Transmission, Part II: A Western RTO?

By Joni Sliger, Energy Fellow

"Photoshop art created from two NREL-Image Gallery
photos of sunset view of electrical power towers combined
with wind machines."
Credit: NREL and Raymond David (Photo Illustration)

A shortage of transmission capacity is a major constraint to the development of renewable energy resources, as I noted in my first blog post in this series on transmission. The Western Interconnection suffers from this shortage—termed a transmission constraint—as well as from transmission congestion, though not as much as other areas of the U.S. do, according to the Department of Energy’s 2015 National Electric Transmission Congestion Study. (The Western Interconnection is the aggregated grid that connects each transmission and distribution system together in all or part of the fourteen western continental states as well as parts of Canada and Mexico.) This post explores one popular idea for improving transmission systems in the West: forming a western Regional Transmission Organization (RTO).

What is an RTO?

An RTO is a third-party entity that manages the transmission systems of every participating utility within the RTO’s territory. (The term RTO is often used interchangeably with the term independent system operator, or ISO, despite some technical differences. As noted below, an RTO might take the form of an ISO.) An RTO balances the grid by managing the dispatch of electricity generation and by operating several wholesale power markets (such as a ‘day-ahead’ market and a ‘spot’ market). As I discussed in my last post, balancing the grid is vital to maintain the proper frequency and to avoid power outages. Ten RTOs now operate in parts of North America, such as the California ISO (CAISO). Together, they manage about two-thirds of the electricity sold in the U.S.

For a third party to manage the transmission system as an RTO, the Federal Energy Regulatory Commission (FERC) must approve it. FERC encourages the “voluntary interconnection and coordination” of electric facilities, such as by RTO formation, pursuant to FERC’s mandate in Section 202(a) of the Federal Power Act of 1935 (currently codified at 16 U.S.C. § 824a) to provide for a more efficient electricity system.

In the 1990s, FERC began taking significant action to promote RTO formation, when grid management grew increasingly complex as more independent power producers (IPPs) (that is, non-utility electric generators) began seeking transmission access and as some states began restructuring their monopolistic electricity sectors. In 1996, FERC issued Order No. 888 to require that transmission owners provide access to transmission to others on the same terms as they provide to themselves. This is called ‘open access transmission’ and discourages discrimination against IPPs. FERC noted one way to comply with this order would be to have an ISO manage the grid, where the ISO offers everyone the same terms. Order No. 888 thus described several “principles” to guide the formation of ISOs. The term RTO arose after the issuance of Order No. 888. In 1999, FERC promoted RTOs (which it said could take the form of ISOs) in Order No. 2000, which required all transmission owners to propose an RTO for FERC’s approval, report on efforts to form an RTO, or explain why the owner had not pursued participation in an RTO. Order No. 2000 also described the key characteristics and functions of an RTO. FERC does not require a “‘cookie cutter’ organizational format” but will review any proposal that meets its standards.

In short, an RTO is a FERC-approved third-party entity that manages the grid.

What are the Benefits of Having an RTO?

FERC promotes RTOs as a way to encourage a more competitive marketplace, which should theoretically reduce electricity rates for consumers. The ISO/RTO Council notes four major benefits are greater reliability, efficiency, transparency, and market innovation. For example, most renewable energy sources (other than those necessary to comply with a state’s Renewable Portfolio Standard) have been built in RTO territory, where intermittent suppliers, such as solar and wind power generators, enjoy a more favorable market. Short-term markets, such as a spot market, enable intermittent suppliers to sell power as they generate it.  

Another noted benefit is that RTOs eliminate a pricing inequity known as “pancaked rates.” To deliver power, producers must buy transmission services. When the transmission owners operate separately, each can charge a producer for using its transmission system. The pile-up of charges is known as rate pancaking. The total fee may be too high for a producer to afford to use transmission and therefore hinders long-distance transmission, even if necessary to get rural renewable power to power-hungry demand centers. The expense of facing pancaked rates rises with the number of systems one crosses; when one is participating in an RTO, one pays for transmission services but only from the RTO. Rates are not pancaked, which is a major benefit of RTO participation. Indeed, FERC describes the elimination of rate pancaking as a “central goal” of its RTO formation policy.

Additionally, an RTO enables greater efficiency by, for example, consolidating balancing areas. A balancing area is the territory within which an entity (called a balancing authority) must balance the grid to ensure reliability. A balancing area may be as small as an individual utility’s territory. By participating in an RTO, that utility can join its balancing area (or “footprint”) to those of other participants. As can be seen in the following map of the United States, each RTO manages its regional territory as a single balancing authority.  An RTO thus creates a geographically broad wholesale power market that enables participants to buy and sell power produced throughout a large area. This means, for example, that an excess of wind power produced in one state could quickly and easily be transmitted to serve demand in another state.

Credit: Energy Information Administration

Is a Western RTO Possible?

As one can see in the map above, most of the West is outside of RTO territory. CAISO only operates in portions of California and Nevada. Recognizing the potential benefits of forming an RTO, entities in the West have been discussing forming a western RTO. Such discussions are not new. In the early 2000s, there was a proposal called “RTO West.” However, the proposal failed, in part because of the California energy crisis and because of opposition to changing the Bonneville Power Administration’s operations (and potentially raising its very cheap rates). Nevertheless, efforts to form a western RTO continue today.

I have blogged previously on a proposal for PacifiCorp to join CAISO, which could enable more renewables to come online and save consumers money at the same time. Proponents continue to push to expand CAISO and form a western RTO. As an example of the incremental success, this past February, the Balancing Authority of Northern California agreed to participate in CAISO’s Energy Imbalance Market (EIM) starting in 2019. (Though an EIM does not offer all the benefits of an RTO, it has provided significant economic benefits to participants). Unfortunately, the election of (pro-coal) President Trump and concerns about maintaining state control have dampened some efforts to form a western RTO, but proponents promise to persist.

Hopefully the movement to expand CAISO and form a western RTO continues to spread and will bring the benefits of an RTO to the West. Until then, renewable developers may continue to face the unnecessary costs of pancaked rates, for example.