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the US grid. The power systems within each interconnection area connect to one another, allowing the free flow of electricity, but there is limited synchronisation between interconnection areas (DOE, 2015).

Within each interconnection area, balancing authorities ensure that supply is sufficient to meet demand. In many states, utilities serve the role of balancing authority, though independent system operators and regional transmission organisations play the role of balancing authorities in regions that they cover (see below).

The US transmission network includes the power lines that link electric power generators to each other and to local electric companies. The transmission network in the 48 lower states is composed of approximately 697 000 circuit-miles (1 121 000 kilometres) of power lines and 21 500 substations operating at voltages of 100 kilovolts (kV) and above. Of this, 240 000 circuit-miles are considered high-voltage, operating at or above 230 kV.

The vast majority of transmission lines operate with alternating current (AC). With commonly used technology, system operators cannot specifically control the flow of electricity over the AC grid; electricity flows from generation to demand through many paths simultaneously, following the path of least electrical resistance. A limited number of transmission lines are operated using direct current (DC). Unlike AC transmission lines, the power flows on DC lines are controllable. However, their physical characteristics make them cost-effective only for special purposes, such as moving large amounts of power over very long distances or interconnecting unsynchronised areas.

Distribution is the delivery of power from the transmission system to the end users of electricity. There are almost 6.3 million distribution line-miles in the United States. Thirty distribution substations connect to the transmission system and lower the transmission voltage to medium voltage. This medium-voltage power is carried on primary distribution lines, after which distribution transformers again lower the voltage, and secondary distribution lines carry the power to customers who are connected to the secondary lines.

Market structure

Wholesale electricity markets

The core of the wholesale electricity system is generation and transmission. FERC’s authorities to establish rates and services for electric transmission in interstate commerce and electric wholesale power sales in interstate commerce form the basis for the economic regulation of the bulk electricity system. FERC directly regulates the economic performance of investor-owned utilities. Those companies are empowered to choose how they will operate their transmission systems and choose their generation sources, subject to state regulations, such as renewable portfolio standards. Regions differ in the structures they use to manage their wholesale electricity transactions (FERC, 2019).

Traditional vertically integrated utility bulk systems

For most of the 20th century, the dominant entities for generating and transmitting bulk power were vertically integrated electric utilities (VIEUs). Today, only a subset of the US

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electricity system is based on the traditional VIEU organisation; these regions are the Northwest, Southeast and Southwest. In these regions, individual utilities control the generation and transmission needed to serve their service territories. These entities either own their own generation and transmission facilities or can purchase electricity through contracts with other suppliers. Sellers and buyers also enter into bilateral contracts, which tend to include agreed volumes and prices.

ISOs and RTOs

Since the late 1990s, utilities in most regions have opted to join Independent System Operators (ISOs) and Regional Transmission Operators (RTOs), organisations that centrally dispatch electricity for all participants. ISOs and RTOs were formed at the suggestion of FERC with the belief that increased competition among generators would help to reduce generation costs and help achieve “just and reasonable rates”.

Utilities in six regions have chosen RTO/ISO structures under FERC authority: California ISO (CAISO), New York ISO (NYISO), Midcontinent ISO (MISO), ISO New England (ISO-NE), PJM Interconnection and Southwest Power Pool (SPP). A seventh organisation, Electric Reliability Council of Texas (ERCOT), centrally dispatches the generation for most of Texas, but it is not subject to FERC wholesale market regulation because it is not interconnected to the rest of the US grid. Two-thirds of US electricity load is served by ISOs or RTOs.

Figure 9.7: US electricity ISO and RTO regions

Source: Courtesy of the U.S. Federal Energy Regulatory Commission (2019).

Among their core functions, ISOs and RTOs control (but do not own) their respective region’s electricity transmission system, administer wholesale electricity markets and ensure the reliability of the bulk electricity system. ISOs and RTOs help maintain system reliability by co-ordinating generation and transmission operations. ISOs and RTOs administer wholesale power auctions, where generators submit bids for a specified amount of electricity at a given price and time period based on their marginal cost of production. Combined, the bids create an energy market supply curve, or generation stack. The market clearing price is the level at which demand intersects with the supply curve, i.e. the marginal cost. Given near-zero generation costs for wind and solar power,

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they often clear first, while nuclear and fossil generators tend to place higher bids on the generation stack and occasionally do not clear an auction, especially during periods of low demand, such as nighttime hours.

In addition, RTOs and ISOs purchase ancillary services from generators. These include services such as frequency control, operating reserves and voltage support; they enable transmission operators to balance supply and demand.

