Background

The electricity industry is based on four distinct functions: generation,  transmission, distribution, and system operations. (See fig. 1.) Once  electricity is generated—whether by burning fossil fuels; through nuclear  fission; or by harnessing wind, solar, geothermal, or hydro energy—it is  sent through high-voltage, high-capacity transmission lines to electricity  distributors in local regions. Once there, electricity is transformed into a  lower voltage and sent through local distribution wires for end-use by  industrial plants, commercial businesses, and residential consumers.
A unique feature of the electricity industry is that electricity is consumed at  almost the very instant that it is produced. As electricity is produced, it  leaves the generating plant and travels at the speed of light through  transmission and distribution wires to the point of use, where it is  immediately consumed. In addition, electricity cannot be easily or  inexpensively stored and, as a result, must be produced in near-exact  quantities to those being consumed. Because electric energy is generated  and consumed almost instantaneously, the operation of an electric power  system requires that a system operator balance the generation and  consumption of power. The system operator monitors generation and  consumption from a centralized location using computerized systems and  sends minute-by-minute signals to generators reflecting changes in the  demand for electricity. The generators then make the necessary changes in  generation in order to maintain the transmission system safely and reliably.  Absent such continuous balancing, electrical systems would be highly  unreliable, with frequent and severe outages.
Historically, the electric industry developed initially as a loosely connected  structure of individual monopoly utility companies, each building power  plants and transmission and distribution lines to serve the exclusive needs  of all the consumers in their local areas. Such monopoly utility companies  were typically owned by shareholders and were referred to as investor- owned utilities. In addition to these investor-owned utilities, several types  of publicly owned utilities, including rural cooperatives, municipal  authorities, state authorities, public power districts, and irrigation districts,  also began to sell electricity. About one-third of these publicly owned  utilities are owned collectively by their customers and generally operate as  not-for-profit entities. Further, nine federally owned entities, including the  Tennessee Valley Authority and the Bonneville Power Administration, also  generate and sell electricity—primarily to cooperatives, municipalities, and  other companies that resell it to retail consumers.
Because the utilities operated as monopolies, wholesale and retail  electricity pricing was regulated by the federal government and the states.  The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal  Power Act of 1935 established the basic framework for electric utility  regulation. PUHCA, which required federal regulation of these companies,  was enacted to eliminate unfair practices by large holding companies that  owned electricity and natural gas companies in several states. The Federal  Power Act created the Federal Power Commission—a predecessor to  FERC—and charged it with overseeing the rates, terms, and conditions of  wholesale sales and transmission of electric energy in interstate  commerce. FERC, established in 1977, approved interstate wholesale rates  based on the utilities’ costs of production plus a fair rate of return on the  utilities’ investment. States retained regulatory authority over retail sales of  electricity, electricity generation, construction of transmission lines within  their boundaries, and intrastate transmission and distribution. Generally,  states set retail rates based on the utility’s cost of production plus a rate of  return.

	The Federal Government Has Taken Steps to Increase Competition in the Electricity Industry and Wholesale Markets

