The Role of the ISO in U.S. Electricity Markets: A Review of Restructuring in California and PJM

Abstract

Several regions of the U.S. have sought to restructure the electric power industry by separating the potentially competitive generation sector from the natural monopoly functions of electricity transmission and distribution. Under this restructuring scheme, a central authority, which we will refer to as the independent system operator (ISO), is given control over both the transmission system and the spot market for electricity. The ISO’s role in managing the spot market is relatively uncontroversial. This is because the spot market takes place in real time and requires continuous physical adjustments to electricity supply and demand subject to complex constraints, such as the need to maintain voltage and frequency within tight bands. Although the ISO’s role in managing the spot market is generally accepted, its role in scheduling and pricing generators prior to actual dispatch was hotly debated during the development of California’s market and remains a contentious issue.1 Like other restructured electricity markets, the California market requires generators to be scheduled for operation on a day-ahead basis and allows for adjustments in these day-ahead schedules up to an hour ahead of actual dispatch. However, the California ISO has a minimal role in this scheduling process; almost all scheduling is carried out by a number of competing scheduling coordinators, referred to as SCs. In contrast, the ISO in the Pennsylvania New Jersey Maryland market (PJM) schedules all generators that do not elect to schedule themselves. This paper discusses the California and PJM approaches to shed light on the controversy over the ISO’s role in pre-dispatch phases of the market. Section I describes the California market while Section II briefly reviews PJM. Section III outlines the costs and benefits associated with limiting the ISO’s role in the scheduling phases of the market. Section IV summarizes recent experience in California and PJM and offers conclusions.