The scheme of regulation of the US electric power industry was based on historic structure of electric industry from the early 1900s.  In many states the structure of the electric industry changed with introduction of “restructuring” in the 1990’s. However, regulation did not change to accommodate new industry structure. Thus, today’s regulatory scheme is a mismatch authority and impact.

The electricity industry in the US was privately funded due to the fact that early electric service was considered a luxury especially when the only service provided was electric lighting. The original customers were either businesses and wealthy consumers or municipalities looking to install street lighting which had demonstrated value in reducing street crimes at night.  These new investor-owned electric utilities (IOU) were state based and vertically integrated. The IOU assets included all necessary generation, transmission to state’s population centers and distribution grid bringing electricity to residences, commercial and industrial customers. The IOU also may have had some municipal owned electric distribution utilities as wholesale customer.  While generating with company owned power stations to meet all local demand the IOU would on occasion buy or exchange electricity with adjacent IOU for economic or when own power plants were shut down for maintenance. Originally regulated at the municipal level, beginning with California, New York and Wisconsin in 1907, state legislatures set up state regulatory agencies to regulate the new public service companies (electric, gas and telephone) with state public service commissions (also called public utility commissions).

The state public service commissions (PSCs) engaged in integrated resource planning, approval of construction authorization for new power plants including siting, approval of construction authorization for new electric transmission lines including granting of state authority of eminent domain including siting. This the state PSC would regulate IOU asset acquisition, construction, and set retail rates (producing 95%of revenue.)

The US Congress approved the establishment of the Federal Power Commission in 1920 (later renamed the Federal Energy Regulatory Commission FERC) to regulate wholesale sales of electricity. The setting of these rates was mostly to protect small municipal wholesale customers from monopoly pricing by IOU. Wholesale sales were not a major revenue source for most IOUs before restructuring.  The FERC also was given authority to set prices for “third party access” to transmission lines for “wheeling” (municipal issue).

As of 2023 thirteen states determined that independent power plant operators could produce electricity at lower cost than if power plants remained under owner of the IOU. They required the IOU’s to sell generators. Upon sale of the power plants the new system required these power plants to sell electricity to IOUs at wholesale putting them under FERC jurisdiction. (Mistakenly called “deregulation”). The states restructured today are: Connecticut, Delaware, District of Columbia, Illinois, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Texas.

In the 13 states which had restructured their electric industry the sold, and any newly built “independent”, power plants were now under FERC jurisdiction. Under the 1920’s statute FPC/FERC must find that rates for wholesale power sales were “just and reasonable.” The historic method of establishing that rates were “just and reasonable” was by the FERC’s inspection of “cost of service.”

However, the establishment of wholesale power markets led the FERC to use “market-based pricing” as basis for “just and reasonable” and this new method was approved by US Supreme Court. Thus, the FERC regulates as “just and reasonable” the rates of the US power markets “Independent System Operators” or “Regional Transmission Organization” by careful monitoring of the market operations, traders and trades.