STATE OF THE MARKETS 2000

Measuring Performance

In Energy Market Regulation

FEDERAL ENERGY REGULATORY COMMISSION

MARCH 2000

James J. Hoecker

Chairman
i

Executive Summary

This is the first year in which Federal agencies are required to submit an

annual performance report to Congress under the Government Performance

and Results Act (GPRA). This report, initiated within the Commission,

complements the FY 1999 Performance Report, by providing greater detail

in the specific area of regulating energy markets. The Commission’s market

assessment and oversight function will provide the basis for future State of the

Markets reports as the Commission develops a “regulation by information”

strategy. The FY 1999 Performance Report covers all Commission programs

and activities, establishing and measuring specific performance indicators.

The markets portion of the FY 1999 Performance Report and this report are

organized into sections on commodity markets, new service availability, price

information, and market power. In addition to specific performance indicators

in each section, this report also conveys background information and discusses

methods and data needs for developing better performance indicators. By

providing a broader and more detailed picture of energy markets and the role

of the Commission in this context, State of the Markets 2000 goes beyond

performance reporting to give Congress and the public a better picture of

these critical parts of the nation’s energy system.

This report describes how energy market regulation has contributed to the

development of competitive commodity markets for electric power and

natural gas, as well as broad changes in the operation of the interstate

transportation networks for electricity, natural gas, and petroleum. A series

of rulemakings and major cases has provided a road map for these parts of the

Nation’s energy system to become more competitive. This is intended to

maximize consumer and economic benefits while minimizing the need for

regulatory intervention.

A series of actions by the Congress, successive administrations, and the

Commission has contributed to the development of competitive commodity

markets in electric power and natural gas. The fundamental change achieved

through this series of actions is the separation of previously integrated supply,

transportation, and distribution functions. This has been accompanied by the

unbundling of rates for services and the introduction of a variety of marketbased and more flexible rate options.

Commodity markets for wholesale electric power and natural gas have grown

rapidly, as has the number of competing commodity sources available to

consumers. These results demonstrate that the initial series of actions taken

by the Commission, in conjunction with many other factors, has succeeded in

aiding the growth of competitive commodity markets for energy. 

Commodity Markets

New Service

Availability
Federal Energy Regulatory Commission State of the Markets 2000

ii

Once commodity markets and competitive prices for energy develop, a wide

range of new services becomes available. Many of these new services were

not even contemplated under the previous regulatory system, and provide

value to consumers would not have been realized without competitive

commodity markets. New services include commodity transportation

services, delivery or end-use services, and financial services.

The number and types of new services available to consumers has grown

dramatically in recent years, showing that competitive markets are providing

incentives for creativity and for innovative customer service. Further

refinements in the Commission’s regulatory strategy were issued this year as

Order No. 637 (concerning short term natural gas transportation) and Order

No. 2000 (concerning electric power transmission) to address ongoing

impediments to the availability of transportation services, and ongoing issues

concerning service availability will continue to be identified and addressed by

the Commission.

Price information plays several critical roles in competitive energy markets:

• conveying information for buyers and sellers to make transactions; 

• setting incentives for short-term operating decisions and long-term

investment decisions; and

• enabling the Commission and others to understand, identify and remedy

ongoing issues.

The most basic function of prices, conveying information about market

conditions, is now well established. This can be seen by analyzing market

prices and tracing the underlying changes in weather, demand and other

factors. Price information appears to be allowing for faster arbitrage and the

convergence of prices for similar services in different locations. There is also

a rapid growth in the range of services being priced, leading to a great deal of

new price information which requires further analysis. Some challenges

remain, such as evaluating incentives for long-term investment and system

expansion with limited experience. In addition, the Commission faces the

challenge of developing more systematic processes for the ongoing analysis

and use of price information.

Mitigating the potential exercise of market power in the interest of economic

and consumer benefits stands at the core of the Commission’s mission.

Separation of transportation from commodity energy production, along with

opening access to the transportation networks, is intended to reduce the

incentives and opportunities for the exercise of market power. Improvements

to the merger approval process are also directed at this goal.

Price Information

Market Power
Federal Energy Regulatory Commission State of the Markets 2000

iii

One indicator relevant to market power in electric power markets is the

development over time of open access to the transmission system. Open

access tariffs and Independent System Operators (ISOs) have grown rapidly

over time, allowing more customers access to competitive commodity

markets, although this process will take time to complete through the new

Regional Transmission Organizations envisioned in Order No. 2000. Ongoing

monitoring and oversight will be required in parts of the energy markets, since

the potential for the exercise of market power is not likely to be eliminated

entirely.

