# The regulatory rulebook: FERC, state commissions and who governs what
When a Texas grid operator can't buy power across state lines without triggering federal oversight, you're seeing the FERC-versus-state jurisdictional line that determines which regulator you must satisfy for any given deal. Get this line wrong, and a project gets delayed by months or a contract gets challenged in court. Get it right, and you know exactly whose approval you need before you spend a dollar.
This lesson maps the actual rulebook: who regulates what, which laws created that authority, and what compliance looks like in practice.
US energy regulation runs on a federal-state divide rooted in interstate commerce.
FERC (Federal Energy Regulatory Commission) regulates:
State public utility commissions (PUCs, sometimes called PSCs or PUCs) regulate:
The dividing line is simple to state and messy to apply: interstate wholesale versus intrastate retail. This split traces back to the Federal Power Act (1935) and the Natural Gas Act (1938), both passed after the Supreme Court ruled that states couldn't regulate interstate power and gas transactions. Congress needed a federal body to fill that gap. FERC, created in 1977 (replacing the Federal Power Commission), inherited that authority.
ERCOT (Electric Reliability Council of Texas) runs a grid that is almost entirely contained within Texas, deliberately. By not connecting significantly to interstate transmission lines, ERCOT avoids triggering FERC jurisdiction over its wholesale market. That is not an accident of geography; it is a regulatory design choice made decades ago.
The moment ERCOT wants to import or export meaningful power across state lines, that flow becomes interstate commerce, and FERC jurisdiction attaches. This is why Texas grid interconnection proposals (there have been several, including debate over the "Southern Spirit" transmission line) are politically fraught: more interconnection means more federal oversight over a market Texas has kept deliberately state-controlled.
Federal Power Act (1935): Gives FERC authority over interstate wholesale electricity sales and transmission rates. Requires rates to be "just and reasonable," a phrase you will see in nearly every FERC order.
Natural Gas Act (1938): Same logic, applied to interstate natural gas pipelines and wholesale gas sales. FERC approves new interstate pipelinepipelineAll active sales opportunities across the stages of the sales process, together with their combined potential value and probability of closing.View full definition → construction under Section 7 of this act.
Public Utility Regulatory Policies Act, PURPA (1978): Passed after the 1970s oil shocks, it forced utilities to buy power from qualifying small and renewable generators, opening the door to independent power producers and the modern competitive generation market.
Energy Policy Act of 2005: Gave FERC authority to enforce mandatory grid reliability standards, enforced in practice through NERC (North American Electric Reliability Corporation), and expanded FERC's role in approving mergers and market-based rate authority.
Public Utility Holding Company Act (1935), repealed 2005: Worth knowing historically. It broke up sprawling utility holding companies after the 1929 crash exposed abusive financial structures. Its repeal (replaced by lighter-touch oversight under the 2005 Energy Policy Act) enabled the wave of utility mergers and holding company structures common today, such as NextEra Energy or Dominion Energy's multi-state portfolios.
If FERC feels abstract, state PUCs are where the compliance work is concrete and constant.
A state commission (examples: the California Public Utilities Commission, the Public Utility Commission of Texas, the New York Public Service Commission) typically:
A rate case is the single most consequential recurring compliance event for a regulated utility. The utility files a request to raise rates, justifying it with a "revenue requirement," the total cost of providing safe, reliable service plus a reasonable return on invested capital. Commission staff, consumer advocates, and often large industrial customers all intervene to challenge the number. These cases can run over a year and directly set the price every ratepayer pays.
Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs), such as PJM Interconnection (covering 13 mid-Atlantic and Midwest states) or the California ISO (CAISO), sit at the exact seam between federal and state authority.
These organizations run wholesale electricity markets and manage grid reliability across multiple states. Their market rules are filed with and approved by FERC. But the generation and distribution assets participating in those markets are often still regulated at the state level for retail rate purposes. A single power plant can be subject to FERC's wholesale market rules and a state commission's separate rules on emissions, siting, or cost recovery, simultaneously.
For a useful primer on how these markets actually clear prices, see FERC's own Energy Primer resource.
Knowledge check
1. What is the fundamental legal principle underlying the FERC-versus-state jurisdictional divide?
2. Why did Congress create federal authority over interstate power and gas transactions in the 1930s?
3. A generator wants to sell electricity to a utility located in another state. Which regulator's approval framework is primarily implicated?
4. Select ALL correct answers about what state public utility commissions (PUCs) typically regulate.
Select all the correct answers.
5. Select ALL correct answers about why getting the FERC-versus-state jurisdictional line wrong matters in practice.
Select all the correct answers.
Two more federal bodies matter even though they are not "energy regulators" in the FERC sense:
EPA (Environmental Protection Agency): Regulates emissions from power plants under the Clean Air Act and water discharge under the Clean Water Act. Power plant retirements are frequently driven as much by EPA rules (like limits on mercury or carbon emissions) as by economics.
PHMSA (Pipeline and Hazardous Materials Safety Administration): Sets safety standards for oil and gas pipelines, under the Department of Transportation. Relevant after high-profile incidents like the 2010 San Bruno gas pipelinepipelineAll active sales opportunities across the stages of the sales process, together with their combined potential value and probability of closing.View full definition → explosion, which led to tighter integrity-management rules.
At the state level, environmental agencies (like the California Air Resources Board) can impose requirements stricter than federal minimums, adding another compliance layer for companies operating across multiple states.
Say a merchant generator wants to build a 500 MW gas plant in Ohio and sell power into the PJM wholesale market, with some output also contracted to a local municipal utility.
1. Siting and environmental permits: Ohio state environmental agency and possibly local zoning approval.
2. Wholesale market participation: FERC-approved PJM market rules govern how the plant bids and gets paid.
3. Interconnection: PJM's FERC-regulated interconnection process determines how the plant physically connects to the grid.
4. Retail sale portion: If any power is sold directly to retail customers rather than wholesale, that slice may fall under Ohio's state commission rules.
5. Reliability compliance: NERC standards, enforced through FERC, apply to the plant's operational reliability once online.
One project, at least four distinct regulatory touchpoints, only one of which is a single state commission.
How Does the U.S. Power Grid Work?