An independent system operator, or ISO, is an independent organization that handles electric grid operations, market facilitation for certain electric markets, and bulk electric system planning. If competitive generation markets are to work effectively, generators must have nondiscriminatory access to the transmission system to deliver their power to customers. ISOs were created to facilitate competitive wholesale electric markets.
The traditional structure in North America is for utilities to own and operate transmission systems within their service territory. This allows them to control access to transmission and determine which generators are dispatched at any point in time. Independent power producers (IPPs) and marketers feel that leaving such functions with utilities creates an unfair playing field in the market. To avoid such conflicts, an ISO does not own transmission but rather manages transmission owned by other entities (either utilities or transcos). The ISO handles all the system operations functions of scheduling generation, transmission, and reserves; acquiring other ancillary services; managing the system in real time; and system planning. In some cases, ISOs also facilitate day-ahead energy and forward capacity markets.
ISOs are non-profit organizations run by an independent board of directors that is not beholden to any one market participant or group of market participants. ISOs in the United States are FERC-regulated entities with the exception of the ERCOT in Texas, which is regulated by the Public Utilities Commission of Texas. In the U.S., FERC has established a closely related category of system operators called Regional Transmission Organizations (RTOs). All FERC-jurisdictional ISOs have also been certified as RTOs.
Outside of North America, many jurisdictions have split system operations, market facilitation, and system planning into multiple organizations rather than having them all within one ISO. For instance many have Transmission System Operators (TSOs) who manage the grid and a Power Exchange (PX) that facilitates markets. However in some countries, organizations similar to ISOs exist including the AEMO in Australia, POSOCO in India, ONS in Brazil, and CAMMESA in Argentina.