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pdfUnited States Government Accountability Office
GAO
Report to the Committee on Homeland
Security and Governmental Affairs,
U.S. Senate
September 2008
ELECTRICITY
RESTRUCTURING
FERC Could Take
Additional Steps to
Analyze Regional
Transmission
Organizations’
Benefits and
Performance
GAO-08-987
September 2008
ELECTRICITY RESTRUCTURING
Accountability Integrity Reliability
Highlights
Highlights of GAO-08-987, a report to the
Committee on Homeland Security and
Governmental Affairs, U.S. Senate
FERC Could Take Additional Steps to Analyze
Regional Transmission Organizations' Benefits and
Performance
Why GAO Did This Study
What GAO Found
In 1999, as a part of federal efforts
to restructure the electricity
industry, the Federal Energy
Regulatory Commission (FERC)
began encouraging the voluntary
formation of Regional
Transmission Organizations
(RTO)—independent entities to
manage regional networks of
electric transmission lines. FERC
oversees six RTOs that cover part
or all of 35 states and D.C. and
serve over half of U.S. electricity
demand. As electricity prices
increase, stakeholders—
organizations and individuals with
financial and regulatory interest in
the electricity industry—have
voiced concerns about RTO
benefits and how RTO expenses
and decisions influence electricity
prices.
RTO expenses and investments in property, plant, and equipment vary,
depending on the size of the RTO and its functions. Expenses for the six
RTOs FERC oversees totaled $4.8 billion from 2002 to 2006, and property,
plant, and equipment investments totaled $1.6 billion as of December 2006.
GAO was asked to review (1) RTO
expenses and key investments in
property, plant, and equipment
from 2002 to 2006, the most current
data available; (2) how RTOs and
FERC review RTO expenses and
decisions that may affect electricity
prices; and (3) the extent to which
there is consensus about RTO
benefits. To do so, GAO reviewed
documentation and data and spoke
with FERC officials and experts.
RTOs and FERC rely on stakeholder participation to identify and resolve
concerns about RTO expenses and decisions that affect electricity prices,
such as decisions about reliability and whether to develop markets for
electricity and other services. The stakeholders GAO spoke with in two RTO
regions value the opportunity for input but have concerns about the resources
and information required to participate. Moreover, although regular review of
RTO budgets could help FERC with its responsibility to ensure RTO rates
remain just and reasonable or determine if a new rate proceeding is needed,
FERC’s review of RTO budgets varies. Furthermore, while FERC requires
RTOs to report actual expenses annually, it does not regularly review this
information for accuracy or reasonableness and is at risk of using and
providing to the public inaccurate and incomplete information.
FERC officials, industry participants, and experts lack consensus on whether
RTOs have brought benefits to their regions. Many agree that RTOs have
improved the management of the transmission grid and improved generator
access to it; however, there is no consensus about whether RTO markets
provide benefits to consumers or how they have influenced consumer
electricity prices. FERC officials believe RTOs have resulted in benefits;
however, FERC has not conducted an empirical analysis of RTO performance
or developed a comprehensive set of publicly available, standardized
measures to evaluate such performance. 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 the creation of RTOs and help address divisions
about which benefits RTOs have provided.
U.S. Regional Transmission Organizations
What GAO Recommends
GAO recommends that FERC
develop an approach for regularly
reviewing RTO budgets and annual
financial reports, and develop and
report on standardized measures
that track RTOs’ performance.
FERC generally agreed with our
report and recommendations.
To view the full product, including the scope
and methodology, click on GAO-08-987.
For more information, contact Mark Gaffigan,
(202) 512-3841, [email protected].
WA
ND
MT
SD
ID
OR
NE
UT
CA
California
ISO
AZ
MN
ME
WI
MI
WY
NV
NY VT
Midwest
ISO
IA
New York
ISO
PA
NH
ISO
New England
MA
IL IN OH
CT RI
NJ
WV
VA
KY
Southwest MO
DE
Power Pool
MD
TN
NC
OK AR
SC
NM
PJM
MS AL GA
Interconnection
LA
Electric Reliability
Council of Texas
FL
TX
CO
KS
Sources: FERC (data); map (Platts POWERmap, December 2007).
Note: FERC regulates California ISO, ISO New England, Midwest ISO, New York ISO, PJM, and
Southwest Power Pool but does not regulate the Electric Reliability Council of Texas.
United States Government Accountability Office
Contents
Letter
1
Results in Brief
Background
RTO Expenses and Investments in Property, Plant, and Equipment
Varied Considerably
RTOs and FERC Rely on Stakeholder Input when Evaluating RTO
Expenses and Decisions That May Affect Electricity Prices
Experts, Industry Participants, and FERC Lack Consensus on the
Benefits of RTOs
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation
5
8
18
27
43
58
59
59
Appendix I
Objectives, Scope, and Methodology
63
Appendix II
RTO Characteristics and Functions Required by
FERC Order 2000
67
RTO Inflation-Adjusted Expenses and Full-time
Equivalents from 2002 to 2006, by RTO
68
Megawatt hour Load Served by RTO from 2002
through 2006
71
Inflation-Adjusted RTO 2006 Expenses Reported on
FERC Form No. 1
73
Investment in Property, Plant, and Equipment for
RTOs as of December 31, 2006
75
Appendix III
Appendix IV
Appendix V
Appendix VI
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GAO-08-987 Electricity Restructuring
Appendix VII
Indexed Electricity Prices, 1990-2007
77
Appendix VIII
Summary of Expert Studies Analyzing the
Benefits of Restructuring and Regional Transmission
Organizations
79
Appendix IX
Comments from FERC
86
Appendix X
GAO Contact and Staff Acknowledgments
90
Table 1: Selected RTO Responsibilities
Table 2: Inflation-Adjusted Rates per MWh Charged to RTO Market
Participants, 2002–2006
Table 3: RTO Processes for Acquiring Stakeholder Input
Table 4: Estimated Stakeholder Meetings by RTO, Calendar Year
2007
Table 5: Last FERC Decision to Approve Rates to Recover
Expenses
Table 6: RTO Budget Submissions to FERC
13
Tables
21
29
34
37
38
Figures
Figure 1: U.S. Regional Transmission Organizations
Figure 2: Components of a Typical Consumer’s Electricity Costs in
New England
Figure 3: Total Inflation-Adjusted RTO Expenses, 2002 to 2006
Figure 4: Inflation-Adjusted Expenses per MWh by RTO, 2006
Figure 5: Inflation-Adjusted Expenses per MWh by RTO, 2002-2006
Figure 6: Inflation-Adjusted Expenses per MWh by RTO as
Reported in the 2006 FERC Form No. 1
Figure 7: Inflation-Adjusted Investment in Property, Plant, and
Equipment as of December 2006
Figure 8: Midwest ISO’s Committee Structure
Page ii
12
16
19
20
22
25
27
32
GAO-08-987 Electricity Restructuring
Figure 9: Retail Electricity Prices by State, 2007
Figure 10: Change in Inflation-Adjusted Retail Electricity Prices for
Industrial Consumers, 1990-2006
Figure 11: Inflation-Adjusted Prices of Coal and Natural Gas Used
to Generate Electricity, 1996-2006
Figure 12: Change in Nuclear Plant Capacity Factors, 1996-2006
Figure 13: Comparison of Relative Electricity Prices for Industrial
Customers, 1990-2007
47
49
50
52
78
Abbreviations:
Btu
FERC
FTE
ISO
KWh
MWh
OASIS
RTO
British thermal unit
Federal Energy Regulatory Commission
full-time equivalent
Independent System Operator
kilowatt hour
megawatt hour
Open Access Same Time Information System
Regional Transmission Organization
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Page iii
GAO-08-987 Electricity Restructuring
United States Government Accountability Office
Washington, DC 20548
September 22, 2008
The Honorable Joseph I. Lieberman
Chairman
The Honorable Susan M. Collins
Ranking Member
Committee on Homeland Security and
Governmental Affairs
United States Senate
The efficient and reliable operation of the electricity industry is critical to
the health of the U.S. economy and well-being of Americans. Residential
consumers rely on electricity to power their households, and electricity is
a key input for businesses that produce trillions of dollars in products and
services. Consumer expenditures for electricity amounted to $343 billion
in 2007, the most recent year for which annual data were available. After
declining in the late 1990s, retail electricity prices rose to an average of
nearly 9 cents per kilowatt hour (KWh) in 2006, an almost 9 percent
increase from 2005 and the largest annual increase since 1982. Prices
surpassed 9 cents per KWh in 2007, and a number of experts anticipate
continued price increases in coming years. These rising prices have
spurred some to question whether federal policies to introduce
competition into electricity markets and new entities to facilitate that
change—referred to in this report as wholesale restructuring—have
brought improvements or whether they themselves are responsible for
rising prices.
For many years, the electricity industry has consisted of regional
monopolies that were regulated by states—generally through state utility
commissions—and the federal government—through the Federal Energy
Regulatory Commission (FERC).1 During the 1990s, efforts were made to
transform the electricity industry from one characterized by monopoly
utilities that provided local consumers with electricity at regulated rates to
one in which companies compete to sell electricity to customers at prices
1
FERC oversees wholesale electricity sales and interstate transmission of electricity by
privately owned utilities, among other things.
Page 1
GAO-08-987 Electricity Restructuring
that are determined under more competitive conditions.2 This
restructuring took place in response to statutory and regulatory changes at
the federal level and in many states. The overall goal of this broad
restructuring was to increase competition in wholesale markets—where
power is bought and sold by utilities and other resellers—and retail
markets—where power is sold to the ultimate consumer—with the goal of
giving electricity consumers benefits such as lower prices and access to a
wider array of retail services. Many stakeholders—organizations and
individuals with financial and regulatory interest in the electricity industry,
including consumer advocacy groups, owners of generation and
transmission resources, and others—are interested in whether
restructuring has achieved its goals, and how it may have affected prices
that consumers pay.
In 1999, as a part of the wholesale restructuring effort, FERC began
encouraging the voluntary formation of Regional Transmission
Organizations (RTO)—independent entities to manage regional networks
of electric transmission lines, called the grid, and give market participants,
such as owners of power plants and other sellers of electricity,
nondiscriminatory access to these lines.3 To form an RTO, owners of
transmission lines voluntarily agree to turn over operational authority––
but not ownership––of their lines to the RTO. FERC encouraged the
formation of RTOs to, among other things, improve the pricing of
transmission service and ease the entry of new generators, thus promoting
efficiency in wholesale electricity markets and ensuring consumers pay
the lowest possible price for reliable service. As part of its evaluation of
whether to create RTOs, FERC estimated that RTOs could provide
significant benefits such as enhanced electric reliability, improved
2
Consumers often pay a combination of electricity rates and prices. Rates are generally
approved by regulators and set to recover the cost of providing a service plus a rate of
return. Transmission and distribution expenses, for example, remain regulated and are
recovered through rates charged to customers. In contrast, prices for generation are
market-based—determined based on the interaction of supply and demand. More
specifically, after wholesale restructuring, prices for many sales of wholesale electricity
began being determined in organized markets. These prices are passed on to final
consumers, unless the state regulatory commission in a nonretail choice state finds a
wholesale purchase imprudent. (Wholesale sales also occur bilaterally, and some utilities
generate their own power to sell at retail.)
3
In 1996, prior to its RTO policy, FERC called for the creation of Independent System
Operators (ISO). ISO and RTO characteristics are similar, and in many cases, FERC uses
the terms interchangeably. However, RTOs are intended to cover a large region and, in
practice, tend to be multistate. In this report, we will use the term “RTO” to refer to both
RTOs and ISOs.
Page 2
GAO-08-987 Electricity Restructuring
efficiencies in the management of electricity transmission, and lower
electricity prices for consumers, among others. FERC estimated the
benefits of RTOs to be at least $2.4 billion annually, due to cost savings
from the improved operational efficiency of generators, easier access to
transmission service, and other factors.
To date, seven RTOs have developed across the United States, covering
part or all of 35 states and the District of Columbia and serving over half of
U.S. demand.4 These RTOs vary in the amount of electricity transmission
they manage and the size of territory they serve. Their functions generally
include administering electricity transmission, managing and monitoring
the competitiveness of wholesale markets for electricity and other
services, and planning for long-term reliability.
In parts of the United States with RTOs, wholesale electricity prices are
related to decisions RTOs make about system reliability, transmission
planning and how to design markets that establish prices for electricity and
other services, as well as the operational and investment expenses of RTOs
that are recovered through FERC-approved rates. The prices consumers
ultimately pay for electricity are affected by the wholesale price, as well as a
number of decisions made by regulators about transmission and distribution,
among other things, and by the price of fuel used to generate electricity.
FERC has statutory responsibility to ensure that prices in wholesale
electricity markets—including those administered by RTOs—are “just and
reasonable” and not “unduly discriminatory or preferential.”5 To do so, it
reviews and approves RTO market rules and monitors the competitiveness of
RTO markets. FERC is also responsible for ensuring the rates RTOs charge
customers to recover expenses—capital expenses, such as software needed
to administer electricity markets, and operational expenses, such as salaries
and benefits—are just and reasonable. To do so, FERC conducts formal rate
proceedings in which it considers information about proposed RTO expenses
and comments from interested parties, though the proceedings may not occur
annually. In certain circumstances, it may also consider other sources of
4
FERC has approved four RTOs: ISO New England, Midwest ISO, PJM Interconnection (in
the Mid-Atlantic and parts of the Midwestern United States), and Southwest Power Pool. It
has approved two Independent System Operators: California ISO and New York ISO,
which, as noted previously, will be referred to as RTOs in this report. The Electric
Reliability Council of Texas, an Independent System Operator, is primarily regulated by the
Public Utility Commission of Texas.
5
This authority is granted under Section 205 and 206 of the Federal Power Act, 16 U.S.C. §§
824d-824e.
Page 3
GAO-08-987 Electricity Restructuring
information on RTO expenses, including budgets RTOs develop annually that
contain information on proposed expenses and an annual financial report—
the FERC Form No. 1—that contains information on actual RTO expenses. If
necessary, such as when facts are in dispute, FERC may hold a trial-type
evidentiary hearing before an administrative law judge before determining the
rates for an RTO. Stakeholders also play a role in reviewing RTO expenses
and decisions that affect electricity prices by providing comments to the
RTOs and FERC.
A number of industry participants have voiced concerns about how RTO
expenses and decisions influence electricity prices and whether RTO costs
outweigh their benefits. Generally speaking, RTO expenses are small
compared to wholesale electricity prices. For example, ISO New England’s
non-inflation-adjusted expenses were 87 cents per megawatt hour (MWh) in
2006; its average wholesale electricity price was $62.74 per MWh that same
year. Because of the potential for RTO markets to influence wholesale, and
ultimately consumer, prices, some of consumers’ most significant concerns
relate to RTO decisions about developing and operating markets for
electricity and other services. Experts from industry and the academic
community have begun to evaluate these issues, as well as the broader effects
of restructuring. In this context, this report provides information about the
steps FERC officials and other experts have taken to analyze RTO expenses
and benefits. Specifically, this report provides information on (1) RTO
expenses from 2002 to 2006 and key investments in property, plant, and
equipment; (2) how RTOs and FERC review RTO expenses and decisions that
may affect electricity prices; and (3) the extent to which there is consensus
about whether RTOs have provided benefits to consumers.
To determine the total expenses incurred by RTOs from 2002 to 2006, the
most current year for which data were available when we began our review,
and their key investments in property, plant, and equipment, we reviewed
independent public auditor reports over this period, as well as information
the RTOs reported on their full-time-equivalent personnel and transmission
volume.6 We also reviewed 2006 financial information the RTOs submitted to
FERC. We adjusted all expense amounts for inflation with 2007 as the base
year. We focused on six RTOs during our study: California ISO, ISO New
England, Midwest ISO, New York ISO, PJM Interconnection (PJM), and
Southwest Power Pool. We did not consider the seventh, the Electric
6
RTO financial statements and independent auditors’ reports are filed on a calendar year
basis, which does not correspond with the federal fiscal year.
Page 4
GAO-08-987 Electricity Restructuring
Reliability Council of Texas, because it is primarily regulated by the Public
Utility Commission of Texas, rather than FERC. To determine how FERC and
RTOs review RTO expenses and decisions, we collected broad information
from these six RTOs about their analysis of expenses and their decisionmaking processes. We also conducted site visits and collected more in-depth
information for two RTOs—ISO New England and the Midwest ISO. In
addition, we spoke with FERC officials and reviewed related documentation
that outlined FERC’s steps to review RTO expenses for reasonableness. While
we generally considered FERC’s oversight of RTO decisions, we did not
perform an in-depth analysis of FERC’s review of specific RTO decisions that
may affect electricity prices. Finally, to understand the extent to which there
is consensus about whether RTOs have provided benefits to consumers, we
interviewed FERC officials and reviewed related documentation, including
FERC’s initial assessment of RTO expected benefits and academic and
industry studies. We also interviewed several experts in the field of electricity
restructuring to discuss their opinions on the benefits and costs of RTOs and
their assessments of the adequacy of FERC’s analysis of RTOs to date. We
conducted this performance audit from October 2007 to September 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based
on our audit objectives. A more complete discussion of our scope and
methodology is provided in appendix I of this report.
Results in Brief
RTO expenses and investments in property, plant, and equipment vary
considerably depending on the size of the RTO and functions it carries out.
Inflation-adjusted expenses for the six RTOs overseen by FERC totaled
$4.8 billion from 2002 to 2006—ranging from $227 million for Southwest
Power Pool, a smaller RTO in terms of 2006 transmission volume and the
number of functions it performs, to $1.4 billion for PJM, an RTO with many
diverse functions and the largest transmission volume in 2006. Despite
having the highest expenses, PJM had the second lowest inflation-adjusted
expense per MWh, because RTOs with greater electricity transmission
volume can spread their expenses over this volume, thus lowering the
amount of RTO-related expenses per MWh. These per MWh inflationadjusted expenses have varied for the RTOs from 2002 to 2006, with
inflation-adjusted expenses for three RTOs rising and three declining.
RTOs’ Form No. 1 filings to FERC in 2006 provide better visibility of
transmission and market expenses than in previous years, because FERC
revised the Form No. 1 that year to require reporting of additional
Page 5
GAO-08-987 Electricity Restructuring
information on these categories of expenses. In 2006, about 17 percent of
all RTO inflation-adjusted expenses were for transmission services, 13
percent were for market expenses, 39 percent were for administrative and
general expenses, and 31 percent consisted of other expenses. In addition
to expenses incurred from 2002 to 2006, the six RTOs also made
investments in property, plant, and equipment. These investments, when
adjusted for inflation, totaled $1.6 billion as of December 2006 and
consisted primarily of software and equipment used to monitor the flow of
electricity along transmission lines and administer RTO markets.
RTOs and FERC rely heavily on the participation and views of
stakeholders when evaluating RTO expenses and decisions that may affect
electricity prices. Specifically, RTOs seek stakeholder input when making
decisions that may affect prices, such as developing markets for
electricity, and evaluating proposed RTO expenses. RTOs have facilitated
the formation of stakeholder committees and working groups to discuss
these issues and advise the RTOs’ boards of directors, which makes the
final decisions. The stakeholders we spoke with in two RTO regions
valued this opportunity for input, but found that attending stakeholder
meetings was resource intensive. For example, one RTO told us over 600
meetings were open to stakeholders in 2007, and some stakeholders noted
that participating in so many meetings could require substantial
stakeholder staff and other resources. In addition, stakeholders
representing consumers expressed concern that the RTOs did not place
adequate emphasis on how decisions may affect consumer prices. For
example, some stakeholders expressed concern that RTOs base some of
their decisions on overly conservative assumptions about reliability that
may raise consumer prices, such as paying noncompetitive generators that
these stakeholders did not believe were needed for reliability to remain
available for electricity production. Moreover, one stakeholder was
concerned that the costs of operating these generators, which may benefit
only certain local areas, were unfairly borne by consumers outside those
local areas. FERC’s reviews of proposed expenses occur when it considers
whether the rates RTOs charge are just and reasonable, but the frequency
of this review varies. Furthermore, although RTO budgets offer one tool
FERC could use to consider whether rates remain just and reasonable
between rate proceedings, the extent to which FERC reviews proposed
expense information in RTO budgets varies. Some consumer groups have
expressed concern over FERC’s lack of more frequent, independent
analysis of budgets, and without more regular review of this information,
FERC may be missing an opportunity to improve its oversight of RTO
rates. Furthermore, while FERC requires RTOs to report their actual
expenses annually using the FERC Form No. 1, it does not regularly
Page 6
GAO-08-987 Electricity Restructuring
review this actual expense information for accuracy or reasonableness.
