The net benefit for all consumers if FERC’s proposed standard market design (SMD) is implemented is about $1 billion per year over the first six years it is in place after factoring in the estimated $760 million per year in regional transmission organization (RTO) costs, a new study issued by the Department of Energy (DOE) concludes.

In the study, the DOE looked at two cases — a non-SMD scenario and an SMD scenario. The non-SMD case projects a continuation of existing conditions, in which some large areas of the country have established centralized wholesale electricity markets and others have not.

In the SMD case, FERC’s SMD rulemaking would be finalized and all areas under FERC jurisdiction would establish fully competitive regional markets with SMD’s basic features.

The DOE said that in the SMD scenario, average wholesale prices under SMD are estimated to decrease by about 1% in 2005 and by about 2% by 2020 relative to the non-SMD case.

According to the study, the largest reductions in wholesale prices under SMD would occur in the following regions: Mid-Atlantic Area Council (MAAC), Florida Reliability Coordinating Council (FRCC), Southwest Power Pool (SPP), Northwest Power Pool (NWPP) and California.

In some exporting regions, wholesale power prices would rise due to competing demands for their low-cost power. In the near-term (2005-2010), these regions would include: East Area Reliability Council (ECAR), Mid-America Interconnected Network (MAIN), Mid-Continent Area Power Pool (MAPP) and the Tennessee Valley Authority (TVA). In the long term (2016-2020), the same general pattern of wholesale price changes is projected, but the price increases in the exporting regions would be smaller.

The study said that the effects of SMD on retail rates would be influenced to a significant extent by whether the states in question have cost-of-service regulation or competitive retail choice. In some regions, most of the states have cost-of-service regulation. Other regions have few if any cost-of-service states and retail prices are determined by market forces.

With cost-based rates, utility costs for fuel and purchased power are passed through to consumers. In a shift to SMD, both the volumes of, and prices for, imports and exports would change, the study noted. “Retail prices would be affected either by the shift induced by SMD from ‘split savings’ to market prices for wholesale transactions or by the changes in the volumes and prices for imports and exports, or by both of these.”

For some importing regions with cost-based rates, the net result could be increased costs associated with wholesale purchases, which would be passed through to retail customers. The DOE noted that a 1% increase is projected for FRCC. For some exporting regions with cost-based rates, additional utility revenues from exports could lead to lower retail prices for the region. In MAPP, for example, retail prices are projected to be 1% to 3% lower.

In regions in which states have adopted retail choice, changes in wholesale prices would have a more direct effect on consumer prices. For MAIN, which covers portions of the Midwest, and what the report refers to as the “AZN region,” SMD could lead in some years to increased electricity exports, which in turn lead to higher market-clearing prices in the short-term markets and somewhat higher consumer prices. The AZN region covers southern Nevada, Arizona, most of New Mexico and a small area of west Texas.

Conversely, MAAC and California are projected to see increased imports, lower wholesale power prices and lower prices for consumers.

Meanwhile, the DOE said that the costs of implementing SMD are subject to “considerable uncertainty.” The report said that this is partly due to the uncertainty about the final rule itself and partly to uncertainty about how to separate the impact of the SMD rule from the costs already incurred in response to previous FERC orders, especially Order 2000, which set the framework for RTO establishment.

“Moreover, it is difficult to estimate how much operational savings may be achieved as the RTO dispatch function under SMD begins to substitute for the utility dispatch function that exists today,” the DOE said. “These factors have been addressed in this study, but not perfectly.”

The report pegs the median estimate of the cost of FERC’s SMD rule at about $760 million per year nationally, which is about $0.21/MWh. DOE noted that this incremental cost can’t be estimated precisely.

“It is possible that the costs could be lower or higher, depending on how the rule is implemented and the extent to which existing technology can be transferred to the new RTOs,” the report said. The range of uncertainty is estimated to be about $100 million, meaning that the incremental cost of implementing the SMD rule might be as low as $660 million or as high as $860 million.

The report was prepared in response to a request from Congress that the DOE conduct an independent study to assess various potential impacts of the SMD rulemaking.

The study could have an impact on the ongoing push in Congress to pass comprehensive energy legislation. Energy legislation recently passed by the U.S. Senate Energy and Natural Resources Committee would prevent FERC from issuing a final SMD rule until July 1, 2005.

The report can be downloaded from the DOE’s website at: https://www.energy.gov/

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