Indicators in all four sections of this report will be refined and upgraded over

time, reflecting the impact of the transition within the Commission and the

experience using indicators and tracking data. For example, e-commerce and

other kinds of information access (i.e., market transparency) may become an

important class of indicators. By building on the success so far and being

responsive to ongoing issues, the Commission can succeed in its mission and

help realize the benefits that more competitive energy markets can bring to the

American consumer and to the economy as a whole.

Development of

Future Indicators
iv

Contents

I. Introduction ....................................... 1

II. Commodity Markets

II. A Background and Regulatory Context .................... 6

II. B Developing Performance Indicators: Methods and Data .... 9

II. C Performance Indicators: Examples .................... 13

III. New Service Availability

III. A Background and Regulatory Context .................. 16

III. B Developing Performance Indicators: Methods and Data ... 20

III. C Performance Indicators: Examples ................... 22

IV. Price Information

IV. A Background and Regulatory Context .................. 25

IV. B Developing Performance Indicators: Methods and Data ... 26

IV. C Performance Indicators: Examples ................... 29

V. Market Power

V. A Background and Regulatory Context ................... 33

V. B Developing Performance Indicators: Methods and Data .... 36

V. C Performance Indicators: Examples .................... 41

Appendix: Electric and Natural Gas Price Graphs ............. 43
1

FERC Mission Statement FERC Mission Statement

The Commission regulates key 

interstate aspects of the electric 

power, natural gas, oil pipeline ,

and hydroelectric industries. 

The Commission chooses 

regulatory approaches that foster 

competitive markets whenever 

possible, assures access to 

reliable service at a reasonable 

price, and gives full and fair 

consideration to environmental 

and community impacts in 

assessing the public interest of 

energy projects. 

FERC Vision FERC Vision

< Promoting Competitive 

Markets 

< Protecting Customers 

< Respecting the Environment 

< Serving and Safeguarding the 

Public 

I. Introduction

Federal agencies are in the process of establishing performance indicators to

measure the success of their work. This will allow Congress and the public

to more fully understand and evaluate agencies’ effectiveness at carrying out

their missions. This report presents an initial set of performance indicators in

the area of energy market regulation. Success in energy market regulation can

maximize economic and consumer benefits through structural reform and

incentives favoring competition, minimizing the need for regulatory

intervention. 

The Federal Energy Regulatory Commission (the Commission) is a regulatory

body charged with protection of the public interest in the oversight and

development of interstate commodity markets and transportation networks in

wholesale electric power and natural gas, in addition to petroleum pipeline

and hydroelectric projects. Since its inception as the successor to the original

Federal Power Commission (FPC) in 1978, the Commission has been working

to protect the public interest through the establishment of just and reasonable

rates for jurisdictional services, and through the fostering and development

of more competitive energy markets wherever appropriate.

Implementing the 1993 Governmental Performance and Results Act (GPRA)

is part of the Commission’s increasing emphasis on mission-based customer

service. GPRA is aimed at increasing the accountability and transparency of

governmental operations through the development of strategic plans,

performance plans which include concrete indicators of agency performance,

and annual performance reports to Congress and the public. This is the first

year in which agencies must submit performance reports.

The current challenge for the Commission is to meet the immediate

requirements of GPRA while accommodating vast industry changes and

completing a major organizational transition. The nation’s energy markets,

like much of the economy, are subject to increasing forces of competition and

change. These pressures have created a context in which all of the parties

affected by energy markets – and energy markets in the end affect virtually

everyone – must reevaluate themselves. The Commission is no exception.

The Commission’s response to GPRA is to meet the requirements in ways that

complement and enhance the transition now taking place within the

Commission. Bringing performance reporting into alignment with strategic

planning, resource allocation, and program activities can lead to valuable

results for all parts of the Commission and its customers. Along with the

annual performance report, the State of the Markets reports will provide a full

picture of energy markets in relation to the Commission’s activities. 
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

2

Unbundling of services has been 

one of the keys to development 

of commodity markets for 

electricity and natural gas. 

The report is organized around major sections based on goals established by

the Commission’s first strategic plan (FY1997-2002), completed in 1997.

These main sections are: 

• commodity markets;

• new service availability;

• price information; and 

• market power.

Subsections for each major section give background and regulatory context,

methods and data for developing performance indicators, and examples of

performance indicators. 

