Page 1 GAO-03-726R FERC Consumer Protection 

June 6, 2003 

Congressional Requesters: 

Subject: Electricity Markets: FERC’s Role in Protecting Consumers

The electricity industry is currently undergoing a restructuring, evolving from an industry 

characterized by monopoly utilities that provide consumers with electricity at regulated rates to 

a competitive industry in which prices are largely determined by supply and demand. The 

Federal Energy Regulatory Commission (FERC) has been engaged in this restructuring effort and 

is currently working, among other things, to foster competitive wholesale energy markets across 

the nation while protecting consumers against abuses of market power. At the retail level, about 

half the states have pursued restructuring their retail electricity markets in order to allow 

consumers such as residential, commercial, and industrial customers to choose their electricity 

suppliers. Proponents of electricity restructuring believe that it will ultimately provide 

consumers with lower electricity prices, more services, and technological innovation. However, 

opponents cite extremely high prices and market manipulation in California as evidence that, 

without more stringent oversight, restructuring may leave consumers vulnerable to higher prices, 

market manipulation, and less reliable service. 

In light of ongoing electricity restructuring efforts, you asked us to describe FERC’s role in 

protecting electricity consumers. This report does not evaluate FERC’s success in serving this 

role, but does provide examples of how FERC has acted previously to protect consumers. GAO 

plans to issue a report in the summer 2003 on the progress FERC has made so far in preparing 

itself to monitor competitive energy markets. A complete list of the requesters appears at the end 

of this report. 

Results in Brief 

FERC’s role in protecting electricity consumers is to ensure that prices in the wholesale 

electricity market are just and reasonable. Traditionally, FERC has ensured rates are just and 

reasonable in the wholesale market by regulating them based on a utility’s costs of service plus a 

regulated return on the utility’s investment. However, with the advent of greater competition in 

the electricity industry, FERC believes the best ways to ensure wholesale prices are just and 

reasonable today is by (1) fostering competitive regional wholesale markets that have balanced 

market rules (i.e., rules that encourage efficient behavior and infrastructure development and 

deter abusive behavior), (2) continuously monitoring these markets for anticompetitive behavior, 

and (3) enforcing or correcting market rules as needed. As part of these efforts, FERC oversees 

the interstate transmission system to ensure it remains open without discrimination to all buyers 

and sellers of electricity. This oversight also works to protect consumers by ensuring companies 

that generate electricity will be able to transmit their power without disruptions or inefficiencies. 

United States General Accounting Office

Washington, DC 20548 
Page 2 GAO-03-726R FERC Consumer Protection 

FERC has limits on where and how it can protect consumers. For example, FERC does not 

oversee wholesale electricity sales and transmission in areas where it generally lacks 

jurisdiction, such as the areas served by federally owned utilities including the Tennessee Valley 

Authority and the Department of Energy’s four federal Power Marketing Administrations, 

publicly owned (municipal) utilities, and most cooperative utilities. In addition, states, rather 

than FERC, have authority over the retail electricity rates paid by customers, the local 

distribution of electricity, and the construction and siting of power plants and transmission lines 

within their boundaries. 

Background 

Established in 1977 as the successor to the Federal Power Commission (FPC), FERC is the 

principal federal agency that regulates the electricity industry. An independent agency, FERC 

obtains much of its legal authority over electricity from three sources: the Federal Power Act of 

1935, which created the FPC and charged it with overseeing the rates, terms, and conditions of 

wholesale sales and transmission of electric energy in interstate commerce; the Public Utility 

Regulatory Policies Act of 1978, which opened the door for competition in the U.S. electricity 

supply market by allowing nonutility generators that met criteria set by FERC to enter the 

wholesale market; and the Energy Policy Act of 1992, which created a new class of electricity 

supplier—the exempt wholesale generator—and led to FERC Order No. 888, which opened up 

the national transmission system to wholesale suppliers. In fiscal year 2002, FERC had a budget 

of about $191 million and funding for about 1,200 full-time staff. 

The electricity industry is based on four distinct functions: generation, transmission, distribution, 

and system operations. (See fig. 1.) Once electricity is generated, 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 3 GAO-03-726R FERC Consumer Protection 

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. 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-byminute 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. 

Since the early 1900s, electric utilities have been largely considered natural monopolies because 

they have high fixed costs (the costs of large-scale power plants, transmission lines, and 

distribution wires) and can lower their production costs as they increase the volume of 

electricity they generate. At that time, large, centralized power plants were seen as the most 

efficient and inexpensive way to produce and distribute electricity to retail customers. As a 

result, utilities obtained exclusive service territories in exchange for the regulation of their retail 
Page 4 GAO-03-726R FERC Consumer Protection 

rates and terms of service by state public utility commissions. Wholesale electricity generated 

and transmitted for the interstate market came (and still resides) under FERC’s jurisdiction. 

