An extract from The Energy Regulation and Markets Review - Edition 10

Energy markets

i Development of wholesale electric energy markets

Throughout certain regions in the United States, ISOs and RTOs operate transmission facilities and administer organised wholesale electricity markets. FERC's Order No. 2000 imposed significant regulatory requirements upon ISOs and RTOs regarding the independence of an energy market administrator, the performance of the energy markets and the elimination of discrimination. FERC leaves considerable discretion to market participants to determine an ISO's or RTO's governance structure, geographical scope and type of market services.

The following seven ISOs and RTOs currently operate in the United States: PJM Interconnection, LLC (PJM), New York Independent System Operator Inc (NYISO), ISO New England Inc (ISO-New England), Midcontinent Independent System Operator Inc (MISO), Electric Reliability Council of Texas (ERCOT), Southwest Power Pool and California Independent System Operator Corp (CAISO). Of these RTOs, only ERCOT is not subject to FERC's regulatory oversight under the FPA, as it is deemed to be electrically isolated from the rest of the transmission grid in the continental United States. (Similarly, Alaska and Hawaii are not subject to FERC's regulatory oversight under the FPA, as their respective electricity transmission systems are not connected to the interstate transmission grid in the continental United States.)

While all the existing ISOs and RTOs administer some form of bid-based markets for one or more energy products (i.e., when the highest price bid for the marginal quantity of supply that satisfies the quantity demanded in any relevant period sets the market price for the product within that applicable region, node or zone), some provide real-time and day-ahead markets, while others do not. In addition, some of the ISOs and RTOs offer forward markets for the sale of capacity (i.e., the ability to produce electric energy) separate from other energy products.

ii Wholesale energy market rules and regulation

Each ISO and RTO develops its own market rules through the market participants' stakeholder approval process. Market rules for all ISOs and RTOs must be filed with and approved by FERC prior to implementation, except for ERCOT, whose market rules are subject to the exclusive jurisdiction of the Public Utility Commission of Texas.

iii Contracts for sale of electric energy at wholesale

The US electricity markets have a long history with bilateral power purchase and sale contracting at wholesale. Even when market participants are located within an applicable ISO or RTO (i.e., bidding or offering into the organised wholesale markets and scheduling flows through the ISO or RTO), market participants often enter into bilateral energy and capacity contracts as a means of hedging the volatility of market prices or providing a reliable source of supply. Bilateral contracts can be in the form of physical purchases and sales or financially settled purchases and sales. Some contracting parties use standardised industry form agreements, such as those developed by the Edison Electric Institute or the International Swap and Derivatives Association, and others negotiate individualised contracts. Physical sales of energy, capacity and ancillary services products in the wholesale markets are subject to FERC jurisdiction and associated contracts must either be filed with FERC or reported through quarterly reports.

iv Natural gas and oil commodity and transportation markets

Unlike in the electricity sector, there are no formal FERC-approved organised wholesale markets for oil and natural gas.

Sales of natural gas or oil commodities may be accomplished through trading platforms, such as the Intercontinental Exchange or bilateral contracts. As with purchase and sale agreements for electricity, bilateral agreements can be in the form of physical purchases and sales or financially settled purchases and sales. Some contracting parties use standardised industry form agreements, such as those developed by the North American Energy Standards Board, and others negotiate individual contracts.

Interstate natural gas pipelines are required to operate secondary markets for the transportation services they offer. Under FERC's rules, any shipper that has contracted for firm transportation service on a natural gas pipeline may release its contracted capacity to other shippers, either by publicly posting the availability of the pipeline capacity on an electronic bulletin board maintained by the pipeline and accepting offers for it, or, if certain criteria are met, in a privately negotiated, but publicly posted, transaction with prices capped at the pipeline's tariff rate (except for releases of one year or less for which the release rate is uncapped).

Given the limited scope of its jurisdiction over oil pipelines under the Interstate Commerce Act, FERC historically has refrained from involvement in crude oil marketers' use of interstate oil pipelines except to ensure that the pipelines' rates, terms and conditions of service for all shippers are 'just and reasonable', and that marketers and other affiliates of oil pipeline companies do not receive preferential treatment in rates, terms and conditions of service.

v Retail energy market regulation

Retail energy markets are regulated at the state and local levels. Across much of the United States, retail consumers buy electricity and natural gas from local utilities, many of whom remain vertically integrated, at rates and under terms and conditions set by local regulators. Since the mid 1990s, there has been a move in some states to unbundle commodity generation or natural gas service from distribution services and allow retail consumers to purchase these commodity services from competitive retail suppliers.