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May 23, 2002
CONTACT: David Fish
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Electricity Journal Features Lenard's FERC Work
PFF Economist Questions Agency's Cost-Benefit Analysis

WASHINGTON, D.C. - In an article featured in the current edition of The Electricity Journal, “FERC’s Flawed Assessment of the Benefits and Costs of Regional Transmission Organizations,” Progress & Freedom Foundation economist Thomas M. Lenard questions federal energy regulators’ rationale for radically restructuring the nation’s system of electricity transmission. He concludes that the Federal Energy Regulatory Agency’s recent cost-benefit analysis “does not meet the minimal requirements” of such exercises, and is “not sufficient to support the policy path the agency seems to have chosen.”
That path is toward the creation of Regional Transmission Organizations that involve the transfer of operational control of networks to an independent authority. “The agency is now moving more aggressively to divide the nation into a small number of large RTOs and to prescribe in detail how those RTOs should operate,” Lenard writes. He says this new position “would appear to supersede [FERC] Order No. 2000, adopted only two years ago.”

According to Lenard, FERC fails to provide evidence its policy prescription is the best means of accomplishing the goal of greater electricity competition. “FERC’s Economic Assessment does not meet the minimal requirements of a cost-benefit analysis of RTOs,” he writes. “It fails to address critical incentive questions associated with the RTO structure, and begs the question of whether RTOs will in fact make electricity markets more competitive and efficient.”

“Neither empirical evidence nor theoretical analysis suggests that institutions designed like [RTOs] – i.e. those that separate ownership from operational control – are likely to produce efficient pricing, usage, or investment decisions,” he continues. “It simply cannot be assumed, as the FERC analysis does, that a new and dramatically different institutional structure will be successful.”

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.



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