F
Fac t S h e e t February 2013
A Brief Description of the Six Regional
Transmission Organizations (RTOs)
Summary
There are currently six operational regional transmission organizations/independent system operators
(RTOs/ISOs) under the jurisdiction of the Federal
Energy Regulatory Commission (FERC): ISO New
England (ISO-NE); the New York ISO (NYISO); the
PJM Interconnection (PJM); the Midwest ISO (MISO);
the California ISO (CAISO); and the Southwest Power
Pool (SPP). The Electric Reliability Council of Texas
(ERCOT) ISO in Texas operates solely within the state,
which has its own intrastate transmission grid and is
therefore subject only to state regulation, and not that
of FERC.
In regions with operating RTOs, market participants
buy and sell a variety of electricity products and services in RTO-run markets. Typically, these products and
services are not actually furnished by the RTO itself;
instead, they are sold by market participants through
market structures that the RTO administers. For example, in RTO regions with centralized markets for electric
energy (PJM, NYISO, ISO-NE, MISO, and CAISO),
the RTO operates the day-ahead and real-time markets
through which market participants buy and sell wholesale electric power. The RTO does not own the power
plants that generate the power bought and sold in the
market. However, the RTO develops the rules it uses to
administer the markets, decides which generators will
run and at what levels, grants (or denies) the transmission services needed for transactions to occur, and runs
the billing systems for payments for power.
Background
RTOs, with the approval of FERC, perform transmission and power supply functions for the regions in
which they operate. Among other things, they: (1)
plan for and operate the regional interstate transmission grid in an open, non-discriminatory manner; and
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(2) administer centralized markets for energy and, in
some cases, capacity and ancillary services. Most of the
controversy over RTOs centers on their management of
these energy and capacity markets. When these markets
were established, proponents argued that competition
would increase in each region, and therefore consumers
would benefit from lower prices and investment in new
infrastructure necessary for the future reliable operation
of the grid (known as “reliability”). In fact, the opposite
has occurred. Electricity prices are on average higher
in RTO regions, and have risen faster than in other
regions. There is, however, scant evidence that these
higher prices have produced greater levels of reliability.
Much of the electricity in a region is bought and sold
in RTO-operated day-ahead and real-time spot markets. The prices for power in these markets are set every
hour, based on the bids that sellers submit to the RTO.
The RTO takes all bids in ascending order, and stops
with the last incremental bid needed to supply power to
buyers in that time interval. The price all sellers in that
time interval receive, however, is based on the last bid
the RTO accepted—this is known as a “single clearing
price” market. These offers need not reflect the sellers’
actual costs of generating power, as FERC would have
required under a traditional cost-of-service ratemaking
regime. Rather, the sellers set their own price offers, regardless of their actual costs, subject only to review and
possible adjustment by RTOs’ market monitors at a later
date. These markets also influence the price of electricity charged by generators who enter into bilateral or
standard offer contracts with load-serving entities (utilities that must serve ultimate customers like homes and
businesses) and in capacity markets, generally resulting
in higher prices.
When congestion (where demand for transmission
service in a specific direction exceeds the capacity of the
needed lines) prevents generation from being delivered
to customers in a “constrained zone,” more expensive
A Brief Description of the Six Regional Transmission Organizations (RTOs)
generation located within the zone may be used to meet
that demand. The price customers in such a zone pay
reflects the offer submitted by this higher cost generator, even if there are generators offering lower prices
in other areas of the RTO region, because they cannot
deliver their power to the constrained zone. The difference between the lower price in the RTO and that
charged in the constrained zone is referred to as the
“congestion charge.” This congestion pricing system is
known as “locational marginal pricing” (LMP).
The conceptual basis for LMP is that if market
participants must pay higher congestion costs to support their power supply transactions, they will have an
incentive to support construction of new generation
or additional transmission facilities, or to reduce their
usage through conservation or shifting of the times
when energy is consumed. Yet, there is little evidence
that this theory has worked in practice—generation and
transmission development has not been greater in those
regions with higher prices. This flawed market design
has led to these “restructured” markets producing both
higher prices and higher profits than one would expect
in a competitive market, and than are seen in non-RTO
regions. See APPA’s “Wholesale Electricity Markets” issue brief for a more detailed discussion of these problems and APPA’s positions.
