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An Expensive Experiment? RTO Dollars and Sense

AN EXPENSIVE EXPERIMENT?
Fortnightly Magazine - December 2004

expend the same level of resources that were expended, e.g., in California. ... The Final Rule will allow RTOs to create streamlined organizational structures that are not overly costly." 10

Five years ago, when Order No. 2000 was written, the California ISO was spending from three to 10 times more than the other ISOs. Although the California ISO remains the most expensive, today it is not even twice as expensive as any of the other RTOs. While ISO-NE, NY-ISO, and ERCOT remain in the $120 million to $140 million per-year level, PJM and MISO closely trail California's level of spending ($229.2 million in 2004). Moreover, ERCOT is forecasted to match California's current spending level in the next three years ($228.6 million in 2007). Clearly, the California ISO is no longer an outlier.

Moreover, FERC asserted in Order No. 2000 that "with five ISOs now operating in the United States, there is considerable experience available regarding what works and what does not with respect to regional transmission entities. This experience should make it somewhat easier, and more cost-efficient, to create new RTOs." 11 No doubt, the existing ISOs can provide volumes in the way of experience. However, keeping costs low does not seem to be one of them. In 2000, the average annual cost of the four established U.S. ISOs, excluding California, was $41.9 million per year. Average operating costs of the same four entities in 2004 is $160.5 million, nearly four times more.

EIA Study

In April 2003, the Department of Energy's Energy Information Administration (EIA) released a report titled (SMD). SMD is a FERC initiative based on the assumption that all areas will be served by RTOs and that RTOs must to be standardized to remove impediments to functioning, competitive wholesale markets. The EIA study analyzes the costs and benefits associated with establishing nine new standardized RTOs, and converting four existing RTOs (California ISO, NY-ISO, PJM, and ISO-NE) to SMD. The study shows a benefit of $1.8 billion per year in the near term (2005-2010), $1.6 billion to $1.7 billion in the mid-term (2011-2015) and $1.5 billion in the long term (2016-2020). 12

According to the data provided in the EIA study, the nine new RTOs would cover 65 percent (2,350 TWh) of the annual electricity demand (the study excludes ERCOT). 13 Using updated data, the 2004 weighted average unit cost for NY-ISO, ISO-NE, California ISO, and PJM is $0.81/MWh. If ERCOT is added into the mix, the weighted average drops to $0.73/MWh. Multiplying the annual energy demand (provided in the EIA study) by the updated average carrying costs results in an annual cost for the remaining RTOs of $1.7 billion to $1.9 billion per year. In the near term, the net benefit is roughly zero ($1.8 billion in benefits minus $1.7 billion to $1.9 billion in costs equals $100 million to -$100 million), suggesting that RTO creation may have a neutral impact on consumers. In the mid term, the net benefit ranges from zero to -$300 million per year ($1.6 billion to $1.7 billion in benefits minus $1.7 billion to