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Electricity: The Value of Regional Transmission Organizations

By Matthew Rose, Enerdynamics Instructor

Decisions made by regulators more than a decade ago formalized a shift to organized wholesale transmission organizations for much of the United States. As electric deregulation advanced in various states in the 1990s, federal regulators saw a need to encourage an independent structure to facilitate the planning and operation of wholesale market operations. This included the need to ensure non-discriminatory access to the transmission system especially as operations crossed state boundaries and covered large regional areas. The reliance on Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) has provided a workable platform for much of the U.S.[1]

 

This move also has resulted in a wide-ranging set of new rules and markets as well as a shift in how revenues and payments are handled and distributed.  It is fair to say that this transition to RTOs has had its share of debates, issues, and even the occasional need for judicial oversight. This article examines the development of RTOs, discusses their value and benefits, and explores the issues and objections voiced by some stakeholders.

 

Current landscape of RTOs

To truly grasp the benefits and value provided by RTOs, it is important to first understand the current landscape of RTO-operated markets. Most notably, the reliance on RTOs has not been fully standardized across the country. Despite Federal Energy Regulatory Commission (FERC) encouragement (and even a failed move to a standard market design) there are large geographic areas of the country with no organized wholesale market operation. This includes not only some investor-owned utilities but also the public power and electric cooperative operations. Still, RTOs cover about two-thirds of the nation’s electricity customers.

 

 

 

 

The development of RTOs, however, continues to emerge over time. With the input of regulators and stakeholders, the rules and markets are constantly being refined and modified. For example, the design of markets to facilitate demand response opportunities was not envisioned at the outset of the transition to RTOs, but now this design is a vital piece of the value stream across all the RTOs.

 

There are also differences in the market design details across the RTOs. These differences reflect varied market composition, maturity of the RTO operations, capacity availability, and unique elements of the respective markets. For example, there are certain market programs such as encouraging energy efficiency as a resource in the forward capacity market that are currently offered by a couple of RTOs.

  

Membership within the various RTOs also is growing. For example, Entergy Utilities recently submitted an executed transmission owner’s agreement with the Midwest ISO. Entergy claims that joining the MISO will save the organization $1.4 billion in the first decade of membership.[2] East Kentucky Power Cooperative (and its 16 distribution utility owners) also announced it will join the PJM Interconnect pending FERC and Rural Utilities Services approvals.[3] These considerations all point to a working structure that offers its members value and benefit to continue ongoing growth and direction of the RTOs.

 

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.[4]  The Midwest ISO claims similar total annual economic benefits including an estimated $180-$200 million annually for its centralized dispatch of energy operations.[5] 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.[6]

 

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 [7]

 

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.[8] This effort was advanced by the United States Government Accountability Office.[9] 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.[10] 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. In this discussion the terms RTO and ISO are used interchangeably.

2. The Street, Entergy Utilities Proceed With Key Step towards MISO Integration, December 2012.

3. The Lane Report, East Kentucky Board Approves Integration Into Regional Transmission Organization, February 2013.

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

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

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

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

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

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

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

 

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