Noted Economist Says Agency's Cost-Benefit Report is Deficient
WASHINGTON, D.C. - The cost-benefit analysis offered by the Federal Energy Regulatory Commission to buttress its plan to restructure the nation’s electricity transmission grid is, according to a noted economist, deficient in a number of respects, the most striking of which being its failure to meet even the minimal requirements of such analyses.
In a new paper, “FERC’s Assessment of the Benefits and Costs of Regional Transmission Organizations,” Progress & Freedom Foundation Vice President for Research Thomas M. Lenard concludes that the agency’s report “does not meet the minimal requirements of a cost-benefit analysis,” avoids “critical incentive questions” and “begs the question of whether RTOs will in fact make electricity markets more competitive.” FERC issued the document last week under the title “Economic Assessment of RTO Policy.”
“Unfortunately, the FERC study is not a cost-benefit analysis of RTOs,” he writes. “It is essentially a study of the benefits of electricity competition. [It] simply assumes that the efficiency benefits of electricity competition will flow from the established RTOs and then goes on to estimate those benefits.
“Neither empirical evidence nor theoretical analysis suggests that [RTOs] are likely to produce efficient pricing, usage or investment decisions,” Lenard writes. “It can’t simply be assumed, as the FERC analysis does, that a new and dramatically different institutional structure will be successful. This is the basic issue that the FERC Economic Assessment fails to address.”
In his study, Lenard cites the Executive Order on regulatory planning and review, listing the types of information required by cost-benefit reports. In line with those requirements, he makes suggestions on how FERC’s analysis can be improved. He also dissects the linear-programming model used by FERC.
The Progress & Freedom Foundation is a market-oriented think tank that studies the digital revolution and its implications for public policy. It is a 501(c)(3) research & educational organization.