LexisNexis(TM) = Academic

1999

20 Energy L. J. 233 =

LENGTH: 19778=20 words

ARTICLE: THE GOVERNANCE OF TRANSMISSION=20 OPERATORS

Robert J. Michaels *

* = Professor of=20 Economics, California State University, Fullerton = rmichaels@fullerton.edu, and=20 Special Consultant, Econ One, Inc., Los Angeles. A.B. University of = Chicago,=20 1965, Ph.D. University of California, Los Angeles, 1972. Earlier = versions of=20 this work have been presented at the Rutgers University Advanced = Workshop in=20 Regulation and Competition, and the Western Economic Association 1999 = Annual=20 Conference. Views expressed here are not necessarily those of the = author's=20 affiliations or clients.

SUMMARY:
= ... The=20 next section contains a summary history of the ISO and Transco concepts = and=20 their embodiments in applications to the Federal Energy Regulatory = Commission=20 (FERC or Commission) and the Commission's subsequent decisions. ... The = Energy=20 Policy Act of 1992 (EPAct) gave the Commission new powers to order = transmission=20 (wheeling) for wholesale transactions, but not for final consumers of = power, who=20 remained under state regulatory jurisdiction. ... The higher the number = of=20 possible coalitions, the larger the number of possible packages and the = less=20 likely that the content of any one will be economically efficient. ... = The=20 FERC's ability to make this assumption greatly simplifies determination = of the=20 content of its regulations. ... The transmission owner's incentive to = exclude=20 may be particularly strong if it also owns generation. ... The state's=20 transition rules, however, give its utilities an interest in low energy = and=20 ancillary services prices, since they must collect their stranded costs = in the=20 difference between these prices and frozen retail rates prior to 2002. = ... Size=20 and shape will change as power markets evolve, particularly if they move = away=20 from the short-term energy exchanges that are the focus of today's = policy. ...=20

TEXT:
[*233]

I.=20 Introduction

As power markets expand, insular = transmission=20 systems have become increasingly incompatible with competition. Regional = grids=20 with open-access tariffs and comprehensive congestion management will = likely=20 dominate electricity's future. Beyond a growing consensus on regionalism = lies=20 controversy over the form of the providing organization. On the two = sides are=20 proponents of non-profit independent system operators (ISOs) that will = control=20 utility-owned transmission assets and proponents of regulated corporate = entities=20 (Transcos) that will own or lease the lines. Each side hopes to win the = debate=20 by repeating a single theme. The Transco's friends believe that a profit = motive=20 will lead it to operate with greater productive efficiency than an ISO. = Its=20 opponents see in the same motive an incentive to exercise market power = that is=20 lacking in the nonprofit ISO. n1

Both viewpoints are poor guides = to=20 policy. The evidence on efficiency of public and private utilities in = the United=20 States is mixed at best, and of little relevance for predicting the = efficiency=20 of hitherto unseen transmission specialists operating in newly = competitive=20 markets. Discussions of profit also mislead, because both the ISO and = the=20 Transco are for-profit organizations, whose decisions are made by = individuals=20 with clear and substantial financial interests. The fact that the ISO's = books=20 show zero profit says nothing about the profits of those organizations = whose=20 votes determine its policies. Both the Transco and the ISO operate under = governing boards, with one elected by shareholders and the other chosen = by=20 "stakeholders" with their own economic agendas. n2 An ISO cannot be=20 [*234] analogized to a charity hospital, governed by = volunteers who=20 want little more than social status in return for their effort. =

The=20 corporate form of business dominates most of the world's economies = primarily=20 because it is governable. The interests of its stockholders are = denominated in=20 shares with equal voting power and equal claims to the firm's earnings.=20 Shareholders may differ on strategy, but the enforced uniformity of = their=20 interests renders useless the formation of voting blocs whose only = intent is to=20 transfer wealth from other shareholders to themselves. Because the = relevant=20 assets of the firm's operations are the only source of wealth for its=20 shareholders, and shareholders can diversify their holdings to deal with = risk,=20 profit maximization will be their near-unanimous goal. The ISO is a = polar=20 opposite, with no profits of its own to be claimed by those who set its=20 policies. An ISO's decision-makers will have conflicting interests, be = affected=20 in different ways by group decisions, and have voting rights that bear = little=20 relation to their economic exposures. A rational choice between ISOs and = Transcos can be made only after examining the nature and consequences of = their=20 governance. The economics of finance and voting = strongly=20 suggest that the outcomes in a nonprofit ISO will be both inefficient = and=20 inconsistent relative to those of a corporation. History leaves ample = room for=20 pessimism. There has been no important economic institution with = voluntary=20 participation that has enjoyed long-term viability under ownership and=20 governance arrangements resembling those proposed for = ISOs.=20

The next section contains a summary history of the ISO and = Transco=20 concepts and their embodiments in applications to the Federal Energy = Regulatory=20 Commission (FERC or Commission) and the Commission's subsequent = decisions. Next,=20 this article evaluates the efficiency claims of Transco advocates by = examining=20 economic studies that compare for-profit and nonprofit electric systems. = Because=20 those studies broadly conclude that neither type of system is generally = more=20 efficient than the other, any case for or against either institution = must be=20 grounded elsewhere. To begin that task, the economic role of nonprofit=20 institutions is next examined in more generality. In important markets,=20 nonprofits have proven themselves viable against for-profit firms. The=20 activities dominated by nonprofits, however, are quite unlike those in = which=20 ISOs will be engaged. Economic studies have found that nonprofits are = more=20 likely to be viable in situations where their = governance=20 mechanisms are biased toward efficient choices.

The ISO's=20 governance by collective choices of opposing interests = is quite=20 unlikely to favor efficiency. To lay a foundation for the importance of=20 collective choice, the article next summarizes economic and legal = research on=20 why the corporate form so dominates economic activity. That research has = generally found that shareholder governance has = important=20 efficiency properties that will probably be lacking in the = administrative=20 structures of non-corporate institutions. ISOs will be governed by the=20 collective choices of self-interested persons with divergent individual = goals,=20 who will use their votes to further their interests. Few, if any, prior = studies=20 of ISOs have examined the structure of their govern [*235] = ance or=20 compared it with the corporate alternative. The remainder of this = article=20 attempts to remedy the omission. It begins with a brief introduction to = the=20 economic analysis of political activity, including the formation of = interest=20 groups and coalitions. The analysis predicts that utility interests will = be=20 uniquely well-situated to dominate the internal politics of ISOs, and = that this=20 dominance cannot be exorcised simply by making them voting minorities. = The=20 history of ISO formations and those in progress is then shown to bear = out this=20 prediction.

The next sections show that ISOs are a priori as = likely as=20 Transcos to exercise monopoly power, and are more likely than Transcos = to=20 produce economically inefficient or inconsistent decisions. The logic of = voting=20 by heterogeneous electorates sheds light on this critical difference. It = is=20 shown that voting in an ISO environment can produce inconsistent or=20 contradictory policies; a party with control of the agenda (sequence of = votes)=20 can at times control voting outcomes, and strategic misrepresentations = by voters=20 are far from unlikely. Certain conditions about voter interests and = preferences=20 can rule out the possibility of paradoxical and perverse outcomes. Those = conditions, however, are less likely to be met in ISOs than in corporate = organizations. The discussion continues with an examination of = regulatory=20 oversight. Contrary to some expectations, the = governance=20 structure of an ISO will probably make it harder to regulate for = efficiency and=20 to police market power than in a Transco. Problems analogous to the = separation=20 of corporate ownership and control can also arise in ISOs, where they = may be=20 harder to remedy than in corporations whose control is transferable in = markets.=20 For reasons inherent in the governance structures of = ISOs, they=20 are less likely to innovate than Transcos, at a critical juncture for = the=20 industry when innovations might be most valuable. Finally, the=20 governance structure of ISOs virtually insures that = they will=20 not simply fade away when a superior institution comes along. =

II. Some=20 History

Regulators and legislators must determine how to=20 harmonize emerging competition in power production and marketing with = the=20 natural monopoly technology of transmission that continues to exist. = Through the=20 1970s, exchanges of power between vertically-integrated utilities were = in most=20 cases a minor supplement to self-sufficiency, with transmission supplied = largely=20 at the discretion of its owners at cost-recovering rates. As these = "wholesale"=20 markets grew in the late 1980s, the FERC imposed "open access" policies = intended=20 to ensure non-discriminatory allocation of transmission, at first as a = condition=20 on utility mergers and requests for market-based rate authority. n3 =

The=20 Energy Policy Act of 1992 (EPAct) gave the Commission new powers to = order=20 transmission (wheeling) for wholesale transactions, but not for final = consumers=20 of power, who remained under state regulatory jurisdiction. n4 Ex=20 [*236] tending the range of EPAct, in 1996 the FERC issued = Orders=20 No. 888 and 889. n5 In those crders, the Commission recognized that pro = forma=20 open access tariffs and electronic bulletin boards (OASIS) would not by=20 themselves allocate regional transmission efficiently in the face of = loop flows=20 and pancaked rates along fictitious contract wheeling paths. n6 = Questions of=20 access and coordination are becoming more urgent as retail wheeling = spreads.=20 Order 888 specifies that customers in states with retail wheeling whose=20 transactions use FERC-jurisdictional lines are to be served under the = same=20 tariffs that apply to wholesale users. n7 In the wholesale markets, = access=20 problems became acute in the summer of 1998, when inefficient and = inadequately=20 coordinated transmission practices were a major cause of price spikes in = the=20 Midwest that ranged up to thousands of dollars per megawatt-hour (Mwh) = on=20 infrequent occasions. n8

To ensure regional coordination and = protect=20 against discrimination, Order 888 set forth eleven principles to = evaluate a=20 regional organization (ISO) that would take over operation of = transmission from=20 vertically integrated transmission-owning utilities. n9 The FERC's = powers to=20 order formation of and participation in ISOs are unclear. n10 In all ISO = applications thus far approved, the Commission has also required = formation of=20 institutions to monitor the state of competition in markets that the ISO = administers. n11 The FERC has approved [*237] (with = conditions) five=20 ISO proposals, for California, New England, the Pennsylvania-New = Jersey-Maryland=20 Interconnection (PJM), New York, and part of the Midwest. n12 The first = three=20 ISOs began operating by May 1, 1999. All are nonprofits governed by = votes of=20 stakeholder representatives, and operate lines that utilities continue = to own.=20 n13

For-profit Transcos arrived at the FERC more recently. In = March=20 1999, FirstEnergy, an Ohio-Pennsylvania holding company, filed a formal=20 application to transfer transmission assets of its four operating = companies to a=20 newly formed affiliate in preparation for divestiture to a larger = regional=20 organization. If that changeover does not occur within two years, the = assets=20 will be divested to an unaffiliated entity. n14 In June, FirstEnergy and = four=20 other large utilities submitted to the FERC the "Alliance" agreement for = a=20 regional transmission organization (RTO) that could take the form of = either a=20 Transco or an ISO. Within ninety days of the FERC's approval, the = companies will=20 declare their intent to transfer assets to a Transco. That organization = will be=20 formed if one or more of the larger companies divests and 50% of the = remaining=20 companies concur with its establishment. If the Transco is not formed, = an ISO=20 will be, with each member still having an option to trigger formation of = the=20 Transco in the future by a similar decision. n15

In the other=20 application, Entergy Services, Inc. (Entergy) seeks a declaratory order = from the=20 FERC to provide guidance on its proposed Transco, "an independent,=20 incentive-driven transmission company that will control and operate = Entergy's=20 transmission system and the transmission system assets of the entities = that will=20 become members of the Transco." n16 Entergy's operating companies will = sell or=20 lease their transmission assets to the Transco, a Limited Liability = Company=20 governed by a board with no ties to Entergy or any other = transmission=20 operator. n17 Entergy argued at length that the Transco is = consistent=20 with Order 888, noting that the Order's ISO principles do not require a=20 nonprofit organization. n18 Intervenors and others have identified the = degree to=20 which a Transco is [*238] independent of its parent(s) as = the most=20 critical screen it must pass through. Commenting on Entergy's proposal, = a group=20 of cooperatives noted that the company will continue to carry the = Transco's=20 assets on its own books and file a consolidated tax return that includes = the=20 Transco. Intervenors believe that such an affiliation will give the FERC = the=20 perpetual duty to act as "conduct police," and that the only acceptable = Transco=20 is one completely separated from generation. n19 In a recent declaratory = order,=20 the Commission determined that Entergy's passive ownership scheme, if = properly=20 designed, would be consistent with the principles of Order 888. n20 Any = guidance=20 contained in that order, however, would be subject to rules that might = emerge=20 from the FERC's comprehensive rulemaking on Regional Transmission = Organizations,=20 currently in progress. n21

