Conducting an economic evaluation of an RTO membership (Strategic Economic Analysis)
“MCR guided us through considerations logically, so we could easily ask what would cause MCR to have a different opinion. They provided recommendations and rationale that was easy to follow… they help synthesize data in a manner that increased our industry insight. They connect and make relevant industry insight based on the audience’s or decision maker’s needs.”
—VP, municipal utility
Background
A municipal utility recently expanded its transmission system and expected continued significant transmission investment for the next several years. The client was interested in whether it made economic sense to place its transmission assets and generation into MISO and take network integrated transmission service (“NITS”) as a MISO transmission owner (“TO”). Currently, it serves its load with behind the meter generation and transmission and takes occasional point-to-point service. The results of this study would provide important input into the municipal’s broader integrated resource strategy and strategic plan goals. In addition to comparing the Base Case (the status quo) to the TO Case, the client also wanted MCR to run scenarios where two coal generating units were retired early and how that would impact transmission costs under the Base Case.
Solution
MCR used its RTO Evaluation Model™ to conduct a 20-year forecast of the Base Case, identifying the current MISO charges and the revenues associated with the client’s excess transmission capacity. This Base Case forecast was compared to the TO Case whereby the client placed the transmission assets into MISO, joined a joint pricing zone and obtained full revenue recovery of its transmission-related costs under MISO’s Attachment O formula rate. For the TO Case, MCR developed an annual transmission revenue requirement (“ATRR”) forecast using the MISO Attachment O formula rate template and projected the ATRR based on forecasted capital expenditures, capital structure, depreciation rate and return assumptions. The analysis included a forecast of all company transmission tariff costs, capital expenditures, load and zonal rates and considered the impacts of a grandfathered agreement applicable to certain load. MCR compared the net annual benefits of the Base Case to the TO Case to identify the forecast year where becoming a TO made economic sense (crossover year). MCR then ran the two early coal generating unit retirement scenarios to determine how operating with less behind the meter generation affected the net benefits and optimal timing to become a TO. MCR also ran a sensitivity based on higher load growth reflecting the potential for a large load addition in the near future.
Results
The analysis using MCR’s RTO Membership Evaluation™ concluded the municipal should delay joining MISO as a TO, as the net benefits under the Base Case were higher than the TO Case for at least the next several years. The analysis showed particular sensitivity to certain inputs, such as projected zonal NITS rates and excess transmission capacity, a portion of which could be resold. These factors and others such as load growth and capital expenditures indicated the client should revisit the analysis with updated assumptions in a few years. The sensitivity analysis indicated one of the early coal retirements had only modest impacts whereas the other coal plant had significant impacts on the decision to become a MISO TO and the optimal timing.