This chapter examines the components that make up the infrastructure of the electric power industry. It explains their ownership characteristics, their current role in electricity supply, and how some roles have shifted since passage of the Energy Policy Act of 1992 (EPACT). EPACT, which provided a Federal mandate to open up the national electricity transmission system to wholesale suppliers, marked the beginning of competition in the electric power industry and was the impetus for significant structural changes. In 1996, the Federal Energy Regulatory Commission (FERC) issued its Order 888, which carried out the goal of EPACT.⁽³⁾ From the 1970s until 1992, little change had occurred in the industry, either structurally or operationally, with the exception of the creation of nonutility qualifying facilities brought about by the Public Utility Regulatory Policies Act of 1978 (PURPA).⁽⁴⁾ The data presented in this analysis are for 1998. In some cases, data for 1992 are compared with 1998 data to show trends.

Generation of electricity in the United States is performed by two types of companies--utilities and nonutilities. Table 1 presents their numbers and characteristics by ownership category. An electric utility is a private company or public agency engaged in the generation, transmission, and/or distribution of electric power that is given a monopoly franchise over a specific geographic area. In return for this franchise, the electric utility is regulated by State and Federal agencies. Utilities can be further classified into four subcategories based on ownership--investor-owned (IOU), Federally owned, other publicly owned, and cooperatively owned.

Recently a fifth subcategory of electric utilities has emerged--the power marketers. They are classified as electric utilities because they buy and sell electricity. However, they do not own or operate generation, transmission, or distribution facilities, and therefore, their data (primarily electricity purchase and sales data) are not included in this chapter, except to give their characteristics in Table 1. Although relatively small in terms of volume of sales, the power marketers are a growing segment of the industry. Currently, about 400 power marketers have filed rate tariffs with FERC to sell electric power. Forty-nine power marketers reported retail sales and 111 reported wholesale sales during 1998.

In addition to power marketers, several other entities have come into existence as a result of the move to competition and can be added to the operational underpinnings of the electric power industry--namely, regional independent transmission system operators (ISOs), power exchanges (PXs), and futures contracts. Power marketers are the only one of the new entities that report to the Energy Information Administration (EIA) in its ongoing data collection program.⁽⁵⁾

Nonutilities are companies that generate power for their own use and/or for sale in wholesale markets.⁽⁶⁾ Past EIA reports have subcategorized nonutilities (for example, as qualifying or nonqualifying facility cogenerators, small power producers, exempt wholesale generators, etc.⁽⁷⁾) based on their qualifications under certain Federal laws. However, as the industry furthers its transition to full retail competition in the generation portion of electricity supply, the distinctions between the nonutility subcategories are becoming less clear, and some may fade entirely within the next 10 years as a result of ongoing structural changes and the imminent repeal of the Federal mandates that created them. For purposes of this report, nonutility data are reported in the aggregate.

Utilities and nonutilities can also be broken down in a different manner, i.e., the number of companies that generate, transmit, and/or distribute electric power. It is interesting to note that only about 27 percent of the Nation's 3,170 utilities actually generate electric power. Many electric utilities (67 percent) are exclusively distribution utilities, purchasing wholesale power from others to distribute it, over their own distribution lines, to the ultimate consumer. These are primarily the utilities owned by State and local governments and cooperatives. Conversely, all nonutilities generate power but do not own or operate transmission or distribution systems (Table 2).

The relative contribution of utility and nonutility components to the supply of the Nation's electricity can be understood by looking at their shares of nameplate capacity,⁽⁸⁾ net generation,⁽⁹⁾ additions to capacity, and number of companies (Figure 1). The number of publicly owned utilities (i.e., those owned by State and local governments) far outweighs the number of IOUs (2,009 versus 239); however, IOUs are responsible for the lion's share of capacity (66 percent) and generation (68 percent). On the other hand, the nonutility share of capacity and generation has been relatively small, but that trend is changing. The change began with the passage of PURPA when nonutilities were promoted as energy-efficient, environment-friendly alternative sources of electricity. More recently, FERC Order 888 opened the bulk power transmission grid to suppliers other than utilities. In response, nonutilities have been expanding their roles in wholesale power supply and are taking advantage of the divestiture activities of utilities by purchasing their generation assets. As a result, the nonutility share of total industry capacity rose from 7 percent in 1992 to 12 percent in 1998.⁽¹⁰⁾

Figure 1. Share of Utility and Nonutility Nameplate Capacity, Net Generation, Additions to Capacity, and Number of Units by Ownership Category, 1998

A yearly comparison of the above-mentioned four statistics (Figure 2) gives a clear picture of the significant shifts in ownership of electricity supply that have taken place in the relatively short period of time since passage of EPACT. A number of these shifts can be attributed to the strategic business plans companies are using to cope in a deregulated and competitive market. For instance, since 1992, the number of IOUs has decreased by nearly 8 percent and their nameplate capacity has decreased by 5 percent (Figure 3). The decrease in the number of IOUs is a result of recent mergers between IOUs. The decrease in generation capacity is evidence of divestiture of generation assets. On the other hand, the fact that IOU net generation has actually increased by 11 percent since 1992 can be attributed to such factors as higher demand for electricity or efficiency gains stemming from competition and mergers.

Figure 2. Total Utility and Nonutility Nameplate Capacity, Net Generation, Additions to Capacity, and Number of Units by Ownership Category, 1992-1998

Figure 3. Annual Growth Rate of Utility and Nonutility Nameplate Capacity, Net Generation, Additions to Capacity, and Number of Units, 1992-1998

Although there was a drop in the number of nonutility companies in 1997, nonutilities grew by over 9 percent during the 7-year period examined. Also, with nonutilities expanding by buying IOU generation assets and constructing new generation units, the result was an increase in nonutility nameplate capacity (up 72 percent since 1992) and generation (up 42 percent since 1992). Nonutility additions to capacity have been increasing at an average annual rate of nearly 7 percent since 1992.

Historically, utilities have generally been vertically integrated companies that provided for generation, transmission, and/or distribution for all customers in a designated franchised service territory. Currently, the industry is in transition from a vertically integrated and regulated monopoly to a functionally unbundled industry with a competitive market for power generation. Market forces will replace State and Federal regulators in setting the price and terms of electricity supply and are expected to lead to lower rates for customers. In addition, the individual States are moving toward opening their retail markets to competition. The transition has begun to induce many far-reaching changes in the structure of the industry (and the institutions that govern it) especially through the corporate combinations that are the subject of this report. The following chapters address the objectives, characteristics, and cumulative effects of these corporate combinations--mergers and acquisitions, convergence mergers, joint ventures and marketing  alliances,  and  divestitures of generation assets.

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Endnotes

10. Energy Information Administration, 1998 Electric Power Annual, Volume I (DOE/EIA-0348(98)/1) (Washington, DC, April 1999), p. 1.

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