As Benjamin Franklin is claimed to have said upon signing the Declaration of Independence, “We must, indeed, all hang together or, most assuredly, we shall all hang separately.” Increasingly, this sentiment, that we can go it alone or go forward together, applies to the world of electricity markets. Consider that states in Regional Transmission Organizations (RTOs), in which an organized wholesale electricity market operates across multiple states, realize cost savings and reliability benefits that are more difficult to realize in states that are not part of an organized market.

Independent studies reveal numerous benefits of RTOs—including cost savings, reliability benefits and greater transparency—that far exceed the direct costs of RTO operations. Those studies show that the extent that cost savings flow through to consumers depends on the quality of retail policy under state control. Despite clear benefits, RTOs are not ubiquitous across the United States. Opposition to RTOs often comes from an unlikely place: conservative states that otherwise highly value competitive markets. This paradox prompts the need for a dialogue to align the RTO value proposition with conservative economic principles.

Importance of RTOs

The creation of RTOs by the Federal Energy Regulatory Commission (FERC) started with Order 888, which sought to facilitate wholesale competition by creating organized markets to replace a fractured system of control run by local monopoly utilities. The loosely organized power pools that existed prior to Order 888 could not create new cost and reliability advantages in managing transmission system operating constraints—nor could they provide the superior planning that comes from RTOs. By bringing transmission owners, generators and utilities from multiple states together to create a more efficient transmission and wholesale market, RTOs allow participants to leverage resources from their neighbors at a lower cost than overbuilding systems on a utility-by-utility basis.

Increasingly, RTOs not only play a role in ensuring the reliability of organized power markets, but are key to enabling a broader set of reforms at both the federal and state level. These reforms include enabling opportunities for retail customers and distributed energy resources to participate in RTO markets directly and be paid for their capabilities; smoothing the transition to renewable energy resources; and providing opportunities for non-thermal resources, such as energy storage, to be treated equally to other resources.

Benefits include better regional planning and new market opportunities for utility programs in RTO markets. For example, according to the Midcontinent Independent System Operator (MISO), its members realized $3.1 to $3.6 billion in annual benefits and achieved around $30 billion in benefits between 2009 and 2020. MISO’s benefits include improved reliability across the region, more efficient uses of existing infrastructure and reduced need for additional resources. As R Street has noted previously: “The most cited literature indicates that wholesale markets operated by RTOs have reduced production costs by increasing trade, as well as coordinating and driving efficiency improvements at power plants.” Furthermore, additional studies looking at the efficiency benefits of RTOs from wholesale electric energy trading note “that while market power wielded by a few large companies was a concern, it was far outweighed by market efficiency benefits.” States that are in an RTO keep much of their existing authority on resource planning, resource adequacy, siting, rate design, retail rate and program development. So, the question remains: why are some states still reluctant to join organized wholesale markets?

Barriers

While the economic and reliability benefits of participating in an RTO are fairly clear, political questions remain: governance and FERC jurisdiction over state policy. In both cases, the concern is that a state loses its authority over electricity planning to another entity.

For a western RTO, there are governance concerns about whether to join the California Independent System Operator (CAISO), create a stand-alone west-wide RTO, or look at expanding the Southwest Power Pool (SPP). While CAISO already operates an energy imbalance market across much of the western interconnect, the CAISO’s Board of Governors are appointed by the Governor of California; the risk of joining CAISO is, therefore, the extent to which a state wants to allow the state of California to have sole authority over the appointment of the board.

Governance challenges take on a different flavor in the Southeast, which lacks an RTO, though FERC recently approved a utility-led effort to facilitate transmission efficiency. A core issue in this proceeding was that too much governance of the Southeast Energy Exchange Market (SEEM) was in the hands of the utilities. Of course, SEEM is not an RTO, nor anything resembling an RTO. As FERC Commissioner Allison Clements stated in a dissent on SEEM regarding its organization, “it is difficult to surmise a more direct and problematic barrier to open access than granting a subset of market participants veto power over whether others may access a market platform that allocates transmission service.” Suffice it to say, ensuring the independence of an RTO is paramount to the viability of an entity, especially one that operates across states. These issues can be overcome, as four of the RTOs in operation today operate across state lines.

Concerns about the role of FERC over state policy is also an issue. This is most notably played out in the proceedings before FERC regarding the Minimum Offer Price Rule (MOPR) which FERC instituted in RTOs where restructured states passed subsidies for preferred generation resources. FERC intended the MOPR to offset the price suppression effects of those state laws, which targets a valid concern but worsens economic outcomes in practice.

While the MOPR primarily addressed subsidies for existing nuclear and new renewable resources, the same rationale could be applied to state subsidies that maintain a fossil unit. A key component of this conversation is that even restructured states have not let competition flourish. This puts federal regulators and intervention-prone states on a collision course. However, administrative price controls like the MOPR only apply if states pursue subsidies in a restructured fleet, whereas states outside RTOs today retain integrated utilities. The bottom line is that the MOPR does not affect the value proposition for the profile of states considering joining an RTO.

States continue to have an important voice

Even in vertically integrated states, RTOs provide benefits and state authority is retained. For example, both MISO and the SPP operate in states where vertically integrated utilities are the norm. In these cases, states have maintained resource adequacy authority and exert a significant amount of oversight regarding their utilities. These areas have decided to band together to the benefit of those who live there to provide for more efficient regional planning, which results in lower costs for customers.

Having access to a market results in a more efficient system overall. By working together, states can extract substantial cost savings from being able to share resources. Rather than having a utility build extra power plants or transmission lines to manage their system, a utility in an RTO can, instead, rely on the power of the RTO market to provide those services. Rather than having a loose collection of overbuilt systems, at higher costs to the utility customers, an RTO coordinates those planning efforts; if one state needs generation or capacity, or needs the ability to transmit power from one side of its territory to another, an RTO allows for a more cost-effective means of meeting that need.

This is evidenced by actions in Nevada and Colorado, which are outside of an organized regional market. In those states, legislatures have passed laws over the past two years requiring their regulators to look at the benefits of a regional market. In Colorado, a Public Utility Commission (PUC) report found savings up to $230 million a year for its utilities by being part of a regional market. Nevada Senate Bill 448 requires that its transmission providers join an RTO by 2030, unless the Nevada Commission grants a waiver. These states recognize that they are better off in a regional market with their neighboring states rather than standing alone. This is only amplified as the energy transition toward cleaner resources and more distributed resources grows around the country. An individual utility can try to build its way toward a reliable and resilient system, but it would be easier and more cost-effective if it were part of a broader marketplace that shares and accesses these services.

Looking back at Ben Franklin’s advice, conservative states can look at their systems and utilities and wonder if they wouldn’t be better off being part of something bigger rather than trying to stick it out on its own. For if there is one thing we’ve learned recently about electricity markets, when the system needs additional resources, it’s much easier to access them through a regional market than one that does not exist at all.

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