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What impact has deregulation had on the U.S. regions that are participating in regional transmission organizations (RTOs)? A new report by the Technology Policy Institute analyzes the impact RTOs have had on wholesale power prices. During today's OnPoint, Tom Lenard, president of the Technology Policy Institute, explains why RTOs have been unsuccessful at achieving their goals and how affected regions within the United States should be reacting. Lenard gives his take on how FERC should address the issue and he discusses how electricity restructuring and competition will fit into the overall energy discussion of the next administration.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. With us today is Tom Lenard, president of the Technology Policy Institute. TPI is a think tank that focuses on the economics of technological change and related regulation in the U.S. Tom, thanks for being here.
Tom Lenard: Thank you.
Monica Trauzzi: Tom, TPI just released a new report analyzing the impact of regional transmission organizations and the impact that they've had on the cost of electricity in the U.S. And just for some background for our viewers, RTOs are independent nonprofit entities that operate utility owned transmission networks.
Tom Lenard: Yes.
Monica Trauzzi: There are several regions in the U.S. that have RTOs. What has the outcome of RTOs been on the price of power?
Tom Lenard: Well, our study found that they have actually raised the price of wholesale power. But if I could I'd like to kind of back up a second and kind of put this in the context of the regulation/deregulation today, which is especially relevant now since people are making kind of sweeping statements either in favor or against regulation or deregulation. Since the 1970s a series of industries have been deregulated, starting with the airline industry. And the premise, the basis on which they've been deregulated, has been that regulation was working against the interest of the consumers that it was designed to protect and that it actually resulted in higher prices rather than lower prices, which is what its intent was. And these industries were deregulated. Economists did a series of studies on them following deregulation and found pretty much that actually deregulation had been beneficial to consumers, that prices had gone down. Now, electricity is probably one of the last of the major industries to undergo some sort of whatever you want to call it, deregulation, liberalization. And the premise there was that, again, introducing competition was going to lower prices to the benefit of consumers. But this is an empirical question, so you've got to go in there and try to do empirical studies and find out if, in fact, the goal was met. What we chose to do was focus on RTOs, which was one of the major elements of wholesale competition, introducing new competition into the wholesale market. And so we did an empirical analysis of the effects. Now there's sufficient data available to do this. We focused on wholesale prices, which very few of the other studies that have been done have focused on. And we studied whether the RTOs had, in fact, lowered prices as was their intent. And we found that not only had they not lowered prices but it appeared that the prices actually were higher in the RTO states than in the non-RTO states.
Monica Trauzzi: So why don't RTOs work like all the other industries that you were talking about that faced and benefited from deregulation? Why is it different?
Tom Lenard: Well, I think one of the major reasons is that it's questionable whether RTOs can be characterized as being competition. I mean, the electricity debate is somewhat different from a lot of the other deregulation/regulation debates that have occurred. And you have this, either you're in favor of regulation or you're in favor of competition. I happen to think of myself as somebody who is not particularly in favor of regulation. I have supported virtually all the deregulation efforts that have taken place. I am very much in favor of competition. I'm skeptical of regulation because I think oftentimes regulatory programs do not work as intended, and they don't work to help consumers. I think with respect to RTOs, what happened was that RTOs were adopted without sufficient analysis of what they actually were going to do and knowing what we were getting into. In a very real sense they are an experiment, and it's a pretty risky experiment to experiment on real markets and real people.
Monica Trauzzi: How significant of a cost difference are we talking about here? What's the dollar value?
Tom Lenard: Well, we're talking about $2.00 to $3.00 per megawatt hour, about 4 to 6 percent on average of the wholesale price.
Monica Trauzzi: Higher than the rest of the country.
Tom Lenard: Right.
Monica Trauzzi: There's a lot of talk about incorporating more wind power. How might the inclusion of clean energy impact prices? And is there any greater impact in these regions with the RTOs?
Tom Lenard: Well, I think obviously these alternative energy sources are going to be expensive. We're not going to - if they were all competitive they would have all been adopted already. So it is going to be expensive to meet these environmental goals. I mean, there is a very real question as to the relative efficiencies of the organized markets, the RTO markets versus the more traditional markets leading the environmental goals. And, again, I think that's an area where we need to do more work. However, to the extent that RTOs are not particularly efficient just at delivering electricity and are raising prices above what they otherwise would be, one might think that they're not going to be that efficient at meeting these environmental goals, and that might be relatively more costly.
Monica Trauzzi: There are also some issues with infrastructure and the need to improve infrastructure. How much of an obstacle is transmission going to be in the future as we need more and more power? I mean, what are we talking about here?
Tom Lenard: Obviously, particularly with something like wind power, you need more transmission. I mean, there's been a problem getting transmission built, and it seems to be more difficult in the RTO regions.
Monica Trauzzi: So how should the RTO regions be reacting to these higher prices? And is there anything they can do so that their consumers aren't affected so much?
Tom Lenard: It's not obvious to me what they can do, but they need to look into it and try to find out what they can do because I think they need to become more efficient and, in reality, more pro-competitive. They're very, very complicated. They have lots of different things that they do from planning transmission to operating option markets to operating locational marginal pricing programs. They are very strange organizations. As you said, they are nonprofit organizations that have been given the control of billions of dollars worth of assets, and that's really what makes it a very risky experiment. But the RTOs, it took a long time to establish the RTOs and nobody expects them to be dismantled overnight. So what they really need to do is to see how they can be reformed to be more efficient.
Monica Trauzzi: How does FERC fit into all of this? Do they have any place in this, and what can FERC be doing?
Tom Lenard: Well, I think FERC perhaps should be taking the lead in this. The wholesale markets are basically under the jurisdiction of FERC, and so FERC has a major responsibility to try to see that these wholesale markets work efficiently and give the lowest possible prices to consumers.
Monica Trauzzi: You're holding a conference at the end of this week to examine the key energy issues facing the next administration. In terms of electricity restructuring and competition where do you see the biggest discussions happening for the next administration?
Tom Lenard: Well, I think the biggest discussions are going to be concerned with the energy and the environment and how to -- I think that's fairly obvious -- carbon reduction programs, how to do this all in a way - it's going to be expensive and so it's going to be very important to do this in a way that minimizes the cost for reaching these environmental goals. That's not going to be easy. Electricity market structure is going to be part of that equation. By no means the whole thing, but it's going to be part of it. And I think those are going to be the key issues.
Monica Trauzzi: All right. We're going to end it right there. Thanks for coming on the show.
Tom Lenard: Thank you very much.
Monica Trauzzi: Thanks for watching. We'll see you back here tomorrow.
[End of Audio]
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