Critiquing RTOs

October 15, 2008

Ken Silverstein, EnergyBiz Insider
Editor-in-Chief

More than a decade later, electricity restructuring divides constituencies. The goal of such public policy has been to increase access to the nation's wires system, thereby encouraging more participation from generators. But the question now is whether the effort has succeeded and what the cost of that pursuit has been.

A recent study by the Government Accountability Office sought to get answers. It found that consensus is lacking, noting that policymakers and stakeholders alike disagree over the extent of such benefits or even whether the regional transmission organizations (RTOs) that have been set up to oversee electricity transport have made significant contributions. The analysis delves into the Federal Energy Regulatory Commission's role in the restructuring process, noting that the agency has ushered the process along since its inception but has not kept empirical records to measure performance and costs.

"Without such measures, FERC will remain unable to demonstrate the extent to which RTOs provide consumers and others with benefits -- information that could aid FERC in its evaluation of its decision to encourage RTOs and help address divisions about which benefits RTOs have provided," says the GAO report.

RTOs are federally regulated and take bids collectively from buyers and sellers of electricity and subsequently establish a price. They also schedule the physical delivery of that product on a day-ahead basis or in real time. Low cost generation is dispatched first. Most of the systems give market participants the most up-to-date information on supply, demand and pricing at numerous delivery points on the transmission system during periods of congestion. At the same time, system operators have the ability to order power generators to ramp up or down.

Of the six RTOs that are under the supervision of FERC, the GAO says that they rang up about $4.8 billion in expenses between 2002 and 2006. While it says that FERC needs to better dissect these expenses, the congressional watchdog group does say that it considers the general outlays to be "small" relative to wholesale electricity prices. It then goes on to say that the overall benefits associated with RTOs are about $2.4 billion a year. In the case of the PJM Interconnection, its expenses were about $1.4 billion during the four year reference period -- the highest of all such networks. Because of its overall volume, however, it had the lowest cost per megawatt of power delivered.

Electricity restructuring got a foothold in the 1990s when larger industrials sought to break free from the monopolies held by local producers. State and federal regulation was thus necessary to break up those vertically-integrated utilities that controlled both the generation and transmission. The idea was to encourage the development of modern, low-cost generation and to give such producers unfettered access to the grid. An offshoot of that policy would be the formation of RTOs whereby the network would be operated by those who do not have a vested interest in which generation gets dispatched.

Empirical Records

Discussion has been ongoing as to whether the federal government's tinkering with the electricity scheme has forced prices higher. Proponents of the changes emphasize that the trend started because of the shortcomings attached to the old system in which one utility controlled businesses and consumers in its jurisdiction. Admittedly, the evolution has been imperfect, they continue, but efficiencies build because RTOs bring together disparate systems thereby providing a broader perspective of capacity needs.

Such proponents say that rising fuel costs have been largely to blame for recent higher power rates -- a phenomenon that has occurred regardless of how power markets are structured. In deregulated markets, however, buyers of power are provided with a number of options that create transparencies and the ability to mitigate risks that include day-ahead markets and financial transmission rights.

Advocates "note that because RTOs operate the grid independently and do not own generation or transmission resources themselves, they have no incentive to discriminate when providing transmission access," says GAO.

Critics take a different position. They are dubious of electricity restructuring, noting that the commodity cannot be stored and that the grid is simply too constrained. Those dynamics can then lead to market manipulation and higher energy prices. By extension, they say that RTOs are both costly and intrusive, arguing that they are more problematic than those traditional systems they replaced in many parts of the country. Any efficiency gains attributed to RTOs, they add, would have come about regardless.

The American Public Power Association is one such skeptic. It has sponsored a series of studies that examine wholesale markets, all of which conclude that market dominance and market manipulation are responsible for higher rates. One such review was performed by two economics professors at Northeastern University in Boston, who concluded there is "no convincing evidence" that deregulation has worked to the betterment of consumers.

The advocacy group says that it supports GAO's recommendation that FERC critique RTO's finances and then begin implementing standardized performance measures to quantify the results. "Until such analysis is conducted, no conclusions can be drawn about whether RTO-run electricity markets are successfully benefiting consumers."

The reality is that deregulation has spawned numerous competitive operations that are here to stay. They are part of the mosaic that now defines the national energy market and as such they use varied fuel types and abide by regional environmental laws. Their prices are subsequently affected by a multitude of factors and not just whether they participate in RTOs. The goal now is to build upon the efficiencies and grid access that GAO has noted while at the same devise a method to measure the benefits.

More information is available from Energy Central:

• Reflections on Regulation, EnergyBiz, July/Aug 2008

• PJM Builds for the Future, EnergyBiz, March/April 2008

• Achieving a Unified Energy Policy - RTO's Lead the Way, EnergyBiz, Sep/Oct 2007
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