RTO Governance Structures Can Affect Capacity Market Outcomes

Abstract

Regional Transmission Organizations (RTOs), which coordinate delivery for over two-thirds of the electricity consumed in the U.S., are required by the FERC to employ stakeholder-driven mechanisms to establish market and operational rules. These “governance structures” set up a quasi-political process for determining which market rules are adopted and which are not. This study shows how governance systems are not simply administrative constructs but have real impacts – the details of how the market rules are made will ultimately affect market outcomes. Using the capacity market in the PJM Interconnection as a case study, we model the preferences of individual stakeholders over different capacity market designs, under different decision rules for which capacity market design is implemented. We compare capacity market design choices under PJM’s current decision system, which requires a super-majority in a sector-weighted voting context to implement a new market rule, with the decision systems used in the New York ISO and also under systems of preferential voting. This voting model is integrated with a model of capacity market clearing which allows us to demonstrate how different decision systems matter in terms of installed capacity and capacity market outcomes.