California, PJM, and New England lead the way.
An Independent System Operator is a nonprofit organization that runs the transmission grid — dispatching generators, maintaining reliability, and operating spot markets — without owning any generation or transmission assets. It's the referee, not a player.
The ISO concept solved a real problem: as long as a utility that owned generators also operated the transmission grid, there would always be suspicion (often justified) that it was tilting the playing field in favor of its own units. An ISO, answerable to FERC rather than to shareholders, could be genuinely neutral.
California launched its ISO — CAISO — in April 1998, simultaneously with a new wholesale market structure. The design was ambitious: a day-ahead market, a real-time balancing market, and an ancillary services market for reserves and frequency regulation. Everything was to be priced by supply and demand.
The California model also attempted something novel: retail competition. Residential and commercial customers would be able to choose their electricity supplier from a menu of competing providers. The utility would still own the wires; the generation and supply functions would be competitive.
While California's restructuring generated enormous attention, a quieter revolution was happening in the Mid-Atlantic. PJM — the Pennsylvania-New Jersey-Maryland Interconnection — had been coordinating power flows since 1927. When FERC issued Order 888, PJM transformed itself from a coordination committee into a full-fledged ISO.
PJM's design was different from California's in one crucial way: it used Locational Marginal Pricing (LMP), a system that set different electricity prices at different points on the grid based on transmission congestion. A megawatt-hour at a congested delivery point would cost more than one at an uncongested point. LMP would prove far more stable than the single-price designs tried elsewhere.
ISO New England formed in 1997, taking over grid operations from the New England Power Pool. Like PJM, it developed a centralized day-ahead market with LMP. The northeastern markets became laboratories for market design — each iteration of the rules revealing new problems, generating new solutions, and slowly building the sophisticated market infrastructure that operates today.
New England, November 1997. When ISO New England formally took over grid operations from the New England Power Pool, it inherited both a regional transmission system and three decades of entrenched relationships between the NEPOOL member utilities. The handover was not clean. Incumbent utilities, which had jointly dispatched the grid through their own coordination committee, resisted transferring real-time dispatch authority to the new nonprofit operator. Early ISO-NE staff had to negotiate access to control room systems and real-time data that utilities had previously considered proprietary. New England chose a deliberate contrast with California's approach: rather than launching retail competition and a day-ahead market simultaneously, ISO-NE spent its first years establishing reliability operations and gradually adding market functions. The incremental strategy meant slower market development but also meant New England had a functioning independent operator when California's market collapsed three years later.
Sustainable FERC — Navigating ISO-NE Harvard Law — ISO-NExit Memo, background on formation