Managing Regulatory Forces The US Regional Transmission Organization Model

A Regional Transmission Organization (RTO) system is being touted by continental energy utilities as a feasible alternative to the comprehensive network unbundling presently debated by the EU Commission. By investigating the US RTO model, it is possible to understand what are the practical implications of such a model in Europe.

Report Highlights

RTO grid networks cover more than two-thirds of the continental US, and are pivotal in supporting an expanding US electricity market. Despite a common EU framework for transmission network operations, implementation at a national level is uneven. Progress on a European RTO framework will require a strong supra-national electricity regulator. Several of the first US RTOs were created on the back of existing exchanges. Spain and Portugal, upon launching MIBEL, the electricity trading market, will be well-placed to be the first European region to have an RTO in place.
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
ANALYSIS 2
EU RTO proposals will borrow heavily from American experience 2
The failure of functional unbundling has re-ignited EU debate on creating independent transmission systems 2
The RTO model has been put forward as an alternative to ownership unbundling of network assets in the EU 3
RTOs are intended to ensure transmission system independence 4
There are five tools available to regulators to establish non-discriminatory access to transmission services 4
The US has a decade of experience in establishing and regulating RTOs 5
RTOs were designed as a response to persistent anti-competitive practices in wholesale transmission services 6
FERC identified four essential characteristics for RTOs and eight requisite functions 6
RTO-managed wholesale markets vary in sophistication 7
The difference between an ISO and an RTO is a question of jurisdiction 8
In the US, RTO frameworks have been put in place in conjunction with regulated transmission tariff regimes 9
US regulatory efforts to encourage the formation of RTOs have developed slowly over a decade 9
In 1996 FERC first launched a voluntary framework for RTO formation, which did not produce results 10
In 1996 functional unbundling was mandated only for publicly-owned utilities 10
By 2000 the voluntary RTO rule did not produce results, but investor-owned utilities still could not be compelled to join RTOs 11
Transmission tariff regulation acts as a 'default' rule to ensure transparency in the provision of transmission services 12
RTOs reduce the regulatory burden on utility participants and improve the efficiency of transmission pricing 13
In 2007, with RTOs still not mandated, FERC has strengthened transmission tariff regulation only for public utilities 13
The 2007 OATT amendment makes calculations of available transmission capacity transparent and consistent 13
Financial hedging mechanisms and new regulatory exemptions boost RTO formation 14
RTOs have established themselves across two-thirds of US states 15
Currently, RTO networks cover more than two-thirds of the continental US 15
RTOs have been formed on the back of existing power pools or through government mandate 16
RTOs can only fulfill their purpose if governance structures are sound 16
RTOs will evolve, but will continue to be the standard transmission system model in the US 17
APPENDIX• 18
Definitions 18
Further Reading 18
Datamonitor Consultancy 18
Ask the Analyst 18
Disclaimer 19

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Figure 1: The Federal Energy Regulatory Commission (FERC) has proposed three of the five tools since 1992 4
Figure 2: FERC identified four essential characteristics for RTOs and eight requisite functions 6
Figure 3: RTO managed wholesale markets vary in services offered 7
Figure 4: US regulatory efforts to encourage the formation of RTOs have developed slowly over a decade 9
Figure 5: Geographic areas covered by ISOs/RTOs 15

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