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for one transaction). RTOs also coordinate regional planning for by securing an obligation from customers that they will curtail new transmission lines. power at times of peak load.The cost of capacity is in addition The RTO markets were also authorized to administer to the price paid for the actual delivery of power and other wholesale markets for the sale of electric energy(both day-ahead ancillary services.Most RTOs(other than the Southwest Power and real-time purchases),electric power capacity,and ancillary Pool(SPP) and California Independent System Operator(CAI- services.RTOs do not own the power plants that generate the SO)) operate markets for capacity.Like RTO-run wholesale power bought and sold in the market,but do exercise extraordi- markets for energy,RTO capacity markets rely on a centrally nary controls over power generation.They decide which genera- determined single clearing price(again allowing windfall profits tors will run and at what levels,grant(or deny) the transmission for low-cost units);are subject to LMP;and can impose dollar services needed for transactions to occur,and run the billing caps on bids.Capacity prices are established in periodic auctions systems for payments for power. –typically on an annual basis. In contrast to energy markets, Prices paid in these markets are not set through bilateral several RTO capacity markets (ISO-NE,PJM,and NYISO) exchanges,but are centrally determined by the RTO.Cus- also include mechanisms to prop up prices for generators,such tomers can,however,engage in bilateral contracts with cepa- as minimum offer price rules or buyer-side mitigation rules.See rate settlements at different prices.All RTOs have centralized APPA's issue brief,"RTO Capacity Markets and Their Impacts markets for the day-ahead and real-time purchase of wholesale on Consumers and Public Power"for a more detailed discus- electric power.The prices are set(either every five minutes or sion. every hour) based on the bids that sellers submit to the RTO. The RTO takes all bids in ascending order and stops with the last incremental bid needed to supply power to buyers in that Market Concerns time interval.The price all sellers in that time interval receive, RTO wholesale markets suffer significant problems stemming however,is based on the last bid the RTO accepted—this is from:certain fundamental features of the market design;the known as a"single clearing price"market. Bids need not reflect ability of some generators to strongly influence market prices, the sellers'actual costs of generating power,as FERC formerly also known as exercising market power;highly complex rules; required.As a result,low-cost generation can reap substantial and problematic governance processes.These problems have financial windfalls. RTOs generally limit the maximum price of arisen,and remain,because of a lack of sufficient FERC over- a bid,typically$1,000 per megawatt-hour,although RTOs all sight.While in recent years FERC has undertaken enforcement have some form of"shortage pricing"where electricity prices can actions against financial entities that have clearly manipulated spike above these caps during times of system stress(prices paid these markets,the generators operating in the markets are still in these markets also strongly influence the price of electricity extracting excess revenues—either operating within the existing charged by generators outside these markets in bilateral or"stan- rules or obtaining FERC's approval for changes to the existing dard offer"contracts.) rules to generate excess revenues.The generators'behavior is an In some cases,congestion on power transmission lines may inevitable consequence of the flawed and opaque market struc- prevent all available generation from being delivered to cus- ture.For its part,FERC continues to impose a strict reliability tomers in a"constrained zone."As a result,the RTO may allow standard on these RTOs,while taking a hands-off approach more expensive generation located within the zone to meet that as to whether resulting rates to customers are still"just and demand,and customers in the zone must pay the higher price. reasonable." The difference between the lower price in the RTO generally Ironically,when RTOs first established wholesale markets, and the higher price being charged in the constrained zone is proponents said switching from a cost-based rate to a mar- called the"congestion charge."This congestion pricing system is ket-based rate would increase price competition,and consumers known as"locational marginal pricing" (LMP).In theory,LMP would benefit both from lower prices and greater investment should incentivize construction of new generation or additional in new infrastructure necessary for the future reliable opera- transmission facilities,or reduce power usage through conserva- tion of the grid.Instead,the opposite has occurred.Electricity tion or shifting of the times when energy is consumed.In reality, prices are,on average,higher in RTO regions and have risen generation and transmission development has not been greater faster than in other regions,and there is scant evidence that in LMP regions. these higher prices have produced greater levels of reliability or One way to ensure that peak load is met is for a utility to significant infrastructure.There has been relatively little new pay a generator to stand ready to provide power,i.e.,to have the investment while plant retirements,primarily that of nuclear "capacity"necessary to meet peak load. Capacity can also be met 52 PubllcPower.org 234