UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION

California Independent System Operator  )  			Docket No. ER98-211-000
   Corporation				       )

CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION’S
MOTION FOR LEAVE TO FILE ANSWER AND ANSWER 
TO INTERVENTIONS AND PROTESTS 

Pursuant to Rule 213 of the Commission’s Rules of Practice and Procedure, 18 C.F.R. § 385.213 (1997), the California Independent System Operator Corporation (ISO) hereby files its Motion to Answer and Answer to the motions to intervene and protests filed in this proceeding on or about November 7, 1997.  The interventions were filed in response to the ISO’s October 17, 1997 rate filing under Section 205 of the Federal Power Act for approval of its Grid Management Charge (GMC) and certain pass-through rates for Ancillary Services, Congestion Management and Wheeling.  

MOTION TO FILE ANSWER TO PROTESTS
	Although Rule 213(a)(2) of the Commission’s Rules of Practice and Procedure, 18 C.F.R. § 385.213(a)(2) (1997), does not permit answers to protests, the ISO respectfully requests that the Commission grant a waiver of Rule 213(a)(2), because good cause exists to allow the ISO’s Answer.  The ISO’s Answer will lead to a more complete record and assist in the Commission's understanding of the issues.  Moreover, this Answer will help to resolve any factual issues that were raised in the Protests, and, therefore, provide a more complete record.  See Niagara Mohawk Power Corp., 45 FERC ¶ 61,199, at 61,555 (1988); Panhandle Eastern Pipe Line Co., 29 FERC ¶ 61,236, at 61,489-90 n.2 (1984).  Thus, good cause exists to permit the waiver of Rule 213(a)(2).
ANSWER
Preliminary Statement
	This response will demonstrate that the rates proposed by the ISO are just and reasonable.  In considering this response, the ISO respectfully requests that the Commission bear in mind that the ISO is not a conventional investor owned utility, but a quasi-public institution that has had its responsibility and costs largely shaped by its users.  The ISO is also a non-profit organization created to advance significant public concerns.  These considerations have a significant impact not only on the costs that the ISO must pay but also on its ability to collect revenues to cover these costs.  Among the special circumstances of the ISO are:

•	While the ISO is a transmission provider, its GMC recovers only its administrative costs of providing that service and none of the costs of investment in transmission facilities;
•	Since the ISO is a non-profit corporation, it has no shareholders to absorb any costs that it has incurred but that are disallowed for revenue collection purposes;
•	Since the ISO may not retain profits from its operations, any excess collections in one year will be carried over for credit against its budget requirements in the following year;
•	Every ISO annual budget will be approved by a Board of Governors comprised of its customers and public representatives;
•	The ISO has been charged by the California legislature, the California Public Utilities Commission and FERC with quasi-regulatory tasks not normally performed by regulated entities;
•	The ISO will perform certain tasks formerly performed by IOUs that may not have been explicitly segregated out for separate cost recovery; and
•	The fact that former control area operators may still have costs built into their filed rates for services that were once provided under Existing Contracts does not mean that the ISO is relieved of cost responsibilities for performing services assigned to the ISO under California restructuring.
Each of these special circumstances is relevant to the issues raised in the interventions and protests filed in this proceeding. 
The ISO is also modifying its position of neutrality on the “net v. gross” issue described in the October 17, 1997 filing.  A review of the interventions and protests in response to the filing and the Commission’s recent comments regarding the importance of Existing Contracts has convinced the ISO that it should adopt a specific policy on how  GMC charges should be applied to Existing Contracts.  As explained below, the ISO concludes that the only feasible and rational alternative is to assess the GMC to Existing Contracts on a uniform “net” basis, rather than attempting to adduce and implement the intent of widely varying contractual provisions.   

I.	ALLOCATION OF THE GRID MANAGEMENT CHARGE (GMC)
A.	The Allocation of the GMC to Gross Load Served by Each Load-Serving Entity in the ISO’s Control Area is Just and Reasonable, with the Exception of Existing Contracts.
The GMC is assessed by the ISO to recover the administrative costs of managing the ISO Control Area.  Certain parties assert that they should be exempted from some or all of the GMC on the basis of the service that they receive under Existing Contracts.  Metropolitan at 19; CMUA at 20; SMUD at 16-18; LADWP at 7; NCPA at 4; TANC at 13-14; San Francisco at 5-9; So. Cities at 5.  The argument for complete exemption from the GMC is predicated on the assertion that an Existing Contract already provides for scheduling and related rights.  These parties claim that because the ISO is the entity to whom their contractual transmission provider must now supply schedules, any GMC charge by the ISO to a Scheduling Coordinator for schedules under an Existing Contract would be an impermissible double collection for scheduling and other services.  NCPA at 5; Metropolitan at 20.
Moreover, the argument for a partial exemption from the GMC is predicated on the assertion that service to load provided by a generator on the transmission user’s side of the meter (“behind the meter” generation) has never been scheduled under the Existing Contract.  Hence, these parties argue that they should not be assessed a GMC when the ISO assumes scheduling responsibility.  LADWP at 7-8; IDD and TID at 3-5; CMUA at 11-16.
Both arguments rest on the simplistic assumption that the ISO is simply a successor in interest to the IOUs as a provider of transmission service.  The ISO does far more; it is the entity responsible for the reliable operation of a NERC control area.  As a control area operator, the ISO has invested substantial sums to acquire the computer hardware and software, the communications capability, and the personnel to run one of the largest control areas in North America.  Any load serving entity that is located within the ISO Control Area benefits from this investment because this investment is a critical factor in the load serving entity’s ability to obtain reliable electric service.
The parties who request that they either be partially or completely exempted from the GMC generally express the view that, because they do not consider themselves to be using the ISO Controlled Grid for all or part of their load, they should have little or no responsibility for the GMC.  Metropolitan at 19; CMUA at 17; SMUD at 12-13; EPUC at 3-6; LADWP at 4; TANC at 13-20; Nichols at 7-8.  This view reflects a misunderstanding of the GMC.  The GMC is not a charge that collects for the use of transmission facilities that comprise the ISO Controlled Grid.  The charge for the use of the ISO Controlled Grid is the Access Charge.  The Access Charge is paid directly to the owner of the transmission facility where the energy is scheduled to exit the ISO Controlled Grid.  The Access charge is not included in the costs underlying the GMC.
The GMC costs are primarily related to control area services.  The GMC recovers ISO’s annual operating costs, debt service on the bonds, and planned capital expenditures.  The annual operating costs, which comprise more than two-thirds of the costs underlying the GMC, are overwhelmingly for staff costs and the third party vendor contracts necessary to establish control area communications and computer operating systems.  The debt service on start-up and development costs pays for the organization of the ISO and the development of its infrastructure.  Planned capital costs are for continuous upgrades needed to keep the ISO equipped to perform its control area functions.  The allocation of all such costs to all load served within the ISO Control Area is supported by cost causation principles.  All load requires control area services and, thus, benefits from the ISO’s administration of such services.  The ISO does not dispute the value of a careful examination of its cost structure.  Such an examination can explore whether the creation of different classes of service is warranted.  The issue is whether customers can logically be grouped into classes on the basis of common costs that they impose on the ISO for their service requirements.  However, the ISO believes that this inquiry can be best done when the ISO has had actual operating experience.  Through actual operating experience, the ISO can understand more fully the Staff time required to execute its various functions.  The ISO further believes that this exercise will be most productive if it is carried out through the stakeholder negotiation process that has been used to develop other aspects of the ISO Tariff.
Certain existing operating entities have Existing Contracts that address the pricing of some aspects of the services now to be provided by the ISO.  The ISO Board of Governors has decided that these customers should be billed for scheduling and other services comprising the GMC in a manner consistent with the billing practices of  the previous control area operators.  Thus, as detailed below, the ISO proposes that, on an interim basis, certain customers with defined characteristics should be billed on a net basis.
The ISO believes that, for the present, any new operating entity should be assessed the full GMC charge for load that it will serve within the ISO Controlled Grid.  New entities will not have any pre-existing contracts that relate to the services now to be provided by the ISO.  Those new entities should pay the full GMC until such time as they can demonstrate that they operate in a way that relieves the ISO of costs recovered through the GMC.  Thus, it is equitable that new service providers participate in the stakeholder process envisioned by the ISO, assist the ISO in understanding the costs that their service will impose on the ISO, and help in devising a class of service structure that accurately reflects their specific cost causation.
With this background, the ISO requests that the Commission accept the following policy as a just and reasonable resolution of the “net vs. gross” billing issue.  The ISO Board of Governors adopted this policy on November 21, 1997 in response to the interventions and protests in the docket and the Commission’s statements in its October 30, 1997 Order respecting the importance of Existing Contracts.  ISO Staff developed this policy for Board consideration after consultation with interested stakeholders on November 19, 1997.  While some stakeholders may contest this policy, the ISO Board concluded that the policy is the most reasonable and feasible accommodation of competing interests.
The Board discussed three general alternatives for applying the GMC to Existing Contracts.  The first is to exempt Existing Contracts from the GMC.  This approach was rejected because under Existing Contracts it is clear that the purchasers of transmission service have recognized an obligation to pay for the type of service now to be provided by the ISO.  A second option is to review and implement the pricing provisions of individual contracts with respect to the services now to be provided by the ISO.  This approach was rejected as impractical.  There are at least twenty-six entities claiming to have Existing Contracts covering GMC services, many of whom have multiple contracts.  The contracts do not clearly articulate prices for identified services that are readily equated to the services that the ISO will now provide.  The ISO’s GMC is based on the ISO’s own costs, not those of the previous control area operator.  In summary, an individualized approach promises protracted litigation.  The third option is to treat Existing Contracts as a class based on a uniform rule for assessing the GMC.  The ISO has adopted the net pricing described below because it generally conforms to the net pricing for transmission services followed in Existing Contracts.  As such, it is fair and equitable, generally consistent with the approach of Existing Contracts, and supported by a majority of the ISO Board of Governors.
Policy to Resolve “Net vs. Gross” Billing Issue
For Existing Contracts

Policy for Volumes Scheduled Under Existing Contracts

This policy concerns volumes scheduled with the ISO on behalf of an Existing Operating Entity (EOE) under the terms and conditions of an Existing Contract for transmission and related ancillary services where these responsibilities have been transferred to the ISO.  An EOE is defined as a load-serving entity with the following characteristics:

•	Located within the ISO Control Area;
•	Existing as of March 31, 1997; and
•	Holding an effective contract on that date with PG&E, SCE or SDG&E that provides for delivery of energy to or from that entity.

The Grid Management Charge (GMC) will be billed by the ISO to the Scheduling Coordinator of the EOE on a “net” basis.  Net billing is based on the absolute value of all volumes scheduled under the ISO Tariff for transactions under the existing contract across the boundary between the ISO and EOE.  This definition applies without regard to the ownership or control of the transmission facility that is used for the transfer.