III. The Efficiency Non-Question =
=20
The ISO/Transco debate has thus far been a war of assertions, with = Transco=20 partisans claiming that only profit-seekers will strive hard for = efficiency and=20 ISO advocates replying that Transcos will by nature harm competition in=20 advancing their owners' interests. n22 The assertions of one side do not = successfully rebut the assertions of the other. Generalizations from = largely=20 dated comparisons of public and corporate efficiency do not decisively = suggest=20 the superiority of either. Between the 1960s and the 1980s, economists = performed=20 many such comparisons, typically finding small or insignificant = differences=20 favoring corporate systems. n23 Many of these studies analyzed = distribution, a=20 standardized technology accounting for less than a third of delivered = costs in=20 most places. n24 Economists largely lost interest in such comparisons = during the=20 1980s, and performed few analyses of the bulk power markets whose growth = would=20 soon trigger pressure for restructuring. Comparisons of transmission, = the=20 subject of the current debate, are almost nonexistent, probably because = few=20 municipal utilities own networks comparable to those of corporate = systems. Even=20 if comparison cases were available, it is difficult to envision a study = relevant=20 to the ISO/Transco controversy. [*239] Variable costs of=20 transmission operation are relatively small, loop flows ensure that the = state of=20 a given grid is not entirely under its owner's control, and the = operators of a=20 system must make their choices in real time subject to reliability = constraints=20 which require judgment calls that are hard for outsiders to evaluate.=20

The lack of definitive results in public-private comparisons is=20 unsurprising. Few of the studies adequately accounted for the effects of = regulation that allowed corporate utilities to recover all but their = most=20 imprudent expenses yet put ceilings on allowable profits. On the public = side,=20 comparisons were difficult because these systems often enjoyed = tax-exempt=20 financing and no explicit property taxes. Most municipal utilities, = however,=20 contribute part of their revenues to city funds, and some also pay = amounts in=20 lieu of explicit property taxes. Unregulated by most state commissions,=20 municipal systems are more often overseen by elected local officials or = their=20 appointees. The weak efficiency incentives of regulated utilities may = produce=20 higher costs than necessary, while the fiscal importance of nominally = nonprofit=20 public systems may induce them to monitor costs closely.

Changes = in both=20 regulation and markets also make historical generalization risky. = Incentive=20 regulation of corporate transmission increasingly rewards economizing on = expenses and smart transactions in the market. n25 Competitors now have = access=20 to utility-owned transmission, although disputes over the degree of = openness are=20 widespread. n26 Market-based wholesale power prices are now the rule = rather than=20 the exception. In states where corporate utility customers have direct = access to=20 suppliers, municipalities are under increased pressure to open up their = systems=20 as well, and in all states they are trading more extensively in = competitive=20 wholesale markets. The stable regulatory and governmental institutions = that made=20 "yardstick" public-private comparisons relevant in the past are = vanishing or=20 changing beyond recognition with the arrival of competition.

IV. = Governance

A corporation's choices are=20 determined by vote of its directors, who ideally act as agents of = shareholders.=20 An ISO's choices are also made by representatives of groups whose wealth = is at=20 stake. n27 The organization's rules explicitly specify the interests = that will=20 be represented, by agents who are implicitly expected to vote those = interests=20 and shape compromises in their favor. If representatives of = self-interested=20 parties run both the ISO and the Transco, the rational choice of an=20 organizational form requires examining how differences in their=20 governance will affect policy outcomes. Operating = efficiency=20 and monopolistic conduct rightly figure in today's debates, but far more = is at=20 stake. Which organization will be [*240] more innovative? = Which will=20 be a better long-term planner, and which is more likely to make = consistent=20 decisions as time passes? Which is more likely to invest efficiently in = new=20 plants? Which can change its form more easily when economically = warranted? Do=20 assertions that ISOs, unlike Transcos, need only "light-handed" = regulation make=20 sense? n28 Answering any of these questions requires a more realistic = analysis=20 of governance, but insights from the economics of = transaction=20 costs, corporate organization, and voting have been conspicuous by their = absence=20 from the debate.

A. Corporations and Non-Profit Entities =
=20
Economists long viewed the business firm as a "black box" that = transforms=20 inputs into outputs in hopes of making a profit. Until recently, = economists have=20 chosen to analyze only input-output and profit-loss relationships, and = showed=20 little interest in the firm's internal organization. Neoclassical = economic=20 theory could not operationally distinguish activities that were likely = to be=20 placed under a common management from those that were not - why some = inputs were=20 made and others were bought, and why some firms but not others branched = across=20 product lines. Historically, economists were unable to explain the=20 administrative structures of firms - why some were divisionalized but = others=20 were not, and why some had longer chains of command than others. n29 = Economics=20 largely depended on ad hoc explanations of why limited-liability = corporations=20 with publicly-traded stock dominated so many sectors of the economy, = while=20 nonprofit entities were a presence in so few.

All this is = changing with=20 the insight that what can be done in the market can also be done = in-house=20 (outsourcing or internal production of a raw material), and that = competition can=20 yield efficient internal organizations as firms seek to profit by = changing the=20 loci of their activities. Markets provide benefits, but they can be = costly to=20 use, particularly when alternative suppliers are few, when transactions = and=20 goods are unstandardized, when coordination must be precise, and when = durable=20 investments cannot be dependably amortized without binding customers to = pay for=20 them. Where these costs are too high, administrative decisions within a = firm are=20 the efficient choice. Utilities in the past were almost invariably = monopolies=20 that were vertically integrated (or linked by long-term contracts) = because=20 coordination of electrical flows was critical for reliability, markets = for=20 outside generation were "thin," and reciprocal obligations to serve and = take=20 service were thought necessary to finance plants that were fixed in = location and=20 unusable in other industries. Changes in technology and law allowed the=20 development of competitive generation markets in which non-utilities = would=20 become major sellers. Because markets cannot (yet) provide real-time = system=20 coordination, provision of reliability remains in the hands of regulated = monopoly utilities.

In environments that allow it, competition=20 determines the legal and finan [*241] cial characteristics = of firms=20 as well as their internal structures. There is a very large range within = which=20 legal and financial forms can vary. n30 Firms may be corporations, = partnerships,=20 or proprietorships with numerous legal variations (particularly as = regards=20 liability) within each of these forms. They can be organized as = profit-seekers=20 or as nonprofits. They can be governed by shareholders, workers, or = customers=20 (e.g. a rural electric cooperative). Their financial structures can have = differing proportions of debt and equity, both of which may or may not = be=20 publicly traded.

With all of these alternatives possible, it is=20 remarkable that one variant so consistently dominates. Almost everywhere = the law=20 allows them, publicly-traded limited-liability corporations financed by = a=20 mixture of debt and equity dominate the economy. In a competition among=20 organizational forms, the corporation has numerous advantages beyond an = ability=20 to pool the resources of small investors and limit their liability. The=20 corporate form facilitates diversification by investors which = facilitates=20 efficient decisions in risky situations while allowing easy transfer of=20 ownership if an individual's circumstances or expectations change. If = publicly=20 traded, shares of common stock carry time-varying prices that can help = investors=20 evaluate the quality of managers they have voted into office. Because=20 shareholders are the sole residual claimants to corporate wealth and the = sole=20 group with rights to determine management, their nearly unanimous goal = will be=20 to seek profit and operate efficiently given the legal constraints and = the=20 market competition that they face. n31 Shareholders sometimes have = difficulties=20 controlling management, but they usually have few difficulties in = agreeing that=20 management decisions ought to seek maximization of shareholder wealth. = n32=20

This dominance of the corporate form is by no means total. = Partnerships=20 (often with limited liability) are common in some professions. Sole=20 proprietorships produce the bulk of farm products. Where forms of = enterprise=20 compete, the characteristics of survivors will depend on details of the=20 environment. n33 The characteristics of transmission and electricity = markets are=20 unlikely to warrant imposition of a nonprofit regional = transmission=20 operator. In the overall economy, neither nonprofit status nor=20 decision-making by diverse stakeholders are consistently associated with = the=20 "necessity" of the good produced, the risk of monopoly, the scale of the = industry, the pace of change in it, or the range of affected interests.=20

Non-corporate forms win out where their organizational costs = (including=20 [*242] those of formation) are lower and decisions by=20 non-shareholders are more likely to produce efficient outcomes than = decisions by=20 shareholders. The existence and viability of an organizational form are = largely=20 determined by its governability. The greater the agreement on its goals, = the=20 more governable it is. n34 There may be differences among those with = votes on=20 how best to achieve those goals, but the cost of reaching decisions and = the=20 likelihood of arriving at a decision that is consonant with the goal = will rise=20 with the commonality of their interests. Competing institutions whose=20 decision-making bodies can arrive quickly at rational and consistent = decisions=20 will supplant those that cannot. Non-corporate organizations supplant = corporate=20 ones when they are better able to cope with problems of=20 governance. This is more likely when individual = governors have=20 identical interests, voting power is apportioned to financial stakes=20 (one-share-one-vote), and non-shareholder governors are more likely to = arrive at=20 efficient decisions than shareholders. The costs of reaching agreements = and the=20 costs of inefficient decisions are both relevant. n35

Corporate=20 dominance will decline in those sectors where non-corporate forms are = better=20 able to govern the organization efficiently. n36 Farmers in a nonprofit=20 marketing cooperative, for example, have a uniform interest in = maximizing their=20 individual returns from crop sales. Votes are often apportioned to = production,=20 and revenues from sales the organization has made at different prices = are pooled=20 and prorated among the members by crop size. n37 Because each farm makes = its own=20 decision on how to allocate the revenue it receives, conflicts over = investment=20 in individual farms are ruled out of the collective decision process. By = contrast, a nonprofit ISO will make its decisions by counting the votes = of=20 heterogeneous interests whose numbers are apportioned on non-economic = criteria.=20 Few, if any, of those interests directly profit from revenues accruing = to the=20 ISO. That organization, however, will also probably play an important = role in=20 choosing investments that differentially affect the incomes of the = various=20 governing interests.

The shareholders of a corporation are = well-defined=20 residual claimants who share its profits or bear its losses (up to the = limits of=20 their liability) after all other claims against it have been settled. = Lodging=20 residual claimancy with shareholders puts corporate decisions in the = hands of=20 parties with a common interest in [*243] wealth = maximization,=20 raising the likelihood that they will pursue economically efficient = policies.=20 n38 Shareholders will be single-minded because legal requirements for = equal=20 treatment ensure that no subset of them can successfully profit by = instituting=20 policies that expropriate some other subset of shareholders. Adding = other=20 interests to the governance mechanism decreases the = likelihood=20 that efficient decisions will prevail. The interests of non-shareholders = can be=20 advanced both by implementing efficient policies that increase the=20 organization's value and by forming coalitions to increase their wealth = at the=20 expense of others in the group.

The potential diversity of these = coalitions is limitless. Workers will be in conflict with shareholders, = and=20 subsets of workers in conflict with one another. The differing time = horizons of=20 older and younger workers engender conflicting preferences over = pensions, job=20 security, and corporate investment in new plants. If non-shareholder = financial=20 interests have seats on corporate boards, their attitudes toward risk = will=20 complicate the decision process, since lenders can receive at most their = contracted payments while shareholders can benefit without limit from = risky=20 decisions that will eventually pan out. Adding customers and input = suppliers to=20 the decision-making mix further increases the scope of redistributional = conflict=20 and diminishes that of incentives toward efficiency. Bringing in other=20 single-minded parties without financial interests (e.g. = environmentalists) can=20 only complicate matters further. As Hansmann notes, "one of the = strongest=20 indications of the high cost of collective decision making is the nearly = complete absence of large firms in which ownership is shared among two = or more=20 different types of patrons, such as customers and suppliers or investors = and=20 workers." n39 An ISO that is inefficiently governed by stakeholders, = however,=20 may survive because compulsory membership and sole control of = transmission=20 largely immunize it from the organizational competition that has = eliminated=20 similar entities from other sectors.

Efficient decisions by = shareholders=20 are those that maximize their wealth. Shareholders in firms whose = pricing is=20 constrained by competition will be able to better themselves by = attempting to=20 operate as efficiently as possible. Shareholders in firms that have the = power to=20 set prices above competitive levels will have additional interests in=20 restricting output to raise prices, denying competitors access to = essential=20 facilities, and other acts that would not be sustainable in a = competitive=20 market. n40 These divergences from competitive performance can be dealt=20 [*244] with in two broad ways: by regulating the firm = (possibly=20 breaking it up) while it remains a corporation, or by imposing a = non-corporate=20 form of governance and a changed decision-making = process. Both=20 the ISO and the Transco will have potentially exercisable monopoly = power. The=20 fact that experiences with regulation of profit-seeking entities have = sometimes=20 been unsatisfactory allows no prediction of how well regulation will = control=20 nonprofit entities that perform the same functions.