The goal of federal efforts to restructure the electricity industry is to  increase competition in order to provide benefits to consumers, such as  lower prices and access to a wider range of services, while maintaining  reliability. Over the past 13 years, the federal government has taken a series  of steps to encourage this restructuring that generally fall into four key  categories: (1) market structure, (2) supply, (3) demand, and (4) oversight.
Regarding market structure, federal restructuring efforts have changed  how electricity prices are determined, replacing cost-based regulated rates  with market-based pricing in many wholesale electricity markets. In this  regard, efforts undertaken predominantly by FERC have helped to  encourage a shift from a market structure that is based on monopoly  utilities providing electricity to all customers at regulated rates to one in  which prices are determined largely by the interaction of supply and  demand. In prior work, we reported that increasing competition required  that at least three key steps be taken:  increasing the number of buyers and  sellers, providing adequate market information, and allowing potential  market participants the freedom to enter and exit the industry.
In terms of supply, federal restructuring efforts have generally focused on  allowing new companies to sell electricity, requiring the owners of the  transmission systems to allow these new companies to use their lines, and  approving the creation of new entities to fairly administer these markets.  The Energy Policy Act of 1992 made it easier for new companies, referred  to as nonutilities, to enter the wholesale electricity market, which  expanded the number of companies that can sell electricity. For example,  we reported that from 1992 through 2002, FERC had authorized 850  companies to sell electricity at market-based rates. To allow these  companies to buy and sell electricity, FERC also required that transmission  owners under its jurisdiction, generally large utilities, allow all other  entities to use their transmission lines under the same prices, terms, and  conditions as those that they apply to themselves. To do this, FERC issued  orders that required the regulated monopoly utilities—which had  historically owned the power plants, transmission systems, and  distribution lines—to separate their generation and transmission  businesses. In addition, in response to concerns that some of these new  companies received unfair access to transmission lines, which were mostly  still owned and operated by the former utilities, FERC encouraged the  utilities that it regulated to form new entities to impartially manage the  regional network of transmission lines and provide equal access to all  market participants, including nonutilities. These entities, including  independent system operators (ISOs) and regional transmission  organizations (RTOs), operate transmission systems covering significant  parts of the country.  One of these, the California ISO, currently oversees  the electricity network spanning most of the state of California.  Another  important effort to facilitate the interaction of buyers and sellers was  FERC’s approval of the creation of several wholesale markets for  electricity. These markets created centralized venues for market  participants to buy and sell electricity. Finally, FERC has undertaken  efforts to improve the availability and accuracy of price information used  by suppliers, such as daily market prices reported to news services, and has  established guidelines for the conduct of sellers of wholesale electricity,  requiring these entities to, among other things, accurately report prices and  other data to news services.
Federal efforts to affect demand at the wholesale level have focused on  encouraging prices in wholesale markets to be established by the direct  interaction between buyers and sellers in these markets. We previously  reported that there were several centralized markets in which suppliers  and buyers submitted bids to buy and sell electricity and that other types of  market-based trading were also emerging, such as Internet-based trading  systems. However, there have been few federal efforts to directly affect  prices at the retail level, where most electricity that is consumed is  purchased, because states, and not the federal government, have regulatory  authority for overseeing retail electricity markets. As part of its efforts to  have prices set by the direct interaction of supply and demand, FERC has  approved proposals to incorporate so-called “demand-response” programs  into the markets that it oversees. These programs, among other things,  allow electricity buyers to see electricity prices as they change throughout  the day and provide the choice to sell back electricity that they otherwise  would have used. For example, we reported that FERC had approved one  such program in New York State that allows consumers to offer to sell back  specific amounts of electricity that they are willing to forgo at prices that  they determine. More recently,  the Energy Policy Act of 2005 requires  FERC to study issues such as demand-response and report on its findings  to the Congress.
Finally, restructuring has fundamentally changed how electricity markets  are overseen and regulated. Historically, FERC had ensured that prices in  wholesale electricity markets were “just and reasonable” by approving  rates that allowed for the recovery of justifiable costs and providing for a  regulated rate of return, or profit. To ensure that prices are just and  reasonable in today’s restructured electricity markets, FERC has shifted its  regulatory role to approving rules and market designs, proactively  monitoring electricity market performance to ensure that markets are  working rather than waiting for problems to develop before acting, and  enforcing market rules. As part of its decision to approve the creation of  market designs that include ISOs and RTOs, FERC approved the creation  of market monitoring units within these entities. These market monitors  are designed to routinely collect information on the activities in these  markets including prices; perform up-to-the-minute market monitoring  activities, such as examining whether prices appear to be the result of fair  competition or market manipulation; and can impose penalties, such as  fines, when they identify that rules have been violated. More recently, the  Energy Policy Act of 2005 granted FERC authority to impose greater civil  penalties on companies that are found to have manipulated the market.

