Electricity regulation in the United States: overview | Practical Law

Electricity regulation in the United States: overview | Practical Law

A Q&A guide to electricity regulation in the United States.

Electricity regulation in the United States: overview

Practical Law Country Q&A 8-525-5799 (Approx. 20 pages)

Electricity regulation in the United States: overview

by Mark F Sundback, Bill Rappolt and Andrew P Mina, Sheppard Mullin LLP
Law stated as at 01 Jul 2020USA (National/Federal)
A Q&A guide to electricity regulation in the United States.
The Q&A gives a high-level overview of the domestic electricity market, including domestic electricity companies, electricity generation and renewable energy, transmission, distribution, supply and tax issues. It covers the regulatory structure; foreign ownership; import of electricity; authorisation and operating requirements; trading between generators and suppliers; rates and conditions of sale and proposals for reform.


Electricity market

1. What is the role of the electricity market in your jurisdiction?


Electricity in the US is a critical commodity on which the residential, commercial and industrial sectors rely. Electricity is broadly regulated based on two separate categories:
  • Wholesale sales and transmission of electricity in interstate commerce. The Federal Energy Regulatory Commission (FERC) is responsible for regulating these.
  • Local distribution and sales of electricity at retail. States generally have jurisdiction over local distribution, retail sales of electricity within a state from one entity to an end user, and the siting and construction of transmission facilities, generation facilities and distribution systems. Some municipalities and electric co-operatives self-regulate their own similar activities. The electrical grid in Texas is not electrically interconnected to any transmission grid outside of Texas. Retail and wholesale sales, transmission and distribution of electricity in Texas are managed by the Electric Reliability Council of Texas (ERCOT) and regulated by the Public Utility Commission of Texas.
Other bodies (such as the Nuclear Regulatory Commission (NRC), the Department of Energy (DOE) and the North American Electric Reliability Corporation (NERC)) play critical roles in other facets of the electricity industry. In addition, the Commodity Futures Trading Commission (CFTC) has jurisdiction over the sales of futures that do not include a physical transfer of the commodity. In many instances, there is an overlap of, or conflict between, one or more of these regulatory regimes, resulting in a complex web of legal, regulatory, economic, technical and environmental implications and considerations for sellers, consumers and regulators of electricity.

Government policy objectives

The DOE is the agency primarily tasked with establishing and implementing federal energy policies, whereas the FERC is responsible for regulating the more technical aspects of the electricity industry. However, the FERC often uses its authority over wholesale electric markets to implement broader federal policies. For example, the current Presidential Administration has pursued policies that would bolster the continued viability of the coal, nuclear and natural gas fired generation. Accordingly, the FERC recently established minimum offer prices in certain wholesale capacity markets for renewable resources receiving state subsidies, ostensibly to make coal- and gas-fired generators more competitive in those markets. Therefore, although the FERC is responsible for regulating the technical aspects of the electricity industry, it often employs technical rules designed to implement broader governmental policies.
States also have energy regulatory bodies that implement their policies, which address issues that are not reserved for the federal government and differ from state to state, including renewable portfolio standards.

Recent trends

Recent trends include the following:
  • States are expected to lead the way on renewable energy use and development in the US, as the current US Administration has signalled increased support for traditional energy sources, such as coal, nuclear and natural gas. Therefore, states will likely drive renewable energy development and policy by continuing to propose and enact legislation aimed at:
    • increasing renewable energy growth;
    • establishing renewable energy generation targets; and
    • removing barriers to entry into the market for renewable energy.
    • The FERC can implement policies that seek to limit the number of retiring US coal and nuclear plants. FERC Chairman Neil Chatterjee has expressed concerns regarding the increasing number of coal plant retirements, and has led actions that support financially troubled coal generation facilities. The FERC also recently implemented changes to its rules regarding qualifying facilities that may materially disadvantage small renewable projects.
  • There is continued growth in the demand response sector, as the cost of small-scale solar facilities (such as rooftop solar panels) has continued to decrease. The FERC defines demand response as "changes in electric usage by end-use customers from their normal consumption patterns in response to changes in the price of electricity over time, or to incentive payments designed to induce lower electricity use at times of high wholesale market prices or when system reliability is jeopardised". As demand response resources continue to reduce overall electricity consumption:
    • utilities must continue to find ways to accurately forecast load, and will seek alternative revenue streams to make up for lost sales due to demand response; and
    • state and federal regulators will likely continue to enact and refine demand response policies.

