTO) are unlikely to be protected from
antitrust enforcement even if those agreements are reached during meetings called to assist in
forming an RTO. We encourage FERC to make this distinction known to participants in RTO
formation meetings.
VI. Conclusion
FERC’s proposed rules concerning RTOs represent a reasonable step forward in
implementing increased competition in the electric power industry. Reliance on behavioral rules
in this regard has proved to be less than ideal. The Notice provides an extensive review of
evidence for the need to move toward RTOs. In large part, we agree with FERC’s RTO
proposals with respect to minimum acceptable characteristics and functions. In this comment, we

32
have noted specific areas where we believe FERC’s prescriptions for qualified RTOs may be
improved from a competition policy perspective, such as by encouraging real-time pricing and
efficient RTO operations. FERC also may wish to consider an externalities framework to
evaluate the appropriate form and size of such incentives.
Respectfully submitted,
________________________
Jeremy I. Bulow, Director
John C. Hilke, Electricity Project Coordinator
Bureau of Economics
Federal Trade Commission
600 Pennsylvania Ave., N.W.
Washington, D.C. 20580
August 16, 1999