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Studying Apples and Oranges

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

that the winners, in terms of generators and load, include New York consumers as well as generators in PJM and New England. The losers include consumers in PJM and New England and generators in New York.

PJM also analyzed the benefit of improving coordination between the three Northeast system operators absent a single Northeast RTO, but assuming a joint and common market between PJM and the Midwest. Interestingly, the coordinated market sensitivity from this analysis produced benefits for consumers in all three markets, though the benefits in New England were essentially negligible. On the other hand, generators in both PJM and New York both lost net revenue, particularly in PJM.

The FERC study, performed by ICF Consulting, examined the potential nation-wide benefits of RTOs and related policy issues. ICF employed a proprietary production cost model to establish a baseline of production costs, and then estimated relative benefits (as measured by production cost savings) of several policy scenarios over a 20-year period. The policy scenarios analyzed included:

  • Transmission Only- reserve pooling and transmission coordination were through certain no-cost improvements to transfer capabilities between regions;
  • RTO Policy- combined with transmission improvements (as above), measured benefits of four RTOs, plus ERCOT; and

  • Demand Response- in addition to the other scenarios, limited price-sensitive demand response was assumed to reduce regional peak demand by 3.5 percent.

The FERC study estimated that the RTO Policy scenario would result in substantially more value over 20 years than the Transmission Only scenario-approximately $34 billion of additional production costs savings on a net present value (NPV) basis. While the Transmission Only scenario estimated cumulative NPV savings from the base case of $6.2 billion, the RTO Policy scenario resulted in a cumulative NPV savings estimate of $40.9 billion. The Demand Response scenario estimated cumulative NPV savings of $60 billion, or $19 billion more than the RTO Policy and Transmission Only scenario.

Interestingly, two sensitivities performed around the RTO Policy scenario to examine the impact of larger vs. smaller RTOs did not have a substantial impact on the savings estimate. The estimated savings were +$500 million and -$700 million for the larger RTO sensitivity and smaller RTO sensitivity, respectively (or $41.4 billion and $40.2 billion).

Meanwhile, the primary aim of the RTO West study 7 conducted by Tabors Caramanis & Associates was to assess the benefits of establishing RTO West in the RTO West and WSCC regions. () The results indicated benefits from RTO West implementation in all western regions, except for California. In every region there were load savings, with the greatest savings in the RTO West region (including British Columbia). On the other hand, in every region generators were expected to see a decline in their net revenues, particularly in California and the RTO West region. However, the total savings to load was greater than the net lost revenue to generators.

A number of sensitivities were run to assess the impact of changes in physical conditions, such as low water/high gas prices and new generation in Montana. The results indicated that the two main benefit drivers in the analysis were the