“An RTO is an industrial purchasing bureau, similar to the Soviet construction.”

RTO = regional transmission organization, and it is being “studied” as something to implement in the Carolinas, if not the whole Southeast.

Story in the Houston Chronicle

The person who compares RTOs and old Soviet economics is Ed Hirs, who teaches energy economics at the University of Houston and co-chairs an annual energy conference at Yale. Hirs is a charter financial analyst who has worked at the Office of Conservation and Solar Energy at the Department of Energy, with independent power producers, and renewable fuels and oil & gas firms. Consultant, dealmaker, executive.

Hirs has been around. I caught up with Ed. I wanted to because of the itch some Southeast policymakers have to go this RTO route.

Hirs says, “An RTO in its pure form should be someone shunting electrons around efficiently, not a market maker. Policymakers have the misconception that operating a basic linear program model will give customers an optimal outcome.”

Carolina policymakers seem eager to give state authority to an RTO. They would do well to consult Hirs, if legislators will really listen, and if they can take it. His homework about RTOs is thorough.

Real world thinking

Hirs’ thoughts are steeped in 40-plus years of research and hard reality. Take the idea that an RTO lowers costs. “When you move from an old-style regulated power market to a new market structure, you may have lower prices in the short term,” he says.

Forbes column about disincentives

Short-term mentality is a lynchpin issue. Get as much as you can with the least amount of money. “It’s like your car. You can ignore the oil changes and tires for a while and it runs fine. The deferred investment catches up and will cost more when it does not operate well.”

Check Texas for that. The bill always comes due at some point. The Wall Street Journal estimated that Texans had to pay upwards of $28 billion more for their cheap-at-all costs energy system BEFORE last winter’s February freeze.

Great idea – on paper

Texas has its own RTO. California, a place of frequent power problems, has its own transmission organization but is connected to grids in its neighboring states. Those two states have the biggest problems, too. Other RTOs have been in the news for tapping too much coal power or paying for too much reserve power capacity (in the opinions of those who don’t run the grid).

“In concept, having a grid operator makes a lot of sense,” says Hirs. “No question about it. So far nobody has figured out how to do it the right way. They layer on an economic market structure which is just ill-conceived, especially with ERCOT.” (ERCOT is the Energy Reliability Council of Texas, the name for that state’s RTO.)

An RTO is far from free enterprise, which is the guise some policymakers use to sell the idea. “I’ve studied comparative economies,” says Hirs, “An RTO is an industrial purchasing bureau, similar to the Soviet construction. There is one only buyer of the electricity in the wholesale market.”

Nothing free enterprise about that. Pick the kind of monopoly you want.

In tomorrow’s column – a look at why the real-world matters when regulating power.