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An Expensive Experiment? RTO Dollars and Sense

Fortnightly Magazine - December 2004

considerable efforts to comply with FERC initiatives such as standard market design (SMD). ISO-NE implemented an SMD market redesign in March of 2003. New York ISO (NY-ISO), currently in the process of implementing SMD, is trailing close behind. MISO has integrated SMD into its market design (launch date March 2005), and PJM is working with MISO to develop a common market design. The California ISO is performing market simulations and is implementing the first stages of its SMD redesign (MD02).

Although it is easy to develop a laundry list of costs for each ISO, it is difficult to make an objective comparison without putting these numbers into a larger context. Three of the U.S. ISOs serve a single state (California, New York, and Texas), while the other three serve multiple states. To make a fair comparison, it is useful to consider the size of the area served by each RTO as measured by annual energy demand. MISO serves the largest electrical load, followed by PJM, ERCOT, California ISO, NY-ISO, and finally, ISO-NE. 6 With the exception of PJM, the annual demand of the ISOs has remained fairly constant. Consequently, PJM is the only RTO whose budget has been driven, in part, by geographical expansion.

Annual demand provides an objective measure for comparing RTO operating costs. Although ISO New England has the lowest annual expenditure of any U.S. RTO, its dollar per megawatt hour ($/MWh) unit carrying cost is second only to the California ISO. Conversely, although PJM has one of the highest operating costs, its membership and geographical scope have expanded, and thus its unit carrying cost has remained among the lowest (). The weighted average carrying cost of the U.S. RTOs/ISOs for 2004 is $0.73/MWh (2003 dollars). MISO is excluded from this calculation because no reliable annual energy data are available. 7

Review of Cost-Benefit Studies: Order No. 2000

In Order No. 2000, FERC asserts that its "best estimate of cost savings from RTO formation is $2.4 billion annually, with potential cost savings estimated to be as high as $5.1 billion annually. This represents about 1.1 percent to 2.4 percent of the current total costs of the U.S. electric power industry." 8 This analysis is the result of an environmental assessment (EA) performed as a precursor to the order. The EA did not take into account RTO startup or operating costs. This year, existing RTOs in the United States will spend a little more than $1 billion (in operating costs) at a weighted average of $0.73/MWh. By applying this average rate to the remaining national load, we can estimate national RTO expenditure at $2.4 billion per year ($1.03 billion + $0.73 /MWh *1934 TWh). 9 Assuming no increase in operating costs over 2004 levels, FERC's "best estimate" of benefits is completely offset by new annual costs.

Although the EA study ignored operating costs, FERC provided an explanation of its assumptions regarding costs. FERC replied that concerns over costs "fails to account for the flexibility we have built into this rule. … Accordingly, we do not believe it will be necessary to