Lessons Learned From Electricity Restructuring:

Transition to Competitive Markets Underway, but Full Benefits Will Take Time and Effort to Achieve

GAO-03-271: Published: Dec 17, 2002. Publicly Released: Jan 16, 2003.

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The electricity industry in the United States is undergoing major change, the outcomes of which will affect every consumer. The industry is restructuring from one where electricity prices are set by regulation to one in which competitive markets set the price. GAO was asked to report on the extent to which federal and state actions, to date, have achieved the goal of restructuring. GAO discusses lessons learned from efforts to date.

The goal of restructuring the electricity industry is to increase the amount of competition in wholesale and retail electricity markets, which is expected to lead to a range of benefits for electricity consumers. These benefits include lower prices and access to a wider array of retail services than were previously available. Increasing competition, however, requires that structural changes be made to the electricity industry, such as allowing a greater number of sellers and buyers of electricity to enter the market. The federal government has taken steps to bring about these changes by, among other things, promoting and opening access to regional wholesale markets and proposing to standardize a market design for these markets. In addition, about one-half of the states have taken steps to introduce competition in retail markets, including allowing customers to choose their own electricity supplier. It is not possible to determine the extent to which the goal of restructuring- the development of competitive markets- has been achieved to date. Our review of studies, our own analysis, and our evaluation of monitoring activities of electricity markets indicate a mixed picture of how much progress the industry has made in developing competitive markets and the extent to which expected benefits have been achieved. While some progress has been made in introducing competition, it has proven difficult to measure the benefits of restructuring, and where measurement has been possible, the extent to which expected benefits of restructuring have been achieved is unclear. Recently, with the formation of its new Office of Market Oversight and Investigations, the Federal Energy Regulatory Commission has taken positive steps to look more broadly at the performance of electricity markets. On the basis of our review, we identified five key issues and lessons learned that will require careful consideration as part of restructuring. The solutions to these lessons may prove contentious and addressing them will take time and effort. Unless addressed, the following four lessons will limit competition and thereby diminish the ability of electricity restructuring efforts to achieve their full expected benefits: (1) Different rules apply to the various regional electricity markets; (2) The Federal Energy Regulatory Commission has limited jurisdiction in wholesale markets; (3) Wholesale and retail electricity markets have developed separately; and (4) Generation and transmission siting decisions are subject to federal state, and local government jurisdiction. In addition, a fifth lesson points out the need for better monitoring of market performance to determine how well restructured markets are functioning and the extent to which these markets provide consumer benefits.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help Congress ensure that the fullest benefits possible are achieved from electricity restructuring, and to better understand what progress has been made, the Chairman of the Federal Energy Regulatory Commission (FERC) should determine how restructured wholesale electricity markets are performing by developing and implementing a plan to collect necessary data and perform evaluative analysis. These data should be sufficient to allow evaluation of the competitiveness of these markets (including, but not limited to, the extent of market power, efficiency of the industry, and ease of market entry) and the expected benefits to retail consumers (such as lower retail prices and the availability of new products). Where possible and appropriate, FERC should work in concert with state and regional entities to take advantage of their knowledge, expertise, and access to important data relevant to the impacts of restructuring on consumers.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: FERC reports as of July 31, 2007, that it has taken a number of steps to implement this recommendation, including collecting more comprehensive information, reviewing market oversight data on a daily basis, regularly reporting to the Commission and public, and expanding efforts to work with States and regional entities. As such, FERC considers this recommendation fully closed and implemented. On July 28, 2004, FERC reported that its Information Assessment Team will identify gaps in FERC's data collection, and expects to propose changes to FERC regulations in the fall 2004.

    Recommendation: To help Congress ensure that the fullest benefits possible are achieved from electricity restructuring, and to better understand what progress has been made, the Chairman, FERC, should report annually to Congress and the states on the status of restructuring efforts, identify emerging issues and impediments to reaching FERC's goal of achieving national competitive wholesale electricity markets, and make appropriate recommendations to Congress and the states for changes to improve the functioning of these markets.

    Agency Affected: Federal Energy Regulatory Commission

    Status: Closed - Implemented

    Comments: On July 28, 2004, FERC reported that it implemented GAO's recommendation through the issuance of the "State of the Markets Report," which is issued annually by OMOI. The reports are presented by OMOI staff to the Commission before issuance and serve as an ongoing resource to FERC, state commissions, industry, and customers.

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