1. Introduction
Electric power generation in the United
States is changing from a regulated industry to a competitive industry.
Where power generation was once dominated by vertically integrated investor-owned
utilities (IOUs) that owned most of the generation capacity, transmission,
and distribution facilities, the electric power industry now has many
new companies that produce and market wholesale and retail electric power.
These new companies are in direct competition with the traditional electric
utilities. Today, vertically integrated IOUs still produce most of the
country's electrical power, but that is changing.
The long-standing traditional structure
of the industry was based, in part, on the economic theory that electric
power production and delivery were natural monopolies, and that large
centralized power plants were the most efficient and inexpensive means
for producing electric power and delivering it to customers. Large power
generating plants, integrated with transmission and distribution systems,
achieved economies of scale and consequently lower operating costs than
relatively smaller plants could realize. Because of the monopoly structure,
Federal and State government regulations were developed to control operating
procedures, prices, and entry to the industry in order to protect consumers
from potential monopolistic abuses.
Several factors have caused this structure
to shift to a more competitive marketplace. First, technological advances
have altered the economics of power production. For example, new gas-fired
combined cycle power plants are more efficient and less costly than older
coal-fired power plants. Also, technological advances in electricity transmission
equipment have made possible the economic transmission of power over long
distances so that customers can now be more selective in choosing an electricity
supplier. Second, between 1975 and 1985, residential electricity prices
and industrial electricity prices rose 13 percent and 28 percent in real
terms, respectively. These rate increases, caused primarily by increases
in utility construction and fuel costs, caused Government officials to
call into question the existing regulatory environment. Third, the effects
of the Public Utilities Regulatory Policies Act of 1978, which encouraged
the development of nonutility power producers that used renewable energy
to generate power, demonstrated that traditional vertically integrated
electric utilities were not the only source of reliable power.
Competition in wholesale power sales
received a boost from the Energy Policy Act of 1992 (EPACT), which expanded
the Federal Energy Regulatory Commission's (FERC's) authority to order
vertically integrated IOUs to allow nonutility power producers access
to the transmission grid to sell power in an open market. FERC's authority
to order access was implemented on a case-by- case basis and proved to
be slow and cumbersome. To remedy that, FERC issued Order 888 requiring
all vertically integrated IOUs to file an open access transmission tariff
that would provide universal access to the transmission grid to all qualified
users. Order 888 was an important stimulus in the development and strengthening
of competitive wholesale power markets, but discriminatory practices regarding
access to the transmission grid still remained, and a more effective effort
was needed. In December 1999, FERC issued Order 2000 calling for the creation
of regional transmission organizations (RTOs), independent entities that
will control and operate the transmission grid free of any discriminatory
practices. Electric utilities are required to submit proposals to form
RTOs from October 2000 through January 2001.
In addition to wholesale competition,
retail competition has started in many States. For the first time in the
history of the industry, retail customers in some States have been given
a choice of electricity suppliers. As of July 1, 2000, 24 States and the
District of Columbia had passed laws or regulatory orders to implement
retail competition, and more are expected to follow. The introduction
of wholesale and retail competition to the electric power industry has
produced and will continue to produce significant changes to the industry.
These changes are referred to collectively as restructuring.
The purpose of this report is twofold.
Part I (Chapters 2 through 4) can be used as a basic reference document
for information about the traditional electric power industry before restructuring
started, while Part II (Chapters 5 through 9) describes the major causes
and events that are changing the industry's structure from a totally regulated
monopoly to one where both competition and regulation coexist. Chapter
2 presents an overview of the industry's history from inception to
approximately when deregulation and restructuring started. Chapter
3 explains the infrastructure of the industry, detailing its generating,
transmitting, and distributing components. It also presents industry-wide
statistics depicting how restructuring has changed the composition of
the industry. For example, it illustrates the growing importance of nonutility
power producers in meeting the Nation's electric power demands. Chapter
4 presents a summary of 21 Federal acts that have directly or indirectly
affected the regulation, structure, and operating procedures of the electric
power industry since its inception.
Chapter 5
presents a discussion of the causes leading to Federal and State deregulation
of power generation and subsequently to restructuring of the electric
power industry. Following this, Chapter 6
discusses numerous Federal bills, either initiated in Congress or by the
Administration, designed to promote, assign responsibility, or provide
guidance to continued deregulation of the industry. This chapter also
discusses the debate to repeal the Public Utility Holding Company Act
of 1935, and the Public Utility Regulatory Policies Act of 1978, both
of which brought significant changes to the industry, but are now considered
by some to be obsolete in a competitive electricity industry.
Continuing a discussion at the Federal
level, Chapter 7 presents FERC's role in promoting
competitive wholesale electric power markets and restructuring the management,
operation, and possibly the ownership of the Nation's high voltage bulk
power transmission system. Although the bulk power transmission system
does not receive wide public attention, it plays a key role in the movement
to a competitive industry.
Chapter 8
discusses the roles of individual States in promoting competition and
restructuring at the retail level. A summary of the status of each State's
restructuring activities is presented along with discussions addressing
retail competition in five States. A discussion of the recent problems
in the California market is included in this chapter.
Chapter 9
examines IOUs--the largest component of the electric industry in terms
of power generation, value of assets, and total revenues--and how they
are coping with and preparing for competition through mergers, acquisitions,
and power plant divestitures. In many ways these corporate activities,
which transfer and/or consolidate ownership and control of the Nation's
electric power assets, represent the core of industry restructuring. Readers
will also find a discussion of the role of the Federal Government in approving
mergers and acquisitions, which has become more important as the number
of mergers increases.
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