	Electricity Markets Have Changed in Several Important Ways Since Restructuring Began

Federal restructuring efforts, combined with efforts undertaken by states,  have created a patchwork of electricity markets, broadened electricity  supplies, disconnected wholesale and retail markets, and shifted how the  electricity industry is overseen. Taken together, these developments have  produced some positive and some negative outcomes for consumers.
In terms of market structure, we previously reported that the combined  effects of the federal efforts and those of some states have created a  patchwork of wholesale and retail electricity markets. In the wholesale  markets, there is a combination of restructured and traditional markets  because FERC’s regulatory authority is limited. As a result, some entities— including municipal utilities and cooperatively owned utilities—have not  been required to make the changes FERC has required others to make. As  shown in figure 2, collectively the areas not generally subject to FERC  jurisdiction span a significant portion of the country. In addition, even  where FERC has clear jurisdiction, it has historically approved a variety of  different rules that govern how each of the transmission networks is  controlled and what types of wholesale markets may exist. In the retail  electricity markets, state utility commissions or local entities historically  have controlled how prices were set, as well as approved power plants,  transmission lines, and other capital investments. Because each state  performed these functions slightly differently, these rules vary. In addition,  many states also have shifted the retail markets that they oversee toward  competition. As we reported in 2002, 24 states and the District of Columbia  had enacted legislation or issued regulations that planned to open their  retail markets to competition. As of 2004, 17 states had actually opened  their retail markets to competition, according to the Energy Information  Administration. One of these states, California, opened its retail markets to  competition but has taken steps to limit the extent of competition.
In terms of supply, efforts to restructure the electricity industry by the  federal government and some states have broadened electricity markets  overall—shifting the focus from state and/or local supply to multistate or  regional supply. In particular, efforts at wholesale restructuring have led to  a significant change in the way electricity is supplied in those markets. The  introduction of ISOs and RTOs in many areas has provided open access to  transmission lines, allowing more market participants to compete and sell  electricity across wide geographic regions and multiple states. In addition,  in some parts of the country, overall supply has grown as a result of the  large increase in new generating capacity that has been built by nonutility  companies, while other regions have witnessed smaller increases in supply.  For example, we reported that, by 2002, Texas had added substantial  amounts of generating capacity—more than double the forecasted amount  needed through 2004. In contrast, in California only about 25 percent of  the forecasted need had been built over the same period, and the region  witnessed a historic market disruption costing consumers billions of  dollars. Similarly, the opening of retail markets has also widened the scope  of electricity markets by allowing new and different entities to sell  electricity, which works to further broaden markets because these retail  sellers must either build or buy a power plant or rely on wholesale markets.  Finally, FERC has improved the transparency of wholesale markets, a key  requirement of competitive markets, by increasing the availability and  accuracy of price and other market information.
In terms of demand, while federal efforts have encouraged price setting by  the interaction of supply and demand, this approach has not been widely  adopted in retail markets. Even though FERC and other electricity experts  have determined that it is important for demand to be responsive to prices  and other factors for competitive markets to operate efficiently, as we  reported in 2004, the use of these programs remains limited. In many  retail markets, including some states where retail markets have been  opened to competition, prices are still set so that rates are either flat or  have been frozen. In either case, prices are not reflective of the hourly costs  of providing electricity. In some cases, demand-response programs are in  place but are aimed at only certain types of customers, such as some  commercial and industrial customers. Overall, these customers account for  only a small share of total demand. As a result, in this hybrid system,  wholesale and retail markets remain disconnected, with competition  setting wholesale prices in many areas, and state regulation setting retail  prices in many states.
Regulatory oversight of the electricity industry remains divided among  federal, regional, and state entities. As we have previously reported, FERC  initially did not adequately revise its regulatory and oversight approach to  respond to the transition to competitive energy markets. However, it has  made progress in recent years in defining its role, developing a framework  for overseeing the markets, and beginning to use an array of data and  analytical tools to oversee the market. In particular, FERC established the  Office of Market Oversight and Investigations in 2002, which oversees the  markets by monitoring its enforcement hotline for tips on misconduct;  conducting investigations and audits; and reviewing large amounts of  data—including wholesale spot and futures prices, plant outage  information, fuel storage level data, and supply and demand statistics—for  anomalies that could lead to potential market problems. In addition to  FERC’s own efforts, substantial oversight also now occurs at the regional  level, through ISO and RTO market monitoring units. These units monitor  their region’s market to identify design flaws, market power abuses, and  opportunities for efficiency improvements and report back to FERC  periodically. Finally, states’ oversight roles vary. Those states that have not  restructured their markets retain key roles in overseeing and regulating  electricity markets directly and indirectly through such activities as setting  rates to recover costs and siting of power plants and transmission lines and  other capital investments needed to supply electricity. The ability of states  that have restructured their retail markets, to oversee their markets is more  limited, according to experts.
The effects of restructuring on consumers have been mixed. While most  studies evaluating wholesale electricity markets, including our own  assessment, have determined that progress has been made in introducing  competition in wholesale electricity markets, results at the retail level have  been difficult to measure. For example, in 2002, we reported that prices  generally fell after restructuring and fell in particular in many areas that  had implemented retail restructuring. However, we were unable to  attribute these price decreases solely to restructuring, since several other  factors, such as lower prices for natural gas and other fuels used in the  production of electricity, could have contributed to the price decreases.  Furthermore, while some consumers had benefited by paying lower prices,  others have experienced high prices and market manipulation. For  example, in 2002, we reported that nationally, consumers benefited from  price declines of as much as 15 percent since federal restructuring efforts  began. However, as consumers in California and across other parts of the  West will attest, there have been many negative effects, including higher  prices and market manipulation. More recently, electricity prices have  risen, potentially the result of higher prices for fuels such as natural gas  and petroleum, and other factors.

