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An Expensive Experiment? RTO Dollars and Sense

AN EXPENSIVE EXPERIMENT?
Fortnightly Magazine - December 2004

$1.9 billion in costs). In the long term, the net impact on consumers is -$200 million to -$300 million per year ($1.5 billion in benefits minus $1.7 billion to $1.9 billion in costs).

This is a liberal estimate of net benefits. The real negative impact of creating nine new standardized RTOs may be much larger. This estimate is based on the assumption that RTO costs will not increase over their 2004 levels. With the exception of the California ISO, no RTO shows signs of leveling costs. ERCOT's revenue requirement is slated to increase by roughly 60 percent in the next two years. In addition to conservative cost estimates, the theoretical benefits include income generated by increased transmission capacity in the four existing RTOs that are converted to an SMD platform. Removing these savings from the benefits calculation likely would tip the net benefits estimates into the negative realm for all time periods.

It should be noted that the EIA study also underestimated the costs of implementing SMD. It assumed zero incremental implementation cost for NY-ISO and ISO-NE, and limited increase for California ISO and PJM. In addition, it assumed that SMD generally would provide a 10 percent decrease in the annual operating cost of RTOs, resulting in an annual SMD cost of $0.22/MWh. 14 Most RTOs have taken steps to implement SMD, resulting in increased operating costs and capital expenditures in 2003 and 2004.

FERC's Cost-Benefit Study

In 2002, FERC hired ICF Consulting to perform an economic assessment of RTO policy. 15 ICF concluded that RTOs provide national annual benefits in the range of $405 million to $1.15 billion in the near term. As with FERC's earlier EA, ICF's study ignores the impacts of startup and ongoing operating costs. ICF claims that the projected $4.2 billion to $7.3 billion in startup costs "would be rewarded after several years with economic gains that appear to justify the initial expense." 16 Further, ICF asserts that operating costs are a "relatively unimportant element of the overall economic impact of RTO policy once existing system operating costs are taken into consideration."

A cursory review of utility transmission operating expenses (, considering a smattering of utilities in each RTO) indicates that RTOs have not, in aggregate, had the effect of decreasing utility-level operating costs. In some areas, such as California, the transmission operating expenses of the investor-owned utilities have increased substantially since the ISO was formed-226 percent for San Diego Gas and Electric Co. between 1997 and 2002, 23 percent for Pacific Gas and Electric, and 134 percent for Southern California Edison. 17 If RTOs are not offsetting the operating expenses of utilities, then the additional costs of RTOs are an important element of the economic impact of RTO policy.

The range of benefits estimated by the ICF study varies widely depending on the assumptions used. Table 1 lists the assumptions used in two ICF model runs. The "RTO Policy" case is ICF's main model run (, all other runs are variations of this case). The "Transmission Only" case is identical to the "RTO Policy" case with