Introduction to Electric PowerRegulation and Electricity MarketsJ. Arnold QuinnDirector, Office of Energy Policy and InnovationFederal Energy Regulatory CommissionJuly 9, 2015Obligatory DisclaimerAny views expressed in this presentation are myown, and do not necessarily represent theviews of the Federal Energy RegulatoryCommission or the United StatesGovernment.The Electric Power SystemGeneration of Electric PowerA Bit of History . . .Early utility systems were localized, serving small numbersof nearby customersSystems grew as technology improved and utilities soughtgreater economies of scaleStates first regulated electric utility service as a matter ofconsumer protection (and investor preference)PUC of RI v. Attleboro Steam & Elec. Co.(1927)Held that Commerce Clause prohibited one state (RI) fromregulating the rate charged by its utility for sales of power to utilityin another state (MA).Federal Power Act (FPA) (1935) fills the “Attleboro Gap”(but preserves state role)Electricity Regulation:Who is Responsible for What?Federal Power ActWholesale sales of electricity forresale in interstate commerceTransmission of electricity ininterstate commerce(Very) Limited “backstop”transmission siting authoritySee16 U.S.C.§824pSiting/Permitting of hydro plantsOtherwise, no generationplanning or siting controlReliability of bulk power systemState Public Utility Acts or similarSee,e.g., VA. CODE ANN. §§ 56-235etseq.and 56-576et seq.(Electric UtilityRegulation Act)Retail sales to end usersLow-voltage distribution linesSiting of power plants andtransmission linesSee, e.g.,MD. CODEANN. PUB. UTIL.COS.§7-207 (transmission and gen.)Resource planning;i.e.thegeneration types (coal, natural gas,renewable) used by a utility toserve customersFederal Regulation (FERC)State Regulation (PUCs)8What is FERC?FERC is an Independent Regulatory Agency in theExecutive Branch of the U.S. GovernmentCreated by Department of Energy OrganizationAct (1977)Five Commissioners, appointed by the Presidentand Confirmed by the Senate, serve staggered fiveyear termsNo more than three from a single political partyPresident designates ChairmanOverview: What FERC Regulates in theElectric, Natural Gas and Oil IndustriesElectric Power IndustryInterstate transmission rates and servicesWholesale electric energy rates and servicesCorporate transactions, mergers, securities issuedby public utilitiesMandatory electric reliability standards for the“bulk power system”Hydroelectric facilities; siting and licensing(including environmental matters), safety,recreational uses, etc. (Part I of the Federal PowerAct)Natural Gas IndustryInterstate transportation rates and servicesInterstate gas pipeline siting, construction, andrelated environmental mattersOil and Products PipelinesInterstate transportation rates and services(common carrier regulation under the ICA)FERC Also Regulates Closely-RelatedNatural Gas Industry and Oil PipelinesWhat FERC Does NOT RegulatePlanning or financing of generation investmentsPollution produced by electric generators(Environmental Protection Agency)Pipeline safety(Department of Transportation)Siting of electric transmission lines (except forlimited backstop)Siting of generating plantsFERC JurisdictionFPA Section 201 (16 U.S.C. § 824) grants FERC plenaryjurisdiction over “the transmission of electric energy in interstatecommerce and . . . the sale of electric energy at wholesale ininterstate commerce”, including “all facilities for suchtransmission or sale of electric energy”. 16 U.S.C. § 824(b)(1).However, FERC jurisdiction “shall notapply to any other sale ofelectric energy,” and FERC “shall not have jurisdiction . . . overfacilities used for the generation of electric energy or overfacilities used in local distribution.”Id.Transmission vs. DistributionFERC established a seven factor test to determine whetherfacilities are jurisdictional transmission or local distribution:1.local distribution facilities are normally in close proximity to retailcustomers2.local distribution facilities are primarily radial in character3.power flows into local distribution systems, and rarely, if ever flows out4.when power enters a local distribution system, it is not reconsigned ortransported on to some other market5.power entering a local distribution system is consumed in a comparativelyrestricted geographic area6.meters are based at the transmission/local distribution interface to measureflow into the local distribution system7.local distribution systems will be of reduced voltageEntities Subject to FERC JurisdictionAn entity that own or operate facilities used in transmission orwholesale of electric energy in interstate commerce is a “publicutility” subject to FERC jurisdiction (16 U.S.C. § 824(e)).Federal, state and municipally-owned utilities and most electriccooperatives are excluded from definition of “public utility”,and thus not generally subject to FERC regulation (althoughthey may be subject to specific FPA provisions) (16 U.S.C. §824(f)). Examples:Bonneville Power Administration, Tennessee Valley AuthorityLos Angeles Department of Water and PowerTri-State Generation and Transmission CooperativeFPA Requirements for Public UtilityRates and ServicesFPA Section 205 (16 U.S.C. § 824d)Requires that all rates and charges for the transmission or sale