Specifically, the GMC will be applied to:

•	Volumes scheduled to the EOE; plus
•	Volumes scheduled from the EOE to other points on or outside the ISO Grid. 

However, the amount billed under this arrangement will not exceed the amount that would be billed to the EOE as a full participant in the ISO.

Net billing for these volumes will continue until the GMC study is completed and any changes are filed and accepted by the FERC or the life of the contract, whichever is shorter.

This policy does not have precedential value and will not dictate the design of classes of service.

Policy for All Other Scheduled Volumes

For volumes other than those described above, the GMC will be billed by the ISO to the appropriate Scheduling Coordinators on a “gross” basis, i.e., based on total load served.

Policy for the Future

In early 1998, the ISO will initiate a study, with stakeholder input, of whether the ISO should offer multiple classes of service with different rates, charges, and other terms and conditions.

On or before October 1, 1998, the ISO staff will report to the Board on the results of the study and any recommended actions.

B.	Those Intervenors Objecting to the ISO’s Proposed Allocation of the GMC Confuse the Costs of Control Area Administration with the Cost of Transmission Service.
SMUD, EPUC and LADWP object to the proposed application of the GMC to all load in the ISO’s Control Area.  They argue that the GMC should not apply to load that does not use the ISO Controlled Grid because the ISO does not provide a service to such load.  They also argue that applying the GMC to load in the ISO Control Area that does not use the ISO Controlled Grid is unduly discriminatory because it ignores the quantity and type of service that the ISO will actually provide.  SMUD at 8-9; EPUC at 3-6; LADWP at 7.  As discussed in Section I.A, supra, these arguments assume that the costs underlying the GMC are incurred only as a result of energy scheduled on the ISO Controlled Grid.  For the reasons discussed herein, this assumption is erroneous.
SMUD and CMUA argue that applying the GMC to gross load is contrary to Order No. 888, which held that “behind the meter” generation could be excluded from network service.  SMUD at14; CMUA at 17.  SMUD, CMUA and several other parties claim that they should be free to meet their load with their own internal generation, in addition to using the ISO’s facilities.  They claim that applying the GMC only to net metered demand will ensure that they are charged only for their actual use of the ISO Controlled Grid.  IID and TID at 4-5; TANC at 13; Metropolitan at 17; CMUA at 11. These arguments should be rejected.  The part of Order No. 888 cited by SMUD and CMUA discussed the portion of transmission system costs for which a network customer should be responsible.  The Commission there recognized that energy not scheduled on the transmission grid could be said not to be using the transmission facilities of the grid.  The GMC, however, does not recover for the costs of using transmission on the grid.  The GMC allocates primarily the costs associated with the administration of load control services.  The fact that load is met by internal generation does not eliminate the obligation of the ISO to monitor and provide load control services for the load within the ISO Control Area.
Similarly, NCPA argues that because using the ISO Controlled Grid is not compulsory for any entity other than the three IOUs, the payment of a compulsory GMC should not be allowed.  Otherwise, parties will, in effect, not have the freedom to choose not to participate.  NCPA at 3.  This argument is also based on a misconception of the nature of the GMC.  An entity may elect not to use transmission services provided by the ISO.  However, the entity, if it is a part of the ISO Control Area or wheels through the ISO Control Area, will require ISO action to administer load control services.  The GMC is the charge to cover for this administrative expense.
C.	The Commission Should Not Accept the Intervenors’ Proposals Charging Existing Contracts Holders for the GMC But Should Accept the ISO Board’s Policy as Fair, Equitable and Feasible
	Several parties argue that the application of the GMC to gross load in the ISO Control Area rather than net metered demand will result in the ISO overcollecting revenues.  IID and TID at 4.  This argument is premised on the assumption that meeting load through internal generation relieves the ISO from the cost of administering Ancillary Services.  As discussed above, the use of internal generation does not have this effect.  The ISO must still administer Ancillary Services, whether those services are provided by the ISO or self provided.  Only the Control Area Operator can be the coordinator of all Ancillary Services if system reliability is to be maintained.  
Others claim that the ISO fails to explain the basis for its volumetric estimate upon which the per MWh GMC is predicated and the actual volumes to which that charge would be applied.  San Francisco at 5; IID and TID at 4-5.  This estimate was explained in Mr. Adamson’s testimony.  SCA-1.  The volumes over which the ISO's costs have been spread are the sum of the IOU's total load, the amounts scheduled under Existing Contracts for transmission service, and the projected amount of wheeling transactions.  See SCA-1 at 5.  This volume calculation is consistent with the ISO Board’s policy adopted on November 21, 1997.
IID and TID argue that if the Commission approves the net load approach and limits its application to existing systems as suggested by ISO, the Commission should clarify that existing systems eligible for the net load approach may continue to add or expand generation within their service territories without such generation being considered a new system for purposes of application of the GMC.  IID at 5; TID at 4-5.  This suggestion should be analyzed in the 1998 stakeholder process that the ISO has suggested in order to investigate the benefits of having separate classes of service for the GMC.  The cost causation effect of the described activity needs careful investigation.
SMUD and CMUA argue that applying the GMC to all load in the future, even if currently existing arrangements are excluded, ignores the assumption underlying the restructured California electric market – choice.  They assert that the ISO’s role is to dispatch the system in a manner agreed to by the participants, with economic choices being made by the market participants.  As a result, they claim that the ISO will not operate like a tight pool, which seeks the least cost dispatch.  SMUD at 16-17; CMUA at 13.  These assertions misconstrue the ISO’s role as a Control Area operator.  The ISO has not suggested that it will control the dispatch decisions of Market Participants. The ISO must incur costs to meet Control Area responsibilities, which include: 
•	administering the Ancillary Services of Regulation, Spinning and Non-Spinning and Replacement Reserves, whether those Ancillary Services are procured by the ISO or are self-provided by Scheduling Coordinators;

•	arranging for Voltage Support and Black Start Ancillary Services, which are the exclusive responsibility of the ISO;
  
•	managing congestion, which must take into consideration all energy generated in the Control Area, whether or not that energy is scheduled on the ISO Controlled Grid;

•	continually analyzing system conditions to detect situations threatening system reliability;

•	coordinating operations with adjacent control areas to maintain compliance with NERC standards;

•	receiving and processing all energy scheduled on the ISO Controlled Grid, including energy scheduled pursuant to Existing Contracts.
The ISO merely requires that all those who benefit from the ISO's administration of these load control services and the ISO’s responsibilities under the ISO Tariff pay their allocable share of these costs.
San Francisco argues that applying the GMC to load served under Existing Contracts violates the sanctity of those contracts and is contrary to Commission policy and the ISO’s Tariff.  San Francisco at 6-8.  According to San Francisco, application of the GMC to Existing Contracts violates the ISO’s Tariff by (a) interpreting Existing Contracts to include an additional charge, (b) failing to honor and implement all contractual provisions that explicitly include all costs of service, and (c) rendering it impossible for parties to Existing Contracts to abide by the negotiated contractual rates.  San Francisco at 6-7.   San Francisco claims that because all costs of services necessary to meet customer requirements are set in Existing Contracts, requiring existing contract holders to pay the GMC would force them to pay for the same service twice.  San Francisco at 8.  This argument is a non sequitor.  The ISO's costs have been newly incurred and are not included in the costs recovered under Existing Contracts.  The ISO recognizes that Existing Contracts may include costs for activities similar to those to be performed by the ISO after January 1, 1988.  The fact that such costs are included under Existing Contracts neither relieves the ISO of its cost obligation nor means that parties to Existing Contracts do not benefit from the ISO's load control services.  If there is any inequity in the situation described by the intervenors, it is that their Existing Contracts recover costs for activities that will no longer be provided under the Existing Contracts.  To address this situation, intervenors should exercise the remedies available under their Existing Contracts.  The ISO expects that intervenors will do so if their Scheduling Coordinator attempts to pass along the GMC assessed on schedules under Existing Contracts.
NCPA, Metropolitan and LADWP argue that the Commission in the October 30, 1997 Order, found that holders of Existing Contract rights would continue to pay their service providers at Existing Contract rates and that duplicative charges would not be permitted.  NCPA at 4-5; Metropolitan at 19-20; LADWP at 4.  As noted above, there are no duplicate charges.  NCPA is further concerned about the potential of double counting of loads if the GMC is extended to Existing Contracts because NCPA takes service under multiple contracts.  NCPA at 5.  This problem will not occur because the GMC is only assessed for deliveries to load and the NCPA members will never be assessed for more than their individual total load.
Existing contract holders, such as SMUD, CMUA and So. Cities, argue that if the Commission determines that the GMC should be applied to Existing Contracts, the GMC should be unbundled so that Existing Contract holders do not pay for services they do not receive.  SMUD at 16-17; CMUA at 13-14; So. Cities at 6.  They claim that the ISO’s proposal to bundle control area services with other services, such as managing Ancillary Services, sends inaccurate price signals to Market Participants because Market Participants operating under Existing Contracts are not similarly situated to Market Participants participating in the new market structure.  Thus, both should not pay the same GMC.  SMUD at 16-17; CMUA at 13-15; So. Cities at 4-5.  
To illustrate their contention, the Existing Contract holders argue that Existing Contracts will not require the ISO to interpret contracts, engage in congestion management activities or procure Ancillary Services relating to those contracts.  Because all customers will not be using all services, the ISO should be required, in their view, to unbundle the costs associated with services provided under Must Run Contracts, Congestion Management and Ancillary Services, for example.  TANC at 20-21; Metropolitan at 21; see also So. Cities at 5-6 (The ISO’s ministerial performance of duties for Existing Contracts will not be comparable to the full range of activities that the ISO will undertake on behalf of users of the ISO Controlled Grid under the ISO Tariff).  Thus, these parties argue that to the extent that entities under Existing Contracts derive limited benefits from ISO administration, they should only pay for the benefits they receive.  So. Cities at 6.
The ISO has indicated its willingness to explore cost causation in the situation described above.  However, the ISO notes that these situations are not as easily resolved as the intervenors suggest.  For example, the fact that deliveries are scheduled under Existing Contracts does not mean that the schedules are irrelevant to congestion management.  To the contrary, the fact that certain schedules are exempted from congestion management consequences increases the software analysis required to administer congestion management among the remaining schedules.  As noted above, even if self provided, Ancillary Services must be managed by the ISO as the Control Area Operator.  These observations confirm the need to explore to what extent different service arrangements actually produce different cost consequences for ISO administration.  Consequently, implementation of the ISO Board of Governors’ recommended policy on net load billing and a cost allocation study is the most efficient and effective means to address the issues raised by intervenors.

