To avoid blackouts and other disruptions, the amount of electricity customers demand must be continually balanced with the amount of electricity power plants supply. This balance is essential because electricity cannot be economically stored. The operators of the electricity system, who oversee the complex network of thousands of power plants and power lines, collectively called the grid, coordinate this process. The continental United States is divided into three large regional electricity systems (East, West, and Texas). Changes in demand or supply within each of the three regions can affect the entire region, reinforcing the need for coordination. Preserving this balance is challenging because customers use sharply different amounts of electricity through the course of the day and year. Typically, demand rises through the day and reaches its highest point— called the peak—in late afternoon. In some parts of the country, average hourly demand can be up to twice as high during late afternoon as it is during the middle of the night, when it is the lowest. In addition to the daily variation in demand, electricity demand varies seasonally, mainly because air conditioning accounts for a large share of overall electricity usage in many parts of the country during the summer. In some cases, peak usage can be nearly twice as high during the summer as it is in the winter. Regardless of when electricity is used, the electricity network must have sufficient generating capacity to meet the highest levels of demand to avoid blackouts. A variety of power plants, ranging from “baseload” plants designed to operate nearly all the time to “peakers” that generally operate only a few hours per day in the summer, are used to meet demand through the day and year. Baseload plants are generally the most costly to build, but they generally have the lowest costs for generating electricity on an hourly basis. In contrast, peakers are much less costly to build but much more costly to operate. The use of costly power plants that are seldom used results in higher electricity prices. In general, grid operators maximize the amount supplied by the baseload plants. However, as demand rises through the day and through the year, they must use plants that are more costly to operate. Because of this need to use more costly plants, the differences in the overall costs of meeting hour-to-hour demand are sometimes quite large. For example, the average cost of generation can rise tenfold from when demand is at its lowest at night to when it is at its highest in the late afternoon. Although the cost of generating electricity during peaks can be quite high, these periods are generally short and account for only a small percentage of the hours during a year. According to one expert, although the 100 highest priced hours of the year account for only about 1 percent of the hours in a year, they can account for 10 to 20 percent of the total electricity expenditures for the year. Regardless of how often or how long demand reaches its highest levels, power plants must be built to meet at least this level of demand to avoid blackouts. Because the cost of building and operating these seldom-used plants must be recovered through higher electricity prices, the need to build and use them adds directly to these prices. A combination of federal, state, and local governments, as well as a private entity oversee aspects of the electric industry. The federal government, through FERC, oversees the interstate transmission of electricity and the operation of wholesale markets—competitive markets in which power is bought and sold by utilities and other re-sellers. FERC has the statutory responsibility to assure that prices in these markets are “just and reasonable.” As noted, FERC has historically done this by approving rates to recover justifiable costs and providing for a regulated rate of return. FERC now seeks to meet its statutory obligation by establishing and maintaining competitive markets, believing that competitive markets will produce prices that are just and reasonable. As part of this oversight, FERC has changed a number of rules to allow, for instance, new suppliers to enter competitive wholesale markets by granting them “market-based rate authority.” In essence, this authority permits suppliers to sell electricity in these markets at market-based prices. In contrast, FERC does not currently limit access of large buyers—including those who resell to retail buyers. To further competition, FERC also approves the creation of new regional entities to operate the electricity grid. In addition to overseeing the daily balancing of supply and demand, some of these grid operators also operate wholesale markets for electricity. States, through their public utility commissions or equivalent, oversee retail markets—markets directly serving customers. In this regulatory role, state commissions have historically approved utility plans for power plants, transmission lines, and other capital investments needed to supply electricity; they have also set rates to recover these costs and provide the utility with an approved profit margin. Under this arrangement, regulated electricity prices have historically been set as a single price, generally an average of the costs of serving a wide customer class, such as residential customers. Thus most of today’s electricity system is a hybrid— competition setting wholesale prices and regulation largely setting retail prices. In