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An Expensive Experiment? RTO Dollars and Sense

AN EXPENSIVE EXPERIMENT?
Fortnightly Magazine - December 2004

Corp.), and near bankruptcies (such as energy marketers Aquila Energy, Allegheny Energy, and Reliant Energy). Moreover, competition has not produced the highly touted price reductions. Some, like former Enron CEO Kenneth Lay, argued that state restructuring should be expected to produce savings of 20 percent to 40 percent (in a 1998 letter to then Gov. George Bush). 19 Generally, state legislators and regulators were promised that deregulation would lower retail rates in the near term. In an attempt to ensure success, protect retail customers, and smooth over the transition to deregulated markets, many states (among them California, New Jersey, Ohio, Maryland, Illinois, and Virginia) instituted retail rate caps or mandatory rate reductions.

In many cases, customers face large rate increases when caps are removed. New Jersey is a particularly bad case; utilities racked up deficits (or "deferred balances") of more than $1 billion while rate caps were in place (1999-2003). This translated to a $171 to $794 per customer bill, depending on which utility served them. 20 In California, the average residential electricity bill increased 20 percent between 1997 and 2002. 21 This July, rate caps were removed for a few Maryland utilities-Pepco raised residential rates 16 percent and Conectiv raise them 12 percent. 22 Similarly, residential power prices in Texas increased 16 percent between 2000 and 2003. 23

The success or failure of deregulation cannot alone be measured by these rate increases. Additional factors such as increased fuel prices directly influence energy prices. Still, restructuring the energy industry was more costly and more risky than anticipated, and reasonable estimates of RTO costs outweigh nearly all of the benefits anticipated in the national cost-benefit studies. Considering the escalation in both prices and RTO costs, additional analysis clearly is needed to determine whether restructured markets are, in fact, providing net benefits.

Data Sources

PJM:

Operating Costs, Amortization, Depreciation, and Interest Expense:

1997-2003 (FERC Form 1 submissions); 2004 (); 2000 (); 2001 (); 2002-2003 (Corresponding Annual Reports); 2004 (, 10/28/2003).

Staffing Levels: 1998-2001 (FERC Form 1 submissions); 2002 (448 employees as of 9/30/2002 noted in PJM's 2002 3rd Quarter Financial Statement); 2003 (NYISO 2003 for the Budget, Performance, and Standards Committee, 9/30/2002).

Startup Costs: PJM staff indicated that they have not calculated their overall startup costs. Estimate provided by the Ontario IMO 2001-2003 Business Plan, 11/13/2000, p. 41.

New York ISO:

Operating Costs, Amortization, Depreciation, and Interest Expense: 2000-2003 (FERC Form 1 submissions); 2004 (NY-ISO 2004 for the Budget, Standards and Performance Subcommittee, 11/12/2003).

Annual Energy: 2000-2002 (NYISO 2003 ); 2003-2004 (Backed into using revenue requirements and $/MWh rates in NYISO 2004 , 11/12/2003).

Staffing Levels: 2000 (); 2001 (NY-ISO , February 2002); 2002 (2003 Budget Review, 9/30/2002); 2003-2004 (2004 Budget Overview, 9/26/2003).

Startup Costs: , 3/11/2002.

ISO New England:

Operating Costs, Amortization, Depreciation, and Interest Expense: 1998-2002 (); 2003 (2003 , 3/3/2004); 2004 (ISO-NE , March 2004).

Annual Energy: 1998-2004 (1999-2004 Annual Reports, Note: 2004 is a forecast).

Staffing Levels: 1998-2001 (FERC Form 1 Submissions); 2002 (); 2003 (NYISO 2003 , 9/30/2002); 2004 (ISO-NE , March 2004, Note: Projected FTE).

Startup Costs: FERC