Corporate = utilities=20 and independent power producers (IPPs) generate nearly 90% of U.S. = electricity.=20 The strategies of utilities are set by boards of directors similar to = those that=20 govern most other corporations. Consumer, competitor, environmental, and = other=20 interests do not get votes on a rationale that the board's decisions may = affect=20 them. Instead, those groups air their interests before regulators who = weigh them=20 through politics and filter them through precedent. Regulators then = impose=20 constraints on utilities that range from service obligations to rates to = investment policies. Utility management subsequently attempts to act in = the=20 interests of shareholders subject to these constraints (and possibly to = test the=20 limits of the constraints). The decisions of non-corporate utilities are = also=20 usually in the hands of relatively homogeneous consumer interests, = rather than=20 being influenced by the votes of other affected parties that might = include power=20 producers, marketers, other utilities, bondholders, and = environmentalists.=20

V. Collective Governance

A. = Self-Interest in=20 Economics and Politics

Individuals seek to further their = personal=20 interests when interacting with others. Their interests may be in part=20 altruistic, but self-interest and altruism are hard to disentangle. n41 = To a=20 first approximation, self-interest also explains much political = behavior.=20 Individuals join interest groups and form coalitions to advance their = personal=20 goals, which often include avoidance of exploitation by rival = coalitions.=20 Self-interest may also lie behind superficially altruistic political = behavior.=20 n42 Empirical research on political behavior generally concludes that=20 individuals vote their self-interest rather than some broader conception = of the=20 public interest. Since government has powers to tax and regulate, those = who can=20 control its decision-making may use it to transfer wealth to themselves. = Constitutional rules are necessary to cope with the constant tension = between the=20 economically necessary functions of government and the opportunities for = political winners to enrich themselves. n43 A number of ISOs are best = viewed as=20 being cur [*245] rently at the constitutional stage of = development.=20

Policy outcomes depend on voting and related procedures that are = themselves set at the constitutional stage. The fundamental = constitutional=20 problem is to arrive at uniform policies on the basis of heterogeneous=20 preferences. If membership in the voting group is not predetermined,=20 constitutional rules must determine who is eligible for representation = and what=20 voting power will be held by various persons or interests. = Constitutional rules=20 must also specify the committee structure: through which motions become=20 policies. Elements of that structure include determination of the = interests to=20 be represented, the sizes and numbers of committees, and decision-making = procedures (including necessary majorities and veto provisions) within = them. The=20 necessary choices include rules for amending established rules.=20 Governance may consist of multiple tiers, and may = contain=20 provisions for the appeal of lower-level decisions. All of these issues = have=20 been matters of contention in the formation of ISOs, but their = generality=20 carries implications for the organizational form itself.

B.=20 Participation in Political Activity

Individuals attempt = to=20 further their interests both by transacting in the market and by = attempting to=20 influence government. The choice of forum is an economic one. Unless = otherwise=20 recovered, resources expended on lobbying are unavailable for market = activities,=20 and the payoff on a dollar spent to influence policy (e.g. the = constitution of=20 an ISO) must be weighed against that of a dollar invested in business. = All=20 collective action faces "free rider" problems: someone whose efforts=20 successfully influence government policy creates a benefit for all who = are=20 similarly situated. n44 Free riding is a smaller problem where the costs = of=20 reaching agreement and monitoring contributions to effort are smaller. A = monopoly firm (which can have no free-riding competitors) or an = association that=20 can coerce contributions may have an advantage over firms in a diffuse = industry=20 or associations that cannot compel their own funding. An industry that = consists=20 of a few large firms and numerous tiny fringe competitors may not be = fully=20 organized, but the large firms may find the benefits of political = activity to be=20 worth the costs, while the small firms ride along for free. n45 =

Marginal=20 costs are the only costs relevant for economic decisions because, unlike = sunk=20 costs, they are avoidable if a different decision is made. Thus the = marginal=20 costs for a preexisting group attempting to influence ISO rules are only = those=20 of undertaking that single activity. The marginal costs for a = yet-unformed=20 interest group are both those of the activity and those of organizing=20 themselves. [*246] Preexisting organized interests can have = a cost=20 advantage in political activity. Organizations that represent diffuse = interests=20 will be disadvantaged relative to more focused ones. Aspects of = heterogeneity=20 include competitive relationships. Industrial power users in low-price = states=20 may wish to discourage deregulations that lower the bills of their = competitors=20 in high-price states, sometimes even if their own rates are cut in the = process.=20 n46 A group whose members do not actively compete with each other will = probably=20 find it easier to organize for political action than one whose members = compete.=20

The cost of political activity is the value of the best = opportunity that=20 is foregone when that activity is chosen, whether lost as foregone = income or as=20 adverse changes in asset values. Entities that have poor market = opportunities=20 will rationally divert dollars to policies supporting good opportunities = for use=20 in the market. In a risky world, the value of an opportunity also = depends on the=20 probability of success. Someone with little political experience who is = facing=20 more experienced rivals will rationally expect a lower probability of=20 successfully influencing policy and will allocate fewer resources to = lobbying.=20 Those who operate in rapidly growing markets will earn higher returns = there,=20 assuming that the political efforts of others do not entirely turn the = rules=20 against them. Some of the lowest opportunity costs of political activity = may be=20 enjoyed by utilities that can recover their expenses in regulated rates. =

On almost all of the above reasoning, established = transmission-owning=20 utilities will be advantageously situated to influence ISO constitutions = and=20 will be economically motivated to do so. The theory of political = participation=20 predicts substantial activity by preexisting organized interests whose = members=20 have few conflicts among themselves, large amounts at stake, and low = costs of=20 influencing the process, whether out-of-pocket or foregone market = opportunities.=20 Those without interests that are unorganized, whose members compete with = one=20 another, and whose costs cannot be recovered in the regulatory process = have=20 generally been a smaller presence in ISO formations. Some large = independent=20 power producers and marketers have at times found participation in the = process=20 worthwhile despite the benefits their efforts confer on smaller = competitors.=20 Small consumers who have low individual stakes and little organization = are least=20 likely to represent themselves, save for advocacy groups whose = dues-paying=20 membership includes relatively few of them. n47

C. The Formation = of ISOs=20

If the model of political participation provides insight = into ISO=20 formations, it may also provide useful predictions about how their=20 governance operate in practice. That model first = predicts that=20 an ISO is more likely to be formed where its scope is less costly to = determine.=20 The more limited the geographic options, [*247] the easier = it will=20 be to settle on one of them. If there are no clear boundaries and the = costs to a=20 utility of staying out are low, an ISO may not form at all. All five = currently=20 operating ISOs have been geographically or otherwise constrained prior = to their=20 formation, while less constrained regions have seen ISO proposals die at = various=20 stages of development. The New England, PJM, and New York ISOs operate = in=20 regions that have long sustained tight power pools. Their contiguity = sets some=20 "natural" boundaries on the organizations that may not coincide with=20 economically efficient boundaries. One of the remaining two ISOs is = ERCOT,=20 composed of Texas systems that have long operated their own reliability = area=20 while separating themselves electrically from interstate commerce. The = other, in=20 California, was legislatively imposed on the state's three largest = utilities as=20 part of a complex restructuring bargain, and whose control only extends = to=20 assets within the state.

Where organizational costs are higher, = ISOs are=20 less likely to form or likely to be smaller in scope. The original = proposals for=20 a comprehensive Midwest Independent System Operator (MISO) faced = obstacles from=20 the outset as utilities with low transmission costs resisted having = their rates=20 averaged with those of high cost systems. n48 Since the breakup of the = original=20 organization, the higher cost utilities making up the Alliance group = have filed=20 for their own organization with the FERC. They have done so amid = comments that=20 the resulting shapes of the Alliance and a possible MISO are = inconsistent with=20 regional operating efficiency and will not completely resolve rate = pancaking.=20 n49 Elsewhere, embedded cost inequalities and political conflicts = between public=20 and private power combined to bring an end to InDeGo, the Pacific = Northwest's=20 proposed ISO, after two years of planning. n50 Nearly half of the area's = transmission is operated by the Bonneville Power Administration, which = is also=20 the dominant supplier to a number of small public power systems and = large=20 industrial users in the area. Similar factors have halted the inclusion = of=20 municipal systems in California's ISO, leaving nearly half of the = state's=20 import-export capability beyond the ISO's control. The Los Angeles = Department of=20 Water and Power has chosen not to join the ISO after learning that it = would pay=20 a cost-based average of 88 cents/kwh to access the grid while corporate = systems=20 are paying under 35 cents/kwh. n51

ISO filings with the FERC = provide=20 indirect evidence that transmission-owning utilities disproportionately=20 influence constitutions. Although the membership of Northeastern ISOs is = more=20 easily determined, the FERC has been persistently dissatisfied with = their=20 governance arrangements. The FERC has questioned, and = at times=20 rejected, portions of applications by the region's three ISOs after = determining=20 that important committees and voting procedures were unac = [*248] =20 ceptably dominated by transmission owners. n52 It has informed the New = York ISO=20 that if the ISO does not submit an acceptable = governance plan,=20 it intends to impose one on the organization. The rejected arrangements = of the=20 Northeastern groups appear to reflect dominance of the planning process = and=20 preexisting regional pools by transmission owning utilities. n53 In = California,=20 numerous parties accused utilities of unwarranted dominance in the ISO = planning=20 process, noting that the state's three large corporate systems had both=20 sufficient resources and the ability to recover most of their expenses. = Those=20 three utilities were the only parties allowed to vote on organizational = design=20 issues. n54 Similar complaints about utility dominance of the = constitutional=20 process have occurred in ISOs that failed to form. n55 On the other = side,=20 utilities might reasonably claim that they are only protecting the = values of=20 assets their shareholders will continue to own, and that their extensive = operating knowledge will be invaluable if the ISO is to succeed. n56 =

The=20 interests represented at the ISO are themselves determined in the = constitutional=20 process that sets its rules. Even if two groups have equal = representation on the=20 board, their effective power may differ if one (e.g. competing = independent power=20 producers) has less monolithic interests than the other. There is no = clear link=20 between the rule-setting power of transmission owners and the range of = interests=20 represented on an ISO's board. Utilities may seek to dominate by = attempting to=20 exclude other interests or by creating large representations for = themselves.=20 Thus, alleged utility dominance of ISO formation in New York has left a=20 stakeholder group as power marketers unrepresented in its=20 governance. n57 Also in New York, the FERC rejected a = proposal=20 that would have given each of the state's utilities, whether large or = small, its=20 own vote on important committees, with a provision that the number not = be=20 reduced in the event one of them [*249] vanished by merger. = n58=20

There is no simple relationship between the structure of an = ISO's board=20 and the influence of transmission owners in creating that structure.=20 California's utilities also dominated the structuring of its ISO, whose = board=20 contains numerous diverse interests. Utilities might choose such a = strategy=20 because it gives them a broader range of potential coalition partners, = because=20 it is easier to organize their own concentrated interests against a = diffuse=20 opposition, or because deadlocks and inertia on the board can facilitate = transfers of effective power to a pro-utility ISO staff. California's = original=20 FERC filing envisioned five classes on its Board of Governors, and = subsequent=20 state restructuring legislation proposed eleven. n59 Later activity led = to=20 thirteen classes, with twenty-five total votes, along with four = non-voting=20 "Advisory Representatives." The two largest classes are "Municipal = Utilities"=20 and "End-Users At Large," with four members each. n60 Investor-owned = utilities,=20 which retail 75% of the state's power, get three members. n61 None of = the=20 classes has stated that it wishes to consolidate with others. The more = likely=20 pressure will be to add new representatives as political conditions = change,=20 without necessarily deleting old ones. n62 As this occurs, free-rider = problems=20 will become more important and favor interests whose purposes are more=20 concentrated and are willing to devote relatively more resources to = influencing=20 ISO governance.

