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RTOs Failed to Reduce Wholesale Power Costs

RTOs Failed to Reduce Wholesale Power Costs

Wholesale Electricity Prices Higher in RTO States

Contact: Ashley Creel
(202) 828-4405

September 20, 2008 – Regional transmission organizations have not produced lower wholesale prices for electricity and the states in these RTOs have higher average prices than regulated states, according to a study released today by the Technology Policy Institute, a Washington-based think tank.

RTOs were expected to create more competitive and efficient markets that would produce lower wholesale electricity prices. “So far, this has not happened,” said TPI President and Senior Fellow Thomas M. Lenard, a co-author of the report. “Wholesale prices in the RTO states are on average about four percent ($2-$3/MWh) higher than they would be without RTOs.” Given these results, the study cautioned, regulators in regions still served by traditional markets should adopt a go-slow approach before creating new RTOs.

According to the study, every RTO except ISO New England has failed to deliver lower wholesale prices. In fact, the data reveal that RTO membership comes with a price tag. “We estimate that the membership in the ERCOT (Texas), Midwest ISO, or PJM Interconnection RTO imposes a burden ranging between $1.55 and $11.41 per MWh in higher wholesale electricity prices,” the study said.

The report suggested that the pre-RTO efforts adopted to promote wholesale competition may have been sufficiently effective given that the marginal benefits from the implementation of RTOs were limited. “It is also possible that RTOs have not only failed to produce benefits, but have actually been counterproductive and made wholesale electricity markets less competitive” according to the study.

The TPI study, “Evaluating the Effects of Wholesale Electricity Restructuring,” was co-authored by Lenard and Stephen McGonegal, the president of Independent Analysis Inc. The study is available at https://techpolicyinstitute.org/.

Its conclusions are consistent with the results of earlier research critical of RTO pricing and management practices. Lenard noted, however, that additional research into RTOs and state restructuring efforts is needed. “We are still in the early stages of evaluating federal and state policies implemented over the last 15 years to promote competition in electricity markets. Much work remains but I hope research like the TPI study will prove valuable to energy policymakers at the national and state levels as they address the problems in organized markets,” Lenard said.

As part of an ongoing education effort, TPI is holding a one-day conference on Friday, September 26 that will examine the key energy issues facing the next Administration. The speakers include policy experts from both the Barack Obama and John McCain campaigns and experts on electricity restructuring, competition and RTOs.

RTOs are independent nonprofit entities that operate utility-owned transmission networks. RTOs have been adopted in the Northeast, the Mid-Atlantic, the Midwest, Texas and California. The Federal Energy Regulatory Commission has encouraged the formation of RTOs to administer the transmission grid on a regional basis throughout the United States.

RTOs were also expected to design and operate auction-based power markets, plan infrastructure expansion, and police the markets. In theory, the RTOs were to create competitive and efficient markets producing lower wholesale prices and cheaper power for residential, commercial and industrial consumers. “In practice, however, RTOs may not have had those positive effects,” the study stated.

The study also found “that the benefits of RTOs have not materialized even in the wholesale markets that have been in operation for the longest period of time.” Government efforts to correct defects in the structure and bidding procedures of wholesale markets “failed to mitigate the adverse impact of RTOs on wholesale electricity prices,” the report said. Fuel costs increased everywhere, but states in RTOs have “experienced higher-than-average rises in average prices” the last two years, the study said.

The Technology Policy Institute

The Technology Policy Institute is a research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.

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