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The Cost Structure of Regional Transmission Organizations

RTOs now cover well over one-half of customers and sales of electricity in the U.S. As they have expanded in geographic coverage and functional scope, controversies have arisen about their rapidly growing costs and overall effectiveness. We model their costs, exploiting the fact that the seven existing RTOs initiated their various functions at different points in time over their roughly ten-year history. Specifically, we investigate the costs of each of the market functions administered by RTOs, the relative costliness of different RTOs in performing the same functions, the possibility of learning economies from either their individual or industry-wide experience, and economies of scale over the sampled range of RTO "output." Our results confirm the importance of some of these factors but raise doubts about others, in all cases based on systematic modeling and data analysis.

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Energy Specializations: Electricity – Transmission and Network Management; Electricity – Markets and Prices ; Electricity – Policy and Regulation

JEL Codes:
D44 - Auctions
D42 - Market Structure, Pricing, and Design: Monopoly
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Regional transmission organizations (RTO), Electricity markets, US

DOI: 10.5547/ISSN0195-6574-EJ-Vol32-No4-8

Published in Volume 32, Number 4 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.