At the beginning of the 20^th century, vertically integrated⁽¹⁾ electric utilities produced approximately two-fifths of the Nation's electricity. At that 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 introduction of the electric motor came the inevitable development and use of more home appliances. Consumption of electricity skyrocketed along with the utility share of the Nation's generation.

Utilities operated in designated exclusive franchise areas which, in the early years, were usually municipalities. Along with the service area designation came the obligation to serve all consumers within that territory. "The growth of utility service territories . . . brought State regulation of privately owned electric utilities in the early 1900s. Georgia, New York, and Wisconsin established State public service commissions in 1907, followed shortly by more than 20 other States. Basic State powers included the authority to franchise the utilities; to regulate their rates, financing, and service; and to establish utility accounting systems."⁽²⁾

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. Because monopolies in the United States were outlawed by the Sherman Antitrust Act,⁽³⁾ regulation of the utilities was a necessity. 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-based regulation.⁽⁴⁾

Electric utility holding companies⁽⁵⁾ were forming and expanding during the early 1900s, and by the 1920s they controlled much of the industry. By 1921, privately owned utilities were providing 94 percent of total generation, and publicly owned utilities contributed only 6 percent.⁽⁶⁾ At their peak in the late 1920s, the 16 largest electric power holding companies controlled more than 75 percent of all U.S. generation.⁽⁷⁾ Originally formed to reap the benefits (mostly of a financial nature) of centralized ownership of a multitude of subsidiaries, these unregulated holding companies were in a position to abuse their power over their subsidiaries. Sometimes, the result was increased prices paid by consumers of electricity. Because the States could not regulate an interstate holding company, it became apparent that the Federal Government would have to step in. After several large holding company systems collapsed, an investigation by the Federal Trade Commission was ordered, leading eventually to the passage of the Public Utility Holding Company Act of 1935 (PUHCA). Under the provisions of the Act, holding companies became regulated by the Securities and Exchange Commission. Under Title II of PUHCA utilities involved in interstate wholesale marketing or transmission of electric power became regulated by the Federal Power Commission (FPC).⁽⁸⁾

Figure 1. Annual Statistics for the Total Electric Utility Industry, 1932-1980

On October 29, 1929, the U.S. stock market crashed, creating losses of $16 billion for that month--a staggering amount of money in 1929--and leading to the Great Depression. The social and economic well-being of the Nation was severely shaken, but the electric power industry was able to stay adrift of the devastation, and local operating utilities remained solvent. Figure 1 shows that, although the rate of growth in the industry did wane at times during the Depression, the U.S. electric utility industry's capacity, generation, revenues, and sales experienced a healthy growth pattern from 1932 through 1980. Table 1 shows the percentage change between various electric power industry statistics for the years 1932 and 1945, which also demonstrates the robust condition of the industry during that time.

In the years immediately following the onset of the Great Depression, Congress took actions designed to alleviate some of the most acute problems, e.g., unemployment and the plight of farmers. Two of these actions directly and advantageously affected the electric power industry: the development of Federally owned power and the creation of the Rural Electrification Administration (REA). (See inset below.)

During the 1920s and the early years of the Depression, the public became disenchanted with privately owned power and began to support the idea of Government ownership of utilities, particularly hydroelectric power facilities. This disenchantment was chiefly the result of abuses heaped on utilities, and ultimately on their customers, by holding companies,⁽⁹⁾ causing the price of electricity to increase. Government-owned hydroelectric power facilities could produce power cheaply and sell it to publicly owned utilities for distribution. This concept was a controversial political issue at the time, with strong arguments on both sides. Many believed that private power did not employ fair operating practices and, therefore, Government-owned power was wholeheartedly supported. Others were opposed to the Government entering the electricity business because they believed that the Government was exploiting hydroelectric sites. Nevertheless, the Federal Government did become heavily involved through the construction and ownership of several massive hydroelectric facilities.

During the presidency of Franklin D. Roosevelt (1933 to 1945), a number of these facilities were built and publicly owned power took a strong hold. President Roosevelt began his New Deal campaign, which was designed to help the American public by providing jobs, and ultimately hope, during the long years of the Depression. As part of the program, he proposed that the Government build four hydropower projects and, within a year after his proposal, his administration began to implement the projects. Large Bureau of Reclamation dams began serving the western States:

• Hoover Dam began generation in 1936, followed by other large projects.

• Grand Coulee, the Nation's largest hydroelectric dam, began operation in 1941.

• The U.S. Army Corps of Engineers flood control dams provided additional low-priced power for preferred customers.

Under the Tennessee Valley Authority Act of 1933, the Federal Government supplied electric power to States, counties, municipalities, and nonprofit cooperatives, soon including those of the REA. The Bonneville Project Act of 1937 pioneered the Federal power marketing administrations. By 1940, Federal power pricing policy was set; all Federal power was marketed at the lowest possible price, while still covering costs. From 1933 to 1941, one-half of all new capacity was provided by Federal and other public power installations. By the end of 1941, public power contributed 12 percent of total utility generation, with Federal power alone contributing almost 7 percent.⁽¹⁰⁾ Besides electric power, these dams provided flood control, navigation, area development, and greatly needed work for the unemployed. Even during the Eisenhower Administration's policy of no new starts, Federal power continued to grow as earlier projects came on line.