Regulatory structure

2. What is the regulatory framework for the electricity sector?
The regulatory authorities include the following:
Federal Energy Regulatory Commission (FERC). The FERC is an independent agency under the DOE. It regulates the rates, terms and conditions of:
  • Wholesale sales in interstate commerce. An example of a wholesale sale of electricity is an independent power producer selling power to a load serving entity (LSE) (such as a local utility company or a competitive retail supplier), but not subsequently reselling that power at retail to end users.
  • Transmission of power in interstate commerce by public utilities. This occurs when electricity is transported (or is commingled with electric energy that has been transported) over at least one state boundary through a transmission line that is interconnected with the transmission grid. A public utility is defined as "any person who owns or operates facilities subject to the jurisdiction of the Commission” under the Federal Power Act (FPA) (with certain limited exceptions).
In addition to regulating wholesale sales and transmission of electricity in interstate commerce, the FERC also:
  • Reviews certain mergers, acquisitions and corporate transactions by public utilities.
  • Licenses and inspects private, municipal, and state hydroelectric projects.
  • Issues and enforces mandatory reliability standards.
  • Monitors and investigates electricity markets.
  • Administers accounting and financial reporting regulations and rules.
  • Authorises facilities at international borders.
  • Can order refunds on certain sales made by federal power marketing administrations (for example, the Bonneville Power Administration) made at rates above just and reasonable levels.
State public utilities commissions. Individual state public utilities commissions generally have jurisdiction over retail sales of electricity in the state where the sales are made, unless deregulated by the state. State public utilities commissions regulate the terms and conditions associated with the sales of electricity by investor-owned LSEs to end users (such as residential, industrial and commercial consumers). State public utilities commissions (and sometimes other state agencies) also regulate the siting and physical construction of generation (except hydroelectric and commercial nuclear facilities), transmission and distribution facilities. When a proposed facility traverses two or more states, the project developer must secure authorisation from each affected state's public utilities commission and any other relevant state agencies.
Nuclear Regulatory Commission (NRC). The NRC is an independent federal agency that has jurisdiction over:
  • Radioactive materials for medical, industrial and academic use.
  • Commercial power reactors, research and test reactors, and new reactor designs.
  • Transportation, storage, and disposal of nuclear material and waste, and the decommissioning of nuclear facilities.
  • Physical security, source security and cyber security of facilities handling such radioactive materials.
The NRC does not regulate sales of electricity generated by nuclear reactors.
North American Electric Reliability Corporation (NERC). The NERC is a not-for-profit international regulatory authority that is overseen by the FERC and the Canadian government. The NERC promotes reliability and security of the bulk power system in North America by:
  • Developing and enforcing its Reliability Standards;
  • Annually assessing seasonal and long-term reliability;
  • Monitoring the bulk power system through system awareness; and
  • Educating, training and certifying industry personnel.
The NERC has jurisdiction over users, owners and operators of the bulk power system in the US, Canada and certain parts of Mexico.
Department of Energy. The DOE is responsible for advancing the national, economic and energy security of the US by implementing policies regarding nuclear power, fossil fuels and alternative energy resources. Federal power marketing agencies are part of the DOE.
Environmental Protection Agency (EPA). The EPA regulates greenhouse gas emissions from power plants. The EPA regulates, among other things, greenhouse gas emissions from power plants. Under the current Administration (which has expressed an interest in enhancing the viability of coal-fired generation), the EPA has rolled or scaled back a number of environmental protections, ostensibly to ensure the continued viability of fossil-fired generation facilities.
Commodity Futures Trading Commission. The CFTC regulates derivatives markets for potential abuses and certain commodity trades (including electricity hedges and trade options). The CFTC does not have jurisdiction over physical sales of electricity.
See box, The regulatory authorities.

Electricity companies

Main companies

3. What are the main companies involved in electricity generation, transmission, distribution and supply?
As of April 2020, the five largest electric utilities in the US based on market value out of a total of approximately 3,300 electricity providers are:
  • NextEra Energy (USD113.1 billion).
  • Dominion Energy (USD64.6 billion).
  • Duke Energy (USD62.1 billion).
  • Southern Company (USD60 billion).
  • American Electric Power (USD41.1 billion).
These five utilities represent around 73% of the total market value of the ten largest electric utilities in the US (the values listed above may include assets not involved in the electric industry).


According to the US Energy Information Administration, at the end of 2019 the US had about 1,100,546 MW of total utility-scale electricity generating capacity. The three largest sources of that electric generating capacity were natural gas-fired plants (43%), renewables (24%) and coal (21%).


As of 2016, the five largest US transmission project owners (excluding the Tennessee Valley Authority) are:
  • American Transmission Company;
  • Pacific Gas & Electric Company (PG&E).
  • American Electric Power.
  • Xcel Energy.
  • Dominion.
While transmission facilities are usually privately owned (except for federal power marketing and state authorities and co-operatives), many are controlled and operated by large regional entities (that is, independent system operators (ISOs) or regional transmission organisations (RTOs)). ISOs and RTOs (overseen by the FERC) are responsible for controlling, managing and operating the bulk electric transmission grid. There are seven ISOs/RTOs in the US (ERCOT is the only one not regulated by the FERC), each of which is responsible for managing the transmission grid in a particular region of the country:
  • California ISO (oversees the bulk power system in California and Nevada).
  • ERCOT (oversees the electrical grid within most of Texas).
  • Midcontinent ISO (manages the bulk power system across 15 Midwestern states and one Canadian province).
  • New England ISO (oversees the bulk electric grid across six New England states).
  • New York ISO (manages the bulk power system in New York).
  • PJM (oversees the bulk electric system across several Mid-Atlantic states).
  • Southwest Power Pool or SPP (oversees the bulk power system in portions of Arkansas, New Mexico and Northern Texas to as far north as Wyoming).


According to a recent DOE study, there are a total of 144 distribution utilities in the US. As of 2014, the largest power distribution companies in the US (ranked by number of customer accounts in the US) are:
  • Duke Energy.
  • Exelon.
  • FirstEnergy.
  • AEP.
  • PG&E.