[*250]

VI.=20 Governance by Collective Choice

A. Models of = Voting=20

In an ISO, stakeholders who once took their differences = to=20 regulators will now vote their interests directly. Economic models of = collective=20 choice give reason to expect that this change will have important and = adverse=20 consequences for efficiency. These models rigorously demonstrate that it = is=20 impossible to design collectively governed institutions that will not = under some=20 conditions produce perverse or irrational voting outcomes. The paradoxes = of=20 choice by voting are straightforward, and students of government no = longer view=20 them as curiosities of interest only to mathematicians. The paradoxes = are=20 logically pervasive, empirically important, and show that several = centuries of=20 political analysis may well be devoid of foundation. n63 Under some = conditions,=20 the paradoxes vanish and consistency will reign. Those conditions are = likely to=20 be met in the governance of a Transco, but not that of = an ISO.=20

The key result in the theory of voting is known as the = "Impossibility=20 Theorem." Stated informally, it says that with at least three issues and = three=20 voters, no collective decision-making process will always produce = outcomes=20 satisfying certain intuitively agreeable criteria. n64 The criteria = include: (1)=20 non-dictatorship; (2) a defined outcome over all possible votes, i.e. = anarchy=20 and ties are impermissible; and (3) outcomes that respect individual=20 preferences. The third means that when someone who formerly preferred = policy A=20 to policy B reorders his ranking, if the collective choice was formerly = B, it=20 cannot now become A. n65 The Impossibility Theorem shows that it is = impossible,=20 rather than just difficult, to find a process that meets the criteria = regardless=20 of the underlying preferences of the voters. In particular, majority = voting,=20 supermajority voting, a point-count system, complex committee = structures, and=20 numerous other schemes all fall subject to the Impossibility Theorem. = There are=20 two important consequences. First, no matter what the method of choice, = outcomes=20 may be intransitive (i.e., the electorate may rank alternative X above = Y, Y=20 above Z, and Z above X.) Second, no rule precludes situations where some = individuals gain by voting strategically. By not expressing their true=20 preferences on the ballot, they can induce an outcome more favorable for = themselves than if they voted sincerely. n66

To illustrate=20 intransitivity, assume the simplest case of majority voting over=20 [*251] three issues. Let individuals A, B, and C rank = policies X, Y,=20 and Z as follows:

A: X > Y > Z

B: Y > Z > X=20

C: Z > X > Y

Preference is indicated by ">". = Assume=20 that the voting is by pairwise comparison with the winner surviving for = the next=20 round. n67 If their first vote pits X against Y, X wins. Z then wins the = second=20 round against X. Now instead assume a different sequence of ballots in = which the=20 first match is between Y and Z, which Y wins. In the subsequent election = between=20 X and Y, X wins. Since the sequence in which votes are taken determines = the=20 winner of this example, the person who can set the agenda of pairwise = elections=20 can ensure that his most desirable choice wins. n68 To illustrate = strategic=20 behavior, assume the first round pits X against Y. Individual A = understands that=20 if everyone votes honestly, then Z, his least preferred choice, will be = the=20 final winner. A can avoid this outcome by concealing his true = preferences and=20 voting for Y rather than X in the first round. Y then wins the second = round,=20 which A finds superior to the outcome without strategic voting. =

This=20 example is, of course, an extreme and possibly unlikely illustration = whose=20 outcome depends on the conditions assumed. If instead A and B both rank = X > Y=20 > Z, then X wins regardless of the vote sequence and insincere voting = by C=20 cannot undo the outcome. Majority voting produces a well-behaved choice = if these=20 are the preferences of the voters, but fails to do so if their rankings = are=20 those of the prior example. The Impossibility Theorem shows rigorously = that=20 there is no voting rule that can eliminate agenda control and strategic=20 misrepresentation for all possible configurations of individual = preferences. n69=20

B. Why the Math Matters

The theory has important=20 consequences for the governance of both ISOs and = Transcos. The=20 situations in which choice can produce perverse or strategic results are = quite=20 likely to occur in ISOs and highly unlikely to occur in Transcos. If = majority or=20 supermajority voting is the rule, an important and plausible condition = known as=20 single-peaked preferences is sufficient to rule out the undesirable = outcomes.=20 Single-peakedness means that each person has a single most-preferred = policy, and=20 that dissatisfaction with an alternative increases with its = [*252] =20 distance from that personal optimum. n70 Directors of a corporate = Transco are=20 likely to have single-peaked preferences. As noted above, the nature of = the=20 corporation ensures that directors will be solely interested in the = wealth=20 created in it, and that each member (and shareholder) is likely to = prefer high=20 profits to low profits. If so, their voting decisions will be = consistent,=20 independent of the sequence in which votes are taken and not subject to=20 strategic misrepresentation by individual directors. n71

Among = the=20 directors of an ISO, single-peakedness is less likely to prevail. For = simple=20 dollar amounts (e.g. the budget for a single item), single-peakedness = appears=20 reasonable. Someone who most prefers a high budget probably prefers a = medium=20 budget to a low one, if the high budget is not a relevant alternative. A = multiple-peak ranking such as "low > high > medium" seems less = likely.=20 Informally, a person with this ranking finds either a high or a low = budget=20 tolerable, but views one between the extremes as less acceptable than = either=20 extreme. n72 On the ISO board, the profits of individual participants, = however,=20 may not be uniformly increasing or decreasing in the magnitudes being = voted on=20 and preferences may not be single-peaked. Consider a transmission access = or=20 construction policy that will make available either a high, medium, or = low=20 amount of capacity. Some board members (e.g. power marketers) will have=20 single-peaked preferences for more capacity, but others may not. An = independent=20 power producer might rank the capacity options "high > low > = medium,"=20 because high capacity gives it a wider market area and higher expected = profits,=20 low capacity lets it exert monopoly power in a load pocket, and medium = capacity=20 gives it neither. An environmentalist might have the same ordering, = preferring=20 either extensive access that minimizes local pollution, or low access = that=20 furthers a conservation agenda to some intermediate amount.

The = larger=20 the fraction of voters without single-peaked preferences, the larger the = proportion of possible winning coalitions that will include them, and = the more=20 likely are paradoxes, strategic behavior, and inefficient policy=20 [*253] choices. n73 The number of possible methods of = forming a=20 winning coalition increases very rapidly as the size of the board = increases. n74=20 A winning coalition is constructed by bundling policies into packages = that=20 attract enough votes to prevail. The higher the number of possible = coalitions,=20 the larger the number of possible packages and the less likely that the = content=20 of any one will be economically efficient. Metaphors of "vote trading" = are=20 reminders that members of the coalition are in effect purchasing votes. = If the=20 policy being voted on is efficient, it creates new economic value (e.g. = by=20 legitimizing a new type of market transaction) that can in principle = benefit all=20 parties, while an inefficient policy (e.g. monopolistic restrictions on=20 transmission access) creates gains for the winners at the expense of the = losers.=20 n75

The exact membership of a winning coalition will be = determined by=20 circumstances of time and place. A group that finds itself with slightly = less=20 than a majority need only attract the votes of a small number of others, = whose=20 identity depends on situational details. The general indeterminacy of = political=20 coalitions has a clear consequence. Since only a majority is necessary = to carry=20 the day, the winning policy is more likely to depend on its value to the = coalition rather than its value to the group as a whole. n76 Since the = majority=20 changes with the subject matter at hand, policies constructed around = minimal=20 winning coalitions are not likely to be mutually consistent and = economically=20 efficient. Unless preferences are single-peaked, as they are in a = Transco, the=20 coalition-forming aspects of collective choice virtually ensure that = economic=20 efficiency and wealth redistribution will be in conflict during the = policy=20 formation process. n77

The indeterminacy of coalitions is of = less=20 consequence for decisions by corporate boards. Because directors act as = agents=20 of shareholders who must by law be treated equally, coalitions to force=20 redistributions among shareholders will not arise. Uncertainty about = outcomes=20 will present the board with difficulties in choosing among alternative = policies,=20 but each member has a legal obligation and most have economic interests = in=20 policies that maximizes shareholder value. The heterogeneous directors = are in=20 effect compelled to have single-peaked preferences for higher value of = the firm,=20 and to consider little other than that value in making their choices. = Corporate=20 decisions are less likely to encounter the inconsistencies, strategic = conduct,=20 and indeterminate coalitions that ISO governance = produces. For=20 a firm that operates in competitive markets, higher profits indicate = that=20 resources are being used more efficiently to create economic value. The = di=20 [*254] rectors of a firm with monopoly power have clear = incentives=20 to exercise it if doing so maximizes shareholder wealth. The indicated = remedy is=20 to constrain their ability to exercise it, whether by regulation, = antitrust, or=20 exposure to market competition. Imposing such a remedy maintains = incentives for=20 consistent, value-maximizing decisions in a way that imposing an ISO = cannot.=20

C. Regulation, Monitoring, and Bureaucracy
=
Operations of=20 both ISOs and Transcos will be constrained by FERC policies that may = give=20 varying weights to economic efficiency, agency precedent, commissioner=20 preferences, and political reality. Regulations incorporate both = economic and=20 non-economic considerations, but the state of the market that ensues = also=20 depends on the response of the entity being regulated. The orientation = of=20 corporate boards toward shareholder value allows the Commission to = assume with=20 some confidence that a Transco will respond predictably when faced with=20 newly-imposed (or newly-lifted) constraints. The FERC's ability to make = this=20 assumption greatly simplifies determination of the content of its = regulations.=20 By contrast, if an ISO has objectives unrelated to profit and = efficiency, the=20 Commission will have a harder time formulating policies that they can be = sure=20 will induce desired behavior. If the ISO's objectives are unclear or = uncertain=20 because it is governed by shifting coalitions, the effects of a given = regulation=20 on its behavior will be even less predictable. The greater = predictability of a=20 Transco's responses to regulation casts doubt on the common assertion = that the=20 nonprofit nature and democratic governance of an ISO = make it a=20 better candidate for light-handed regulation. n78 As that organization = responds=20 in unforeseen ways, regulators will probably have to monitor it more = assiduously=20 and possibly change policies more frequently. If transmission-owning = utilities=20 succeed in dominating ISO governance, these = inconsistencies are=20 less likely, and the FERC can regulate the organization as if it were an = ordinary transmission monopolist. This, however, is the situation that = ISOs are=20 ostensibly being instituted to avoid.

Ideally, the directors of = a=20 Transco will make decisions that are congruent with the desires of = shareholders,=20 and compensation plans or stock ownership requirements can further = incentivize=20 them. n79 A corporate management that successfully insulates itself from = shareholders gains power to institute self-serving and potentially = inefficient=20 policies that shareholders cannot deter at reasonable cost. If all = shareholders=20 have small individual stakes, they now face a free rider problem. No = individual=20 has strong incentives to actively monitor management, and an activist = produces=20 benefits for others who do not bear the costs of the effort. Inept = management=20 may, however, impose such substantial losses on large investors that = they are=20 motivated to engage in activism while knowing that others will capture = some of=20 its benefits. n80 In the limit, an investor can acquire a con = [*255] =20 trolling interest in the company's stock and throw out the old = management. n81=20 Recent economic research has shown that the market for corporate control = often=20 functions efficiently, and that superficial statements about free-riding = shareholders and managerial autonomy do not adequately describe its = workings.=20 n82

The mechanisms of corporate control do not apply to ISOs. An = ISO has=20 neither shareholders nor a profit motive, but decisions by its board = affect=20 asset values. Some of its governors may prefer inefficient decisions or=20 decisions that transfer the wealth of others to the interests they = represent.=20 n83 Unlike corporate shareholders, those who lose from inefficient ISO = decisions=20 have no tradeable claims on the organization's wealth. Lacking such = claims,=20 their best alternatives may be to try influencing the ISO's internal = politics=20 and intervening at regulatory agencies. Free rider problems, conflicting = governance interests, and the absence of a share market = all=20 increase the ability of an ISO bureaucracy to gain autonomy and distance = itself=20 from external controls. If so, the organization's staff can take a more = active=20 role in formulating policy and determining the issues that come before = the=20 governors. n84 In doing so, it can become an agenda-setter with the = concomitant=20 ability to influence outcomes. n85 Inherent in the ISO's=20 governance structure is the potential for it to become=20 independent in a way that was probably never intended, with potentially = adverse=20 consequences for the efficiency with which it operates both itself and = the=20 system. n86 There is, however, an odd upside to bureaucratic control: it = renders=20 collective choice paradoxes less likely because [*256] the = real=20 decision-makers are members of a homogeneous group with a common = interest in the=20 survival of their organization. n87

VII. Market Power and = Competition=20

A. Monitoring Monopoly

Even if its rates are = regulated, a=20 transmission monopolist can harm competition by denying access to = facilities.=20 The transmission owner's incentive to exclude may be particularly strong = if it=20 also owns generation. n88 As noted above, it is easy to envision = restrictive=20 policies initiated by governing coalitions that include non-transmission = owners.=20 If such coalitions can form, assertions that the ISO is a less likely = monopolist=20 than the Transco, those coalitions can lose their force. The ISO's = nonprofit=20 status only ensures that denial does not enrich the organization itself. = The=20 scope for monopolizations may even be greater in the ISO, since = regulation may=20 be unable to reach or even estimate the profits earned by non-utilities = that=20 succeed in bending policy to favor themselves. By contrast, regulators = will=20 continue to have their customary jurisdiction over the Transco, = including the=20 ability to investigate familiar operations and finances. Perhaps = regulation's=20 most oft-cited flaw is that interest groups, sometimes the regulated = themselves,=20 may "capture" a nominally independent agency to serve their own = interests. n89=20 The board of an ISO is a potential arena for the same types of politics = that=20 have hitherto occurred in regulated settings, and may be as likely to be = captured by coalitions of represented interests.