II.	COST SUPPORT FOR THE GRID MANAGEMENT CHARGE

A.	The ISO has Provided Sufficient Cost Support for the Operating Costs Used to Calculate the Grid Management Charge.

 	Several parties argue that the ISO has failed to support the costs included in calculating the GMC.  They claim that the amounts allocated to salaries and benefits, third party vendor contracts and legal, regulatory and consulting services are excessive and lack sufficient explanatory data.  San Francisco at 15-16; CMUA at 20; SMUD at 22-23.  For example, SMUD complains that there is no breakdown of the salary and benefits of ISO employees by grade level of position.  SMUD at 23.  In addition, TANC requests an explanation for how the ISO will recover costs for communications infrastructure upgrades if more than 2000 entities subscribe to the ISO’s communication network.  TANC at 34-36.
	1.	The ISO’s Operating Costs are Fully Supported.
Exhibit CAS-6 contains the workpapers for the cost statements and the budget projections that support the ISO’s proposed GMC.  With respect to salaries and benefits, the workpaper to Statement AI provides the breakdown of salaries and benefits by department, e.g., Operations, Customer Service, Finance, Human Resources, Information, and Regulatory Affairs.  CAS-6 at 3-5.  The workpaper for Statement AI further details the salaries and benefits by FERC account, e.g, transmission expenses (Accounts 560-568), customer accounts expenses (Accounts 901-905), customer service and information expenses (Accounts 907-908) and administrative expenses (Accounts 920-935).  CAS-6 at 6.  The salaries and benefits by FERC account are also shown by department.  CAS-6 at 7.  The budget workpapers, CAS-6 at 8-19, further explain how the salaries and benefits amounts were calculated for each department, including the headcount and benefits load factor.  The only detail that the ISO has not provided is the salary level of each employee.  Parties challenging the level of detail of these expenses are suggesting that the ISO provide far more detail than that required of most utilities.  
In addition, these parties’ claims that the ISO’s third party vendor contracts are excessive and unsupported should be rejected.  The ISO’s third party vendor contracts, include the MCI Communications Contract, the IBM Computing Contract, the ISO Alliance Maintenance Contract, the UTS Meter Data Acquisition Contract, the ABB Maintenance Contract, and other miscellaneous contracts, including new telecommunications equipment, pagers, calling cards, long distance service, cellular service, 800 numbers, conferencing, Web administration, remote access servers and equipment, data and voice drops and security services.  These contracts are described in detail in Mr. Smart’s testimony.  CAS-1 at 16-21; CAS-2 at 7.  As shown on page 12 of the workpapers, CAS-6, $41,850,000 of the total $47,799,000 million in third party vendor contract costs falls under the Computing and Communications Department (Information Department) operating budget, which is responsible for supporting and maintaining the ISO’s computer and communications infrastructure.  
The ISO’s legal, regulatory and consulting services consist of the projected legal and regulatory expenses necessary to carry out the ISO’s regulatory responsibilities in 1998.  As discussed in Mr. Smart’s testimony, these expenses relate to the Section 35 rate proceeding, debt financing approvals, compliance filings, dispute resolution activities, exploring new access charge and congestion charge methodologies, revising protocols, developing the June 1998 firm transmission rights filing and other such expenses.  These expenses all fall in the budget of the Legal and Regulatory department and are further explained in CAS-6 at 10-11.  The ISO has provided sufficient detail regarding these expenses. 
2.	The ISO’s Operating Costs are Not Excessive.
The claims that the ISO’s costs are excessive should also be rejected.  These budget items, like all items in the ISO’s budget are projections of future costs.  The projections are based on the knowledge and experience of the ISO’s managers and consultants without the benefit of an established operating history.  The ISO has attempted to make its best estimate of the expenses necessary to ensure reliable operations.  Unsupported allegations that certain costs are excessive cannot supplant the reasoned judgment of the ISO’s employees who have been diligently working to ensure that the ISO is up and running by January 1, 1998, and have carefully projected the operating expenses for the ISO’s first year of operation.  
If some of the ISO’s projections turn out to be too high, any overcollection will work its way back to transmission users in the form of a lower GMC.  The ISO’s formula rate is designed to use the overrecovery in one year to reduce the revenue requirement for the following year, assuming the Operating and Reserve Account is fully funded.  
Furthermore, because the ISO is a nonprofit corporation, even if it has over projected some of its costs – which will not be known until the end of 1998 – that overrecovery will not be treated as corporate profits.  
The manner in which the ISO established the salary and benefits level for each employee is explained by ISO witness Charles A. Smart.  According to Mr. Smart, the ISO’s compensation plan was “designed to reflect the need for flexibility in a start-up organization, to be cost efficient and to be sufficiently competitive to attract knowledgeable and experienced individuals to get the ISO up and running in a safe and reliable manner.”  CAS-1 at 13.  The ISO had to offer competitive, but not excessive, compensation packages to attract experienced individuals who could “hit the ground running” to ensure that the ISO will be operational on January 1, 1998.
To set salary and benefit benchmarks for each position, the ISO looked to comparable positions in the marketplace, including the utility industry, power trading, financial services, and west coast industrials.  According to Mr. Smart, the base salaries and incentive compensation criteria were set using the 50th percentile of the market data.  This means that for each position, roughly half of similar positions in the market place paid more and half paid less than the compensation level established by the ISO.  Given the experience level of most of the employees hired, this method is more than reasonable for establishing the ISO’s compensation structure.   
With respect to third party vendor contracts, the ISO relies heavily on third party vendors for computing and communication systems, which are the backbone of its operations.  As the statewide transmission operator and controller in California, the ISO must have sophisticated and reliable computer and communications equipment and service contracts.  These facilities are essential to successful and reliable operations.  Claims that the ISO’s third party contracts are excessive have no merit.  First, as discussed above, the computer and communications equipment, which is the bulk of the third party vendor contracts, is the backbone of the ISO’s operations.  The computer and communications facilities are to the ISO what ovens are to a baker.  Second, the ISO engaged in a competitive bidding process to select the third party vendors to provide these services.  Stakeholders were part of the evaluation teams that evaluated and selected the bids submitted by MCI, IBM and other service providers.  The ISO’s selection process was subject to stakeholder scrutiny from the early stages of the development of these contracts.  Third, the claims that the third party vendor contracts are excessive are vague and unsupported.  These attacks are essentially a claim that the ISO’s costs are imprudent.  As discussed below, unsupported claims that costs are excessive do not meet the threshold for prudence challenges.
Certain parties also claim that the ISO has not explained how it will recover costs for communications infrastructure upgrades if more than 2000 entities subscribe to the ISO’s communication network.  TANC at 34-36.  The cost of such an upgrade and whether it will be necessary, however, are not yet known.  Presently, there are approximately 200 subscribers, far below the 2000 maximum.  It may take several years for the number of subscribers to even approach the maximum.  Moreover, the ISO should not be required to speculate on how it will seek to recover those costs at some unknown point in the future.  
Parties challenging the ISO’s legal, regulatory and consulting services expenses have not explained how the ISO would fulfill its regulatory responsibilities without these funds.  Unsupported claims that these costs are excessive are insufficient to raise a prudence challenge.
Finally, Nichols claims that the ISO’s costs are three to five times higher than the cost of system operators in other countries.  Nichols at 4-5.  As a result, Nichols argues, the ISO’s high cost will encourage market participants to behave inefficiently.  Nichols at 6.  Nichols’ argument, however, fails to consider the specific circumstances of this case.  Nor has Nichols argued that the ISO’s costs, in and of themselves, are unreasonable.  The cost of other systems cannot be a basis for finding the ISO’s costs to be unreasonable.   

B.	It is Just and Reasonable for the ISO to Collect a Certain Portion of the MCI Communications Costs from the Entities Who Subscribe to the ISO’s Communications Infrastructure.

BPA argues that the Communications Subscriber Charge should be rolled-in to the GMC rather than directly assigned to Communications Subscribers.  BPA at 10-11.  BPA does not explain, however, why it believes that all users of the ISO Grid should incur the connection costs even if they are not connected.
The ISO directly assigned a portion of the MCI Communications costs to Communication Subscribers who will be connected to the ISO’s communication network.  These costs are directly assigned because they are directly identifiable to those entities that will be subscribers.  Not all users of the ISO Grid will need to be subscribers and should not have to pay a portion of those costs in a rolled-in GMC charge.  Moreover, by establishing a separate charge for the Communication Subscribers, the ISO may be able to avoid costly upgrades in the future.  The current system will accommodate 2000 Communication Subscribers.  A system upgrade will be a substantial capital expenditure.  Also, imposing a cost for entities to be Communication Subscribers sends more accurate price signals.  Prior to connecting, subscribers will be required to pay the actual cost of the connection.  With prices that more accurately reflect the cost of the service, the ISO believes the demand for connections (currently about 200), may never exceed the 2000 currently available.  

C.	BPA has Not Raised a “Serious Doubt” to Challenge the Prudency of the ISO’s Start-up and Development and Operating Costs.