In response to the rapid pace of change in the energy markets and the

economy as a whole, the Commission has recently taken major actions that

affect not only its approach to serving its customers and the public, but also

its own internal systems and activities. These actions include:

• rulemakings including Order Nos. 637, 888 and 2000 and major cases

which provide a blueprint for more competitive energy markets;

• process-centered agency restructuring through the FERC First initiative;

and

• strategic planning, manage-to-budget and other budgetary innovations,

and new approaches to demonstrate accountability to Congress and the

public.

Rulemakings and major cases. Energy markets were subject to some form

of cost-based regulation for most of the 20th century. Electric power markets

were based upon vertically integrated, monopoly franchise utility companies

in most of the nation, while natural gas and petroleum markets were regulated

from the wellhead to final customer delivery. While there were valid reasons

for the establishment of this regulatory regime, over time changes in the

technological, economic and political factors underlying that regime created

the conditions for change in these industries. 

Beginning in the late 1970s, a series of actions by the Congress, successive

administrations, and the Commission dramatically altered the landscape of

federal policy towards the nation’s energy markets. In brief, the Commission

assisted in the creation of competitive commodity markets for electric power

and natural gas by restructuring the functional ties and ownership interests

between the production of energy commodities and the transportation and

distribution networks. This vertical separation was accompanied by the

breaking apart or unbundling of services which had previously been rolled

together as a single combined service. In mandating open access for the

transportation systems, the Commission set a standard under which any user

The Commission in

Transition
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

3

One result of the Commission’s 

reinvention effort was the 

creation of a new organization 

structure that is more responsive 

to today’s changing energy 

industries. 

of the system should have the same level of services at the same cost as the

system’s owner.

This fundamental break with past practice has had far-reaching impacts on

how business is conducted in energy markets. The Commission also took

action to allow market-based rates and other innovative rate designs, and to

remove rate regulation where appropriate. The resulting commodity prices,

free from regulated cost-based rates, change in response to underlying market

conditions. This price responsiveness has in turn spurred a rapid expansion

in new value-enhancing services such as risk hedging via futures and other

financial instruments, innovative transportation service offerings, and a wide

range of customer-focused delivery options including full energy service

portfolio management and e-commerce for a growing number of customers.

The Commission is also transforming its relationships with its customers. For

its own part, the Commission is delivering services in more rapid and

responsive ways, including faster case processing, more collaborative and

consensual dispute resolution, and updated filing procedures and public

information provision. Information flows in the markets must also become

more open and responsive, and to this end the Commission has introduced a

number of innovations such as new real-time transmission availability

information (through the Open Access Same-Time Information System or

OASIS), sponsorship of collaborative processes in several areas, and the

development of markets where new types of interactions such as trading

exchanges, auctions, and secondary trading are possible.

Process-centered agency restructuring. The Commission, recognizing the

need to become a more flexible and responsive organization, is in the process

of completing a far-reaching process reengineering effort. Two years of

work, led by the FERC First initiative, has culminated this year in a major

reorganization, along with a set of processes designed to support an ongoing

culture of change. The new Commission organizational structure is based on

its major processes: energy markets and energy projects. Internal support

services including information technology and human resources are also being

retooled to meet the needs of the new organization. These steps and the

ongoing process of program development should enable the Commission to

fulfill its mission in the context of fast-paced and continuously evolving energy

markets.

Strategic planning, budgeting and accountability. The Commission is

committed to bringing its relationships with Congress, other agencies, and the

public into coordination with its program activities and its strategic resource

planning. This involves a number of initiatives. The role of strategic planning

and budgeting is crucial to the Commission’s ability to bring resources to bear

on the right priorities over time, and to secure the confidence and support of

others. To this end, key activities in these areas have also been reworked to

reflect the new focus on energy markets, energy projects, and support
Federal Energy Regulatory Commission State of the Markets 2000

4

activities. The new FY 2001 budget is among the first products of this effort.

Manage-to-budget and other new budgetary innovations will allow the

Commission to fulfill its mission while maintaining efficient resource

allocations and reducing its overall budget. Human resource management

assumes an ever-increasing importance in this effort, as energy markets

require more rapid and flexible Commission services to be provided with

fewer resources over time. Recruitment and training are thus a high priority

to ensure that the Commission has the necessary skill mix to meet these

challenges. 

As the Commission coordinates its organizational structure with strategic

planning and resource allocation, the new performance reporting requirements

set by GPRA are changing the Commission’s approach to accountability. By

aligning performance reporting with strategic planning and resource

allocation, the Commission can use the GPRA process to assist in its

programmatic development. This is especially important in the context of the

agency restructuring promoted by FERC First.

