Measuring the Benefits and Costs of Regional Electric Grid Integration

I. INTRODUCTION Electric industry restructuring in its modern form has been underway for over a decade in the United States. The major new institutional arrangement under United States restructuring is the formation of the Independent System Operator (ISO) or the Regional Transmission Operator (RTO). The RTO is an independent not-for-profit organization (independent in the sense that it owns no assets and does not take a position in the wholesale power market) that manages the joint transmission assets of a number of transmission-owning electric utilities. In many places, RTOs also run centralized regional spot markets for electric energy, ancillary services, and offer financial contracts for hedging congestion risk.1 Other than the move from a market based on physical transmission rights to one based on financial transmission rights, one major difference between RTO markets and their predecessors is the aggregation of generation resources for economic dispatch. Prior to the introduction of RTO markets, generation resources were either dispatched centrally at the level of the individual utility or power pool. With the introduction of RTO markets, the generation resources over a number of utility control areas are cost-optimized and dispatched jointly.2 It is striking that, even after ten years of experience, neither industry nor academia has produced a definitive study of the costs and benefits of RTO markets and regional grid integration. Broadly speaking, analyses by RTOs and industry consultants trumpet benefits to consumers in the billions of dollars, while academics have generally come to the opposite conclusion.3 Part of the controversy stems from the fact that certain studies claim large benefits from regional grid integration based on one set of factors (or performance metrics) while others claim large costs from a different set of factors. This paper does not attempt to provide the definitive study, but rather seeks to lay out a reasonably complete set of factors or performance metrics that ought to be considered in any serious analysis of the costs and benefits of RTO markets or operations. In this sense, the paper hopes to right the path of the debate over electricity restructuring by providing a foundation for future cost-benefit studies and discussions. Restructuring's major failures should be blamed not on opportunistic behavior by any party or group of parties, but rather on the failure of regulators, policymakers, and market designers to develop precise policy goals and complete performance metrics (and also the failure to verify that a given market design would meet the policy goals). The focus of this paper is limited to the shift towards regional grid integration through RTO markets and operations. It does not discuss other institutional changes associated with restructuring, such as the movement away from cost-based rates or the possibility of increased industry consolidation through (for example) the repeal of the Public Utility Holding Company Act. Regional integration and the RTO market structures have had benefits, largely in the form of increasing the operating efficiency of base-load plants in the Eastern Interconnection (fueled largely by coal and nuclear fission). Whether the increased market liquidity and operating efficiency has brought benefits to ultimate consumers is a controversial subject that has just started to get the attention of academics in the past couple of years. Section 2 provides some background on the process of electric industry restructuring and the introduction of regional transmission coordination and power markets. Section 3 provides a conceptual discussion of the loss of utility-level dispatch as a policy tool and draws some parallels with the economic theory of currency union. Section 4 discusses how the costs and benefits of regional electric grid integration have been measured and evaluated in the existing literature. The focus of Section 4 is on the effects of regional integration on generator operating efficiency, wholesale market efficiency, and retail price effects seen by end-use customers. …