Description of RTOs/ISOs
Beyond the basic similarities discussed above, each RTO
has individual characteristics:
California ISO
CAISO operates only in California, but it is FERCjurisdictional because the state’s transmission grid is
interconnected with the rest of the West. Some public
power utilities in the state have chosen not to turn over
operational control of their transmission facilities to
the CAISO, but all public power utilities are impacted
by the CAISO’s energy market prices and provision of
transmission service, due to the web of business relationships among market participants in the state.
ISO-New England
ISO-NE operates in Maine, New Hampshire, Vermont,
Massachusetts, Rhode Island and Connecticut. ISO-NE
has implemented a separate market for capacity called
the forward capacity market (FCM). Low prices in the
FCM has led to a complaint from the merchant genPublicPower.org
erators in recent months – i.e.; these generators want
higher prices. In response, FERC ordered ISO-NE to
implement rules that would impose a minimum price
offer on new generation bidding into future capacity auctions, and in response the ISO NE submitted a
proposal in the end of 2012 to impose minimum price
offers on all new generation bidding into the FCM,
including renewable energy.
Midwest ISO
MISO operates in all or parts of Illinois, Indiana, Iowa,
Kentucky, Michigan, Minnesota, Missouri, Montana,
North Dakota, Ohio, Pennsylvania, South Dakota, Wisconsin and Manitoba, Canada. MISO has seen a number of defections by transmission-owning utilities—First
Energy and Duke left MISO to join PJM (see below).
Many industry observers believe these utilities are joining PJM so their existing capacity can receive lucrative
capacity market payments not available from MISO.
FERC in 2012 approved a locational capacity market
for MISO, but ruled against mandatory participation in
that market.
New York ISO
NYISO operates only in New York, but is FERC-jurisdictional because the state’s transmission grid is interconnected with the rest of the region. New York City is a
very transmission-constrained area within the NYISO,
which requires substantial mitigation of the NYISO
power sales into that area. There have been recent efforts by incumbent generation owners to constrain the
entry of new power plants in New York City, and these
efforts have been supported by FERC.
PJM Interconnection
PJM operates in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North
Carolina, Ohio, Pennsylvania, Tennessee, Virginia,
West Virginia and the District of Columbia. PJM has a
very large footprint, but faces substantial transmission
constraints between its eastern and western regions.
PJM has implemented a capacity market, called the
reliability pricing model (RPM), which has proven very
controversial due to the substantial dollars paid to existing generators and demand response resources, with
little new generation to show for these payments. FERC
recently approved a tightening of what is known as the
“minimum offer price rule” in RPM that will impose
minimum price offers on new natural gas generation.
A Brief Description of the Six Regional Transmission Organizations (RTOs)
These rule changes are highly contentious and FERC’s
decision is the subject of an ongoing federal circuit
court review.
Southwest Power Pool
SPP operates in all or parts of Arkansas, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico,
Oklahoma and Texas. SPP has approached RTO formation and market development on a slower and more
conservative track than many other RTOs. It does not
operate LMP-based day-ahead and real-time markets,
but did implement a real-time “energy imbalance market” in February 2007. Energy imbalances reflect the
difference between the amount of energy consumed at
a given point in time and the amount that the suppliers
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schedule to deliver at that time. Although this imbalance market also uses a single-clearing-price method,
the vast majority of the energy in SPP is supplied
through bilateral contracts, and only the imbalances are
supplied through this spot market. In 2012 SPP received conditional approval from FERC to transition to
both a day-ahead and real-time market.
APPA Contacts
Seth Voyles, Director of Government Relations, 202467-2928/[email protected]; and Elise Caplan,
Manager, Electric Market Reform Initiative, 202-4672974/[email protected]