Federal Energy Regulatory Commission (FERC)

Federal Energy Regulatory Commission (FERC)

Investopedia / Madelyn Goodnight

What Is the Federal Energy Regulatory Commission?

The Federal Energy Regulatory Commission (FERC) is an independent agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines as well as licensing hydropower projects.

Key Takeaways

  • The Federal Energy Regulatory Commission (FERC) is responsible for oversight of the energy industry, including power plants, transmission lines, pipelines, and other infrastructure.
  • FERC is also responsible for oversight over energy markets. It can punish companies for fixing or manipulating energy prices.
  • FERC requires the companies it regulates to follow a Uniform System of Accounts. This makes it easier to conduct oversight.
  • FERC has been criticized for its lenience towards the energy industry. The Sierra Club and other environmental groups have won several lawsuits for stricter scrutiny of natural gas permits.
  • FERC has five commissioners, of which no more than three can be from the same political party. In August 2021, FERC had two Democratic commissioners, two Republicans, and one open seat.

Understanding the Federal Energy Regulatory Commission

The Federal Energy Regulatory Commission’s stated mission is to assist consumers in obtaining reliable, efficient, and sustainable energy services at a reasonable cost through appropriate regulatory and market means. It has five guiding principles.

FERC aims to use its resources efficiently and effectively to achieve its strategic priorities via organizational excellence. With the goal of due process and transparency, it aims to be open and fair to all participants. In its orders, opinions, and reports, FERC strives to provide regulatory certainty through consistent approaches and actions. FERC conducts regular outreach to ensure that interested parties have an opportunity to contribute to the performance of its responsibilities.

FERC Background and Responsibilities

FERC was established under the Department of Energy Organization Act of 1977. It regulates electric transmission and wholesale sales rates and services principally under Parts II and III of the Federal Power Act. It regulates Hydroelectric dam licensing and safety under Part I of the Federal Power Act. FERC oversees natural gas pipeline transportation rates and services principally under the Natural Gas Act. It regulates oil pipeline transportation rates and services under the Interstate Commerce Act. FERC is subject to these statutes and can only operate within what the statutes allow.

The Energy Policy Act of 2005 gave FERC many additional responsibilities. It regulates the transmission and wholesale sales of electricity in interstate commerce. It reviews certain mergers and acquisitions and corporate transactions by electricity companies. FERC regulates the transmission and sale of natural gas for resale in interstate commerce.

Also, it regulates the transportation of oil by pipeline in interstate commerce. FERC approves the siting and abandonment of interstate natural gas pipelines and storage facilities. It reviews the siting application for electric transmission projects. FERC ensures the safe operation and reliability of proposed and operating LNG terminals.

In addition, it licenses and inspects private, municipal, and state hydroelectric projects. FERC protects the reliability of the high voltage interstate transmission system through mandatory reliability standards. It monitors and investigates energy markets. It enforces FERC regulatory requirements through the imposition of civil penalties and other means. And, it oversees environmental matters related to natural gas and hydroelectricity projects as well as administers accounting and financial regulations and conduct of regulated companies.

Criticism of FERC

Environmental groups have criticized the FERC for its close ties to the energy industry, alleging that the regulator overlooked its legal obligations for the industry's benefit. After a 2017 lawsuit led by the Sierra Club, a Federal Appeals Court vacated the FERC-issued permit for the Sabal Trail pipeline, saying that the Commission had failed to evaluate the "downstream" emissions of the natural gas project. FERC was ordered to produce a new environmental impact statement, taking these additional factors into account.

However, the FERC did not follow the court's instructions in later projects, saying that it did not have the authority to evaluate the indirect greenhouse gas emissions of the projects they were evaluating. This posture was described as "decidedly less-than-dogged" by judges of the D.C. Circuit Court.

Following the Sabal Trail lawsuit, the D.C. Circuit Court of Appeals required FERC to consider "downstream emissions" in assessing the environmental impact of new transmission pipelines.