The primary document the Commission is required to submit to Congress

under GPRA is the annual performance report. The Commission has

submitted its FY 1999 Performance Report, but because of the unique nature

of the Commission’s responsibilities in the energy markets, this report is being

produced to complement the FY 1999 Performance Report. State of the

Markets 2000 represents a major contribution to its performance reporting

approach, which seeks to show how the Commission’s energy markets

activities affect its customers and the economy as a whole. The Commission

is accountable to Congress and the public; to be protective and responsive, to

show initiative in understanding, identifying and responding to customer needs

in the energy markets, and to remove unneeded regulations and requirements

wherever appropriate. State of the Markets 2000 demonstrates how the

Commission can use performance indicators to inform and improve its

customer service.

Beyond providing more detail on context and methodological issues, State of

the Markets 2000 also serves to inform Congress and the public of important

developments in commodity markets for electric power and natural gas, and

ongoing reforms in the interstate transportation networks for electricity,

natural gas and petroleum. By giving a coherent picture of what is developing

in these crucial sectors of the nation’s energy system, State of the Markets

2000 can serve a valuable purpose beyond performance reporting.

Going forward, there are also more fundamental issues involved in applying

performance reporting in the regulation of energy markets. Because

performance indicators can be quantified, they are intended to enable

evaluation of whether performance goals are being met. Performance

indicators should also be based on external outcomes, so actual events in

The State of the

Markets Reports
Federal Energy Regulatory Commission State of the Markets 2000

5

energy markets should be the basis of performance indicators for the

Commission’s energy market activities. 

This could be taken to imply that the Commission should develop a set of

static or simple performance indicators, in the form of real market trends or

events, and then attempt to influence them through its ongoing market

activities. But such an approach could lead to policy interventions that inhibit

efficient markets, as opposed to aiding the Commission in its mandate to

further the public interest through encouraging efficient market institutions.

There is thus a special burden in the energy markets area to develop an

approach to performance reporting which reflects both accountability and

sensitivity to the dynamic nature of energy markets. This report is the

Commission’s response to that challenge.

Much of the Commission’s information about the markets is non-quantitative

(comments, filings, complaints, etc.), and this kind of information needs to be

included in performance indicators. In addition, within the past year the

Commission has updated its external information requirements in an effort to

minimize filing burdens while obtaining the most relevant information. The

impact of such steps should be reflected in future reports.

The current pace of transition in energy markets, and the pace of transition in

the Commission itself, makes creation of this first State of the Markets report

by necessity a formative exercise. New activities and capabilities coming out

of the FERC First process and the resulting reorganization will be brought

into the State of the Markets reports as they develop. Reporting on the

competitive evolution of energy markets as a measure of the Commission’s

success has not been done before, and the Commission improve it over time.

The GPRA process is forcing the Commission to think strategically within the

metes and bounds of Congressional statute, which will lead to changes in the

Commission’s multi-year Strategic Plan, annual Performance Plan, and the

resulting Performance Report and State of the Markets reports. And finally,

improvements in the operations and information flow of the Commission’s

market activities will be reflected in improvements in future reports. The

process of change, in the context of understanding and helping to shape

developing energy markets, will continue.
6

The core of competitive markets 

lies in the ability of consumers to 

choose among a sufficient 

number of competing suppliers 

for any given product or service. 

Until some parts of the nation 

faced rapidly increasing electric 

rates in the 1970s, there was 

little pressure to restructure the 

electric industry. 

II. Commodity Markets

Beginning with the enactment in 1978 of the Natural Gas Policy Act and the

Public Utility Regulatory Policies Act, successive Congresses, administrations,

and Commissions have pursued policies leading to more competitive energy

markets. The key structural changes during the development of these new

energy markets involved granting or requiring access to multiple sources of

the energy commodity, through the mechanism of mandated open access to

the transportation systems.

In both the natural gas and electric industries, the Commission has fostered

the mitigation of market power in transportation services and the promotion

of competition in the relevant wholesale commodity markets.

Energy markets have three functions in terms of the physical delivery of

energy:

• supply of the basic energy commodity; 

• transportation of that commodity through pipeline or electric transmission

networks; and 

• final distribution of the energy to consumers. 

These three functions are now being further separated through institutional

restructuring as well as changes in the operational practices of existing

institutions. The concept of unbundling traditional, vertically integrated

monopoly utility functions is the first fundamental step toward competitive

energy markets. Unbundling, in other words, is the action which promotes

effective competition among commodity sources. The histories of evolving

regulation in the electric power and natural gas industries are different, but

reflect some common themes.

