Regional Transmission Organizations and Independent System Operators

Background

The Federal Energy Regulatory Commission(FERC) began encouraging the voluntary formation of regional transmission organizations (RTOs) to administer the transmission grid. FERC also recommended the creation of independent system operators (ISOs) to allow existing power pools to provide nondiscriminatory access to transmission. RTOs/ISOs serve approximately two-thirds of electricity customers in the U.S.

Regional Transmission Organizations (RTOs) and similar entities called Independent System Operators (ISOs) coordinate multi-state electricity grids. They are overseen by a federal regulator rather than state regulatory agencies. They facilitate access by non-utility generators to the interstate electricity transmission system, oversee market operations and financial transactions, and coordinate and approve reliability and regional planning, including new transmission lines. They are regulated by FERC. Many critics, including many consumer advocates, question whether these organizations have provided benefits to consumers and have adequate oversight by federal regulators. Generally, the federal regulator provides less oversight than the state regulators did previously.

Unlike utilities (which are strictly regulated by state commissions and thus have a duty to protect ratepayers in their state), RTO/ISOs often escape 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. 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 large utilities often dominate the process. This can mean that the cost impact on retail electricity customers is sometimes ignored.

Furthermore, the operating costs of RTOs and ISOs are directly passed on to utility customers. They make up a growing portion of consumer electricity bills. Yet, the federal regulator does not use its authority to review or approve annual operating budgets, which can  reach hundreds of millions of dollars.

REGIONAL TRANSMISSION ORGANIZATIONS AND INDEPENDENT SYSTEM OPERATORS: Policy

Improving regional transmission organizations (RTOs) and Independent System Operators (ISOs)

In this policy: FederalState

Policymakers should refrain from approving utility requests to join an RTO or ISO if they have not already done so. Federal and state regulators should ensure that RTOs and ISOs are cost-effective, transparent, and accountable in governance to a broad group of stakeholders. This includes residential consumer representatives. In evaluating whether to allow a utility to join an RTO or ISO, policymakers should:

  • consider costs associated with RTO membership, such as out-of-state transmission upgrades, uplift fees, and subsidies to certain types of power plants;
  • determine how RTO membership and FERC jurisdiction will limit the state’s ability to control its own energy policy; anddetermine the rate impact of ceding state control of certain decisions related to investments and other costs to FERC (for example, rate of return and demand-response Programs that use incentives or price variations to encourage consumers to reduce electricity usage, especially during times of peak demand.  reimbursements).

Regulators should ensure that RTOs and ISOs:

  • minimize the 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 also Chapter 1, Government Integrity and Civic Engagement—Lobby Reform).