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Wholesale Markets vs. Retail Rates
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The crux of the current energy crisis lies in the conflicting regulations governing wholesale markets and retail markets. Deregulation lifted controls in the wholesale markets while retaining price caps on retail rates. As a result, when prices shot up on the wholesale market, utilities were unable to pass on these rate increases to the consumer and were forced to take a loss. This drove PG&E into bankruptcy in California.

The wholesale markets existed even before deregulation. However, before access to transmission lines was opened, the trade was constrained. Since then, the number of companies participating in the market has grown considerably and trade takes place similar to other commodity futures, with transactions typically including daily, monthly, and long-term contracts for energy supply.

The regions for which these contracts are made are delineated by the power grid and the major transmission lines, regions which don't correspond exactly to state lines. For example, Southern California is covered by the Palo Verde Hub, based around the Palo Verde nuclear power station in Arizona, and the market which supplies Northern California is classified as the California/Oregon Border. Therefore, conditions in one state can affect areas beyond its borders.

Price fluctuations on the wholesale market don't immediately affect residential rates, mostly because temporary price caps have remained in place to cushion the transition to a fully deregulated marketplace. Therefore, in much of the country, residential rate payers have been insulated from wholesale market price spikes. In San Diego, the first city where price caps were lifted, retail rates immediately shot up once they were freed. As caps are lifted in other parts of the country, similar price jumps can be expected.

Four representative wholesale power markets are depicted on this map. They are the Palo Verde Hub in the Southwest, the COB (California/Oregon Border) in the Northwest, the MAIN (Mid-America Interpool Network) in the Midwest and the PJM (Pennsylvania/New Jersey/Maryland) in the Mid-Atlantic. These four areas were chosen to illustrate how deregulation of power markets has affected various areas of the country differently. Click on the map to find out more about how deregulation has affected the wholesale markets in that region and what the effect has been on consumers' bills.

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