Electric energy is typically supplied to end users by load serving entities (LSEs). LSEs can meet demand by:
  • Self-generating power needed to satisfy demand.
  • Purchasing it from other entities (such as generation companies or power marketers) under bilateral agreements.
  • Obtaining it in organised wholesale auction markets operated by ISOs/RTOs.
  • Shedding load (that is, the partial deliberate shutdown of electric power to prevent failure of part of or the entire system when the demand strains its capacity).

Unbundling requirements

The FERC issued Order No. 888 in 1996, requiring all public utilities that own, control or operate facilities used for transmitting electric energy in interstate commerce to have a FERC-approved open access transmission tariff (OATT) on file. An OATT sets out the terms and conditions under which a transmission utility must offer open, non-discriminatory transmission service to customers. Order No. 888 requires all OATTs to follow the FERC's mandatory pro forma OATT, unless the FERC has already granted a specific waiver of the OATT requirements based on the applicant's unique circumstances.
FERC's Order No. 2000 encouraged the creation of ISOs and RTOs. ISOs and RTOs are FERC-regulated entities responsible for controlling, managing and operating the bulk electric transmission grid (see above, Transmission). Participation by public utilities in an ISO/RTO is voluntary, but all public utility transmission owners participating in an ISO/RTO must relinquish control (but not ownership) of their transmission facilities to the ISO/RTO. The central control of transmission facilities is intended to benefit all stakeholders by providing regional co-ordination of transmission.
Each ISO and RTO has a tariff on file with the FERC, which sets out the rules, procedures, terms and conditions applicable to the services it provides. Each of the ISOs/RTOs operates an organised energy market, which acts as a clearinghouse for sales of products, such as day-ahead or real-time energy. A number of the ISOs/RTOs also operate organised capacity markets. The design of each of those markets is unique to the particular ISO/RTO. The common feature is that each auction for an applicable product (energy, capacity or certain ancillary services) is designed to produce a market clearing price that is paid to all sellers that clear in the auction. Discretionary additional compensation (for example, uplift payments) may also be available. Outside of the systems operated by an ISO or RTO, electric utilities generally continue to provide unbundled transmission service under each utility's own FERC-approved tariff.
At the distribution level, regulation varies by state. Some states (most typically in the Northeast, but also in other regions, for example, Illinois and California) offer retail choice where a local utility provides distribution service in a franchised service territory, but electric energy as a commodity is offered for sale to end users by competitive suppliers. Other states use a traditional regulatory scheme where each local utility offers distribution and the sale of energy to end users as a bundled product.

Foreign ownership

4. Are there any restrictions concerning the foreign ownership of electricity companies or assets?
Foreign entities are not restricted from owning electricity assets in the US. However, any foreign entity that takes ownership of electric companies or assets is (as a minimum) subject to the same statutes, regulations and policies that apply to domestic companies, including rules requiring disclosure of direct and indirect owners' identities. Further, the jurisdiction of the Committee on Foreign Investment in the US is very broad, and given the infrastructure security concerns that have been expressed recently in Executive Order 13920, this may be a more sensitive area than in the past.


5. Are there any special insolvency regimes that apply to companies operating in this sector?
There has been recent litigation concerning the extent to which the FERC has jurisdiction over a public utility's cancelled power contracts resulting from the utility's bankruptcy. Some courts have held that the FERC is simply another litigant in a bankruptcy proceeding, without a separate role as a decision-maker in the process of determining of an executory wholesale power contract should be rejected. The FERC itself has held otherwise.

Import of electricity

6. To what extent is electricity imported and/or exported?

Import of electricity

In 2018, the US imported approximately 51.5 TWh of electricity from Canada, which has an abundance of inexpensive hydropower.
In 2018, the US imported 6.8 TWh from Mexico.

Export of electricity

In 2018, the US exported approximately 13.8 TWh of electricity.

Electricity generation and renewable energy

Sources of electricity generation

7. What are the main sources of electricity generation?

Fossil fuels

In 2019, approximately 67% of utility-scale net electric generation in the US came from fossil fuels, including natural gas, coal, and petroleum. Natural gas, coal and petroleum accounted for 33%, 32% and 0.6% of utility-scale net electric generation in the US (respectively); coal's share continues to decrease.

Nuclear fission

In 2019, nuclear accounted for approximately 19% of utility-scale net electric generation.

Renewable energy

In 2019, total renewables accounted for 17% of utility-scale electric generation.
8. Are there any government policies, targets or incentives in place to encourage the use of renewable or low carbon energy?

Renewable energy targets

States with RPS programs have established various renewable energy targets. There is currently no federal renewable energy target mandate.
See box, Renewable energy sources.