The BPA’s motion to protest and intervene devotes considerable space to attacking the prudency of the ISO’s expenditures in its startup and operating budgets.  The overarching argument is that the ISO failed to justify the prudency of various costs submitted in its October 17, 1997 rate filing.  BPA at 5.  However, in taking this position, BPA has inappropriately placed the initial burden of proof on the ISO.  Its stance is contrary to precedent established by both the Commission and the federal courts. 
Under the Federal Power Act, all rates and charges imposed by a public utility must be “just and reasonable.”  16 U.S.C. § 824d(a) (1985).  In determining reasonableness, the FERC applies a  “‘prudence test’, which permits utilities to recover in their rates the cost of ‘prudent’ investments.”  City of New Orleans v. FERC, 67 F.3d 947, 954 (D.C. Cir. 1995).
As noted by the D.C. Circuit in Anaheim v. FERC, 669 F.2d 799, 809 (D.C. Cir. 1981), there is “Supreme Court precedent for the proposition that a utility’s costs are presumed to be prudently incurred.” (referring to Missouri ex rel. Southwestern Bell Telephone Co. v. Missouri Pub. Serv. Comm., 262 U.S. 276, 289 n.1 (1923)).  The Commission itself has noted that “[a]s a matter of practice, utilities seeking a rate increase are not required to demonstrate in their cases-in-chief that all expenditures were prudent unless the Commission’s requirements, policy or precedent otherwise require.” Minnesota Power & Light Co., 11 FERC ¶ 61,312, at 61,645 (1980) (footnote omitted), modified in part, 12 FERC ¶ 61,264 (1980).  Thus, the burden of showing imprudence initially lies with the party objecting to the proposed rate.  Until that party creates a “serious doubt” as to the reasonableness of an expenditure, “good faith is presumed on the part of the managers of a public utility and every investment is assumed to be prudent.” Connecticut Light & Power Co., 43 FERC ¶ 63,029, at 65,219 (1988), aff’d in relevant part, 48 FERC ¶ 61,139 (1989).  It is only after a “serious doubt” has been raised by the opposing party that the burden of proof shifts.  It is also the case that raising a serious doubt requires evidence that carries weight and has some merit.  The evidence adduced must be reliable, probative, and substantial.  Administrative Procedure Act, 5 U.S.C. § 556(d) (1996); Connecticut, 43 FERC ¶ 63,029, at 65,220.  Allegations by themselves are insufficient to support a prudence claim.  Minnesota, 11 FERC at 61,645 (indicating that more than a “bare allegation” of imprudence is required); Western Resources, Inc., 68 FERC ¶ 61,366, at 62,479 (1994)(dismissing prudence challenge because parties failed “to support their allegations of imprudence with any actual numerical support”).
Here, BPA argues imprudence on two grounds: (1) that the ISO does not have an adequate system in place to ensure the prudency of expenditures; and (2) that there is no evidence to support a showing that the ISO evaluated the prudency of its startup or operating costs.  BPA at 5, 7.  Neither of these prongs of attack directly addresses specific costs incurred by the ISO.  Rather, BPA’s challenge, admittedly, is that “The ISO Does Not Present Sufficient Evidence To Show That Its Costs Are Prudent.”  BPA at 5.  BPA complains that the ISO failed to “demonstrate that is has policies and procedures in place to efficiently and prudently manage costs” and indicates that the ISO did not present testimony to justify the amount of staff or address alternatives to full startup.  BPA at 6, 8.
BPA has attempted to place the burden of production onto the ISO, and its efforts are at odds with long-standing Commission policy.  See, e.g., Kentucky Utilities Co., 62 FERC ¶ 61,097, at 61, 697-98 (1993); Midwestern Gas Transmission Co., 30 FERC ¶ 61,260, at 61,543 (1985); Minnesota, 11 FERC ¶ 61,312 at 61,645.  The demand that the ISO first produce evidence to affirmatively show that its expenditures were prudent ignores BPA’s responsibility to create a “serious doubt” in the mind of the Commission.  In fact, BPA has not even attempted to carry its burden.
Although a number of other protests query whether all costs were “prudent” or “just and reasonable” when describing their dissatisfaction, these arguments are oriented towards gathering further information from the ISO and clarifying that which has already been submitted.  For example, San Francisco questions what it considers excessive employee salaries but “does not necessarily argue that such costs should be rejected out of hand.”  San Francisco at 15.  Instead, San Francisco appears more concerned with gaining “satisfactory, detailed cost support” and “explanatory data” in order to more thoroughly analyze particular expenditures.  Id. at 14, 15.  See also Metropolitan at 21-22, TANC at 21-22; SMUD at 22-24.  These points are addressed in Section II.A of this Answer.
In response to BPA’s assertion that the ISO has not demonstrated that it has sufficient oversight to manage its costs, the ISO offers the testimony of Charles A. Smart from the October 17, 1997 rate filing.  See also Nichols at 6-7.  In his testimony, Mr. Smart describes how the organizational structure of the ISO balances cost efficiency and system reliability.  CAS at 9-10.  
The ISO’s Board of Governors, in accordance with AB 1890, contains a broad cross-section of California electricity users and providers, including investor-owned utility transmission owners, publicly-owned utility transmission owners, non-utility electricity sellers, public buyers and sellers, private buyers and sellers, industrial end-users, agricultural end-users, public interest groups, and nonmarket participant representatives.  The Board exercises considerable control over the operations of the ISO.  It sets the ISO’s goals and objectives and approves all major actions.  In addition, the Board of Governors is responsible for reviewing and approving the capital and operating budgets on a yearly basis.  Without authorization from the Board, the ISO cannot exceed its approved budget.  The Board’s composition ensures that a variety of groups are represented within the ISO and that their self-interest will promote the ISO’s goal of cost efficiency.  This self-interest in combination with the power that the Board exercises, ensures that the ISO has a governing framework geared toward providing a reliable transmission system at the least cost.  
Additionally, the ISO’s CEO executive compensation bonus structure depends, in part, on the CEO’s successful implementation of the Board of Governors’ goals and objectives. This policy filters down to other ISO staff as well – the employee bonus structure is similarly designed to compensate individuals who contribute to reaching the ISO’s goals and objectives.  The ISO’s goals, as a nonprofit corporation, do not include maximizing revenue in order to increase profit.  The ISO does not have the pressure from shareholders to provide a return on equity capital and is instead focused on simply matching revenues to costs. 
Although BPA acknowledges many of these facts in its protest, the ISO believes that it does not grant them sufficient weight.  Both the goals and the organization of the ISO are oriented towards cost efficiency, and the measures described here provide substantial guarantees that service will be offered at the least cost.  BPA’s arguments to the contrary are groundless and, more importantly, fail to raise a serious doubt as to the prudency of the ISO’s start-up and development and operating costs.    

D.	The ISO is Not Required to Justify the Costs Included in the Proposed GMC by Showing a Corresponding Decrease in the Operating Costs of the PTOs. 

BPA claims, without support, that the ISO should be required to justify the necessity of its costs by demonstrating that there is a corresponding reduction in the operating costs of the IOU utilities (PTOs).  BPA at 6.  Specifically, BPA claims that the ISO must show that the costs it seeks to recover in the GMC are no longer recovered in the PTO access charges.  BPA at 14-15.
BPA’s arguments should be rejected.  The ISO seeks to recover in the GMC the costs of operating the ISO.  The costs the IOU utilities are seeking to recover in their access charges are the subject of separate proceedings.  The justness and reasonableness of the IOU access charges will be determined in those proceedings.  BPA can raise its concerns there.  Moreover, BPA seems to be raising a larger policy issue, i.e., that the costs of a statewide ISO are not justified unless there are corresponding decreases elsewhere in the statewide transmission system.  The California legislature, in AB 1890, and the California Public Utilities Commission ordered the creation of a statewide ISO to expedite the transition to a competitive electric market in the State of California.  This proceeding is not the forum to challenge those decisions.  Accordingly, BPA’s arguments in this regard should be rejected.

E.	Costs Associated with Services that Will Not be in Operation on January 1, 1998 are an Insignificant Portion of the GMC and Should Not be Removed.

In the Commission’s October 30, 1997 Order, the Commission stated that the ISO should remove from its tariff provisions related to services that will not be in operation on January 1, 1998.  BPA argues that any costs associated with those services that will not be in operation on January 1, 1998 should be removed from the GMC.  BPA at 17-18.
BPA’s proposal to remove certain costs from the GMC for services that will not be in operation on January 1, 1998, even if it were possible to do, would cause the ISO to underrecover its costs in 1998.  The ISO’s August 15, 1997 filing contained a staging plan, which proposes to stage commencement of certain operations to allow participants to gain experience with the more sophisticated features of the market.  As stated in the ISO’s Initial Staging Plan, the elements that will be staged include the following:
•	Permanent historical information storage system will be implemented by April 1, 1998. Temporary storage will be used in the interim.

•	The price of energy delivered from Spinning, NonSpinning and Replacement Reserve resources will be calculated every five minutes beginning on July 1, 1998.  The Energy will be priced at the Hourly Ex Post Price in the interim.

•	Transmission Losses calculated using Generator Meter Multipliers will be based on ex-post numbers by July 1, 1998.  GMMs will initially be based on the last available forecast.

•	The ISO will determine the applicable Usage Charge for Ancillary Services bid evaluation in accordance with ISO protocols by a yet-to-be determined date.  Initially the ISO will use an estimated Usage Charge.

•	Intra-zonal congestion will be determined using AC Optimal Power Flow methods by January 1, 1999.  Initially, it will be determined by standard power flow models.

•	The ISO will use AC Optimal Power Flow methods to assess transmission capability, Voltage Collapse Analysis, Available Transfer Capability and Transient Stability Analysis by January 1, 1999.  

•	The ISO Power Management System, which monitors and controls the ISO Controlled Grid and power plants, will work through the existing control centers until January 1, 2000.

•	The ISO will increase the communication system capacity to serve market participants as the number of participants exceeds 2000.

81 FERC ¶ 61,122, slip op. at 17-18 (1997).  In addition, certain requirements of the Commission’s October 30, 1997 Order will require staging, such as: Allocation of Replacement Reserve Costs; Access to MDAS; Self Providing or Bidding into ISO Ancillary Services Auction from the Outside the ISO Control area; ISO to make available Operating Reserves to Cover Interruptible Imports and On-Demand Obligations; ISO to Publish Results of Comparative Congestion Costs Based on Full System Optimization; Bid Evaluation Constraint for Non-Spinning Reserve and Replacement Reserve in the ISO’s Auction.  Further, there are additional staging items listed in the ISO’s November 21, 1997 Revised Staging Plan No. 1, include: Standing Schedules; Ancillary Services Bid Evaluation and Pricing Algorithm; Ancillary Services Self-Provision and Bidding from the Same Resource; Acquisition of Black Start Services; Acquisition of Voltage Support Services; Final Schedule Selection by the ISO; Profiled Meter Data.
BPA’s argument that the ISO should remove costs related to these staging elements should be rejected for three reasons.  First, the operating costs in the GMC related to each of the staged elements above are not separately identifiable.  The same basic staff and equipment will be used for temporary operations as well as long term operations.  The ISO needs to incur the costs now in order to complete the items.  For the majority of the staged elements, the costs will be incurred in 1998 to complete the staging process by January 1, 1999.  Second, the GMC is based on the ISO’s start-up and development costs and its projected operating budget.  The start-up and development costs are sunk costs.  The operating budget is based on the ISO’s projections of its operating costs for 1998.  The budget projections take into account the necessary staging of certain elements of the ISO’s operations.  Third, the eighth original staging element, upgrading the communications network, is a cost that will not be incurred until the number of Communication Subscribers exceeds 2000.  The current number of subscribers is 200.  There are no costs related to this upgrade in the GMC.  

F.	The ISO’s Filing Does Not Contain Duplicative or Unnecessary Financial Assurance Mechanisms.
The protesters advance a number of arguments in opposition to both the budgeted 5% contingency amount and the Operating Capital Reserve Account.  The thrust of their challenge is that (1) the Commission does not generally allow contingency expenses and (2) the ISO’s use of “multiple and redundant” contingency funds is excessive.  TANC at 24-25; San Francisco at 16-18.  Regarding the former, the ISO stresses that the traditional arguments used to disallow contingency funds should not apply.  As to the charge that the budget contains “clearly excessive” financial assurances, the ISO believes that the protesters misconstrue the nature of the funds they call into question.  
In addition, San Francisco raises a concern that the exact duration of the  contingency amount is unclear.  San Francisco at 17.  The Commission need not address this issue at this time.  The ISO is prepared to defend its need for a 5% contingency in 1998 because that budget is now before the Commission.  The ISO does not know whether the same funding will be required in the future; therefore, the issue noted by San Francisco is premature.  