Barring = principal-agent=20 problems, corporate management acts to increase shareholders' wealth = subject to=20 legal and regulatory constraints. Those constraints explicitly account = for the=20 interests of others, whether in the form of antitrust laws or = open-access=20 requirements. Whatever the ultimate antitrust status of an ISO, a = Transco begins=20 its life under a well-defined set of rules that constrain its monopoly = power.=20 n90 The Transco's managers may wish to test or evade those rules, but = treble=20 damages for a successful antitrust plaintiff may induce desirable (as = well as=20 questionable) lawsuits. There is also little foundation for the Federal = Trade=20 Commission's belief that the psychological climate in an ISO-governed = market=20 will be more conducive to competition than it is when a Transco rules. = n91=20 [*257] The ISO itself may be like a "revolving door" agency, = through=20 which upwardly mobile officials pass on their way to lucrative private = sector=20 positions. n92 Such individuals may conclude that single-minded devotion = to=20 market efficiency does not always further their long-term personal = interests.=20

Quasi-independent ISO monitoring departments and committees = reflect both=20 the politics and the economics of the organizations. n93 In California = these=20 committees have substantial autonomy, with uncertain but potentially = substantial=20 powers to investigate behavior they find "anomalous." n94 Until = recently, the=20 ISO's Market Surveillance Committee asserted that its meetings need not = be=20 public. n95 One rationale for monitors is that the ISO's novelty = requires=20 dedicated specialists because antitrust and regulation may be unable to = quickly=20 detect imperfections and remedy them. Monitoring institutions, however, = may=20 themselves be an artifact of ISO constitutional politics. Two of = California's=20 transmission-owning utilities initially proposed them in response to the = FERC's=20 concerns about market power, a seemingly odd posture for monopolists. = The=20 state's transition rules, however, give its utilities an interest in low = energy=20 and ancillary services prices, since they must collect their stranded = costs in=20 the difference between these prices and frozen retail rates prior to = 2002.=20 Reports by California's market monitors have uniformly concluded that = the owners=20 of divested utility generation have manipulated bids and contracts to = raise=20 energy costs by hundreds of millions of dollars in the first months of = the new=20 system's operation. n96

[*258]

B. = Innovation,=20 Investment, and Adaptation

Governance = issues=20 aside, ISO advocates can easily show how that organization can manage=20 transmission, allocate it without exercising market power, and run = ancillary=20 services markets to advance competition. Their underlying model, = however, is one=20 of equilibrium rather than market dynamics. Prior to restructuring, = utilities=20 performed the ISO's functions, but not in a market context. n97 If only=20 short-term efficiency matters, it can probably be improved by regulatory = innovations that carry lower costs than are necessary to restructure and = form an=20 ISO. The more important form of competition in electricity's current = state is=20 rivalry to make long-term innovations. The industry is undergoing = transformation=20 into services, contracts, and markets whose future configuration no one = can know=20 today. Where such uncertainty is pervasive, the transmission=20 operator's incentives to innovate and adapt to the innovations = of=20 others should be of at least as much concern as short-term efficiency.=20

The ISO governance process, however, is likely = to be=20 biased against innovation. Few valuable innovations fail to put some = established=20 interest at risk. A new market institution, for example, might increase = the=20 well-being of consumers, benefit some efficient market participants, and = harm=20 some inefficient ones. The lure of profit induces ordinary corporations = to=20 regularly jeopardize the established routines of less efficient = competitors. The=20 unanimity of a Transco's decision-making process ensures that solicitude = for=20 market participants who have been displaced by competition will not = block its=20 search for profits. The assortment of interests that govern an ISO will = find it=20 more difficult to turn innovative proposals into reality without at = least=20 diluting their benefits in order to mollify those adversely affected.=20 Bureaucratic interests at the ISO may also have more influence than = employees of=20 a Transco to keep activities in-house when deference to market = innovations is=20 warranted.

Mirroring inefficiencies in the collective=20 governance of innovations, the choice process of an ISO = may=20 also be less likely than the Transco to induce efficient investment in = new=20 transmission. The parallel flow problem has long been a major rationale = for=20 large, unitarily owned transmission grids. An entity that owns and = operates all=20 of the lines in an area (or has long-term leases on them) will be aware = of the=20 opportunity cost of a given transaction everywhere on its system. = Utilities have=20 at times been reluctant to build or upgrade transmission because = parallel flows=20 allow them to gain from the investments of others without incurring the = costs. A=20 regulated for-profit entity that owns a large grid will have incentives = to=20 expand capacity because all of these costs are internalized. A=20 collectively-governed nonprofit entity that only operates a grid of=20 independently owned systems will face problems in inducing investment = similar to=20 those encountered in systems that do not operate under an ISO. Owners of = the=20 individual systems in an ISO may even have stronger incentives to free = ride on=20 the investments of others than when operating autonomously. Surrender of = control=20 to the ISO reduces the certainty that an owner will see these lines put = to the=20 same [*259] value-maximizing (non-monopolistic) uses that = the owner=20 itself would have chosen.

There is currently no factual basis = for=20 assertions that Transcos will excessively favor transmission solutions = while=20 ISOs will consider the long-term aspects of the system more rationally. = n98 Even=20 if Transcos would inefficiently favor transmission, the relevant = comparison is=20 with the collective choices made in an ISO, which depend on its internal = politics and its constitutional power to control transmission owners. = n99=20 Depending on the membership of an ISO's majority coalition, almost any = pattern=20 of over- or under-investment is conceivable. Free-rider incentives of=20 transmission owners not to invest may (or may not) overcome incentives = to=20 overcapitalize. Incumbent generation owners and others may have = incentives to=20 foreclose or delay the new construction, and the votes to carry the day = with the=20 ISO. Counsel for the California ISO recently stated that the = organization's=20 inability to induce transmission expansion has made it dependent on = costly=20 "must-run" plants to maintain reliability. n100 The California board is=20 currently divided over a proposal (put forth by its staff) that new = generation=20 owners pay the entire cost of grid improvements if their connection = causes=20 congestion. Supporters in the ISO argue that the requirement "forces = those=20 companies who want to compete to be more efficient than their = opponents," and=20 "keeps fly-by-night companies out of the process by making sure that any = competitive supplier has the revenue to invest in the grid." n101 The = PJM ISO is=20 facing a similar problem, with the additional question of who is to have = priority in a queue of generators seeking to interconnect. There, an ISO = source=20 said that "the queue order was designed to prevent companies with = little, if=20 any, background in the industry from gaining access and threatening the=20 reliability of the grid." n102

The future of electricity is so=20 sufficiently uncertain that no one can be sure that any ISO or Transco = formed=20 today will have the size, geographic scope, or membership to continue = operating=20 efficiently as markets evolve. Like other corporations, a Transco can, = with the=20 approval of shareholders and regulators, take initiatives to change its = own=20 organization. n103 For the ISO, adding or deleting rep = [*260] =20 resented interests and changing the assets and markets it operates may = upset a=20 pre-existing political balance and make efficient changes in its = organizational=20 form more difficult. Flexibility of the organization is critical because = no one=20 today can know the efficient size or shape of a regional organization. = n104 It=20 may, for example, shrink if distributed generation becomes important or = grow if=20 new long-distance transmission technologies arrive. Size and shape will = change=20 as power markets evolve, particularly if they move away from the = short-term=20 energy exchanges that are the focus of today's policy. n105 Numerous = proposals=20 for ISO operating areas have surfaced, ranging from single utilities to = states=20 to entire interconnections. n106 If there is no universally optimal size = that is=20 invariant among regions or over time, adaptability is a critical = attribute of=20 the transmission operator. That adaptability has = certainly been=20 a factor in the long-term survival of the corporate form itself. =

VIII.=20 Conclusions

ISOs are less embodiments of theoretical = ideals than=20 they are strategic responses to market and regulatory changes. They = arrived=20 concurrently with the threat of retail competition, proposed and = supported by=20 groups with economic interests, some clearly inimical to competitive = markets.=20 Their logic is superficially appealing: since private monopolies can = produce=20 excessive profits, the antidote is a collective entity that does not = operate for=20 profit. The ISO cannot be such an antidote (and none may in fact exist), = since=20 it will provide a forum for profit-seeking by those whose votes = determine its=20 policies. The Transco-ISO debate has misleadingly pitted a = familiar-looking=20 corporate entity whose operation and regulation are imperfect against a = hitherto=20 unseen institution. The relevant comparison can only be made after = thoroughly=20 examining the imperfections of the ISO.

A quick look at the = lineup of=20 those who favor ISOs makes the interests more clear. Supporters = frequently have=20 diametrically opposed interests, with heavy representation from=20 transmission-owning utilities, public power entities, environmental=20 organizations, self-styled small-consumer advocates, and regulators. = Absent from=20 their backers, most are independent power producers, power marketers, = and other=20 retail wheeling advocates. Broadly, ISOs are supported by those who have = been=20 best at playing the politics of traditional regulation, and opposed by = those who=20 have generally been less successful. The opponents are = [*261] the=20 most likely victims of monopoly as competitive markets open, but they = have=20 chosen to reject the institution that will supposedly best protect them. =

The FERC and state commissions have been justifiably concerned = over new=20 regulatory problems that Transcos will pose. Over a very few years, = however, the=20 FERC has seen a multitude of dockets that should have made it equally = concerned=20 with ISOs over the same issues. It has become increasingly clear that an = ISO is=20 a political institution being called on to do an economic job. It is an=20 institution whose structure invites inefficiency, inconsistency, and = dominance=20 by transmission owners, with decisions made by internal processes whose=20 implications no one can fully understand today. Pervasive evidence of = strategic=20 politics in ISO filings does not appear to have swayed many regulators = from an=20 irrational faith that after ISOs are in place they will be kinder = organizations=20 than Transcos could possibly be. An ISO is a fundamentally new type of=20 institution that provides a forum in which a new constellation of = interests can=20 experiment with a still unknown repertoire of ways to impede = competition, shift=20 costs, and operate inefficiently. Its nonprofit nature will complicate = rather=20 than simplify regulation by making it harder to see the substance of=20 self-interest that lies below. Traditional regulation worked best where = natural=20 monopoly ruled, costs were easy to track, assets had long service lives, = and=20 financial risk was minimal. That situation still describes transmission = fairly=20 well, whether it is owned by a single utility or by a Transco. =

The=20 development of ISOs is at a critical stage, because a decision to go = forward=20 with them is a decision to put in place questionable institutions that = are=20 unlikely to vanish of their own accord when a better alternative becomes = available. The oft-heard claim that ISOs are transitional institutions = on the=20 road to Transcos is unconvincing. There is no reason to expect that = politically=20 important interests able to participate in hands-on = governance=20 of the ISO will voluntarily give up their power in exchange for no = obvious=20 benefit. n107 ISOs are more likely to become massive barriers to the = entry of=20 new and more efficient organizations for the control of transmission. = Even if=20 ISOs could be terminated with ease, the rationale for making them a way = station=20 on the road to Transcos has yet to be articulated.