Government policies/incentives

At the federal level, the most well-known programs currently incentivising the use of renewable energy are:
  • The production tax credit (PTC). The PTC is a per-kilowatt-hour tax credit for electricity generated by qualified renewable energy resources. Eligible resources include wind, closed- and open-loop biomass, geothermal, solar, small irrigation power, municipal solid waste and some hydroelectric resources.
  • The investment tax credit (ITC). The ITC is a tax credit given to eligible renewable resources that is based on the amount invested in the project. Solar, fuel cells, and small wind generators are eligible for a 30% tax credit. Geothermal, microturbines, and combined heat and power resources are eligible for a 10% tax credit.
  • Cash grants under section 1603 of the American Recovery and Reinvestment Act. These are cash payments offered to eligible renewable energy developers in lieu of tax credits. They are usually equivalent to 30% of the project's total eligible cost basis.
  • Modified Accelerated Cost Recovery System Depreciation Schedule (MACRS), which is a federal incentive that provides for a five-year accelerated depreciation schedule for all ITC-eligible renewable facilities and large wind projects.
At the state level, states have been proactive about increasing integration and proliferation of renewable resources, primarily through the use of renewable portfolio standards (RPSs). Currently, 29 states, Washington, DC, Puerto Rico and the US Virgin Islands have RPSs that require utilities to sell a specified percentage or amount of electricity from renewable resources. There is no federal RPS program, unless the renewable facility constitutes a "Qualifying Facility' under Public Utility Regulatory Policies Act of 1978 (PURPA).
9. What are the main obstacles to the development of renewable energy?
A major obstacle to the development of renewable energy is the abundance of relatively inexpensive and highly price-competitive natural gas. This is largely the result of the evolution of drilling technologies (such as hydraulic fracturing) which have increased access to supplies. In the electricity market, natural gas has displaced fossil and other fuels (such as coal and nuclear) as a primary fuel source for the generation of electric energy. In addition, tax credits previously made available to renewable facilities are scheduled to sunset. However, renewable energy facilities relying on the Continuity Safe Harbour to qualify for the ITC or PTC were granted an additional year to complete projects that commenced in 2016 and 2017 in order to receive such credits.
Another potential obstacle to the development of renewable energy is the transmission interconnection process. Renewable energy projects that rely on interconnections with the transmission grid may face barriers to entry due to the expense and regulatory delay associated with the development of, and interconnection with, new transmission lines needed to transmit energy from such resources.
Additionally, the current Administration and its appointees to the FERC are attempting to bolster the viability of fossil resources, even if it is as the expense of renewable resources. The FERC has enacted several policies aimed at making fossil-fired resources more competitive with renewable resources or increasing challenges to renewables as renewables are otherwise becoming increasingly economic.
10. Are there any plans to build new nuclear power stations?
According to the NRC, there are 14 new nuclear power reactor applications, most of which are located in the eastern half of the US.

Authorisation and operating requirements

11. What are the authorisation requirements to construct electricity generation plants?
Siting and construction of electric generation facilities (with the exception of commercial nuclear and hydroelectric facilities) are regulated at the state and local levels. State public utilities commissions are generally responsible for granting or denying developers authorisation to construct electric generation facilities. If the state public utilities commission finds that a proposed project complies with the relevant state utility laws and standards, the commission will generally issue what is commonly referred to as a Certificate of Public Convenience and Necessity (CPCN). The CPCN authorises the project developer to construct the facility with the specifications set out in the CPCN. As part of the process of obtaining a CPCN, a developer must also usually obtain permits from various federal or state agencies to comply with environmental or cultural resource requirements. Local governments cannot issue certificates, but they often can reject some or all aspects of a proposed project if they find that the project will violate local land use or other ordinances.
The federal government has siting authority over nuclear and hydroelectric facilities. The NRC is responsible for licensing nuclear facilities. The FERC (under Part I of the FPA) regulates hydroelectric dam licensing and safety. A hydroelectric project developer must file an application for licence or exemption from licensing if the project will either:
  • Be located on a navigable waterway of the US
  • Occupy US lands
  • Utilise surplus water or water power from a U.S. government dam;
  • Be located on a body of water over which Congress has Commerce Clause jurisdiction, project construction occurred on or after 26 August 1935, and the project affects the interests of interstate or foreign commerce.
Licences for hydroelectric facilities are generally for 30 to 50 years.
12. Are there any requirements to ensure new power stations are ready for carbon capture and storage (CCS) technology, or requiring a plant to retrofit CCS technology once this is ready?
There are currently no federal requirements mandating that power plants be equipped or retrofitted with carbon capture technology. The US has attempted to pass several federal laws (such as the American Clean Energy and Security Act) to provide for carbon capture and sequestration technology subsidies. However, none of these federal bills were signed into law. Only one fossil fuel electric generation plant is currently in operation in the US that is capturing carbon dioxide in large quantities (the Petra Nova plant in Texas).
13. What are the authorisation and main ongoing requirements to operate electricity generation plants?
At the state level, each state has its own technical, safety and environmental standards applicable to generation facilities. It is important to maintain any requisite environmental authorisations (such as water and emissions permits). Some states have enacted environmental standards that become increasingly stringent over time, ultimately dooming existing fossil plants.
At the federal level, hydroelectric facilities are bound by the terms set out in their FERC-issued licenses and applicable FERC regulations. Generators must also satisfy applicable NERC requirements. Generators seeking to participate in an organised wholesale market (that is, sell power into an ISO/RTO) must also comply with FERC's standards and the ISO's/RTO's FERC-approved tariff. For example, generators must obtain authorisation from the FERC to sell their output at wholesale. This authorisation is usually given to sell energy and capacity at market-based rates if the generator does not have (or has mitigated) market power. Additionally, under PURPA, certain eligible generators (referred to as qualifying facilities) can receive special rate and regulatory treatment if they continue to meet eligibility criteria (including compliance with operating and efficiency standards). Independent power producers typically operate as qualifying facilities under PURPA, or sell only at wholesale so that they qualify as "exempt wholesale generators" under the Public Utility Holding Company Act of 2005. This makes them exempt from certain reporting and accounting requirements that otherwise apply to their operations.
The NRC periodically renews nuclear power plant licences by conducting a technical review, an integrated plan assessment and an environmental study.
The Occupational Safety and Health Administration has issued rules concerning utility employee workplace safety.
14. What requirements are there concerning connection of generation to the transmission network or a distribution network?
Interconnection of generation facilities with the transmission grid is regulated by the FERC. The FERC has established rules and standards for all interconnections, and has issued Standard Interconnection Agreements & Procedures for large and small generators. Each transmission utility (including every ISO/RTO) is bound by and required to incorporate these rules. Interconnection agreements cannot impose additional obligations on the parties unless the FERC has authorised terms and conditions that are different from the applicable standard form. The FERC has issued several orders that set out policies governing the interconnection of different sized generators, including separate standards applicable to facilities with over 20 MW, 20 MW or less, and large wind generation facilities. The FERC can require the establishment of an interconnection between transmission and generation facilities.
The NERC also has standards and rules regarding the interconnection of generation facilities to the bulk transmission grid.
15. What requirements are there concerning the decommissioning of a generation plant at the end of its period of operation?
Decommissioning power plants can be subject to various state and federal requirements. However, the decommissioning of generating facilities (other than nuclear and hydroelectric generating facilities) is not subject to a standardised set of federal energy regulatory requirements, apart from environmental regulations.
Power plant decommissioning generally involves electric generation equipment being shut down and operating permits being terminated. Unused fuel and other materials are removed or sold, and generating equipment and on-site structures can be sold as scrap if they are not repurposed. The land on which the facility is located may need to be remediated or redeveloped.
Coal-fired plants may present some environmental issues in closing (for example, ash pits).
However, owners of hydroelectric facilities can surrender a licence or exemption only upon FERC approval, and the decommissioning of nuclear generating facilities is highly regulated by the NRC, and generally must correspond to one of several FERC-authorised models. There may also be state rules and requirements applicable to the termination of service from, and the removal of, electric generating equipment, and the rights of affected employees, which will vary by state.