	Four Key Challenges Remain Unresolved

We have identified four key challenges that, if addressed, could benefit  consumers and the restructured electricity markets that serve them.

		Making Wholesale Market Structures Work Better Together

With several fundamentally different electricity market structures in place  simultaneously in various parts of the country, it is important that these  markets work together better in order to meet regional needs. As we  previously reported, two aspects of the current electricity markets serve to  limit the benefits expected from restructuring. First, FERC’s limited  authority has meant that significant parts of the market and significant  amounts of transmission lines have not been subject to FERC’s effort to  restructure wholesale markets—creating “holes” in the national  restructured wholesale market. These gaps, where efforts to open  wholesale markets have not been undertaken, may limit the number of  potential participants and the types of transactions that can occur, thereby  limiting the benefits expected from competition. Second, where FERC  has clear authority, it has historically approved a range of rules for how the  different transmission systems and centralized wholesale markets  operate—creating “seams” where these different jurisdictions meet and the  rules change. We have previously noted that the lack of consistent rules  among restructured wholesale markets limits the extent of competition  across wholesale markets and, in turn, limits the benefits expected from  competition. California experienced this firsthand, as it tried to “cap”  wholesale electricity prices in its state market—establishing rules different  from those in the markets surrounding California. The lower price cap in  California, coupled with an exemption for electricity imports, created  incentives to sell electricity to areas outside the state (where prices were  higher) and later import it (because imports were exempt from the price  cap).
FERC has acknowledged that the lack of consistent rules can lead to  discrimination in access, raise costs, and lead to reliability problems. As a  result, FERC made an effort to standardize the various wholesale market  designs under its jurisdiction. However, these efforts met with sharp  criticism from some industry stakeholders. FERC ended its effort to  require a single market design in all regions and has, instead, promoted  voluntary participation in RTOs and having the RTOs work together to  reconcile their differences. In the end, today’s patchwork of wholesale  market structures, with holes and seams, is at odds with the physics of the  interdependent electricity industry, where electrons travel at the speed of  light and do not stop neatly at jurisdictional boundaries. Successfully  developing markets will require the alignment of market structures and  rules in order to reconcile them with these physical certainties.

		Providing Timely, Clear, and Consistent Signals to Help Ensure Adequate Regional Supplies

