Senator Susan Collins has requested an investigation of electricity charges in Maine and other markets that participate in Independent System Operators/Regional Transmission Organizations (ISOs/RTOs). ISOs and RTOs were intended to help electricity consumers save money by improving efficiency and reliability and increasing wholesale electricity competition. However, Senator Collins is now concerned that these ISOs and RTOs might not be living up to their full potential with respect to improving efficiencies and reducing costs. In addition, she is concerned they might not have adequate incentives to minimize costs.
“A report recently released by the Maine Public Utilities Commission suggests that not only are these electricity operators and organizations failing to save the average consumer money, they may actually be costing them more,” said Senator Collins. “We must determine whether these organizations are living up to their promise to consumers, and if not, what alternative options are available to states like Maine who are looking to protect families who need electricity at affordable prices.”
Senator Collins, as the Ranking Member of the Senate Homeland Security and Governmental Affairs Committee, has begun an investigation of ISOs and RTOs. As part of the investigation, Senator Collins and Senator Joseph Lieberman, the Committee Chairman, have requested that the independent Government Accountability Office (GAO) investigate ISO and RTO costs, structure, processes, and operations.
“High electricity prices are a terrible hardship for Maine families and businesses, and as such require very careful scrutiny,” said Senator Collins. “Every component of our electricity rates must be carefully examined. For example, ISO New England, which runs the electrical system in most of Maine, spent $124 million in 2005 on General and Administrative matters. Consumers have a right to know how the electricity grid is being managed and to expect that every effort is made to reduce prices.”
Maine last year passed a resolution directing the Maine Public Utilities Commission (PUC) to study the costs and benefits to Maine of being a member of ISO New England. The resolution also required the PUC to study the options available to Maine for leaving that organization. An interim report released by the Maine PUC earlier this year asserts that ISO New England could cost Maine consumers as much as $616 million in net costs over five years, and suggested that leaving ISO New England is an available option for utilities in Maine.
The following is the text of the letter that Senators Collins and Lieberman wrote to GAO Comptroller General David Walker requesting the investigation:
Dear Mr. Walker,
It has been fifteen years since Congress passed the Energy Policy Act of 1992, which authorized the Federal Energy Regulatory Commission (FERC) to order jurisdictional, transmission-owning utilities to provide open, non-discriminatory transmission access to third parties in order to promote competition in the wholesale electricity market and lower costs for consumers. FERC acted aggressively to implement that new authority in Order 888, issued in 1996, by directing all jurisdictional utilities to file a standard tariff that set forth the costs, terms, and conditions for such service, instead of responding to individual complaints from generators seeking access to specific facilities. In issuing Order 888, FERC predicted that consumers would benefit significantly from competition and would see “approximately $3.8 to $5.4 billion per year in cost savings.”
As part of the effort to achieve these objectives, the Commission sought in Order 888 to encourage the development of “Independent System Operators/Regional Transmission Organizations” (ISOs/RTOs). Order 2000, issued by FERC four years after Order 888, further promoted but did not require the development of RTOs. In response to these initiatives, six RTOs/ISOs were formed, approved by FERC, and placed in control of the dispatch of facilities in significant portions of the nation’s electric grid.
The ISO/RTOs were intended to enhance reliability and the development of wholesale electricity competition. They were designed to control, on a region wide basis, the dispatch of generation and transmission facilities, but not to own them. FERC imposed specific RTO eligibility criteria, which the Commission believed would produce additional consumer benefits. Because these entities were intended to be “independent” of market participants, it was believed that ISO/RTOs would be able to operate regional grids in a more efficient and less discriminatory manner. In short, both RTOs and ISOs were seen as means of improving overall efficiency and lowering costs.
We are writing now out of concern that ISOs and RTOs might not be living up to their full potential with respect to improving efficiencies and reducing costs, and might not have adequate incentives to minimize costs.
Creating and operating ISOs and RTOs have turned out to be costly. Hundreds of millions of dollars have been spent on new staff, facilities, software, and other infrastructure just to begin operations of these organizations. Additional millions are spent each year operating these systems.
RTOs and ISOs make many market-development decisions and advance market-design mechanisms that significantly affect consumer costs. While RTOs and ISOs must weigh many factors in making these decisions, we believe that seeking the lowest possible prices for consumers should be a high priority.
While the RTOs/ISOs have no profit motive, they also are not subject to the usual pressures or mechanisms to keep the rates charged for their services low. RTOs and ISOs are effective monopolies, since within their geographic boundaries they are the only entities providing regional transmission and market-administration services. This has led to concerns that the lack of competitive pressure, which otherwise could help constrain ISO and RTO costs, can result in rates that are higher than necessary.
As a result of high costs and disadvantageous operating characteristics, some members of ISOs are now considering leaving them. For example, on April 13, 2006, the state of Maine passed a resolution directing the Maine Public Utilities Commission to study the costs and benefits to Maine of being a member of ISO New England, and the options available to Maine for leaving that organization. An interim report released by the Maine PUC on January 16, 2007, asserts that ISO-New England could cost Maine consumers as much as $616 million in net costs over five years, and suggested that leaving ISO New England was an available option for utilities in Maine. In addition, two large members of the Midwest ISO have already filed their intentions of leaving that ISO.
In order to help the Senate Homeland Security and Government Affairs Committee continue its oversight of restructured electricity markets, we request that GAO begin an investigation into ISO and RTO costs, structure, processes, and operations. Specifically, we ask that GAO address the following questions, to the extent practicable:
1. We are interested in obtaining data, for each of the past five years, on relative RTO/ISO startup and operating. For each RTO/ISO, what (a) costs were incurred in connection with initial development and completion of the start up/implementation phase; (b) is the current annual operating budget, in both absolute terms and as expressed on the basis of the dollars per Kwh of energy that moves over each RTO/ISO’s grid; (c) is the current capital budget?
2. To the extent it can be determined, do RTO/ISO markets reduce the all-in, delivered costs to load for energy, capacity, and ancillary services in each affected region (eliminating the effects of fuel costs)?
3. For each RTO/ISO region, please provide: (a) a description of the process in place to conduct regional planning, including as to (i) transmission, (ii) generation and (iii) demand-side resources; (b) a description of the process in place to ensure that reliability criteria not met through economic dispatch are satisfied at the lowest reasonable cost; and (c) the level of investment in transmission, generation, and demand-side resources over the past five years.
4. Does each RTO/ISO have a defined “mission” statement? (a) To the extent this is the case; do these mission statements include an obligation on the part of the RTOs/ISOs to control administrative and operational costs, as well as the cost impacts of its market-design decisions, in order to keep costs low for consumers? (b) What incentives are built into the organization or mission of each RTO/ISO with respect to ensuring that costs to consumers are as low as reasonably possible? (c) Does each RTO/ISO have a mechanism in place to identify, assess, track, and monitor the cost impacts of its decisions at the retail consumer level and, if so, how does that mechanism work?
5. With respect to each RTO/ISO: (a) what process is in place to ensure that an evaluation of the costs and benefits of the market design proposals is conducted prior to their submission to the FERC for approval; and (b) what role do market participants and other stakeholders (e.g., state commissions) play in the development, consideration and submission for approval to FERC and approval of (i) new market design proposals; and (ii) the RTO/ISO annual operating budget?
6. What is the level of customer satisfaction with each RTO/ISO?
7. What benefits have these ISOs and RTOs provided? If possible, please estimate the annual savings that may have accrued because of the creation of these entities.
8. Provide your insights as to whether restructured electricity markets are delivering net benefits to end consumers and identify the potential impediments and/or solutions.
Thank you for your timely assistance in this matter.