1.) Because the utilities operated as monopolies, wholesale and retail  electricity pricing was regulated by the federal government and the states. The Federal Government Has Taken Steps to Increase Competition in the Electricity Industry and Wholesale Markets

The goal of federal efforts to restructure the electricity industry is to  increase competition in order to provide benefits to consumers, such as  lower prices and access to a wider range of services, while maintaining  reliability. Over the past 13 years, the federal government has taken a series  of steps to encourage this restructuring that generally fall into four key  categories: (1) market structure, (2) supply, (3) demand, and (4) oversight. Electricity Markets Have Changed in Several Important Ways Since Restructuring Began

Federal restructuring efforts, combined with efforts undertaken by states,  have created a patchwork of electricity markets, broadened electricity  supplies, disconnected wholesale and retail markets, and shifted how the  electricity industry is overseen. Taken together, these developments have  produced some positive and some negative outcomes for consumers. In particular, efforts at wholesale restructuring have led to  a significant change in the way electricity is supplied in those markets. Those states that have not  restructured their markets retain key roles in overseeing and regulating  electricity markets directly and indirectly through such activities as setting  rates to recover costs and siting of power plants and transmission lines and  other capital investments needed to supply electricity. However, as consumers in California and across other parts of the  West will attest, there have been many negative effects, including higher  prices and market manipulation. Making Wholesale Market Structures Work Better Together

With several fundamentally different electricity market structures in place  simultaneously in various parts of the country, it is important that these  markets work together better in order to meet regional needs. Providing Timely, Clear, and Consistent Signals to Help Ensure Adequate Regional Supplies

Broadening of restructured electricity markets has made the federal  government, the states, and localities more dependent on each other in  order to ensure a sufficient supply of electricity. Connecting Wholesale and Retail Markets

As we have previously reported, for competitive wholesale electricity  markets to provide the full benefits expected of them, it is essential that  they be connected to the retail markets, where most electricity is sold and  consumed. This  occurs when consumers do not see prices at the retail level that accurately  reflect the higher wholesale market prices. While FERC has been supportive of increasing the role of demand-response  programs in the wholesale markets that it oversees, there have been limited  efforts to do so in retail markets—these markets are outside FERC’s  jurisdiction and overseen by the states. While authority over the  electricity industry is divided, restructuring has served to make the success  of each of the oversight efforts more interdependent, and FERC and the  states will have to rely on each other, as well as on new entities, to a greater  degree than before to be successful. GAO staff who contributed to this report are listed  in the appendix. Electricity Markets: Consumers Could Benefit from Demand Programs,  but Challenges Remain. Electricity Restructuring

Electricity Restructuring: 2003 Blackout Identifies Crisis and  Opportunity for the Electricity Sector. Energy Markets: Results of Studies Assessing High Electricity Prices in  California.
Why GAO Did This Study

The electricity industry is in the midst of many changes, collectively referred to as restructuring, evolving from a highly regulated environment to one that places greater reliance on competition. This restructuring is occurring against a backdrop of constraints and challenges, including a shared responsibility for implementing and enforcing local, state, and federal laws affecting the electricity industry and an expected substantial increase in electricity demanded by consumers by 2025, requiring significant investment in new power plants and transmission lines. Furthermore, several recent incidents, including the largest blackout in U.S. history along the East Coast in 2003 and the energy crisis in California and other parts of the West in 2000 and 2001, have drawn attention to the need to examine the operation and direction of the industry. At Congress's request, this report summarizes results of previous GAO work on electricity restructuring, which was conducted in accordance with generally accepted government auditing standards. In particular, this report provides information on (1) what the federal government has done to restructure the electricity industry and the wholesale markets that it oversees, (2) how electricity markets have changed since restructuring began, and (3) GAO's views on key challenges that remain in restructuring the electricity industry.

What GAO Found

Over the past 13 years, the federal government has taken a variety of steps to restructure the electricity industry with the goal of increasing competition in wholesale markets and thereby increasing benefits to consumers, including lower electricity prices and access to a wider array of retail services. In particular, the federal government has changed (1) how electricity is priced--shifting from prices set by regulators to prices determined by markets; (2) how electricity is supplied--including the addition of new entities that sell electricity; (3) the role of electricity demand--through programs that allow consumers to participate in markets; and (4) how the electricity industry is overseen--in order to ensure consumer protection. Federal restructuring efforts, combined with efforts undertaken by states, have created a patchwork of wholesale and retail electricity markets; broadened electricity supplies; disconnected wholesale markets from retail markets, where most demand occurs; and shifted how the electricity industry is overseen. Taken together, these developments have produced some positive outcomes, such as progress in introducing competition in wholesale electricity markets, as well as some negative outcomes, such as periods of higher prices. We have identified four key challenges to the effective operation of the restructured electricity industry: making wholesale markets work better together so that restructuring can deliver the benefits to consumers that were expected; providing clear and consistent signals to private investors when new plants are needed so that there are adequate supplies to meet regional needs; connecting wholesale markets to retail markets through consumer demand programs to keep prices lower and less volatile; and, resolving divided regulatory authority to ensure that these markets are adequately overseen. The theme cutting across each of these challenges is the need to better integrate the various market structures, factors affecting supply and demand, and various efforts at market oversight.