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Studying Apples and Oranges

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

published to date highlight the inherent complexity and the judgment required in undertaking an RTO economic analysis. It is quite clear that a number of issues must be well thought through. The following discussion of issues that must be carefully considered in conducting any such analysis expands on some of those previously mentioned, and offers further insights from our own experiences in working with market simulation and other models on similar assignments. This list is by no means exhaustive, but presents several issues that will substantially impact the conduct and results of an RTO cost/benefit analysis:

  • Choosing an Appropriate Model,
  • Establishing the Base Case, and
  • Determining the Impact on Various Customer Groups.

While choosing an appropriate model is a required step in any such analysis, the choice of the modeling tool to be used in an RTO cost/benefit study must be suitable for answering the question at hand. The use of market simulation models that can accurately and dynamically represent the operation and limitations of the transmission system (like GE MAPS) will be increasingly important.

One of the principal tasks in any comparative study is the need to establish a credible base case. For an RTO cost/benefit study, the modeling of the status quo can be more challenging than the modeling of changes in wholesale markets attributable to RTO scenario(s). For example, the highly fluid nature of the current regulatory and market environment poses significant issues for modeling the status quo. The impact of FERC's Standard Market Design initiative and evolving RTO developments directly influence not only market modeling, but also the shelf life of the modeling results.

Many of the existing cost/benefit analyses focus largely on the impact of RTO decisions on certain (typically multi-state) geographic areas. However, regulators and other groups increasingly are pushing the debate down to the level of assessing the impact of RTO formation on specific customer classes on a state-by-state level. Some regulators have expressed a desire to know the extent and timing of the impact of RTO costs and benefits on different groups of ratepayers, based on how changes in wholesale market price flow through to retail tariffs. Providing this level of analytic detail requires modeling the complex interface in each state between wholesale and retail prices, necessitating a sophisticated understanding of state level tariff structures and policies.

Net Winners and Losers

Unfortunately, the result of more detailed analyses to determine specific winners and losers may further galvanize RTO opposition, even if there is eventual consensus on the overall net benefit of RTO formation, as the issues take on a more parochial tone. There is certainly a need to understand better the actual costs as well as benefits of RTO formation on a macro level, and more effort should be focused in this area to determine whether net benefits can be credibly established. However, no matter how great the potential net benefits, there still are likely to be both winners and losers.

The fact that certain groups would lose, but lose less than others will gain, should not prevent the achievement of overall net benefits