Traditionally regulated vs. competitive wholesale markets
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Introduction
In the 1990s and 2000s, U.S. states chose either to restructure their wholesale electricity markets fully or partially, or to retain regulation of vertically integrated monopoly utilities. Generally, the Southeast and Mountain West states have retained the traditional regulatory model, opting not to join regional transmission organizations and independent system operators (RTO/ISOs). In these regions, investments in utility infrastructure must be approved by state regulators. Utilities usually operate their own electricity systems and incorporate exchanges with other utilities. These take the form of “bilateral trading,” where the price and terms of each transaction are set through a negotiation process between two parties.
Texas, Illinois, Ohio and most mid-Atlantic and Northeast states transitioned to competitive wholesale and retail markets. These areas joined or formed RTO/ISOs to operate organized wholesale electricity markets. This reduced regulation of generation and shifted some regulatory oversight of generation and transmission from the states to the federal government. Today, the Electric Reliability Council of Texas (ERCOT); PJM Interconnection LLC (PJM); the New York Independent System Operator (NYISO); and ISO New England (ISO-NE) span primarily or entirely restructured states.
Some states that retained the monopoly-utility model allowed their utilities to join RTO/ISOs. Specifically, the Midcontinent Independent System Operator (MISO), Southwest Power Pool (SPP) and California Independent System Operator (CAISO) consist primarily of monopoly-utility service territories. These utilities relinquished their role as grid operators to the RTO/ISO. While these utilities “compete” in the organized markets, they generally do not use market signals to guide their behavior. State regulators still approve utility investments and their costs and market revenues are passed through to a captive customer base. The trend for utilities to join RTO/ISOs has expanded since the 2000s. In 2013, MISO integrated utilities spanning most of Arkansas, Louisiana, Mississippi and some of Texas. CAISO expanded outside of California in 2014, while SPP has also grown recently.
Utilities or independent power producers, also known as merchants, can engage in bilateral trades outside or within RTO/ISOs. Bilateral-only areas have comparatively low liquidity, in part because trading requires greater negotiation. RTO/ISOs instead use standardized electricity products in short-term markets. Bilateral-only and restructured RTO/ ISO areas take somewhat similar approaches to operating their electricity systems, but sharply diverge in infrastructure-investment models.
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