Wholesale Electricity Markets

Not all utilities own and operate power plants or generate enough electricity to meet all their needs. As a result, many buy power in the wholesale energy market. They then resell this energy to their customers. 

Federal and state regulators oversee these wholesale transactions in their jurisdictions. They must ensure adequate supplies of energy and that consumers pay reasonable rates. 

The Federal Power Act (FPA) governs the actions of public utilities that engage in interstate commerce to ensure that wholesale electricity providers charge fair rates. The Federal Energy Regulatory Commission (FERC) is the agency with authority to oversee the interstate sale and transmission of electricity, ensure that wholesale contracts are “just and reasonable,” and monitor and investigate wholesale energy markets. 

By enacting the just and reasonable provisions of the FPA, Congress intended to protect consumers from exploitation and abuse. Therefore, FERC must determine whether challenged rates affect the public interest. To do so, FERC must assess whether consumers’ electric bills are higher than they would have been if their utilities’ wholesale contracts had included just and reasonable costs. 

Multi-state electricity grids are networks that deliver power to customers across state lines. They are coordinated by Regional Transmission Organizations (RTOs). A similar entity is the independent system operator (ISO). The Federal Energy Regulatory Commission, rather than state regulatory agencies, oversees them. FERC began encouraging the voluntary formation of RTOs to administer the transmission grid. FERC also recommended the creation of ISOs to allow existing power pools to provide nondiscriminatory access to transmission. They facilitate access by non-utility generators to the interstate electricity transmission system, oversee market operations and financial transactions, and coordinate and approve reliability and regional planning, including new transmission lines. RTOs/ISOs serve approximately two-thirds of electricity customers in the U.S. Many critics, including consumer advocates, question whether these organizations have provided benefits to consumers. They are concerned the organizations do not have adequate oversight. Generally, the federal regulator provides less oversight than the state regulators did previously. FERC has allowed these entities to set prices based on the market rather than actual costs of service or traditional ratemaking. 

Unlike utilities (which are strictly regulated by state commissions and thus have a duty to protect ratepayers in their state), RTO/ISOs often escape scrutiny. This is because FERC allows a more generous rate of return, uses alternative ratemaking mechanisms that favor companies, and does not require a single-state focus. Given the more generous levels of return on investment that FERC allows, some have argued that consumers would have saved substantially if such investments had remained under state jurisdiction, where returns are generally more modest. 

In addition, RTOs have adopted complex stakeholder procedures. Consumer groups have generally had difficulty fully participating. It requires a substantial commitment of time and resources needed to monitor the proposals and attend meetings. As a result, major generators and large utilities often dominate the process. This can mean that the cost impact on retail electricity customers is sometimes ignored. 

Furthermore, the operating costs of RTOs and ISOs are directly passed on to utility customers. They make up a growing portion of consumer electricity bills. Yet, the federal regulator does not use its authority to review or approve annual operating budgets. These budgets can reach hundreds of millions of dollars.