a

GAO

United States Government Accountability Office

Report to the Chairman, Subcommittee 

on Energy and Resources, Committee on 

Government Reform, House of 

Representatives

November 2005 ELECTRICITY 

RESTRUCTURING

Key Challenges 

Remain

GAO-06-237
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2005

ELECTRICITY RESTRUCTURING

Key Challenges Remain 

Highlights of GAO-06-237, report to the 

Chairman, Subcommittee on Energy and 

Resources, Committee on Government 

Reform, House of Representatives

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 the Committee’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. 

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. This theme is 

illustrated below. 

Integrating Restructuring Efforts is Important 

Source: GAO.

Federal Local

Power

plants

New

entities

Wholesale

Retail

Wholesale

Retail

State

Transmission

Regional

Supply Oversight

Market Structure Demand

www.gao.gov/cgi-bin/getrpt?GAO-06-237.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Jim Wells, 202-

512-3841 or wellsj@gao.gov. 
Page i GAO-06-237 Electricity Restructuring

Contents

Letter 1

Results in Brief 2

Background 3

The Federal Government Has Taken Steps to Increase Competition 

in the Electricity Industry and Wholesale Markets 6

Electricity Markets Have Changed in Several Important Ways Since 

Restructuring Began 9

Four Key Challenges Remain Unresolved 13

Concluding Observations 18

Appendix

Appendix I: GAO Contact and Staff Acknowledgments 20

Related GAO Products 21

Figures Figure 1: Functions of the Electricity Industry 4

Figure 2: Areas Served by Entities Subject to FERC Jurisdiction, 

2002 10

Abbreviations

FERC Federal Energy Regulatory Commission

PUHCA The Public Utility Holding Company Act of 1935 

ISOs Independent System Operators 

RTOs Regional Transmission Organizations

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Page 1 GAO-06-237 Electricity Restructuring

United States Government Accountability Office

Washington, D.C. 20548

A

November 15, 2005 Letr

The Honorable Darrell E. Issa

Chairman

Subcommittee on Energy and Resources

Committee on Government Reform

House of Representatives

Dear Mr. Chairman:

Since 1992, the electricity industry has been in the midst of many changes, 

collectively referred to as restructuring. Before restructuring, electric 

service was provided primarily by federally and state-regulated electric 

utilities. A utility typically owned the power plants, transmission system, 

and local distribution lines that supplied electricity to all of the consumers 

in a geographic area. Under this system, the Federal Energy Regulatory 

Commission (FERC) regulated, among other things, sales of electricity for 

resale and the transmission of electricity over high-voltage power lines in 

interstate commerce.1

 The states regulated retail markets by participating 

with utilities in forecasting growth in demand, planning and building new 

power plants, reviewing and approving utility costs, and establishing rates 

of return. Since restructuring began, there has been a shift from a highly 

regulated environment to one that places greater reliance on competition. 

This restructuring effort is occurring against a backdrop of constraints and 

challenges. First, it is occurring within a context of numerous federal and 

state laws and regulations that address clean air and water, fish and wildlife 

management, and irrigation and flood control. Second, responsibility for 

implementing and enforcing these laws and regulations is distributed 

across a wide range of federal, state, and local agencies. Third, electricity 

demanded by consumers is expected to rise 36 percent by 2025, requiring 

significant investment in new power plants and transmission lines. 

Furthermore, several recent events, including the largest blackout in U.S. 

history along the East Coast in 2003, the energy crisis in California and 

other parts of the West in 2000 and 2001, and rolling blackouts as recently 

as August 25, 2005, in southern California, have drawn attention to the need 

to examine the operation and direction of the industry. 

1

FERC does not regulate most of Texas’ electricity system because it is an independent 

transmission region that does not engage in interstate commerce.
Page 2 GAO-06-237 Electricity Restructuring

In this context, you asked us to provide 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 efforts began, and (3) our views on key 

challenges that remain. As you requested, this report is based on our 

previous work, including 17 reports issued since 1998,2

 which was 

conducted in accordance with generally accepted government auditing 

standards. As a result, we did not seek additional comments on this report.

Results in Brief Since at least 1992, the federal government has pursued a policy 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, federal restructuring has changed how electricity is 

priced—shifting from prices set by regulators to prices determined by 

markets; how electricity is supplied—including the addition of new entities 

that sell electricity; the role of electricity demand—through programs that 

allow consumers to participate in markets; and how the electricity industry 

is overseen—in order to ensure consumer protection. 

Federal restructuring efforts, combined with efforts undertaken by states, 

have fundamentally changed key aspects of how the electricity sector 

operates. First, because many of the changes have been made by FERC, 

which has limited jurisdiction over wholesale markets and no jurisdiction 

over retail sales, the changes have created a patchwork of wholesale and 

retail electricity markets. Some of these markets feature a greater role for 

competition, while others do not. Second, the introduction of a greater role 

for competition has broadened electricity supplies by allowing new 

suppliers to participate in markets. Some of these suppliers sell electricity 

across wide geographic regions and multiple states, which has broadened 

supplies and made markets more regional. Third, while actions taken at the 

wholesale level have encouraged prices to be set by the direct interaction 

of supply and demand, there have not been widespread similar efforts on 

retail prices, resulting in a disconnection of wholesale markets from retail 

markets. Fourth, although regulatory authority remains divided between 

federal, state, and local entities, restructuring has shifted the way 

electricity markets are overseen. Taken together, these developments have 

2

See the list of related GAO products at the end of this report.
Page 3 GAO-06-237 Electricity Restructuring

produced some positive outcomes, such as progress in introducing 

competition in wholesale electricity markets, and some negative outcomes, 

such as periods of substantially higher prices in some areas of the country. 

