FERC’s Role And How Their Work Impacts Your Business

Posted on January 3rd, 2011 by

The Federal Energy Regulatory Commission (“FERC”) is an independent government agency that regulates the transmission and wholesale sales of electricity in interstate commerce.[1] FERC enacts regulations to lower wholesale electric prices by promoting greater competition in electric wholesale markets.  The results of its regulations indirectly promote lower energy costs for consumers.  FERC’s regulatory control over the Bulk Electric System’s (“System”) [2] reliability standards provide System wide infrastructure needed to maintain the efficient operation of electric wholesale markets.  FERC achieves both of these objectives by adopting rules under which electric wholesale markets operate and approve reliability standards that ensure System reliability.

Regulation of Wholesale Markets

Wholesale electric markets provide a platform for low cost energy suppliers to competitively bid into electric wholesale markets and provide downward pressure on wholesale electric prices.  Prior to 1996, energy markets consisted of bilateral trading between vertically integrated utilities. [3] Due to a lack of competitive forces in these markets, FERC began to encourage the formation of regional auction based markets to provide a platform for both low cost independently owned generation resources and non-traditional resources[4] to equally participate in markets. [5] With greater access to electric wholesale markets, low cost energy suppliers could be more effective in influencing lower wholesale prices.  To promote greater electric wholesale competition, FERC had to replace the existing rules that prohibited independent generation resources and non-traditional resources from successfully competing in wholesale electric markets.

In 1996, FERC began establishing rules that removed discriminatory practices in electric wholesale competition.  In an effort to further increase wholesale competition, FERC began to institute rules which ensured the equal treatment of traditional and non-traditional resources.  FERC continues to propose rules that encompass these principles for each of the regional market operators to adopt and tailor to its individual market characteristics.  Each regional market operator then submits its wholesale market rules for FERC’s approval. Finally, FERC reviews each rule before issuing its final approval to ensure that the proposed rules comply with FERC’s directives.  Through this practice, FERC allows low cost energy resources greater access to successfully compete in electric wholesale markets and indirectly lower wholesale electric prices.

Reliability Standards

Reliability standards provide System wide rules that interstate transmission operators[6] must comply with in order to maintain the reliable transmission of electricity.  Reliability standards support electric wholesale markets by ensuring the efficient and reliable transmission of electricity throughout the regional electric wholesale market.  Among other objectives, reliability standards target regional transmission congestion and blackouts.  These events can cause imbalances between supply and demand which in turn can create price abnormalities in electric wholesale markets.  To promote greater efficiency, FERC determined reliability standards derived from regional organizations, as opposed to local transmission operators, would be more effective in establishing a series of rules and practices to maintain System reliability.

In 1999, FERC encouraged the creation of voluntary regional reliability organizations to monitor the regional transmission system’s supply and demand.  In 2006, Congress authorized FERC to certify an electric reliability organization to propose and enforce mandatory reliability standards and over the entire System.  FERC then approved the North American Electric Reliability Coordinator (“NERC”) as the reliability coordinator.  NERC further divided itself into eight regional reliability coordinators covering the various regions of the United States and Canada.  The regional reliability coordinators ensure that its region is reliable by certifying transmission operators and balancing authorities[7].  These organizations operate in a synchronized effort ensure System reliability so that electric wholesale markets can effectively operate in a manner that will promote lower energy costs for consumers.

Editor Endnotes

[1]FERC does not regulate the local distribution of electricity to consumers. This includes retail electric rates.

[2] The Bulk Electric System typically  includes transmission lines which transmit electricity at 100 kV or higher.

[3] Vertical Integration of an electric utility exists where a utility owns and operates generation, transmission and distribution resources.

[4] Traditional generation resources include coal, natural gas and nuclear energy.  Non-traditional resources include renewable resources.

[5] The western (excluding California)and southeastern regions of the country continue to operate bilateral markets.  FERC monitors these markets through individual company reports, internal oversight and responses to complaints.

[6] Transmission operators ensure reliability of its own local transmission system.

[7]Balancing authorities monitor real-time transmission efficiency on the transmission system in its designated area.

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Written by Robert Clifford. Rob is a Boston-based attorney  who represents clients before the Federal Energy Regulatory Commission and state public utility commissions.

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