RTO Backgrounders

What are regional transmission organizations (RTOs) and independent system operators (ISOs)? They are responsible for much more than their names might suggest and considering their enormous influence over energy policy they remain largely unknown to the general public. (We use the term “RTO” to refer to both RTOs and ISOs because they are functionally similar in key respects.)

RTOs manage wholesale power markets transacting hundreds of billions of dollars annually in sales, they manage the second-to-second electricity delivery needs for 192 million people, and they plan for the long-term needs of the electricity power system. Six FERC-regulated RTOs exist in the United States:

  • PJM Interconnection (PJM)
  • Midcontinent ISO (MISO)
  • California ISO (CAISO)
  • Southwest Power Pool (SPP)
  • New York ISO (NYISO)
  • New England ISO (ISO-NE)

The Electric Reliability Council of Texas (ERCOT) also performs most of the functions of an RTO, but is not subject to federal (FERC) jurisdiction because its grid is nearly entirely separate from the rest of the country, and power sales in ERCOT therefore are not sales in interstate commerce.

RTOs came into being at the turn of the 21st century. First, in Order 888 (1996), FERC created ISOs to promote wholesale competition for electricity supply and non-discriminatory access to transmission services. Soon thereafter, in 1999, FERC issued Order 2000, which established RTOs to encourage broader regional transmission planning and energy trading and coordination. RTOs do not own any transmission assets themselves; rather, transmission-owning utilities have agreed to let the RTOs largely manage the power on their systems and perform long-term planning in exchange for compensation.

One benefit of an RTO is the elimination of rate “pancaking,” which occurs when a buyer or seller of electricity is required to pay a separate charge for sales across multiple transmission systems. This is especially valuable for sales of renewable energy, which often is generated several systems away from the utility and other buyers who in the absence of a large regional market would have to pay multiple separate charges. This was a primary reason why some environmental organizations in the Midwest supported the creation of MISO in the early 2000s – lowering the transaction costs of wind power in remote areas of the region.

This and other attributes of RTOs should in theory reduce discrimination and barriers against new and usually cleaner power supply, especially wind and solar power and advanced technologies for both power supply and demand. However, RTOs also present challenges in accountability and a general preference for incumbent interests:

  • They exist as a middle layer between individual utilities and the regulator (FERC). There is no analogue at the retail state level – state utility commissions have direct regulatory oversight over state utilities.
  • RTOs are unique legal creatures; they are not utilities as we normally think of that term, and nor are they government agencies. Instead, they exist as quasi-autonomous nongovernmental organizations, or “quangos.”
  • RTO rules are lengthy and complex, and they often differ from RTO to RTO.
  • In states that have adopted retail choice and moved away from integrated resource planning, RTOs are taking more responsibility for long term resource adequacy – much to the chagrin of many of those states.

As RTOs move into their third decade of existence, they are facing increasing challenges in staying ahead of the fast-changing energy system and increasing economic and policy preferences for clean energy. Rather than facilitating the clean energy transition, some of their rules and practices are undermining it. For example: