Market Structure
Traditionally, regulated vertically integrated utilities owned and operated generation and transmission infrastructure, possibly trading bilaterally with neighboring utilities. Wholesale markets (e.g., ISOs and RTOs) for electric power came into being as parts of the country deregulated their electricity sectors. The role of an RTO or ISO is to serve as a nexus for trading electric power, and to dispatch the system to facilitate those trades. They are, by FERC requirement, operated by personnel unassociated from the market participants and market outcomes, and thus maintain incentive to provide free and fair access to all participants. Each ISO and RTO has its own market design — the rules by which participants trade power. These market designs are very complex and continually evolving, but are in general designed to generate efficient, competitive outcomes. For example, changes are made to increase the efficiency of the market outcomes, to stop any potential economic “games” when they are detected, and to reduce the amount of non-market dispatch required to operate the system. Changes to market rules are made when directed by FERC and through stakeholder processes.
Because of the fixed geographic nature of wholesale markets, they do not compete with each other, but they do operate as profit neutral entities (i.e., “nonprofit” or “not-for-profit”) to ensure that market participants have access to a competitive market for their services (see, e.g., PJM’s description of how it makes money or CAISO’s description of its business model).
The more resources that are available to a wholesale market with which to balance supply and demand, the better the overall solutions can be. Similarly, drawing from generation across a wide geography may smooth out diverse load and supply patterns, particularly from intermittent renewables. As a result, there is pressure for wholesale markets to operate over larger balancing areas. This can happen by growing an ISO/RTO, or creating imbalance markets or other arrangements that make it easier coordinate over larger areas (see, e.g., CAISO EIM). However, larger regional markets may make it harder for certain states and geographies to pursue their preferred policies, so it is difficult to predict which wholesale markets will aim to expand, coalesce, or maintain their balancing area in the future.
U.S. ISOs and RTOs are: New England ISO (ISO-NE), New York ISO (NY ISO), Pennsylvania – New Jersey – Maryland Interconnection (PJM), Midcontinent ISO (MISO), Southwest Power Pool (SPP), Electric Reliability Council of Texas (ERCOT), and California ISO (CAISO). Additionally, there are federal power marketing administrations (PMAs) within the Department of Energy that operate hydroelectric dams across 33 states and perform wholesale marketing and transmission operations activities; they generally do not own generation facilities or transmission equipment. The PMAs are: Tennessee Valley Authority (TVA), Bonneville Power Administration (BPA), Southeastern Power Administration (SEPA), Southwestern Power Administration (SWPA), and Western Area Power Administration (WAPA).
Porter’s Five Forces
In this section, we explore Porter’s five forces as they relate to wholesale market and transmission operators; specifically, these are: the threat of new entrants, the threat of established rivals, the threat of substitute products or services, the bargaining power of suppliers, and the bargaining power of customers. The framework is illustrated in Figure SC.1 below and characteristics of each of the forces will be discussed in detail subsequently in the context of wholesale market and transmission operators. We note that due to the nature of these roles within the power market value chain (e.g., geographic exclusivity, cost-effectiveness of avoiding infrastructure redundancy, etc.), several of the five forces likely do not manifest as they do, for example, for a technology sold in a competitive market.
Figure SC.1 Porter’s Five Forces
- Industry Rivalry
ISOs/RTOs do not overlap and thus do not engage in traditional intra-industry rivalry. However, for the physical movement of energy between two points, private transmission links not under the ISTO/RTO’s control between resources can avoid using the ISO/RTO system. As for the market-making aspect of the transmission operator, participants can choose to trade bilaterally avoiding the organized spot market. In such cases, the parties who have made such arrangements still need to inform the wholesale market operator of their intended scheduled flow, for inclusion in the market optimization to make sure in the long-term, load can leave the territory area covered by the wholesale market.
- Threat of New Entrants
Due to exclusivity within a geographic region, electricity wholesale market and transmission operators do not face the threat of new entrants in the same way as other segments of the value chain.
- Threat of Substitutes
Because the wholesale market is intrinsically tied to the electric grid, its economic viability is susceptible to the emergence of and growth in technologies and systems that threaten to enable avoidance of the system entirely: self-generation, distributed generation including microgrids, storage systems, and other technologies that might allow electricity consumers to disconnect from the grid. In such scenarios, transmission and market operators would be deprived of business, just as would an LSE.
- Bargaining Power of Suppliers
From the transmission operations perspective, the power market’s main suppliers are the companies that provide the software and hardware to run power auctions and dispatch the transmission system according to the results. Obviously, with no transmission assets, there would be nothing to operate, so, of course, the organizations that actually own and invest in transmission assets are also suppliers.
- Bargaining Power of Buyers
The primary customers to the wholesale market are and load serving entities. Energy from the wholesale market can also be exported over interconnections to other wholesale markets, making other markets a potential customer.
Overview of Geography
Wholesale electricity markets are geographically distinct, though they may trade with neighboring markets in cases of over- or under-supply. The U.S. northwest, southeast, and southwest regions (see Figure SC.2) are primarily served by traditional wholesale electricity markets with vertically integrated utilities managing generation, transmission, and distribution. Other U.S. regions are served by ISOs or RTOs: California ISO (CAISO), Midcontinent ISO (MISO), New England ISO (ISO-NE), Pennsylvania – New Jersey – Maryland Interconnection (PJM), Southwest Power Pool (SPP), Electric Reliability Council of Texas (ERCOT).
