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An Expensive Experiment? RTO Dollars and Sense

Fortnightly Magazine - December 2004

one exception-it does not include assumptions regarding generator improvements (6 percent improvement in heat rates, and a 2.5 percent improvement in generator availability). As shown in Table 2 on page 43 the magnitude of RTO benefits rely strongly on the assumed generator improvements.

Assuming that the benefits remain constant between the years listed in the ICF study (, $405 million for the "Transmission Only" case benefits in 2004-2005, $356 million in 2006-2009, and so on), then the total estimated benefit for the "Transmission Only" case between 2004 and 2020 is $11.4 billion dollars. As previously described, applying the current 2004 $/MWh rate to non-RTO regions results in an estimated $2.4 billion per year to support nationwide RTO operations. Assuming no escalation, RTO costs between 2004 and 2020 would amount to $40.8 billion. The "Transmission Only" case over this time period would thus leave a net deficit of $29.4 billion.

Using the same assumptions, annual RTO costs exceed the benefits from the "RTO Policy Case" in the near term, accumulating a net deficit of $3.5 billion between 2004 and 2009. Consider a third case where benefits fall halfway between the "RTO Policy" level and the "Transmission Only" level (2004-$742.5 million, 2006-$1,272.5 million, 2010-$3,001 million, 2015-$3,562 million, 2020-$4,380.5 million). Again, in the near term, the costs outweigh the benefits, accruing to a net deficit of $7.8 billion by 2009. In 2010, the net benefit calculation turns to a positive $601 million ($3 billion in benefits minus $2.4 billion in costs). The deficit from the previous years ($7.8 million), however, nets out the small positive benefits until the year 2019.

RTO costs more than completely subsume benefits from transmission improvements (no transmission rates, low export fees, lowered reserve margins, increased capability, and increased capacity sharing). For regions where improvements in heat rates are likely to be small, the costs appear to outweigh by far the benefits. To provide net benefits between 2004 and 2020, the nation must realize at least half of the assumed generator improvements.

It should be noted that the "RTO Policy Case" is the second most optimistic model run provided in the study and assumes only five RTOs (including ERCOT). Several RTOs have engaged in merger discussions (MISO/PJM, NYISO/ISO-NE, MISO/Southern Power Pool [SPP]), though no mergers have been implemented to date. Consequently, the assumption of four large RTOs and ERCOT is unrealistic in the near term.

In conclusion, so far, the war over deregulation has been fought with rhetoric by the true believers and the naysayers. FERC appears to fall in the true-believer camp-its policy on RTOs was not based on a comprehensive analysis of the possible costs, benefits, and risks. Rather, it was based in an optimistic assumption-"competition in wholesale electricity markets is the best way to protect the public interest and ensure that electricity consumers pay the lowest price possible for reliable service." 18

Unfortunately, the path to competitive wholesale power markets has been littered with market crises (most notably but not uniquely in California), bankruptcies (among them, Pacific Gas & Electric, Texas Commercial Energy, Mirant, Enron, NRG, and Northwestern