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Studying Apples and Oranges

RTO cost/benefit studies are difficult to reconcile.
Fortnightly Magazine - September 15 2002

the Northeast markets would eliminate these uneconomic flows when transmission capacity was available, the Mirant study estimated the associated annualized benefits by deriving "revised" prices and flows using statistical analyses and comparing them to historical data. The study estimated total potential annual benefits of approximately $440 million. While the results showed positive benefits for all three regions, NYISO enjoyed the greatest benefit ($256 million) and PJM the least ($76 million). ()

The NYISO asked consultants LECG to review the Mirant study. The resulting NYISO study took exception to a number of the Mirant study's assumptions, as well as certain fundamental aspects of their methodology, including:

  • Comparing day-ahead prices with real-time flows in deriving potential benefits in PJM and New York;
  • Using historic data from a time period that does not accurately reflect current market operating conditions;
  • Comparing NEPOOL prices to those in NYISO and PJM, even though NEPOOL did not use locational marginal pricing (LMP); 4
  • Ignoring real transmission constraints and the presence of binding constraints between the three markets; and
  • Using overly flat supply curve estimates (i.e., price rises more slowly with demand).

The NYISO study first attempted to replicate the approach and methodology used in the Mirant study in order to verify the results. Using the Mirant approach and methodology, the NYISO study estimated approximately $140 million less than the original Mirant study in aggregated benefits.

The NYISO study then altered its replication analysis by comparing real-time prices and flows in New York and PJM (as opposed to day-ahead prices and real-time flows). Though the combined benefit to New York and PJM increased approximately 17 percent from the replication analysis (from $189 million to $222 million), the shift in benefits from New York to PJM was dramatic.

Next, the NYISO study conducted a separate analysis using data from October 11, 2000 to August 31, 2001, a time period that the authors believed more accurately reflected current market operating conditions. The study also used sensitivities that varied system operating conditions, including increased transmission-constrained curtailments, reduced transmission interface limits, and steeper sloping supply curves. 5 These sensitivities indicated a range of annualized benefits between $275 and $440 million. However, the distribution of these benefits significantly favored PJM, with NYISO expected to experience real costs from Northeast RTO formation.

Modeling the Future: The PJM, FERC, and RTO West Studies

The PJM study also compared three separate Northeast markets to a single Northeast market. 6 The results were reported in terms of changes to energy savings to load, generation production costs, and generator revenues. By splitting the results into these categories, the PJM study began to look at the distribution of benefits between market participants, in addition to the geographic distribution of benefits examined in previous studies.

The base case results indicated an overall annual benefit of $262 million from forming a single Northeast RTO. However, on a regional basis, NYISO would experiences a $22 million loss as a result of the formation of a single Northeast RTO, while both PJM and ISO-NE would experience positive benefits. () More specifically, the PJM study shows