Electricity transmission

Authorisation and operating requirements

16. What are the authorisation requirements to construct electricity transmission networks?
The siting and construction of transmission facilities is generally regulated by state regulatory agencies. A transmission facility may not be constructed in any state unless authorised by the state public utilities commission (and, in some cases, other state agencies) in each affected state. Each state has its own rules, regulations and guidelines concerning the siting and development of transmission facilities. State review of transmission projects may include environmental impact studies, a public hearing for affected landowners and considering whether the exercise of eminent domain is appropriate.
Federal projects are subject to the National Environmental Policy Act 1969, which requires the applicable federal agency to review the environmental impacts of the proposed project.
17. What are the authorisation and main ongoing requirements to operate electricity transmission networks?
The FERC regulates the transmission of electric energy in interstate commerce (see Question 3, Transmission). Every public utility transmission owner and operator of facilities that are used to transmit electricity in interstate commerce must have an OATT on file with the FERC (see Question 3, Unbundling requirements). The OATT sets out the minimum rules and procedures with which all interstate public utility transmission owners and operators must comply. In regions of the country where an ISO or RTO manages and controls the transmission system (such as California, Midwest, Mid-Atlantic and Northeast regions) each ISO and RTO is regulated by the FERC and is bound by the provisions established in its FERC-approved OATT.
All interstate transmission facilities must be operated in accordance with NERC's reliability standards, which set out rules and requirements for the reliability of the bulk electrical transmission system.
Authorisation must be obtained from the DOE to transmit electric energy across the international borders with Canada and Mexico.

Transmission charges

18. How are the charges and conditions for the transmission of electricity regulated?
The FERC has mandated the unbundling of services so that electric generation and transmission are offered as separate products (see Question 3, Unbundling requirements). The FPA requires that charges for transmission rates are just and reasonable, and that no public utility grants undue preference or advantage to any entity or charges different rates to similarly situated transmission customers. Transmission rates vary, but the most common types are:
  • Point-to-point, which is based on the distance the electricity travels.
  • Postage stamp, which is a single rate regardless of distance between contractual receipt and delivery points.
  • Licence plate, which is based on pre-identified zones.
Transmission customers may have to pay multiple rates if the power is transmitted over multiple areas or zones (known as pancaked rates) or if the power is transmitted across the systems of more than one transmission provider. In general, transmission rates are cost-based (unlike wholesale generation rates which are typically market-based).
Additionally, the Energy Policy Act 2005 directed the FERC to offer a number of incentive-based interstate transmission rate treatments.

System balancing

19. How is electricity supply and demand balanced?
Electricity supply and demand is balanced through self-supply, bilateral contracts or ISO/RTO electricity auctions (see Question 3, Supply). Electric utilities not participating in an ISO or RTO must effectively balance their supply with customer demand by relying on their own generation facilities (that is, self-supply), purchasing electricity under bilateral contracts and/or shedding load. Electric utilities must have sufficient energy and capacity to meet demand. Supply and demand in ISO/RTO regions is balanced through reverse auctions, in which the ISO/RTO matches bids for supply with bids for demand. In the event of an emergency involving a shortage of generation or transmission, temporary interconnection and transmission of energy can be ordered under the FPA.

