Federal Power Act: Rates, Licensing, and Reliability

The Federal Power Act is the principal federal statute governing wholesale electricity sales, interstate transmission of electric energy, and the licensing of non-federal hydroelectric projects in the United States. It began in 1920 as the Federal Water Power Act, was expanded in 1935 to reach interstate electricity markets, and today assigns the Federal Energy Regulatory Commission authority over the bulk power system while leaving retail sales to state regulators.¹

What the Law Reaches, and What It Doesn’t

The statute draws a sharp jurisdictional line. Federal authority extends to two activities: transmitting electric energy in interstate commerce and selling it at wholesale in interstate commerce. A wholesale sale is defined as a sale of electric energy to any person for resale.²

When a generator sells power to a distribution utility that then delivers it to homes and businesses, that first transaction is a wholesale sale subject to FERC oversight. The second sale, from the distribution utility to the household, is retail and stays under state control. The statute explicitly excludes local distribution facilities, generation facilities themselves, and purely intrastate transmission from federal jurisdiction.² In practice, because the modern grid is interconnected across state lines, most wholesale transactions fall within federal reach.

Any entity that owns or operates facilities used for interstate transmission or makes interstate wholesale sales is classified as a “public utility” under the Act and must file the reports and accounting records FERC requires.²

Who Administers the Act

FERC is the independent federal agency that administers the statute. It is led by up to five commissioners, appointed by the President and confirmed by the Senate for staggered five-year terms.³ The original statute created the Federal Power Commission; that body was replaced by FERC in 1977 when energy agencies were reorganized under the Department of Energy.

FERC sets and reviews wholesale rates, licenses hydroelectric projects, oversees bulk power reliability, polices market manipulation, and reviews mergers and acquisitions involving jurisdictional facilities. The Commission has broad investigative authority, including the power to compel documents and sworn testimony and to open enforcement proceedings on its own motion.

Just and Reasonable Rates

Every rate and charge collected by a public utility for wholesale sales or transmission service must be “just and reasonable.” A rate that fails this standard is unlawful. The statute also prohibits any undue preference or advantage, and unreasonable differences in rates between localities or classes of service.⁴

A public utility that wants to change its rates must give FERC and the public at least 60 days’ notice by filing a new rate schedule spelling out exactly what will change and when. FERC can suspend the proposed rate and hold hearings on whether it meets the standard before it takes effect.⁴

Challenging Existing Rates Under Section 206

Section 206 lets FERC go after rates already on the books. The Commission may investigate an existing rate on its own initiative or in response to a complaint. If it finds the rate is unjust, unreasonable, or unduly discriminatory, FERC determines the lawful rate and orders the utility to adopt it.⁵ When FERC opens a Section 206 investigation, it sets a “refund effective date,” and the utility may owe refunds to customers dating back to that date if the rate is ultimately found unlawful.

Market-Based Rate Authority

Not every seller is confined to traditional cost-of-service ratemaking. FERC allows wholesale sellers to charge market-based rates if they can show that they and their affiliates lack horizontal and vertical market power, or have adequately mitigated it. Applicants pass screening tests that examine wholesale market share and whether they are a pivotal supplier in their region.⁶ FERC can revoke that authority if a seller’s market position shifts enough to raise competitive concerns.

Open Access to Transmission

In 1996, FERC used its authority under the Act to issue Order No. 888, which requires all public utilities that own or control transmission facilities to offer service under open access, non-discriminatory transmission tariffs. The goal was to remove impediments to competition in wholesale markets and deliver lower-cost electricity to consumers.⁷ A transmission owner must offer outside generators the same quality of service it provides to its own plants. Violations can trigger enforcement actions and civil penalties.

Hydroelectric Project Licensing

Part I of the Act, the surviving core of the 1920 statute, requires anyone who wants to build or operate a dam, reservoir, or other hydroelectric project on navigable waters or federal lands to obtain a license from FERC.⁸ The licensing process involves environmental review, engineering analysis, and consideration of how the project fits with other uses of the waterway such as irrigation, flood control, and recreation.