ofelectric energy , and rules and regulations affecting or pertaining tothose rates (i.e., terms and conditions), must be “just and reasonable”Prohibits granting of “undue preference or advantage” injurisdictional rates or terms and conditions of serviceRates, charges, and terms and conditions must be filed with FERCwith 60 days notice.FPA Section 206 (16 U.S.C. § 824e)Authority of Commission, on its own motion or on complaint, toremedy rates or terms and conditions that it finds are “unjust,unreasonable, unduly discriminatory or preferential”FERC Rate RegulationWholesale Electricity– Almost entirely market-based ratesAnalyze sellers for market power in defined products and geographicmarkets, utilizing screens that assess market share and ability ofseller to be “pivital supplier”RTO/ISO regions v. Non-RTO/ISO regionsElectric Transmission -Almost entirely cost of service-based ratesThe “Cost of Service” is the amount needed to cover operatingexpenses, taxes, interest, return of investment, and a reasonable rateof return on that investmentSeeing increasing use of “negotiated” rates for new transmissionfacilitiesTransmission Service Regulation –“Open Access”Order Nos. 888/889 (1996)Open Access – Public utilities must provide non-discriminatorytransmission service pursuant to an Open Access Transmission Tariff(OATT)FERC’spro formaOATT establishes minimum requirements for serviceIn short, public utilities must provide the same transmission service to othersthat they provide to themselvesFunctional Unbundling – Public utilities were required to separatetransmission and generation or power marketing functions, and stateseparate rates for these functionsOrder Nos. 890 (2007) and 1000 (2011)Planning – Public utilities must participate in regional and interregionaltransmission planning processesCost Allocation - Processes must include transparentex antecostallocation methods that meet certain principles (e.g., “beneficiary pays”)Reliability StandardsFERC approves and enforces reliability standards to provide for thereliable operation of the “bulk power system” (16 U.S.C. § 824o)Reliability standards are developed by the FERC-certified “ElectricReliability Organization” through industry stakeholder process andfiled with FERC; FERC may then either approve or remand, butdoesn’t write the standards (although it can direct that a new standardbe developed).“Bulk power system” generally 100 kv and up, with certain inclusionsof critical facilities and exclusion of non-critical facilities or facilitiesused solely in distributionReliability standards cover planning, operations, communications,physical and cyber protection, etc. Do NOT require construction ofspecific facilities.State PUC RegulationExtends to all other matters not addressed in FPARetail rates paid by end-use customersInvestments in distribution (including meters, poles, wires, etc.)Investments in generation resources and the mix of resourcesused to serve customers (e.g., RPS)States with restructured retail markets may have more limited authorityover generation investmentDemand-side management and energy efficiency programsSiting of transmission lines* and power plants* FERC has limited “backstop” siting authority in designated areas ofcongestion where states have not acted on a siting application within one year* Local governments (counties) have this authority in some statesElectricity Restructuring by StateRegional Transmission Organization/Independent System Operators (RTOs/ISOs)Independent of market participants and transmission ownersProvide non-discriminatory access to transmission service,interconnection, etc.Operate and oversee multiple markets for capacity, energy andancillary services to facilitate competition among multiple sellersEnergy markets: bid-based, securityconstrained economic dispatch withlocational marginal pricingCapacity markets: some RTOs/ISOs operate centralized markets toprocure capacity to meet the region’s resource adequacy requirementsAncillary services: markets allow multiple sellers to provide supportservices (frequency response, reserves, etc.)Market rules and tariffs developed through stakeholder process,then filed with FERC (no “one-size fits all” approach)Generally more non-utility “merchant” generationCurrent Jurisdictional IssuesDemand Response in Wholesale MarketsEPSA v. FERCat Supreme CourtResource Adequacy in RTO/ISO RegionsRTO/ISO role in ensuring sufficient resourcesParticipation of state-ordered generation in centralizedcapacity markets“Bilateral” MarketsVertically-integrated utilities operating their own balancingauthorities (BAs)Buyers and sellers contract at arms-length, with mostlymarket-based rates (some cost-based rates where sellers havemarket power)FERC approves market-based rate authority before entity can makesales, and requires after the fact reporting of market-based salesCost-based rates filed at FERC prior to providing servicePhysical transmission service and generator interconnectionservice purchased from utilities under their filed OATTState PUCs retain all authority for resource adequacy(through integrated resource planning and other tools)Less prevalence of merchant generationAncillary services typically provided by the utility itselfThanks!Questions?Arnie Quinn(202) 502-8693arnie.quinn@ferc.gov