This increases the risk that FERC may inappropriately use and provide to
the public inaccurate and incomplete RTO financial data, limiting the
effectiveness of the Form No. 1 as a tool for determining whether RTO
rates are just and reasonable. In fact, in reviewing the 2006 Form No. 1s,
we noted a reporting error that overstated certain expenses reported by
one RTO by millions of dollars that remained on FERC’s Web site for more
than a year. After being informed of this error, FERC initiated an audit of
whether one RTO’s expenses were reported accurately on its Form No. 1.
Similar to the RTOs, FERC also emphasizes the stakeholder process when
reviewing RTO expenses and decisions that have the potential to affect
consumer electricity prices. FERC officials explained that RTO decisions
undergo much scrutiny during the RTO stakeholder process and
acknowledged that this process is integral to FERC’s process for
identifying imprudent and unreasonable expenses and its approval of
other RTO decisions. While the stakeholder process is likely a useful tool
that FERC can use in making such decisions, more scrutiny of RTO
budgets and the Form No. 1s could also have a role in supplementing
FERC’s current oversight of RTO expenses and rates.
FERC officials, industry participants, and experts lack consensus on
whether RTOs have brought benefits to their regions that outweigh their
costs. Many agree that by integrating multiple transmission systems into
larger service areas, RTOs provide opportunities for certain benefits, such
as more efficient management of the transmission grid and improved
generator access to electricity markets, but some believe that these
benefits could have been achieved without RTOs. Many experts and
industry participants agree that RTOs are better positioned to more
frequently use the least costly and most efficient power plants, although
they do not agree about whether this has translated into prices for
consumers that are lower than they otherwise would have been. Experts
and industry participants are divided about whether the markets
developed and administered by RTOs provide benefits to consumers and
how they have influenced consumer electricity prices. Specifically,
advocates and critics of RTOs debate the extent to which RTO markets,
rising fuel prices, and other factors have contributed to rising costs of
electricity generation and generally higher prices in RTO regions.
Assessments developed by RTOs generally find that RTOs benefit their
regions. FERC officials also believe that RTOs have resulted in net benefits
to the economy, such as new efficiencies in operating the regional
transmission grid; however, FERC has not conducted an empirical analysis
of whether RTOs achieved the benefits expected of them or developed a
comprehensive set of publicly available, standardized measures to help
Page 7
GAO-08-987 Electricity Restructuring
evaluate such performance. GAO’s Standards for Internal Control identify
the value to organizations of comparing actual performance to planned or
expected results; however, according to FERC, neither an empirical
analysis nor performance measures are necessary parts of FERC oversight
of RTOs and both would be methodologically challenging to develop.7
Experts agreed that a onetime empirical analysis of RTO performance
would be difficult but added that tracking certain measures of RTO
success—for example, measures relating to transmission and generation
investment, plant efficiency, and reliability—could encourage better RTO
performance and potentially identify areas for improvement. Without such
measures, FERC will remain unable to demonstrate the extent to which
RTOs have provided consumers and others with benefits—information
that could aid FERC in its evaluation of the success of its decision to
encourage the creation of RTOs. Furthermore, information gleaned from
such measures could help FERC address the divisions among experts and
industry participants about the benefits of RTOs.
To improve its oversight of RTOs, we recommend that FERC (1) develop a
consistent approach for regularly reviewing RTO budgets and (2) routinely
review and assess the accuracy, completeness, and reasonableness of the
financial information RTOs report to FERC in their Form No. 1 filings. To
better understand the extent to which RTOs have provided consumers and
others with benefits, we are recommending that FERC work with RTOs,
stakeholders, and experts to develop standardized measures to track the
performance of RTO operations and markets and report the performance
results to Congress and the public. FERC reviewed a draft of this report
and generally agreed with our report and recommendations.
Background
The electricity industry includes four distinct functions: generation,
transmission, distribution, and system operations. Once electricity is
generated—whether by burning fossil fuels; through nuclear fission; or by
harnessing wind, solar, geothermal, or hydro energy—it is sent through
high-voltage, high-capacity transmission lines to areas where it will be
used. Once there, electricity is transformed to a lower voltage and sent
through local distribution wires for end use by industrial plants,
businesses, and residential customers. Because electric energy is
generated and consumed almost instantaneously, the operation of an
7
GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).
Page 8
GAO-08-987 Electricity Restructuring
electric power system requires that a system operator constantly balance
the generation and consumption of power.
Historically, the electric industry developed as a loosely connected
structure of individual monopoly utility companies, each building and
operating power plants and transmission and distribution lines to serve
the exclusive needs of all the consumers in its local area. Because these
companies were monopolies, they were overseen by regulators who
balanced different stakeholder interests in order to protect consumers
from unfair pricing and other undesirable behavior. Retail electricity
prices were regulated by the states, generally through state public utility
commissions. States retained regulatory authority over retail sales of
electricity, construction of transmission lines within their boundaries, and
intrastate distribution. Generally, states set retail rates based on the
utility’s cost of production plus a fair rate of return. States also approved
plans and spending for building new power plants to serve regulated
customers. In contrast, wholesale electricity pricing and interstate
transmission were regulated by the federal government, principally FERC.
Under law, FERC has the obligation to ensure that the rates it oversees are
“just and reasonable” and not “unduly discriminatory or preferential.”8 To
meet this responsibility, FERC approved rates for transmission and
wholesale sales of electricity in interstate commerce based on the utilities’
costs of production plus a fair rate of return on the utilities’ investment.
Since the early 1990s, the federal government has taken a series of steps to
restructure the wholesale electricity industry, generally focused on
increasing competition in wholesale markets. Federal restructuring efforts
have (1) changed how electricity prices are determined, replacing costbased regulated rates with market-based pricing in many wholesale
electricity markets, and (2) allowed new companies to enter electricity
markets.9 Some of these efforts have focused on allowing nontraditional
8
This authority is granted under Section 205 and 206 of the Federal Power Act, 16 U.S.C.
§§ 824d -824e.
9
With the advent of restructuring, companies began to request approval from FERC to
charge market-based prices. As a result, FERC departed from its historical policy of basing
rates upon the cost of providing service plus a fair return on invested capital. FERC initially
began considering proposals for market-based prices on a case-by-case basis. Over the
years, FERC began granting authority to charge market-based prices to companies that
could demonstrate these market-based prices were established in a competitive context.
See FERC Order 697, “Market-Based Rates for Wholesale Sales of Electric Energy, Capacity
and Ancillary Services by Public Utilities,” June 21, 2007.
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GAO-08-987 Electricity Restructuring
utilities to buy and sell electricity in wholesale markets, while others have
focused on allowing nontraditional utilities to build new power plants and
sell electricity to utilities and others.
To facilitate formation of these markets and these companies’ efforts to
buy and sell electricity, FERC initially required that transmission owners
under its jurisdiction, generally large utilities, allow all other entities to use
their transmission lines under the same prices, terms, and conditions as
those they apply to themselves. To do this, FERC required the regulated
monopoly utilities—which had historically owned the power plants,
transmission systems, and distribution lines—to separate their generation
and transmission functions, and encouraged these companies to form
independent entities, called Independent System Operators (ISO), to
manage the transmission network.10 In recognition that these initial efforts
were not sufficient, FERC issued Order 2000 in December 1999 to
encourage owners of transmission systems to develop more robust
organizations, called RTOs, to manage the transmission networks and
perform other functions that FERC believed were important. FERC
believed RTOs were needed to address impediments to competitive
wholesale markets: growing stresses on the transmission grid and
remaining discrimination in the provision of transmission service—
transmission owners operating their grids in a way that favored their own
interests over those of their competitors. FERC Order 2000 encouraged,
but did not mandate, that transmission owners join RTOs and allowed
companies engaged in purchase and sale of electricity in markets to
continue to own power plants, retail utilities, distribution lines,
transmission lines, and other assets regulated by FERC or the states.
FERC outlined minimum characteristics that RTOs were to have:
independence from control by any market participant, sufficient scope to
maintain reliability and support nondiscriminatory power markets,
operational authority for transmission facilities under their control, and
exclusive authority for maintaining the short-term reliability of the grid
they operate. Appendix II describes these characteristics in more detail. In
Order 2000, FERC opined that RTOs would achieve the following benefits:
10
These requirements were outlined in FERC’s Order 888—“Promoting Wholesale
Competition through Open Access Non-discriminatory Transmission Services by Public
Utilities”—issued April 1996.
Page 10
GAO-08-987 Electricity Restructuring
•
•
•
•
•
•
eliminate multiple charges incurred when crossing transmission
systems owned by different utilities,
improve management of electricity congestion––bottlenecks resulting
from insufficient transmission capacity to accommodate all requests to
transport power and maintain adequate safety margins for reliability,
provide more accurate estimates of transmission system capacity—the
amount of electric power the transmission system can manage,
increase efficiency in planning for transmission and generation
investments;
improve grid reliability, and
reduce opportunities for discriminatory transmission practices.11
FERC expected the formation of RTOs to result in significant cost
reductions, additional efficiencies, and better wholesale market
performance, ultimately lowering prices for electricity consumers.
Specifically, it estimated RTOs would bring at least $2.4 billion in annual
benefits to the industry. Because of their independence, FERC expected
RTOs to lead to lighter regulation by reducing the need for resolving
stakeholder disputes through the FERC complaint process and allowing
FERC to provide additional latitude to RTOs in their transmission pricing
proposals, among other things.
FERC’s efforts to encourage the formation of RTOs have been relatively
successful and RTOs now serve many parts of the country and extend into
Canada, as figure 1 shows. FERC oversees six RTOs: California ISO, ISO
New England, Midwest ISO, PJM, New York ISO, and Southwest Power
Pool.12 The Electric Reliability Council of Texas is primarily regulated by
the Public Utility Commission of Texas.
11
Other expected benefits included facilitating the development of environmentally
preferred generation, increased coordination among state regulatory agencies, reduced
transaction costs, and the facilitation of the success of state retail competition programs.
Furthermore, RTOs were expected to more effectively manage “parallel path flows,” a term
that refers to the fact that electricity flows over all possible transmission lines regardless of
who owns the lines and what transmission contracts were agreed to. According to FERC,
because of this engineering reality, many transmission owners found their grids overloaded
by the actions of others. Since they were unable to determine the responsible party, these
owners had to curtail their own use of their grids.
12
As noted in the introduction, throughout this report, we use the term “RTO” to refer to
RTOs and Independent System Operators—entities with similar, though not identical,
characteristics and purposes.
Page 11
GAO-08-987 Electricity Restructuring
Figure 1: U.S. Regional Transmission Organizations
Midwest ISO
WA
ND
MT
MN
ME
SD
ID
OR
VT
WI
NY
MI
WY
NH
New York
ISO
IA
ISO
New
England
MA
NE
PA
NV
UT
CO
IL
KS
CA
California
ISO
OK
NM
MO
RI
NJ
WV
Southwest
Power Pool
AZ
OH
IN
VA
KY
CT
DE
MD
TN
NC
AR
SC
LA
MS
AL
GA
PJM
Interconnection
Electric Reliability
Council of Texas
TX
FL
Sources: FERC (data); map (Platts POWERmap, December 2007).
Note: This graphic represents the seven U.S. RTOs. FERC regulates six of these RTOs—California
ISO, ISO New England, Midwest ISO, New York ISO, PJM, and Southwest Power Pool. It does not
regulate the seventh, the Electric Reliability Council of Texas.
Page 12
GAO-08-987 Electricity Restructuring
RTOs operate, but do not own, electricity transmission lines and are
responsible for ensuring nondiscriminatory access to these lines for all
market participants.13 As shown in table 1, the six RTOs under FERC’s
jurisdiction, in general, are responsible for managing transmission in their
regions—by implementing the rules and transmission pricing outlined in
their tariffs and performing reliability planning by considering factors such
as weather conditions and equipment outages that could affect electricity
supply and demand—as well as operating wholesale markets for
electricity and other services.
Table 1: Selected RTO Responsibilities
Category
California
ISO
ISO
New
England
Midwest
ISO
New
York
ISO
PJM
Southwest
Power
Pool
Administers the transmission
tariff and provides transmission
services. Receives and
processes transmission
service requests. Determines
available capacity.
Y
Y
Y
Y
Y
Y
Balancing
authority
Integrates resource plans
regionally and maintains in real
time the balance of electricity
resources and electricity
demand.
Y
Y
Na
Y
Y
N
Reliability
coordinator
Ensures the real-time
operating reliability of the
transmission system.
Y
Y
Y
Y
Y
Y
Planner
Works with stakeholders to
develop overall plans for new
transmission needed to meet
future projected electricity
demand.
Y
Y
Y
Y
Y
Y
Responsibility
Transmission Service provider
functions
Description
13
Order 2000 neither required nor prohibited RTO ownership of transmission lines. In
practice, however, the RTOs developed in the United States do not own transmission lines.
Page 13
GAO-08-987 Electricity Restructuring
Category
Responsibility
PJM
Southwest
Power
Pool
Wholesale
energy
market
functions
Real-time market Administers a market where
administrator
electricity is bought and sold at
prices determined in real-time
to satisfy the difference
between projected needs and
actual demand. Many of these
markets price electricity
differently at various locations
across the region in order to
reflect the costs associated
with congestion.
Y
Y
Y
Y
Y
Y
Day-ahead
market
administrator
Nb
Y
Y
Y
Y
N
Ancillary services Manages services necessary
market
to support the reliable
administrator
operation of the transmission
system and provision of
electricity at appropriate
frequency and voltage levels.
Y
Y
Na
Y
Y
N
Capacity market
administrator
N
Y
N
Y
Y
N
Description
Administers a forward market
where electricity is bought and
sold for use the following day
based on projected customer
needs.
Administers a system to
procure a sufficient portfolio of
supply and demand resources
to meet future electricity needs
and encourage investment.
California
ISO
ISO
New
England
Midwest
ISO
New
York
ISO
Legend: Y = yes; N = No.
Source: GAO analysis of FERC and RTO documentation.
a
These functions for the Midwest ISO are expected to become effective in December 2008, the
proposed start date of its ancillary services market.
b
California ISO’s day-ahead markets are expected to start in 2009.
Decisions an RTO makes when carrying out these responsibilities can
influence the wholesale price of electricity and ultimately the price
consumers pay. A number of other factors outside an RTO’s control, such
as regulator decisions about what transmission and distribution rates to
approve and whether to implement price caps, also influence the prices
consumers pay for electricity. Prices are also highly dependent on the cost
of fuel used to generate electricity.
Typically, consumer electricity prices are composed of three broad
components: (1) distribution, which, for four states GAO contacted,
accounts for about 15 to 30 percent of the final price of electricity; (2)
Page 14
GAO-08-987 Electricity Restructuring
transmission, which accounts for about 5 to 10 percent of the final price;
and (3) electricity generation or production, which accounts for about 55
to 65 percent of the final price.14 In RTO regions, distribution rates
continue to be set by state regulators, and transmission rates continue to
be set by state and federal regulators. FERC also approves RTO
procedures for planning transmission infrastructure, as well as the
recovery of transmission expenses. The electricity generation component
was previously set by regulators based on the cost of providing electricity
plus a rate of return. The price of this component is now determined in
RTO-administered markets—regulated by FERC to ensure they are
competitive—to the extent that entities choose to buy electricity in these
markets.15 Some RTOs also administer markets that determine the price of
other services needed to maintain reliability, such as capacity and
ancillary services, in lieu of charging a cost-based rate.16 The generation
portion of consumers’ bills may also include administratively determined
payments made to generators to maintain reliability—reliability payments,
as well as a FERC-approved rate to recover RTO expenses. The size of
these components varies from region to region. In New England, for
example, on average approximately 47 percent of a typical consumer’s bill
in 2006 was for electricity, capacity, and ancillary services, the prices of
which are determined through the markets this RTO administers. A very
small portion of a typical consumers’ bill, less than 1 percent, was from
ISO New England’s rate to recover operational and investment expenses.
Figure 2 provides more information.
14
These figures are based on recent estimates from four states: Connecticut, Indiana,
Illinois, and California. Because the source data are from different regions and because
utilities in these regions may pass through other charges, such as bond repayments, to
customers, estimates may not total 100 percent.
15
The amount of electricity procured in RTO markets varies across RTO regions. Electricity
may also be self-supplied by utilities that continue to own generators or procured through
bilateral contracts, agreements made directly between parties. According to figures
provided by five of the six RTOs, between 3 and 55 percent of energy transacted in RTO
regions is through RTO wholesale markets. Most of the remaining 45 to 97 percent is
transacted through bilateral contracts or is self-supplied.
16
Capacity represents the maximum amount of power that a given system can produce at a
particular moment. It reflects the ability to produce electricity when needed and is sold
separately from electric power. Ancillary services are necessary to support the reliable
operation of the transmission system and provision of electricity at appropriate frequency
and voltage levels.
Page 15
GAO-08-987 Electricity Restructuring
Figure 2: Components of a Typical Consumer’s Electricity Costs in New England
Distribution costsa
($68.90/MWh)
47%
Reflect the cost of building the distribution system, as well as
operating and maintaining it
Wholesale energy priceb
($66.32/MWh)
45%
Reflects a market-determined price for energy (electricity) that
includes an energy, congestion, and loss component
Out-of-market payments (reliability payments)b
($5.41/MWh)
4%
Reflect nonmarket payments to generators that the RTO
determines are needed for reliability
2%
Transmission costsc
($3.60/MWh)
Reflect the cost of building the transmission system, as well
as operating and maintaining it
1%
Capacity costsb
($1.44/MWh)
Reflect a market-determined price for procuring power
resources to satisfy the region’s future needs
<1%
Ancillary service costsb
($1.10/MWh)
Reflect the costs associated with providing services to
support the reliable operation of the electric grid
RTO expensesd
($0.82/MWh)
<1%
Reflect the administrative rate charged to ISO New England
market participants in 2006 to recover operating and
investment expenses
Source: GAO analysis of information provided by ISO New England.
a
Distribution costs were determined by ISO New England by surveying the Web sites of distribution
companies in New England.
b
The wholesale energy price, out-of-market payment, capacity, and ancillary service components
were calculated by ISO New England according to a FERC-defined methodology and can be found in
the 2006 Annual Markets Report.
Page 16
GAO-08-987 Electricity Restructuring
c
Transmission costs were provided by ISO New England and represent the total revenue requirement
of transmission-owning utilities in the New England region. This revenue requirement covers the
transmission owners’ costs of building the transmission system and operating and maintaining it. The
transmission cost estimate does not include any transmission costs associated with electricity
imported into the ISO New England region—those costs would be subsumed in the wholesale price of
electricity as reflected in the energy costs estimates.
d
RTO expenses were provided by ISO New England and reflect the rate charged to market
participants to recover operating and investment expenses in 2006.
Because RTOs charge for the use of transmission lines, for certain
wholesale sales of electricity, and to recover their own expenses, they are
subject to FERC oversight and regulation. In general, FERC regulates
RTOs as it does other utilities. FERC’s basic rate authority stems from
Sections 205 and 206 of the Federal Power Act of 1935 and is to ensure
that wholesale electricity rates are just and reasonable and not unduly
discriminatory or preferential. Under Section 205, FERC generally has the
authority to review and approve expenses and, if applicable, a reasonable
rate of return on investment used to serve customers. For RTOs, which are
nonprofit entities, rates are generally based on proposed annual expenses
and are periodically adjusted based on the actual expenses incurred by the
RTOs. RTOs must also seek FERC approval for decisions to implement
initiatives such as new markets and changes to existing markets and
market rules, among other things. Section 206 authority provides for FERC
review of rates already in effect. FERC may initiate Section 206
proceedings if it deems an investigation is needed or in response to a
complaint filed by an outside party.17 FERC has authority to determine if
these rates are just and reasonable, set new rates, and may, in some cases,
order refunds.
Under Section 205 or Section 206, RTOs or other parties, respectively, file
evidence with FERC to support their proposed rates or rate changes.