Broadening of restructured electricity markets has made the federal  government, the states, and localities more dependent on each other in  order to ensure a sufficient supply of electricity. We previously concluded  that, as federal and state restructuring efforts broaden electricity markets  to span multiple states, states will become more interdependent on each  other for a reliable electricity supply. Consequently, one state’s problems  acquiring and maintaining an adequate supply can now affect its neighbors.  For example, in the lead up to the western electricity crisis in 2000-2001,  few power plants were built to meet the rising demand in California, which  became dependent on power plants located outside the state. However,  when prices began to rise, this affected consumers, both inside and outside  California. We previously reported these higher prices had implications for  California consumers such as higher electricity bills, as well as others  located outside the state, costing billions of additional dollars. Because of  these negative outcomes, some have questioned whether restructuring will  eventually benefit consumers.
More broadly, rising interdependence has significant implications for many  industry stakeholders, especially in light of the shift in how plants are  financed and built. In the past, monopoly utilities proposed, and regulators  approved, the construction of new power plants and other infrastructure.  Today, policymakers at all levels of government must recognize that  providing consumers with reliable electricity in competitive markets  requires private investors to make reasoned investments. We have reported  that these private investors make decisions on investing by balancing their  perceptions of potential risk and profitability. Further, we concluded that  the reliability of the electricity system and, more generally, the success of  restructuring, now hinges on whether these developers choose to enter a  market and how quickly they are able to respond to the need for new  power plants. The implications of this broadening of electricity markets are  important, since it has occurred while most of the primary authorities  associated with building new power plants, such as state energy siting or  local land use planning, still rest with states and localities. As we have  reported, there is sometimes considerable variation across states and  localities in how long these processes take and how much they cost, and  building new power plants can take a year or more once all the approvals  are obtained. Because of the broader electricity markets, one state’s or  locality’s processes and decisions provide signals affecting private  investors’ perceptions of  the risk or profitability of making investments in  local areas and can have long-lasting implications for the entire region. In  this context of growing interdependence for adequate electricity supplies,  our work shows that it is important for federal, state, and local entities to  provide timely, clear, and consistent signals that allow private developers  to make the kinds of reasonable and long-term investments that are  needed.

		Connecting Wholesale and Retail Markets

As we have previously reported, for competitive wholesale electricity  markets to provide the full benefits expected of them, it is essential that  they be connected to the retail markets, where most electricity is sold and  consumed. Otherwise, hybrid electricity markets—wholesale prices set  by competition and retail prices set by regulation—will be difficult to  manage because consumers at the retail level can unknowingly drive up  wholesale prices during periods when electricity supplies are limited. This  occurs when consumers do not see prices at the retail level that accurately  reflect the higher wholesale market prices. Seeing only these lower  electricity prices, consumers use larger quantities of electricity than they  would if they saw higher prices, which raises costs and can risk reliability.  We have noted that, in this environment (consumers seeing low retail  prices during periods of high wholesale prices) consumers have little  incentive to reduce their consumption during periods when prices are high  or reliability is at risk.  The appeal of seeming to insulate retail consumers  from wholesale market fluctuations may be compelling, but most experts  agree that the lack of significant demand response can actually lead to  higher and more volatile prices.  In 2004, we concluded that this system  makes it difficult for FERC to ensure that prices in wholesale markets are  just and reasonable. We further concluded that connecting wholesale and  retail markets through demand-response programs such as real-time  pricing or reliability-based programs  would  help competitive electricity  markets function better, enhance the reliability of the electricity system,  and provide important signals that consumers should consider investments  into energy-efficient equipment. Such signals would work to reduce  overall demand in a more permanent way.
While FERC has been supportive of increasing the role of demand-response  programs in the wholesale markets that it oversees, there have been limited  efforts to do so in retail markets—these markets are outside FERC’s  jurisdiction and overseen by the states. Some states, such as California,  have a long history with demand-response programs and have conducted  more recent experiments with using it in more widespread ways. Sharing  and building upon these and other examples could help develop efficient  ways to bring the consumers who flip the light switches into the markets  responsible for ensuring that their lights go on. Since electricity travels at  the speed of light, retail markets where electricity is consumed are tightly  connected to the wholesale markets that supply these retail markets. As a  result, much of the success of federal restructuring of the wholesale  markets relies on actions taken at the state level to bring consumers into  the market.

