Overview of Regulation and Oversight in the Electricity Industry

Problems in the financial markets have been attributed in some measure to “deregulation” and ineffective regulation and oversight. But there is no corollary with the organized competitive electricity markets, which often are erroneously described as “deregulated.” While the electricity industry has undergone restructuring over the last decade, regulation and oversight are as strong now as they ever were before restructuring and vigorously protect against the same types of problems occurring in the electricity industry.

THE ELECTRICITY INDUSTRY IS NOT “DEREGULATED”

• The electricity industry remains perhaps the most highly regulated in the United States. The industry is regulated under strict standards at multiple levels -- federal, state and sometimes local.
• Under the Federal Power Act, the independent and bipartisan Federal Energy Regulatory Commission (FERC) regulates interstate transmission, wholesale sales of electricity, corporate acquisitions and dispositions, securities and debt issuances, debt acquisitions, and reliability.
  • The Commission’s authority under the Federal Power Act to protect consumers was actually strengthened by energy policy legislation enacted in 2005.
  • FERC is now charged with strict policing against market manipulation and rule violations, and may impose fines of up to $1 million per day per violation.
• State utility commissions perform a similar role, regulating sales of electricity to end-use customers, as well as financial stability and reliability.
• Electricity markets in some regions have been restructured to promote entry by, and competition among, an increasing number of diverse suppliers selling generation and other services.
  • The idea behind restructuring is to allow well-structured and highly-monitored competitive markets to determine the value of electricity, just as markets do for other goods and services in our society. Cost-of-service ratemaking was widely viewed as ineffective and inefficient, and it imposed unnecessary costs on consumers.
  • Restructuring included developing regional wholesale power markets and allowing consumers a choice of retail service providers. In the restructured regions, the regulatory oversight is even stronger than it was 10 years ago.
  • Transmission and distribution continue to be natural monopoly services and as such remain highly regulated.
  • Restructuring has greatly diminished financial risk for consumers by shifting the risk of poor business decisions from consumers to investors, where it belongs.
• Strict oversight and enforceable rules regarding the important aspects of electricity service assure a strong electric utility industry. Those aspects are:
  • Reliable service and adequate supplies of electricity
  • Financial security and transparency
  • Reasonable prices
  • Markets safeguarded against manipulation

RELIABILITY

• Regulatory oversight of reliability is detailed, extensive and comprehensive.
• All utilities must secure sufficient generation resources to meet standards that assure reliable retail service.
• All entities that use the transmission system must adhere to strict and detailed standards established by FERC for the reliable operation of the grid.
  • The Commission vigorously oversees compliance with the standards, and violations are subject to FERC penalties of up to $1 million per day per violation.
• FERC has authority to order interconnections to a transmission system (and among systems), and power sales and transmission service, if needed to assure reliability. FERC has used this authority when necessary.
• State regulatory commissions foster reliability through some or all of the following actions:
  • Set and enforce reliability benchmarks
  • Require periodic reliability performance reporting
  • Establish, monitor and enforce inspection and maintenance standards
  • Review customer service reliability complaints
  • Monitor and investigate major reliability events.
• Significant financial problems of one utility, such as bankruptcy, although highly unlikely, would not impact reliable service and would not spread to other utilities.
  • History demonstrates that a utility’s “hard assets” would continue to operate under bankruptcy protection and provide service to consumers.
  • Operations and reliability would not be affected, and regulators would take any steps necessary to protect consumers.

FINANCIAL SECURITY AND TRANSPARENCY

• Dispositions and mergers of public utility assets, acquisitions of public utility securities by a public utility, mergers of certain utility holding companies, and purchases of existing generation facilities require FERC approval in a public process and the approval of many state authorities. Mergers are also subject to review by the Department of Justice and the Federal Trade Commission.
• Security issuances and assumptions of obligations or liabilities by public utilities require regulatory approval in a public process. Where state authority is lacking, FERC approval is required.
• Utility financial records must be kept in accordance with FERC’s comprehensive Uniform System of Accounts.
• Financial reports must be filed regularly with FERC and the states, and are publicly available.
• Utility officers and directors may not serve as officers or directors of another utility, a bank, a security underwriter, or an electrical equipment supplier without FERC approval.

WHOLESALE PRICE (FERC)

• Prices for interstate transmission service are strictly regulated on a traditional cost-of-service basis.
• Prices for wholesale generation services are strictly regulated on a traditional basis if the seller is unable to show it cannot exercise market power. If a seller shows that it cannot exercise market power according to FERC standards, it may sell at “market-based prices,” which are disciplined by market forces.
• FERC has a vigorous monitoring and enforcement program.
  • The terms of all market-based sales of electricity must be reported to FERC on a quarterly basis.
  • Sellers with authority to sell at market-based prices undergo rigorous review at FERC every three years to assure they lack the ability to exercise market power.
  • FERC’s enforcement office reviews market conditions, activities of market participants and prices every day.
  • The enforcement office also undertakes a regular program of audits to assure compliance with FERC rules and accounting requirements.
  • Questionable behavior may be reported anonymously to FERC’s enforcement "hotline."
  • FERC can levy substantial penalties (up to $1 million per day per violation) and impose other remedies for market manipulation or other violations of its regulations, and can refer serious cases to the Department of Justice for criminal prosecution.
• FERC-jurisdictional organized regional competitive markets have safeguards and protections in addition to those listed above.
  • Market behavior is monitored in real time by independent professional market monitors
  • Market rules and operations are assessed periodically by independent professional market monitors.
  • Bid caps (i.e., price caps) protect against high prices caused by market power.
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  • Creditworthiness requirements bar financially weak participants.
  • Reliability is bolstered by mechanisms that assure sellers meet resource adequacy requirements.
• Consumers are protected from subsidizing investors by FERC rules establishing standards of conduct and restrictions on transactions with affiliates. State regulators oversee similar rules.
• The CFTC can also levy substantial penalties (up to $1 million per day per violation) and impose other remedies for manipulation of energy markets.
• All power providers must comply with strict business and communication standards. As a result, trades are made fairly, and more efficiently, keeping costs and prices down.

RETAIL PRICES (STATES)

• Prices for retail transmission and distribution are strictly regulated on a traditional cost-of-service basis.
• Prices for generation services in states without retail choice are similarly regulated on a traditional basis.
• In states with retail choice, retail service providers charge market-determined prices, but states impose a number of safeguards, including:
  • Certifying only competitive suppliers that meet specific requirements, including financial integrity and technical competence.
  • Overseeing the competitive procurement of the electricity supply for customers who do not want, or are unable, to purchase from a competitive supplier. The retail rates for such service are set at the cost of procurement.