Others can file comments and present any contrary evidence under either
provision. FERC conducts hearings, which may include proceedings
before an administrative law judge, and makes final decisions. Parties may
file appeals, first with FERC and later in federal court.
17
16 U.S.C. § 824e.
Page 17
GAO-08-987 Electricity Restructuring
RTO Expenses and
Investments in
Property, Plant, and
Equipment Varied
Considerably
From 2002 to 2006, RTO expenses totaled $4.8 billion when adjusted for
inflation and varied considerably depending on the size of the RTO and
functions it carried out.18 In general, RTOs with greater electricity
transmission volume benefit from economies of scale by spreading their
expenses over more units of electricity volume, thereby reducing their
expenses per MWh. On a per MWh basis, RTO inflation-adjusted expenses
have varied from 2002 to 2006, with ISO New England, Midwest ISO, and
New York ISO expenses rising and California ISO, PJM, and Southwest
Power Pool expenses decreasing. The expenses per MWh we calculated
for PJM for 2002 and 2003 are significantly higher than the amounts it
billed its market participants, because we did not retroactively apply
financial statement reclassifications to data from prior years. Form No. 1
filings for 2006 made by the RTOs to FERC provide better visibility of
transmission and market expenses than prior years’ reports did. In 2006,
about 17 percent of all RTO expenses were for transmission services, 13
percent were for market expenses, 39 percent were for administrative and
general expenses, and 31 percent consisted of other expenses. RTOs also
made major investments in property, plant, and equipment—$1.6 billion
when adjusted for inflation as of December 2006.
RTO Expenses Totaled
$4.8 Billion from 2002 to
2006
From 2002 to 2006, total inflation-adjusted expenses reported in RTO
financial statements totaled $4.8 billion, ranging from $227 million for
Southwest Power Pool, a smaller RTO in terms of 2006 transmission
volume and the number of functions it performs, to $1.4 billion for PJM, an
RTO with many diverse functions and the largest 2006 transmission
volume. As shown in figure 3, the largest category of expenses for RTOs
over this time period was salaries and benefits, accounting for about $1.6
billion, or 33 percent of RTOs’ expenses from 2002 to 2006. According to
RTO officials, due to the highly technical and sophisticated nature of the
functions RTOs must carry out, RTOs require highly trained staff, such as
power system engineers, economists, and software engineers. In 2006, all
RTOs combined employed 2,737 full-time equivalents (FTE) with an
average salary and related benefits of approximately $134,000.19 Appendix
III shows the inflation-adjusted expenses, number of full-time equivalents,
and average salary and expenses per full-time equivalent for each RTO
18
Numbers in this section for expenses, expenses per MWh, rates and investments in
property, plant, and equipment are inflation adjusted and presented in 2007 dollars.
19
FTEs reflect staffing levels at the end of each year reported. As a result, average salary
and related benefits per FTE may not reflect RTO staffing changes throughout the year.
Page 18
GAO-08-987 Electricity Restructuring
from 2002 to 2006. Our analysis reflects total annual expenses as reported
in the RTOs’ audited financial statements. We did not retroactively apply
financial statement reclassifications to data from prior years. Because PJM
made retroactive reclassifications that affected its 2002 and 2003 financial
statements, in 2002 and 2003, the expenses we calculated for PJM are
significantly higher than the amounts it billed its market participants.
Figure 3: Total Inflation-Adjusted RTO Expenses, 2002 to 2006
Dollars in thousands
Salaries and related benefits
($1,565,644)
Interest expense
($189,883)
Regulatory dues and assessments
($292,820)
4%
6%
11%
Other
($505,991)
33%
13%
19%
Facility and maintenance
($631,142)
15%
Consulting, professional, and other
outside services
($704,946)
Depreciation and amortization
($902,592)
Source: GAO analysis of RTO independent auditor reports, 2002 to 2006.
Note: Dollar amounts represent total expenses from 2002 to 2006 and are adjusted for inflation and
presented in 2007 dollars. Percentages do not add to 100 due to rounding.
Larger RTOs Benefit from
Economies of Scale
In general, RTOs with greater electricity transmission volume benefit from
economies of scale––spreading their expenses over more units of
electricity volume, thus lowering the amount of RTO-related expenses per
MWh. For example, PJM had the highest total inflation-adjusted expenses
Page 19
GAO-08-987 Electricity Restructuring
among RTOs in 2006—$282 million—but had the second lowest expense
per MWh—$0.39 per MWh—because it transmitted a greater amount of
electricity than the other RTOs. In contrast, ISO New England had the
second lowest expenses in 2006—$118 million—but had the highest
expense per MWh—$0.89 per MWh—because it transmitted less
electricity. Figure 4 illustrates total RTO expenses in 2006 per unit of
electricity transmitted by major category. Appendix IV provides
transmission data and expense per MWh data by RTO from 2002 to 2006.
Figure 4: Inflation-Adjusted Expenses per MWh by RTO, 2006
Dollars of expenses per MWh
1.0
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
En IS
gla O
nd
Ne
w
kI
SO
Ne
wY
or
ia
ISO
rn
lifo
Ca
Mi
dw
e
st
IS
O
PJ
M
So
Po uthw
we es
rP t
oo
l
0
Other
Regulatory dues and assessments
Depreciation and amortization
Facility and maintenance
Consulting, professional, and other outside services
Interest expense
Salaries and related benefits
Source: GAO analysis of RTO independent auditor reports, 2006.
Note: Dollar amounts are inflation adjusted and presented in 2007 dollars.
Page 20
GAO-08-987 Electricity Restructuring
Our analysis reflects total annual expenses as reported in the RTOs’
annual audited financial statements, divided by the amount of
transmission volume within the RTO. These calculations may result in
MWh expenses that differ from what RTOs charge their market
participants. Furthermore, we did not retroactively apply financial
statement reclassifications to data from prior years. Because PJM made
retroactive reclassifications that affected its 2002 and 2003 financial
statements, in 2002 and 2003, the expenses per MWh we calculated for
PJM are significantly higher than the amount it billed its market
participants. For example, in 2002, PJM had expenses of $0.95 per MWh,
according to our analysis. According to data provided by PJM officials that
we adjusted for inflation, market participants were billed $0.51 per MWh,
after refunds and other billing adjustments were taken into account.
Similarly, in 2003, PJM had expenses of $0.85 per MWh according to our
analysis, but market participants were billed $0.57 per MWh when
adjusted for inflation. In addition, RTOs utilize differing billing
methodologies. As a result, the rates they charge to market participants
may be different than the total expenses per MWh calculated in our
analysis. Table 2 shows actual electricity rates per MWh charged to RTO
market participants, adjusted for inflation, from 2002 to 2006.
Table 2: Inflation-Adjusted Rates per MWh Charged to RTO Market Participants, 2002–2006
2002
2003
2004
2005
2006
California ISO
$1.15
$1.17
$1.06
$0.95
$0.79
ISO New England
$0.55
$0.94
$1.01
$0.89
$0.84
Midwest ISO
$0.23
$0.18
$0.25
$0.39
$0.39
New York ISO
$0.77
$0.82
$0.84
$0.84
$0.82
PJM
$0.51
$0.57
$0.49
$0.38
$0.39
Southwest Power Pool
$0.23
$0.21
$0.16
$0.17
$0.16
Sources: Rates provided by California ISO, ISO New England, Midwest ISO, New York ISO, PJM, and Southwest Power Pool.
Note: We adjusted these expenses for inflation and present them in 2007 dollars.
Page 21
GAO-08-987 Electricity Restructuring
Individual RTO Expenses
Have Varied over Time
When looked at annually, inflation-adjusted RTO expenses from 2002 to 2006
have varied, reflecting new initiatives implemented by the RTOs and other
changes made by management. Figure 5 illustrates changes in RTO inflationadjusted expenses per unit of electricity transmitted over this period.
Figure 5: Inflation-Adjusted Expenses per MWh by RTO, 2002-2006
Dollars of expenses per MWh
1.2
1.0
0.8
0.6
0.4
0.2
0
2003
2002
2004
2005
2006
Year
Southwest Power Pool
PJM
Midwest ISO
California ISO
New York ISO
ISO New England
Source: GAO analysis of RTO independent auditor reports, 2002 to 2006.
Note: This chart reflects inflation-adjusted expenses as reported on each RTO’s annual financial
statement. Amounts are in 2007 dollars. In 2004, PJM changed its method of classifying revenues
and expenses related to study and interconnection fees for financial reporting purposes. Had 2002
and 2003 expenses been reported as they were from 2004 to 2006, PJM’s inflation-adjusted
expenses per MWh would have been $0.52/MWh (instead of $0.95/MWh) in 2002 and $0.59/MWh
(instead of $0.85/MWh) in 2003.
Several key trends occurred over this period, with the expenses per MWh
of three RTOs—Midwest ISO, New York ISO, and ISO New England—
rising as they implemented major market and other initiatives. For
example, during this period, Midwest ISO expanded its role from
coordinating reliability, administering its tariff, and performing
transmission system planning to include operating markets for energy and
Page 22
GAO-08-987 Electricity Restructuring
other services. As a result, Midwest ISO’s expenses rose in a number of
areas. Salaries and benefits increased as the RTO increased its full-time
equivalents from 265 in 2002 to 643 in 2006, in part, to carry out the RTO’s
expanded operations. Expenses for consulting, professional, and outside
services—used, in part, to develop the new markets for electricity and
other services—and depreciation and amortization expenses—to recover
the costs of major investments, such as information systems and
infrastructure related to the electricity market—also increased from 2002
to 2006.20 Increases in Midwest ISO’s expenses were mitigated by its rising
transmission load as it took on additional members.
In contrast, California ISO’s expenses per MWh hour declined significantly
over this time period, particularly in the areas of depreciation and
amortization and facilities and maintenance. California ISO officials
attributed declining expenses to an organizational focus on keeping
expenses low, including a specific cost containment management initiative
in 2005, and more economically advantageous contracts in a few key
areas. Additionally, as noted in the graphic, PJM changed the way it
reported revenues and expenses. Starting in 2004, PJM offset revenues and
expenses related to study and interconnection fees. Had 2002 and 2003
expenses been reported as they were in later years, PJM’s inflationadjusted expenses per MWh would have fluctuated over the period and
ultimately declined from $0.52 per MWh in 2002 to $0.39 per MWh in 2006.
Finally, Southwest Power Pool’s expenses per MWh declined slightly over
this time period—from $0.47 per MWh to $0.37 per MWh, as increasing
overall expenses were mitigated by rising transmission load.
FERC’s Revisions to Its
Form No. 1 Provide Better
Visibility of RTO Expenses
Related to Transmission
and Markets
Starting in 2006, FERC required RTOs and other utilities to provide more
detailed information about market and transmission expenses on their
Form No. 1 filings to improve the visibility and uniformity of RTO and
utility financial reporting, and we found that RTO’s 2006 Form No. 1s are
more transparent than in previous years. FERC officials told us these
changes would facilitate review by FERC and the public of RTO expenses
and rates. Form No. 1 filings categorize expenses according to two key
20
Depreciation and amortization expense allocates the acquisition cost of an asset, less its
estimated salvage or residual value, over its estimated useful life. This expense reflects the
use of the asset during specific operating periods to match costs with related revenues in
measuring income or determining the costs of carrying out program activities. RTOs often
use depreciation and amortization expenses to recover the costs of financing an asset, such
as a computer system or control center.
Page 23
GAO-08-987 Electricity Restructuring
functions RTOs perform—transmission coordination and market
operation—as well as other categories such as administrative and general
expenses. In 2006, about 17 percent of all RTO inflation-adjusted expenses
were for transmission services, 13 percent were for market expenses, 39
percent were for administrative and general expenses, and 31 percent
consisted of other expenses.21 Figure 6 provides information reported in
the Form No. 1 about each of the RTOs’ expenses. Appendix V shows 2006
RTO inflation-adjusted expenses as reported on the FERC Form No. 1.
21
Other expenses include taxes, net interest charges, and expenses related to customer
accounts and service.
Page 24
GAO-08-987 Electricity Restructuring
Figure 6: Inflation-Adjusted Expenses per MWh by RTO as Reported in the 2006
FERC Form No. 1
Dollars of expenses per MWh
0.9
0.8
0.7
66
70
0.6
0.5
0.4
0.3
0.2
0.1
En ISO
gla
nd
Ne
w
Ne
wY
or
ISOk
rn
i
ISOa
lifo
Ca
Mi
dw
es
t
ISO
M
PJ
So
Po uthw
we e
r P st
oo
l
0
Other expenses
Administrative and general expenses
Regional market expenses
Transmission expenses
Source: GAO analysis of RTO 2006 FERC Form No. 1s.
Note: Dollar amounts are inflation adjusted and presented in 2007 dollars. New York ISO, Southwest
Power Pool, and PJM expenses reported on FERC Form No. 1 filings do not agree with the expenses
noted on the independent auditors’ reports due primarily to differences in how certain interest, lease,
planning, and other revenues were netted against related expense accounts in the FERC Form No. 1
filings.
Transmission expenses cover the cost of providing reliability services and
monitoring and operating the transmission systems, among other things.
Market expenses include the cost of administering markets for electricity
and other services, monitoring markets for competitiveness, and related
computer software and hardware maintenance, among other things.
Administrative and general expenses consist of employee salaries and
benefits, rent, and outside services, among other things.
Page 25
GAO-08-987 Electricity Restructuring
RTOs Have Made
Investments in Property,
Plant, and Equipment
The six RTOs whose financial statements we reviewed have made
investments in property, plant, and equipment. Total inflation-adjusted
investment for all RTOs was $1.6 billion as of December 31, 2006, without
adjusting for accumulated depreciation.22 Software and equipment was the
largest category of investment at each of the RTOs, as shown in figure 7,
and was used by the RTOs to provide various transmission and market
services across regions. For example, in 2005, ISO New England began
construction of a replacement control center equipped with computer
hardware and software to deploy generators, forecast electricity
requirements, ensure load is not interrupted in the event of a contingency,
and conduct and monitor electricity transfers with other RTOs. Appendix
VI shows RTOs’ investments in property, plant, and equipment as of
December 2006.
22
Total investment in property, plant, and equipment is not adjusted for depreciation
because accumulated depreciation was not allocated to specific asset classes in the
independent auditors’ reports.
Page 26
GAO-08-987 Electricity Restructuring
Figure 7: Inflation-Adjusted Investment in Property, Plant, and Equipment as of
December 2006
Investment in property, plant and equipment (dollars in millions)
450
400
350
300
250
200
150
100
50
En IS
gla O
nd
Ne
w
Ne
wY
ork
ISO
rni
a
ISO
lifo
Ca
Mi
dw
es
t
ISO
M
PJ
So
Po uthw
we e
r P st
oo
l
0
Furniture and fixtures
Land
Buildings and leasehold improvements
Construction, work, and projects in process
Software and equipment
Source: GAO analysis of RTO independent auditor reports, 2006.
RTOs and FERC Rely
on Stakeholder Input
when Evaluating RTO
Expenses and
Decisions That May
Affect Electricity
Prices
RTOs consider stakeholder comments when reviewing RTO expenses and
other decisions that may affect electricity prices. In the two RTOs we
visited, stakeholders said they valued the opportunity for discussion with
the RTOs, but some stakeholders expressed concern that attending
meetings was resource intensive and that too little emphasis was placed
on how decisions might affect the prices consumers pay for electricity.
Furthermore, though RTO budgets offer one tool FERC could use to
revisit whether rates remain just and reasonable between rate
proceedings, the extent to which FERC reviews proposed expense
information in RTO budgets varies. Additionally, although FERC annually
requires RTOs to report the actual expenses they incurred, FERC staff
have not regularly reviewed or audited these submissions for accuracy and
Page 27
GAO-08-987 Electricity Restructuring
do not look at them for reasonableness. Instead, FERC relies heavily on
stakeholders to raise concerns over proposed expenses and other
decisions that may affect consumer electricity prices.
RTOs Consider
Stakeholder Comments
when Reviewing RTO
Expenses and Making
Decisions That Affect
Electricity Prices
According to senior RTO officials, RTO boards and staff give much
consideration to stakeholder comments when reviewing RTO expenses
and making decisions that affect electricity prices. They told us that while
RTO decisions are independent—stakeholder input is generally advisory—
stakeholders play an important role in evaluating RTOs’ operations and
plans. In particular, although RTOs conduct internal reviews of their
proposed expenses, establish controls for reviewing the prudence of
expenses, and may perform formal cost-benefit analysis on major
initiatives, officials told us stakeholder comments are one of the most
important factors when reviewing expenses and making decisions. In
general, RTOs solicit comments from stakeholders about their opinions on
decisions to modify new market rules, changes to governing documents,
and budgets and expenses, among other things. According to RTO
officials, in some instances, RTOs are required to secure affirmative
stakeholder votes on these decisions prior to proceeding. Specific issues
for discussion may be raised by the RTOs, stakeholders, or in response to
FERC orders or directives.
Stakeholders generally provide input to the RTO boards of directors in three
ways––written communications, oral discussions, and votes––although each
RTO has a unique process for soliciting this input, as shown in table 3. RTO
officials told us that these processes were developed after extensive
negotiations with stakeholders when each RTO was formed. To ensure
stakeholder input reflects a range of interests, five of the six RTOs we
reviewed group stakeholders with common interests, such as electric
distribution companies, transmission owners, and end users. All six of the
RTOs we reviewed involve state regulators in their decision-making process,
either formally as a unique stakeholder group or informally as participants
who attend stakeholder meetings. Though state regulators are not prohibited
from voting in stakeholder meetings, most have chosen to participate
formally in the process but not vote.23 Additionally, in several RTO areas, state
regulators have formed organizations to collectively represent their interests
and advise the RTO. For instance, state regulators in the Midwest ISO formed
23
State regulating authorities are a formal stakeholder group in Midwest ISO and vote at the
primary committee level.
Page 28
GAO-08-987 Electricity Restructuring
the Organization of MISO States to discuss what decisions the RTO should
make and participate in stakeholder meetings.
Table 3: RTO Processes for Acquiring Stakeholder Input
RTO
Stakeholder
groups
ISO New
California ISO England
Not applicable
California ISO
has identified
sectors, but
any interested
party is
considered a
stakeholder
and is able to
participate in
meetings.
Midwest ISO
Transmission Vertically integrated
transmission owner
Generation
and stand-alone
Suppliers
transmission
companies
End users
Independent power
Publicly
owned entity producer/exempt
wholesale generator
Alternative
Power marketer
resources
Eligible end use
customers
Municipals/
cooperatives/
transmission
dependent utilities
New York ISO
PJM
Southwest Power
Pool
Transmission
owners
Transmission
owners
Investor owned
utilities
Generation
owners
Generation
owners
Independent power
producers/marketers
Other suppliers
Other suppliers
Large retail customer
End use
consumers
End use
customers
Small retail customer
Public power and Electric
environmental
distribution
stakeholders
companies
New York Public
Service
Commissiona
Cooperatives
Municipals
Alternative power/
public interest
stakeholders
State/federal power
agencies
Environmental
advocates
State regulatory
authorities
Public consumer
advocate
Coordinating
members
Required
stakeholder
representation
on the primary
committee
Not applicable
Stakeholders
from each
stakeholder
group
Elected representation Representation
(Two participants and from each
one or two alternates) member
from each stakeholder
group
Required
stakeholder
representation
on the budget
subcommittee
Not applicable
Open to any
interested
stakeholder
Open to any
interested
stakeholder, typically
includes
representation from
each stakeholder
group
California ISO
has a formal
process for
stakeholder
review of the
budget that is
open to any
interested
stakeholder. It
does not have
a formal
budget
subcommittee.
Page 29
Open to any
interested
stakeholder
Representation
from each
stakeholder
group
Representation from
each member
Two members
elected by each
of the five
stakeholder
groups and two
members of the
board
Two RTO directors,
two representatives
of the nontransmission-owning
group, and two
representatives of
the transmission
owners
GAO-08-987 Electricity Restructuring
RTO
Process
through which
comments are
shared with the
board
ISO New
California ISO England
Proposals to
the board
include a
matrix of
stakeholder
comments on
the proposal.
Stakeholders
can speak
directly with
the board
during board
meetings,
which are
open to the
public.