		Resolving Divided Regulatory Responsibilities

Significant changes in how oversight is carried out in competitive markets,  combined with the divided regulatory authority over the electricity  industry, has made effective oversight difficult. We previously reported that  FERC, the states, and other market monitors were neither fully monitoring  the overall performance of all wholesale and retail markets nor collecting  sufficient data to do so, thus limiting the opportunity to meaningfully  compare performance. At the federal level, FERC protects customers  primarily through ensuring that prices in the wholesale markets are just  and reasonable. In prior work, we found that FERC did not initially revise  its oversight approach adequately in response to restructured markets,  resulting in markets that were not adequately overseen. However, more  recently, we reported that FERC has made significant efforts to revise its  oversight strategy to better align with its new role overseeing restructured  markets, has taken a more proactive approach to monitoring the  performance of markets, and has better aligned its workforce to fit its  needs in these new markets. Recent actions will require further changes  to FERC’s role. The Energy Policy Act of 2005 provided FERC additional  authority to establish reliability rules for all “users, owners, and operators”  of the transmission system. We had previously reported that this change  would be desireable, but it is too early to judge its success. At the state  level, oversight varies widely. States that have retained traditionally  regulated retail markets continue to require substantial amounts of  information to help them set the regulated prices that consumers see. The  states that now feature restructured retail markets face a sharply different  oversight role of policing their state-level retail markets for misbehavior  and signs of market malfunction. The introduction of the market  monitoring units within ISOs and RTOs adds a new layer of regional  oversight to the existing federal and state roles. While authority over the  electricity industry is divided, restructuring has served to make the success  of each of the oversight efforts more interdependent, and FERC and the  states will have to rely on each other, as well as on new entities, to a greater  degree than before to be successful.

	Concluding Observations

It is becoming increasingly clear that many of the challenges facing the  electricity industry are rooted in the interdependence of actions taken by  federal, state, local, and private entities, as well as consumers. Accordingly,  the individual challenges we have discussed follow a central theme—the  need to integrate the various ongoing activities and efforts and harmonize  them in a way that improves the functioning of the marketplace while  providing adequate oversight to protect electricity consumers. This will not  be easy because it requires what is, at times, most difficult: collaboration  and cooperation among entities with a history of independence.
Successfully restructuring the electricity industry is an ongoing process  that will require rethinking old issues, such as jurisdictional  responsibilities, and applying new and creative ideas to help bridge the  current gap between wholesale and retail markets. Only if interdependent  parties work together will electricity restructuring succeed in delivering  benefits to U.S. consumers by way of healthy, viable, and competitive  markets. Not adequately addressing these issues could result in an  electricity industry that does not provide consumers with sufficient  quantities of the reliable, reasonably priced electricity that has been a  mainstay of our nation’s economic and social progress.
As agreed with your office, unless you publicly announce its contents  earlier, we plan no further distribution until 15 days after the report date. At  that time, we will send copies of this report to appropriate congressional  committees. We will also make copies available to others on request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-3841 or wellsj@gao.gov. Contact points for our Office of  Congressional Relations and Office of Public Affairs may be found on the  last page of this report. GAO staff who contributed to this report are listed  in the appendix.

GAO Contact and Staff Acknowledgments

	GAO Contact

	Acknowledgments

In addition to the contact named above, Dan Haas, Jon Ludwigson, and  Kris Massey made key contributions to this report. Barbara Timmerman,  Susan Iott, and Nancy Crothers also made important contributions.

Related GAO Products

	Electricity and Energy Markets

Meeting Energy Demand in the 21st Century:  Many Challenges and Key  Questions. GAO-05-414T. Washington, D.C.: March 16, 2005.
Electricity Markets: Consumers Could Benefit from Demand Programs,  but Challenges Remain. GAO-04-844. Washington, D.C.:  August 13, 2004.
Energy Markets:  Additional Actions Would Help Ensure That FERC’s  Oversight and Enforcement Capability Is Comprehensive and  Systematic. GAO-03-845. Washington, D.C.:  August 15, 2003.
Electricity Markets: FERC’s Role in Protecting Consumers. GAO-03-726R.   Washington, D.C.:  June 6, 2003.
Energy Markets: Concerted Actions Needed by FERC to Confront  Challenges That Impede Effective Oversight. GAO-02-656.  Washington,  D.C.:  June 14, 2002.

