ISO Net Surplus Extraction in Restructured Wholesale Power Markets

This study uses dynamic 5-bus and 30-bus test cases to explore the net surplus (congestion rents) collected and redistributed by ISOs in restructured wholesale power markets with grid congestion managed by locational marginal pricing. The price-sensitivity of demand and the learning capabilities of generators are taken as treatment factors. A key finding is that ISO net surplus substantially increases as the pricesensitivity of demand is reduced and the learning capabilities of generators are increased, conditions resulting in greater economic capacity withholding and a loss of market efficiency. A practical implication is that oversight of the extractions and uses of ISO net surplus is publicly prudent because ISO financial incentives are not structurally well-aligned with ISO fiduciary responsibilities for ensuring market efficiency.