Technological advances, such as the development of smaller, less costly generation units, and the 

passage of the Public Utility Regulatory Policies Act of 1978 created opportunities for companies 

other than utilities to generate and sell electricity in the wholesale market. The Energy Policy Act 

of 1992 gave FERC the authority, on a case-by-case basis, to require utilities to provide nonutility 

generators with access to the utility’s interstate transmission lines. Subsequent FERC orders 

advanced this principle, requiring most utilities to provide nonutility generators access to their 

interstate transmission lines on a nondiscriminatory basis. Several states have restructured their 

intrastate market to allow retail customers to choose their electricity provider while retaining 

their utility’s traditional distribution services. As we reported in December 2002, 24 states and 

the District of Columbia had enacted legislation or issued regulations opening their retail 

markets to competition.1

 Of those, 17 states and the District of Columbia were implementing 

programs that enable retail customers to choose their electricity supplier. 

FERC’s Role is to Protect Consumers through the Wholesale Markets 

FERC’s role with respect to protecting electricity customers is to ensure that prices in the 

wholesale electricity market are just and reasonable and to oversee the interstate transmission of 

electricity.2

 Traditionally, FERC approved its regulated rates for wholesale electricity based on a 

utility’s cost to generate and transmit the power, plus a rate of return on investment. Opponents 

of cost-based rate regulation contend that it is less efficient than market pricing and results in, 

among other things, over investment in a utility. In light of the advances in technology, the 

introduction of nonutility power generators, and the nation’s general shift in policy over the past 

three decades away from government regulation and toward markets, FERC now believes that 

the best way of achieving just and reasonable rates is to 

• foster competitive regional wholesale markets that have balanced market rules (i.e., rules that 

encourage efficient behavior and infrastructure development and deter abusive behavior), 

• continuously monitor these markets for anticompetitive behavior, and 

• enforce or correct market rules as needed. 

Under this approach, FERC’s first goal is to advance the development of competitive wholesale 

markets by implementing clear and balanced market rules and regulations on sales and 

transmission. According to FERC, establishing balanced market rules up front encourages 

efficient behavior and infrastructure development and deters abusive behavior in the market. 

More specifically, following Order No. 888, FERC approved the creation of independent system 

operators for New England, the Mid-Atlantic states, New York, and California to operate 

 1

 U. S. General Accounting Office, 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.: Dec. 17, 

2002). 

2

 Although FERC has authority to oversee the interstate transmission system, the North American Electric Reliability 

Council (NERC) makes sure the interconnections among transmission systems work reliably by developing and 

monitoring standards of operation. 
Page 5 GAO-03-726R FERC Consumer Protection 

wholesale energy markets and transmission systems within their regions. Then, in December 

1999, FERC issued Order 2000, which encouraged all privately owned utilities to voluntarily place 

their transmission facilities under the control of a broader market entity called a regional 

transmission organization (RTO). RTOs are intended to bring the nation’s transmission systems 

under regional control in order to increase access for all suppliers, improve management of 

system congestion and reliability, and achieve fully competitive wholesale power markets. Since 

issuing Order 2000, FERC has approved the creation of two RTOs—the Midwest Independent 

Transmission System Operator, Inc. (Midwest ISO) and the PJM Interconnection. Five others are 

in various stages of the approval process—GridFlorida, GridSouth, RTO West, WestConnect, and 

SeTrans3

. Additionally, in July 2002, FERC issued a Notice of Proposed Rulemaking to establish a 

standard market design for all jurisdictional electric transmission providers. In FERC’s view, the 

proposal will enable sellers to transact for electricity more easily across transmission 

boundaries, thus potentially bringing more sources of electricity to consumers and allowing them 

to receive the benefits of lower-cost and more reliable electricity supply. Since 1992, FERC has 

granted authority to more than 850 companies to charge market prices for their electricity, 

provided that the companies comply with market rules and charge wholesale prices that are just 

and reasonable. 

