Most people do not think the nation's Midwestern states include Texas, Louisiana, Mississippi and Arkansas. But the folks at Entergy (ETR) -- which operates its utility business exclusively in those states -- decided they want to be part of the Midwest Independent Transmission System Operator (MISO) system.
On many levels, this is a stunning decision. It's not a bad decision; it's just a surprise. Let me explain.
First, it surprising that Entergy would want to join a regional transmission organization (RTO) at all. The idea behind RTOs came from the federal government to manage open access to transmission lines. After they are created, RTOs and transmission lines are regulated by the Federal Energy Regulatory Commission (FERC), because by definition transmission lines represent interstate commerce.
Southern sensibilities resist the idea that Washington can regulate any part of their electric utility system. Accordingly, Texas created a very special RTO called the Electric Reliability Council of Texas (ERCOT), which made sure not even one of their electrons ever crosses state lines. By so doing, ERCOT can claim it is not engaged in interstate commerce and thus not subject to federal regulation.
For the techies, there are several ways to keep power from crossing state lines. One is to use isolation transformers, where the input and output use different electrons. Another is to convert power to direct current then reconvert it to alternating current.
And Texas isn't alone in resisting Washington's RTO goals; many Southern utilities -- including Cleco (CNL), The Southern Company (SO), Tennessee Valley Authority (TVA), NextEra Energy (NEE), TECO Energy (TE), Chesapeake Utilities (CPK), Progress Energy (PGN), SCANA (SCG) and Duke Energy (DUK) -- engage in such electrical border patrol.
Second, it is surprising Entergy selected MISO. Only a tiny piece of Entergy's northern footprint touches MISO. But a significant portion of its western territories is adjacent to the RTO called the Southwest Power Pool.
ERCOT did consider expanding its service area to include one of Entergy's subsidiaries, Entergy Texas (ETI). While that addition may benefit ERCOT, it does not seem prudent to split Entergy's transmission line system into pieces and operate them in separate RTOs.
Third, Entergy's decision to join MISO is impacting other utilities. As Entergy goes through the approval process, neighboring Duke is going through a similar process in its quest to acquire Progress. Like Entergy, Duke has to seek permission from FERC, state utility commissions and other regulators.
Sure enough, FERC is withholding approval for Duke because it has concerns over what would be Duke's larger footprint and how it would affect competition in the wholesale power markets. FERC's concerns originated from complaints that were lodged by the cities of New Bern and Rocky Mount, N.C. Those cities argued to FERC that the proposed merger should not proceed because the merger would eliminate any competition in provisioning their municipal utilities with wholesale power.
To resolve the competition issue, and to further its own policies, FERC is suggesting that Duke, Progress and other utilities form an RTO. Firmly opposing the idea of a new RTO is North Carolina's utility commission, which also needs to approve the proposed merger.
Duke's merger is in trouble. Entergy's untimely interest in joining MISO is not making it any easier. Further, Duke is caught between two regulators -- the federal agency responsible for regulating wholesale power and the state agency responsible for regulating retail electricity.
Duke's first solution is to argue that the FERC's ruling is in error. Second would be to propose a "virtual divestiture" that would set aside capacity for wholesale market offerings while the merged utility holds on to the power plants that generate the capacity. FERC likes the idea of restructuring the merged utilities and divesting all their power plants.
Heading in the opposite direction is the state of New Jersey. It already restructured its utilities, had the utilities sell their power plants and joined an RTO, PJM Interconnection. Now it seems the state has realized its decision was a mistake. New Jersey is embroiled in a dispute with PJM, FERC and independent power producers and is threatening to withdraw from PJM.
New Jersey Board of Public Utilities President Solomon mentioned that the prospect of withdrawing is an option of last resort. Leaving PJM could wreak havoc with independent power producers, power marketers, the RTO and others. It would also be a black eye for the FERC.
ERCOT, Duke and New Jersey Governor Chris Christie learned that RTOs live at the intersection of federal and state energy policies, along with a host of other unresolved policy issues. Entergy should consult with its colleagues before proceeding with any MISO plans -- ultimately, it should rejoin its Southern neighbors.