1.	The Proposed Five Percent Contingency Amount in the ISO’s Budget is Just and Reasonable Because the ISO has no Operating History on which to Base its Budget Projections.
TANC contends what the ISO readily concedes: for a conventional utility, the Commission does not approve contingencies in operating budgets.  TANC at 25.  However, the ISO asserts, as it did in its rate filing, that its circumstances present a unique situation, which the Commission has not previously encountered.  The ISO’s scenario most closely resembles a pipeline certificate project or a hydroelectric construction project rather than an established utility and should therefore have the same latitude in budgeting for uncertainties.
In the typical electric utility rate filing, the Commission holds that contingency expenses are not permitted due to their speculative nature.  See, e.g., Southwestern Public Service Company, 37 FERC ¶ 63,012, at 65,101 (1986), aff’d in pertinent part, 49 FERC ¶ 61,354 (1989).  This principle applies, according to the Commission, because utilities have the opportunity to estimate expenditures and to include a growth/inflation factor to account for anticipated increases in costs.  Under the “test year concept,” rates are based on specific projections of expenses and operating circumstances.  “If [the utility’s] estimates [are] inadequate or excessive, the utility should bear the risk of under-or-overrecovery.”  Wisconsin Power & Light Company, 12 FERC ¶ 63,059, at 65,247 (1980), aff’d in pertinent part, 19 FERC ¶ 61,288 (1982).
Here, however, the ISO is unlike a traditional electric utility.  First, because of its start-up nature, the ISO does not have an operating history on which to base its future costs.  Thus, the ISO’s operating cost projections are more unreliable than other utilities’ Period II costs of service, which simply escalate current costs to project future costs.  This recognition alone undermines the logic of following the approach applied to an established utility.    
Second, unlike other utilities, the ISO is a non-profit organization and will not have shareholder equity.  If, for any reason, the ISO has unforeseen expenses, it will not have equity funds to cover those expenses and will be forced to seek short-term debt, at additional cost, to cover any shortfall in revenues.  Although SMUD claims that the ISO can compensate for any underrecovery by adjusting the GMC for the next year, this does not address the immediate need for cash, which would necessitate external financing.  Such external financing would be to the detriment of all transmission users because the increased costs to the ISO would later be passed on to them.   
In addition, the ISO has nothing to gain from additional revenue were the contingency fund underutilized.  If the ISO has excess revenues, the surplus will simply be treated as revenues for the next period’s operating budget, which would likely reduce the next period’s charges.  In short, the ISO cannot bear the risk of underrecovery or, for that matter, the benefit of overrecovery.  
The ISO is a start-up entity, similar to the pipeline certificate projects for which this Commission has approved budget contingencies.  See, e.g., Northern Border Pipeline Company, 80 FERC ¶ 61,150, at 61,610 (1997) (a $50 million contingency (6.2%) approved in a construction project cost projection of  $796.8 million for inclusion in rates); see also Iroquois Gas Transmission System, 52 FERC ¶ 61,091 at 61,391-92, aff’d in pertinent part, 53 FERC ¶ 61,194 (1990); Northwest Alaskan Pipeline Company, 11 FERC ¶ 61,088, at 61,174 (1980) (a 5-7% cost estimate contingency is normally included in pipeline cost estimates for “anticipated unknown events”); El Paso Natural Gas Company, 5 F.P.C. 115 (1946) (3.5% contingency fund in financing for construction project is consistent with the public interest).  
TANC argues that these cases are inapposite because in them the Commission authorized a contingency amount in construction budgets not operating budgets.  TANC at 25.  This argument misses the point.  The ISO is not claiming that the construction cases support a finding that a contingency should be allowed in all electric utility operating budgets, which would be contrary to Southwestern.   Rather, these construction cases support the ISO’s position that a start-up project, such as the ISO, is similar to pipeline construction projects where the Commission has allowed contingencies to address circumstances that were unforeseen at the time of authorization, as is the case here. 
The Commission also has found that hydroelectric project cost estimates should include a sum for contingency costs.  Rivers Electric Company, Inc., 62 FERC ¶ 61,232, at 62,568 (1993) (project cost estimate of $1.64 million included a $250,000 contingency line item (15%), which the Commission found was reasonable); Town of Springfield, 14 FERC ¶ 61,103, at 61,188 (1981) (in license application proceeding, the Commission found that a project cost estimate with a 25-30% contingency was more appropriate than a 15% contingency amount); Power Authority of the State of New York, 20 FERC ¶ 63,001, at 65,007 (1982) (ALJ approved license to construct project with a “substantial contingency line item in its cost estimates”), modified on other grounds, 25 FERC ¶ 61,084 (1983).  Although these costs were not directly included in rates and passed on to consumers, these hydroelectric cases illustrate that reasonable cost estimates for start-up projects include contingency cost estimates. 
Thus, there are several bases on which to support the justness and reasonableness of a 5% contingency in the ISO’s projected budget: 1) the cost projections are not based on an established operating history; 2) the non-profit nature of the ISO means that it will not have equity funds to absorb revenue shortfalls; and 3) the ISO, as a start-up entity, is no different from a new pipeline or hydroelectric project for which the Commission allows reasonable development-type contingencies.  The proposed 5% contingency amount in the ISO’s budget is just and reasonable under the circumstances.
2.	There are No Multiple Contingency Funds.
Both San Francisco and SMUD portray the ISO as padding its budget with multiple contingency funds, which will provide an excessive cushion should unexpected expenses arise.  Their protests insist that the ISO has bolstered its 5% contingency amount with the 15% Operating and Capital Reserve Account  (Reserve Account) and the 125% Debt Service Coverage.  San Francisco at 18; SMUD at 25.  However, this argument ignores a number of distinctions that highlight the differences in these budgetary components.  The Operating and Reserve Account serves primarily to maintain the ISO’s liquidity.  The contingency serves as protection from budgetary uncertainties.
Initially, it should be noted that the 15% Reserve Account, in part, stems from the 1.25X Debt Service Coverage.  The ISO’s GMC was set to produce net revenues, which will exceed the Debt Service requirements by 125%.  At the end of the fiscal year, this calculated excess shifts into the Reserve Account and can be used to smooth the differences between projected and actual costs or finance emergency capital expenditures.  Thus the 15% Reserve Account and the 1.25X Debt Service Coverage will be bond covenants and will assist the ISO in qualifying for the highest possible bond rating, which would thereby reduce costs for all transmission users.  SSM-1 at 9.  San Francisco’s and SMUD’s claims that each provide separate avenues for the ISO to make up for shortfalls are, therefore, inaccurate. 
In contrast to the Reserve Account, the contingency fund is a budgeted amount that is to be utilized during the fiscal year.  The 5% represents an amount designed to cover those cost overruns that are expected but are as yet unidentified.  
In summary, the Reserve Account is in place to maintain financial liquidity throughout the year and ensure that the ISO will comply with the bond covenants.  The crucial difference between these two funds is that the Reserve Account, created to achieve a high bond rating, could remain untouched throughout its existence while the contingency amount will be supplanted with identifiable costs as soon as the ISO develops an operating history.  CAS-1 at 23.  The Reserve Account, however, will continue for as long as the bond issuance is outstanding. 

G.	The ISO’s Start-up and Development Costs are Adequately Supported.

San Francisco, CMUA and SMUD argue that the ISO has failed to explain or support the $178,466,000 in start-up and development costs or indicate to whom the funds have been or will be disbursed.  San Francisco at 10-11; CMUA at 20-21; SMUD at 23.  They also claim that the ISO’s filing is not clear about whether the ISO has drawn upon its existing line of credit in order to finance some of the start-up costs.  San Francisco at 11.  They further argue that the ISO has not fully explained how the start-up and development costs will be financed and the terms of the bonds.  San Francisco at 12; CMUA at 20.  For example, they allege that there is a $74,364,000 discrepancy between the start-up costs and total indebtedness for which the ISO has failed to account.  San Francisco at 12; CMUA at 20.  As a result, they claim that the Commission does not have sufficient information on which to determine the prudence of these costs or whether they are just and reasonable.
1.	The Start-up and Development Costs are Fully Documented. 
	The ISO’s start-up and development costs total $155,163,000, as of December 31, 1997 and are fully supported in the ISO’s rate filing.  This amount consists of plant-in-service, detailed in the workpaper to Statements AD and AE (CAS-6 at 1), and prepaid assets, as shown on Statement AA (CAS-5 at 1).  The plant-in-service consists of the following:  

Capitalized Organizational Costs – AC 301 includes:		
Legal and regulatory service ($6,407,000)
Interim operating expenses ($8,126,000) 
Hiring costs ($4,872,000) 
Interest expense ($4,804,000) 
Consultant services ($2,008,000) 
Corporate expenses ($1,530,000).

 AC 301 also contains ISO Trust start-up costs, such as:
Trustee and related expenses ($272,000)
Consultant services ($551,000),
Accounting and financing consulting ($511,000)
Legal Services ($3,399,000)
Insurance ($177,000)
Meetings and Travel ($233,000)
Pre-Trust Commitments by IOUs ($250,000)
Other ($82,000)

The Miscellaneous Intangible Plant – AC 303 represents the cost of the ISO’s software:
Power Management Systems ($4,007,000)
Scheduling Infrastructure ($7,262,000)
Scheduling Applications ($9,346,000)
Balance of Balance Systems ($24,377,000)
Metering Systems ($1,744,000)
ACC Upgrades ($777,000)

The General Assets in accounts 390, 391, 397 and 399 include the following:

Leasehold Improvements ($11,053,000)
Balance of Business Systems hardware ($1,486,000)
Furniture ($4,232,000)
Computing Infrastructure and Equipment ($5,968,000)
Communication Equipment ($31,168,000)
Hardware (PMS, SI, SA, Metering, ACC upgrades) ($17,370,000)

CAS-1 at 11; CAS-6 at 1.
Thus, contrary to the intervenors’ arguments, there is adequate information in the filing to explain the $155,163,000 in start-up and development costs.  The nature of those costs is obvious.  A challenge to the amounts spent on these items is basically a prudence challenge, the burden for which these parties have not met.  See Section II.C. of this Answer.  Moreover, these costs were all approved by the Board of Governors in the ISO’s Quarterly Expenditure Plans (QEPs) and filed with the CPUC.  The QEPs were approved by the Board of Governors, which is made up of representatives from all transmission users in the State of California.
In addition, the ISO’s start-up and development costs include $23,303,000 in capital expenditures that will not be incurred until 1998 and 1999.  The $23,303,000 consists of development costs necessary to complete the ISO’s systems and infrastructure, as contemplated in the scopes of work submitted by PG&E, SCE and SDG&E to the CPUC on July 5, 1996.  SSM-1 at 3-4.  The future expenditures of $23,303,000 are expenses to complete the scope of work as outlined in the QEPs.  These expenditures are for upgrades or adjustments to the following:
Dispatch Integration System  ($3,793,000)
Systems (BBS,SI,SA)  ($12,666,000)
Communications Infrastructure – MCI Development ($3,010,000)
Computing Management Infrastructure --IBM Dev. ($1,993,000)
Project Management ($1,342,000)
Testing and Validation ($500,000)

These amounts are consistent with to the QEP 4, Tab 1.  Thus, the total amount of start-up and development costs is $178,466,000 ($155,163,000 + $23,303,000).  CAS-1 at 12. 
2.	The Financing of Start-up and Development Costs is Fully Explained.
The financing of the start-up and development costs is described in the Testimony of Sandra McDonald, SSM-1 at 3.  The amount financed includes the $178,466,000 in start-up and development costs, plus $31,829,000 for working capital for the first 105 days in 1998, plus additional capital expenditures of $39,002,000, plus financing costs of $1,561,000, for a total of $250,858,000.  
The $39,002,000 in capital expenditures reflects additions to the original scope of work, as identified by the ISO management for operational effectiveness.  SSM-1 at 4.  These additional capital expenditures for 1998 and 1999 are listed by department in CAS-2 at 2.  The capital expenditures include expenses for the following: 
•	development of the information system security;
•	development of the intra-net server;
•	replacement of network servers and workstations;
•	development, upgrades and changes to the EMS/SI/SA/BBS systems; and
•	sales tax on equipment.

