The Costs of Participating in Restructured Wholesale Markets

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The Costs of Participating in Restructured Wholesale Markets

American Public Power AssociationFebruary 5, 2007

William M. BatemanRobert C. Smith

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Introduction• The presentation is an overview of the study. • Study examined operational and administrative

cost of 6 FERC Approved Regional Transmission Organizations (“RTO”).– Southwest Power Pool (“SPP”)– California ISO (“CAISO”)– ISO New England (“ISO-NE”)– Midwest ISO (“MISO”)– New York ISO (“NYISO”)– PJM Interconnection (“PJM”)

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Regional Transmission Organization(RTO)

• Created in Order 2000 by the Federal Energy Regulatory Commission (“FERC”) to further the Commission’s goal of creating competitive wholesale electric markets.

• RTOs are independent organizations that are responsible for the operation and reliability of the grid.

• Three Stages of Development– Pre-Day 1– Day 1– Day 2

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Relative Sizes of RTOs2005 Load

(MWh)Miles of

TransmissionGeneration

Capacity (MW)

PJM 682,317,607 56,070 164,634

MISO 652,763,614 93,600 162,981

CAISO 236,925,183 25,526 55,039

SPP 201,511,494 52,301 45,950

NYISO 167,204,055 10,775 37,524

ISO-NE 136,355,309 8,000 32,000

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RTO Cost Recovery• Costs are recovered through FERC approved

charges in the RTO’s tariff.• Charges are generally assessed on a per

megawatt-hour basis.• Mix of “Formula Rates” and “Stated Rates”.• The number and type of charges vary widely

among the RTOs. • Some RTOs have one or two cost recovery

mechanisms, or schedules, while others have a dozen or more.

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Study Methodology• The study examined RTO costs for 2001-2005.

• Cost data taken from FERC Form 1 filed by each RTO.

• Each cost examined to determine how much it contributed the RTOs overall cost.

• Cost classified as either Operational or Administrative.– Operational costs are costs related to running the grid.

– Administrative costs are other costs incurred by the RTOs.

• Cost are actual dollars as reported on the Form 1.

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Overall Results

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Overall Results$/MWh

Period 2005 Average High Low

ISO-NE 2001-2005 $0.912 $0.721 $0.912 $0.497

NYISO 2001-2005 $0.892 $0.740 $0.892 $0.574

CAISO 2001-2005 $0.724 $0.829 $0.963 $0.683

MISO 2002-2005 $0.419 $0.296 $0.419 $0.196

PJM 2001-2005 $0.393 $0.583 $0.873 $0.393

SPP 2005 $0.240 $0.240 $0.240 $0.240

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Overall Results• For the study period, the $/MWh cost for Day

2 RTOs ranged from $0.393/MWh to $0.963/MWh

• The Day 2 RTOs had a combined 5 year average cost of $0.658/MWh

• The total cost is about 75% Administrative and about 25% Operational.

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Overall ResultsCategories with the Largest Costs

Administrative

– Depreciation Costs

– Regulatory Costs

– Consulting Fees/Outside Services

– Administrative & General Salaries

Operational

– Load Dispatching

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Overall Results

• There is a significant variation in costs between the RTOs.

• RTOs use different methods to account for and report costs.

• FERC Order 668 established a new set of FERC accounting codes. RTOs will begin using these new codes for calendar year 2006.

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Southwest Power Pool(SPP)

• Day 1 RTO. Approved in October 2004.• Only one year of data available: 2005• Average cost was $0.240/MWh• 176 employees • Administrative & General Salaries, Regulatory

Costs and Consulting Fees/Outside Services were the largest expenses.

• SPP is implementing an Energy Imbalance Market. Expect that SPP’s operational cost will increase.

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California ISO(CAISO)

• Day 2 RTO. Started 1997.• Data for 2001-2005• Average cost was $0.829/MWh• 489 employees• Rents, Depreciation expense, Administrative &

General Salaries, and load dispatching were the biggest expenses.

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ISO New England(ISO-NE)

• Day 2 RTO. Approved 2005. Effectively operated as a Day 2 RTO since 2001.

• Data for 2001-2005• Average cost was $0.721/MWh• 400 employees• Administrative & General Salaries,

Depreciation expense and Consulting fees/Outside services were the largest expenses.

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Midwest ISO(MISO)

• Day 2 RTO. Approved as Day 1 in December 2001. Approved as Day 2 in 2005.

• Data for 2002-2005• Average cost was $0.296/MWh• 646 employees• Administrative & General Salaries, Consulting

fees/Outside services, Regulatory debits, and Depreciation expense have been the largest expenses.

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New York ISO(NYISO)

• Day 2 RTO. Started 1999.• Data for 2001-2005• Average cost was $0.740/MWh• 400 employees• Administrative & General Salaries, Consulting

fees/Outside services and Depreciation expense have been the largest expenses.

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PJM Interconnection(PJM)

• Day 2 RTO. Approved 2001.• Data for 2001-2005• Average cost was $0.583/MWh• 500 employees• Administrative & General Salaries, Load

dispatching and Depreciation expense have been the largest expenses.

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Summary1. Cost recovery is accomplished through

various charges specified in the RTO tariff.2. Total operational and administrative costs

vary widely by RTO. 3. The Day 2 RTOs 5 year average cost was

$0.658/MWh and the study period cost ranged from $0.393/MWh to $0.963/MWh.

4. Some RTO’s are seeing their $/MWh cost increase, while others are seeing it decrease. The overall $/MWh cost is stabilizing as the markets mature.

The Costs of Participating in Restructured Wholesale Markets

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