Licenses run between 30 and 50 years, with FERC choosing a term it determines is in the public interest.⁹ Licensees pay reasonable annual charges to reimburse the government for administering the program, compensate for the use of federal lands, and prevent excessive profits. A separate annual charge applies if a project uses a government-owned dam or occupies tribal lands.¹⁰

Licensees must maintain the structural safety of their dams throughout the license term. Regular inspections assess structural integrity and seismic stability. If a dam is deemed unsafe, the owner must make repairs or face mandatory decommissioning. Non-compliance with license conditions can result in revocation or civil penalties.

Relicensing has hard deadlines. A licensee must notify FERC of its intent to seek a new license at least five years before expiration, but no more than five and a half years before. The actual relicensing application must be filed at least 24 months before expiration.¹¹ Missing those windows can jeopardize the project, because the government has the option to take over the project or issue a license to a competing applicant when the original term ends.

Mandatory Reliability Standards

Section 215, added by the Energy Policy Act of 2005, gives FERC jurisdiction over the reliability of the bulk power system. All users, owners, and operators of that system must comply with mandatory reliability standards.¹²

FERC does not write the technical standards. It certifies an Electric Reliability Organization that develops and enforces them, subject to FERC review. The North American Electric Reliability Corporation holds that certification. NERC proposes standards covering everything from vegetation management near transmission lines to cybersecurity for grid control systems, and FERC can approve a proposed standard only if it is just, reasonable, not unduly discriminatory, and in the public interest.¹²

This framework was a direct response to the August 2003 blackout that left 55 million people without power across the northeastern United States and Canada. Reliability standards were voluntary before 2005. They no longer are.

PURPA and Qualifying Facilities

The Public Utility Regulatory Policies Act of 1978 amended the Federal Power Act to encourage small-scale and renewable generation. PURPA created a category called Qualifying Facilities, which includes small power producers using renewable or waste fuels and cogeneration plants that produce both electricity and useful thermal energy.

To qualify as a small power production facility, a project must use biomass, waste, renewable resources, or geothermal energy for at least 75 percent of its total energy input, and the combined capacity of affiliated facilities at the same site cannot exceed 80 megawatts.¹³ Cogeneration facilities must meet efficiency standards that vary by configuration; topping-cycle plants, for example, must produce useful thermal energy equal to at least 5 percent of total energy output.

Electric utilities are generally required to purchase a QF’s output at the utility’s “avoided cost,” meaning what the utility would have spent generating or buying that power elsewhere. Avoided cost caps what utilities can be required to pay.¹⁴ The purchase obligation is not absolute. Utilities operating within MISO, PJM, ISO-New England, or NYISO can seek relief from the mandatory purchase requirement if the QF has nondiscriminatory access to those markets. There is a rebuttable presumption that QFs larger than 20 megawatts (or 5 megawatts for small power producers under FERC Order No. 872) have such access.¹⁵

Mergers, Acquisitions, and Asset Transfers

Section 203 requires a public utility to get FERC approval before completing certain major transactions worth more than $10 million. The threshold applies to four categories:

Sales or leases of jurisdictional facilities.
Mergers and consolidations combining jurisdictional facilities with those of another entity.
Purchases of securities of another public utility.
Acquisitions of an existing generation facility used for interstate wholesale sales.¹⁶

Holding companies that include a transmitting utility or electric utility face the same $10 million approval threshold for mergers or security acquisitions involving other utilities. Certain deals are exempt under blanket authorizations, including internal corporate reorganizations that do not involve captive customers, acquisitions of non-voting securities, and purchases of less than 10 percent of a company’s voting securities.¹⁷

Market Manipulation and Civil Penalties

The Act prohibits fraud and manipulation in wholesale electricity markets. FERC’s anti-manipulation rule makes it unlawful to use any deceptive scheme, make materially misleading statements, or engage in any practice that operates as a fraud in connection with the purchase or sale of electric energy or transmission services subject to FERC jurisdiction.¹⁸ The language mirrors the SEC’s Rule 10b-5 against securities fraud, and FERC reads it just as broadly.

