Regulation of electricity utilities – sales of power

Approval to sell power

What authorisations are required for the sale of power to customers and which authorities grant such approvals?

FERC has jurisdiction over sales of power at wholesale in interstate commerce other than sales by federal or state governmental bodies and rural cooperatives that are indebted to the Rural Utilities Service (RUS) or cooperatives that sell less than 4 million MWh of electricity per year. Retail sales of electricity are regulated at the state level, with variation from state to state.

Power sales tariffs

Is there any tariff or other regulation regarding power sales?

Tariffs and contracts pursuant to which public utilities sell power generally must be filed with FERC (wholesale sales) or the applicable state PUC (retail sales) before service commences to allow the applicable regulatory entity an opportunity for review, as well as for public notice and comment. Under the FPA, FERC has jurisdiction over wholesale rate-making and is charged with assuring the rates, terms, and conditions pursuant to which public utilities offer wholesale power sales are ‘just and reasonable’.

FERC permits wholesale sales of power at market-based rates if the seller demonstrates a lack of market power by passing a series of horizontal and vertical market screens. FERC has commenced investigations to determine whether utilities should retain their authority to sell power at market-based rates after finding that certain utilities did not pass at least one of the screening tests. In response, several utilities voluntarily agreed to implement cost-based rate caps in the areas where FERC found a presumption of market power and revoked the market-based rate authority of a utility.

Sellers of wholesale power that have applied for and received FERC approval to sell power pursuant to a market-based rate tariff can thereafter enter into new power sales contracts and transactions without filing the contracts before commencing service. Instead, such sellers file quarterly reports of their power sales contracts and transactions under their market-based rate tariff. In the absence of a showing of a lack of market power, FERC regulates the rates for wholesale sales under cost-of-service rate-making principles, and each new contract must be filed with FERC before the commencement of service.

Unlike the situation with respect to transmission tariffs, FERC does not generally dictate specific non-price terms and conditions in wholesale power sales contracts but does dictate specific non-price terms and conditions in the market-based rate tariff. The regulatory structure allows complaints to be filed challenging contracts or reported power sales transactions as being unjust, unreasonable, unlawful or discriminatory.

Retail sales are regulated at state level, with significant variation from state to state. In the absence of a competitive retail market, retail rates are typically established based on cost of service.

Rates for wholesale of power

Who determines the rates for sales of wholesale power and what standard does that entity apply?

Section 201 of the FPA grants FERC exclusive regulatory authority over the wholesale sale of electricity in interstate commerce by jurisdictional entities. The state utility commissions retain regulatory authority over wholesale sales of electricity by purely intrastate wholesale sales (in practice, this class is limited to wholesale sales in Alaska, Hawaii and ERCOT), as well as wholesale sales by non-jurisdictional entities such as rural electric cooperatives, municipal utilities, and state- or federally created utilities.

FERC’s exclusive regulatory authority was reaffirmed in a recent decision by the US Supreme Court that invalidated a state incentive programme that provided a guaranteed income to new natural gas-fired generating facilities to ensure the facility would clear the wholesale capacity auction operated by the RTO. A unanimous US Supreme Court struck down the programme, finding that subsidy artificially suppressed wholesale power prices, and therefore infringed on FERC’s exclusive authority to regulate wholesale sales of electricity in interstate commerce.

The FPA grants FERC authority over all jurisdictional wholesale sales of electricity to ensure that wholesale rates are just, reasonable and not unduly discriminatory or preferential. Although traditionally FERC had employed a cost-of-service ratemaking inquiry when reviewing wholesale rates to realise this statutory mandate, FERC has also allowed the market to determine wholesale power rates where it has found that the seller and its affiliates lack or have mitigated vertical or horizontal market power, and have adequately restricted affiliate transactions with captive customers. Once FERC approves a jurisdictional entity’s generic market tariff, the jurisdictional entity is free to negotiate with other parties in the marketplace over the specific rate charged for the wholesale sale without having to seek FERC approval of the agreement before commencing service.

Public service obligations

To what extent are electricity utilities that sell power subject to public service obligations?

At the retail level, electric utilities have traditionally operated under an obligation to serve. In exchange for what is generally an exclusive service territory and an opportunity to recover prudently incurred expenses through cost-based rates, utilities are obliged to provide service to all customers in that service territory, as well as to plan adequately for the future needs of customers. In states that adopt retail competition, certain electric utilities may still retain an obligation to provide service to customers who do not select a competitive supplier.

FERC has recognised that wholesale electricity sales are generally governed by private contract, rather than by regulatory order or an express obligation to serve.