Price Effects of Independent Transmission System Operators in the United States Electricity Market

Abstract

In 1996, the Federal Energy Regulatory Commission sought to “remove impediments to competition in the wholesale bulk power marketplace and to bring more efficient, lower cost power to the Nation’s electricity consumers” through a series of market rules. A product of these rules was the establishment of regional transmission organizations (RTOs) and independent system operators (ISOs) charged with facilitating equal access to the transmission grid for electricity suppliers. Whether these changes in market structure have succeeded in achieving the FERC’s goal to provide “lower cost power to the Nation’s electricity consumers” remains an open question. We utilize a panel data set of the 48 contiguous United States and a treatment effects model in first differences to determine whether there have been changes in delivered electric prices as a result of the establishment of ISOs and RTOs. To avoid the confounding effects of electric restructuring, we have initially estimated the model with the full panel data set, and then again without the states that have restructured their electric markets. By considering only the states that have not restructured their electric markets, we can see whether there have been price effects due to the establishment of RTOs, in the absence of restructuring agreements. We estimate a model of annual changes in electricity prices using 2SLS and show that electricity prices fall approximately 4.9% in the first 2 years of an ISO’s operation and that this result is statistically significant. However, we further show that this result is dependent on the presence of states that restructured their electricity markets and the accompanying rate agreements and temporal subsidies that may have forced prices below their market rates. When these restructured states are removed from the data set the price effects of RTOs become indistinguishable from zero. We conclude that rate agreements are the source of the observed decrease in prices and that RTOs have not had the desired effect on electricity prices.