This post looks at Independent System Operators (ISO) and Regional Transmission Operators (RTO).
In the 1990s the idea of formal wholesale markets and management of transmission to facilitate the market’s energy flows were floated as the way to organize the market. The UK and Australia were the first two to look at the concept. The UK started their studies informally in 1988 and formalized those studies in 1990. Australia started operating NEM in 1998.
PJM started operating as a power pool in 1927, and in 1996 became an ISO.
ISO/RTO and the wholesale markets are not new (pools – their predecessors existed for more than 80 years in some parts of the world). But they were for some parts of the world a radical change to the vertically integrated utilities. ISOs not only operated the transmission grid physically, but also were the hub for bidding generation and firm transmission rights.
Yes, in much of the world you not only have to win the bid to generate but must have the right to send the power to the load over the transmission network. To create liquidity, financial trading was allowed by banks and other traders, and in the early days, financial activity was 5 to 10 times the physical trading in the market. Many ISO territories now see as little as 1 to 2 times the financial trading that exists in physical trading.
Most ISO markets use what is called a market clearing price. Each generation resource bids in and are stacked up with the lowest price generation at the bottom of the stack. When the number of MWH is equal to the load, whatever that generation resource costs, is what everyone gets paid. If the market clears (cost of the highest price generator to meet the load is $500, even if your generator bid negative $10, you get paid $500. This is very different than the old cost of service model. Several studies show that larger commercial and industrial customers saved money. But most residential customers did not in the long run. Fuel riders allowed the utilities to pass these costs to their customers without having to get approval from the regulators within reason.
The creation of the ISOs allowed many customers to shop for a retailer to provide energy, in the early days literally thousands of firms signed up to sell energy to customers, for instance the UK pharmacy Boots, Virgin, and Marks & Spencer in the UK all started retail firms. There were literally thousands of rate plans. Within two years, most markets were down to less than 10 retailers. The rest having gone bankrupt. Tens of billions of dollars were lost, and customer prices rose.
Enron was a bad actor in the wholesale market (whole different story) not only going bankrupt but taking dozens of other trading firms with it around the world.
The state of California ended up paying off the damage that Enron did to the energy market for more than a decade. Enron pretty much ended the push for additional ISO markets around the world.
The creation of ISOs also created opened the market for Independent Power Producers, Merchant Transmission Providers, and more entities. In some markets all customers were forced to find a retailer (save the ones who could not pay for electricity they used), in others the utility had to sell off their generation plants, in still others they had to sell of their transmission assets. Each of these new entities was mostly deregulated, meaning in places like the US, the state regulators lost the ability to set rates and tariffs, and the only recourse was the courts, over time in the US FERC has clawed back the ability to regulate aspects of these new entities.
ISO typically have a fee or “tax” on each MWH sold, and each MWH transmitted, to operate. In 2024 CAISO had a budget of $120 million. ISO do not use Return on Invested Capital (ROIC) but rather a conventional cash accounting mechanism.
Part #2 - Distribution Cooperatives
Part #3 -Â Generation and Transmission Cooperatives (G&T)
Part#4 -Â Federal power districts
Part #5 -Â Salt River Project (SRP)
Next Post: Merchant transmission and IPP