Electricity Markets:

FERC's Role in Protecting Consumers

GAO-03-726R: Published: Jun 6, 2003. Publicly Released: Jun 27, 2003.

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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, Congress asked us to describe FERC's role in protecting electricity consumers.

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. 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.

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