Electric power markets. The Federal Power Act (FPA) was enacted in 1935

during an age of vertically integrated electric utilities, in which generation,

transmission, and distribution facilities were owned by a single entity and sold

as part of a bundled service (delivered electric energy) to wholesale and retail

customers. Most electric utilities built their own power plants and

transmission systems, entering into interconnection and coordination

arrangements with neighboring utilities. 

Through much of the 1960s, electric utilities were able to avoid price

increases to consumers and still achieve increased profits because of

substantial increases in scale economies, technological improvements, and

moderate increases in input prices. Thus, there was little pressure on

regulatory commissions or market participants to change the structure of the

industry. However, this began to change in the 1970s, as a variety of factors

led to rapidly increasing electric rates in some parts of the Nation. At the

Background and

Regulatory Context
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

7

The Commission began 

authorizing market-based 

wholesale electric rates as a way 

to encourage the emergence of 

independent and affiliated power 

producers. 

Types of New Power Types of New Power

Suppliers Suppliers

< Qualifying Facilities (QFs) 

< Independent Power Producers 

(IPPs)

< Affiliated Power Producers 

(APPs)

< Exempt Wholesale Generators 

(EWGs) 

< Power Marketers 

same time, significant technological changes in power generation (such as

smaller, less costly power plants and improved power transmission systems)

also suggested the need to reevaluate the nature of wholesale electric

regulation. These technological changes highlighted the existence of rate

disparities between neighboring regions, and suggested that some sort of open

access regime could give consumers in one region the benefit of generation

efficiencies in neighboring regions.

In response to these changes, Congress passed the Public Utility Regulatory

Policies Act (PURPA) in 1978. PURPA sanctioned the development of

alternative generation sources designated as qualifying facilities (QFs) as a

means of reducing the demand for traditional fossil fuels. PURPA required

utilities to purchase power from QFs at a price not to exceed the utility’s

avoided costs, and to sell them backup power.

While QFs were limited to cogenerators and small power producers, other

non-traditional power producers (see text box) also began to compete in

commodity electricity markets. The Commission encouraged these new

entities by authorizing market-based rates for their power sales on a case-bycase basis. In addition, in order to mitigate utility market power over

transmission, the Commission began to require utilities to file open access

transmission tariffs for as a condition of approving utility mergers, or requests

for market-based generation rates.

These events helped to support emerging competitive commodity markets for

electricity by the early 1990s. In addition, through the Energy Policy Act of

1992, Congress sought to promote greater competition in bulk power markets

by encouraging new suppliers to develop projects free from many regulatory

impediments. Congress also expanded the Commission’s FPA authority to

approve applications for transmission access. 

In response, the Commission began to mandate network open-access

transmission service on a case-by-case basis, and to hold that voluntarily

offered, new open-access transmission tariffs must provide for services

comparable to those that the transmission owner provided itself. Following

this logic, in 1996 the Commission issued Order Nos. 888 and 889, which

required functional separation or unbundling of wholesale power service from

transmission, while mandating open access to transmission. Finally, in late

1999, in Order No. 2000, the Commission issued regulations encouraging

regional transmission organizations (RTOs) to enhance transmission reliability

and further safeguard open access for consumers, through structural

unbundling of transmission operations (Order No. 2000 and RTOs are

discussed in more detail in Section III, New Service Availability).

These Commission actions have been instrumental in the creation of

competitive wholesale electric power markets. New regional markets are now

in operation or under discussion across the Nation, and the ability of
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

8

Competitive natural gas markets 

emerged as a result of a 

combination of Congressional 

action and Commission orders 

between 1978 and 1992. 

customers to shop around for power on the wholesale level has been assured.

The implications of these new competitive power markets for service delivery

are discussed in Section III, New Service Availability, while the implications

for electric power prices are discussed in Section IV, Price Information. 

Natural gas markets. The Natural Gas Act (NGA) and related legal

developments originally established a public utility commission regime for the

old FPC and, later, this Commission to regulate the wholesale natural gas

industry. Producers sold their natural gas in the production area to the

interstate pipelines at regulated rates. The pipelines in turn transported gas

to the city gate for sale to local distribution companies (LDCs) at regulated

rates which recovered both the pipelines’ cost of gas and the cost of

transmission. In addition, the pipelines sold gas to end-users in

nonjurisdictional sales. 