We have identified four key challenges to achieving the goals of a 

restructured electricity industry: (1) making wholesale markets work 

better together so that restructuring can deliver the benefits to consumers 

that were expected, (2) providing clear and consistent signals so that there 

are adequate supplies to meet regional needs, (3) connecting wholesale 

markets to retail markets through consumer demand programs to keep 

prices lower and less volatile, and (4) resolving divided regulatory 

authority to ensure that these markets are adequately overseen. Not 

adequately addressing these issues could result in an electricity industry 

that does not provide consumers with the sufficient quantities of reliable, 

reasonably priced electricity that has been a mainstay of our nation’s 

economic and social progress. 

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.
Page 4 GAO-06-237 Electricity Restructuring

Figure 1: Functions of the Electricity Industry

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 

Generators

Transmission

system

(Grid)

Distribution

system

System operations

Substation

Factory

Homes

Offices

Flow of power

System operations coordinates the balancing of the

generation and consumption of power for final customers.

To final customer

To final customer

To final customer

Source: GAO.
Page 5 GAO-06-237 Electricity Restructuring

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 investorowned 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, 
Page 6 GAO-06-237 Electricity Restructuring

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.3

 

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,4

 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 

3

GAO, 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).

4

Companies that generate, buy, and/or sell electricity but do not transmit electricity.
Page 7 GAO-06-237 Electricity Restructuring

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.5

 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.6

 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, 

5

A process referred to as “unbundling.”

6

GAO-03-271.
Page 8 GAO-06-237 Electricity Restructuring

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.7 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.8

 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. 

7

GAO, Electricity Markets: Consumers Could Benefit from Demand Programs, but 

Challenges Remain, GAO-04-844 (Washington, D.C.: August 13, 2004).

8

While FERC is the principal federal regulator for the electricity industry, other federal 

agencies also play important roles in regulating energy markets, including the Commodity 

Futures Trading Commission.
Page 9 GAO-06-237 Electricity Restructuring

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.9 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.10 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.11 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. 

9

GAO-03-271. 

10Municipal utilities are city-owned electricity suppliers, such as the Los Angeles 

Department of Water and Power. Cooperatively owned utilities are customer-owned 

electricity suppliers, historically more common in rural areas. 

11GAO-03-271.
Page 10 GAO-06-237 Electricity Restructuring

Figure 2: Areas Served by Entities Subject to FERC Jurisdiction, 2002

Notes: 

Areas served by entities generally not subject to FERC jurisdiction include areas served by publicly 

owned entities, such as municipal utilities, cooperative utilities, and others.

Data on service territories include some overlaps, indicating that some areas are served by both 

entities subject to FERC jurisdiction and entities not generally subject to FERC jurisdiction, particularly 

some areas in Pennsylvania, Michigan, Wisconsin, and Iowa. Data reflected above depict those areas 

of overlap as not generally subject to FERC jurisdiction.

Unshaded portions of the map indicate either that no electric service is provided or the service area is 

very small.

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 

FERC jurisdiction

Generally not subject to FERC jurisdiction

Source: GAO analysis of PowerMap data provided by Platt's/RDI.
Page 11 GAO-06-237 Electricity Restructuring

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 2004.12 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.13 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. 

12GAO, Restructured Electricity Markets: Three States’ Experiences in Adding Generating 

Capacity, GAO-02-427 (Washington, D.C.: May 24, 2002). 

13GAO-04-844.
Page 12 GAO-06-237 Electricity Restructuring

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.14 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.

15 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, 

14GAO, Energy Markets: Additional Actions Would Help Ensure that FERC’s Oversight and 

Enforcement Capability Is Comprehensive and Systematic, GAO-03-845 (Washington, 

D.C.: Aug. 15, 2003).

15GAO-03-271.
Page 13 GAO-06-237 Electricity Restructuring

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.16 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.

17 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.18 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.19 California experienced this firsthand, as it tried to “cap” 

16GAO-03-271.

17GAO-03-271.

18GAO-03-271.

19GAO-03-271. 
Page 14 GAO-06-237 Electricity Restructuring

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.

20 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. 

20GAO-02-427.
Page 15 GAO-06-237 Electricity Restructuring

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.21 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.22 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 

21GAO-02-427.

22GAO-04-844.
Page 16 GAO-06-237 Electricity Restructuring

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.23 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.24 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. 

23GAO-04-844.

24Real-time pricing refers to markets where consumers see retail prices that are closely 

linked the frequently changing wholesale prices. Reliability-based programs refer to any of a 

variety of programs that allow the operators of the electricity system to enter into voluntary 

agreements with electricity consumers, who are compensated, that allow the grid operator 

to reduce overall demand on short notice.
Page 17 GAO-06-237 Electricity Restructuring

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.25 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.26 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.27 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.28 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. 

25GAO-03-271.

26GAO, Energy Markets: Concerted Actions Needed by FERC to Confront Challenges That 

Impede Effective Oversight, GAO-02-656 (Washington, D.C.: June 14, 2002).

27GAO-03-845.

28GAO-03-271.
Page 18 GAO-06-237 Electricity Restructuring

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.
Page 19 GAO-06-237 Electricity Restructuring

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.

Sincerely yours, 

Jim Wells 

Director, Natural Resources 

and Environment
Page 20 GAO-06-237 Electricity Restructuring

Appendix I

GAO Contact and Staff Acknowledgments AAppenednxidexiIs

GAO Contact Jim Wells, (202) 512-3841 or wellsj@gao.gov

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. 
Page 21 GAO-06-237 Electricity Restructuring

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-RCED98-144. Washington, D.C.: March 31, 1998.
Related GAO Products

Page 22 GAO-06-237 Electricity Restructuring

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.

(360645)
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