Comprised of more than 11,000 circuit-miles of transmission lines and generating more than 140,000 GWh of electricity each year, New York’s power grid keeps the lights on for the state’s nearly 20 million residents. Managing this system is the New York Independent System Operator (NYISO), a non-profit agency that runs the state’s competitive electricity markets and ensures grid reliability.
What exactly is an independent system operator (ISO)? As an example, we’ll take a look at one ISO in particular – NYISO – and briefly examine how it came into existence. In part 2, we’ll investigate how it determines the price of electricity through its competitive electricity markets.
First though, a little background on how the electricity grid is organized in the U.S. and Canada. According to Harris Williams & Co., the grid is comprised of over 450,000 miles of high voltage lines and six million miles of distribution cables transmitting power from suppliers to almost 300 million customers. This grid is split into four main interconnections overseen by the North American Electric Reliability Corporation (NERC): the Eastern Interconnection, the Western Interconnection, the Texas Interconnection and the Quebec Interconnection.
Overseeing Grid Reliability
The NERC delegates its authority to monitor the power system and enforce reliability standards to eight regional entities that together oversee nearly all the electricity supplied in the United States, Canada and the northern region of Baja California, Mexico. Members of these entities represent all aspects of the electricity industry: independent power producers; investor-owned, state, municipal, and provincial utilities; rural electric cooperatives; power marketers; federal power agencies; and end-use customers. The eight regional entities are: Florida Reliability Coordinating Council (FRCC), Midwest Reliability Organization (MRO), Northeast Power Coordinating Council (NPCC), ReliabilityFirst (RF), SERC Reliability Corporation (SERC), Southwest Power Pool, RE (SPP RE), Texas Reliability Entity (Texas RE) and Western Electricity Coordinating Council (WECC).
Managing the flow of electricity along the grid are nine ISOs/regional transmission organizations (RTOs) regulated by the Federal Energy Regulatory Commission (FERC). Some areas are outside of ISO/RTO management and are run by many types of transmission owners. ISOs/RTOs operate the grid in their respective regions, providing independent oversight to ensure reliability. In addition, they administer wholesale electricity markets to facilitate supplier competition, guard against market manipulation and perform grid planning. NYISO is one of nine ISOs/RTOs operating in North America.
The NYISO was established in 1999, but its history stretches back to the late 1960s when its predecessor, the New York Power Pool (NYPP), was created in the wake of the 1965 Northeast electrical blackout. The NYPP was a statewide organization formed by New York’s utilities to coordinate power reliability and manage the grid. It dispatched power from generators to balance supply and demand in the electricity system. But unlike the power pools in two neighboring regions (New England and the Mid-Atlantic), which committed power based on regional power market costs, the NYPP dispatched electricity based on unit schedules provided by individual utilities, which was less effective at minimizing the cost of producing power in the state overall.
Dominating New York’s electricity industry in the early 1990s was a large publicly owned utility – the New York Power Authority (NYPA) – and seven utilities owned by investors – Central Hudson Gas & Electric Company (CHG&E), Consolidated Edison Company (ConEd), Long Island Lighting Company (LILCO), New York State Electric & Gas Company (NYSEG), Niagara Mohawk Power Corporation (NIMO), Orange & Rockland Company (O&R) and Rochester Gas & Electric Company (RGE). The New York State Public Service Commission regulated cost-based electricity rates for the bundled power service these utilities provided to retail customers. But the public was unsatisfied with rates that continued to climb.
Birth of NYISO
Rising electricity prices created the pressure that led to the creation of NYISO in 1999. In the mid-1990s, electricity prices in New York were among the highest in the nation. The elevated prices were a result of a number of factors, including high-priced power contracts signed under the state’s “six-cent” law and the high costs of constructing and operating power plants in the state (including taxes and land costs), as well as the nature of the electricity market run by the utility-operated NYPP. FERC began encouraging states in the 1990s to form independent operator organizations that would manage the regional power systems from a neutral position, having no financial stake in the market.
In 1999, NYISO was established and the NYPP dissolved. A new set of centrally administered, bid-based electricity markets run by NYISO was created. Today, NYISO manages the electric power transmission system in New York, operating these competitive markets for electricity pricing, maintaining grid reliability and planning for the future of the power system.
Part 2 will delve into how electricity prices are determined in NYISO’s wholesale electricity markets.