The statutory penalty for violating Part II of the Act is up to $1,000,000 per violation for each day the violation continues.¹⁹ That base figure is adjusted annually for inflation. As of 2025, the inflation-adjusted maximum stood at $1,584,648 per violation per day.²⁰ In setting the actual penalty, FERC weighs the seriousness of the violation and the company’s efforts to fix it.

These are not theoretical numbers. In April 2026, FERC assessed a $722 million civil penalty against American Efficient, LLC for running a manipulative scheme in PJM and MISO markets. Other 2026 actions targeted utilities for misrepresenting outage information, submitting inaccurate generation data, and selectively avoiding regulation obligations.²¹

Companies that discover violations internally can reduce exposure by self-reporting promptly. FERC weighs how the company uncovered the misconduct, whether it acted immediately to stop it, whether senior management participated in the investigation, and whether the company fully disclosed the identities of employees involved.²² Delay erodes the credit; the Commission expects contact with enforcement staff “without delay” once a potential violation is identified.

How the Statute Reached Its Current Shape

The 1920 Federal Water Power Act addressed a growing problem: private developers were racing to build dams on the nation’s rivers with no unified federal oversight. That original law created a licensing framework for hydroelectric projects on navigable waters and federal lands.

By the 1930s, electricity had become an interstate commodity, and the existing statute could not keep pace. The Supreme Court had already sharpened the point in 1927. In Public Utilities Commission of Rhode Island v. Attleboro Steam & Electric Co., the Court struck down a state commission’s attempt to regulate rates on an interstate electricity sale, holding that such regulation placed a direct burden on interstate commerce that only the federal government could manage.²³

In 1935, Congress passed the Public Utility Act. Title II transformed the Federal Water Power Act into the Federal Power Act. The original hydroelectric provisions became Part I, and Part II extended federal authority to electric utilities engaged in interstate commerce, drawing the wholesale-versus-retail line that still defines the law.¹

The Energy Policy Act of 2005 brought the next wave of change. It added mandatory reliability standards, gave FERC anti-manipulation authority modeled on securities law, and raised civil penalty caps to $1,000,000 per violation per day. Those amendments reshaped the Federal Power Act from a rate-regulation statute into a broader market oversight framework.

1
EveryCRSReport.com. The Federal Power Act (FPA) and Electricity Markets
2
Office of the Law Revision Counsel. 16 USC 824 – Declaration of Policy; Application of Subchapter
3
Office of the Law Revision Counsel. 16 USC 792 – Federal Power Commission
4
Office of the Law Revision Counsel. 16 USC 824d – Rates and Charges
5
Office of the Law Revision Counsel. 16 USC 824e – Power of Commission to Fix Rates and Charges
6
Federal Energy Regulatory Commission. Electric Market-Based Rates
7
Federal Energy Regulatory Commission. Order No. 888 Final Rule
8
Office of the Law Revision Counsel. 16 USC 797 – General Powers of Commission
9
Office of the Law Revision Counsel. 16 USC 808 – New Licenses and Nonpower Licenses
10
Office of the Law Revision Counsel. 16 USC 803 – Conditions of License Generally
11
eCFR. Procedures Relating to Takeover and Relicensing of Licensed Projects
12
Office of the Law Revision Counsel. 16 USC 824o – Electric Reliability
13
eCFR. Qualifying Cogeneration and Small Power Production Facilities
14
Federal Register. Qualifying Facility Rates and Requirements Implementation Issues Under PURPA
15
Federal Energy Regulatory Commission. PURPA Qualifying Facilities
16
Office of the Law Revision Counsel. 16 USC 824b – Disposition of Property; Consolidations
17
eCFR. Applications Under Federal Power Act Section 203
18
eCFR. Prohibition of Energy Market Manipulation
19
Office of the Law Revision Counsel. 16 USC 825o-1 – Enforcement of Certain Provisions
20
Federal Register. Civil Monetary Penalty Inflation Adjustments
21
Federal Energy Regulatory Commission. All Civil Penalty Actions – 2026
22
Federal Energy Regulatory Commission. Self-Reports
23
Justia. Public Utilities Comm’n v. Attleboro Steam Co., 273 US 83 (1927)