Under this system, natural gas prices were regulated and interstate pipeline

sales of gas for resale to LDCs at the city gate took place through

transactions that combined, or bundled into one package, the pipelines’ gas

supply and transmission costs. Thus, bundling of services into one package

under cost-based rates was the central feature of this regulatory approach.

However, interstate natural gas shortages in the 1970s demonstrated that this

approach to commodity price regulation was proving inadequate to the task

of ensuring adequate supply. Intrastate markets were functioning and showed

that competitive pricing was an attractive option for market participants.

Congress responded by enacting the Natural Gas Policy Act of 1978 (NGPA).

Basically, the NGPA commenced decontrol of producer prices (completed by

the Natural Gas Wellhead Deregulation Act of 1989) and broke down existing

barriers between the intrastate and interstate markets. This accelerated a

fundamental change in the gas industry: the establishment of gas as a

commodity distinct from gas transportation.

To further enhance competition in the gas commodity market, the

Commission in 1985 adopted Order No. 436, which instituted open-access,

nondiscriminatory transportation. This allowed downstream gas users to buy

gas directly from gas merchants in the production area and ship that gas via

the interstate pipelines, while still allowing the latter to make bundled sales at

the LDC’s city gate. In 1992 the Commission issued Order No. 636, which

required the pipelines to completely unbundle their transportation, storage,

and sales services; interstate pipelines basically exited their prior merchant

function. In other words, gas as a commodity was decoupled from gas

transportation, and pipelines were required to treat third-party shippers of

now unbundled gas the same as the pipelines’ own affiliated merchant

functions (if any).

As a corollary to unbundling, Order No. 636 allowed shippers to release

unneeded firm pipeline transportation capacity, on either a temporary or
Federal Energy Regulatory Commission State of the Markets 2000

9

permanent basis, leading to the creation of a secondary capacity market

designed to compete with the primary pipeline market. In February, 2000, in

Order No. 637, the Commission took further steps to improve the efficiency

of the market, further encourage capacity release, and provide captive

customers with the opportunity to reduce their cost of holding long-term

pipeline capacity while continuing to protect again the exercise of market

power. Order No. 637 is discussed in Section III, New Service Availability.

Petroleum markets. In contrast to electric power and natural gas, the

commodity oil and oil pipeline industries, while involving many affiliate

relationships, have been functionally unbundled for many years. This,

together with the fact that oil pipelines are subject to competition from other

forms of commodity transportation and a different statutory scheme, resulted

in a different regulatory system that has long separated oil production and oil

pipeline transportation. 

The Commission’s regulation of oil pipelines is governed by the oil provisions

of the Interstate Commerce Act and the amendments to that Act by the

Energy Policy Act of 1992. The Act directed the Commission to pursue a

simplified program of oil pipeline regulation based in part on a recognition

that oil pipeline transportation markets may be more competitive than was the

case at the time with either gas transportation or electric transmission

markets. While recognizing that there are markets in which individual oil

pipelines may possess significant market power (these issues are discussed in

Section V, Market Power), the Commission has made significant strides

toward streamlining its regulation over common carrier interstate oil pipelines.

One of the major accomplishments of the Commission’s efforts over the past

20 years has been the encouragement of commodity markets, allowing

consumers to shop around for competing sources of energy commodities. As

an indicator of the Commission’s performance in the area of market

development, commodity source options are among the most relevant

measures of energy consumers’ basic freedom to choose in the markets. 

The measurement of commodity source options must begin with a definition

that allows for meaningful evaluation. The concept of a commodity source

option is not simply any entity which offers some type of energy-related

product or service. Rather, the more relevant concept is that of a supplier of

the basic commodity, bulk energy in the form of natural gas, petroleum, or

electric power. 

A commodity source is the upstream or wholesale energy provider. It is the

existence of multiple commodity sources which in turn allows for the

development of services such as risk hedging, and specialized delivery

contracts using multiple supply sources (see Section III, New Service

Developing

Performance

Indicators: Methods

and Data
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

10

The challenge for the

Commission in developing and 

evaluating performance

indicators for commodity source 

options is defining such

commodity sources and related 

changes in energy markets, and 

then locating suitable data. 

Availability). Commodity source options also begin to create more

meaningful price information through competitive bidding, arbitrage, and

other forms of buyer-seller interactions (see Section IV, Price). 

The promotion of commodity source options through Commission actions

should have effects on the structure and characteristics of commodity markets

for natural gas and electricity. Performance indicators in this area should be

able to clearly track these developments. The challenge in developing and

evaluating these indicators is twofold: defining commodity sources and related

changes in commodity markets, and locating publicly available performance

data that conforms to such a definition. 