Midwest ISO
New York ISO
PJM
A record of
stakeholder votes
and summary of
comments is
provided to the
board of
Stakeholders can
submit documents
Stakeholders can directors.
At least two
directly to the board.
submit
board members
documents
Board meets with
attend each
Stakeholders stakeholders regularly. directly to the
meeting of PJM’s
can submit
board.
Stakeholders have the
highest
documents
Representatives
committee.
directly to the opportunity to speak
directly with the board from the liaison
board.
Any PJM
committee,
during board
member can
composed of
Board meets meetings.
provide
with
representatives
comments to the
stakeholders
from each
board in writing.
regularly.
stakeholder
group, meet with Board meets with
the board after
a liaison
board meetings. committee
Board
receives
information
on
stakeholder
votes on the
budget and
other
decisions.
Board receives
information on
stakeholder votes on
the budget and other
decisions.
Board receives
information on
stakeholder votes
on the budget
and other
decisions.
Southwest Power
Pool
Board receives
information on
stakeholder votes on
the budget and other
decisions.
Stakeholders in the
primary committee
meet with the board
and provide
feedback on behalf
of stakeholders.
Stakeholders have
opportunity to speak
directly with the
board during board
meetings.
Board meets with composed of
representatives
stakeholders
of each sector at
regularly.
Stakeholders with least once
a minority opinion quarterly to
discuss current
can appeal a
decision with the topics.
board.
Board holds
general sessions
with all PJM
members for
panel
discussions of
current topics
twice annually.
Voting
Not applicable
requirement to
approve a
decision/budget
at primary
committee
Two-thirds
support to
pass; each
stakeholder
group has a
weighted
vote
Simple majority
support to pass; each
stakeholder group has
a weighted vote
58 percent
support to pass;
each stakeholder
group has a
weighted vote
Two-thirds
support to pass;
each stakeholder
group has a
weighted vote
66 percent support to
b
pass; votes are
weighted among two
groups: transmission
owners and
transmission users
Stakeholder
Yes
input is advisory
to the RTOs’
board
Yes
Yes
Yesc
Yesd
Yese
Source: GAO analysis of data from RTOs.
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GAO-08-987 Electricity Restructuring
Note: This table describes the RTO process for acquiring stakeholder input on a variety of decisions.
As required by FERC Order 890, each RTO must also have an open and transparent transmission
planning process in which, according to RTO officials, stakeholders play a critical role. Each RTO
uses a different structure to achieve this goal.
a
In New York ISO, the New York Public Service Commission participates in stakeholder meetings but
does not vote.
b
In Southwest Power Pool, the primary committee does not vote on the budget. The finance
committee votes by simple majority to recommend the budget to the board.
c
In New York ISO, Section 205 filings with FERC require an affirmative stakeholder vote except in
exigent circumstances since New York ISO operates under a shared governance agreement.
d
In PJM, a stakeholder vote is required in order to make changes to its structure and governance.
e
In Southwest Power Pool, some stakeholder committees that report to the board have been
delegated certain decision-making authority.
In general, stakeholders participate in the RTO decision-making process
through a primary committee that reports to the board of directors and a
range of lower-level committees and working groups that report to the
primary committee.24 Lower-level committees and working groups tend to
focus on narrow subjects or specific initiatives such as development of
specific markets or proposed changes to existing rules, and lower-level
committees often involve stakeholders with expertise in the specific
subject matter. The primary committee and lower-level committees and
working groups hold regular or episodic meetings that stakeholders
participate in. These meetings are open to participation by any stakeholder
with an interest in attending. As shown above, stakeholders representing
many perspectives, from generators to groups representing consumers,
participate. Because of the numerous, simultaneous matters under
consideration, there can be many meetings potentially relevant to
stakeholders. Subjects discussed and analyzed in lower-level committee
and working group meetings are eventually raised for discussion at the
primary committee meeting, where a vote is taken about whether to
recommend a decision be pursued by the board of directors. (See fig. 8 for
an example of the Midwest ISO’s committee structure. Midwest ISO’s
primary committee is called the Advisory Committee.)
24
California ISO is unique among the six RTOs we reviewed in that it does not use a
committee structure to solicit input from stakeholders. However, California ISO
stakeholder meetings and board meetings are open to all interested parties.
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GAO-08-987 Electricity Restructuring
Figure 8: Midwest ISO’s Committee Structure
Transmission Owners’
Commitee
Vertically
integrated
transmission
owners
Midwest ISO
Board of Directors
Midwest
stand-alone
transmission
companies
Advisory Committee
Tariff and
Business
Practices
Subcommittee
Stakeholder
Governance
Working Group
Finance
Subcommittee
Alternate Dispute
Resolution Committee
Market
Subcommittee
Planning
Advisory
Committee
Reliability
Subcommittee
Steering
Committee
Credit
Practices
Working Group
Planning
Subcommittee
Available
Flowgate
Capacity
Working Group
Data
Transparency
Working Group
Demand
Response
Working Group
Operations
Planning
Working Group
Market
Settlements
Working Group
Operations
Working Group
Revenue
Sufficiency
Guarantee
Task Force
Emergency
Preparedness/
Power System
Restoration
Working Group
Supply
Adequacy
Working Group
System
Operator
Training Group
Energy and
Ancillary
Services
Market
Readiness
Task Force
Source: Midwest ISO.
RTO staff may facilitate discussions within the primary committee, as well
as lower-level committees and working groups, and may also prepare
analyses to help stakeholders understand how a decision might affect
them. For example, as agreed to when its RTO status was approved,
Southwest Power Pool must develop a cost-benefit analysis before making
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GAO-08-987 Electricity Restructuring
the decision to implement a new market rather than relying on cost-based
pricing of a service. Other RTO officials told us that although they may
develop formal cost-benefit analyses for some major decisions, such as
changes to key market rules, the stakeholder process is a key way in
which the cost and benefits of a decision are discussed.
Most RTOs have a specific lower-level committee to review and analyze
RTO budgets that contain information about proposed expenses.
According to RTO officials, RTOs and stakeholders discuss and jointly
determine organizational priorities, which influence the RTO’s preparation
of a draft budget. Stakeholders serving on the budget committee review
the budget’s proposed expenses and provide recommendations.
Discussion of the budget is then taken up by the primary stakeholder
committee, which then votes whether to recommend to the board that the
budget be adopted.25 The composition of the subcommittee that initially
reviews the budget differs among the six RTOs. For example, PJM’s
budget committee consists of equal representation from each formal
stakeholder group plus two members of the independent board. ISO New
England’s budget committee is open to participation by any stakeholder.
Stakeholders Value the
Opportunity for Discussion
with RTOs, but Some
Believe Inadequate
Emphasis Is Placed on
Consumer Prices
Most stakeholders we spoke with in the two RTOs we visited—ISO New
England and Midwest ISO—valued the opportunity for discussion with
their respective RTOs and believed that RTOs facilitate an open and
democratic process that focuses on reaching consensus among
stakeholders. However, most stakeholders in these two RTOs found the
process resource intensive, specifically the stakeholder meetings, which
require staff time and travel costs. RTOs may carry out hundreds of
stakeholder meetings annually, as shown in table 4.
25
In Southwest Power Pool, the finance committee recommends the budget to the board
and votes by simple majority. The primary committee does not vote on the budget.
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GAO-08-987 Electricity Restructuring
Table 4: Estimated Stakeholder Meetings by RTO, Calendar Year 2007
RTO
Number of
Stakeholder
Meetings
California
ISO
ISO New
England
57a
184b
Midwest New York
ISO
ISO
611
280
PJM
Southwest
Power Pool
330
202c
Sources: California ISO, ISO New England, Midwest ISO, New York ISO, PJM, and Southwest Power Pool.
a
California ISO’s estimated number of stakeholder meetings excludes meetings conducted for the
start-up of the Market Redesign and Technology Update, those hosted by California ISO
departments, and lower-level committee and working group meetings.
b
ISO New England’s estimated number of stakeholder meetings excludes lower-level committee and
working group meetings related to the regional system plan process.
c
Southwest Power Pool’s estimated number of stakeholder meetings includes only meetings posted to
its Web site that require an agenda and minutes.
Stakeholders must prepare for meetings by reviewing documentation and
preparing comments, and the ability of stakeholders we spoke with to do
so varied significantly. Individual stakeholders in the two RTO regions we
visited estimated they devoted a range of time—from less than one-half of
a full-time equivalent to 5 full-time equivalents—to stakeholder
involvement annually. In some cases, stakeholders told us they are not
able to attend all meetings they would like to due to resource constraints.
For example, stakeholders from ISO New England’s public power sector
told us they often have to rely on other stakeholders to attend meetings in
their place, because they lack the resources to participate themselves.
Many stakeholders told us they believe the level of their participation
determines their influence on RTO decisions.
In the two RTOs we visited, many stakeholders representing and serving
consumers, such as consumer advocates and state commissioners, were
concerned that RTOs do not place adequate emphasis on assessing the
implications on consumer electricity prices of decisions, such as whether
to build new transmission lines, when to create markets for services in lieu
of charging cost-based rates, and reliability decisions. Several of these
stakeholders believed that RTOs overemphasize ensuring reliability
without full consideration as to whether lower-cost options are available.
For example, some ISO New England stakeholders we spoke to believed
the RTO was overly conservative when determining whether
noncompetitive generators were needed for reliability. They believed that,
as a result, the RTO entered into unnecessary and costly contracts to keep
these inefficient generators running. They observed that this could lead to
higher consumer electricity prices, which they did not believe were
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GAO-08-987 Electricity Restructuring
justified, since they did not agree the generators were needed to ensure
electricity was delivered reliably. Moreover, one stakeholder we spoke to
was concerned that the cost of operating these generators, which may
benefit only certain local areas, were unfairly borne by consumers outside
those local areas. Officials from ISO New England acknowledged that
there can be trade-offs between reliability and costs, but said
transmission-planning efforts and their new capacity market are effective
in keeping payments for reliability as low as possible. They and other RTO
officials explained that fulfilling their mission of ensuring reliability and
efficient markets will minimize consumer prices in the long run. A number
of stakeholders representing and serving consumers in these two regions
were concerned, however, that the RTOs do not conduct enough costbenefit analyses of how decisions may affect electricity prices. Others felt
they had inadequate access to data and resources to conduct such
analyses themselves. Some RTO officials told us that while they always
consider the costs and benefits of a decision before making it, formal costbenefit analysis may not always be practical, because it is difficult to
estimate the potential impact of a decision on electricity prices, how
benefits and costs could change over time, the appropriate assumptions to
be made, and how different stakeholders are affected. They noted that
individual stakeholders already give much consideration to the costs and
benefits of a given decision when discussing it during stakeholder
meetings.
There was disagreement among stakeholders in ISO New England and
Midwest ISO about which groups have, and should have, more influence
with RTOs; however, many stakeholders agreed that participating in
stakeholder meetings and, in particular, participating in lower-level
committees and working groups, provided the best opportunity to
influence RTOs’ proposed expenses and decisions that may affect
electricity prices. Although most stakeholders we spoke with thought ISO
New England and Midwest ISO worked hard to solicit comments from all
stakeholders, many believed that when making decisions, the RTOs
deferred more to certain stakeholders and that because RTOs were
created through the voluntary agreement of the transmission owners, the
RTOs were more likely to defer to their interests than to others’. Other
stakeholder groups we spoke with in ISO New England and Midwest ISO
commented that state regulators have a large influence on the RTOs’
decisions. A number of state public utility commission officials disagreed
with this view. In particular, one state regulator stated that because state
regulators are charged with protecting the public interest, their opinions
should carry greater weight than those of participants whose interests are
primarily profit-oriented.
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GAO-08-987 Electricity Restructuring
The Frequency of FERC’s
Review of Proposed RTO
Expenses Varies
The frequency of FERC’s review of proposed RTO expenses varies, with
reviews of certain expenses not being conducted for years at a time.
FERC’s review of proposed expenses occurs when it conducts a
proceeding to evaluate whether the rate an RTO charges customers to
recover these expenses is just and reasonable and not unduly
discriminatory or preferential.26 Because of variation in the manner and
frequency with which rate proceedings are conducted, FERC’s
consideration of proposed RTO expenses can be infrequent.27 For example,
in 2001, FERC conditionally approved Midwest ISO’s rate for recovering
expenses associated with administering its tariff and ensuring reliability.
Because Midwest ISO has not since asked to change its rate for recovering
these expenses, FERC has not reviewed these expenses since 2001.28 FERC
officials explained that more frequent review of proposed RTO expenses is
not necessary because RTO expenses and decisions undergo much
scrutiny during the RTO stakeholder process. Moreover, according to
these officials, stakeholders are in the best position to know whether RTO
expenses are prudent and reasonable. As a regulator, FERC may initiate a
new rate proceeding if it believes an RTO’s rates are no longer just and
reasonable. While, as FERC points out, stakeholder comments and
complaints are an important piece of FERC’s consideration, more frequent
review of proposed expenses could also aid FERC in determining whether
a rate remains just and reasonable. Table 5 shows when each RTO’s rate
for recovering expenses was last approved.
26
In five cases in 2004, FERC’s Office of Enforcement conducted limited reviews of RTO
budgets and expenses during the course of audits to determine RTO compliance with
governance policies, practices, and procedures.
27
According to FERC, the rate-setting process involves extensive examination of expenses,
interventions by customers and other stakeholders, and months of testimony and crossexamination before an administrative law judge. It can be an expensive and timeconsuming process and may take years to complete. FERC’s rates for RTOs tend to remain
in place for years.
28
In 2004, FERC did review Midwest ISO’s rate for recovering expenses associated with
operating its financial transmission rights and energy market. However, it has not reviewed
Midwest ISO’s tariff administration and reliability expenses since 2001.
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GAO-08-987 Electricity Restructuring
Table 5: Last FERC Decision to Approve Rates to Recover Expenses
RTO
California ISO
ISO New England
Midwest ISO
New York ISO
Date of last FERC approval of rates
2005a
2007
2001 and 2004b
2004
PJM
2006
Southwest Power Pool
1999
c
Source: GAO analysis of FERC information.
Note: FERC allows RTOs and other utilities to bill customers using a stated rate or a formula rate.
With a stated rate, the RTO cannot exceed a fixed rate of x cents per MWh. With a formula rate,
FERC approves a multipart formula for recovering expenses. Once approved, the formula itself does
not change, although the expenses inputted into that formula and therefore the rate charged to
customers may vary. Midwest ISO, New York ISO, California ISO, and Southwest Power Pool use
formula rates. ISO New England and PJM use stated rates.
a
California ISO’s rates were approved by FERC in 2005 for the years 2004 through 2006. In 2006 and
2007 FERC reviewed and accepted changes to the tariff that extended the same rates through 2008.
California ISO has subsequently filed rate changes to be effective upon implementation of its FERCapproved Market Redesign and Technology Upgrade program, which is expected to occur in 2009.
These changes have not yet been approved by FERC.
b
Midwest ISO’s rate for recovering tariff administration and reliability expenses was conditionally
approved in 2001. Its rate for recovering expenses associated with operating markets for energy and
other services was approved in 2004.
c
Southwest Power Pool’s formula rate for its tariff administration charge was last approved in 1999,
before Southwest Power Pool became an RTO. In 2004, FERC reviewed and accepted revisions to
Southwest Power Pool’s nonrate terms and conditions. On July 31, 2008, SPP filed a Section 205
revised tariff request with FERC in order to increase the rate cap for its administration charge.
RTOs annually develop budgets that contain extensive information on
proposed expenses; however, FERC’s use of RTO budgets as a tool in
reviewing proposed RTO expenses varies. For example, ISO New England
agreed with its stakeholders to submit operational and capital budgets to
FERC for annual approval. Southwest Power Pool submits annual copies
of its operating and capital budgets for informational purposes, rather than
for FERC approval. The other RTOs either do not submit budgets or do so
infrequently, despite the fact that these budgets could provide FERC with
potentially valuable information about proposed RTO expenses that could
help it in ensuring the rates RTOs charge customers are just and
reasonable. For example, FERC could use such information to regularly
benchmark RTO spending on key categories, such as market oversight or
capital investments. (Table 6 outlines the frequency with which RTOs
submit budgets to FERC for review.) FERC officials pointed out that
FERC staff sometimes attend stakeholder meetings, including discussions
about the budget, to observe what concerns stakeholders raise. They also
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GAO-08-987 Electricity Restructuring
noted that RTOs post their budgets on their Web sites annually, allowing
FERC and the public to view them if so desired.
Table 6: RTO Budget Submissions to FERC
Budget submission to FERC
RTO
Operational
Capital
California ISO
Not currentlya
Not currentlya
ISO New England
Annually submitted to FERC
for approval
Annually submitted to FERC for
approval with quarterly updates
Midwest ISO
No
No
New York ISO
No
No
PJM
No
No
Southwest Power Pool
Annually but for informational Annually but for informational
purposes
purposes
Source: FERC and RTOs.
a
California ISO last submitted its revenue requirement for approval by FERC for the year 2004. A
settlement agreement approved by FERC in 2005 provided that the California ISO need not make an
annual filing unless its revenue requirement exceeded the cap specified in the agreement. The
settlement agreement expired at the end of 2006. The California ISO filed in 2006 and again in 2007
to extend the provisions that allow it to defer filing its revenue requirement.
Some representatives of stakeholder groups including public utility
commissions, consumer groups, and the publicly owned sector expressed
concerns over FERC’s infrequent review of budgets or lack of independent
analysis of proposed RTO expenses. They expressed concern that FERC
deferred too much to the stakeholder process within the RTOs, assuming
stakeholders had adequately resolved all concerns. These stakeholders
were concerned that without more scrutiny of proposed expenses, FERC
could not be sure that the RTOs were as cost-effective as possible. We
found that RTO expenses may change over time, and some—such as
expenses for outside consultants––may decrease between the times FERC
reviews the rates. Furthermore, without more consistency in how FERC
reviews proposed expenses, customers may not fully benefit from
potential improvements or efficiencies RTOs achieve. For example, for the
2008 Midwest ISO budget, expenses as approved by the finance
subcommittee and the board of directors for outside services decreased by
24.4 percent, while its net operating expense increased by 1.2 percent. The
total cost of salaries and benefits increased by 10 percent, offsetting some
of the increased efficiency in the area of outside services. In the
stakeholder process for the 2007 budget, the finance subcommittee
expressed concerns about the continued increase in staffing levels and
how that need was determined. They recommended that Midwest ISO
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GAO-08-987 Electricity Restructuring
develop financial metrics to evaluate and compare and contrast Midwest
ISO’s financial results. Since Midwest ISO’s proposed expenses were not
regularly reviewed by FERC, FERC may have missed an opportunity to
determine whether Midwest ISO’s salaries were reasonable and ensure
that Midwest ISO customers benefited from lower outside service
expenses.29 More broadly, without regular, recurring analysis of RTO
expenses, such as through review of RTO budgets, it is not clear that
FERC is as well positioned as it could be to know whether certain
expenses are reasonable and RTOs are as cost-effective as possible. Such
knowledge could supplement comments from stakeholders and help
FERC determine whether rates remain just and reasonable or when a new
rate case should be initiated.
FERC Does Not Regularly
Review or Assess Actual
RTO Expenses
FERC does not routinely review or assess the accuracy or reasonableness
of expenses RTOs report annually using the Form No. 1. FERC officials
told us they use the financial information in the Form No. 1 to carry out
FERC’s responsibilities and post this information to their Web site for use
by public utility customers, state commissions, and the public so that they
can assess the reasonableness of electric rates. However, during the
course of our work, FERC officials told us they did not routinely audit or
review the Form No. 1s for accuracy or completeness. When we began our
work, FERC had not audited any RTO FERC Form No. 1 filings for
accuracy or completeness, although in 2004 it performed some limited
review of the Form No. 1s during the course of other audits. In May 2008,
FERC initiated an audit of Midwest ISO that includes a more in-depth
examination of its Form No. 1. FERC officials told us it is the RTOs’
responsibility to ensure that the FERC Form No. 1 filings are accurate and
complete and said that it requires public accounting firms to attest that
they have audited RTOs’ balance sheets, statements of income, retained
earnings, and cash flows contained in their Form No. 1s in conformity with
FERC’s Uniform System of Accounts requirements. Auditor opinions
confirm that CPAs audit the above statements in the Form No. 1 but may
not audit all supporting schedules.