Second, according to FERC, it will also monitor these markets and thereby protect consumers by 

proactively identifying market violations or mismanagement. In order to better monitor markets 

for anticompetitive behavior, in August 2002, FERC established the Office of Market Oversight 

and Investigations (OMOI). The role of this office is to scrutinize wholesale energy markets in 

order to identify issues before they develop into major problems and to monitor the market to 

ensure that participants play by the rules. In addition, to help monitor the markets, the Office of 

Market Oversight and Investigation manages FERC’s Enforcement Hotline, which is designed to 

provide industry participants and the public a way to tell the commission their concerns or 

complaints about behavior in electricity markets. In 2002, the Hotline handled 584 calls. 

Finally, to enforce or correct market rules, FERC, through OMOI, is conducting investigations 

that are either self-initiated or result from Hotline complaints or other referrals by industry 

participants. According to FERC, as of May 1, 2003, OMOI’s Divisions of Enforcement and 

Operational Investigations were conducting 38 investigations related to electricity matters such 

as generator practices, undue discrimination, or market manipulation. Between June 2002 and 

midApril 2003, the division resolved or terminated 18 investigations. Several of these 

investigations led to enforcement actions that either provided payment of refunds, civil penalties, 

or investigation costs or provided corrections to market rules to help ensure generation can 

adequately meet increased demand. 

 3

 As we reported in December 2002, Midwest ISO operates in Illinois, Indiana, Iowa, Kentucky, Michigan, Minnesota, 

Missouri, Montana, North Dakota, Ohio, South Dakota, Virginia, Wisconsin, and Manitoba (Canada). PJM operates in 

Delaware, the District of Columbia, New Jersey, Maryland, Ohio, Pennsylvania, Virginia, and West Virginia. GridFlorida 

operates in Florida. GridSouth operates in North Carolina and South Carolina. According to FERC, RTO West operates 

in Washington state, Idaho, Montana, Oregon, Nevada, Wyoming, Utah, and a small part of northern California. 

WestConnect operates in Arizona, Colorado, New Mexico, and Utah. SeTrans operates in Alabama, Arkansas, Florida, 

Georgia, Louisiana, Mississippi, South Carolina, and Texas. 
Page 6 GAO-03-726R FERC Consumer Protection 

Portions of the Wholesale Market are Not Subject to FERC Jurisdiction 

Some entities in the wholesale electricity market operate outside FERC’s statutory jurisdiction. 

These entities include the Tennessee Valley Authority and the Department of Energy’s four 

Power Marketing Administrations.4

 In addition, the Federal Power Act of 1935 excludes publicly 

owned utilities, such as municipal utilities, public power districts, and irrigation districts, as well 

as most cooperatively owned utilities from FERC’s jurisdiction. Publicly owned utilities are 

usually nonprofit and are regulated by the government organization that owns them, while 

electric cooperatives are owned by and provide service primarily to their members. Most 

cooperatives do not sell electricity on the wholesale market or transmit electricity interstate. 

Figure 2: Jurisdictional Territories of FERC and Power Entities Not Subject to FERC, 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. 

Portions of the map without shading indicate either that no electric service is provided 

or the service area is very small. 

 4

The Power Marketing Administrations are Bonneville, Western Area, Southeastern, and Southwestern. 
Page 7 GAO-03-726R FERC Consumer Protection 

As shown in figure 2, power entities generally operating outside FERC’s jurisdiction represent a 

significant share of the electricity market. Together, they currently provide service for about 25 

percent of the nation’s consumption of electricity and constitute an even larger portion of the 

electricity market in some areas. For example, in Nebraska, municipal utilities, cooperatives, and 

other suppliers not explicitly subject to FERC’s jurisdiction provide almost all of the state’s 

electricity. Many of the entities operating outside FERC’s jurisdiction reside in the Southeast, 

Midwest, and West. In addition, municipal utilities, cooperatives, and federally-owned power 

entities own about 30 percent of the nation’s transmission system. Lines owned by 

nonjurisdictional entities are prominent in the South and West. 

States Regulate Retail Electricity Markets

Although FERC has regulatory authority over most of the interstate wholesale market in 

electricity, states have authority over the retail electricity and distribution markets and thus 

regulate the retail rates paid by residential, commercial, and many industrial customers.5

 In a 

majority of states, public utility commissions set consumers’ retail rates based on a utility’s cost 

of service plus a rate of return on investment. As we reported in December 2002, 24 states have 

enacted legislation or regulations to open their retail electricity markets to competition. 

Seventeen of those states and the District of Columbia have implemented programs enabling 

residential, commercial, and industrial customers to choose their electricity provider. However, 

of these 17 states, most have frozen their retail electricity prices at levels equal to or less than the 

retail cost-of-service rates that were in place at the outset of competition. 