In the mid-1930s, many homes, farms, and ranches in rural areas were still without lights, indoor bathrooms, refrigerators, or running water. It was too expensive for the investor-owned utilities that served the cities to stretch their lines into the countryside, so many areas remained without access to electric power. The Federal Government encouraged the growth of rural electricity service by subsidizing the formation of rural electric cooperatives. The Rural Electrification Act of 1936 established the REA to provide loans and assistance to organizations providing electricity to rural areas and towns with populations under 2,500. REA-backed cooperatives enjoyed Federal power preferences⁽¹¹⁾ plus lower property assessments, exemptions from Federal and State income taxes, and exemption from State and Federal Power Commission regulation. As a result, by 1941 the proportion of electrified farm homes rose to 35 percent, more than three times that of 1932.⁽¹²⁾

For decades, utilities were able to meet the increasing demand for electricity at decreasing prices. Economies of scale were achieved through capacity additions, technological advances, and declining costs. 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.⁽¹³⁾ Over a relatively short time, a number of events took place which contributed to the unprecedented reversal in the growth and well-being of the industry: the Northeast Blackout of 1965 raised pressing concerns about reliability; the passage of the Clean Air Act of 1970 and its amendments in 1977 required utilities to reduce polluting emissions; the Oil Embargo of 1973-1974 resulted in burdensome increases in fossil-fuel prices; the accident at Three Mile Island in 1979 led to higher costs, regulatory delays, and greater uncertainty in the nuclear industry; and inflation (in general) caused interest rates to more than triple.

While the industry was attempting to recover from this onslaught of damaging events, Congress designed legislation that would reduce U.S. dependence on foreign oil, develop renewable and alternative energy sources, sustain economic growth, and encourage the efficient use of fossil fuels. One result was the passage of the Public Utility Regulatory Policies Act of 1978 (PURPA). PURPA became a catalyst for competition in the electricity supply industry, because it allowed nonutility facilities⁽¹⁴⁾ that met certain ownership, operating, and efficiency criteria established by FERC to enter the wholesale market. Utilities initially did not welcome this forced competition, but some soon found that buying generation from a qualifying facility (QF) had certain advantages over adding to their own capacity, especially because of the increasing uncertainty of recovering capital costs. The growth of nonutilities was further advanced by the Energy Policy Act of 1992 (EPACT). EPACT expanded nonutility markets by creating a new category of power producers--exempt wholesale generators (EWGs)--that are exempt from PUHCA's corporate and geographic restrictions. Like QFs, EWGs are wholesale producers that do not sell electricity in the retail market and do not own transmission facilities. Moreover, unlike the nonutilities that qualified under PURPA, EWGs are not regulated and may charge market-based rates, and utilities are not required to buy their power. The growth of EWGs marked another step toward increasing the level of competition in the wholesale electricity market. (For a more detailed description of the purpose and effects of PUHCA, PURPA, and EPACT, see Chapter 4.)

Prior to passage of PURPA in 1979, the electric power industry had been relatively stable for approximately 45 years. Today, however, the industry is undergoing immense change, both structurally and operationally. Having a basic knowledge of how it was originally organized can facilitate understanding its current transitional state. A more detailed account of the industry's history is provided in Appendix A, History of the U.S. Electric Power Industry, 1882-1991. Appendix B, Historical Chronology of Energy-Related Milestones, 1800-2000, lists the major technological and institutional events in the development of the U.S. electric power industry. The following chapter describes its organizational components.

• Table of Contents
• Chapter 1
• Chapter 3

Endnotes

1. A vertically integrated utility is one which engages in generation, transmission, and distribution operations.

2. Energy Information Administration, Annual Outlook for U.S. Electric Power 1985, DOE/EIA-0474(85) (Washington, DC, August 1985), p. 3.

3. The Clayton Antitrust Act of 1914 strengthened the Sherman Antitrust Act of 1890.

4. This form of rate setting has been blamed by some groups for removing the incentive for utilities to achieve maximum efficiency in operations and planning, thereby exhibiting the major flaw in this type of regulation and promoting the push for its demise.

5. A holding company is a company that confines its activities to owning stock in and supervising management of other companies. The Securities and Exchange Commission, as administrator of the Public Utility Holding Company Act of 1935, defines a holding company as "a company which directly or indirectly owns, controls or holds 10 percent or more of the outstanding voting securities of a public utility company" (15 USC 79b, par. A (7)).

6. Energy Information Administration, Annual Outlook for U.S. Electric Power 1985, DOE/EIA-0474(85) (Washington, DC, August 1985), p. 3.

7. Encyclopedia Americana, International Edition, Vol. 22 (New York, NY: Americana Corporation, 1977), p. 769.

8. In October 1977, many of the regulatory powers of the FPC were transferred to the Federal Energy Regulatory Commission (FERC).

9. For further details, refer to the subsequent section on The Public Utility Holding Company Act of 1935.

10. Edison Electric Institute, Historical Statistics of the Electric Utility Industry Through 1970, pp. 2, 24.

11. The Federal Government moved quickly in the mid-1930s to, where opportunities appeared, produce and distribute less expensive federally produced electricity to preference customers.

12. U.S. Bureau of the Census, Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition, Part 2 (Washington, DC, 1975), p. 827.

13. Energy Information Administration, Annual Outlook for U.S. Electric Power 1985, DOE/EIA-0474(85) (Washington, DC, August 1985), p. 7.

14. A nonutility is a corporation, person, agency, authority, or other legal entity or instrumentality that owns electric generating capacity and is not an electric utility. Nonutility power producers include qualifying cogenerators, qualifying small power producers, and other nonutility generators (including independent power producers) without a designated franchise service area, and which do not file forms listed in the Code of Federal Regulations, Title 18, Part 141.