To finance these capital expenditures, the bond financing has been designed to provide $37,500,000 of initial bond proceeds and $1,502,000 of projected interest earnings to match the budgeted capital expenditures.  SSM-1 at 4.  
In addition, the difference between the financing amounts in Sandra McDonald’s testimony (raised by TANC at 27) is due to the following:
SSM-2 at 1	  $253,487,008
SSM-2 at 1               (657,088)	accrued interest earned on the bonds for the period of 2/1 – 2/15/98.  J.P. Morgan will collect the interest earnings for the period 2/1 through 2/15/98 and remit these to the ISO for the first interest payment due on 4/15/98.
    	        (1,218,000)	interest on Bank of America credit line. 
	           (753,908)	Capitalized interest for the period 2/15/98 to 4/15/98, net of anticipated interest accretion on bond proceeds.
	    $250,858,092	

The total amount financed is thus the $253,487,008 figure in SSM-2 at 1.  See San Francisco at 12.   
	In response to San Francisco’s and CMUA’s inquiry, the ISO has drawn on the existing line of credit to finance all of its start-up costs.  San Francisco at 11; CMUA at 20. There is no other source of funds available to the ISO until it issues its bonds in 1998. The existing line of credit is guaranteed by the three IOUs.  The bond issuance is necessary so that the ISO can achieve financial independence.  
San Francisco and CMUA question why the ISO proposes to incur long-term debt and interest payment for costs that will be incurred after initial ISO operations and should, therefore, be recovered by the GMC revenue stream.  San Francisco at 12; CMUA at 20.  The ISO must include its working capital requirements in the bond issuance because the ISO will not collect operating revenues until April 1998 due to the settlement process.  These funds will have been borrowed from the ISO Trust and must be repaid.  The ISO will also include the $39,002,000 in future capital expenditures because it is more cost effective to issue one set of bonds for a larger amount than to obtain additional financing for capital expenditures.  
3.	The IOUs Have Been Reimbursed Only for Legitimate Out-of-Pocket Expenses. 

Several parties question whether the ISO is attempting to recover start-up and development expenses actually incurred by the IOUs.  San Francisco at 13-14; TANC at 21-22; Metropolitan at 22-23; CMUA at 20; WAPA at 8.  They request clarification of the exact nature of start-up costs to prevent such double recovery of IOU expenses and ensure that such costs legitimately and exclusively contributed to the ISO structure. 
The affidavit of Mr. Philip R. Leiber states that the ISO reimbursed the IOUs for their out-of-pocket costs during the start-up and development of the ISO.  The IOUs loaned employees to the ISO Trust to act as interim ISO staff to help with the planning and developing of the ISO systems.  The IOU interim staff salaries were paid by the IOUs.  The ISO only paid direct expenses, such as travel and lodging.  In addition, the ISO reimbursed the IOUs for payments they made to third party vendors on behalf of the ISO.  The ISO’s start-up and development costs included in the GMC include only the costs the ISO incurred in reimbursing the IOUs for these direct expenses.  Therefore, the assertion that the ISO is attempting to recover start-up and development expenses incurred by the IOUs is without merit.

H.	All Joint Start-up and Development Costs Were Properly Allocated Between the ISO and PX.   

	SMUD, TANC and others argue that the start-up and development costs for the ISO and PX were not properly allocated between them.  SMUD at 32; TANC at 22-24; Metropolitan at 23; see also PG&E at 2.  They claim that the ISO and PX have incentives to make sure that fewer joint costs are allocated to the PX, because of the ISO’s relatively assured revenue stream.  SMUD at 30-31.  They also claim that the filing contains insufficient information to determine the proper allocation of costs such as the third party vendor contracts, building leases and facilities costs.  These claims are baseless.
	The start-up and development costs for the ISO and PX Trusts were allocated by the former ISO Trustee, S. David Freeman.  Mr. Freeman was succeeded by the current Trustee, Susan Uecker in September 1997.  Section 4.5 of the Amended and Restated ISO Restructuring Trust Agreement, executed on September 4, 1997, states:
Section 4.5 Audit.  Consistent with Ordering Paragraph 1(k) of the August CPUC Trust Decision, the Trustee’s administration of the Trust shall be subject to audit both prior to and following termination of the Trust, or in connection with any change of Trustee, by a firm qualified to perform such audits at the request of the ISO Corporation.  The Trustee shall operate in a reasonable manner with any such audit and such audit shall be conducted by an independent auditor acceptable to the ISO Corporation.  

Consistent with this provision, the ISO and the ISO Trustee have undergone an audit triggered by the change in Trustee.  The audit process was supervised by the ISO audit committee and was conducted by an independent accounting firm.  As described in the affidavit of Philip R. Leiber, the audit shows that the start-up and development costs were correctly allocated between the ISO and PX save for approximately $191,421 that was mistakenly allocated to the PX rather than the ISO.  Attachment A at 6.  Mr. Leiber’s affidavit attaches a letter from the accounting firm Lautze & Lautze, which states that the audit concludes that the ISO owes the PX approximately $191,421.  The overallocation of costs to the PX was caused by legal bills that were inadvertently split 75/25 instead of 80/20 to the ISO and PX, respectively.  The audit shows that the allegations of improper allocation by SMUD and TANC are wrong.  Moreover, SMUD, as a member of the ISO audit committee, should have been aware of the audit results. 
I.	The ISO’s Working Capital Assumptions are Proper.
Several parties claim that the ISO has failed to support the $31,829,000 in working capital that the ISO will need to cover the first 105 days of its operations.  So. Cities at 6-7; TANC at 27-28; Metropolitan at 25.  The ISO’s working capital needs are fully supported in the filing and, thus, these claims should be rejected.
The $31,829,000 represents three and one half months of the ISO’s 1998 operating budget of $109,129,000.  SSM-1 at 4.  The working capital requirement assumes monthly expenses of $9,094,000 from 1/1/98 to 4/15/98.  Contrary to the intervenors’ claims, the working capital figure in Statement AL cannot be directly compared with Ms. McDonald’s working capital calculation.  The $31,829,000 monthly working capital calculated by Ms. McDonald represents the amount of cash the ISO needs to finance its operations before receiving revenues from the GMC.  The working capital figure set forth in Statement AL was reached by calculating the average monthly cash balances from the cash flow analysis.  The total was then averaged over 13 months.  The amount in Statement AL represents the average cash balance that will be on the ISO’s books, not the amount the ISO will actually spend during each month.  In this regard, the protestors are thus comparing apples and oranges.  
Several parties also argue that there is no explanation for why the PX only needs 45 days of working capital and the ISO needs 105 days of working capital.  So. Cities at 6-7; TANC at 27-28; Metropolitan at 25.  The explanation is simple.  The GMC will be levied monthly in arrears based on metered demand.  ISO Tariff Section 8.3.  The entire billing and settlement cycle, which is 95 days from the start of service, takes into account obtaining the meter data (30 days after the month’s end), reconciling the difference between schedules and meter data, sending bills and receiving revenues.  Accordingly, the GMC for the month of January will not be billed and collected until 65 days after the month’s end.  The extra 10 days in the ISO’s estimate of 105 days of working capital is to account for any delays in the above described settlement process.  Because the whole process is new, it is not unreasonable for the ISO to factor in delays in processing the final settlements and collecting the GMC.  As set forth above, the ISO’s working capital assumptions are appropriate.

J.	The ISO’s Market Power Monitoring and Oversight Budget is Sufficient to Carry Out the ISO’s Market Monitoring Responsibilities. 

TANC and Metropolitan argue that it is not clear whether the ISO’s market power monitoring and oversight budget is sufficient to carry out the ISO Market Monitoring and Information Proposal filed on October 31, 1997, i.e., the ISO should have budgeted more for this activity. TANC at 32-33; Metropolitan at 28-29.  These parties fail to explain why they believe the ISO’s proposed budget may be insufficient.  
The ISO’s budget was developed by experienced utility managers based on their best judgment of the cost necessary to fulfill the ISO’s responsibilities.  The ISO agrees that its market monitoring responsibilities are extremely important.  At the present time it appears that the monitoring and oversight budget is sufficient.  

III.	FORMULA RATE ISSUES

A.	The ISO’s Annual Adjustment Mechanism is Fully Supported.

TANC argues that the ISO’s proposed annual adjustment mechanism is “not fully or clearly explained” and that the Commission should review it to determine whether it is appropriate.  TANC at 29.  
The ISO’s proposed annual adjustment is a relatively simple formula described in detail in the testimony of Sandra McDonald, SSM-1 at 13-18.  The elements in the formula will be updated annually to reflect new cost data.  Each year, the GMC will be based on the projected operating costs for the next year.  An Operating and Reserve Account is built into this formula as a safety mechanism to satisfy expected bond covenants.  Because the ISO is a nonprofit corporation, it will have no equity to fall back on if revenues are insufficient to meet current costs.  The Operating and Reserve Account is designed to be a pool of funds essentially filling the role of equity for the ISO.  The Operating and Reserve Account will be capped at 15% of the current year’s operating budget.  The ISO estimates that it will take between two and three years to fund the Operating and Reserve Account.  Once it is fully funded, excess revenues will be used to decrease the ISO’s revenue requirement and, thereby, decrease the GMC for the following year.  

B.	The ISO Should Not be Required to Make a Section 205 Filing if the Proposed Rate Adjustment Each Year is More than Five Percent.