Natural gas and electric power markets have different structures and histories,

and the status of publicly available data (whether reported directly to the

Commission or developed through other means) is not consistent. Therefore

the most useful approach to measuring commodity source options at this time

will be to consider electric and natural gas markets in turn.

Electric Power Markets. In the electric power markets, a commodity source

is a supplier of the bulk electric power commodity. The importance of

commodity source options can be seen, for example, in the evolution of

choices for traditional wholesale requirements customers. Under the cost-ofservice regulatory structure, a vertically integrated utility was required to

provide service to municipal utilities and other captive customers located

within the utility’s exclusive service franchise territory. These wholesale

requirements customers received service under terms and conditions which

did not even contemplate transmission grid access for the captive customer to

seek out alternative sources of supply. Even if there were independent

generators located in the utility’s franchise territory, they were usually unable

to enter into contracts with captive customers because of their lack of grid

access. 

When the electric power industry underwent functional unbundling as a result

of statutory and regulatory actions, this situation changed. Commodity source

options became available to captive wholesale customers through open access

to the transmission grid, based on the principle of comparable access. If an

independent generator or another franchise utility had generating capability

available, wholesale customers could now negotiate power supply contracts

which bypassed the local utility even though the local utility’s transmission

grid was needed to provide the power to the customer.

Natural Gas Markets. Natural gas commodity markets have undergone

major changes since pipeline unbundling. Prior to unbundling, the vast

majority of customers bought natural gas at the city gate under pipeline sales

services. After unbundling, downstream customers purchased gas in the

production area directly from producers as well as from natural gas marketers.

Moving the point of purchase to the production area greatly expanded the
Federal Energy Regulatory Commission State of the Markets 2000

11

Henry Hub

Generalized Supply Area

Operating Market Center Moss Bluff

Waha 

Interchange

Katy

Interchange

New York

Market Hub Chicago 

Hub

Empress

Louisiana Hub

Texaco Gulf

Coast Star Center

Ellisburg Leidy

Buffalo Wallow

Western 

Market 

Center

Houston Hub

CNG/Sabine

Center

Union

Grands Lacs

Intra-Alberta

Egan

Perryville-Ouachita

Equitable Resources

Katy Hub

South Texas

10 Section Hub

Permian Waha Hub

Proposed Market Center

Crossfield

Rocky Mountain

Mid-Continent

Columbia Gas

PGT

Carthage

Lebanon

Waha Header

California 

Energy Hub

Sumas

Golden Gate

Blanco/San Juan

AECO C

Perryville-NorAm

Iroquois

Avoca

Tioga

Mojave

Alberta Hub

Kiowa

Mobile

Waha (Delhi) 

Hub

number of commodity source options available to gas users. The number of

commodity options expanded from one or two pipeline sales suppliers to

dozens of upstream suppliers operating in each supply area. Production area

market centers also developed which enabled producers and marketers to

aggregate and trade supply from numerous wellhead sources, simplifying

purchasing by downstream customers, and making possible a gas futures

market keyed to a common point for physical delivery (e.g. Henry Hub).

Market centers have also developed at downstream points. One measure of

the variety of commodity source options is the number of market trading

centers. The number of market centers has grown from 5 in 1992 to 38

today. The figure below shows the number and location of current and

proposed market centers.

In parallel with the development of market center commodity trading, an

active financial market has developed on the NYMEX to enable wholesale

shippers to hedge against future price risks in gas. The NYMEX futures

contract has been the fastest growing instrument in its history, and in October
Federal Energy Regulatory Commission State of the Markets 2000

12

Northwest

PGT

PGT

PG&E (multiple areas)

SoCal Gas (multiple areas)

Transwestern

Northwest

Northwest

Transwestern

El Paso (multiple areas)

Transwestern

Chicago (multiple

 areas)

N. Border

Carthage

N. Natural (multiple areas)

ANR Williams (multiple areas)

Panhandle (multiple areas)

Natural

ONG

Natural

Trunkline

Trunkline

Exxon-Katy

Florida Gas

Natural

Tennessee

TETCO

Waha PG&E

El Paso (multiple areas)

Williams (multiple areas)

Trunkline

TETCO

Natural

C. Gulf (multiple areas)

Tennessee & Transco

Texas Gas (multiple areas)

TETCO (multiple areas)

Henry Hub Erath-Sea Robin

ANR

Trunkline

Tennessee

Natural

Consumers Pwr.

