Under the Federal Power Act, wholesale power prices must be “just and reasonable”, i.e., remain within a “zone of reasonableness” (“ZOR,” or simply “zone”). When prices were regulated directly by the Federal Energy Regulatory Commission (“FERC” or “Commission”) and based on costs, including capital returns, the variations that gave rise to the need for a zone (rather than a single absolutely correct point of correctness) were difficulties in defining the precise meaning of “costs” in a particular ratemaking instance.
When the FERC began regulating prices only indirectly by allowing market-based rates (“MBRs”), the zone took on an entirely new meaning. The Commission believed that under the appropriate market structure the natural forces of competition would constrain prices to levels that were inherently just and reasonable. By extension, the ZOR was the range over which prices vary in a well-functioning competitive market, which over time could move from periods of shortage to surplus and back again.