FERC 101: Electricity Regulation and the Federal Energy Regulatory Commission
This explainer provides background on the Federal Energy Regulatory Commission (FERC) and its role as a regulator of wholesale electricity markets.
The Federal Energy Regulatory Commission (FERC) is a federal agency tasked with regulating interstate transmission of electricity, natural gas, and oil. In the electricity sector, FERC regulates interstate wholesale electricity transactions, sets reliability standards for the bulk power system, and licenses hydroelectric projects. Decisions at FERC affect the markets that determine wholesale electricity prices and in turn which power plants are built, which has numerous implications for the environment. This explainer provides background on FERC and its role as a regulator of wholesale electricity markets.
Many concepts in this explainer rely on those covered in past explainers, including “Electricity 101” and “US Electricity Markets 101.” Therefore, these explainers would be useful to read prior to this one.
What FERC Regulates (and What It Doesn't)
FERC serves as an economic regulator for interstate transmission of electricity and oversees the reliability standards for the bulk power system, the interconnected system of power plants and transmission lines. In this role, FERC must approve how rates are set for wholesale electricity and for transmission. FERC’s legal authority derives from the Federal Power Act, which tasks the agency with ensuring that wholesale rates are “just and reasonable” and not “unduly discriminatory or preferential.”
Regulation of Wholesale Electricity
FERC only regulates wholesale electricity transactions that cross state lines. As discussed in “US Electricity Markets 101,” regions differ with respect to electricity regulation. Some regions of the country chose to deregulate electricity and rely on organized wholesale markets operated by regional transmission operators (RTOs) to determine which plants will be dispatched and deployed and how wholesale prices are set. FERC regulates how these RTOs, which typically encompass multiple states, operate their wholesale markets.
By contrast, several states still rely on regulated, vertically integrated utilities that own and operate transmission, distribution, and generation infrastructure. FERC does not regulate these utilities, except to the extent that they trade with utilities in other states. The same is also true for the RTO in Texas (ERCOT), which runs wholesale markets exclusively for trade within the state. This means that ERCOT is not subject to the same federal oversight as other RTOs, which may have contributed to the Texas electricity crisis of 2021.
FERC also regulates electricity reliability under section 215 of the Federal Power Act. The North American Electric Reliability Corporation (NERC), a nonprofit organization, is responsible for creating enforceable reliability standards for the North American bulk power system. NERC then must submit these standards to FERC for approval. Reliability standards govern frequency and voltage levels, resource adequacy, cybersecurity, transmission planning, emergency preparedness and planning, and more.
While much of FERC’s regulatory power over electricity is limited to interstate wholesale electricity sales, the agency’s actions indirectly affect several components of the bulk power system. For example, FERC does not typically approve the construction of new transmission lines, which is normally up to states and local authorities. However, FERC does regulate transmission rates and cost recovery, which can influence how much transmission infrastructure gets built. Similarly, although FERC does not approve the siting of power plants, its regulation of wholesale electricity markets can affect what types of power plants are constructed.
FERC also does not directly regulate the distribution or sale of retail electricity to consumers, which falls under the jurisdiction of each state’s public utility commission. However, decisions at FERC affect wholesale prices, which can in turn affect retail prices.
How FERC Regulates Electricity
FERC regulates wholesale electricity by issuing orders. Some FERC orders are broad and address policy issues, which might require sweeping changes to existing rules, while others are more specific and routine, such as orders that approve or reject specific RTO tariff Tariffs are documents that contain rules on the operation of electricity markets and how rates are set. changes. FERC can issue orders of its own accord or in response to complaints filed with the agency. Under the Federal Power Act, all of FERC’s decisions must result in wholesale rates that are considered “just and reasonable.”
Some key examples of transformational FERC orders include Order 888, which required transmission owners to provide non-discriminatory access to their lines, thus enabling wholesale competition, and Order 1000, which changed transmission expansion to some degree by requiring transmission owners to participate in regional planning processes.
FERC also issues orders to approve RTO tariffs, which must comply with FERC’s other orders. RTO tariffs contain rules on how an RTO will operate wholesale markets in its territory. Tariffs include market rules such as those that keep prices from rising too high (market price caps) or otherwise influence market outcomes.
Stakeholders can influence FERC’s regulatory process by initiating a proceeding under section 205 or section 206 of the Federal Power Act. In a section 205 proceeding, a public utility (a term that includes RTOs) proposes changes to existing rates or market rules. The utility must prove that the proposed changes would result in “just and reasonable” rates. In a section 206 proceeding, the complainant challenges an existing rule as “unjust and unreasonable.”
FERC is an independent agency run by five commissioners nominated by the President and approved by the Senate. The President selects one commissioner as Chairman. FERC is bipartisan and by law cannot have more than three commissioners from one political party.
However, politics can still influence FERC decisions. Because the number of commissioners is odd, one party—usually the President’s party—typically has more members. This then influences voting outcomes, which require a simple majority.
While FERC’s decisions must result in rates that are “just and reasonable,” the interpretation of “just and reasonable” can vary from commissioner to commissioner and therefore can change as the composition changes. For example, some commissioners (mostly Democrats) have expressed support for the idea that incorporating some form of carbon pricing into wholesale markets is just and reasonable, while some (mostly Republican) commissioners have advocated that allowing state-subsidized resources to compete in the market on an equal playing field with non-subsidized resources creates rates that are unjust and unreasonable. These competing views can influence FERC’s agenda and the orders it issues.
The companion explainer, FERC 102: FERC’s Role in Grid Decarbonization, has more on this.
Kathryne Cleary is a senior research associate at RFF where her work centers around the Future of Power Iniative.
Karen Palmer is a Senior Fellow at Resources for the Future and an expert on the economics of environmental, climate and public utility regulation of the electric power sector. She also serves as the director of the Future of Power Initiative.