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An Expensive Experiment? RTO Dollars and Sense

Financial data raises doubts about whether deregulation benefits outweigh costs.

Fortnightly Magazine - December 2004

This year, U.S. electricity consumers will spend more than $1 billion financing the operation of six regional transmission organizations (RTOs). 1 RTO costs have nearly doubled since 2001 and now outweigh nearly all of the benefits anticipated by the national cost-benefit studies.

Operating costs consist of salaries, employee benefits, leases, facility costs, legal and consulting services, amortization and depreciation on capital costs, insurance, travel expenses, and the like. Since 2000, the total annual U.S. RTO operating expenses increased by 143 percent-growing at an annualized rate of 20 percent per year ( see Figure 1 ). Individually, the existing RTOs exhibit a similar trend. Costs at the Pennsylvania-New Jersey-Maryland Interconnection (PJM), the first to introduce a bid-based wholesale energy market, have grown from $21.4 million in 1997 to $215 million in 2004. 2 With the most pronounced growth, spending by the Midwest Independent System Operator (MISO) jumped from $20.7 million in 2000 to a budgeted $210 million in 2004 (914 percent in 4 years). 3 Others, like ISO New England (ISO-NE), orchestrated a slower expansion, increasing costs from $57.5 million in 1998 to a budgeted $122 million in 2004. 4 Figure 2 displays the operating costs for each RTO/ISO including amortization, depreciation and interest (in 2003 dollars).

This upward trend reflects an expansion of the RTOs' organizational size and scope. The RTOs have grown in response to internal pressure ( e.g., requests from members, staff directed projects) and external pressure ( e.g., FERC initiatives, state regulation, and legislation). The Electric Reliability Council of Texas (ERCOT)-the only non-FERC jurisdictional RTO-is contained within the state of Texas and thus is not subject to FERC regulation, which applies only to interstate energy commerce. In response to state deregulation legislation, ERCOT expanded its staff and constructed two new buildings (an administrative headquarters and a new control center) in 2000. ERCOT quickly became Texas' single control area for Texas in 2001 and instituted a massive retail choice program in 2002. ERCOT and the Texas Public Utility Commission (PUC) are now undertaking a wholesale market redesign effort called Texas Nodal Pricing.

Figure 1 - Total Annual U.S. Operating Expense (2003 dollars)

One measure of growth is how quickly a business adds employees. Figure 3 shows the employee levels for each of the RTOs. 5

PJM systematically has added markets—some at the request of its membership. PJM was the first to introduce a bid-based wholesale energy market in 1997. The following year, a locational marginal pricing system (location-based energy prices reflect congestion on the transmission system) was implemented to manage congestion. PJM added real-time energy and capacity markets in 1999, and a spinning reserves market in 2002. Most RTOs have expanded in similar ways. ISO-NE launched a wholesale energy market in 1999; began a demand response program and created five new departments in 2002; and rolled out a major market redesign in 2003. In contrast, development of the California ISO often is described a "big bang" where the majority of functions were built into the initial