Introduction to Electric Power 

Regulation and Electricity Markets

Jeffery S. Dennis

Director, Division of Policy Development

Federal Energy Regulatory Commission

June 25, 2015
Obligatory Disclaimer

Any views expressed in this presentation are my 

own, and do not necessarily represent the 

views of the Federal Energy Regulatory 

Commission or the United States 

Government.
The Electric Power System
Generation of Electric Power

A Bit of History . . . 

 Early utility systems were localized, serving small numbers 

of nearby customers

 Systems grew as technology improved and utilities sought 

greater economies of scale

 States first regulated electric utility service as a matter of 

consumer protection (and investor preference)

 PUC of RI v. Attleboro Steam & Elec. Co. (1927)

 Held that Commerce Clause prohibited one state (RI) from 

regulating the rate charged by its utility for sales of power to utility 

in 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 for 

resale in interstate commerce

 Transmission of electricity in 

interstate commerce

 (Very) Limited “backstop” 

transmission siting authority

 See 16 U.S.C. § 824p

 Siting/Permitting of hydro plants

 Otherwise, no generation 

planning or siting control 

 Reliability of bulk power system

 State Public Utility Acts or similar

 See, e.g., VA. CODE ANN. §§ 56-235 et 

seq. and 56-576 et seq. (Electric Utility 

Regulation Act)

 Retail sales to end users

 Low-voltage distribution lines

 Siting of power plants and 

transmission lines

 See, e.g., MD. CODE ANN. PUB. UTIL. 

COS. § 7-207 (transmission and gen.)

 Resource planning; i.e. the 

generation types (coal, natural gas, 

renewable) used by a utility to 

serve customers

Federal Regulation (FERC) State Regulation (PUCs)
8

What is FERC?

 FERC is an Independent Regulatory Agency in the 

Executive Branch of the U.S. Government

 Created by Department of Energy Organization 

Act (1977)

 Five Commissioners, appointed by the President 

and Confirmed by the Senate, serve staggered fiveyear terms

 No more than three from a single political party

 President designates Chairman
Overview: What FERC Regulates in the 

Electric, Natural Gas and Oil Industries

Electric Power Industry 

 Interstate transmission rates and services

 Wholesale electric energy rates and services

 Corporate transactions, mergers, securities issued 

by 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 Power 

Act)
Natural Gas Industry

 Interstate transportation rates and services

 Interstate gas pipeline siting, construction, and 

related environmental matters

Oil and Products Pipelines

 Interstate transportation rates and services 

(common carrier regulation under the ICA)

FERC Also Regulates Closely-Related 

Natural Gas Industry and Oil Pipelines
What 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 for 

limited backstop)

 Siting of generating plants
FERC Jurisdiction 

 FPA Section 201 (16 U.S.C. § 824) grants FERC plenary 

jurisdiction over “the transmission of electric energy in interstate 

commerce and . . . the sale of electric energy at wholesale in 

interstate commerce”, including “all facilities for such 

transmission or sale of electric energy”. 16 U.S.C. § 824(b)(1).

 However, FERC jurisdiction “shall not apply to any other sale of 

electric energy,” and FERC “shall not have jurisdiction . . . over 

facilities used for the generation of electric energy or over 

facilities used in local distribution.” Id.
Transmission vs. Distribution

 FERC established a seven factor test to determine whether 

facilities are jurisdictional transmission or local distribution:

1. local distribution facilities are normally in close proximity to retail 

customers 

2. local distribution facilities are primarily radial in character

3. power flows into local distribution systems, and rarely, if ever flows out

4. when power enters a local distribution system, it is not reconsigned or 

transported on to some other market

5. power entering a local distribution system is consumed in a comparatively 

restricted geographic area

6. meters are based at the transmission/local distribution interface to measure 

flow into the local distribution system

7. local distribution systems will be of reduced voltage
Entities Subject to FERC Jurisdiction

 An entity that own or operate facilities used in transmission or 

wholesale of electric energy in interstate commerce is a “public 

utility” subject to FERC jurisdiction (16 U.S.C. § 824(e)).

