Electricity Primer - The Basics of Power and Competitive Markets

What Are RTOs and Organized Markets?

A regional transmission organization or independent system operator (RTO or ISO) serves as a third-party independent operator of the transmission system. There is an inherent conflict of interest when the same single company owns all of the transmission and distribution system and some of the generation. These third-party independent operators, however, ensure that no preference is given in the dispatch of a utility-owned generator over a competitive generator. ISO/RTOs also conduct "spot" (also called "Day 1" or real-time) markets and "day-ahead" (or "Day 2") markets.

ISO/RTOs provide fair transmission access to facilitate competition for the benefit of consumers. They provide transaction support as part of their market duties and engage in regional planning to ensure that the right infrastructure gets built in the right place, at the right time. They accomplish all of this over a large regional area providing greater value to customers at every level of the supply chain than would be seen in the more piecemeal utility-by-utility approach.

This wide, regional approach also improves the reliability and coordination of what has been called the "most complex machine ever devised by man." ISO/RTOs have worked to eliminate "seams" between regions. This has helped to facilitate more efficient power flows and transactions, which previously may have had to cross numerous individual utility areas and had to pay transaction charges for every utility border crossed.

As previously noted, ISOs and RTOs cover many regions of the country with two-thirds of the United States' economic activity occurring within their boundaries. Current organized markets include:

1. ISO New England;
2. New York ISO;
3. PJM (Mid-Atlantic, a portion of the Midwest);
4. Midwest ISO;
5. Southwest Power Pool;
6. ERCOT (most of Texas); and the
7. California ISO.

Taking such a regional planning approach allows for the pooling of resources and therefore the need for fewer plants than on a state-by-state basis. By cutting the need for more power plants, ISO/RTOs help save consumers money and substantially reduce emissions.

ISO/RTOs conduct vigorous oversight of both their market and transmission functions and are regulated by the Federal Energy Regulatory Commission (FERC). As a further check, each organized market is overseen by an independent market monitor. All stakeholders in the market have input into ISO/RTO activities while the transparency of a fluid and liquid market also helps to make sure markets are fair.