Without more regular audits and review of actual expense information for
accuracy, FERC may be at risk of unknowingly using and providing to the
29
According to FERC officials, through their attendance at Midwest ISO Advisory
Committee meetings, they would most likely be aware of these and other stakeholder
issues.
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GAO-08-987 Electricity Restructuring
public inaccurate and incomplete RTO financial data, limiting the
effectiveness of the Form No. 1 as a tool for determining whether rates are
just and reasonable. For example, during the course of our audit work, we
noted a significant reporting error on Southwest Power Pool’s 2006 Form
No. 1 filing. In 2006, Southwest Power Pool reported $88 million in rent
and $175 million in maintenance of general plant expenses; however, we
noted actual rent and maintenance of general plant expenses were
$830,000 and $440,000, respectively. FERC officials said that in 2006
several RTOs experienced problems using FERC’s software program to
file their Form No. 1s, due to an unforeseen delay in implementing
software updates. To correct the errors, a revised schedule was added to
Southwest Power Pool’s 2006 Form No. 1 filing. However, maintenance of
general plant expenses was still overstated in the revised schedule by
approximately $3 million, and the revised schedule was not clearly
referenced by the original schedule. FERC said the error did not affect
electricity rates; however, the overstated expense information remained
posted on FERC’s Web site for over a year, where public utility customers,
state commissions, the public, and other parties that may be interested in
reviewing RTOs’ expenses could access it. In August 2008, Southwest
Power Pool submitted a revised FERC Form No. 1 that corrects the error.
Furthermore, according to FERC officials, the Office of Enforcement is
taking steps to incorporate a system of electronic data validation checks
into the FERC Form No. 1 submission software to help ensure the
accuracy of the FERC Form No. 1 filings before they are submitted. FERC
anticipates having the validation checks in place for the 2008 FERC Form
No. 1 submission year and told us that once the checks are implemented,
an error like the one identified at Southwest Power Pool can be corrected
prior to the entity submitting its FERC Form No. 1 filing. Because these
checks have not yet been implemented, we cannot review their
effectiveness. We believe that while they will likely help identify and
correct some reporting errors, they do not constitute the comprehensive
review of the Form No. 1s for accuracy and completeness that FERC staff
could perform through audits or other review.
FERC does not routinely review RTOs’ reported expenses to ensure that
they are reasonable, noting that Form No. 1 information on expenses is
made public and interested parties can file a complaint about their
concerns. FERC officials from the Office of Energy Market Regulation
observed that the Form No. 1 might sometimes be used to detect
potentially unreasonable expenses but told us they do not analyze them
due to limited resources. Moreover, although FERC compared expenses
across RTOs in 2004 as a means to estimate the potential expense involved
in creating new RTOs, FERC officials do not regularly compare expenses
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GAO-08-987 Electricity Restructuring
across RTOs or create expense benchmarks to use as an analytical tool in
evaluating just and reasonable rates or as a way of determining whether
efficiencies realized by one RTO could be applied to another.30 FERC and
RTO officials said that the varied nature of RTO functions would make
regular comparison of actual RTO expenses challenging and of limited
value. Several stakeholders we spoke with, including a former RTO
executive, disagreed, observing that comparisons among RTOs could help
raise questions about the appropriateness of expenses. Without reviewing
actual RTO expenses for reasonableness, FERC may not be as well
positioned as it could be to ensure the rates RTOs charge to recover their
expenses are just and reasonable and that RTO funds were spent
according to how FERC and the stakeholders approved them to be.
FERC Relies on
Stakeholders to Raise
Concerns over RTO
Expenses and Decisions
FERC relies heavily on stakeholders to raise concerns about RTO
expenses and other decisions with the potential to affect electricity prices.
FERC officials acknowledged that the process through which RTO
stakeholders review information on proposed expenses contained in RTO
budgets is integral to identifying imprudent and unreasonable expenses
between RTO rate cases. Parties who disagree with RTO expenses can file
comments when an RTO’s rate for recovering these expenses is being
evaluated at FERC during rate-setting proceedings. In one instance, in
November 2005, the Attorneys General of Connecticut and Massachusetts
submitted comments to FERC about ISO New England’s proposed 2006
budget, contesting executive salaries that they believed were
unnecessarily high. FERC found the proposed salary expenses to be just
and reasonable after reviewing the entire record in the proceeding,
including all comments and ISO New England’s comments that surveys
and benchmarks showed the salaries were competitive. However, FERC
did not perform any independent analysis of ISO New England salaries or
review the surveys or benchmarks ISO New England cited.31 FERC also did
not conduct comparisons of salaries across RTOs, although FERC officials
30
FERC’s 2004 work was presented in “Staff Report on Cost Ranges for the Development
and Operation of a Day One Regional Transmission Organization.” October 2004.
31
According to an ISO New England representative, nonprofit RTOs must comply with
Internal Revenue Service standards governing the reasonableness of compensation for
executives, including base salaries. Executive compensation must fall within a range of
competitive practices for total compensation paid by similarly situated organizations, both
taxable and tax-exempt, for functionally comparable positions. To ensure compliance with
these procedures, ISO New England has engaged a nationally recognized, independent
consulting firm to evaluate compensation offered by similarly situated entities.
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GAO-08-987 Electricity Restructuring
said that had this information been introduced into the record, it would
have considered it. As with stakeholder review of proposed expenses,
FERC officials told us the Form No. 1 is a tool to provide stakeholders
with ready access to data needed to assess the prudence of actual RTO
expenses, and that its information is key to stakeholders knowing when a
new rate case may be needed.
FERC also explained that stakeholders can file a complaint that rates are
not just and reasonable at any time. 32 However, several stakeholders told
us that because FERC places the burden of proof on the complaining
party, it is difficult and resource intensive to file a complaint. These
stakeholders told us that they typically lack the staff and resources to file
a complaint and said that it is difficult to obtain the data and conduct the
analysis necessary to support it. For example, one state regulator noted
that the data needed to show that expenses are not just and reasonable is
typically proprietary and that such complaints are difficult to win, since
the burden of proof is high. FERC officials confirmed that they have heard
over the years that it can be challenging to make complaints and win. They
said consumer groups sometimes felt they were at a disadvantage
compared to transmission owners and generators because they have fewer
resources, including staffing and funding, to file and support complaints.
FERC officials also noted that if an evidentiary hearing was deemed
necessary, their staff might provide some analytical assistance.
As in its reviews of expenses, FERC also places much emphasis on the
stakeholder process when reviewing RTO decisions with the potential to
affect electricity prices, and FERC offers stakeholders the opportunity to
provide additional evidence for its consideration prior to making a final
decision. For example, in 2006, FERC conducted a proceeding related to a
proposed PJM decision to develop a capacity market—a market designed
to attract new generation and other resources to ensure PJM can meet
future electricity needs. PJM’s proposal resulted from years of work and
numerous stakeholder meetings. Additionally, PJM and numerous parties
submitted thousands of pages of comments in support and against the
proposed decision, which FERC evaluated. FERC issued a final order on
this proceeding in December 2006. In May 2008, numerous stakeholders,
32
Rate-setting proceedings at FERC involving proposed rates are generally conducted under
authority granted in Section 205 of the Federal Power Act and are commonly referred to as
Section 205 hearings. The authority of FERC to receive complaints that existing rates are
not just and reasonable is generally under Section 206 of the Federal Power Act and are
commonly referred to as Section 206 complaints.
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GAO-08-987 Electricity Restructuring
including public utility commissions and consumer advocacy groups, filed
a complaint with FERC alleging the initial model PJM used for establishing
the price of capacity produced excessively high prices and did not deliver
commensurate benefits. Complainants are asking for rate relief, which
they estimate to be about $12 billion. The Maryland Office of the People’s
Counsel calculates that excess charges to Maryland residential customers
will average $570 over 3 years. FERC evaluated the merits of this
complaint and supporting documents. On September 18, 2008, it dismissed
the complaint but granted a request for a technical conference to
determine if further action would better achieve this market’s goals.
Experts, Industry
Participants, and
FERC Lack
Consensus on the
Benefits of RTOs
Experts, industry participants, and FERC lack consensus about whether
RTOs have provided net benefits to consumers. Many key experts and
industry participants agree that RTOs can provide certain benefits, such as
more efficient management of the transmission grid and improved access
by independent generators. However, there is some disagreement about
whether RTOs’ access to additional lower-cost generating resources has
led to electricity prices for consumers that are lower than they otherwise
would have been. Furthermore, experts and industry participants are
divided on the benefits of RTO markets and their effect on consumer
electricity prices. Some critics of RTO markets believe that RTO markets
have not fully achieved anticipated benefits and contribute to higher
consumer electricity prices, while proponents believe RTO markets have
kept prices lower than they otherwise would have been. Some RTOs have
developed assessments to demonstrate the benefits they have provided to
their regions. FERC officials share the view that RTOs have resulted in
benefits to the economy, such as new efficiencies in operating the regional
transmission grid, but FERC has not conducted an empirical analysis to
measure whether these benefits were realized or developed a
comprehensive set of publicly available, standardized measures that can
be used to evaluate RTO performance.
Many Agree That RTOs
Can Improve Management
of the Transmission Grid
and Access
Many industry participants and experts agree that RTOs provide
opportunities for more efficient management of the transmission grid and
can improve access by independent generators. They believe that because
RTOs integrate multiple transmission systems into a larger service area,
they have broader knowledge of the grid’s transmission capacity and
wider perspective on events that can affect reliability, allowing them to
more efficiently manage the grid. For example, Midwest ISO now centrally
controls operation of a vast transmission network spanning 15 states that
was once overseen by 24 different system operators who had to work
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GAO-08-987 Electricity Restructuring
together to address any reliability problems such as the unexpected loss of
a key transmission line or power plant. Some also believe that because
RTOs integrate multiple transmission systems into a larger service area,
they keep electricity buyers and sellers from paying multiple fees for each
transmission network they use—previously a disincentive to trade power
across multiple utilities’ transmission systems. In addition to the benefits
of centralized management of the transmission grid, many experts and
industry participants believe RTOs have improved independent generators’
access by reducing discrimination. They 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. According to a representative of
independent developers of new generation we spoke to, this improved
access has allowed new generators to more easily connect to and use the
transmission system. A representative of buyers of power, on the other
hand, told us this improved access has allowed buyers of power
opportunities to purchase electricity from new suppliers, although this
representative questioned whether the prices they receive for that
electricity are better. Despite much agreement that RTOs have provided
opportunities for more efficient management of the transmission grid and
improved access, some industry participants we spoke with believed RTOs
were not the only way to provide these benefits. They question whether
similar benefits could be achieved using other mechanisms, such as power
pools—groups of utilities that have entered into agreements to coordinate
electricity supply, like those that have existed along the East Coast for
more than 30 years.
Many Agree That RTOs
Provide Opportunities to
Lower Costs of Producing
Electricity, but Some
Question whether This
Improves Consumer Prices
Many experts and industry participants agree that RTOs are better
positioned than individual utilities to make use of lower-cost generators
more frequently, although they do not agree whether this has resulted in
electricity prices for consumers that are lower than they otherwise would
have been.33 By overseeing a region formerly run by many individual
utilities, RTOs have more generators at their disposal than the individual
utilities did. Because RTOs generally use the generators with the lowest
bid first—according to some, the least costly and most fuel efficient—they
may be able to more efficiently meet requirements for electricity reserves,
lower the cost of producing electricity, and use fuel more efficiently.
33
Lowering the cost of electricity production can result in lower electricity prices, higher
profits for generators and others that sell electric power, or a combination of both effects.
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GAO-08-987 Electricity Restructuring
However, some industry participants we spoke with questioned whether
this has kept electricity prices for consumers lower than they otherwise
would have been. They noted that generator bids may not always reflect
their costs of production and that in some cases, lower costs of production
have led to higher profits for generators rather than lower consumer
prices.
Experts and Industry
Participants Are Divided
on the Benefits of RTO
Markets and Their Effect
on Consumer Electricity
Prices, Generator
Efficiency, and
Infrastructure
Investment
Experts and industry participants are divided on whether RTO efforts to
create and oversee markets have lowered electricity prices and led to
other benefits, such as improved generator efficiency and more investment
in electricity infrastructure. Studies of restructuring draw differing
conclusions.
Experts and Industry Participants Are Divided on RTOs’ Influence on
Electricity Prices
Experts and industry participants debate how RTO markets have
influenced the prices consumers pay for electricity. Critics of RTO
markets believe these markets have not fully achieved anticipated benefits
and have contributed to the higher prices for electricity seen by
consumers, because markets are expensive to establish and operate, and
as currently designed, produce higher wholesale prices than would
otherwise occur. RTO markets use multiple types of generators—coal,
nuclear, natural gas, and others—in satisfying consumer demand, and the
different costs of fuels for these generators, among other factors,
contribute to different costs of electricity production. RTO markets select
the smallest amount of generating resources needed each day to provide
reliable service. To do so, these markets generally rank and accept
generator bids in the market in order of lowest to highest and pay
generators, regardless of their costs of production or fuel, the price bid by
the last generating unit needed to satisfy demand. Critics believe this
pricing approach reduces the benefits for consumers of using varied types
of generators, because low-cost generators, like nuclear and coal plants,
receive the same price as higher-cost generators, like natural gas plants,
when higher cost generators are needed to satisfy demand. Supporters of
RTOs believe this pricing approach, by rewarding low-cost generators,
promotes efficiency and provides an incentive for new low-cost generators
to enter the market, leading to lower prices in the long run than otherwise
would have been the case. They note that price transparency in RTO
markets is valuable and can signal profit-making opportunities for
potential new entrants. They believe that this, coupled with improved
access to the grid, can encourage market entry by, among others,
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GAO-08-987 Electricity Restructuring
developers of renewable energy sources, such as wind power. Proponents
of RTO markets observe that price transparency may also encourage
demand response—consumers lowering electricity usage in response to
price signals—which can lead to lower, less volatile prices. RTO officials
explained that while RTO markets establish wholesale prices for
electricity traded in them, a number of other factors also influence the
price consumers ultimately pay. Furthermore, much electricity is supplied
from sources outside RTO markets, for example, when utilities use their
own generators to self-supply or when two parties directly negotiate a
transaction with each other. However, critics believe that the pricing
approach used by RTO markets has led to higher prices for directly
negotiated contracts as well, because low-cost generators recognize that
they can often receive the price bid by higher-cost generators in the RTO
marketplace.
A state-by-state analysis of electricity prices reveals differences between
RTO and non-RTO regions that have likely led to concerns about the
impact of RTO markets on electricity prices. We considered retail
electricity prices in four regions of the country: (1) original RTO states—
states that joined an RTO in 1999 or earlier and were historically in a
power pool, (2) new RTO states—states in an RTO region after 1999, (3)
non-RTO states—states outside RTO regions, and (4) California.34 As
shown in figure 9, 11 of the 17 states with above-average retail electricity
prices are in the original RTO group. California also had above average
prices in 2007.
34
See appendix I for a more complete description of our methodology. Our analysis was
based on state-level data that we obtained from the Energy Information Administration on
electric power retail sales and electric revenues. We divided the states into four geographic
groups. Over the time period analyzed, California’s electricity industry went through
turbulent changes that would unduly influence any grouping in which it would otherwise
fall; therefore, we included California in a category by itself. We did not include Texas in
our analysis, because its market is largely unregulated by FERC. A listing of states in each
category is in appendix I.
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GAO-08-987 Electricity Restructuring
Figure 9: Retail Electricity Prices by State, 2007
Average electricity price, cents per KWh
25
20
15
10
Average U.S. electricity price, 9.14 cents per KWh
5
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Original RTO
New RTO
Source: GAO analysis of Energy Information Administration data on estimated 2007 retail electricity prices.
Note: Information for California is presented separately from the three primary groups in the legend.
We also present information on Texas in this graph for purposes of comparison, although the
wholesale market in most of Texas is not regulated by FERC.
To further understand the basis for these disagreements, we analyzed
retail electricity prices for industrial customers, because we believe that
trends in industrial prices more closely reflect trends in wholesale prices,
which RTOs are most capable of influencing. However, this relationship is
not perfect, because, as noted earlier in the report, many other factors
influence retail prices. Furthermore, numerous wholesale transactions
occur outside RTO markets.
As shown in figure 10, inflation-adjusted electricity prices for industrial
consumers have been consistently higher in the original RTO states than in
the new and non-RTO states over the entire period. Prices in the original
RTO states fell from 1990 to 1999 but have since risen close to prior
Page 47
GAO-08-987 Electricity Restructuring
levels.35 However, in recent years, the rate of price increases in the original
RTO states has generally been higher than in the non-RTO states. It is
important to note that this price analysis does not isolate the impact of
RTOs on prices. It is not possible to draw conclusions about what impact
the establishment of RTOs has had on electricity prices without properly
accounting for and isolating the impacts of other factors, such as the cost
of fuels used to generate electricity, changes in the fuel mix, and changes
in consumer demand.36
35
We found similar relationships by examining indexes of prices, relative to the national
average, which are reflected in appendix VII.
36
Various studies have used economic techniques to isolate the impacts of restructuring
and RTOs from other factors that influence electricity prices. These studies reach different
conclusions, as shown in appendix VIII.
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GAO-08-987 Electricity Restructuring
Figure 10: Change in Inflation-Adjusted Retail Electricity Prices for Industrial
Consumers, 1990-2006
Cents per KWh
12
11
10
9
8
7
6
5
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
0
Year
Non-RTO
New RTO
Original RTO
California
Source: GAO analysis of Energy Information Administration data.
Note: At the time of our review, the annual data series from Energy Information Administration used
for this figure did not include 2007 estimates.
Experts generally agree that fuel prices play a large role in determining
electricity prices. However, they disagree about the magnitude of their
influence. Prices for fuels commonly used to generate electricity—such as
coal and natural gas—have increased in recent years, with prices of
natural gas rising more dramatically than those for coal over this period.
Figure 11 illustrates how average prices of fuels used in the electricity
sector have changed from 1996 through 2006. Compounding this overall
trend, the original RTO region tends to rely more heavily on natural gas
than the non-RTO region.
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GAO-08-987 Electricity Restructuring
Figure 11: Inflation-Adjusted Prices of Coal and Natural Gas Used to Generate
Electricity, 1996-2006
Dollars per million British thermal units
10
9
8
7
6
5
4
3
2
1
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Coal
Natural gas
Source: GAO analysis of Energy Information Administration data.
Note: Prices are presented in 2007 dollar values.
Proponents of RTOs acknowledge that consumer electricity prices have
increased in RTO regions, but they believe that higher fuel prices, greater
demand for electricity, increasing costs for infrastructure needed after
years of underinvestment, the high costs of complying with environmental
regulations, and regulatory decisions made by states about transmission
and distribution rates are the principal reasons for rising electricity prices
across the country and in RTO regions. They believe RTO markets have
kept prices to consumers lower than they otherwise would have been.
Critics of RTO markets disagree, observing that problems with RTO
markets have exacerbated the effect of other factors, such as higher fuel
prices, on electricity prices.
Experts and Industry Participants Disagree on RTOs’ Influence on
Generator Plant Efficiency
Experts and industry participants are also divided about the ways in which
RTO markets may influence how efficiently existing plants are used. Some
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GAO-08-987 Electricity Restructuring
believe prices established competitively in RTO markets have given
generators an incentive to improve the maintenance and operation of their
facilities and operate them a greater percentage of the time, thereby
improving efficiency and lowering the overall cost of generating
electricity. By operating plants more efficiently, generators can better
compete against rival bidders, resulting in either greater profits for
themselves, lower prices to consumers, or both. Some studies conclude
that nuclear plants in RTO and restructured regions have increased their
capacity factors—the electricity generated by a plant as a percentage of
that plant’s maximum capacity to generate electricity. As seen in figure 12,
our analysis illustrates that nuclear plant capacity factors show more
pronounced improvement in recent years in the original RTO states and
new RTO states than in the non-RTO group. We did not attempt to account
for other potential causes for this improvement, such as technological or
institutional factors that may have improved efficiencies prior to the
advent of restructuring and RTO markets or determine whether aggregate
trends were the result of widespread efficiency improvements or a few
improved generating units. While many agree that the results of capacity
factor analysis would inform discussions of the benefits of RTO markets,
they do not agree on how to isolate the influence of these markets and
restructuring on capacity factors or determine whether improvements
preceded restructuring changes or resulted from them.
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GAO-08-987 Electricity Restructuring
Figure 12: Change in Nuclear Plant Capacity Factors, 1996-2006
Capacity factor
1.00
0.95
0.90
0.85
0.80
0.75
0.70
0.65
0
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Year
Non-RTO
New RTO
Original RTO
California
Source: GAO analysis of Energy Information Administration data.
Note: Capacity factors represent the electricity generated by a plant as a percentage of that plant’s
maximum capacity to generate electricity.
Some experts and industry participants believe improved generator
efficiency at existing plants benefits consumers because it reduces the
need to construct new generating plants and allows less expensive
generating options, such as previously constructed nuclear plants, to
satisfy a greater portion of electricity demand. Others question the role of
RTO markets and restructuring in improving nuclear plant generator
efficiency and whether efficiencies have resulted in lower prices for
consumers than would have otherwise occurred.
Experts and Industry Participants Disagree about RTO Influence on
Infrastructure Investment
There is also disagreement about whether RTOs have led to other regional
benefits, such as increased construction of transmission and generation
infrastructure. For example, some industry participants and experts
believe a practice a number of RTOs employ of pricing electricity
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GAO-08-987 Electricity Restructuring
differently at various locations in a region to reflect the costs associated
with transmission congestion provides valuable signals by indicating
where additional generation or transmission is needed.37 Some critics,
however, charge that this method of pricing electricity has not produced
the expected investment in transmission and generation in the locations
where it is needed. Furthermore, they believe this practice, combined with
what they characterize as limited competition in RTO markets, allows
generators to keep their bids high and earn excess profits.
Studies of Restructuring and RTOs Draw Differing Conclusions
In order to weigh in on these issues, a number of academics and private
consulting firms have conducted studies about the benefits of
restructuring and RTOs and their effect on electricity prices, although
their studies have drawn differing conclusions. Some of these studies seek
to isolate the effect of restructuring and RTO membership from other
factors, such as fuel prices, to determine whether restructuring and RTOs
themselves have influenced prices and led to other benefits. We identify
and describe in appendix VIII a selection of 13 studies that are
representative of these varied conclusions. Several of the studies conclude
that the formation of RTOs resulted in greater efficiencies in the electricity
industry, significantly benefited local economies, and, in some cases, kept
electricity prices lower than they otherwise would have been. Others
conclude that RTO market design and operations have not kept prices to
consumers lower, but rather have led to higher consumer prices and
higher generator profits.
RTO-Developed
Assessments of
Performance Find Benefits
As a way of addressing concerns about whether they have provided
benefits, some RTOs have quantified the benefits they believe they have
provided to their regions. ISO New England, for example, developed
measures related to wholesale electricity prices, power production costs,
emissions, and other areas to quantify the value it has provided to New
England. According to ISO New England, average wholesale electricity
prices in its region, when adjusted for rising fuel costs, have declined from
37
Transmission congestion refers to instances in which a transmission line has insufficient
capacity to transfer the electricity needed to satisfy demand in a particular area. An area
that does not have sufficient transmission capacity may have to rely on local power plants
whose production costs may be higher than those for electricity supplies from other
locations. Inability to import lower-cost supplies may cause electricity prices in the
transmission-constrained area to be higher than would be the case without congestion.
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GAO-08-987 Electricity Restructuring
$45.95 per MWh in 2000 to $42.64 per MWh in 2006. ISO New England
reports that over this same period, non-fuel-adjusted prices rose from
$45.95 per MWh to $62.74 per MWh. Midwest ISO also recently developed
an initiative to quantify its performance. According to its analysis, Midwest
ISO has improved electric service reliability and is more efficiently using
generation resources, a fact that, along with other factors, has contributed
to between $555 million and $850 million in annual net benefits. Midwest
ISO is currently soliciting comments from stakeholders on its analysis. We
did not analyze or validate either of these efforts.
FERC Believes RTOs Have
Produced Benefits but Has
Not Conducted a Study or
Developed a
Comprehensive Set of
Publicly Available
Measures for Tracking
RTO Performance
FERC officials believe that RTOs have resulted in benefits to the economy,
such as new efficiencies in operating the regional transmission grid;
however, it has not conducted an empirical analysis or developed a
comprehensive set of performance measures to analyze these benefits.
FERC officials told us they consider RTO benefits when they review
proposals to create RTOs and approve RTO decisions, such as new
markets for electricity and other services. FERC also recently initiated a
proceeding to consider specific reforms to RTO markets—for example,
considering how to strengthen market monitoring and increase
opportunities for long-term power contracts.38 FERC believes RTOs have
produced numerous benefits, including the following:
•
•
•
•
•
•
•
improving the efficiency of the regional transmission grid, including
resolving operating problems such as transmission congestion;
providing more efficient transmission pricing policies; and minimizing
market power;
improving transmission reliability by facilitating more accurate
calculations of regional transmission capacity;
improving access to the grid by reducing opportunities for
discriminatory transmission practices;
improving competition in regional power markets by facilitating the
entry of new independent generators;
facilitating stakeholder consensus solutions to regional problems;
enhancing transparency and oversight regarding how prices are
determined and how access to the grid is granted; and
providing a process of regional transmission planning, thus resulting in
more efficient planning and use of resources across a region, as well as
an opportunity for input by a broad range of stakeholders.
38
FERC, Wholesale Competition in Regions with Organized Electric Markets, Docket RM0719-000 and AD07-7-000, February 22, 2008.
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GAO-08-987 Electricity Restructuring
However, FERC has not conducted an empirical analysis to measure
whether RTOs have achieved these expected benefits or how RTOs or
restructuring efforts more generally have affected consumer electricity
prices, costs of production, or infrastructure investment. FERC believes
data exist to support its conclusion that RTOs have provided benefits—for
example, data illustrating changes in generating capacity in RTO regions
and data about the number of transmission interruptions used by system
operators to address congestion. However, FERC has not used these or
other available data to analyze whether RTOs have produced benefits.
Furthermore, FERC has not reexamined its prospective estimate of the
benefits RTOs were expected to produce—estimated in 1999 at $2.4 billion
annually in cost savings—to determine whether these expected benefits
are actually being realized or how actual outcomes have differed from
original estimates. Some of the projections used to develop this estimate
were too conservative, indicating that the estimate is not as reliable as it
could be.39 Rather than incorporating a range of assumptions about future
fuel prices to account for uncertainty, the model used one set of fuel price
projections that turned out to be lower than what actually occurred. For
example, the model’s projections assumed the average price of natural gas
delivered to electric generation plants in the United States would rise to
$3.25 per million British thermal units (Btu) by 2005.40 In fact, the actual
price rose much faster, reaching $8.50 per million Btu in 2005. Similarly,
the model assumed that U.S. electric generation capacity using natural gas
and oil as fuel would increase from about 230,000 megawatts in 1997 to
about 284,000 megawatts in 2005, but in fact, U.S. electric generation
capacity rose to about 440,000 megawatts. FERC officials acknowledge
that some of the study’s assumptions were low but maintain that RTOs
have provided benefits.
Although FERC collects a wide range of data from the RTOs, it has not
developed a report or other assessment with comprehensive, standardized
measures that Congress and the public could use to identify and track
RTO performance. FERC has taken a step in this direction by developing a
nonpublic document that provides some standardized measures of RTO
market performance, and these measures are also addressed in public
39
FERC’s estimate was based on a model developed by ICF Inc.
40
We adjusted FERC’s estimate of natural gas prices and the actual prices to 2007 dollars to
facilitate comparison.
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GAO-08-987 Electricity Restructuring
reports issued by the RTOs.41 However, FERC officials explained that these
measures were not intended to be used to assess RTO benefits or evaluate
the performance of individual RTOs. Moreover, they are not
comprehensive, since they do not address the extent to which RTOs have
achieved the full range of expected benefits—such as improved reliability,
more efficient planning for generation and transmission investments, or
prices for consumers that are as low as possible—and do not compare
performance between RTO and non-RTO regions. FERC also includes
some statistics about RTOs on its Web site and in its annual report on the
electricity industry, but these data are of limited scope and do not contain
measures of operational and market performance.42 The RTOs themselves
publish large volumes of data about market and operational performance
in publicly available annual reports and other documents available on their
Web sites; however, the large amount of information and, in some cases,
its lack of standardization, make it difficult for the public or Congress to
easily compare and interpret it. Moreover, FERC has not synthesized these
data in a way that allows Congress and the public to draw conclusions
about the benefits of RTOs and their effectiveness or discern whether
RTOs and organized markets are in their best interest.
According to FERC officials, quantitative analyses of whether benefits
were achieved and identification of performance measures are not a
necessary part of its oversight of RTOs. Rather, FERC officials believe
FERC’s continual review of RTO performance—through its evaluation of
RTO decisions, proceedings about RTO market reforms, and market
monitoring—is sufficient to ensure RTOs continue to benefit consumers as
expected. Furthermore, FERC officials cited methodological challenges to
performing an empirical analysis of whether benefits were achieved and
developing performance measures, which it believes would limit their
value. FERC officials also explained that RTO participation is voluntary,
and that participants are able to assess for themselves the benefits of RTO
membership and join or depart based on their own determination.
Experts from the electricity industry and the academic community we
spoke with acknowledged that empirical analysis and measures of RTO
performance would be methodologically challenging to conduct. In
41
These include, among other things, data on load, prices, outage rates, net revenue,
imports and exports, and generation by fuel type.
42
FERC annually produces the “State of the Markets Report,” which contains broad
information on the electricity and natural gas industries.
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GAO-08-987 Electricity Restructuring
particular, these experts noted that there are difficulties in isolating the
influence of RTOs on prices, efficiency, and investment from other factors,
such as fuel prices. However, these experts observed that tracking
performance measures across RTOs would encourage better performance
and could identify potential areas for improvement. Some added that, in
certain cases, the same measures could be developed for non-RTO regions
to provide points of comparison. These experts suggested measuring and
providing standardized information to the public on market
competitiveness, transmission and generation investment, plant efficiency,
reliability, and changes in prices in RTO regions, among other things.
Some industry groups have also called for the development of common
measures of RTO performance, such as measures to track the difference
between generator costs and prices charged in RTO markets, changes in
congestion costs over time, and RTO costs of acquiring capital for major
investments. Another industry group commissioned an independent study
to identify and begin tracking standardized measures of RTO performance.
GAO’s Standards for Internal Control identify the value to organizations of
comparing actual performance to planned or expected results. More
specifically, past GAO work recognizes that federal agencies can use
performance information to identify problems in existing programs,
develop corrective actions, and identify more effective approaches to
program implementation, among other things.43 By developing standard
performance measures that draw upon its own internal analysis or work
being conducted by RTOs, industry experts, market monitors, and others,
FERC could, over time, develop a more thorough empirical understanding
of RTO performance and whether and to what extent RTOs have provided
benefits to the industry and to consumers. This could help FERC in
evaluating the success of the decision to encourage the creation of RTOs
and understand whether RTOs have led to the benefits expected of them.
Measures may also help FERC determine whether to encourage the
creation of additional RTOs or identify areas where its RTO policy and
RTOs themselves could be improved. Moreover, if available to Congress
and the public, measures could allow FERC to weigh in on the
disagreements among experts and industry participants about the benefits
RTOs provide.
43
GAO, Managing for Results: Enhancing Agency Use of Performance Information for
Management Decision Making, GAO-05-927 (Washington D.C.: Sept. 9, 2005).
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Conclusions
It has been over 10 years since major federal electricity restructuring was
introduced and some of the first RTOs were developed to facilitate it, yet
there is little agreement about whether restructuring and RTOs have been
good for consumers, how they have affected electricity prices, and
whether they have produced the benefits FERC envisioned. Compounding
this, rising electricity prices and diverse regional interests complicate an
unbiased discussion of the merits of RTOs and restructuring. Although
there are challenges to answering questions about the benefits of RTOs, a
more structured and formalized approach to RTO oversight would be
beneficial.
FERC’s initial approach to allow a diverse range of RTO types, governance
structures, and rate recovery mechanisms provided a means for regions to
quickly build upon existing institutions like power pools and past
participant experience working together. However, much has changed
since the first RTOs came into existence, and it has become clear that
FERC’s efforts to regulate RTOs as it does utilities may no longer be
sufficient. Furthermore, the specific characteristics of RTOs devised by
FERC and its expectation that these entities would lead to lighter
regulation by FERC give RTOs a unique position in the electricity industry.
Some RTO functions, such as operating the transmission grid, typically fell
within the purview of utilities. Others, including market monitoring and
balancing different stakeholder interests, were more traditionally
performed by regulators. As a result of this unique set of responsibilities,
RTOs face much public scrutiny—something RTOs have implicitly
embraced in part through their varied stakeholder processes—and may
require different oversight by FERC. Although stakeholders told us they
value the stakeholder process at each of the RTOs, the concerns they
raised about its resource intensiveness and the challenges involved in
analyzing RTO decisions highlight the importance of FERC involvement
and oversight. In this regard, without more regular, consistent review of
RTO expenses and budgets, FERC may be missing an opportunity to better
ensure the cost-effectiveness of RTOs and that their rates remain just and
reasonable, even between rate proceedings. Furthermore, FERC’s lack of
regular review of RTO financial reports, filed annually in the Form No. 1,
limits its ability to ensure RTO expenses are accurately and completely
reported and reassure Congress, industry participants, stakeholders, and
the public that the billions of dollars in expenses RTOs have incurred in
recent years were reasonable and spent in accordance with budgets
previously approved.
Finally, while FERC believes RTOs have produced numerous benefits, the
fact that it has not developed a comprehensive set of publicly available
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GAO-08-987 Electricity Restructuring
standardized measures to track RTO performance contributes to
uncertainty about what those benefits have been and their magnitude. We
acknowledge that FERC’s review of RTO decisions that affect electricity
prices and consideration of stakeholder comments and complaints
sometimes results in new rules designed to improve the ability of RTOs to
deliver benefits to their regions. However, in the absence of measures for
evaluating the success of the decision to encourage the creation of RTOs,
FERC may be missing opportunities to facilitate improvements in RTO
operations and markets and is not as strongly positioned as it could be to
evaluate the success of its decision to encourage the creation of RTOs and
determine whether to encourage further RTO development.
Recommendations for
Executive Action
To help ensure that FERC, industry participants, and the public have
adequate information to inform their assessment of whether rates to
recover RTO expenses are just and reasonable, we recommend the
Chairman of FERC take the following two actions:
•
•
develop a consistent approach for regularly reviewing expense
information contained in RTO budgets and
routinely review and assess the accuracy, completeness, and
reasonableness of the financial information RTOs report to FERC in
their Form No. 1 filings.
To provide a foundation for FERC to evaluate the effectiveness of its
decision to encourage the creation of RTOs and help Congress, industry
stakeholders, and the public understand RTO performance and net
benefits, we recommend the Chairman of FERC take the following two
actions:
•
•
Agency Comments
and Our Evaluation
work with RTOs, stakeholders, and other experts to develop
standardized measures that track the performance of RTO operations
and markets and
report the performance results to Congress and the public annually,
while also providing interpretation of (1) what the measures and
reported performance communicate about the benefits of RTOs and,
where appropriate, (2) changes that need to be made to address any
performance concerns.
We provided FERC a draft of this report for review and comment. In a
letter dated August 28, 2008, we received written comments from the
Chairman of FERC. These comments are reprinted in appendix IX. We also
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GAO-08-987 Electricity Restructuring
received technical comments, which we incorporated into the report as
appropriate.
In his letter, the Chairman generally agreed with our report and its
recommendations. We commend FERC for its interest in addressing the
concerns we raised. The Chairman also provided comments in response to
each of the recommendations and outlined plans to address them.
Specifically:
•
Regarding our first recommendation, that FERC develop a consistent
approach for regularly reviewing expense information contained in RTO
budgets, FERC agreed to increase its efforts to review RTO budgets and
the reasonableness of RTO costs, and the Chairman has directed FERC
staff to evaluate possible approaches for doing so.
•
Regarding our second recommendation, that FERC perform additional
review of the financial information in Form No. 1 filings, FERC indicated
that, in addition to the one audit it has already begun, it plans to perform
periodic audits of the financial information in Form No. 1 filings in the
future.
•
Regarding our third and fourth recommendations, that FERC work with
RTOs, stakeholders, and other experts to develop standardized measures
that track the performance of RTO operations and markets and report on
those measures to Congress and the public, the Chairman noted that
FERC is considering appropriate procedures for developing such
measures and how best to report them. Regarding reporting, the Chairman
observed that RTO “State of the Market” annual reports may be a vehicle
for providing data and additional information to the public on RTO
performance. While we agree that these annual reports of data on RTOs
could be helpful for providing the public with additional performance
information, we urge the Commission to consider what role it can play in
helping Congress, industry stakeholders, and the public interpret and
evaluate data and other information from RTOs in order to draw
conclusions about RTO performance and value. It is clear that electricity
markets and RTO operations are complex. FERC’s expertise and
independence make it well positioned to help Congress and others assess
RTO performance and net benefits, and its oversight authority gives it the
ability to use this information to encourage continued improvement. The
Chairman also expressed uncertainty about whether annual evaluation of
results and recommendations for change was feasible or cost-effective. We
recognize that FERC must balance numerous responsibilities and that the
extent of its evaluation of RTO performance may vary from year to year.
However, we believe significant value could be realized from (1) providing
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GAO-08-987 Electricity Restructuring
Congress and others with a consistent, annual source of data for tracking
the performance of RTOs and (2) ongoing analysis of performance
information and consideration of how it could aid FERC in carrying out its
RTO responsibilities.
Finally, along with its general agreement with our recommendations,
FERC provided two clarifying comments.
•
The first clarifies FERC’s role in approving RTO procedures for planning
transmission infrastructure, and we incorporated this comment into our
report.
•
In the second, FERC commented on a statement in our draft report’s
conclusions that RTOs are in a position of greater public trust than
utilities. FERC observes that all utilities have a position of public trust and
that a number of utilities are responsible for administering transmission
systems that are as large as or larger than those of some RTOs. We agree
that all utilities carry out important activities in the public interest that
necessitate vigilant regulatory oversight and acknowledge that a number
of large utilities exist. However, we also recognize that FERC had a
number of unique expectations for RTOs that it did not have for utilities,
believing the creation of RTOs could lead to lighter regulation by FERC.
For example, FERC expected RTOs to assist it in its oversight of the
electricity industry through, among other things, their market monitoring
activities and the stakeholder process in which market development and
other issues are discussed and potentially resolved without resorting to
FERC’s complaint process. It is for these reasons that we believe FERC
should take certain regulatory steps specific to RTOs like those we
recommend in our report—for example, evaluating RTOs using
performance measures—in order to improve RTOs and educate the public
on their performance. However, in response to FERC’s comments, we
revised the report’s conclusions to emphasize the unique role of RTOs and
avoid relative comparisons of trust between RTOs and utilities.
As agreed with your offices, unless you publicly announce the contents of
this report earlier, we plan no further distribution until 30 days from the
report date. At that time, we will send copies of this report to interested
congressional committees; the Chairman of FERC; and other interested
parties. We will also make copies available to others upon request. In
addition, the report will be available at no charge on the GAO Web Site at
http://www.gao.gov.
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GAO-08-987 Electricity Restructuring
If you or your offices have any questions about this report, please contact
me at (202) 512-3841 or [email protected]. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix X.
Mark Gaffigan
Director, Natural Resources and
Environment
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GAO-08-987 Electricity Restructuring
Appendix I: Objectives, Scope, and
Methodology
Appendix I: Objectives, Scope, and
Methodology
At the request of the Chairman and Ranking Member of the Senate
Committee on Homeland Security and Governmental Affairs, we reviewed
(1) Regional Transmission Organizations’ (RTO) key expenses and
investments in property, plant, and equipment; (2) how RTOs and the
Federal Energy Regulatory Commission (FERC) review RTO expenses and
decisions that may affect electricity prices; and (3) the extent to which
there is consensus about what benefits RTOs have provided. Our review
focused on the six RTOs in FERC’s jurisdiction—California Independent
System Operator (ISO), ISO New England, Midwest ISO, New York ISO,
PJM Interconnection (PJM), and Southwest Power Pool.
