The California Independent System Operator (CAISO) currently operates an electricity grid that is largely limited to the state of California. This geographic limitation has led to concerns over the state’s access to low-cost imports, ability to import affordable clean electricity when demand is high, ability to export rather than curtail in-state, renewable production when supply exceeds demand, and the resulting impact on energy prices. AB 825, which the governor signed on Sept. 19, 2025, is intended to address these issues by allowing the CAISO and participating utilities to establish a western regional energy market. The new law is part of the Legislature’s climate and energy package.
Western Regional Energy Market: Background and Development
The CAISO is a non-profit organization that manages California’s electricity grid, ensuring reliable power delivery and facilitating a competitive electricity market. Earlier attempts to regionalize CAISO’s transmission operations and establish independent governance have been unsuccessful.
In 2023, California and other Western regulators called for a pathway to a Western electricity market with independent governance and broader stakeholder participation. This effort evolved into the West-Wide Governance Pathways Initiative, which proposes a new independent entity to manage CAISO’s energy market functions while preserving other responsibilities such as transmission and reliability. The initiative has broad support from environmental groups, labor groups, local utilities, and community choice aggregators.
Supporters state that this bill aligns with the Pathways Initiative by authorizing CAISO and the utilities it serves to participate in voluntary regional energy markets governed by an independent organization. They argue this approach may encourage other Western states to join, since governance would no longer rest solely with California. Expanding the market footprint is seen as critical for improving efficiency, strengthening grid reliability, and advancing clean energy goals.
Federal and California Energy Regulation: FERC, CPUC, and CAISO Authority
Federal law gives the Federal Energy Regulatory Commission (FERC) exclusive authority over interstate electricity transmission and wholesale electricity sales, while the California Public Utilities Commission (CPUC) regulates public utilities within the state. The CAISO, governed by a five-member board appointed by the governor and confirmed by the Senate, manages the state’s transmission grid and operates real-time and day-ahead energy markets, including the Western Energy Imbalance Market and the Extended Day-Ahead Market, largely under FERC jurisdiction. As a nonprofit public benefit corporation, the CAISO must act in the public interest by reducing costs and ensuring efficiency and reliability while complying with state health and environmental laws. It is also required to comply with federal regulations under FERC oversight.
State law allows CAISO to transform into a regional organization (RO) to expand electricity markets across the West, but only if it benefits California ratepayers and the Legislature approves. California also requires retail electricity sellers to procure 60% of their electricity from renewable resources by 2030, and to transition to 100% renewable and zero-carbon resources by 2045, with safeguards to prevent increases in greenhouse gas emissions elsewhere on the western grid.
AB 825: Key Provisions for California’s Western Regional Electricity Market
- Authorizes CAISO and participating utilities to join voluntary energy markets run by an RO, if specific requirements are met, subject to California Public Utilities Commission (CPUC) approval.
- Beginning Jan. 1, 2028, allows CAISO to adopt FERC-approved tariff changes once the CAISO board finds requirements have been satisfied.
- Preserves CPUC’s authority to direct utilities to withdraw from RO markets and requires CAISO to maintain the ability to serve participants who withdraw.
- Requires CAISO to continue its balancing authority functions and prohibits changing its balancing authority area except under specific conditions.
- Clarifies that AB 825 does not change CAISO’s other statutory duties, such as grid management, transmission planning, reliability, and resource adequacy.
- Requires CAISO, in consultation with the RO, to submit annual reports to the CPUC, California Energy Commission (CEC), and the Legislature, and for CPUC and CEC to post acknowledgments online, while having CAISO’s board chair and CEO present the report to legislative committees each year.
- Directs CAISO to complete a study by Dec. 31, 2026, on the job impacts of participation in RO markets, including impacts on power plant jobs.
Implementation Timeline and Potential Future Market Impacts
If its intent is realized, AB 825 may lead to the development of a broader, coordinated energy market that is better able to deliver cost effective, reliable zero carbon electricity to consumers, together with an increased ability to export, rather than curtail, excess renewable production when supply exceeds demand in California. Significant regulatory and other legal and business steps may be taken over the next several years to implement the legislation’s market goals.
* Special thanks to Law Clerk/JD Julia Lopez˘ for contributing to this GT Alert.
˘ Not admitted to the practice of law.