In addition to setting rates in the retail electricity market, states have the authority to approve 

the construction and siting of power plants and transmission lines. To be built, these facilities 

usually require the approval of the state’s public utility commission as well as the consent of 

other state and local government agencies on environmental, zoning, and energy policy issues. 

Although transmission lines increasingly serve regional needs and can cross state boundaries, 

state and local governments make many of the decisions on whether and where to site new lines 

and thus potentially have significant impact on the transmission system’s reliability and the 

amount of electricity it can deliver to consumers. 

Agency Comments 

We provided FERC with a draft of this report for its review and comment. In general, FERC’s 

Chairman agreed with our report and its depiction of the commission’s role in protecting 

electricity customers. The Chairman suggested technical and editorial changes that we included 

as appropriate. 

 5

 Wholesale energy trades within a state--for example, when a municipality purchases power from a generator in the 

same state--are regulated by the state’s public utility commission. In addition, FERC has no jurisdiction over the 

wholesale market in Hawaii and Alaska because, being geographically separated from the contiguous U.S., these states 

have no interstate trade in electricity. Similarly, FERC has no jurisdiction over wholesale electricity trades in much of 

Texas because the state has few connections with the two major interstate grid systems in the United States, the 

Eastern and Western Interconnect. 
Page 8 GAO-03-726R FERC Consumer Protection 

Scope and Methodology 

To obtain information on the ways in which FERC can protect consumers, we reviewed industry 

reports, academic literature, and discussed the issue with officials from FERC’s Office of 

Markets, Tariffs, and Rates and Office of Market Oversight and Investigations. To obtain 

information on FERC’s jurisdiction, we reviewed applicable statutes and federal rules. To 

identify areas of consumer protection and concerns, we reviewed industry publications and 

interviewed officials with consumer advocacy groups. In addition, we spoke to officials with the 

National Association of Regulatory Utility Commissioners and the Electricity Consumers 

Resource Council. 

We performed our work between November 2002 and May 2003 in accordance with generally 

accepted government auditing standards. 

- - - - - 

As agreed with your offices, unless you publicly announce its contents earlier, we plan no further 

distribution of this report until seven days from the date of this letter. At that time, we will send 

copies to appropriate congressional committees as well as to the Chairman, FERC, and the 

Director, Office of Management and Budget. We will also make copies available to others upon 

request. In addition, the report will be available at no charge on the GAO Web site at 

http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me at (202) 512-3841. Key 

contributors to this report include Dan Haas, Daren Sweeney, Randy Jones, Carol Kolarik, Jon 

Ludwigson, Frank Rusco, Jonathan McMurray, and Barbara Timmerman. 

Jim Wells 

Director, Natural Resources 

 and Environment 
Page 9 GAO-03-726R FERC Consumer Protection 

List of Congressional Requesters 

The Honorable Robert E. Andrews 

United States House of Representatives 

The Honorable Brian Baird 

United States House of Representatives 

The Honorable Tammy Baldwin 

United States House of Representatives 

The Honorable Shelley Berkley 

United States House of Representatives 

The Honorable John Conyers, Jr. 

United States House of Representatives 

The Honorable Peter DeFazio 

United States House of Representatives 

The Honorable Sam Farr 

United States House of Representatives 

The Honorable Bob Filner 

United States House of Representatives 

The Honorable Michael M. Honda 

United States House of Representatives 

The Honorable Dennis J. Kucinich 

United States House of Representatives 

The Honorable Tom Lantos 

United States House of Representatives 

The Honorable Barbara Lee 

United States House of Representatives 

The Honorable Carolyn Maloney 

United States House of Representatives 

The Honorable Karen McCarthy 

United States House of Representatives 

The Honorable James P. McGovern 

United States House of Representatives 

The Honorable George Miller 

United States House of Representatives 
Page 10 GAO-03-726R FERC Consumer Protection 

The Honorable Bill Pascrell, Jr. 

United States House of Representatives 

The Honorable Bernard Sanders 

United States House of Representatives 

The Honorable Hilda L. Solis 

United States House of Representatives 

The Honorable Fortney Pete Stark 

United States House of Representatives 

The Honorable Tom Udall 

United States House of Representatives 

The Honorable Maxine Waters 

United States House of Representatives 

The Honorable Robert Wexler 

United States House of Representatives 
Page 11 GAO-03-726R FERC Consumer Protection 

Enclosure I: Comments from the Federal 

Energy Regulatory Commission 
Enclosure I: Comments From the Federal Energy Regulatory Commission 

Page 12 GAO-03-726R FERC Consumer Protection (360279) 
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