The Value of Regional Transmission Organizations, Part II

By Matthew Rose, Enerdynamics Instructor

Last week we introduced this topic with Part I of this article and discussed the current landscape of the RTO and RTO development. This week we continue our examination of map and the shadow of Electric PlugRTOs with a discussion on the value and perceived benefits of RTOs as well as the issues and objections voiced by some stakeholders.

RTO benefits
There is no shortage of industry discussion regarding the qualitative benefits of a regional transmission organization. Many of the ongoing regulatory proceedings and rulings generally include discussion of the rationale and benefits for RTO-based organizations to handle the wholesale bulk power market. A listing of some of the key benefits follows:

What RTOs Do Implications
Provide independent transmission system access Equal and non-discriminatory transmission system access using transparent and open access transmission tariffs (OATT)
Perform efficient market operations Operate energy, capacity, and ancillary service markets using low-cost unit commitment, dispatch, and congestion management
Facilitate larger, competitive, and “liquid” markets   RTO rules encourage greater market participation, greater liquidity, and pricing options for participants
Coordinate regional planning Integrated system planning with regional expansion needs and plans; includes recent ruling FERC 1000
Deliver improved reliability Ensure reliability through efficient resource sharing and formalizing rules for handling “seams” issues
Ensure market competitiveness  Employ a “market monitor” to assess market competitiveness and ensure no market power or members with undue influence
Foster alternative resource options Facilitate markets for demand response and integrate renewable resources in the resource mix
Integrate risk management tools Provide hedging products including financial transmission rights to mitigate congestion risks

In addition to the above qualitative benefits, there have been recent efforts to quantify the extent of RTO benefits. In this process, the various RTOs have identified a series of value drivers and developed estimates of the economic value each provides to the RTO.

For example, the PJM Interconnect claims that its services provide regional savings benefits of more than $2 billion annually including savings from energy production cost from $340-$445 million annually.[1]  The Midwest ISO claims similar total annual economic benefits including an estimated $180-$200 million annually for its centralized dispatch of energy operations.[2] The Southwest Power Pool estimates that its move to a Day 2 market (locational marginal price as well as day-ahead and real-time spot markets) may result in annual net benefits of $100 million.[3]

As a point of detail, a more comprehensive forecast of benefits by value driver for the Midwest ISO is shown below:

Midwest ISO Value Proposition [4]  
Value Driver Estimated Annual Economic Benefit (in $ millions)
Reliability $180-$270
Dispatch of Energy $180-$200
Regulation/Spinning Reserve $130-$150
Wind Integration $240-$285
Compliance $60-$95
Footprint Diversity $760-$950
Generator Availability $455-$570
Demand Response $110-$145
MISO Cost Structure -($225)
Total Net Benefits  $1,890-$2,440
Note: economic benefits are rounded up based on MISO values

To the extent that these economic benefits are real it requires greater attention to the detail behind the valuation. For example, what methodology was used to arrive at the comparative costs to determine savings?  With this in mind, the FERC completed a Report to Congress aimed at examining the formal benefits of RTOs through a series of standardized metrics.[5] This effort was advanced by the United States Government Accountability Office.[6] The RTO metrics were designed to measure performance on three dimensions:

  • market benefits
  • organizational effectiveness
  • reliability

A comprehensive review of these metrics is outside the scope of this discussion (but will likely be addressed in a future Energy Insider issue). What is important is the recognition that the FERC Report identified 57 different metrics that it believes should be evaluated on an ongoing basis. This amplifies the recognition that determination of RTO benefits is wide ranging and includes numerous factors.

RTO objections
In discussing the economic benefits of RTOs, it is only fair to talk about the range of stakeholders who continue to voice objections to the RTO structure. The American Public Power Association (APPA) has maintained that RTO-run electricity markets fail to produce just and reasonable electric rates.[7] Some of their key objections include:

  • Offers to sell power are not directly connected to the sellers’ cost of production. The construct where the final bid establishes the price paid to all sellers needs to be analyzed as a means of ensuring lowest supply costs.
  • The current bidding structure and reliance on locational marginal pricing shows no evidence between locational price signals and the construction of new generation or transmission facilities.
  • Consumers are paying millions in additional charges required by RTO-run locational capacity markets, especially given the corresponding lack of market response to build new capacity in high-cost areas.
  • Limited options exist for long-term bilateral contracts due to the influence of high-price sellers and the growth of financial deals (versus physical transactions).

Moving forward, the APPA has suggested placing a FERC moratorium on the establishment of new RTO markets and encourages a formal cost effectiveness investigation into the impacts of RTO-run organizations.  (A review of the accompanying references used in this discussion includes numerous examples of objections to the current RTO structure.)

Conclusion
In the end, it is clear that most stakeholders see the benefits of moving to a RTO-based transmission organization. The efforts, resources, and dollars invested in the current RTO system make it difficult to consider reverting to another framework without significant policy backtracking. Still, there are areas where further efficiencies and market design considerations should and may be pursued. The goal now is to to build upon the efficiencies and grid access in RTO-based regions while widening the participation in devising methods to more accurately measure value and benefits.


References

1. PJM, PJM Efficiencies Offer Regional Savings ( taken from PJM website- PJM Value Proposition)

2. MISO, 2011 Value Proposition, January 2012 (presentation on MISO website)

3. SPP press release, SPP Files Tariff Revisions for Integrated Marketplace,  February 2012.

4. MISO, 2011 Value Proposition, January 2012 (presentation on MISO website)

5. FERC, Performance Metrics for Independent System Operators and Regional Transmission Organizations, April 2011.

6. Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations Benefits and Performance. GAO-08-987, September 2008.

7. Caplan and Brobeck, Have Restructured Wholesale Electricity Markets Benefitted Consumers, Electricity Policy.com, December 2012.

About Enerdynamics

Enerdynamics was formed in 1995 to meet the growing demand for timely, dynamic and effective business training in the gas and electric industries. Our comprehensive education programs are focused on teaching you and your employees the business of energy. And because we have a firm grasp of what's happening in our industry on both a national and international scale, we can help you make sense of a world that often makes no sense at all.
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