The Electric Power Industry

At the turn of the century, vertically integrated electric utilities produced approximately two-fifths of the nation's electricity. At the time, many businesses (nonutilities) generated their own electricity. When utilities began to install larger and more efficient generators and more transmission lines, the associated increase in convenience and economical service prompted many industrial consumers to shift to the utilities for their electricity needs. With the invention of the electric motor came the inevitable use of more and more home appliances. Consumption of electricity skyrocketed along with the utility share of the nation's generation.

The early structure of the electric utility industry was predicated on the concept that a central source of power supplied by efficient, low-cost utility generation, transmission, and distribution was a natural monopoly. In addition to its intrinsic design to protect consumers, regulation generally provided reliability and a fair rate of return to the utility. The result was traditional rate base regulation.

For decades, utilities were able to meet increasing demand at decreasing prices. Economies of scale were achieved through capacity additions, technological advances, and declining costs, even during periods when the economy was suffering. Of course, the monopolistic environment in which they operated left them virtually unhindered by the worries that would have been created by competitors. This overall trend continued until the late 1960s, when the electric utility industry saw decreasing unit costs and rapid growth give way to increasing unit costs and slower growth.

The passage of EPACT-1992 began the process of drastically changing the way that utilities, their customers, and the energy services sector deal (or do not deal) with each other. Regulated monopolies are out and customer choice is in. The future will require knowledge, flexibility, and maybe even size to parlay this changing environment into profit and cost saving opportunities.

One of the provisions of EPACT-1992 mandates open access on the transmission system to "wholesale" customers. It also provides for open access to "exempt wholesale generators" to provide power in direct competition with the regulated utilities. This provision fostered bilateral contracts (those directly between a generator and a customer) in the wholesale power market. The regulated utilities then continue to transport the power over the transmission grid and ultimately, through the distribution grid, directly to the customer.

What EPACT-1992 did not do was to allow for "retail" open access. Unless you are a wholesale customer, power can only be purchased from the regulated utility. However, EPACT-1992 made provisions for the states to investigate retail wheeling ("wheeling" and "open access" are other terms used to describe deregulation). Many states have held or are currently holding hearings. Several states either have or will soon have pilot programs for retail wheeling. The model being used is that the electric generation component (typically 60-70% of the total bill), will be deregulated and subject to full competition. The transmission and distribution systems will remain regulated and subject to FERC and state Public Service Commission (PSC) control.

A new comprehensive energy bill, EPACT-2005, was signed into law in 2005, just as this edition was being finalized. Look for expanded discussion of EPACT-2005 in future editions of this chapter. This bill affects energy production, including renewables, energy conservation, regulations on the country's transmission grids, utility deregulation as well as other energy sectors. Tax incentives to spur change are key facets of EPACT-2005.

ELECTRIC INDUSTRY DEREGULATION TIME LINE 1992 - Passage of EPACT and the start of the debate. 1995 & 1996 - The first pilot projects and the start of special deals. Examples are: The automakers in Detroit, New Hampshire programs for direct purchase including industrial, commercial and residential, and large user pilots in Illinois and Massachusetts.

1997 - Continuation of more pilots in many states and almost every state has deregulation on the legislative and regulatory commission agenda.

1998 - Full deregulation in a few states for large users

(i.e., California and Massachusetts). Many states have converged upon 1/1/98 as the start of their deregulation efforts with more pilots and the first 5% roll-in of users, such as Pennsylvania and New York. 2000 - Deregulation of electricity became common for most industrial and commercial users and began to penetrate the residential market in several states. These included Maryland, New Jersey, New York, and Pennsylvania among others. See figure 24.1.

2002/3- Customers have always had a "backstop" of regulated pricing. Now that the transition periods are nearing their end, customers are faced with the option of buying electricity on the open market without a regulated default price. 2003 - During the summer, parts of the northeast and upper Midwest experience a massive blackout that shuts down businesses and residential customers. The adequacy of the transmission system is blamed. 2005 - EPACT-2005 becomes law


Even before the passage of EPACT in 1992, FERC played a critical role in the competitive transformation of wholesale power generation in the electric power industry. Specific initiatives include notices of proposed rulemaking that proposed steps toward the expansion of competitive wholesale electricity markets. FERC's Order 888, which was issued in 1996, required public utilities that own, operate, or control transmission lines to file tariffs that were non-discriminatory at rates that are no higher than what the utility charges itself. These actions essentially opened up the national transmission grid to non-discretionary access on the wholesale level (public utilities, municipalities and rural cooperatives). This order did not give access to the transmission grid to retail customers.

In an effort to ensure that the transmission grid is opened to competition on a non-discriminatory basis, Independent System Operators (ISO's) are being formed in many regions of the country. An ISO is an independent operator of the transmission grid and is primarily responsible for reliability, maintenance (even if the day-to-day maintenance is performed by others) and security. In addition, ISO's generally provide the following functions: congestion management, administering transmission and ancillary pricing, making transmission information publicly available, etc.

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