	Electricity Restructuring

Electricity Restructuring: 2003 Blackout Identifies Crisis and  Opportunity for the Electricity Sector. GAO-04-204. Washington, D.C.:   November 18, 2003.
Electricity Restructuring: Action Needed to Address Emerging Gaps in  Federal Information Collection. GAO-03-586.  Washington, D.C.:  June 30,  2003.
Lessons Learned from Electricity Restructuring: Transition to  Competitive Markets Underway, but Full Benefits Will Take Time and  Effort to Achieve. GAO-03-271. Washington, D.C.:  December 17, 2002.
Restructured Electricity Markets: California Market Design Enabled  Exercise of Market Power. GAO-02-828. Washington, D.C.:  June 21, 2002.
Restructured Electricity Markets: Three States' Experiences in Adding  Generating Capacity. GAO-02-427.  Washington, D.C.:  May 24, 2002.
Electric Utility Restructuring: Implications for Electricity R&D. T-RCED- 98-144.  Washington, D.C.:  March 31, 1998.

	Western Electricity Crisis

Restructured Electricity Markets: California Market Design Enabled  Exercise of Market Power. GAO-02-828.  Washington, D.C.:  June 21, 2002.
California Electricity Market: Outlook for Summer 2001. GAO-01-870R.   Washington, D.C.:  June 29, 2001.
California Electricity Market Options for 2001: Military Generation and  Private Backup Possibilities. GAO-01-865R. Washington, D.C.:  June 29,  2001.
Energy Markets: Results of Studies Assessing High Electricity Prices in  California. GAO-01-857.  Washington, D.C.:  June 29, 2001.

	Federal Power

Bonneville Power Administration: Better Management of BPA’s  Obligation to Provide Power Is Needed to Control Future Costs. GAO-04- 694. Washington, D.C.: July 9, 2004.
Bonneville Power Administration: Long-Term Fiscal Challenges. GAO-03- 918R. Washington, D.C.: June 27, 2003.
Federal Power:  The Evolution of Preference in Marketing Federal Power.  GAO-01-373. Washington, D.C.: February 8, 2001.

Summary:
Why GAO Did This Study

The electricity industry is in the midst of many changes, collectively referred to as restructuring, evolving from a highly regulated environment to one that places greater reliance on competition. This restructuring is occurring against a backdrop of constraints and challenges, including a shared responsibility for implementing and enforcing local, state, and federal laws affecting the electricity industry and an expected substantial increase in electricity demanded by consumers by 2025, requiring significant investment in new power plants and transmission lines. Furthermore, several recent incidents, including the largest blackout in U.S. history along the East Coast in 2003 and the energy crisis in California and other parts of the West in 2000 and 2001, have drawn attention to the need to examine the operation and direction of the industry. At Congress's request, this report summarizes results of previous GAO work on electricity restructuring, which was conducted in accordance with generally accepted government auditing standards. In particular, this report provides information on (1) what the federal government has done to restructure the electricity industry and the wholesale markets that it oversees, (2) how electricity markets have changed since restructuring began, and (3) GAO's views on key challenges that remain in restructuring the electricity industry.

What GAO Found

Over the past 13 years, the federal government has taken a variety of steps to restructure the electricity industry with the goal of increasing competition in wholesale markets and thereby increasing benefits to consumers, including lower electricity prices and access to a wider array of retail services. In particular, the federal government has changed (1) how electricity is priced--shifting from prices set by regulators to prices determined by markets; (2) how electricity is supplied--including the addition of new entities that sell electricity; (3) the role of electricity demand--through programs that allow consumers to participate in markets; and (4) how the electricity industry is overseen--in order to ensure consumer protection. Federal restructuring efforts, combined with efforts undertaken by states, have created a patchwork of wholesale and retail electricity markets; broadened electricity supplies; disconnected wholesale markets from retail markets, where most demand occurs; and shifted how the electricity industry is overseen. Taken together, these developments have produced some positive outcomes, such as progress in introducing competition in wholesale electricity markets, as well as some negative outcomes, such as periods of higher prices. We have identified four key challenges to the effective operation of the restructured electricity industry: making wholesale markets work better together so that restructuring can deliver the benefits to consumers that were expected; providing clear and consistent signals to private investors when new plants are needed so that there are adequate supplies to meet regional needs; connecting wholesale markets to retail markets through consumer demand programs to keep prices lower and less volatile; and, resolving divided regulatory authority to ensure that these markets are adequately overseen. The theme cutting across each of these challenges is the need to better integrate the various market structures, factors affecting supply and demand, and various efforts at market oversight.