	PG&E asks the Commission to require the ISO to make a Section 205 filing if the annual rate adjustment is more than 5%.  PG&E at 4.   PG&E asserts that the Commission should have the opportunity to decide whether the Operating and Reserve Account should be used to cover costs, rather than increase the rates.  PG&E at 4.  BPA further argues that any quarterly or annual rate adjustment should be subject to ratepayer review.  BPA at 14
	These proposals should be rejected.  If successful, both arguments would defeat the purpose of having a formula rate.  First, PG&E’s suggestion that the Operating and Reserve Account could be used instead of a rate increase is not feasible.  The Operating and Reserve Account mechanism will be a required element of the ISO’s bond issuance.  It exists to ensure the financial viability of the ISO and lower the risks to bondholders.  Second, PG&E and BPA, by arguing that changes in rates should be reviewed by the Commission, are essentially arguing that a formula rate should not be allowed here.  The ISO believes that a formula rate is particularly appropriate for several reasons.  First, the ISO is a nonprofit company and will have no incentive to maximize profits.  Second, because it has no equity, the ISO will not have an impermissible return on equity component in the formula rate.  Third, a formula rate will save money for the benefit of transmission users because the ISO will not have to make costly rate filings to recover its costs.  Fourth, as a nonprofit corporation with no equity, the ISO will have difficulty selling bonds if investors do not have certainty of a rate methodology.  Moreover, parties are free to file Section 206 complaints if they are not happy with the annual or quarterly rate changes.  PG&E and BPA are the only two parties who criticize the ISO’s proposed formula rate.  If these parties succeed in requiring the ISO to make Section 205 rate filings for increases as small as 5%, all transmission users will pay higher administrative costs as a result.  For these reasons, the ISO should not be required to make a Section 205 filing for its yearly rate adjustment.  

C.	The GMC Rate Formula Sufficiently Distinguishes Between Start-Up and Development Financing and Ongoing Operations Costs.

	PG&E asserts that the ISO should submit quarterly reports of recorded costs and forecasted future costs for start-up and development showing the amounts expended by category or function.  PG&E at 2-3.  It also states that any contingency that was assigned to start-up costs and not used should be refunded.  PG&E at 3.
	The ISO’s formula rate distinguishes between start-up and development costs and ongoing operating costs.  Of the $178,466,000 in total start-up and development costs, $155,163,000 will be incurred in 1997.  Thus, PG&E, for all intents and purposes, is requesting quarterly reports for the $23,303,000 million in start-up costs that will be incurred in 1998 and 1999, the bulk of which will be incurred in the first quarter of 1998.   Moreover, because the entire $178,466,000 in start-up and development costs is part of the ISO’s revenue requirement, to the extent there are excess bond proceeds attributable to capital expenditures, the Board of Governors will have to take that into consideration when funding future capital expenditures.  Nevertheless, the ISO will file quarterly reports if the Commission considers it appropriate. 

D.	The GMC Formula Will Not Cause Inter-Generational Inequities.

1.	The Cash-Funded Capital Expenditures Allowance in the GMC Formula Rate Will Not Result in Inter-Temporal Inequities for Customers.

	PG&E argues that the ISO’s proposed formula does not have any limits on cash-funded capital expenditures that could be paid for with the Operating and Capital Reserve Account.  PG&E at 4-6.  According to PG&E, this lack of limits creates inter-temporal inequities because customers paying the GMC in years after a cash-fund capital expenditure would pay a higher GMC.  Id.  
	The ISO has limited flexibility to make capital expenditures using the Operating and Capital Reserve Account or the 1.25 coverage revenues in a given year.  The primary purpose of the Operating and Capital Reserve Account is to maintain liquidity.  Use of the Operating and Reserve Account will only be considered for unforeseen, emergency or small  expenditures.  This financing flexibility is necessary so that the ISO is not placed in the position where it frequently has to undertake small and costly financings.  Furthermore, contrary to PG&E’s contentions, the ISO indeed has limits on its ability to make capital expenditures.  All capital expenditures, and the manner in which they are financed, must first be approved by the ISO Board of Governors.
2.	The Operating and Capital Reserve Account Should Not Be Funded with Debt. 

	PG&E raises yet another equity issue.  PG&E argues that the Operating and Capital Reserve Account should be funded with debt instead of operating revenues.  PG&E at 6.  According to PG&E, funding the Operating and Reserve Account with operating revenues in the first three years of the ISO’s operations benefits customers in later years when the account is fully funded.  Instead, PG&E argues that funding of the reserve account should be capitalized and funded by debt so that customers throughout the years pay the annual carrying cost of the working cash.  PG&E at 4-6.
	This issue was also specifically considered by the ISO and the Board of Governors.  The decision was made to fund the account with GMC revenues because that method had an overall lower cost.  Funding the capital reserve account with debt will increase the ISO’s total cost of service to the detriment of all transmission users and, therefore, should not be required. 
IV.	LONG-TERM FINANCING

A.	The ISO’s Assumption That The $251 million of Long Term Bonds Would be Taxable Does Not Significantly Affect the GMC.  

SMUD claims that the ISO should not have assumed that the $251 million of the ISO’s long-term debt would be taxable.  SMUD at 24-25.  At a minimum, SMUD argues the ISO should be required to adjust the GMC downward thirty days after the issuance of tax-exempt debt.  SMUD at 24-25.
To calculate the GMC revenue requirement, the ISO assumed that the long-term bonds it expects to issue in 1998 will be taxable.  The ISO made this assumption to be conservative in its estimation of the ISO’s 1998 operating costs.  The ISO expects to receive a determination of its tax status in early 1998.  The difference in interest cost to the ISO between issuing tax-exempt and taxable bonds is approximately $4,000,000 per year.  With $4,000,000 less in its operating budget, the coverage requirement would decline by approximately $1,000,000 or twenty-five percent.  Thus, the total effect of issuing taxable bonds would be a benefit of approximately $5,000,000 per year.  However, if permitted, the tax-exempt bonds would not be issued until May or June of 1998.  Thus, the effect in the first year would be limited to $2,500,000 to $3,000,000 million.  Lowering the GMC revenue requirement by $2,500,000 to $3,000,000 million would change the GMC by only 0.015 $/MWh.  Moreover, the circumstance would only exist for six months in 1998, because in 1999 the lower interest costs will be reflected in the GMC annual adjustment.  Instead, the excess $2.5 to $3.0 million would be used to fund the Operating and Capital Reserve so that the reserve would be funded faster than it would otherwise.  Finally, if the rates are suspended and subject to refund, a portion of the bond financing will be delayed and the savings resulting from tax-exempt bonds in the first year would be significantly reduced.

B.	The ISO’s Proposed 10-Year Term for its Long-Term Bond Issuance is Just and Reasonable.

	Some parties argue that the ISO’s proposed 10-year financing for the bond issuance is too short and will result in front-end loading costs to transmission customers who take service in the early years of the ISO’s operations.  San Francisco at 12; BPA at 13.  Other parties argue the opposite – that the ISO’s proposed 10-year financing for the bond issuance is too long.  TANC at 25-26; CMUA at 20; WAPA at 7.  Both arguments correctly assume that the expected useful life of the ISO’s assets will be approximately five years, on average.  
	The ISO believes its proposed 10-year bond financing for long-term financing is an appropriate balance of competing interests.  On the one hand, the financing term should, to the extent possible, match the expected life of the assets being financed.   Here, the assets have an average useful life of 5 years.  As shown on CAS-6 at 1, some assets have a useful life of only two years (computer software), while others have a useful life of 9.9 years (leasehold improvements).  The average maturity of the bonds under the proposed financing is 6.2 years, which approximates the useful life of the assets.   
	On the other hand, a bond term of 5 years instead of 10 would significantly increase the ISO’s operating costs in its first five years.  All of the ISO’s start-up and development costs and working capital would have to be repaid in five years instead of 10 years, which would significantly increase the GMC to the detriment of all transmission users and may adversely affect the delicate transition to competition in its early stages.
	During the stakeholder negotiation process, the ISO considered financing terms of as low as 5 years and as much as 30 years.  A five-year bond financing has the detriment of producing a higher GMC.  A thirty-year financing term of course has the benefit of a producing a lower GMC, but it has the drawback of extending the repayment of the cost of the assets for thirty years, well beyond the average life of the ISO’s assets.  With a thirty year financing term, as the ISO assets require enhancements or replacement, new debt would be layered onto the initial debt.  Consequently, thirty-year debt will be less attractive to investors.  Thus, the ISO’s proposed 10-year bond term is an attempt to strike a balance between matching the useful life of the assets and producing a reasonable GMC level.    

V.	CONSOLIDATION/HEARING ISSUES

A.	The Public Interest Does not Require Suspension of the GMC.

1.	There Are No Factual Issues Requiring An Evidentiary Hearing.
Several parties have requested that the Commission schedule an evidentiary hearing in this proceeding.  They request that the matter be set for hearing with respect to the cost support for the Grid Management Charge (GMC).  In addition, these parties request a hearing and urge the Commission to suspend the effective date of the ISO’s filing for one day and make the GMC subject to refund.  Finally, other parties request a hearing on the issue of whether the GMC will apply to gross v. net load.  Because these parties have failed to raise a genuine issue of material fact which cannot be resolved based on the written record, their requests for an evidentiary hearing must be denied.
“An evidentiary hearing is required only if there exists a genuine issue of material fact.  [Moreover,] genuine issues of material fact are not created by mere conjecture, or allegations . . . but, rather, some affirmative demonstration of fact material to the decision that creates a dispute regarding the material fact.”  Tenneco Oil Company, 25 FERC ¶ 61,234, at 61,605 (1983) (denying intervenors motion for an evidentiary hearing on grounds that there were no disputed facts regarding certain aspects of a proposal for an experimental program to develop a spot market for surplus gas), reh’g granted in part and denied in part, 26 FERC ¶ 61,030 (1984); see also Northern States Power Co., 71 FERC ¶ 63,016, at 65,086 (1995) (citing Tenneco, the ALJ concluded that no disputed facts existed which barred certification of a contested settlement); Woolen Mill Associates v. FERC, 917 F.2d 589, 592 (D.C. Cir. 1990) (stating that where a party requesting an evidentiary hearing merely offers allegations or speculations without an adequate proffer, the Commission may properly disregard them).  It is also the case that an evidentiary hearing is not necessary where the issues raised do not involve contested factual issues and can be disposed of summarily based on Commission policy.  See Western Transmission Corp., 52 FERC ¶ 61,305 at 62,221 (1990) (denying a motion for rehearing where movant claimed that the Commission erred in not ordering an evidentiary hearing in a proceeding that conditionally accepted a compliance filing to establish terms and conditions for open-access and interruptible transportation service).  
Further, the Commission is not required to hold an evidentiary hearing, even if genuine issues of material fact exist, if the disputed issues can be resolved on the written record or if there is not an adequate proffer of evidence to support the allegation that material issues of fact exist.  See Cajun Electric Power Coop. v. FERC, 28 F.3d 173, 177 (D.C. Cir. 1994) (concluding that the Commission wrongly summarily approved a market-based rate proposal without a hearing because the record revealed that disputed issues of material fact existed regarding the impact of open access transmission tariff on a public utility’s market power); CNG Transmission Corp. and Texas Eastern Transmission Corp., 80 FERC ¶ 61,092, at 61,327 (1997) (stating that an evidentiary hearing is necessary only where there are material issues of fact in dispute that cannot be resolved based on the written record), order on reh’g and denying clarification, 80 FERC ¶ 61,269 (1997).   
	As demonstrated herein, the parties requesting a hearing based on the cost support for the GMC have failed to demonstrate the existence of a genuine issue of material fact which would warrant the necessity of an evidentiary hearing.  The ISO has provided more than adequate support for the financial basis for the GMC and its application.  Those parties seeking a hearing have failed to raise an issue of fact as to the justness or reasonableness of the GMC.  The GMC should be approved as proposed and the requests for an evidentiary hearing should be denied.  Should the Commission determine that these parties have raised an issue of fact, the October 17, 1997 rate filing and this Answer have provided any additional factual support which the Commission might need to resolve any such issues; therefore, no evidentiary hearing is required.    
As to those parties who have requested an evidentiary hearing on the issue of whether the GMC will apply to gross v. net load, as set forth in the October 17, 1997 rate filing, this is a policy question for the Commission.  There are no factual issues that have been raised in this regard and the Commission can decide this issue based on the written record and Commission policy.  
2.	Suspension and Hearing Will Have An Adverse Effect on the ISO’s Financial Plans.

