One popular model in electric utility restructuring assumes a fully competitive merchant segment providing retail energy services. These "retail energy service companies," or RESCOs, would offer...
Studying Apples and Oranges
RTO cost/benefit studies are difficult to reconcile.
The premise behind the Federal Energy Regulatory Commission's (FERC) push for regional transmission organizations (RTOs)-that they will provide positive economic benefits to society- increasingly is being challenged.
Over the course of the past year, at least five studies examining the costs and benefits of RTO formation have been published, with more certainly to follow. 1 Not surprisingly (given the differences in approach, methodology, assumptions, and geographic scope), the results have added fuel to the ongoing national debate about the economic benefits that may or may not result from RTO formation.
While there are significant differences between the five RTO cost/benefit studies summarized in this article, they all share two principal characteristics. First, each concludes that creating RTOs will provide substantial benefits to society. However, only the RTO West study provides an attempt to detail the actual costs and, therefore, net benefits of RTO implementation. Second, each study also finds that while there are overall benefits from RTO formation, there will be winners and losers as a result of this process. These findings have raised further concerns, particularly among regulators, and are leading the debate in the direction of more detailed analyses of state-level customer class impacts.
The variety of differences in the time period, scope, and assumptions make comparing the various studies difficult. Even so, comparing the apples-and-oranges studies does yield some useful insights.
This article compares the methodologies, results, and critiques of the five published cost/benefit studies. The comparison is by no means exhaustive, focusing instead on the major issues and characteristics of the various studies. In addition, based on our experience with similar quantitative modeling assignments, we discuss what we consider to be among the most difficult issues in quantifying RTO costs and benefits, and also offer some thoughts on the next steps in the evolution of cost/benefit studies.
Analyzing the Past: The Mirant and NYISO Studies
The study that Energy and Environmental Analysis, Inc. conducted for Mirant attempts to quantify only one source of the potential benefits associated with a single Northeast market, and does not address any of the costs associated with establishing or operating a single Northeast RTO. 2 The study developed an estimate of potential efficiency benefits by comparing historical market price and power flow data to "revised" prices and flows that presumed more efficient dispatch of units in PJM, New York Independent System Operator (NYISO), and ISO-Northeast (ISO-NE) during periods when transmission was not constrained.
In conducting the analysis, the authors sought to identify and measure the benefits of eliminating uneconomic power flows from high-price areas to low-price areas. The study first identified periods when transmission was unconstrained between June and December 2000, and then determined instances of uneconomic power flows between regions. During unconstrained transmission periods when prices failed to correlate or converge, and when energy flowed from a higher-price region to a lower-price region, such flows were considered uneconomic. 3 This was described largely as the result of inefficient regional coordination and a lack of standardized procedures and market design.
Assuming that centralized dispatch of