Jim,

	In Denver you asked for our views on RTO Governance, i.e., preference for Stakeholder vs Independent Board.  As a basic principle, I believe that the key issue is independence energy marketing, generation ownership etc.  I have given each of these a grade from 1-10 based on my preference.

For-Profit Transco--Grade 10.  The best form of governance is the for-profit Transco.  It is governed by a independent corporate board and regulated by FERC.  Independence is a fact of corporate structure and regulatory restriction.  The Transco can take on delivery risk, building new facilities as necessary to meet customer demand.  The Transco is prohibited from taking any long term position in the energy market, and it is compensated only by system through flow (total load served and energy wheeled).  Unfortunately I think the likelihood of Transcos forming is remote.  The biggest obstacle is the difficulty of getting around the tax problems.  The LLP/LLC structures skirts the tax problem, but it also results in converting a sizable investment in to a passive investment with control by a minority owner.  I think the only way to get Transcos in the short run is for there to be a short window (2-3 years) when transmission owners have the ability to sell assets to a company combining assets, without taxes.  Those missing the window would have to pay taxes on a pre-sale merger transactions as they do now.  This would compel owners to determine if they want to be transmission owners and spin off could occur.  Federal assets (TVA, BPA, WAPA) are unlikely to be spun off for some time, if ever.
For-Profit-Gridco-Grade 8.5.  I see this as a slight variant from an ISO form.  Like the transco, independence arises from  corporate structure and regulatory restriction on activities.  However, I don't think it can take on much risk for delivery or congestion cost certainty.  The Gridco will be thinly capitalized in comparison to the cost of the transmission system or the value of energy transmitted.  As a result its efficiency over the not-for-profit ISO is some share of operational benefits.
Not-For-Profit ISO with Independent Board--Grade 8.0.   This is actually very close tie with the For-Profit Gridco.   The best form I have seen is that proposed for RTO West.  The members of the ISO (the customers and stakeholders) select a nominating committee representing each class of members.  The nominating committee selects a search firm to proposed candidates who meet the conflict of interest standard.  The nominating committee elects directors from the slate of candidates.  Every member of the nominating committee votes on every director.  A majority of the committee must agree to every director selected.  Directors must stand for reelection every three years, with staggered terms for the directors.  The Board of Directors is subject to open meeting requirements except for personnel matters.  An Advisory Committee is formed of the members,  but it is open to participation by all parties.  The Advisory Committee meets periodically by itself and with the board.  However, any party may submit its views to the board on any matter.  The Advisory Committee serves as a forum for discussion but it is not a gate keeper determining what the board should be told.  There is no voting class structure for the Advisory Committee because it does not make recommendations as a group.  Individual groups submit their views directly to the board.
Not-For-Profit ISO with Stakeholder Board--Grade 5.  This is a poor option, far below the Independent Board.  The first CA-ISO board showed it self to be largely paralyzed by the inability of the various stakeholders to vote for anything that would harm anyone.  As a result, in my view, they never really enforced the file tariff, e.g., forming new zones when it was clearly needed.  However, two worse forms exist.
Not-For-Profit ISO with State Appointed Board--Grade 2.1.  This is an even poorer outcome, since state politics will prevent the ISO from ever acting independently.  This kind of board will serve at the Governor's pleasure.  It will discriminate in the interests of a single state.  Even if the board were appointed by multiple governors, it would have no incentive to provide an efficient market.  To include multiple states, an interstate compact is needed with Congressional approval.  Similar organizations (Northwest Power Planning Council, Colorado River Commission, Port Authority of New York and New Jersey, etc.) have slow reaction times and are political driven.
Not-For-Profit Transco--Grade 2.0.  Lacking an efficiency target imposed by a profit goal, a not-for-profit transco would tend to maximize the benefits for its own staff.  The management will want to extend the size of the enterprise to justify salaries and the staff will have few reasons to care about customer service.  This is the DMV.  This kind of agency will tend toward condescending, paternalistic approaches to its services, i.e., imposing the values of the staff on the response to any request for service.

Steve
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