Examples of FERC Regulatory Actions

BP America

In 2015, an administrative law judge determined that BP America had timed their deliveries of natural gas in order to manipulate the settling price of natural gas futures. The company was ordered to repay $207,000 in unjust profits, and an additional $20 million in penalties.

Competitive Energy Services and Rumford Paper Company

In another case of market manipulation, FERC fined a large paper company and its energy consultant for conspiring to manipulate their energy costs at the expense of the local independent systems operator. According to the Commission, Competitive Energy Services conspired to "artificially inflate Rumford’s customer baseline to enable Rumford and CES to receive compensation for demand response without Rumford intending to provide the service or actually having to reduce load."

By creating the illusion of using less power, they were able to claim payment from the local transmission operator in times of high demand. FERC ordered civil penalties of $7,500,000 against Competitive Energy, and a further $600,000 against its managing member. The paper company was ordered to disgorge $166,000.


What Is FERC Order 1000?

FERC Order 1000 is a Final Rule that changes the planning and cost allocations for public electricity transmission providers. Although the rule is highly complex, the core issue is whether states can be compelled to coordinate on planning and cost obligations for new transmission capacity. The rule was first proposed in 2010 and adopted the following year.

What Is FERC Accounting?

FERC Accounting refers to the Uniform System of Accounts, a set of record-keeping guidelines by the Federal Energy Regulatory Commission. In order to ensure transparency and consistency in corporate accounts, FERC Accounting details how companies should report plant investment costs, the definitions of common industry terms, and how facilities should be reported for utility purposes.

What Is a FERC Paper Hearing?

A FERC Paper Hearing refers to an administrative hearing in which the Federal Energy Regulatory Commission (FERC) adjudicates a claim or complaint, using paper records and written arguments rather than an oral argument before an administrative law judge.

The Bottom Line

The Federal Energy Regulatory Commission (FERC) is an important regulator for the U.S. Energy industry, supervising infrastructure such as oil and natural gas pipelines, as well as electricity transmission. It is responsible for evaluating the environmental impacts of new energy infrastructure, as well as preventing price manipulation in the energy market. Like other regulators, it is susceptible to regulatory capture and lobbyist pressure.

Article Sources
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  1. Federal Energy Regulatory Commission. "What FERC Does." Accessed Oct. 2, 2021.

  2. Federal Energy Regulatory Commission. "Accounting Matters." Accessed Oct. 2, 2021.

  3. Federal Energy Regulatory Commission. "Meet the Commissioners." Accessed Oct. 2, 2021.

  4. Federal Energy Regulatory Commission. "About FERC." Accessed Oct. 2, 2021.

  5. U.S. Government Publishing Office. "Public Law 95-91 - Aug. 4, 1977, 95th Congress," Pages 571-572. Accessed Oct. 2, 2021.

  6. Federal Energy Regulatory Commission. "An Overview of the Federal Energy Regulatory Commission and Federal Regulation of Public Utilities," Page 10. Accessed Oct. 2, 2021.

  7. U.S. Congress. "Energy Policy Act of 2005." Accessed Oct. 2, 2021.

  8. U.S. Court of Appeals. "Sierra Club et al., Petitioners v. Federal Energy Regulatory Commission, Respondent," Page 19. Accessed Oct. 2, 2021.

  9. U.S. Court of Appeals. "Lori Birckhead, et al., Petitioners v. Federal Energy Regulatory Commission, Respondent," Page 14. Accessed Oct. 2, 2021.

  10. Federal Energy Regulatory Authority. "BP America, Inc,, Order on Initial Decision and Rehearing," Page 3. Accessed Oct. 2, 2021.

  11. Federal Energy Regulatory Commission. "Competitive Energy Services LLC, Order Assessing Civil Penalty," Page 2. Accessed Oct. 2, 2021.

  12. Federal Energy Regulatory Commission. "Competitive Energy Services, LLC, Order Assessing Civil Penalty," Page 45. Accessed Oct. 2, 2021.

  13. Federal Energy Regulatory Commission. "Order No. 1000—Transmission Planning and Cost Allocation"." Accessed Oct. 2, 2021.

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