The following is a contributed article by James J. Hoecker, former Chairman of the Federal Energy Regulatory Commission, Director of Americans for a Clean Energy Grid, Senior Counsel at Husch Blackwell and former Executive Director of WIRES.
Two decades ago, on Dec. 20, 1999, a divided Federal Energy Regulatory Commission crossed its collective fingers in hopes that the patchwork of largely state-regulated electric transmission providers could be persuaded to coalesce around uniform, independent, and regional management of transmission infrastructure plans and wholesale electric markets in the U.S. In retrospect, it’s remarkable that Order No. 2000 — a rulemaking that "encouraged" (but did not compel) formation of Regional Transmission Organizations, or "RTOs" — would prove so transformative for most large power markets across the country.
Birthed by a Commission deadlocked at the time over the need to institute RTOs, Order No. 2000, or "O2K," has long since exceeded our modest expectations in producing economic, reliability, and (I maintain) environmental benefits for electricity consumers. Pundits may have lampooned FERC as a lawless big government sheriff holding a gun to the industry’s head — "Just do what we say, and nobody gets hurt" — but the order has since left a positive imprint on the domestic electric power business. It was also a missed opportunity for major reform that would not come again for a generation. Timing is everything, even in regulation.
A radical move
Predicating electricity policy on the idea that wholesale electric markets in the U.S. (and their regulation) should be no less than regional was a radical move at the time. Electric transmission systems had only recently become physically interconnected and then only for limited purposes.
As transmission systems began to knit in the 1960s and 1970s to attain the benefits of economic energy or emergency power, the potential benefits of regional coordination at the wholesale market level had become more evident. With the Energy Policy Act of 1992 and FERC’s open access ruling in Order No. 888 (1996), regionalism in transmission planning and operations became irrepressible. Today, that logic is prevailing even in markets that resisted that development.
In the 20 years since O2K, the evolution of wholesale power markets and electric transmission regulation has been seismic and disruptive but also a generator of new ways to produce, control and deliver power to load. The agonizing and unfulfilled struggles to establish the Northeast RTO, Northern Tier, Grid Florida and SeTrans are monuments to the limitations of voluntary compliance, however.
Their failures and the demise of a subsequent visionary attempt by FERC to further remediate undue discrimination and level the playing field across electricity markets by standardizing transmission services and wholesale market design and by mandating a small number of large RTOs to govern all domestic power markets — so-called Standard Market Design or "SMD" — ended the era of grand regulatory reform begun in 1992 (or 1985, if you count gas pipeline open access). Although FERC’s Order Nos. 890 and 1000 articulated new regional planning and cost allocation requirements for both organized (i.e., RTO) and bilateral (non-RTO) markets, they gingerly acceded to local and regional interpretations and preferences in these matters.
Needless to say, modern RTOs meet O2K’s prescriptions in varying and divergent ways. Our power markets are not seamless, especially as defined by state or individual utility or RTO boundaries. These seams continue to present artificial barriers to trade, create operational or technical difficulties, and tend to increase costs to the extent that economic exchanges of energy, capacity or ancillary services are prohibited. Inter-regional agreements between and among RTOs and Independent System Operators (ISOs) have been difficult and largely unsuccessful as the inertia of incompatible local and regional rules and preferences have stymied innovation. Market-to-market infrastructure is tortuously slow to plan and site.
Have the aspirations underlying Order No. 2000 been fulfilled? Yes and no. The formation of SPP and MISO in the middle of the country during the George W. Bush years in the early 2000s and expansion of PJM nearly doubled the amount of RTO participation from 1/3 of the country to 2/3. Since then, little progress has been made. Parochial policy making is widespread, although each region has unique energy needs and challenges.
The U.S. has a way to go to achieve a national power market. Despite remarkable new technological developments in the past two decades, the cost competitiveness of renewable energy resources, the natural gas revolution, and potential of large HVDC projects to integrate our disparate markets, the full measure of benefits to consumers and the environment remains bottle-necked, not by economics but by a lack of vision, political will, and the complex interface of divergent market rules. Clearly, more work needs to be done.
That said, the benefits of the RTOs and ISOs that O2K so strongly encouraged are demonstrable and belie the rule’s halting origins. Several examples illustrate what is being accomplished:
The Southwest Power Pool, in its Modernizing the Grid: The Value of Transmission study, announced that its nearly $10 billion investment in upgrading and expanding the grid (though 2016) yielded a benefit-to-cost ratio of 3.5 to 1 and a $16.6 billion net benefit in lower prices and greater reliability over 40 years. Its work will open access to some of the world’s best wind and solar resources.
The Midcontinent ISO estimates that from 2007 through 2018, it provided an estimated $24.3 billion in cumulative net benefits, and approximately $3.5 billion in annual benefits to electricity providers in its footprint. In 2018, the top "value drivers" included: (i) footprint diversity ($2.17 billion to $2.67 billion estimated value), (ii) wind integration ($354 million to $414 million estimated value) and (iii) energy dispatch ($282 million to $312 million estimated value).
The PJM Interconnection estimates that its regional grid and market operations provide annual savings of $2.8 billion to $3.1 billion, consisting of savings from (i) reliability ($475 million), (ii) integrating more efficient resources ($600 million), (iii) energy production costs ($525 million), (iv) generation investment ($1.1 billion to $1.4 billion) and (v) regulation and synchronized reserve grid services ($100 million).
The New York ISO is integrating the state’s robust public policy objectives while maintaining reliability and working to ensure that proper long-term price signals are sent to market participants.
In ISO-New England, transmission investments have reduced the risk of blackouts, lowered overall wholesale energy costs and reduced air pollution.
The California ISO, between 2014 and 2018, states that the Energy Imbalance Market (EIM) produced for its members over $500 million in gross benefits in the form of reduced costs from lower reserve requirements and fewer renewables curtailments. The EIM’s potential expansion across the West (and similar efforts by SPP from the East) may be portents of RTO-like grid administration in the Western Interconnection. CAISO is expanding Reliability Coordinator functions that further integrate Western grid operations. SPP will soon be expanding its Reliability Coordinator services to several Western utilities in late 2019.
In Nevada, the state legislature and Governor’s Committee on Energy Choice is considering options for the state to join or create an RTO. The committee’s Technical Working Group on Energy Market Design recommended that Nevada join an existing ISO with an existing wholesale market located in close proximity to the state.
All this should make us optimistic about what benefits await electricity consumers if the logic of O2K is pursued for another 20 years. FERC, and perhaps Congress, must finish the work that was begun in 1999, expanded but not wholly resolved in Orders No. 890 and 1000 in 2007 and 2010, and extend to all regions and all consumers the kinds of benefits that seamless, integrated power markets can provide. Happy Birthday, O2K!