Figure SC.2 U.S. ISOs, RTOs, and Other Electricity Markets
Source: FERC website https://www.ferc.gov/market-oversight/mkt-electric/overview.asp
Table. SC.1 Summary Statistics on RTOs/ISOs and other U.S. regions (2017)
Source: FERC website https://www.ferc.gov/market-oversight/mkt-electric/overview.asp
| ISO/RTO | Generating Capacity (MW) | Peak Demand (MW | Transmission lines (miles) | Annual Billing ($billion) | States served (#) | Population (million) |
| CAISO | 60,000 | 50,000 | 26,000 | 11 | 2 | 30 |
| MISO | 174,724 | 127,125 | 65,800 | 25.3 | 15 | |
| ISO-NE | 31,000 | 28,130 | 9,000 | 5.4 | 6 | — |
| NYISO | 38,777 | 33,956 | 11,131 | — | 1 | 20 |
| PJM | 165,569 | 165,492 | 82,546 | 39.05 | 13 | 65 |
| SPP | 84,946 | 45,279 | 60,000 | — | 14 | 18 |
| ERCOT | 75,964 | 69,621 | 46,500 | 34 | 1 | 24 |
| Southeast region | 238,000 | 170,000 | 55,,000 | — | 10 | 57 |
| Southwest region | 50,000 | 42,000 | — | — | 6 | — |
Overview of Governance
The wholesale markets in the US operate primarily under the supervision of the Federal Energy Regulatory Commission (FERC). The Federal Power Commission (FPC) was established in 1920; in 1977 the Department of Energy Organization Act renamed the FPC to FERC. Under the Federal Power Act of 1935, the FPC (now FERC) was assigned the statutory obligation to ensure that wholesale prices are “just and reasonable.”
FERC is primarily responsible for the commercial and competitive aspects of operating the transmission system, but the many of the technical operational standards come from the North American Electric Reliability Corporation (NERC), a nonprofit corporation, that has authority to enforce its standards by way of having been designated as an Electric Reliability Organization (ERO) by FERC.
Much of the governance surrounding deregulated wholesale markets involves encouraging and enforcing competition within power markets. Therefore, the specific rules and tests used to detect the existence of market power and its abuse are particularly relevant to a discussion of governance. FERC applies market share and pivotal supplier tests to establish a rebuttable presumption that an applicant for market-based pricing does not possess significant market power. The three pivotal supplier test determines a situation uncompetitive if removing any three suppliers would result in a system constraint being violated. Some ISOs have additional tests for non-competitive market structures. For example, PJM extends the FERC pivotal supplier test to encompass the two largest suppliers in the market in addition to the applicant and includes only economic capacity in its market assessment. Furthermore, the PJM market power test applies to any region affected by a binding transmission constraint at any time of the year. Typically, when market power is detected, ISO auction systems will automatically adjust the bids of market participants to negate its influence.
Quantitative Measurement of Imperfect Competition
Four Firm Concentration Ratio (FFCR)
For consistency with the data provided in other value chain segments, we include the four firm concentration ratio for the general electric power sector and electric power transmission and control (Table SC.2). However, as discussed above, the FFCR and HHI may not accurately represent the ability of firms in this industry to exercise market power.
Table SC.2 FFCR for Electric power generation, transmission, and distribution (NAICS 2211) and electric bulk power transmission and control (NAICS 221121)
Source: 2007 U.S. Economic Census, Utilities: Subject Series – Establishment and Firm Size: Summary Statistics by Concentration of Largest Firms for the United States: 2007
| NAICS | Firms | Number of Establishments | Number of Employees | Revenue ($1,000) | Total revenue from large firms (%) |
| 2211 | All firms | 9,554 | 511,487 | 445,693,484 | 100.0 |
| 2211 | 4 largest firms | 770 | 67,129 | 66,671,244 | 15.0 |
| 2211 | 8 largest firms | 1,176 | 130,510 | 119,303,717 | 26.8 |
| 2211 | 20 largest firms | 3,860 | 259,388 | 238,954,814 | 53.6 |
| 2211 | 50 largest firms | 5,784 | 384,056 | 343,709,798 | 77.1 |
| 221121 | All firms | 74 | 6114 | 4,267,551 | 100.0 |
| 221121 | 4 largest firms | 43 | 2341 | 2,312,863 | 54.2 |
| 221121 | 8 largest firms | 50 | 3723 | 3,403,647 | 79.8 |
| 221121 | 20 largest firms | 66 | 6087 | 4,265,976 | 100.0 |
| 221121 | 50 largest firms | 74 | 6114 | 4,267,551 | 100.0 |
Firm Economic Data Table
Table SC.3 lists firm revenues, number of employees, as well as location of headquarter and manufacturing facilities. More detailed firm information can be found in their annual report or company website (link provided).
Table SC.3 Summary of Dollars Billed by Charge Type (2014)
Source: FERC Common Metrics Report (revised August 2017)
| ISO-NE | MISO | NYISO | PJM | SPP | |
| Energy Markets | 9.079 | 31.958 | 5.023 | 30.573 | 7.753 |
| Capacity | 1.056 | 0.145 | 3.222 | 7.735 | — |
| Transmission Service | 1.819 | 2.004 | 2.172 | 8.451 | 2.671 |
| Financial Transmission Rights | 0.032 | 4.115 | — | 0.96 | — |
| Reserves | 0.207 | 0.093 | — | 0.918 | — |
| Regulation Market | 0.029 | 0.087 | — | 0.258 | — |
| Administrative Costs | 0.171 | 0.247 | 0.161 | 0.274 | 0.149 |
| Other | 0.167 | 0.033 | 0.171 | -9.712 | — |
| Total | 12.56 | 38.68 | 10.749 | 50.03 | 10.573 |