 Federal, state and municipally-owned utilities and most electric 

cooperatives are excluded from definition of “public utility”, 

and thus not generally subject to FERC regulation (although 

they 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 Cooperative
FPA Requirements for Public Utility 

Rates and Services

 FPA Section 205 (16 U.S.C. § 824d)

 Requires that all rates and charges for the transmission or sale of 

electric energy , and rules and regulations affecting or pertaining to 

those rates (i.e., terms and conditions), must be “just and reasonable”

 Prohibits granting of “undue preference or advantage” in 

jurisdictional rates or terms and conditions of service

 Rates, charges, and terms and conditions must be filed with FERC 

with 60 days notice.

 FPA Section 206 (16 U.S.C. § 824e)

 Authority of Commission, on its own motion or on complaint, to 

remedy rates or terms and conditions that it finds are “unjust, 

unreasonable, unduly discriminatory or preferential”
FERC Rate Regulation

Wholesale Electricity – Almost entirely market-based rates

 Analyze sellers for market power in defined products and geographic 

markets, utilizing screens that assess market share and ability of 

seller to be “pivital supplier”

 RTO/ISO regions v. Non-RTO/ISO regions

Electric Transmission - Almost entirely cost of service-based rates

 The “Cost of Service” is the amount needed to cover operating 

expenses, taxes, interest, return of investment, and a reasonable rate 

of return on that investment

 Seeing increasing use of “negotiated” rates for new transmission 

facilities
Transmission Service Regulation –

“Open Access”

 Order Nos. 888/889 (1996)

 Open Access – Public utilities must provide non-discriminatory 

transmission service pursuant to an Open Access Transmission Tariff 

(OATT)

 FERC’s pro forma OATT establishes minimum requirements for service

 In short, public utilities must provide the same transmission service to others 

that they provide to themselves

 Functional Unbundling – Public utilities were required to separate 

transmission and generation or power marketing functions, and state 

separate rates for these functions

 Order Nos. 890 (2007) and 1000 (2011)

 Planning – Public utilities must participate in regional and interregional 

transmission planning processes

 Cost Allocation - Processes must include transparent ex ante cost 

allocation methods that meet certain principles (e.g., “beneficiary pays”)
Reliability Standards

 FERC approves and enforces reliability standards to provide for the 

reliable operation of the “bulk power system” (16 U.S.C. § 824o)

 Reliability standards are developed by the FERC-certified “Electric 

Reliability Organization” through industry stakeholder process and 

filed with FERC; FERC may then either approve or remand, but 

doesn’t write the standards (although it can direct that a new standard 

be developed).

 “Bulk power system” generally 100 kv and up, with certain inclusions 

of critical facilities and exclusion of non-critical facilities or facilities 

used solely in distribution

 Reliability standards cover planning, operations, communications, 

physical and cyber protection, etc. Do NOT require construction of 

specific 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 resources 

used to serve customers (e.g., RPS)

 States with restructured retail markets may have more limited authority 

over 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 of 

congestion where states have not acted on a siting application within one year

* Local governments (counties) have this authority in some states
Electricity Restructuring by State
Regional 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 and 

ancillary services to facilitate competition among multiple sellers

 Energy markets: bid-based, security constrained economic dispatch with 

locational marginal pricing

 Capacity markets: some RTOs/ISOs operate centralized markets to 

procure capacity to meet the region’s resource adequacy requirements

 Ancillary services: markets allow multiple sellers to provide support 

services (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” generation

Current Jurisdictional Issues

 Demand Response in Wholesale Markets

 EPSA v. FERC at Supreme Court

 Resource Adequacy in RTO/ISO Regions

 RTO/ISO role in ensuring sufficient resources

 Participation of state-ordered generation in centralized 

capacity markets
“Bilateral” Markets

 Vertically-integrated utilities operating their own balancing 

authorities (BAs)

 Buyers and sellers contract at arms-length, with mostly 

market-based rates (some cost-based rates where sellers have 

market power)

 FERC approves market-based rate authority before entity can make 

sales, 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 interconnection 

service 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 itself
Thanks!

Questions?

Jeff Dennis

(202) 502-6532

jeff.dennis@ferc.gov