Electricity distribution

Authorisation and operating requirements

20. What are the authorisation requirements to construct electricity distribution systems?
State public utilities commissions (and other related agencies in some states) generally have jurisdiction over the construction of electricity distribution systems. In both retail choice states and states subject to traditional bundled regulation, utilities are granted franchised service territories for their distribution operations. It is unusual for a state public utilities commission to permit a different utility to provide any distribution services in a utility's franchised service territory. A state public utilities commission reviews applications to construct new electric distribution systems or upgrades to determine whether they comply with state laws and regulations. State public utilities commissions typically look at environmental, technical, public interest and economic factors in deciding whether to approve a project.
In addition, co-operatives and municipalities may construct distribution facilities with financing assistance from the US Department of Agriculture.
21. What are the authorisation and the main ongoing requirements to operate electricity distribution systems?
The ongoing requirements to operate electricity distribution systems vary by state. Such laws and regulations aim to ensure that facilities continue to meet minimum reliability, safety and operational standards. Additionally, local governments and/or municipalities in some states own and operate local distribution systems, effectively taking the place of a local investor-owned utility company. Also, local distribution facilities in some states are owned and operated by the customers they serve (known as a co-operative). Municipalities and co-operatives are subject to limited regulation by the FERC, and are mostly self-regulated (although the extent of self-regulation and governmental oversight varies from state to state).
Investor-owned utilities may have to obtain and pay for a franchise granted to serve a municipality (depending on the state and locality).

Distribution charges

22. How are the charges and conditions for the distribution of electricity regulated?
State public utilities commissions regulate the charges and conditions of service for electric distribution service by investor owned utilities. Typically, a state public utilities commission sets rates to recover the costs traditionally incurred by a utility to provide service (that is, the cost of debt, operation and maintenance costs, administrative and general expenses, plus a return of and on equity).
There is a wide array of cost allocation methodologies adopted at the state level such as the "Average & Excess" methodology, the "1 Coincident Peak" methodology and a variety in between. Changing the allocation methodology can substantially affect an aggregate share of costs of a customer class and the cost borne by an individual customer.
State public utilities commissions also can establish customer charges, demand charges and energy charges, which are all components of a total rate. State utilities commissions also may determine which are more appropriate: demand charges (which do not vary with use) or volumetric charges (which vary with use). Some states also provide for utilities' recovery of the costs of items that are non-traditional or are subject to potential volatility in cost levels (such as environmental or fuel costs). Such costs may be collected through clause recoveries that are in addition to base rates, which provides greater assurance that the specific amount of that cost is collected (regardless of the level of the utility's sales).

Electricity supply

Authorisation and operating requirements

23. What are the authorisation and the main ongoing requirements to supply electricity to end consumers?
State public utilities commissions have jurisdiction over the supply of electricity to end users. The scope of this jurisdiction depends on whether the state has authorised retail choice (that is, retail competition) or not. In retail choice states, retail customers can choose between the franchised public utility serving their territory and other competitive suppliers when purchasing electricity. Retail customers with retail choice are not charged for the commodity of electric energy under "cost-based rate regulation". Instead (under state law) they can purchase electricity at market-based rates from competitive suppliers (other than a franchised public utility, although the latter may arrange default supplies). Therefore, while state commissions may regulate the price, terms and conditions associated with retail electricity from franchised public utilities, state commissions typically do not regulate electricity prices from competitive suppliers (although they typically license the suppliers and impose other conditions on them).

Trading between generators and suppliers

24. How is electricity traded between generators and suppliers?
Some parts of the US still have vertically-integrated utilities that generate their own electricity. Where that is not the case, electricity is typically traded between generators and suppliers through bilateral contracts or organised wholesale markets. For example, a generator and a supplier (such as an LSE) can enter into a bilateral agreement for the sale and purchase of power. Suppliers can also purchase power at market-based rates from organised wholesale electricity markets, such as those operated by ISOs and RTOs. Entities that are deemed to own qualifying facilities can obligate their local utility to purchase electricity from them at the utility's avoided cost, although the FERC has been taking steps to diminish the opportunity to do so.
25. How is electricity trading (between generators and suppliers) regulated?
Electricity trading between generators and load serving entities typically occurs through one or both of the following:
ISO/RTO organised wholesale market transactions. ISOs/RTOs control, operate and manage the bulk transmission grid, and perform various market auctions that are intended to match supply and demand (see Question 3, Supply and Question 17). Sellers in these ISO/RTO organised wholesale markets must first have authority from the FERC to sell electricity at market-based rates. Moreover, sellers and buyers in wholesale markets must comply with the rules and regulations of the FERC, and the applicable ISO/RTO OATT. Sellers that clear in an auction generally are paid the market clearing price (see Question 3, Unbundling requirements). If a wholesale seller is found to have violated conditions on its market-based rates (such as failing to show in reports filed on a triennial basis that it and its affiliates lack market power, or has not filed the required reports), its authorisation to charge market-based rates may be revoked.
Bilateral agreements. The supply of electricity can also occur through bilateral agreements between buyers and sellers of a specified amount of electricity at a given price. Wholesale sales of electricity in interstate commerce are regulated by the FERC and can be market-based (most sales are market-based) or cost-based. The most common example for the latter is the payment of a rate to a reliability must run unit (which is usually a unit that cannot operate economically but is needed for reliability). See Question 24.