	So. Cities and others argue that ISO Witness McDonald has not presented evidence to demonstrate that any costs associated with a delay in the completion of permanent financing would be so burdensome as to outweigh the unfairness of requiring transmission customers to pay the GMC without the possibility of a refund.  So. Cities at 7-8; TANC at 31.  They further argue that utilities routinely engage in financing activities while proposed rates are subject to refund.  Id.
	If the ISO’s rates are subject to refund, there will be several adverse consequences on the ISO’s financial plans.  First, the ISO will be a riskier company and will not be able to sell as many bonds as it has proposed until the rates are no longer subject to refund.  This delay in the full bond financing will delay the ISO’s financial independence from the IOU guaranteed line of credit.  In addition, delaying the full bond issuance will subject the ISO to additional interest rate uncertainty.

B.	The ISO and PX Rate Proceedings Should Not Be Consolidated and Set for Hearing.

Several parties have moved to consolidate this proceeding with Docket No. ER98-210-000.  SMUD argues that the two proceedings should be consolidated because the ISO and PX have incurred shared expenses for items such as third-party vendor contracts, building leases and facility costs and the allocation of these shared costs between the ISO and PX and will affect the administrative charge in each docket.  SMUD at 35.  Therefore, SMUD claims, it would be more administratively efficient to explore these issues in a single proceeding.  
Metropolitan moves to consolidate on the grounds that separation of the two dockets is impractical in the context of the initial filing of rates and charges for the ISO and PX because the costs to be allocated in the ISO and PX rate schedules are derived from common sources and funds.  Metropolitan at 30.  Metropolitan also asserts that consolidation is in the public interest because (a) the ISO and PX were created as part of a comprehensive proposal for restructuring the California electric industry; (b) the existence and allocation of shared start-up and development costs will affect the charges assessed to ratepayers by both entities; (c) the ISO and PX Tariffs and the Transmission Control Agreement were jointly filed by the ISO/PX Trustee and have been considered jointly by the Commission; (d) the two proceedings will involve many identical or substantially similar issues regarding ISO and PX startup and development costs, the ongoing cost of shared facilities and the allocation of such costs between the ISO and PX; (e) absent consolidation there is the potential for double counting and the duplication of costs and the overrecovery of such costs by the ISO and/or PX in their respective tariffs and rate schedules; (f) failure to consolidate will result in redundant proceedings and litigation over common issues and facts which may result in inconsistent or conflicting findings of fact and conclusions of law; and (g) it would be more efficient administratively for the dockets be consolidated for all purposes, including if necessary and appropriate, for hearing on contested issues of fact and law.  SMUD at 35; TANC at 36-40;  Metropolitan at 31-34.
TANC seeks consolidation on essentially the same grounds articulated by Metropolitan, adding that the proceedings should be consolidated because in the course of performing their separate but related functions, the ISO and PX will, to some extent, share facilities, coordinate transactions in the California energy market and will provide services to many of the same market participants.  TANC at 37.  
Contrary to these arguments, consolidation of the ISO and PX rate proceedings is inappropriate.  Pursuant to Rule 502 of the Commission’s Rules of Practice and Procedure, the Commission may issue a notice or order initiating a hearing.  18 C.F.R. § 385.502(a) (1997).  Such notice or order “may direct consolidation of proceedings, phasing of a proceeding, or severance of proceedings or issues in a proceeding.”  18 C.F.R. § 385.502(c) (1997).  The Commission’s determination as to whether to consolidate turns on whether the proceedings at issue involve common questions of law and/or fact.  See Southwestern Public Service Co., 50 FERC ¶ 61,273, at 61,864 (1990) (consolidating proceedings after finding that there were common questions of law and fact concerning allegedly discriminatory rates amongst full requirements customers); American Natural Rocky Mountain Co., 21 FERC ¶ 61,229, at 61,513-14 (1982) (concluding that the similarities between and overlap of two pipeline proposals to offer gas transmission services below the cost proposed by other pipelines, and without constructing major new facilities, justified consolidation); Pacific Gas and Electric Company, 49 FERC ¶ 61,366, at 62,316-17 (1989) (finding that common questions of law and fact warranting consolidation may be presented regarding billing determinants and rate computations used under a contract between the parties); Southwestern Public Service Company, 50 FERC ¶ 61,008, at 61,017-18 (1990) (finding a likelihood of common issues of law and fact regarding allegedly discriminatory rates); Southern California Edison Company, 23 FERC ¶ 61,002, at 61,006 (1983) (anticipating common questions of law and fact relating to the accounting and ratemaking treatment of test energy).  
In determining whether to consolidate proceedings, the Commission’s primary goal is to avoid duplication of effort and foster administrative efficiency. See Northern Natural Gas Company, 58 FERC ¶ 61,207, at 61,650 (1992).  Accordingly, the Commission has stated that “identical issues should not be litigated simultaneously in different dockets.”  Panhandle Eastern Pipe Line Co., 46 FERC ¶ 61,268, at 61,789 (1989).   
The ISO and PX rate proceedings involve very different factual and legal issues for resolution by the Commission.  The intervenors are correct that some of the start-up and development costs were initially shared by the ISO and PX.  In his affidavit, Mr. Leiber demonstrates that these costs were properly allocated to each corporation on the basis of the benefits each corporation derived from the expenses.  See Affidavit of Philip R. Leiber, Attachment A at 3-5.  This initial cost allocation is the only overlap between the two proceedings.  Any issues regarding the proper allocation of the start-up costs, if any remain, do not outweigh the differences in the two proceedings and can be resolved without consolidation.  
The ISO and PX rate structures on the other hand are fundamentally different in terms of rate design.  The rates for each corporation are for completely different services and have been developed using mainly separate and distinct costs.  As a result, consolidation would not gain any efficiencies for any parties.  In addition, the interests of the parties in each proceeding are different and possibly conflicting.  Should these proceedings be consolidated, specific interests in one proceeding could delay or prevent the settlement of issues in the other.  The ISO and PX are separate corporate entities created to perform related, but distinct, functions.  Each has a different role in the newly restructured California energy marketplace.  In their respective capacities, the ISO and PX will provide different services to market participants and have designed rates for their services, which are supported by data that relates solely to either the ISO or the PX.  In short, these are two completely separate institutions whose respective rates and services require independent examination by the Commission.  The proceedings involving their rates are not so inextricably intertwined as to warrant consolidation.  In fact, the consolidation of these proceedings would unnecessarily frustrate, rather than foster, administrative efficiency.
Moreover, the Commission recognized that the ISO and PX proceedings involve very different factual and legal issues in its October 30, 1997 0rder. 81 FERC ¶ 61,122, slip op. at 8 (1997).  In that order, the Commission directed the ISO and the PX to “henceforth make separate filings with respect to their separately administered Tariffs and underlying agreements.”  Id.  In so doing, the Commission recognized that the ISO and PX are separate entities whose rate and tariff proceedings involve distinct legal and factual issues requiring independent examination by the Commission.
The Commission has refused to consolidate proceedings where it concludes that the matters at issue are conceptually separate, see Panhandle Eastern Pipe Line Co., 73 FERC ¶ 61,343, at 61,981 (1995), or where it determines that consolidation would not serve a useful purpose or would cause unnecessary delay.  See Pacific Gas & Electric Company, 49 FERC ¶ 61,115, at 61,492 (1989) (denying motion to consolidate because consolidation could delay the pending proceedings); Southern California Edison Company, 40 FERC ¶ 61,371, at 62,150 (1987) (denying motion to consolidate which asserted that both proceedings involved the price squeeze phase of requests for rate increases because of factual differences in the records of the instant cases), reh’g granted in part, 50 FERC ¶ 61,275 (1990).  As set forth above, and implicitly recognized in the Commission’s October 30, 1997 order, the ISO and PX rate proceedings involve distinct factual and legal issues requiring independent analysis by the Commission; therefore, consolidation is inappropriate.  
Furthermore, as indicated in the affidavit of Philip R. Leiber, the joint startup and development costs, as well as other costs originally shared by the ISO and PX, were prudently incurred and appropriately allocated to either the ISO or PX.  Therefore, no threat exists of double counting or overrecovery of costs by either entity.  Accordingly, the motions to consolidate Docket No. ER98-210-000 and Docket No. ER98-211-000 should be denied.
C.	The ISO’s Proposed Mechanisms for Calculating Ancillary Service and Congestion Charges Were Approved In The Commission’s October 30, 1997 Order.  

	BPA and San Francisco challenge the ISO’s proposed procedures for Congestion Management and Ancillary Services.  BPA at 15-17; San Francisco at 18-20.  These issues are not part of this proceeding.  Moreover, in its October 30, 1997 Order, the Commission approved the ISO’s proposed procedures for Congestion Management and Ancillary Services.  81 FERC ¶ 61,122, slip op. at 91 (1997).  

CONCLUSION
Contrary to the protests discussed herein, the GMC is fully supported and has been shown to be just and reasonable.  Thus, there are no factual issues requiring a hearing.  The Commission should accept the proposed GMC rate as filed.
Respectfully submitted,

California Independent System
Operator Corporation

__________________________
N. Beth Emery
General Counsel
California Independent System Operator Corporation
151 Blue Ravine
Folsom, CA  95630
(916) 351-2334
fax (916) 351-2350

Stephen Angle
Linda L. Walsh
Howrey & Simon
1299 Pennsylvania Avenue, NW
Washington, DC  20004
					Tel:  202-383-7261
Fax:  202-383-6610

Dated:  November 24, 1997

Certificate of Service

	I hereby certify that I have this day served the foregoing document upon each person designated on the official service list compiled by the Secretary in this proceeding.

	Dated the 24th day of November 1997

						_________________________
						Linda L. Walsh