FERC Authority as Least Cost Regulator

GAO discussed the Federal Energy Regulatory Commission's (FERC) authority to affect least cost investment strategies by utilities, the degree to which it has exercised such authority, and the limitations which may hinder FERC from serving as a model least cost regulator for the Nation. FERC is responsible for regulating the transmission and wholesale sales of electricity in interstate commerce and for licensing non-Federal hydroelectric projects. Six areas of FERC jurisdiction relating to least cost investment are: (1) rate structure and revenue requirements; (2) hydroelectric permits and licenses; (3) wheeling; (4) pooling; (5) rate approval for Federal power marketing administrations; and (6) cogeneration and small power production. Least cost investment strategy centers around three concepts: (1) providing electricity at the least possible cost by considering all types of generation; (2) reducing the need to expand generating facilities; and (3) reducing or containing production costs through efficiency improvements. To date, FERC ratemaking and other regulatory activities have not generally been oriented toward encouraging electric utilities to develop least cost investment strategies. FERC can establish ratemaking policies that will encourage or influence utilities to examine their investment decisions from a least cost perspective. Rate setting authority is the principal means FERC has of influencing utility management decisions. It has not developed rate treatment policies for two cost of service elements, conservation and construction, that influence a utility's least cost investment strategy. Rate treatment for construction work in progress costs is another area where FERC has legal authority to influence a utility's least cost investment strategy, but FERC has not done so. A number of factors serve to limit FERC ability to fully develop a role as the Nation's model least cost regulator of electric utilities. Although recent legislation appears to broaden some aspects of FERC authority to affect least cost investment, such legislation may be difficult to apply because it is restrictive.