In our haste = to=20 control a monopoly by any means possible, it is worth pausing to = consider the=20 fundamental strangeness of the ISO. In no other deregulation or = restructuring=20 has there been pressure to take an industry's essential facilities into = an=20 environment where their governance is so radically = changed, and=20 to assume on faith that an organization superficially unconcerned with = profits=20 will provide a superior resolution to threats of monopolistic conduct. = No ISO=20 advocate has ever attempted a showing that telecommunications or gas = would be=20 more competitive today if only critical decisions about their facilities = had=20 been turned over to stakeholder committees. Gas even provides an = important part=20 of the template for the Transco. Innovative regulation and market = competition to=20 [*262] gether moved interstate pipelines from ossification = to=20 efficiency, facilitating physical and risk-management transactions that = were=20 unimaginable only ten years ago. Electricity producers and consumers = deserve the=20 same opportunities, but are unlikely to get them in a regime of ISOs.=20

FOOTNOTES:
n1. Compare Frank = McCamant et=20 al., Uncrossing the Wires; Transmission in a Restructured Market, 12 = Elec. J. 24=20 (1999); Richard J. Pierce, Jr., Why FERC Must Mandate Efficiently = Structured=20 Regional ISO's - Now!, 12 Elec. J. 49 (1999); Joshua Z. Rokach, = Transcos; How=20 FERC Can Lend a Hand, 12 Elec. J. 64 (1999); Curt L. Hebert, Jr., The = Quest for=20 an Inventive Utility Regulatory Agenda, 19 Energy L.J. 1 (1998), Stephen = Angle=20 & George Cannon, Jr., Independent Transmission Companies: The = For-Profit=20 Alternative in Competitive Electric Markets, 19 Energy L.J. 229 (1998).=20

n2. The range of existing and proposed = governance=20 structures are extensive. Summaries appear in James Barker, Jr. et al.,=20 Governance and Regulation of Power Pools and System = Operators,=20 World Bank Technical Paper No. 382 (1997); and William W. Hogan et al.,=20 Governance Structures for an Independent System = Operator (ISO),=20 Harvard Electricity Policy Group Background Paper (June 6, 1996). =

In the=20 case of the affiliated Transco proposed by Entergy Services, Inc., a = slate of=20 potential directors will be chosen by an executive search firm, from = which the=20 member companies or a selection committee of market participants will = select=20 seven. Petition of Entergy Servs., Inc. for Declaratory Order Regarding=20 Compliance of Transco Proposal with Applicable ISO Principles, No. = EL99-57-000,=20 at 22 (April 5, 1999) [hereinafter Entergy Petition]. The Alliance = Transco will=20 be a public corporation whose board members cannot be affiliated with = its member=20 utilities.

n3. The first of these mergers was Opinion No. 318, = Utah=20 Power & Light Co., PacifiCorp & PC/UP&L Merging Corp., 45 = F.E.R.C. P=20 61,095 (1988); the first power marketing plan was Opinion No. 349, = Public Serv.=20 Co. of Ind., 52 F.E.R.C. P 61,260 (1990).

n4. Energy Policy Act = of 1992,=20 Pub. L. No. 102-486, 106 Stat. 2776 (1992) (codified at 42 U.S.C. 13201 = (1995)).=20

n5. Order No. 888, Promoting Wholesale Competition Through Open = Access=20 Non-Discriminatory Transmission Services by Public Utilities; Recovery = of=20 Stranded Costs by Public Utilities and Transmitting Utilities, F.E.R.C. = Stats.=20 & Regs. P 31,036, 61 Fed. Reg. 21,540 (1996) (codified at 18 C.F.R. = pts. 35,=20 385) [hereinafter Order No. 888], order on reh'g; Order No. 888-A, = Promoting=20 Wholesale Competition Through Open Access Non-Discriminatory = Transmission=20 Services by Public Utilities; Recovery of Stranded Costs by Public = Utilities and=20 Transmitting Utilities, III F.E.R.C. Stats. & Regs. P 31,048, 62 = Fed. Reg.=20 12,274 (1997) (codified at 18 C.F.R. pt. 35), order on reh'g; Order No. = 888-B,=20 Promoting Wholesale Competition Through Open Access Non-Discriminatory=20 Transmission Services by Public Utilities; Recovery of Stranded Costs by = Public=20 Utilities and Transmitting Utilities, 81 F.E.R.C. P 61,248, 62 Fed. Reg. = 64,688=20 (1997), order on reh'g; Order No. 888-C, Promoting Wholesale Competition = Through=20 Open Access Non-Discriminatory Transmission Services by Public = Utilities;=20 Recovery of Stranded Costs by Public Utilities and Transmitting = Utilities, 82=20 F.E.R.C. P 61,046, (1998). Order No. 889, Open Access Same-Time = Information=20 System (formerly Real-Time Information Networks) and Standards of = Conduct,=20 F.E.R.C. Stats. & Regs. P 31,035, 31,585 (1996), order on reh'g, = Order No.=20 889-A, Open Access Same-Time Information System (formerly Real-Time = Information=20 Networks) and Standards of Conduct, III F.E.R.C. Stats. & Regs. P = 31,049, 62=20 Fed. Reg. 12,484 (1997) (codified at 18 C.F.R. pt. 37), reh'g denied, = Order No.=20 889-B, Open Access Same-Time Information System (formerly Real-Time = Information=20 Networks) and Standards of Conduct, 81 F.E.R.C. P 61,253 (1997). =

n6. It=20 is very costly to direct electricity down a single line in an = interconnected=20 system. Instead, it flows through all of the lines in accordance with = their=20 relative resistances (impedances), taking both direct and roundabout = paths=20 (which may extend over several service territories) to reach its = ultimate user.=20 These "loop flows" may affect the ability of other utilities to put = their own=20 lines to their desired uses. Power transactions have generally = disregarded the=20 reality of these flows, instead specifying contract paths to be used in=20 determining payments to only a subset of affected transmission owners.=20

n7. FERC Clears the Way for Retail-Access Programs in Several = States,=20 Inside FERC, Dec. 22, 1997, at 11.

n8. Robert J. Michaels & = Jerry=20 Ellig, Price Spike Redux: a Market Emerged, Remarkably Rational, Pub. = Util.=20 Fort. (Feb. 1, 1999), at 40.

n9. Order No. 888, supra note 5, = F.E.R.C.=20 Stats. & Regs. P 31,036, at 31,730.

n10. The = administration's draft=20 restructuring legislation would allow the FERC to impose ISOs and = require=20 utilities to join them. Comprehensive Electricity Competition Act, S. = 1047,=20 106th Cong. (1999); H.R. 1828, 106th Cong. (1999).

n11. The = California=20 ISO, for example, administers markets for reserves of varying priority = and for=20 energy to flow within the next hour. The major energy market in the = state is for=20 day-ahead flows, administered by the California Power Exchange, an = unrelated=20 organization that also has market monitoring functions.

n12. = Pacific Gas=20 & Elec. Co., San Diego Gas & Elec. Co., & S. Cal. Edison = Co., 77=20 F.E.R.C. P 61,204 (1996), order on reh'g, 81 F.E.R.C. P 61,122 (1997); = New=20 England Power Pool, 79 F.E.R.C. P 61,374 (1997) reh'g pending; = Pennsylvania-New=20 Jersey-Maryland Interconnection, 81 F.E.R.C. P 61,257 (1997), reh'g = pending;=20 Central Hudson Gas & Elec. Co., 83 F.E.R.C. P 61,352 (1998), reh'g = pending,=20 Midwest Ind. Transmission Sys. Operator, 84 F.E.R.C. P 61,231 (1998). = The=20 Electricity Reliability Council of Texas (ERCOT) also operates as an ISO = but is=20 largely autonomous of the FERC.

n13. A list of the California = interests=20 and their representation appears below.

n14. Application of the=20 FirstEnergy Operating Co. for Authorization to Transfer Transmission = Assets to=20 Am. Transmission Sys., Inc., Docket No. EC99-53-000. (March 19, 1999)=20 <http://rimswebl.ferc.fed.us/wconnect/wc.dll?rwsearch<diff>rimsd= ocinfor<diff>1930731>.=20

n15. American Elec. Power Serv. Corp., Docket No. ER99-57-000,=20 Attachment 1, Summary of Alliance Documents (June 4, 1999).

n16. = Entergy=20 Petition, supra note 2. Entergy has thus far attracted no other = transmission=20 owners into its proposed organization.

n17. Id. at 5. =

n18.=20 Entergy Petition, supra note 2, at 19-35. Dissenting from the = Commission's=20 subsequent declaratory order, Commissioner Massey quoted Order 888 as = stating=20 that "to be truly independent, an ISO cannot be owned by any market=20 participant." Entergy Services, Inc., 88 F.E.R.C. P 61,149 (1999) = (Dissent, at=20 61,505) (citation omitted).

n19. Cooperatives Pan Entergy = Transco Plan=20 at FERC, Elec. Daily, May 11, 1999.

n20. Entergy Petition, supra = note 2.=20

n21. Notice of Proposed Rulemaking, Regional Transmission = Organizations,=20 87 F.E.R.C. Stats. & Regs. P 32,541, 64 Fed. Reg. 31,389 (1999).=20

n22. Compare, e.g., Prepared Testimony of Leonard S. Hyman for=20 FirstEnergy, Docket No. EC99-53-000, at 4 (May 5, 1999)=20 <http://rimswebl.ferc.fed.us/wconnect/wcdll?rwsearch<diff>rimsdo= cinfor<diff>1930735>=20 with Motion to Intervene of Industrial Consumers, No. EC99-57-000, at = 6-11=20 <http://rimswebl.ferc.fed.us/wconnect/wcdll?rwsearch<diff>rimsdo= cinfor<diff>1944621>.=20

n23. A summary appears in Louis De Alessi, An Economic Analysis = of=20 Government Ownership and Regulation: Theory and the Evidence from the = Electric=20 Power Industry, 19 Pub. Choice 1 (1974).

n24. Most municipal = systems at=20 the time were solely distributors that received their full electrical=20 requirements from surrounding corporate utilities at regulated rates.=20 Representative studies (some more recent) with quite different findings = include:=20 Randy A. Nelson & Walter J. Primeaux, Jr., The Effects of = Competition on=20 Transmission and Distribution Costs in the Municipal Electric Industry, = 64 Land=20 Econ. 338 (1988); R. Richard Geddes, Ownership, Regulation, and = Managerial=20 Monitoring in the Electric Utility Industry, 40 J. Law & Econ. 261 = (1997);=20 Robert A. Meyer, Publicly Owned Versus Privately Owned Utilities: A = Policy=20 Choice, 57 Rev. Econ. & Stats. 391 (1975); and John E. Kwoka, Jr., = Power=20 Structure: Ownership, Integration, and Competition in the U.S. = Electricity=20 Industry (1996).

n25. Michael A. Crew & Paul R. Kleindorfer, = Incentive Regulation in the United Kingdom and the United States: Some = Lessons,=20 9 J. Regulatory Econ. 211 (1996); Michael Einhorn, Electricity Wheeling = and=20 Incentive Regulation, 2 J. Regulatory Econ. 173 (1990).

n26. = Altra=20 Energy Technologies, Inc., Petition for a Rulemaking on Electric Power = Industry=20 Structure and Commercial Practices and Motion to Clarify or Reconsider = Certain=20 Open-Access Commercial Practices, Nos. RM95-8-000 and RM 98-5-000 (Mar. = 25,=20 1998).

n27. "Public interest" ISO governors likewise vote their = groups'=20 interests, and those whom they represent probably best advance their = agendas=20 (e.g. environmentalism) by choosing aggressive partisans. In what = follows,=20 "board members" and "governors" of an ISO are used interchangeably. =

n28.=20 Compare Curt L. Hebert, Jr., Moving the RTO Debate, 12 Elec. J. 24 = (1999), with=20 McCamant et al., supra note 1, at 26.

n29. Ronald Coase's = fundamental=20 works both brought these problems to light and pointed the way toward = answers.=20 They are collected in R.H. Coase, The Firm, the Market, and the Law = (1988).=20 Later works have addressed these problems. See, e.g., Oliver E. = Williamson,=20 Economic Organization: Firms, Markets and Policy Control (1986); and = Oliver E.=20 Williamson, The Mechanisms of Governance (1996). =

n30.=20 .Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of = Corporate Law (1991).

n31. Michael C. Jensen & William H. = Meckling,=20 Theory of the Firm: Managerial Behavior, Agency Costs and Ownership = Structure, 3=20 J. Fin. Econ. 305 (1976).

n32. Michael C. Jensen, The Modern = Industrial=20 Revolution, Exit, and the Failure of Internal Control Systems, 48 J. = Fin. 831=20 (1993).

n33. For example, family farms produce most of the = nation's=20 grain while corporate farms have taken over poultry and livestock. Scale = economies in livestock favor the corporate form, while the importance of = attention to heterogeneous details in grain production favors the family = farm.=20 Douglas W. Allen & Dean Lueck, The Nature of the Farm, 41 J. L. = & Econ.=20 343 (1998). Likewise, general hospitals with short patient stays are = more likely=20 to be nonprofits than long-term care facilities, the difference being = explained=20 by an analogous distinction between the modalities of short-term and = long-term=20 treatments. Susan Rose-Ackerman, Altruism, Nonprofits, and Economic = Theory, 34=20 J. Econ. Literature 701 (1996).

n34. .Henry Hansmann, The = Ownership of=20 Enterprise (1996). See also Harry DeAngelo, Competition and Unanimity, = 71 Am.=20 Econ. Rev. 18 (1981) (providing a demonstration of how shareholders will = generally be unanimous in their objectives).

n35. In addition, a = well-established body of law specifies the details of equal treatment of = shareholders, relationships between shareholders and management, = transactions in=20 shares, and the protocols of shareholder governance. = Because=20 such detailed law does not exist for (e.g.) worker-managed firms they = will also=20 be inherently riskier even if there is agreement on goals.

n36.=20 Professionals with highly specialized but similar skills may thus choose = partnership, since it is easier for members of a homogeneous group to = evaluate=20 one another and to compare effort when apportioning rewards. =

n37.=20 .Hansmann, supra note 34, at 28. The reasoning also explains why a farm=20 cooperative is usually restricted to growers of single crop or the = members of a=20 medical partnership usually practice the same specialty. If the = organization=20 handles sells in two unrelated markets, its members must collectively = decide on=20 (e.g.) how to allocate limited marketing funds between them. Those who = succeed=20 in capturing more of the funds make part of their gains at the expense = of those=20 who operate in the other market. Id.