To determine the total expenses incurred by RTOs from 2002 to 2006, the
most recent data available when we began our review, and their key
investments in property, plant, and equipment, we reviewed independent
public auditor reports over this period, as well as full-time-equivalent
personnel and transmission volume as reported to us by the RTOs. We
summarized RTO expense, personnel, and transmission volume and
property, plant, and equipment balances by RTO, and calculated average
salary and related benefits per full-time equivalent and total expenses per
megawatt hour (MWh) from 2002 through 2006 for each RTO. Our analysis
reflects total annual expenses as reported in the RTOs’ annual audited
financial statements. We did not retroactively apply financial statement
reclassifications to data from prior years. In addition, RTOs utilized
differing billing methodologies, and consequently, the rates they charged
to market participants may be different from the total expenses per MWh
calculated in our analysis.
To illustrate the total amount of investments in property, plant, and
equipment as of December 31, 2006, we used total property, plant, and
equipment in our analysis without reducing those amounts by
accumulated depreciation. We also reviewed 2006 RTO FERC Form No. 1
filings, the most current available at the time of our audit, to determine the
amount of RTO expenses attributable to transmission expenses and
regional market expenses, as well as administrative and general expenses.
Independent public auditor reports did not aggregate expenses by these
categories. We adjusted all expense amounts for inflation utilizing 2007 as
the base year.
To determine how FERC and RTOs review RTO expenses and decisions
and discuss other aspects of RTO costs and benefits, we collected general
information, interviewed representatives from the six RTOs, and spoke to
the ISO/RTO Council about how FERC and the RTOs review proposed
budget expenses and consider how RTO decisions affect electricity prices.
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Appendix I: Objectives, Scope, and
Methodology
For two RTOs—ISO New England and Midwest ISO—we collected more
in-depth information and interviewed stakeholders from each of the major
stakeholder sectors. We selected these two RTOs because they are
multistate and perform a breadth of functions and services, but also reflect
geographical and historical differences. For example, ISO New England
evolved from a power pool; Midwest ISO did not. We interviewed state
agency officials from these RTO areas, including state regulatory agencies
(such as the Connecticut Department of Public Utility Control, Illinois
Commerce Commission, Indiana Utility Regulatory Commission, Maine
Public Utilities Commission, and Massachusetts Department of Public
Utilities), state consumer agencies (such as the Connecticut Office of
Consumer Counsel and Maine Office of the Public Advocate), and state
regulatory associations (such as the Organization of MISO States, National
Association of Regulatory Utility Commissioners, and the New England
Conference of Public Utility Commissioners). We also interviewed
representatives from each of these RTOs’ stakeholder groups to
understand how FERC and RTOs review RTO decisions and expenses. We
interviewed officials from the North American Electric Reliability
Corporation to understand their interaction with RTOs. We spoke with
officials from FERC’s Office of Enforcement and Office of Energy Market
Regulation and reviewed related documentation that outlined FERC’s
steps to review RTO expenses for reasonableness and accuracy. We
reviewed selected FERC rate proceedings to better understand the type of
information provided to FERC about proposed RTO expenses and the
analysis it performs. We also considered FERC’s process for reviewing
actual expenses as reported in FERC Form No. 1 filings and reviewed
FERC audits of RTOs conducted in 2004 which focused primarily on
governance. While we generally reviewed FERC’s oversight of RTOs, we
did not perform an in-depth analysis of FERC’s review of specific RTO
decisions.
Finally, to address the extent to which there is consensus about what
benefits RTOs have provided, we interviewed FERC officials and reviewed
related documentation, including FERC’s 1999 prospective assessment of
RTO expected benefits. We interviewed several experts in the field of
electricity restructuring to discuss their opinions on the benefits and costs
of RTOs and their assessment of the adequacy of FERC’s analysis of RTOs
to date. These included experts from the Analysis Group, Cornell
University, Northeastern University, Penn State University, the University
of California Berkeley, and Vermont Law School. We chose experts
affiliated with academic institutions and research firms with extensive
knowledge of electricity restructuring and RTOs. We selected experts with
a balanced range of views about the economic benefits of RTOs. We also
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Appendix I: Objectives, Scope, and
Methodology
interviewed a number of industry participants, including representatives
from electricity industry associations and consumer organizations, such as
the American Public Power Association, Compete Coalition, Consumer
Federation of America, Electric Power Supply Association, Edison
Electric Institute, Electricity Consumers Resource Council, Industrial
Energy Consumers of America, National Rural Electric Cooperative
Association, and Public Citizen to more fully understand where there was
agreement and disagreement about the costs and benefits of RTOs. We
reviewed reports and analyses from these and other industry participants
that discussed the costs and benefits of RTOs.
We also reviewed expert studies on the economic effects of restructuring
and competition in the electricity industry and electricity consumers. In
deciding which studies to include in our summary table, we selected some
studies that were sponsored by both advocates and critics of the existing
RTOs, as well as studies that are more academic in nature. Some of these
studies specifically addressed the impact of RTOs on electricity costs and
prices, while others addressed the impacts of restructuring and
competition more generally, without specifically isolating the impact of
RTOs. We conducted basic analyses of data on electricity prices, intensity
of the use of generation resources (capacity factors), and type of
generation resources (by fuel use). For the analysis of prices and capacity
factors, we divided states into four categories: (1) original RTO states—
states joining an RTO in 1999 or earlier and historically in a power pool,
(2) new RTO states—states joining an RTO region after 1999, (3) non-RTO
states—states outside RTO regions, and (4) California. The original RTO
states category included Connecticut, Delaware, Massachusetts, Maryland,
Maine, New Hampshire, New Jersey, New York, Pennsylvania, Rhode
Island, Vermont, and the District of Columbia. The new RTO states
category included Iowa, Illinois, Indiana, Kansas, Michigan, Minnesota,
Missouri, North Dakota, Ohio, Oklahoma, Virginia, Wisconsin and West
Virginia. The non-RTO states category included Alaska, Alabama,
Arkansas, Arizona, Colorado, Florida, Georgia, Hawaii, Idaho, Kentucky,
Louisiana, Mississippi, Montana, North Carolina, Nebraska, New Mexico,
Nevada, Oregon, South Carolina, South Dakota, Tennessee, Utah,
Washington and Wyoming. We placed California in a separate category
because its electricity industry went through a turbulent restructuring
process during part of the time period that we analyzed. We did not
include Texas in our analysis, because most of the state constitutes a
separate grid from the two other main grids in the United States and is
largely unregulated by FERC. For the other three groupings, states that
were partially in an RTO region were considered part of the region if
electricity for most major cities was provided by a utility that participated
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Appendix I: Objectives, Scope, and
Methodology
in an RTO. Our analysis was based on electricity data obtained from the
Energy Information Administration. For the price analysis, we used
electric power retail sales and electric revenues data. We developed
average price estimates by aggregating state-level data, dividing revenues
by sales, and adjusting for inflation using the gross domestic product price
index. We focus on the prices in the industrial sector because the retail
portion of its electricity prices is typically smaller than the retail portion of
residential and commercial electric prices. RTOs operate wholesale
markets and do not determine the retail portion of electric prices. We also
conducted a specific analysis of relative industrial electricity prices. A
description of that analysis and our methodology is presented in Appendix
VII. For the analysis of the intensity of the use of generation resources, we
calculated capacity factors from Energy Information Administration statelevel data on electric power generation capacity and actual generation. We
also interviewed representatives from the Energy Information
Administration to understand the type of data that agency collects related
to estimating the benefits and costs RTOs.
We conducted this performance audit from October 2007 to September
2008 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to
obtain sufficient, appropriate evidence to provide a reasonable basis for
our findings and conclusions based on our audit objectives. We believe
that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives. We provided a draft of this
report to FERC for its review. FERC’s comments are reprinted in
Appendix IX.
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GAO-08-987 Electricity Restructuring
Appendix II: RTO Characteristics and
Functions Required by FERC Order 2000
Appendix II: RTO Characteristics and
Functions Required by FERC Order 2000
RTO characteristics
Description
Independence
RTOs must be independent of control by any market participant and have the authority to
propose rates, terms, and conditions of transmission services provided over the facilities they
operate. An RTO’s employees must not have financial interest in any market participant.
Scope and regional configuration
RTOs must serve an appropriate region of sufficient scope to maintain reliability, support
efficient and nondiscriminatory power markets, and carry out their other functions.
Operational authority
RTOs must have operational authority for all transmission facilities under their control.
Short-term reliability
RTOs must have exclusive authority for maintaining the short-term reliability of the grid they
operate.
RTO functions
Description
Tariff administration and design
RTOs must administer their own transmission tariff—an agreement that outlines the terms and
conditions of transmission service—and employ a transmission pricing system that promotes
efficient use and expansion of transmission and generation facilities.
Congestion management
RTOs must ensure the development and operation of market mechanisms to manage
transmission congestion. These mechanisms should accommodate broad participation by all
market participants and provide transmission customers with efficient price signals.
Parallel path flow
RTOs must develop and implement procedures to address engineering and reliability problems
caused by parallel path flows—a term that refers to electricity flowing over all possible
transmission lines regardless of who owns the lines and what transmission contracts were
agreed to. According to FERC, prior to RTOs many transmission owners found their grids
overloaded by the actions of others because of this engineering reality. Since they were unable
to determine the responsible party, these owners had to curtail their own use of their grid.
Ancillary services
RTOs must serve as the provider of last resort for ancillary services—services to maintain the
reliable operation of the transmission system—and have the authority to decide the minimum
required amounts of each ancillary service. RTOs must also ensure that transmission
customers have access to a real-time balancing market.
OASIS and capacity
RTOs must be the single administrator for the Open Access Same Time Information System
(OASIS) site—an Internet-based electronic communication and reservation system through
which transmission providers provide information about the availability and price of transmission
and ancillary services and customers procure those services. Furthermore, RTOs must
independently calculate total and available transmission capacity—measures of the amount of
electric power that the transmission system is capable of transferring from one point in the grid
to another.
Market monitoring
RTOs must provide for objective monitoring of markets administered to identify market design
flaws, market power abuses, and opportunities for efficiency improvements.
Planning and expansion
RTOs must be responsible for planning and directing necessary transmission expansions,
additions, and upgrades that will enable it to provide efficient, reliable, and nondiscriminatory
service. In doing so, they must coordinate such efforts with appropriate state authorities and
must encourage market-driven operating and investment actions for preventing and relieving
congestion.
Interregional coordination
RTOs must ensure the integration of reliability practices across regions.
Source: FERC Order 2000 and GAO analysis.
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GAO-08-987 Electricity Restructuring
Appendix III: RTO Inflation-Adjusted
Expenses and Full-time Equivalents from
2002 to 2006, by RTO
Appendix III: RTO Inflation-Adjusted
Expenses and Full-time Equivalents from
2002 to 2006, by RTO
(Dollars in thousands)
California ISO
2002
2003
2004
2005
2006
Total
Expenses
Salaries and related benefits
$76,427
$80,949
$84,451
$81,600
$75,393
$398,820
Interest expense (income)
13,716
5,542
5,133
211
223
24,825
Consulting, professional, and other outside services
20,286
21,954
22,427
22,163
17,425
104,255
Facility/maintenance
67,234
67,365
41,373
40,311
33,178
249,461
Other
11,020
27,748
9,709
8,864
9,227
66,568
Depreciation and amortization
52,471
26,178
17,198
19,026
17,123
131,996
Regulatory dues/assessments
0
0
0
0
0
0
$241,154
$229,737
$180,291
$172,174
$152,569
$975,925
Total expenses
Full-time equivalents (FTE)
Salaries and related benefits per FTE
572
591
576
484
506
$134
$137
$147
$169
$149
$39,345
$46,581
$50,632
$53,956
$55,499
ISO New England
Expenses
Salaries and related benefits
Interest expense (income)
$246,013
911
3,448
2,800
2,603
3,110
12,872
13,570
13,992
18,349
18,428
15,051
79,390
Facility/maintenance
9,918
9,771
8,505
7,116
7,334
42,644
Other
Consulting, professional, and other outside services
5,515
6,078
8,945
8,447
10,893
39,877
Regulatory dues/assessments
0
0
0
0
1,465
1,465
Depreciation and amortization
4,104
35,886
38,515
41,219
24,653
144,377
$73,362
$115,757
$127,745
$131,768
$118,005
$566,638
345
373
401
413
401
$114
$125
$126
$131
$138
Total expenses
FTEs
Salaries and related benefits per FTE
Midwest ISO
Expenses
Salaries and related benefits
$29,160
$39,899
$58,497
$75,344
$80,727
$283,628
Interest expense (income)
10,690
12,646
17,710
19,435
14,149
74,629
Consulting, professional, and other outside services
10,234
26,374
50,237
53,298
29,698
169,841
Facility/maintenance
9,635
16,601
23,156
27,761
31,612
108,764
18,573
-44,851
-30,112
424
4,411
-51,556
Regulatory dues/assessments
0
20,343
21,646
34,769
32,748
109,506
Depreciation and amortization
16,536
22,477
26,474
72,011
81,731
219,229
$94,828
$93,489
$167,607
$283,041
$275,075
$914,040
Other
Total expenses
FTEs
Salaries and related benefits per FTE
Page 68
265
373
517
590
643
$110
$107
$113
$128
$126
GAO-08-987 Electricity Restructuring
Appendix III: RTO Inflation-Adjusted
Expenses and Full-time Equivalents from
2002 to 2006, by RTO
New York ISO
2002
2003
2004
2005
2006
Total
$33,158
$36,824
$41,258
$48,391
$48,351
$207,982
2,559
1,489
2,652
3,337
3,863
13,901
Consulting, professional, and other outside services
23,621
28,086
29,519
27,882
25,563
134,671
Facility/maintenance
16,931
15,451
22,092
23,424
25,713
103,611
Other
19,505
20,371
19,789
5,761
5,708
71,135
8,740
10,526
7,455
11,209
9,733
47,663
Expenses
Salaries and related benefits
Interest expense (income)
Regulatory dues/assessments
Depreciation and amortization
Total expenses
FTEs
Salaries and related benefits per FTE
9,671
19,761
26,651
37,974
32,892
126,949
$114,185
$132,508
$149,416
$157,979
$151,824
$705,912
316
345
393
383
391
$105
$107
$105
$126
$124
$54,412
$62,037
$65,913
$78,024
$80,971
$341,358
12,046
10,092
7,777
9,802
18,502
58,218
PJM
Expenses
Salaries and related benefits
Interest expense (income)
Consulting, professional, and other outside services
28,045
25,962
32,709
41,147
38,914
166,778
Facility/maintenance
20,742
23,208
22,830
20,413
16,223
103,415
Other
154,422
103,037
23,775
37,243
45,951
364,428
Regulatory dues/assessments
11,256
12,409
25,713
29,689
33,358
112,425
Depreciation and amortization
30,735
54,512
56,553
67,902
47,648
257,351
$311,657
$291,257
$235,271
$284,220
$281,568
$1,403,973
484
531
562
578
551
$112
$117
$117
$135
$147
$12,616
$13,503
$15,852
$19,638
$26,233
$87,842
2,414
2,138
1,003
454
-571
5,438
11,764
5,215
8,181
10,750
14,100
50,012
Facility/maintenance
3,323
3,687
4,215
4,802
7,221
23,247
Other
1,877
1,435
3,488
4,131
4,609
15,540
930
701
757
8,712
10,661
21,760
Total expenses
FTEs
Salaries and related benefits per FTE
Southwest Power Pool
Expenses
Salaries and related benefits
Interest expense (income)
Consulting, professional, and other outside services
Regulatory dues/assessments
Depreciation and amortization
Total expenses
FTEs
Salaries and related benefits per FTE
Page 69
5,028
4,956
5,839
3,041
3,825
22,689
$37,953
$31,635
$39,335
$51,528
$66,078
$226,529
110
116
131
169
245
$115
$116
$121
$116
$107
GAO-08-987 Electricity Restructuring
Appendix III: RTO Inflation-Adjusted
Expenses and Full-time Equivalents from
2002 to 2006, by RTO
Total salaries and related benefits for RTOs
$245,119
$279,794
$316,603
$356,953
$367,175
Total FTEs
2,092
2,329
2,580
2,617
2,737
Total salaries and related benefits per FTE
$117
$120
$123
$136
$134
$1,565,644
Source: GAO analysis of independent auditors’ reports. FTE information provided by RTOs.
Note: Dollar amounts are inflation-adjusted and presented in 2007 dollars. Additionally, the sum of
component data in this appendix may not equal the totals due to rounding. In 2004, PJM changed its
method of classifying revenues and expenses related to study and interconnection fees for financial
reporting purposes. The expenses we calculated for PJM for 2002 and 2003 are significantly higher
than the amounts it billed market participants, because we did not retroactively apply financial
statement reclassifications to data from prior years.
Page 70
GAO-08-987 Electricity Restructuring
Appendix IV: Megawatt hour Load Served by
RTO from 2002 through 2006
Appendix IV: Megawatt hour Load Served by
RTO from 2002 through 2006
California ISO
Load served in megawatt hours
(MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
2002
2003
2004
2005
2006
Total
220,888,474
220,572,396
229,981,261
234,978,833
240,171,616
1,146,592,580
$241,154
$229,737
$180,291
$172,174
$152,569
$975,925
$1.09
$1.04
$0.78
$0.73
$0.64
$0.85
128,029,400
130,777,700
132,520,500
136,355,200
132,091,800
659,774,600
$73,362
$115,757
$127,745
$131,768
$118,005
$566,638
$0.57
$0.89
$0.96
$0.97
$0.89
$0.86
365,911,866
460,340,014
628,868,057
691,478,733
668,033,817
2,814,632,487
$94,828
$93,489
$167,607
$283,041
$275,075
$914,040
$0.26
$0.20
$0.27
$0.41
$0.41
$0.32
160,500,000
159,800,000
163,700,000
173,800,000
170,300,000
828,100,000
$114,185
$132,508
$149,416
$157,979
$151,824
$705,912
$0.71
$0.83
$0.91
$0.91
$0.89
$0.85
329,462,687
343,709,652
472,688,685
727,989,643
729,139,288
2,602,989,955
$311,657
$291,257
$235,271
$284,220
$281,568
$1,403,973
$0.95
$0.85
$0.50
$0.39
$0.39
$0.54
80,520,302
86,135,886
92,601,921
125,478,287
179,096,451
563,832,847
$37,953
$31,635
$39,335
$51,528
$66,078
$226,529
$0.47
$0.37
$0.42
$0.41
$0.37
$0.40
1,285,312,729
1,401,335,648
1,720,360,424
2,090,080,696
2,118,832,972
8,615,922,469
$873,140
$894,382
$899,664
$1,080,711
$1,045,120
$4,793,017
$0.68
$0.64
$0.52
$0.52
$0.49
$0.56
ISO New England
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
Midwest ISO
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
New York ISO
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
PJM
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
Southwest Power Pool
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
All RTOs
Load served (MWh)
Total expenses (Dollars in
thousands)
Total expenses per MWh (Dollars)
Source: GAO analysis of data supplied by RTOs.
Page 71
GAO-08-987 Electricity Restructuring
Appendix IV: Megawatt hour Load Served by
RTO from 2002 through 2006
Note: Dollar amounts are inflation-adjusted and presented in 2007 dollars. Additionally, the sum of
component data in this appendix may not equal the totals due to rounding. In 2004, PJM changed its
method of classifying revenues and expenses related to study and interconnection fees for financial
reporting purposes. The expenses per MWh we calculated for PJM for 2002 and 2003 are
significantly higher than the amounts it billed its members because we did not retroactively apply
financial statement reclassifications to data from prior years. Had 2002 and 2003 expenses been
reported as they were from 2004 to 2006, PJM’s inflation-adjusted expenses per MWh would have
been $0.52/MWh (instead of $0.95/MWh) in 2002 and $0.59/MWh (instead of $0.85/MWh) in 2003. In
addition, RTOs utilize differing billing methodologies. As a result, the rates it charges market
participants may be different from the total expenses per MWh calculated in our analysis.