addition, neither FERC nor the states generally have jurisdiction over electricity entities owned by cities, such as the Los Angeles Department of Water and Power, or utilities owned by their customers, such as rural electric cooperatives and local public utility districts; these entities account for about 25 percent of the wholesale market and are self- regulated by an elected board. In addition to involvement by federal and state agencies, a private membership organization made up of large electricity providers in the United States—the North American Electric Reliability Council (NERC)— establishes technical and operational standards to maintain the reliable operation of the electricity networks. However, membership in NERC and adherence to its standards are currently voluntary, and it cannot penalize nonmembers who do not adhere to these standards. Among other NERC standards, utilities must maintain specific amounts of power in reserve in the event that demand rises to a higher level than expected or supply is interrupted, such as when a power plant has to shut down unexpectedly. In addition to FERC’s direct regulatory oversight, the federal government influences the electricity sector through the Department of Energy (DOE). Broadly, DOE formulates national energy policy, funding research and development on various energy-related technologies (e.g., energy-efficient air conditioners and refrigerators and other appliances); setting some standards for energy efficiency; analyzing energy issues; and disseminating information about energy issues to the states, industry, and the public. More specifically, DOE established the Office of Electric Transmission and Distribution in August 2003 “to lead a national effort to help modernize and expand America’s electric delivery system to ensure a more reliable and robust electricity supply.” This office worked jointly with FERC and the Canadian government to investigate the causes of the August 14, 2003, blackout in the northeastern United States and parts of Canada. Over the past 20 years, experts have begun to recognize the potential advantages of allowing customers to see and respond to market conditions. Historically, grid operators have maintained reliable operations by increasing or decreasing the amount of electricity supplied that was needed to meet changes in demand. However, industry experts have long said that allowing customers to change their demand in response to ongoing changes in prices or limitations in supply may offer cost and operating advantages over relying solely upon changes in supply. Further, these experts generally believe that only a small amount of demand, in total, may be needed to bring about these advantages. In this regard, FERC and DOE have said that demand-response is an important part of well-functioning electricity markets but is largely missing from today’s markets. In 2001 FERC staff concluded that demand-response could reduce market power, reduce price spikes, and reduce electricity bills, among other things. Over the past several years FERC has identified problems with some wholesale markets, such as periodic price spikes and efforts by some electricity suppliers to manipulate prices. Further, FERC has said that the absence of demand-response can worsen price spikes and allow suppliers to manipulate prices, both of which produce prices that are higher than its estimate of competitive prices. For example, in its 2002 proposed market design, FERC stated that if customers are allowed to respond to high prices, then price volatility and the ability of sellers to manipulate prices could be reduced. FERC has determined that several electricity sellers in the West manipulated prices during periods when supplies were scarce and that customers did not reduce demand in response to these high prices. Over the past several years, FERC has approved proposals by grid operators in New York State, New England, and California to incorporate demand-response into the wholesale markets they operate, but these efforts are unique to each grid operator and have not yet attracted significant participation. As part of a broader effort, referred to as Standard Market Design, to develop consistent rules for regional markets to promote more efficient and reliable electricity markets, FERC proposed a limited effort to encourage consistent demand-response in wholesale markets. However, this effort to implement demand-response was delayed because of resistance to certain aspects of the broad effort. In 2000, a DOE team studying a series of electric power outages in the U.S. found that the ability of customers to manage their demand in response to market prices was key to ensuring reliable electric service and the efficient functioning of competitive electric markets. More recently, DOE’s Office of Electric Transmission and Distribution believes that demand-response could help resolve price and reliability problems and plans a demand- response initiative as part of its strategy to help modernize the grid. Further, DOE’s Federal Energy Management Program has promoted awareness of demand-response programs, pointing out opportunities for electricity users to receive payment for reducing use during specific periods of time. The federal government is a large owner and user of commercial and other building space. As of September 30, 2000, the federal government owned about 3 billion square feet of office space and leased about an additional 350 million square feet.