n38. Shareholders adjust to = their=20 preferred levels of risk by diversification of their individual = holdings.=20

n39. .Hansmann, supra note 34, at 44. Likewise, firms = incorporated in=20 Delaware (and other states) have the option of allowing debtholders = voting=20 rights symmetric with those of shareholders, but never do. Easterbrook = &=20 Fischel, supra note 30, at 63. Effective control of a firm passes to = debtholders=20 in bankruptcy, a rational choice because they have the strongest motive = to make=20 wealth-maximizing decisions on its assets after equity claims have = become=20 worthless.

n40. If there is an active market for corporate = control that=20 leads to removal of inept managers the oft-cited (but seldom evidenced) = desire=20 of a monopolist for a "quiet life" ceases to be a problem. A monopolist = who=20 simultaneously owns and manages the firm gives up the opportunity of = selling it=20 at the capitalized value of a more efficient owner's expected economic = profit.=20 Findings of inefficient operation or investment by traditional regulated = utilities may reflect limits on their profitability, the inability of = regulators=20 to monitor management decisions accurately, the absence of competition = in=20 territorial monopolies, or impediments to transactions in corporate = control=20 under the Public Utility Holding Company Act.

n41. Individuals=20 contribute to churches in hopes of a better afterlife, and parents treat = their=20 children with kindness in expectation that the children will support = them in old=20 age. Laurence R. Iannaccone, Introduction to the Economics of Religion, = 36 J.=20 Econ. Literature 1465 (1998). Likewise, a business may "altruistically" = choose=20 not to degrade the quality of its output because the near-term profit is = not=20 worth the future loss in reputation. Benjamin Klein & Keith B. = Leffler, The=20 Role of Market Forces in Assuring Contractual Performance, 89 J. Pol. = Econ. 615=20 (1981).

n42. The prospect of increased funding for food stamps = may, for=20 example, bring farmers and welfare recipients into the same coalition.=20

n43. "Constitutional" in the text is a term from economics. See = James M.=20 Buchanan & Gordon Tullock, The Calculus of Consent (1962), James M.=20 Buchanan, The Limits of Liberty: Between Anarchy and Leviathan (1975); = and=20 Geoffrey Brennan and James M. Buchanan, The Reason of Rules: = Constitutional=20 Political Economy (1985).

n44. .Mancur Olson, The Logic of = Collective=20 Action: Public Goods and the Theory of Groups (1971). Olson argues that=20 successful groups often solve the free-rider problem by also offering = services=20 of private value that are not available to nonmembers, e.g. a trade = association=20 collects market data whose distribution is restricted to members. =

n45.=20 This is also a frequent explanation of how large institutional = shareholders=20 solve the free-rider problem in monitoring corporate managements, = benefiting the=20 small shareholders in the process. Donald E. Farrar & Lance Girton,=20 Institutional Investors and Concentration of Financial Power: Berle and = Means=20 Revisited, 36 J. Fin. 369, 369-381 (1981).

n46. Steven C. Salop = &=20 David T. Scheffman, Raising Rivals' Costs, 73 Am. Econ. Rev. 267 (1983). =

n47. Regulators have at times attempted to lower obstacles to=20 participation by small and hard-to-organize interests. The California = Public=20 Utilities Commission, for example, allows certain classes of intervenors = in its=20 proceedings to claim compensation for their time and expenses. That = Commission=20 also contains an Office of Ratepayer Advocates staffed by employees = whose=20 function is to provide input on behalf of smaller consumers. Few if any = ISO=20 formations have proceeded under rules which allow cost recovery by = participants=20 who can claim financial hardship.

n48. Midwest ISO Brouhaha Seen = Slowing=20 Competition, Testing FERC's Policy, Power Markets Wk., Dec. 15, 1997, at = 3.=20

n49. American Elec. Power Serv. Corp, No. ER99-57-000. Massey = Takes=20 Hebert to Task on Transcos, Berates Use of "Sweeteners', Inside FERC, = Dec. 14,=20 1998, at 7.

n50. Last InDeGo Organizers Shelve ISO Plan but Hope = that=20 FERC Will Step in to Lead, 26 Energy Rpt., Mar. 9, 1998.

n51. = Calif. ISO=20 Is Too Expensive to Join, LADWP Complains, Looks for Changes to Rules, = Power=20 Markets Wk., Feb. 9, 1998, at 10.

n52. FERC Approves PJM = Majority's ISO=20 and Congestion Pricing Proposal, Foster Elec. Rep., Dec. 3, 1997, at 1; = With=20 Bailey Dissenting, FERC Orders NYPP to Revise = Governance Rules=20 for Key NY-ISO Committee; Gives Other Approvals Needed for the NY-ISO to = Begin=20 Operations, Foster Elec. Rep., May 5, 1999, at 8 [hereinafter Revised=20 Governance Rules]; FERC Conditionally Approves its = First ISO,"=20 Foster Elec. Rep., July 2, 1997, at 5.

n53. Tensions Threaten = N.Y. ISO,=20 Electricity Daily, July 16, 1996; IPPs, Marketers Vote No on PJM = Transmission=20 Proposal, Energy Daily, Aug. 22, 1996.

n54. Various Parties = Protest=20 California IOU's ISO and Power Exchange Proposals, Foster Elec. Rpt., = June 26,=20 1996, 1; California Utilities Defend Their three Applications at FERC = for=20 Implementing CPUC's Restructuring Decision, Foster Elec. Rpt., July 10, = 1996, 1.=20

n55. Midwest ISO Planners to Allow for More Input, but = Industrials Still=20 Fault Plan, Electric Util. Wk., April 21, 1997, at 4 (referring to a = predecessor=20 of the current Midwest ISO).

n56. This reasoning has carried = some weight=20 at the FERC. Commenting on the New York arrangements, Commissioner = Bailey stated=20 that she is "not particularly concerned about the prospect of = transmission owner=20 dominance...[because] reliability organizations should be dominated by=20 expertise." FERC Eases OASIS Posting Load, Okays N.Y. ISO; Massey Argues = on Some=20 Calls, Power Markets Wk., June 29, 1998, at 10. The Commissioner also = stated=20 that she had supported a PJM restructuring plan because "when seven of = the eight=20 [utilities] support one approach, it was difficult to reject that = approach."=20 Independent power producers and marketers strongly opposed the plan. PJM = Majority's Plan Wins FERC Nod for Restructuring Pool into ISO, PX, = Electric=20 Util. Wk., Dec. 1, 1997, at 12.

n57. The FERC has promised to = take up=20 the marketers' case after the ISO submits a revised = governance=20 proposal. Revised Governance Rules, supra note 52, at = 8.=20

n58. Power Marketers Protest NYPP's ISO Settlement Agreement and = its=20 Weighted Voting Proposal, Foster Elec. Rep., Dec. 16, 1998, at 8. =

n59.=20 Pacific Gas & Elec. Co., Order Conditionally Authorizing = Establishment of an=20 Independent System Operator and Power Exchange, Nos. EC96-19-000 and=20 ER96-1663-000, 77 F.E.R.C. P 61,204 (Nov. 26, 1996).

n60. = Standing over=20 the ISO's governors, California's Oversight Board determines which = organizations=20 are able to choose individuals who will be seated on the ISO board, and = has the=20 final say on whether a nominee is acceptable. It has rejected only one = nominee,=20 a consumer representative whom it claimed did not have sufficient = experience on=20 boards of directors. California Consumer Groups Charge that California = ISO's and=20 Oversight Board's Failure to Seat their Chosen Representative on the = ISO's=20 Governing Board Violates FERC's Directives, Foster Elec. Rep., June 17, = 1998, at=20 12. The current representatives of At-Large End-Users are from the = League of=20 Women Voters, Proctor & Gamble, The California Public Utilities = Commission's=20 Office of Ratepayer Advocates, and a self-employed person. California = ISO Board=20 of Governors: Class and Affiliation Listing <http://www.caiso.com> = [hereinafter CAISO Board of Governors].

n61. During the = formation=20 process a representative of a California corporate utility stated that = "the=20 government structure for the exchange and the ISO was specifically set = up to=20 favor the [municipal utilities]," presumably to keep them from = protesting the=20 structure. Are California Munis Trying to Game the ISO System?, Elec. = Daily, May=20 9, 1996.

n62. The other ten classes include: (1) one member from = "Government Market Participant Entities" (California Department of Water = Resources); (2) two from "Non-Utility Electric sellers" (Dynegy Inc. and = the=20 Independent Energy Producers Association); (3) one from "Public Buyers = and=20 Sellers" (Western Area Power Administration); (4) one from "Private = Buyers and=20 Sellers" (Enron Corporation); (5) one from "Agricultural End-Users"; (6) = one=20 from "Industrial End-Users"; (7) one from "Commercial End-Users"; (8) = two=20 "Residential End-Users" (consumer-advocate group TURN and a sometime = consultant=20 to TURN); (9) two "Public Interest Groups" (both environmentalist); and = (10) two=20 "Non-Market Participants" (International Brotherhood of Electrical = Workers and=20 engineering-construction firm Bechtel) Advisory Representatives are from = the=20 Bonneville Power Authority, Powerex (British Columbia), the California = Energy=20 Commission, and the California Public Utilities Commission. CAISO Board = of=20 Governors, supra note 60.

n63. Charles R. Plott, Axiomatic = Social Choice=20 Theory: An Overview and Interpretation, 20 Am. J. Pol. Sci. 511 (1976).=20

n64. .Kenneth Arrow, Social Choice and Individual Values (2d ed. = 1963).=20 Readable summaries appear in Steven J. Brams, Rational Politics (1985); = and=20 Plott, supra note 63. Arrow received the Nobel Prize for his work. =

n65.=20 One final condition is the "independence of irrelevant alternatives." = Roughly,=20 it states that if coffee and tea are on the menu and I order coffee, if = the=20 waiter unexpectedly announces that beer is also available I may switch = to beer,=20 but I will never change my choice to tea.

n66. Alain Gibbard,=20 Manipulation of Voting Schemes: A General Result, 41 Econometrica 587 = (1973);=20 Mark Allen Satterthwaite, Strategy-Proofness and Arrow's Conditions: = Existence=20 and Correspondence Theorems for Voting Procedures and Social Welfare = Functions,=20 10 J. Econ. Theory 187 (1975). If one group can gain by misrepresenting = its=20 preferences, others may best be able to defend their interests by=20 misrepresenting their own.

n67. Very few elections take this = form, but=20 the example also applies to motions and amendments. Saul Levmore, = Parliamentary=20 Law, Majority Decisionmaking, and the Voting Paradox, 75 Va. L. Rev. = 971, 992=20 (1989). Levmore also argues that important elements of parliamentary = procedure=20 have the objective of minimizing either the likelihood or the visibility = of=20 paradoxes. Id. at 997.

n68. Summarizing the pairwise outcomes, = this=20 society prefers Z to X, X to Y, and Y to Z, an intransitive ranking. = Voting on=20 all three at once, e.g. by a point-count ranking, it fails to produce a = winner=20 in this example, and will also fall subject to the Impossibility Theorem = in the=20 general case.

n69. There are many real-world instances of the = paradox.=20 See, e.g., Frank H. Easterbrook, Ways of Criticizing the Court, 95 Harv. = L. Rev.=20 802 (1982) (Supreme Court decisions); William H. Riker, Arrow's Theorem = and Some=20 Examples of the Paradox of Voting, in Mathematical Applications in = Political=20 Science 41 (J.M. Claunch ed.) (1965) (U.S. House and Senate); and J.C.=20 Blydenburgh, The Closed Rule and the Paradox of Voting, 33 J. Politics = 57 (1971)=20 (U.S. House votes).

n70. The concept first appears in Duncan = Black, The=20 Theory of Committees and Elections (1958). More general mathematical = results=20 appear in Donald G. Saari, The Geometry of Voting (1994). As an = illustration,=20 assume that A, B, and C are to vote on a public school budget, with low, = medium,=20 and high as their choices. Single-peaked preferences look like a single=20 mountain, and multiple-peaked ones look like a range. A person with=20 single-peaked preferences whose optimum is a high budget will prefer it = to a=20 medium budget, but if only medium and low budgets are possible then that = person=20 prefers medium. A single-peaked person who is happiest with a medium = budget=20 prefers it to the two extremes, but if high and low are the only choices = might=20 favor either over the other. Assume voters have the following = single-peaked=20 orderings on budget size and no other issues are before them: =

A:High=20 > Med > Low

B:Med > Low > High

C:Low > = Med >=20 High

For any vote sequence, the medium budget wins. If, however, = B's=20 ranking is changed to: High > Low > Med, which is not = single-peaked, the=20 paradox returns and the winning budget depends on the sequence of = choices. B's=20 new preferences rank a distant alternative to "high" as less = dissatisfying than=20 a nearby one.