Competitive markets can face challenges ensuring adequate revenues to generators to sustain the existing fleet and to secure timely and efficient investments in new generation capacity (Congressional Research Service, 2016). In the United States, the share of total generation costs covered by wholesale electricity revenues has been in decline mainly due to low natural gas prices. Stagnant demand and the rising share of variable renewables have intensified the downward pressure on wholesale electricity prices in several US electricity markets, and the main drivers of low wholesale electricity prices are likely to stay, with wind and solar set for further growth to meet state-level targets, and natural gas prices staying low. Therefore, US electricity sales may continue to recoup less than the total cost of generation in some states, despite the possibility of a return to growth for electricity demand from heating and cooling as well as transport.

Capacity markets

Federal and state reliability obligations require utilities to ensure that they have sufficient resources to meet projected demand as well as an additional reserve margin that covers unexpected demand spikes or supply disruptions. Capacity markets are used in some markets to ensure adequate reserve supply where the RTO/ISO is responsible for resource adequacy (i.e. ISO-NE, PJM and NYISO). In other regions (RTO/ISO and traditional), the principal responsibility for resource adequacy rests on the electric utility distributing the electricity and serving load (GAO, 2017).

Where capacity markets are used, ISOs and RTOs incentivise generators to provide reserve capacity and award incentives based on auctions that seek the lowest-cost capacity resources. Capacity markets seek to ensure adequate reserves over various time horizons, from one month (MISO) to three years (PJM and ISO-NE). Demand response, under which utilities signal consumers to cut demand during periods of tight supply (usually through time-based rates or other financial incentives), can also bid into capacity markets (see more on demand response under Policies and Regulations section).

Energy Imbalance Market

Launched in 2014, the Western Energy Imbalance Market (EIM) is a real-time bulk power trading market run by CAISO across eight Western states (Western Energy Imbalance Market, 2019). Regional utilities and balancing authorities outside of CAISO can opt into participating in the EIM. Like the RTOs/ISOs, the EIM is designed to identify the lowestcost energy resource to reduce costs and optimise use of all generation resources (variable renewable generation and conventional fossil resources) across the geographical footprint, and increase system flexibility (NRDC, 2017). The EIM also monitors congestion on transmission lines across participating areas to boost reliability, but unlike RTO/ISO participants, EIM participants control their respective transmission systems (Power mag, 2018).

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More recently, the SPP announced that it plans to launch the Western Energy Imbalance Service market in December 2020 to balance regional real-time load and generation (Power Mag, 2019).

Distribution system rates and competition

State regulators determine how rates and prices for retail electricity customers will be determined. Where states rely on regulated distribution utilities to provide retail service, retail rates are set based on traditional costs of service. Retail rates are approved by state public utility commissions, which have regulatory purview over the rates of return and expenditures of investor-owned utilities.

Selected states have chosen to implement retail electricity competition, where at least a portion of the electricity is sold on a competitive basis. Retail competition is most common in states where the state forced utilities to divest generation assets, as part of restructuring (21st Century Power Partnership, 2017). In the competitive model, multiple electricity suppliers sell electricity sourced from wholesale markets or the company’s own generation. Customers choose their supplier based on offers made by multiple suppliers.

Currently, 18 states plus the District of Columbia have deregulated retail electricity markets, out of which 13 states and the District of Columbia have full retail choice (Littlechild, 2018). Moreover, the number of customers participating has increased substantially over time. Texas has the largest participation because it does not allow the local distribution utility to engage in retail sales, whereas most retail competition states require the local distribution utility to provide retail supply at regulated rates to customers that do not pick a competitive supplier.

Ownership

Consistent with the regulatory models that prevailed, US electricity system ownership was dominated by vertically integrated utilities that owned generation, transmission and distribution assets that served a group of customers defined by the state regulatory authorities until the late 1990s. In addition, firms owned by non-investor-owned entities have served selected segments of the market for many decades:

Municipal utilities owned by local governments at the city or county level generally provide retail distribution services, but also own interests in transmission and generation.

Rural co-operatives are owned by the customers they serve; co-operatives take the form of distribution utilities, or generation and transmission co-operatives.

Federally owned entities are bulk power system only and include power marketing administrations that sell power generated by federally owned plants (mostly hydro) in 33 states. These include the Bonneville Power Administration in the Northwest, the Southeastern Power Administration, the Southwestern Power Administration and the Western Area Power Administration. The Tennessee Valley Authority is a federal corporate agency that both generates and transmits electricity to seven states in the Tennessee Valley. Other agencies, such as parts of the Department of the Interior, also own generation assets.

While these ownership types continue, electricity restructuring has fostered other business models in some states and regions:

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