Electricity price and conditions of sale

26. How is the price for electricity and conditions of sale regulated at the consumer and wholesale level?


Rates and conditions at the consumer level (that is, retail) are established by state public utilities commissions, or, in the case of municipally-owned utilities and co-operatives, by the governing board or city council. Rates established by a state public utilities commission will usually contain several components, including energy charges, demand charges, customer surcharges and sometimes environmental surcharges (which are often used to fund state clean energy programs).


Wholesale rates and conditions are regulated by the FERC under the FPA, which requires that rates for wholesale sales in interstate commerce must be just and reasonable and not unduly discriminatory. The FERC can grant (at the utility's request), market-based rate authorisation, which allows the utility to charge the market price of the electricity product if the utility lacks (or has mitigated) market power in a particular market. Alternatively, the FERC may regulate rates and conditions through cost-of-service rates, although cost-based wholesale rates now are the exception, as cost-based rates are much less common than market-based rates. (See Question 22.)
Additionally, four federal power marketing agencies (PMAs) operate electric systems, and market and sell the electrical output primarily of federally-owned and operated hydroelectric dams in 33 states. The FERC does not regulate federal PMA activities, but it does review their rates.

Statutory powers

27. Do companies involved in the generation, transmission, distribution or supply of electricity have any statutory powers to undertake work (for example, compulsory purchase powers or street works powers)?
The actions utilities may take in the intrastate retail market are subject to state jurisdiction, with each state having different rules and regulations. If a utility acquires a franchise from a municipality, it likely will be given power to access existing rights of way. Generally, a utility's retail tariff specifies the scope of actions the utility can take. However, utilities should always exercise caution before engaging in any activity, as a retail tariff does not always provide an exhaustive list of authorised activities. Once a retail utility is franchised to serve an area, it may gain eminent domain or condemnation rights subject to authorisation by the relevant regulatory agency.

Tax issues

28. What are the main tax issues arising on electricity generation, distribution, transmission and supply?
Disputes may arise regarding accumulated deferred income taxes (ADIT) and deductibility of interest on debt. The treatment of ADIT is a highly litigated area in rate cases. ADIT arises from differences in the methods of computing taxable income for the various taxing bodies (such as the Internal Revenue Service) and income for regulatory accounting purposes. These differences result in utilities initially collecting from ratepayers money (that is not yet needed) to pay taxes. Additionally, disputes may arise over the methodologies used to calculate tax deductions associated with interest on debt.
Qualifying renewable facilities may be eligible for the PTC, ITC and/or cash grants offered by the IRS.


29. Are there any insurance requirements from the regulatory authority?
The Price-Anderson Act was passed to cover liability claims of individuals who suffer personal or property injury caused by nuclear accidents involving NRC-licensed nuclear plants. The Price-Anderson Act requires NRC licence holders and DOE contractors to execute indemnity agreements to cover liability for personal injury and/or property damage if there is a nuclear incident. NRC licensees must pay insurance premiums each year to help cover the costs associated with payouts to harmed individuals.


30. What reform proposals are there for the regulation of the electricity sector?
The US Government has attempted to enhance the viability of fossil-fired generation facilities and fuel sources. For example, after the DOE had proposed to require the FERC to address threats to the resiliency of the electric grid by "premature retirements" of coal and nuclear resources and following extensive criticism of the DOE's position, the FERC ultimately declined to take further action on the DOE's proposal.
However, the FERC has more recently implemented other policies that enhance fossil-fired resources' competitiveness relative to renewable resources. For example, the FERC has imposed on renewable resources participating in several wholesale capacity markets the obligations to bid into procurement auctions at a price that is materially above their incremental dispatch costs. The FERC also has revised regulations that previously encouraged renewable resources sales as “qualifying facilities”.
Additionally, the FERC recently issued an order adopting significant revisions to its regulations implementing avoided cost rate setting and other items under PURPA, and has also issued rules and guidance regarding the implementation of certain renewable energy initiatives, such as net metering. In another proceeding, two FERC commissioners indicated that they might be sympathetic to asserting jurisdiction over net metering programs that have traditionally been overseen by individual states.
The FERC also continues to explore ways to better co-ordinate the electric and natural gas industries in light of electric generators' increasing reliance on natural gas as a combustion fuel. The FERC has explained that any outages and reliability problems should not be the result of the lack of co-ordination between the electricity and gas industries (example, due to timing differences between auctions in the organised wholesale electric markets and gas pipeline nomination cycles). The FERC has continued to actively engage affected participants to try to better align timing between the electric and gas industries so that potential outages are obviated or minimised.
Additionally, former US Vice President Joe Biden has indicated that, if elected President, he would push for the elimination of carbon pollution from power plants by 2035, as well as other electricity reforms, such as in the transportation sector.