ANR Union/Dawn

Transco (multiple areas)

TCO/IPP

CNG (multiple areas)

M-3 TETCO

Transco

Florida Gas

Transco

Sumas

Natural

Natural (multiple areas)

Empress

NOVA (multiple areas)

Intra-Alberta

Transco

Florida Gas

1992, NYMEX began offering options on natural gas futures, giving market

participants additional flexibility in managing their market risk. 

Another advance in natural gas commodity markets is the rise of electronic

trading. Electronic trading creates a more efficient market by expanding the

number of buyers and sellers interacting, reducing the time and resources

needed to obtain price information and consummate trades, providing

anonymity so traders do not have to disclose their market positions, and

providing traders with more confidence in the prices they obtain. One study

estimates that on-line trading of natural gas in 1999 will amount to $10 billion.

Many of these electronic transactions occur at downstream markets. The

figure below shows the electronic gas trading points for Altrade and Natural

GasExchange.
Federal Energy Regulatory Commission Federal Energy Regulatory Commission State of the Markets 2000 State of the Markets 2000

13

The number of power suppliers 

authorized to charge market 

rates has increased dramatically 

since 1994. 

New electronic trading companies are entering the market and e-commerce

for gas is expected to grow, reaching 20% of total gas business within two

years.

Thus, a measure of the ability of wholesale customers to contract with

multiple sources for commodity electricity would be an appropriate

performance indicator. Developing such an indicator, or several related

indicators, is the challenge now facing the Commission. There are two broad

ways to approach the problem: broader macro-scale indicators which count

the overall number of commodity source options on a national or regional

basis, and narrower, perhaps firm-level, micro-scale indicators which count

the number of commodity source options available to a specific wholesale

customer, whether an actual customer or an idealized representative customer.

The proper specification of such indicators depends on a useful definition of

a market, since it is not appropriate to count commodity sources which cannot

make delivery to the wholesale customer. 

For the purposes of this report, preliminary examples of performance

indicators in the area of commodity source options have been based on

existing information; the broader questions of market definition and data

availability remain to be addressed in future Commission activities.

While the Commission has not normally collected systematic data on the

number of commodity source options available to customers, some

information is available which demonstrates the rapid growth of energy

providers in the marketplace as a whole. For example, the Commission

accepts filings from entities seeking approval to transact business under

market-based rates, which are subject to lighter-handed review by the

Commission.

By taking the list of such marketers and sorting them by type and year of

market-based rate approval, a trend of rapid growth during the period of

competitive commodity market development in the electric power markets can

be seen, although more work needs to be done to develop and interpret this

data. Specifically, more information on the current status and size of various

commodity suppliers would be useful, since some entities which received

market-based rate approvals may have since left the business or do not

actively participate in the market. Information about other sources which may

not have market-based rate filings would help to fill in the picture of how

many commodity sources are available to consumer, and this larger picture

should probably be developed at a regional level (which in turn ties in with

problems of market definition and market concentration as discussed in

Section V, Market Power).

Performance

Indicators: Examples
Federal Energy Regulatory Commission State of the Markets 2000

14

Cumulative Power Suppliers with M arket Based Rates

0

100

200

300

400

500

600

700

800

900

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

CumulativeTotal 

Power Marketers

Affiliated Power

Marketers

Affiliated Power

Producers

Investors Owned

Utilities

Other Utilities

Power Supp liers w ith Market Based Rates

0

5 0

100

150

200

250

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Number of Power Suppliers with MBR

Other Utilities 

Investors Owned

Utilities

A ffiliated Power

P roducers

A ffiliated Power

M arketers

Power Marketers
Federal Energy Regulatory Commission State of the Markets 2000

15
Federal Energy Regulatory Commission State of the Markets 2000

16

0.19 

0.2 

0.21 

0.22 

0.23 

0.24 

4/96 7/96 10/96 1/97 4/97 7/97 10/97 1/98 4/98 7/98

Marketer Share of Firm Transportation

A further measure of commodity source availability is the ongoing success of

gas end-users in obtaining supply independent of their local gas distributor

(i.e. retail unbundling). In 1998 the level of commodity supply from thirdparty sources was 84.5% for industrial customers, 66.1% for electric utilities,

33% for commercial loads, and 2.3% for residential customers. Gas supply

for the much of this unbundled load is obtained from natural gas marketers.

The figure below shows the increasing share of interstate capacity rights held

by natural gas marketers.