The Federal Energy Regulatory Commission (FERC) adopted an order encouraging the voluntary formation of regional transmission organizations (RTOs) to administer the transmission grid on a regional basis throughout North America. FERC also recommended the creation of an independent system operator (ISO) as a way for existing power pools to provide nondiscriminatory access to transmission. All utilities transmitting power across state lines are under FERC jurisdiction, but not all utilities belong to ISOs. RTOs/ISOs serve approximately two-thirds of electricity customers in the US.
Initially, RTOs were formed to provide transmission access on a nondiscriminatory basis, create a platform for wholesale markets, oversee market operations, and coordinate reliability and regional planning. Since then they have evolved and now perform other functions, including operating wholesale power markets, deciding which new transmission projects may be built, and operating administrative auctions known as capacity markets. Many critics, including many consumer advocates, question whether these additional functions have provided benefits to consumers.
Unlike utilities (which are strictly regulated by state commissions and thus have a duty to protect ratepayers in their state), RTO/ISOs often escape close scrutiny. This is because FERC allows a more generous rate of return, uses alternative ratemaking mechanisms that favor companies, and does not require a single state focus. Given the more generous levels of return on investment that FERC allows, some have argued that consumers would have saved substantially if such investments had remained under state jurisdiction where returns are generally more modest.
In addition, RTOs have adopted complex stakeholder procedures, and consumer groups have generally had difficulty fully participating because of the substantial commitment of time and resources needed to monitor the proposals and attend meetings. As a result, major generators and dominant utilities often dominate the process, and the cost impact on retail electricity customers is sometimes ignored.
RTO and ISO costs are directly passed on to retail customers and make up a growing portion of consumer electricity bills. Yet FERC does not approve their annual operating budgets, which can exceed $200 million.
Regional Transmission Organizations and Independent System Operators: Policy
Improving regional transmission organizations (RTOs)
The Federal Energy Regulatory Commission, with assistance from the states, should ensure that RTOs:
- are cost-effective, transparent, and accountable in governance to a broad group of stakeholders, including residential consumer representatives;
- minimize cost of operations to ratepayers;
- include mechanisms for diverse representation of residential ratepayers in proceedings;
- follow open meetings laws and publish market bid data in a timely fashion;
- are completely independent of transmission and distribution owners and generators;
- provide protections against market manipulation; and
- enact ethics reforms, including a ban on revolving-door hiring. (see Chapter 1, Government Integrity and Civic Engagement.)