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Studying Apples and Oranges

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

elimination of pancaked transmission loss charges and the increase in reserve sharing. The elimination of pancaked transmission loss charges had a significant impact on reducing congestion charges, while increased reserve sharing dramatically lowered production costs.

Far From a Simple Exercise

Not surprisingly, most studies have been critiqued by one or more interested parties. What follows are highlights of some of the principal areas of debate regarding assumptions and/or methodology.

Several studies were criticized (or criticized one another) for the selection of an inappropriate study period. For example, the Mirant and NYISO studies both relied on a partial-year of historical data (from which benefits were extrapolated), but each questioned the suitability of the period the other had selected. The PJM study, on the other hand, was criticized for estimating RTO benefits using a market simulation of a past calendar year (2000) that did not account for generation and transmission enhancement planned or underway. 8

Not surprisingly, most studies received criticisms regarding assumptions and/or methodology from one or more interested parties.

Several studies were criticized for the selection of the study period over which annual benefits were estimated. At one end of the spectrum, the Mirant, NYISO, and PJM studies were criticized for selecting short time frames that arguably were not suitable for extrapolating annualized data. At the other end, FERC's study was criticized for forecasting too far into the future, and calibrating its forecast with year 2000 data. Critics argued that calibrating the base case to the year 2000 resulted in an overestimation of the benefits from RTO formation given the unusually high wholesale market prices seen during that period. 9

In addition, several parties commented on the way that transmission capacity and constraints were treated in the studies. The FERC study was criticized for its use of a model that did not use a detailed representation of the transmission system for what is essentially a transmission study. 10 The Mirant and NYISO studies also questioned each others' assumptions regarding the amount of available transmission capacity among the Northeast ISOs in order to estimate the benefits of more economic dispatch. While the Mirant study revealed only a modest impact (16 percent decrease in benefits) when transmission capacity was constrained, the NYISO study found the results to be considerably more sensitive to more stringent assumptions about transmission transfer capability. 11

Furthermore, several study critiques focused on specific assumptions regarding generation resources. Some argued that the modeling of hydro resources in the RTO West study status quo case created an unrealistically high reliance on thermal units for reserves, and thus overstated the annual generation cost savings due to formation of RTO West by $150 million. 12 Similarly, the Mirant and NYISO studies debated the slope of supply curves in the Northeast and the impact that varying such an assumption can have on an estimation of short-term benefits associated with economic dispatch. The FERC study was criticized for presuming that formation of RTOs would cause generators to move toward best practices and thus improved efficiency and availability. 13

Considerations Going Forward

Many critiques of the studies