Independent System Operators (ISOs)
Independent System Operators (ISOs) are independent, nonprofit entities established to manage the operation of electricity grids in a manner aimed at promoting efficiency and competition within the energy sector. Created in the United States in 1996 by the Federal Energy Regulatory Commission (FERC) as part of the deregulation of energy markets, ISOs play a crucial role by controlling grid operations without owning the physical transmission facilities. Their responsibilities include preventing power outages, restoring service during interruptions, and facilitating markets for electricity and ancillary services.
ISOs operate within a regulatory framework guided by FERC Orders 888 and 889, which introduced rules for unbundling electricity services and ensuring transparent access to grid information. While there are ten ISOs in North America, including notable ones like the California ISO and New York ISO, the concept of ISOs has also been adopted internationally, particularly in Europe, Australia, and parts of South America. In Europe, ISOs are part of broader efforts to deregulate energy markets to enhance integration and efficiency, although recent geopolitical events have posed challenges to these initiatives. Overall, ISOs serve as a vital mechanism for ensuring reliable electricity supply while encouraging competitive practices in the energy market.
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Independent System Operators (ISOs)
Summary: In 1996, the Federal Energy Regulatory Commission (FERC) created Independent Systems Operators (ISOs), which are independent and nonprofit organizations, as part of the deregulation of US energy markets.
FERC Orders 888 and 889, issued in 1996, established the rules for deregulating US energy markets and the functions of ISOs. Order 888 compelled utilities to “unbundle” their wholesale power services, establishing separate rates for generation, transmission, and ancillary services. All parties were also given access to information about the operation of electricity grids, including supply, demand, and prices. The goal was to remove inefficiencies in the system and promote competition by granting control over markets and grids to an independent, not-for-profit, or nonprofit organization separate from producers and suppliers of power. Order 889 lays out the principles for the creation and function of ISOs. An ISO does not own transmission facilities such as generators, substations, transformers, and power lines, but rather has partial or complete control over the operation of the grid and its components.
ISOs are expected to prevent interruptions in services (blackouts) and step in to restore power when interruptions occur. They are permitted to run spot markets or power exchanges, operate a control area, dispatch transmission, administer an ancillary service market, deliver ancillary services, carry out transmission planning, and expand transmission capacity in coordination with transmission owners.
It is important to note that Orders 888 and 889 did not mandate the use of ISOs but allowed their formation, with the additional promise that FERC would monitor new ISOs and other deregulation activities. After consultation with industry participants, FERC issued Order 2000 in 1999, which finalized the regulations for ISOs and Regional Transmission Operators (RTOs). An ISO is a type of RTO, but not all RTOs are ISOs. RTOs can also include organizations that own transmission facilities, operate for profit, or combine public and private utilities. The amount of permitted activities carried out varies with the ISO. For example, the California ISO (CAISO) operates an ancillary services market and an energy market, which sells power a day ahead, an hour ahead, or in real time, that is, immediately. The New England ISO (ISO-NE) also offers ancillary services and energy markets, plus a forward reserves market.
There are 10 ISOs in North America. They are California (CAISO), the Electric Reliability Council of Texas (ERCOT), the New York ISO (NYISO), ISO New England (ISO-NE), Midcontinent ISO (MISO), Southwest Power Pool (SPP: Arkansas and surrounding states), PJM Interconnection (Pennsylvania and Mid-Atlantic states), and in Canada, the Alberta Electric Systems Operator (AESO) and Independent Electricity System Operator (IESO).
International ISOs
In Europe, the European Commission (EC), via its third regulatory package on unbundling, committed itself to deregulating the European Union’s (EU’s) energy markets, with ISOs as one potential model. ISOs are one of five options for deregulated electricity transmission. The others are an independent transmission system operator or TSO, a legally unbundled TSO; like RTE, the French electricity transmission company; an ISO/TSO hybrid model where both the ISO and the TSO are ownership unbundled from the rest of the system; and the traditional, vertically integrated (VI) public utility, that is, government-owned. TSOs are perhaps the most common, with more than forty operating across Europe.
Electricity ISOs can also be found in Australia, Canada, Bosnia-Herzegovina, Argentina, Brazil, and Ireland. Gas ISOs are in Australia and other countries.
As part of its “Energy 2020” plan, the EC called for the deregulation of energy markets. An updated directive addressing these issues was issued in June 2011. The previous directive, “Directive 2009/72/EC,” was similar to FERC Order 2000 in that it did not mandate a specific kind of system operator but made it clear that deregulation would occur. Like FERC, the EC saw deregulation and “unbundling” of electricity transmission operators as keys to an integrated EU energy grid, which would improve efficiency, reduce greenhouse gas emissions, remove barriers to competition, and promote energy security and investment in new energy technologies. European efforts to embrace deregulation of its energy markets were dealt a severe blow following the Russian invasion of Ukraine in 2022. As the war in Ukraine unfolded, energy prices across the continent soared, forcing some governments, including those in Great Britain and France, to reintroduce energy cost controls.
Bibliography
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Kwoka, J., “Restructuring the U.S. Electric Power Sector: A Review of Recent Studies.” Review of Industrial Organization 32 (2008).
Porter, Kevin L. “Independent System Operators and Biomass Power.” www.nrel.gov/docs/fy99osti/25099.pdf. Accessed 5 Aug. 2024.
Reed, Stanley. “The Days of Energy Deregulation Are Over in Europe.” New York Times, 8 Sept. 2022, www.nytimes.com/2022/09/08/business/energy-regulation-europe-britain.html. Accessed 5 Aug. 2024.