Contributor profiles

Mark F Sundback, Partner

Sheppard Mullin LLP

T +1 202 662 2755
F +1 202 662 2739
E [email protected]
W www.sheppardmullin.com
Professional qualifications. District of Columbia, US; US Court of Appeals for the First, Fifth, Ninth, Tenth and DC Circuits
Areas of practice. Natural gas pipelines; federal energy regulatory; state energy regulatory; electricity; oil and gas.
Recent transactions
  • Advised on a wide array of issues under the Federal Power Act and related federal and state statutes involving the regulation of energy industry participants.
  • Counseled and represented before the Federal Energy Regulatory Commission (FERC) multiple merchants of electric power in the Southeast US and New England.
  • Successfully defended entities doing business in the Pacific Northwest that have been accused of charging rates for electricity inconsistent with the standards of the FPA. In particular, Mark has been involved in rebutting allegation by California market participants that a wholesale power merchant had and unlawfully exercised market power.
  • Challenged NYISO rules regarding compensation for generators that could operate using dual fuels, including oil.
  • Successfully defended a client against claims of undue price discrimination and bad faith in wholesale electric markets.
  • Appeared before the regulatory commissions of a number of states on behalf of end users and coalitions of market participants.
  • Represented market participants in arbitrations involving fuel prices for generation facilities and disputes involving market rules of RTOs.
  • Served as first chair in a number of contested proceedings before the FERC.
  • Involved in compliance matters.
  • Involved in arbitration actions involving disputes between generation units and regional transmission organisations, and arbitrations involving the pricing of fuel for generation assets.
Non-professional qualifications. JD, Columbia Law School, 1981; BA (magna cum laude), Dickinson College, 1978
Professional associations/memberships
  • Listed in Best Lawyers in America.
  • Ranked as a Super Lawyer in Washington Lawyer Magazine.
  • Ranked as a leading attorney by Chambers & Partners USA, Chambers & Partners Global, and The US Legal 500.
  • Rated AV by Martindale-Hubbell for more than 15 years.
  • "In Pursuit Of Fair Compensation For Grid Reliability", Law360 (6 July 2010).
  • "Can an RTO's Performance Be Measured?", Law360 (30 March 2010).
  • "FERC's Proposed Disclosure of the Names of Office of Enforcement Targets", Law360 (15 March 2010).

Bill Rappolt, Partner

Sheppard Mullin LLP

T +1 202 662 3063
F +1 202 662 2739
E [email protected]
W www.sheppardmullin.com
Professional qualifications. District of Columbia, US, 2017; Maryland, US, 2010: US Court of Appeals for the District of Columbia, and the US Court of Appeals for both the Fourth and Ninth Circuit
Areas of practice. Federal energy regulatory; state energy regulatory; electricity; oil and gas.
Recent transactions
  • Represented energy industry participants before federal and state agencies that supervise energy markets and their participants.
  • Due diligence and regulatory counseling on various renewable projects, including issues of interconnection, jurisdiction, tax equity financing and rates.
  • Represented an RTO, electric generators, commercial class electric customers and independent electric transmission providers.
Non-professional qualifications. JD, American University Washington College of Law; BA (Economics), University of Maryland, 2003
Professional associations/memberships. Member of the Energy Bar Association; Member of the Maryland Bar Association.

Andrew P Mina, Associate

Sheppard Mullin LLP

T +1 202 662 3055
F +1 202 662 2739
E [email protected]
W www.sheppardmullin.com
Professional qualifications. District of Columbia, US, 2017; Massachusetts, US, 2012
Areas of practice. Federal energy regulatory; state energy regulatory; electricity; oil and gas.
Recent transactions
  • Representing energy companies in a variety of federal and state regulatory matters, particularly before the FERC and state utility commissions.
  • Counselling electric utilities and other industry participants on regulatory issues, including those related to electric transmission development, utility ratemaking, wholesale and retail electric markets and compliance.
  • Due diligence and regulatory counseling on various renewable projects, including issues of interconnection, jurisdiction, tax equity financing and rates.
Non-professional qualifications. JD, Boston College Law School, 2012; BS, The Pennsylvania State University, 2009
Professional associations/memberships. Vice Chair, American Bar Association-Energy Infrastructure, Siting and Reliability Committee; Member of the Energy Bar Association.
  • FERC Rejects Net Metering Petition, But Fight is Far From Over (2020).
  • FERC Energy Capacity Orders Invite Lawsuits, Uncertainty (2020).
  • FERC's New Return on Equity Formulas are Out of Sync (2020).
  • A Blow To Crypto Miners Disputing Local Energy Rates (2020).
  • Walking the Path of Utilities' Ownership of Wind and Solar (2020).
  • FERC Issues Revised Guidance Regarding Return on Equity Calculations (2020).
  • Securing the U.S. Bulk Power System: An Assessment of Executive Order 13920 (2020).
  • FERC Reaffirms Controversial Energy Capacity Decisions: Insights and Analysis (2020).
  • FERC Orders, Notices, and Other Guidance Regarding the Novel Coronavirus (2020).
  • FERC Continues to Squeeze Renewable Resources Participating in Wholesale Electric Capacity Markets (2020).
  • FERC Holds the Line on One-Year Limit for State Review of Clean Water Act Certifications for Interstate Natural Gas Pipelines (2020).
  • Considering Blockchain In The Electricity Industry (2018).
  • The Climate Report (Winter 2017).
  • FERC, Facing Rare Loss of Quorum, Delegates Additional Authority to Its Staff, but Uncertainties Remain (February 2017).
  • The Climate Report (Summer 2016).
  • The Climate Report (Spring 2016).
  • IRS Extends Windpower Developers' Time to Receive Production Tax Credits (May 2016).