Wholesale Energy Markets

Most utilities operate in wholesale energy markets. They need to buy natural gas or electricity or sell the energy they generate in regional markets. In addition, all electric utilities rely on long-distance transmission systems to ensure that the local grid balances the flow of electricity. Natural gas utilities rely on long-distance pipelines to deliver sufficient natural gas supplies. As a result, most utilities participate in regional power markets for transmission and generation services.

Federal and state regulators oversee regional pipelines and transmission systems. They also establish wholesale power markets. They must ensure adequate supplies of energy for reliability of service on every hour of every day of the year 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 pipeline owners, transmission owners, and 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 prices charged for natural gas pipelines, electric transmission service, and wholesale generation contracts are “just and reasonable.” In recent years, FERC has relied on its determination that the markets are operating without undue discrimination rather than actually having rate cases to determine that rates are just and reasonable.

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. Their concern is that there is the lack of adequate oversight of the organizations. 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.