Page 72
GAO-08-987 Electricity Restructuring
Appendix V: Inflation-Adjusted RTO 2006
Expenses Reported on FERC Form No. 1
Appendix V: Inflation-Adjusted RTO 2006
Expenses Reported on FERC Form No. 1
(Dollars in thousands)
California ISO
Expenses
Administrative and general expenses
$73,220
48%
Other expenses
28,005
18%
Transmission expenses
33,678
22%
Regional market expenses
Total
17,667
12%
$152,570
100%
$46,682
40%
ISO New England
Expenses
Administrative and general expenses
Other expenses
34,927
30%
Transmission expenses
19,845
17%
Regional market expenses
16,550
14%
$118,005
100%
$68,891
25%
97,626
35%
Total
Midwest ISO
Expenses
Administrative and general expenses
Other expenses
Transmission expenses
53,877
20%
Regional market expenses
54,681
20%
$275,076
100%
Total
New York ISO
Expenses
Administrative and general expenses
$61,145
42%
Other expenses
47,114
32%
Transmission expenses
17,891
12%
Regional market expenses
Total
20,610
14%
$146,760
100%
$108,979
39%
PJM
Expenses
Administrative and general expenses
Other expenses
104,916
37%
Transmission expenses
45,609
16%
Regional market expenses
22,037
8%
$281,541
100%
Total
Page 73
GAO-08-987 Electricity Restructuring
Appendix V: Inflation-Adjusted RTO 2006
Expenses Reported on FERC Form No. 1
Southwest Power Pool
Expenses
Administrative and general expenses
$46,234
76%
Other expenses
6,428
11%
Transmission expenses
3,769
6%
Regional market expenses
Total
4,587
8%
$61,018
100%
$405,152
39%
Total 2006 expenses reported to FERC
Expenses
Administrative and general expenses
Other expenses
319,017
31%
Transmission expenses
174,669
17%
Regional market expenses
136,132
13%
$1,034,970
100%
Total
Source: GAO analysis of FERC Form No. 1 filings.
Note: Dollar amounts are inflation-adjusted and presented in 2007 dollars. Additionally, percentages
in this appendix may not add to 100 due to rounding, and the sum of component data may not equal
the totals due to rounding. New York ISO, Southwest Power Pool, and PJM expenses reported on
FERC Form No. 1 filings do not agree with the expenses noted on the independent auditors’ reports
due primarily to differences in how certain interest, lease, planning, and other revenues were netted
against related expense accounts in the FERC Form No. 1 filings.
Page 74
GAO-08-987 Electricity Restructuring
Appendix VI: Investment in Property, Plant,
and Equipment for RTOs as of December 31,
2006
Appendix VI: Investment in Property, Plant,
and Equipment for RTOs as of December 31,
2006
(Dollars in thousands)
California ISO
Property and equipment at cost
Software and equipment
Construction, work, and projects in process
Buildings and leasehold improvements
$234,735
59%
131,400
33%
13,763
3%
Land
9,630
2%
Furniture and fixtures
9,685
2%
$399,213
100%
$174,295
75%
Property and equipment, gross
ISO New England
Property and equipment at cost
Software and equipment
Construction, work, and projects in process
24,118
10%
Buildings and leasehold improvements
33,078
14%
Land
Furniture and fixtures
Property and equipment, gross
0
0
2,055
1%
$233,546
100%
$325,846
89%
Midwest ISO
Property and equipment at cost
Software and equipment
Construction, work, and projects in process
0
0
33,857
9%
Land
2,216
1%
Furniture and fixtures
3,330
1%
$365,248
100%
$154,053
79%
Buildings and leasehold improvements
Property and equipment, gross
New York ISO
Property and equipment at cost
Software and equipment
Construction, work, and projects in process
12,112
6%
Buildings and leasehold improvements
24,054
12%
Land
2,098
1%
Furniture and fixtures
2,998
2%
$195,314
100%
Property and equipment, gross
Page 75
GAO-08-987 Electricity Restructuring
Appendix VI: Investment in Property, Plant,
and Equipment for RTOs as of December 31,
2006
PJM
Property and equipment at cost
Software and equipment
$285,328
88%
Construction, work, and projects in process
18,705
6%
Buildings and leasehold improvements
17,454
5%
Land
982
0
Furniture and fixtures
788
0
$323,256
100%
$59,654
85%
6,303
9%
513
1%
Property and equipment, gross
Southwest Power Pool
Property and equipment at cost
Software and equipment
Construction, work, and projects in process
Buildings and leasehold improvements
Land
Furniture and fixtures
Property and equipment, gross
337
0
3,246
5%
$70,054
100%
Total 2006 property, plant, and equipment for RTOs
Property and equipment at cost
$1,233,910
78%
Construction, work, and projects in process
Software and equipment
192,638
12%
Buildings and leasehold improvements
122,718
8%
Land
15,262
1%
Furniture and fixtures
22,102
1%
$1,586,631
100%
Property and equipment, gross
Source: GAO analysis of independent auditors’ reports.
Note: Dollar amounts are inflation-adjusted and presented in 2007 dollars. Additionally, percentages
in this appendix may not add to 100 due to rounding, and the sum of component data may not equal
the totals due to rounding.
Page 76
GAO-08-987 Electricity Restructuring
Appendix VII: Indexed Electricity Prices,
1990-2007
Appendix VII: Indexed Electricity Prices,
1990-2007
As part of our effort to examine trends in state-level prices for industrial
customers, we created indexes of prices at the state level.1 The indexes
reflect the average of electricity prices paid by industrial customers,
divided by the comparable national average price. As such, a state with an
index greater than 1.0 would indicate that the state price was greater than
the national average and vice versa. Such an approach focuses attention
on how prices compare to the national average and how the different
states’ standing relative to the national average changes over time. This
approach also avoids the necessity of deciding which deflator is most
appropriate for adjusting nominal electricity prices for inflation.
To examine the trends in these indexes for the different regions of the
country according to their RTO affiliations, we created weighted average
indexes consistent with our RTO classifications described in appendix I.
We chose to include Texas in this analysis for purposes of comparison. We
obtained a weighted average by multiplying each state’s index for a given
year by the share of its retail sales of electricity to industrial customers
relative to its group’s total, and then summing up the resulting multiples
for all the states in a given group. The results of this effort are reasonably
consistent with the results of the basic price analysis reflected in figure 10
of the report. This analysis provides additional insights into price trends
over the period of analysis. For example, it shows that from about 1997
through 2002, the original and new RTO states witnessed relative price
decreases compared to the non-RTO group. Further, it appears that from
2002 through the most recent data in 2007, the original RTO states also
witnessed relative price increases that effectively erased the decline in
prices from 1997 through 2002. In this analysis, these prices (original RTO
states) in 2007 are higher, in a relative sense, than they were prior to
restructuring in 1997. Industrial prices in Texas, generally not overseen by
FERC, have witnessed notable relative price increases since the
introduction of restructuring. It is important to note that this analysis
provides a look at price trends and does not provide any indication of
RTOs causing these trends or even influencing them. Notably, both the
original RTO states and Texas are highly reliant on natural gas, the prices
of which have increased dramatically in recent years.
1
Data collected by the Energy Information Administration reflect average revenue per
kilowatt-hour of electricity sold to customers and represent a proxy for prices.
Page 77
GAO-08-987 Electricity Restructuring
Appendix VII: Indexed Electricity Prices,
1990-2007
Figure 13: Comparison of Relative Electricity Prices for Industrial Customers, 1990-2007
Index of prices
2.1
1.9
1.7
1.5
1.3
1.1
0.9
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Year
New RTO
Non-RTO
Original RTO
California
Texas
Source: GAO analysis of Energy Information Administration data.
Page 78
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Study and date
Assessment of net
Author and affiliation benefits
Primary measure of
net benefits/major
data elements
Study conclusion and GAO
comment
A Cost-Benefit
Assessment of
Wholesale Electricity
Restructuring and
Competition in New
England (2006)
M. Barmack, E. Kahn,
and S. Tierney,
Analysis Group
Capital and operating
Restructuring and
costs of electricity
competition in New
generation
England resulted in
relatively small savings
in the capital and
operating costs of
wholesale electricity. No
specific analysis of the
impact of wholesale cost
savings on consumer
prices.
Electricity Prices and
Costs under
Regulation and
Restructuring (2008)
S. Blumsack, L. Lave,
and J. Apt, Carnegie
Mellon Electricity
Industry Center
Restructuring has been
beneficial to companies
that restructured, but the
evidence regarding the
impact of RTOs on
consumers is far less
clear.
Page 79
A measure of the gap
between prices and
firm-level costs of
generating electricity
Sponsored by an electricitygenerating company. Estimated
that restructuring and
competition resulted in an
expected 2 percent savings in
wholesale electricity costs for
New England from 2002 to
2018. Net benefits estimate
based on comparing model
simulations of capital and
operating costs of the
restructured electric industry in
New England with simulations of
investments and operating costs
in a “counterfactual” case with
more traditional regulation and
without industry restructuring.
Attributed very significant
benefits to greater nuclear plant
efficiency from restructuring and
competition.
Constructed an economic and
statistical model to study the
impact of various elements of
retail and wholesale
restructuring on the price-cost
markup of electricity-generating
companies. Asserted that
restructuring was beneficial to
companies that restructured,
based on the conclusion that 2
to 3 cents per kilowatt-hour of
the difference between prices
and costs was explained by
restructuring rather than
increases in fuel prices.a
Concluded that of the various
restructuring elements, RTO
membership had little overall
impact on the price-cost
markup.b
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Primary measure of
net benefits/major
data elements
Study and date
Assessment of net
Author and affiliation benefits
Measuring and
Explaining Electricity
Price Changes in
Restructured States
(2006)
M. Fagan, MossavarRahmani Center for
Business and
Government, Harvard
University
The study finds no
evidence that RTO
formation or industry
restructuring explains
price differences among
regions of the country.
Putting Competitive
Power Markets to the
Test (2005)
Global Energy
Decisions
Operating costs of
Consumers in the
producing electric power
Eastern Interconnect
region (entire United
States except 11
Western states and
Texas) benefited from
large savings in the cost
of utility wholesale
purchases of electric
power.
Page 80
Study conclusion and GAO
comment
Industrial electricity
prices
Compared actual average retail
industrial electricity prices with
model-predicted prices in states
classified as restructured and
nonrestructured in 2001-2003.
Concluded that prices were
lower than predicted in twothirds of restructured states and
in about one-quarter of
nonrestructured states.
Concluded also that regulatory
reform at neither the retail nor
wholesale levels (RTO
participation) was a significant
driver of the difference in price
trends.
Commissioned by private
energy companies. Concluded
that wholesale competition in
the electricity industry in the
Eastern Interconnect region
resulted in large net economic
benefits and that RTOs
contributed significantly to the
realization of these benefits.
Used a computer model to
simulate wholesale electricity
production costs for 1999-2003
under two scenarios: simulating
(1) actual restructuring events
over 1999-2003 and (2) the
absence of procompetitive
FERC reform over the same
period. Concluded that
procompetitive reforms resulted
in about $15 billion net savings.
Savings largely driven by
dramatically improved
efficiencies of power plants.
Also specifically estimated large
net economic benefits from
expansion of the PJM
Interconnect in 2004, supporting
the conclusion that RTO
formation and operations played
an important role in realizing the
benefits of competition.
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Study and date
Assessment of net
Author and affiliation benefits
Primary measure of
net benefits/major
data elements
Study conclusion and GAO
comment
Analysis of the Impact
of Coordinated
Electricity Markets on
Consumer Electricity
Charges (2007)
S. Harvey, B.
McConihe, and S.
Pope, LECG
Average retail prices are
slightly lower per
megawatt hour for PJM
and New York ISO
residential consumers
than if coordinated
markets had not been
implemented.
Average residential
prices for selected
states that are members
of RTOs and states that
are not members of
RTOs in 1990-2004
Commissioned by PJM. Used
several statistical economic
models to isolate the impact of
electricity restructuring from
several other variables that
affect electricity prices. All
model specifications indicated
somewhat lower prices
associated with restructuring.
Concluded that while current
RTO markets are imperfect,
they have provided material
benefits to consumers.
LMP Electricity
Markets: Market
Operations, Market
Power, and Value for
Consumers (2006)
E. Hausman and
others, Synapse
Energy Economics
LMP markets in RTOs
have not delivered
benefits to consumers in
ISO New England and
PJM; resource owners
have reaped windfall
profits.
Wholesale electricity
prices; bidding behavior
data, measures of
investment in generation
capacity, market
concentration, price-cost
markup, demand
response, congestion
costs
Commissioned by the American
Public Power Association.
Concluded that location-based
pricing of RTO markets like PJM
and ISO New England
represented the best approach
available for operating large,
interconnected power pools
efficiently and reliably. Also
concluded that the benefits of
this form of pricing have been
limited because markets are
based on bids rather than costs
and lack perfect competition.
Further, this pricing mechanism
in the PJM and ISO New
England markets resulted in
windfall profits for resource
owners without benefits to
consumers. Found no evidence
of this form of pricing improving
the pattern of investments in the
industry.
Page 81
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Study and date
Assessment of net
Author and affiliation benefits
Primary measure of
net benefits/major
data elements
Study conclusion and GAO
comment
ISO New England:
ISO New England
Delivering Value to the
Region (2007)
Large savings in
wholesale electricity
costs in New England
and in ratepayers’ bills,
and other benefits
including service
reliability, lower
emissions, and greater
demand response.
Electric system costs,
cost of electric power
generation capacity,
new investment in
generation and
transmission, demand
response participation,
others
Summarized unpublished ISO
New England analyses that
estimated RTO benefits in
different aspects of electricity
service in New England.
Estimated average annual
wholesale market savings of
about $850 million from 2000 to
2006, equivalent to an
approximate net monthly
savings of $4 for the average
New England ratepayer.
Quantified other RTO benefits,
such as lower emissions of
certain pollutants. Concluded
that ISO New England had a
significant role in enhancing the
reliability and efficiency of the
region’s electricity industry and
can help achieve the region’s
environmental goals by enabling
the interconnection of lowcarbon-emitting resources,
benefit the region’s electricity
consumers, improve planning,
and more.
Markets for Power in
the United States: An
Interim Assessment
(2006)
Lower prices for
Average industrial and
residential and industrial residential prices
consumers.
Constructed an economic and
statistical model to study the
effects of retail and wholesale
competition on electricity prices
for residential and industrial
consumers, using the share of
electricity generated by
unregulated generators in a
state as a proxy measure for the
effect of wholesale
restructuring.c Concluded that
greater activity in a state’s
wholesale electricity market is
associated with lower prices for
residential and industrial
consumers, supporting the
study’s view that RTOs
improved industry performance.
P. Joskow, MIT
Page 82
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Study and date
Assessment of net
Author and affiliation benefits
Primary measure of
net benefits/major
data elements
Study conclusion and GAO
comment
Restructuring the U.S.
Electric Power Sector:
A Review of Recent
Studies (2006)
J. Kwoka
Found no reliable or
No data analysis
convincing evidence that conducted (review of
consumers are better off other studies)
as a result of
restructuring the U.S.
electric power industry.
Commissioned by the American
Public Power Association,
reviewed 12 studies on the
economic impact of restructuring
in the U.S. electricity industry.
Identified serious weaknesses in
all 12, concluding that the
methodologies consistently fell
short of the standards for good
economic research. Most also
failed to fully address the effects
of restructuring.
Midwest ISO Value
Proposition (2007)
Midwest ISO
Large net economic
benefits in the Midwest
ISO region in various
aspects of electricity
services; no specific
analysis of how benefits
affect consumer prices.
Summarized Midwest ISO and
consulting firm studies that used
different approaches to
estimating the economic impact
of Midwest ISO operations in
several areas. Concluded that
$555 million to $850 million in
annual net economic benefits for
the region resulted from more
efficient use of the industry’s
resources (generation and
transmission assets), more
reliable service, and improved
planning and investment
patterns. Pointed to unquantified
benefits related to greater price
transparency, regulatory
compliance, and improved
opportunities for demand
response and renewable
resources.
Page 83
Size, duration, cost, and
probability of electricity
outages; measures of
the use of electricity
generation capacity and
of the cost of reserve
generation capacity;
RTO administrative and
operating costs; etc.
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
Study and date
Assessment of net
Author and affiliation benefits
Primary measure of
net benefits/major
data elements
The Regional
Transmission
Organization Report
Card: Wholesale
Electricity Markets and
RTO Performance
Evaluation, 2nd ed.
(2007)
M. J. Morey and
others, Christensen
Associates Energy
Consulting
No conclusions on
whether RTOs yielded
net economic benefits or
whether retail
consumers were
benefiting from RTOs.
2006 Performance
Review of Electric
Power Markets (2006)
K. Rose, Institute of
Public Utilities,
Michigan State
University, and K.
Meeusen, Ohio State
University
Restructuring electricity Retail prices of
electricity
markets at least so far
has resulted in no
discernible benefits to
consumers of electricity.
Estimating the Benefits R. J. Sutherland
of Restructuring
Electricity Markets: An
Application to the PJM
Region (2003)
Restructuring and
competition resulted in
significant reductions in
the prices consumers
pay for electricity.
Study conclusion and GAO
comment
Numerous metrics
related to prices, costs
(including RTO
administrative and
operating costs), market
power, plant efficiencies
and availability,
reliability of service, and
investments in
generation and
transmission
Prepared for the National Rural
Electric Cooperative Association
and intended to provide insight
into RTO performance in various
areas. Stated that many industry
stakeholders were concerned
that no single reference
document was available for
RTO statistics to objectively
analyze RTO and RTO market
performance. Consolidated data
from different sources to make
performance comparisons
across RTOs. Mentioned areas
of strength of individual RTOs
and expressed concern,
particularly about market power,
demand response, and
investments.
Commissioned by the Virginia
State Corporation Commission.
Addressed retail and wholesale
restructuring. Recognized that
RTOs’ “marginal cost” pricing is
needed for an efficient market
under competitive conditions,
but expressed concern that RTO
markets were not sufficiently
competitive because consumers
had very limited ability to
respond to high prices by
reducing demand and because
of evidence of market power on
the supply side.
Residential, commercial, Used a comparison of prices for
and industrial prices
1997 and 2002, assuming that
prices were lower in 2002 due to
a large extent to restructuring.
Estimated that PJM electricity
consumers saved about $3.2
billion in 2002 from
restructuring, equivalent to
about 15 percent of their
electricity bills that year.
Source: GAO.
Note: Studies are listed alphabetically by author.
a
For comparison, the 2007 average retail price of electricity was about 9 cents per kilowatt-hour (see
fig. 9).
Page 84
GAO-08-987 Electricity Restructuring
Appendix VIII: Summary of Expert Studies
Analyzing the Benefits of Restructuring and
Regional Transmission Organizations
b
Blumsack, Lave, and Apt, Electricity Prices (2008), p. 24: “Overall, simply joining an RTO has had
little effect on price-cost markups, although the combination of RTO membership and retail
competition appears to dampen the increase in price-cost margins.”
c
Although the article did not explicitly model the effect of RTO membership, the proxy measure for
restructuring in the analysis was related to RTO membership. The share of electricity generated by
unregulated generators is likely to be much higher in states that were members of RTOs than in
states that were not members of RTOs.
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GAO-08-987 Electricity Restructuring
Appendix IX: Comments from FERC
Appendix IX: Comments from FERC
Page 86
GAO-08-987 Electricity Restructuring
Appendix IX: Comments from FERC
Page 87
GAO-08-987 Electricity Restructuring
Appendix IX: Comments from FERC
Page 88
GAO-08-987 Electricity Restructuring
Appendix IX: Comments from FERC
Page 89
GAO-08-987 Electricity Restructuring
Appendix X: GAO Contact and Staff
Acknowledgments
GAO Contact
Mark Gaffigan, (202) 512-3841, [email protected]
Staff
Acknowledgments
In addition to the individual above Jon Ludwigson, Assistant Director;
Pedro Almoguera; Dan Egan; Philip Farah; N’Kenge Gibson; Paige
Gilbreath; Randy Jones; Jennifer Leone; Ying Long; Alison O’Neill; Glenn
Slocum; Barbara Timmerman; Walter Vance; and George Warnock
provided significant contributions.
(360887)
Page 90
GAO-08-987 Electricity Restructuring
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| File Type | application/pdf |
| File Title | GAO-08-987 Electricity Restructuring: FERC Could Take Additional Steps to Analyze Regional Transmission Organizations' Benefits |
| Author | U.S. Government Accountability Office, http://www.gao.gov |
| File Modified | 2012-12-18 |
| File Created | 2008-09-22 |