n71. Single-peakedness in shareholder preferences = is=20 discussed in more detail in Frank Easterbrook & Daniel Fischel, = Voting in=20 Corporate Law, 26 J. Law & Econ. 395 (1983).

n72. The = example comes=20 from Edgar K. Browning, A Note on Cyclical Majorities, 12 Pub. Choice = 111=20 (1972).

n73. Attempting to identify successful interest groups, = Levmore=20 argues that they "act where there are cycling majorities or other = aggregation=20 anomalies and, therefore, where there are excellent opportunities to = influence=20 agenda setters or to bargain for the formation of winning coalitions." = Saul=20 Levmore, Voting Paradoxes and Interest Groups 28 J. Leg. Studies 259 = (1999).=20

n74. A winning coalition of two persons can be chosen from a = group of=20 three in three distinct ways, three persons from five in 10 ways, and 13 = from 25=20 (California's board size) in 5.3 million ways.

n75. .William H. = Riker,=20 The Theory of Political Coalitions (1962).

n76. Parties with = more=20 influence at the ISO's constitutional stage can attempt to bias its = membership=20 toward the formation of favorable coalitions. Utilities organizing an = earlier=20 Midwest ISO proposed that its board consist of equal numbers of=20 transmission-owning and transmission dependent utilities (and no other = interests=20 represented), with a chair chosen by the group. Eight Midwest Utilities = Propose=20 ISO but Arrangement Wouldn't be Exclusive, Energy Rep., May 27, 1996.=20

n77. Sam Peltzman, Toward a More General Theory of Regulation, = 19 J. Law=20 & Econ. 211 (1976).

n78. See, e.g., McCamant et al., supra = note 1.=20

n79. Transcos taking the form of limited liability corporations = that=20 pool utility assets will require some other method of incentivizing = directors,=20 who will almost surely be required to abandon all financial ties to the=20 utilities. This issue has yet to be thought through with the detail it = deserves.=20 Entergy Petition, supra note 2, at 10, 13.

n80. The stakes of = large=20 investors appear substantial enough to induce activism. In a sample of = 511 large=20 U.S. corporations, the five largest shareholders held an average of 24.8 = percent=20 of common stock outstanding. Harold Demsetz & Kenneth Lehn, The = Structure of=20 Corporate Ownership: Causes and Consequences, 93 J. Polit. Econ 1155, = 1157=20 (1985).

n81. The text abstracts from the Public Utility Holding = Company=20 Act, which produces some complications unique to electricity. =

n82.=20 Easterbrook & Fischel, supra note 30, at 109-144; Sanjay Bhagat, = Andrei=20 Shleifer, and Robert W. Vishny, Hostile Takeovers in the 1980s: The = Return to=20 Corporate Specialization, Brookings Papers on Economic Activity (Special = Issue,=20 1990), at 1; Andrei Shleifer & Robert W. Vishny, Large Shareholders = and=20 Corporate Control, 94 J. Polit. Econ. 461 (1986); Randall Morck et al.,=20 Alternative Mechanisms for Corporate Control, 79 Am. Econ. Rev. 842 = (1989).=20

n83. One critical utility representative described the PJM-ISO = as having=20 "a governance structure that has evolved into "politics = of=20 popularity' and the perception of a "secret society,' and decisions = driven by=20 perception rather than the cost/benefit analysis usually conducted by = for-profit=20 companies." Fiery Panel Discussion During Energy Lawyers' Conference = Results in=20 Calls for FERC's Disbandment, Foster Elec. Rep., Dec. 16, 1998, at 1=20 [hereinafter Fiery Panel Discussion].

n84. Stakeholders accused = the=20 California ISO of sidestepping them in forming its plan to redesign the = state's=20 ancillary services markets. The ISO replied that it "has an obligation = to apply=20 its judgment to the issues, rather than simply to ratify the choices of = the=20 stakeholders whose representatives attend meetings, as [one intervenor] = would=20 prefer." Calif. ISO Calls Generators' Concerns over Plant Control Plan=20 Unfounded, Power Markets Wk., April 19, 1999, at 10. An officer of = Northern=20 States Power, which until recently favored Transcos, noted prior to the=20 corporate change of heart (concurrent with a merger application) that = "new ISOs=20 will create bureaucracies that will find ways to survive whether the ISO = is a=20 good idea or not." Robert Smock, ISOs Level Playing Field, Elec. Light = &=20 Power, Aug. 1998, at 12.

n85. For evidence on separation of = ownership=20 and control in non-corporate settings, see William A. Niskanen, = Bureaucrats and=20 Politicians, 18 J. Law and Econ. 617 (1975).

n86. In another = variation,=20 the transmission owning utilities in PJM have told the FERC that their = ISO's=20 administrative Office of Interconnection is attempting to give itself = excessive=20 authority over transmission, including power to order new construction. = The=20 utilities claim that OI's compliance filing at the FERC was not approved = by=20 them. PJM Utilities Complain ISO is Trying to Be Too Independent of Grid = Owners,=20 Power Markets Wk., Feb. 23, 1998, at 6.

n87. The ubiquity of=20 institutional rules that cannot easily be changed by elected officials = has been=20 put forward as an explanation for the relative lack of paradoxical = outcomes in=20 contemporary legislatures. Kenneth A. Shepsle & Barry R. Weingast,=20 Struture-Induced Equilibrium and Legislative Choice, 37 Pub. Choice 503 = (1981).=20 The applicability of this reasoning to ISOs is unclear.

n88. = Even if a=20 transmission owner does not control generation, under some congestion = pricing=20 regimes it may have incentives to defer investment in new facilities or = to use=20 its downstream operating practices to create upstream bottlenecks. =

n89.=20 George J. Stigler, The Theory of Economic Regulation, 3 Bell J. Econ. = &=20 Management Sci. 1 (1970).

n90. Questions of liability for = antitrust and=20 related violations by a nonprofit ISO thus far remain unanswered. =

n91.=20 Testifying on Entergy's proposed Transco, the FTC told the Mississippi = Public=20 Service Commission that unlike a Transco, an ISO would manage and = operate=20 transmission "so as to avoid the potential vertical and horizontal = threats posed=20 by the Transco while capturing the vertical integration advantages." FTC = Opposes=20 Entergy's For-Profit "Transco' Plan, Favors ISO Regime, Southeast Power = Rep.,=20 Oct. 16, 1998, at 2. Even if the Transco's subtle anticompetitive acts = are=20 policed, the FTC states without evidence that "potential entrants [into=20 generation and marketing] are likely to perceive a continued risk of=20 discrimination in transmission services based on past experience in the=20 industry." Id. Arguments such as this one can also be reversed. = Marketers have=20 complained that ISOs will chill competition because their rules and = operations=20 are often in the hands of former employees of the utilities who will = continue to=20 own transmission. Marketers Fighting Calif. ISO Rules, Worry that = Utility=20 Culture Dominates, Power Markets Wk., Dec. 8, 1997, at 1.

n92. = Ross D.=20 Eckert, The Life Cycle of Regulatory Commissioners, 24 J. Law & = Econ. 167=20 (1981).

n93. Politics may also help explain why California has = four=20 distinct monitoring bodies. The ISO has an internal Market Surveillance = Unit and=20 an appointed Market Surveillance Committee, and the Power Exchange (PX) = has=20 analogous internal and external units. While the PX and ISO are required = to=20 maintain confidentiality of bids into the energy and ancillary services = markets,=20 both of their monitoring committees have expressed preferences that the = data be=20 made public, and that they be allowed to collect data on bilateral = transactions=20 to ensure that these are also not tainted by monopoly.

n94. = David B.=20 Raskin, ISOs; The New Antitrust Regulators?, 11 Electricity J. 15 = (1998). The=20 FERC recently determined that the California ISO's Market Surveillance = Committee=20 (which has exclusive access to some market data) could choose the = occasions on=20 which it provides expert witness services for the ISO (e.g. at contested = regulatory proceedings), since this is "an element of the MSC's = independence."=20 Opinion No. 911, Redondo Beach, L.L.C., 87 F.E.R.C. P 61,208 (1999).=20

n95. The courts have determined that the board of the California = ISO=20 need not hold public meetings because it is not a state agency. Until = recently=20 its Market Surveillance Committee acted similarly, holding only two = public=20 sessions in its two years of existence. The Committee declared its = meetings open=20 to spectators (but not to public participation) after a reporter = insisted that=20 she not be barred from them. No More Secret ISO Surveillance Meetings,=20 California Energy Markets, July 16, 1999, at 12.

n96. Among = others, see=20 Market Surveillance Committee of the California Independent System = Operator,=20 Report on Redesign of Markets for Ancillary Services and Real-Time = Energy (Mar.=20 25, 1999) <http://www.caiso.com>; and Market Monitoring Committee = of the=20 California Power Exchange, Second Report on Market Issues in the = California=20 Power Exchange Energy Markets (Mar. 9, 1999) = <http://www.calpx.com>=20 [hereinafter Second Report on Market Issues]. I have authored testimony = before=20 the FERC on behalf of generation owners regarding the economic content = of these=20 and related reports.

n97. Utilities may also have performed them = more=20 efficiently. The average volume of ancillary services used by the = California ISO=20 has been substantially higher than the total used by utilities when they = were=20 operating their own control areas. Second Report on Market Issues, supra = note=20 96, at 25.

n98. These views have been espoused by = environmentalists and=20 the FTC. Comments Submitted in Advance of FERC's ISO Conference Reveal = Wide=20 Range of Views on What the Perfect ISO Should Look Like and What FERC's = Role=20 Should Be in Developing ISOs, Foster Elec. Rep., Apr. 15, 1998, at 1; = and FTC=20 Opposes Entergy's For-Profit "Transco' Plan, Favors ISO Regime, Electric = Util.=20 Wk., Oct. 5, 1998, at 4. Since ISOs will not have control of competitive = generation investments (but may influence their siting), the nature of = the=20 alternatives beyond transmission that they can consider is unclear. The = relative=20 waste from overinvestment and premature investment may not be = substantial.=20 Transmission accounts for 2% of utility operating expenses, 11% of the = capital=20 stock, and 6% of utility revenues. Comments of Paul L. Joskow, No. = RM99-2 (Aug.=20 13, 1999).

n99. Economic studies of regulation and = overcapitalization by=20 utilities in the past failed to produce consensus results. Leon = Courville,=20 Regulation and Efficiency in the Electric Utility Industry, 5 Bell J. = Econ. 53=20 (1974), and Robert M. Spann, Rate of Return Regulation and Efficiency in = Production: An Empirical Test of the Averch-Johnson Thesis, 5 Bell J. = Econ. 38=20 (1974).

n100. Fiery Panel Discussion, supra note 83. =

n101. Rift=20 Among Cal-ISO Board Members Explodes over Transmission Expansion, Elec. = Power=20 Alert, May 5, 1999, at 7.

n102. Reliability Regions Struggle = with=20 Generation Interconnection, Elec. Power Alert, May 5, 1999, at 6. =

n103.=20 Such obstacles as bond indentures and the provisions of the Public = Utility=20 Holding Company Act make the change more difficult in this industry than = in most=20 others.

n104. This is certainly clear for the existing ISOs.=20 California's ISO is a localized creature created by the state's = politics. New=20 England, PJM, New York, and Texas coincide with preexisting pool areas. = Even if=20 these boundaries make sense for the industry as it once was, they do not = necessarily also make sense for the markets of the future.

n105. = In=20 questioning Transcos, FERC Chairman Hoecker asked "can they be optimally = sized=20 from the outset?" implying that he or someone else already knows that = size, and=20 that an unnamed force pushes ISOs but not Transcos in the direction of=20 optimality. Symposium, Regionalism in Electricity Markets: It's Time to = Have the=20 Debate, Edison Elec. Inst., Winter Chief Executive Conference, Jan. 8, = 1999.=20

n106. Entergy Petition, supra note 2 (existing holding company = system);=20 Arizona Utilities to Form First Transco in Stranded Costs Deal, Energy = Rep.,=20 Nov. 9, 1998, at 4 (portion of state); ELCON, Independent System = Operators,=20 Profiles on Electricity Issues No. 18 (Mar. 1997) (Eastern, Western, and = Texas=20 Interconnections).

n107. FERC Commissioner Massey, a strong = backer of=20 ISOs, earlier noted that stakeholder boards, nonprofit status, and = operation of=20 power exchanges may make ISOs difficult to dismantle. He has stated that = "the=20 Commission hasn't given this much thought." Should ISOs Be Designed to = Become=20 Gridcos?, Restructuring Today, Feb. 26, 1998, at 2. Compare Transcos = Will Evolve=20 from Interim ISOs Utility Say Industry Leaders, Energy Rep., Mar. 1, = 1999, at 3.=20

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