Elsevier

The Electricity Journal

Volume 19, Issue 10, December 2006, Pages 50-62
The Electricity Journal

Toward More Comprehensive Assessments of FERC Electricity Restructuring Policies: A Review of Recent Benefit-Cost Studies of RTOs

https://doi.org/10.1016/j.tej.2006.11.004Get rights and content

Definitive assessment of Federal Energy Regulatory Commission policies on regional transmission organizations is not currently possible because of uncertainties in the data and methods used in recent benefit-cost studies as well as lack of investigation of key impacts of the formation of RTOs.

Introduction

During the past four years, government and private organizations have issued more than a dozen studies of the benefits and costs of wholesale electricity competition. Recent studies have focused on the formation of regional transmission organizations (RTOs).1 Many of these studies use simulation techniques to estimate benefits in the form of production-cost savings resulting from greater centralized dispatch under an RTO compared to less centralized dispatch without an RTO. These benefits are compared to estimated costs for RTO startup and operation. Generally, but not always, the studies find that the production-cost savings are greater than the costs of forming and operating an RTO. Compared to total production-costs, however, the differences are modest, on the order of a few percent.

We reviewed recent studies of RTO impacts and identified two areas of concern:

  • (1)

    Significant uncertainties in the data and methods used to estimate benefits and costs. Because of the narrow margin between benefits and costs, we recommend that future simulation-based studies more consistently discuss key elements, including: (a) the benefits and costs examined (and not examined) and the perspectives from which they are considered; and (b) the choice and use of study tools, including how tools are calibrated and how they are used to represent the effects of the policies under consideration. Consistent discussion of these elements will increase confidence in study results by clarifying what is and is not represented in each study.

  • (2)

    Absence of treatment of entire categories of RTO impacts, resulting in systematic understatement of both benefits and costs. The impacts of RTO formation on reliability management, generation and transmission investment and operation, and wholesale electricity market operation are either not considered at all or are not quantified in recent studies. This is a major shortcoming. If these impacts are not studied quantitatively, then for all intents and purpose they are treated as if they are equal to zero. Omitting these impacts is misleading. Assessment of the effect of FERC's electricity restructuring policies is incomplete if these impacts are not addressed.

The remainder of this article briefly reviews the main features of the RTO studies we reviewed, describes elements that should be addressed more systematically in future studies, and discusses the challenges of addressing RTO impacts that have not been studied quantitatively to date.

The baselines and policies addressed by studies have changed over time. The earliest ones focused on very large RTOs.

Section snippets

Overview of Recent RTO Benefit-Cost Studies

In 2005, we reviewed 11 simulation-based benefit-cost studies that were published between 2002 and 2004.2 Taken together, these studies represent the current state of the art of RTO benefit-cost analysis. As other researchers have noted, these studies primarily consider the tradeoff between benefits in the form of short-run production-cost efficiencies and costs for the startup and operation of an RTO.3 The analytical approach compares two hypothetical

Recommendations for Improving Short-Term Efficiency Estimates in Future Benefit-Cost Studies

Current RTO benefit-cost studies are similar in general approach but differ in their data, assumptions, models, and logic. The data are sometimes incomplete and often proprietary or otherwise unverifiable. Assumptions are rarely tested against data; the sensitivity of results to variations in study assumptions is not revealed. In addition, studies are inconsistent in what they tell readers about the technical details that play a decisive role in determining the results. Adding the results of

Toward More Comprehensive Assessments of FERC Electricity Restructuring Policies

A broad scope of impacts was considered by the original FERC-commissioned studies of electricity restructuring policies when these policies were first articulated.15 FERC wrote “…competition will create benefits through better use of existing assets and institutions, new market mechanisms, technical innovation, and less rate distortion. Staff estimates only the first quantitatively, but based on the experience of, for example, the natural gas and telecommunications industries, we

Summary

Our review of recent benefit-cost studies of RTO formation finds many uncertainties and unexamined impacts. Because of these uncertainties and omissions, it is not currently possible to definitively assess FERC's RTO policies. Although technical improvements in the traditional production-cost methods used to conduct the studies that we reviewed will be helpful to some degree, we believe that future assessments should study impacts that have not been adequately examined, including impacts on

Joseph H. Eto is a Staff Scientist at the Lawrence Berkeley National Laboratory, where he manages the program office for the Consortium for Electric Reliability Technology Solutions.

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Joseph H. Eto is a Staff Scientist at the Lawrence Berkeley National Laboratory, where he manages the program office for the Consortium for Electric Reliability Technology Solutions.

Douglas R. Hale recently retired from the Department of Energy's Energy Information Administration, where he served as a senior economist most recently working in the areas of energy price risk management, modeling electricity transmission pricing, and electricity transmission data.

Bernard C. Lesieutre is a Staff Scientist at the Lawrence Berkeley National Laboratory, where he conducts public-interest research on the electric power grid and electricity markets.

The work described in this article was funded by the Office of Electricity Delivery and Energy Reliability of the U.S. Department of Energy under Contract No. DE-AC02-05CH11231. This article is based on a longer technical report titled A Review of Recent RTO Benefit-Cost Studies: Toward More Comprehensive Assessments of FERC Electricity Restructuring Policies (LBNL-58027), available at http://certs.lbl.gov.

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