You’re Only as Good as Your Grid: Part II

Last week’s post covered the mechanics of how the power grid works and what the parts are. This week, we’re going to focus on the regulation of the power grid. What is so important about the regulation of the power grid, you might ask? The policies that rule the power grid have cost implications for consumers who use power (aka nearly everyone) as well as huge implications for moving towards a future that uses a greener, smarter grid . Regulation of the electrical grid happens at the international, national, regional, state and county levels. Decisions made at any of these levels can have effects that will be felt throughout the whole system. Understanding how all these different pieces of regulation fit together to build the robust, consistent electrical supply we are all used to is essential for thinking about how we might go about making the system more efficient and emit less greenhouse gas.

Regulatory Agencies of the Power Grid

While we will be almost exclusively focusing on the US energy market, it’s worth mentioning that the US grid is connected to both the Canadian and Mexican electricity markets. The US is a net importer of electricity from Canada, although this is a small portion of the energy market. The North American Electric Reliability Corporation (NERC) is a non-profit international regulatory body whose goal is to ensure the reliability and safety of the electrical grid throughout North America, and is overseen by the governments of both the US and Canada.

The physical electrical grid within the US is a system of three major interconnections. Each interconnected region is physically connected within that region, but there is minimal power exchange between the systems. The three main systems that operate in the US are the Eastern Interconnection, the Western Interconnection and ERCOT, which operates exclusively in Texas. The balancing authorities shown on the map are agencies that cooperate to ensure that the supply and demand for power are balanced at any particular moment in time.

Within the United States, the electrical grid is a complex network that extends across state lines. Therefore, there is a federal regulatory body, the Federal Energy Regulatory Commission (FERC) which regulates wholesale electricity sales and transmission of electricity across state lines. In addition, several other government agencies are involved in setting policy related to electricity. For example, the Department of Energy, which does not directly regulate electricity markets, but is responsible for setting national policy around energy security and alternative energy sources.  In addition, the Environmental Protection Agency regulates greenhouse gas emissions from power plants. Last, the Nuclear Regulatory Commission is involved in all activities related to nuclear material, which includes building new nuclear power plants. While all of these agencies are involved in energy policy, FERC is the federal agency which does the most heavy lifting in terms of implementing and enforcing the rules and regulations of electricity markets.

Until the 1990’s or so, states in the US ran what are known as regulated energy markets; in this situation, also known as a traditional wholesale market, utilities are vertically integrated meaning they  own the generation, transmission and distribution systems. However, following changes to federal policy (in particular the Energy Policy Act of 1992 and Order 888), opened the possibility of having deregulated energy markets. Since then, many Individual states have introduced deregulation; Nevada is the most recent state to have had the issue on the ballot, where the measure was defeated in November 2018.

There are two ways the market can be deregulated: retail deregulation, which allows consumers to choose their power provider, or wholesale deregulation, which creates a market in which power suppliers can sell their electricity to a single entity that distributes it to consumers. A wholesale deregulated market is administered by Regional Transmission Organizations (RTOs) or Independent System Operators (ISOs). There are technical differences between ISOs and RTOs, but for our purposes, we will treat them as being effectively the same. (If you are interested, there’s this Wikipedia page that spells out the differences.) There are 7 ISOs in the US; most are regional, except for ERCOT, which operates exclusively in Texas, CAISO, which operates in California and a very small part of Nevada and the New York ISO. The role of these organizations is to run the markets in which power generators compete to sell their electricity, in addition to managing and operating the transmission grid for electricity and ensuring that the price of electricity is fair for consumers.

Illustration of RTO/ISOs from FERC.

If you live in an ISO region on the map above, you buy electricity in a deregulated market. You still buy your power from your local distribution utility; but that utility is buying power on an open, bid-based marketplace for electricity in which generators can sell their power in real time. In the current US market, two-thirds of consumers are served by RTO/ITO administered marketplaces and one-third by traditional markets. Retail electricity choice, in which consumers themselves can choose their energy supplier (rather than purchasing power from a single distribution entity) is available in a smaller number of states; combinations of wholesale and retail deregulation are possible. For example, Georgia and Oregon offer retail choice for large commercial consumers, but do not participate in wholesale deregulated markets. Conversely, Kansas,
Oklahoma, and Minnesota are part of wholesale deregulated markets, but do not offer retail deregulation to consumers.

State Level Regulation of Electricity Providers

At the state level, a Public Utilities Commission (PUC) regulates the sale of electricity to consumers and other end users. Each state has a public utilities commission that operates within regional distribution systems; the role of these PUCs varies slightly depending on state and regional regulations. In regulated states, PUCs regulate all aspects of energy distribution, including generation, transmission and distribution of power to consumers. In deregulated markets, PUCs only regulate distribution; the RTO or ITO for the region oversees generation markets and regional transmission of power.

Outcomes for Consumers

So, what do all these interlocking energy policies actually mean for consumers of electricity. The shortest answer is that it depends a lot on what state you live in, but additionally, even a “deregulated” energy market is highly regulated; thus, while there is variation in electricity pricing, there aren’t wild fluctuations in power cost across states, time of day or time of year. The effect on of deregulation on consumer prices for electricity seems like a mixed bag; in Pennsylvania, energy prices have dropped from 15% above the US average to 4.4% below the US average. In Texas, which interestingly is deregulated but has a few regulated cities, deregulated consumers pay slightly more than regulated consumers (11.38 cents per kilowatt hour rather than 11.1 cents per kilowatt hour). (This is a tiny difference.) It seems like most of the major arguments in favor of energy deregulation center around consumer choice in the source of electricity, rather than the price of deregulated electricity.  This white paper from NREL suggests that deregulated energy markets have led to increased efficiency in electricity generation, but that factors such as natural gas prices have a greater effect on electricity pricing.

Next week, we’ll look in more detail at three case studies: Colorado, Washington and New Hampshire, to learn more about the ramifications of market regulation on how we consume electricity. Each of these states has a different profile of energy regulation and electricity portfolio, so they will provide interesting examples of how electricity markets play out in the real world. Additionally, the way these markets are organized provides different opportunities for consumer involvement in making choices about how electricity is generated.

My hope is that investigating our case studies will help make more clear how actual decisions about the electricity grid are made, and what the specific ramifications of those decisions are for consumers.

P.S. I am not going to cover the California energy markets, but there are some really interesting things going on there with regard to their electricity markets. This article from Vox provides a great summary, which was also really helpful for me while I was researching this post!

Other extremely helpful sources:

Electricity regulation in the United States: overview (Thomson-Reuters)

Electricity Regulation: United States

Regulated vs. Deregulated Electricity Markets

I Tried, and Failed, to Find Out Where My Electricity Comes From

Regulated and deregulated electricity markets

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