High Voltage Transmission Investment in the Restructured Electric Industry : How Do the New ISOs Compare to the Traditional Vertically Integrated Utilities?

This paper examines the impact on transmission investment of the transition away from central planning by vertically integrated electric utility monopolies toward Independent System Operators (ISOs) and market incentives. After summarizing the regulatory background of the new ISOs and the unbundled transmission sector, the paper maps ISO regions, states, and cost regions to a sample of nine NERC sub-regions. A log-linear, two-way fixed effects specification estimates the causal effect of the institutional transition and is fitted according to the General-to-Specific Method. The results indicate that, upon becoming an ISO, the uncertainty over losing control of system operations may result in an initial hesitancy to modify transmission investment behavior on behalf of the formerly vertically integrated sub-regions. However, utilities eventually gain confidence in the ISOs and in the ISOs’ transmission investment policies. Over six years, the cumulative effect of the transition is an 11.59% relative increase in transmission capacity, or a 1.93% average annual relative increase