EIA Reports

Move to Competition Raises Critical Issues For Electric Power Industry, Regulators

Historic changes are taking place in the U.S. electric power industry -- an industry in transition from the Nation's last major regulated monopoly to a competitive power market. Steady progress toward competitive wholesale electricity markets was accelerated by the Federal Energy Regulatory Commission in April, when it issued Order 888 mandating open access to the transmission grid. Retail competition will make its debut in California, New York, and most of the New England States in 1998.

According to The Changing Structure of the Electric Power Industry: An Update, a new study released today by the Energy Information Administration (EIA), a number of critical issues currently being debated by regulators, lawmakers, and industry participants will shape the future of the electric power industry.

Cost Reduction and Recovery

In the past, utilities have been assured a fair rate-of-return on investment by regulators. During the transition to competition, they have been downsizing, consolidating, and merging in order to reduce costs. They have decreased their real operation and maintenance costs from about 4.5 cents per kilowatthour in 1986 to 3.5 cents per kilowatthour in 1995. In addition, there were 13 investor-owned electric utilities that merged or had mergers pending with other utilities in the industry in 1995 as compared to 1 in 1994 and 4 in 1993.

A significant portion of utility costs will become "stranded," if customers choose other electricity suppliers. Such stranded costs could include, for example, capital costs for generation capacity left without an adequate customer base when a utility loses customers to other suppliers. Studies undertaken by organizations such as the American Public Power Association, Edison Electric Institute, and others estimate projected stranded costs from a low of $10 billion to a high of $500 billion. A study conducted by the Oak Ridge National Laboratory for EIA shows that 34 strategies to mitigate these costs have been proposed and that ratepayers have the primary or secondary responsibility for absorbing the stranded costs in 19 of the strategies.

Other Issues

In 1995, California residents paid on average 9.9 cents per kilowatthour of electricity, while their neighbors in Oregon paid 4.7 cents. Such price differentials between neighboring States throughout the country became one of the strongest motivators for restructuring the industry.

As of June 30th of this year, 44 States and the District of Columbia (or over 88 percent of the Nation's regulatory commissions) had started restructuring activities in one form or another. Some of them have already introduced pilot programs.

Spirited debates are taking place on Capitol Hill over repeal of the Public Utility Holding Company Act of 1935 and the Public Utility Regulatory Policies Act of 1978. Repeal supporters say these bills are impeding the industry's transition while opponents argue that repeal will leave electricity ratepayers and the environment unprotected.

The EIA report discusses these and other issues. It also provides a historical look at the industry's evolution as a "natural" monopoly, touching on the major events that formulated the underpinnings of its traditional structure, and ending with the factors that have initiated and spurred the interest in moving to a competitive market.

Copies of The Changing Structure of the Electric Power Industry: An Update are available from the U.S. Government Printing Office or through EIA's National Energy Information Center, Room 1F-048, Forrestal Building, Washington, DC 20585. The report also will be available on EIA's Internet Web Site http://www.eia.doe.gov.

EIA Program Contact: Rebecca McNerney, 202/426-1251

EIA Press Contact: Thomas Welch, 202/586-1178

EIA-97-05

Contact:

National Energy Information Center

Infoctr@eia.doe.gov

Phone:(202) 586-8800

FAX:(202) 586-0727

URL: http://www.eia.doe.gov/neic/press/press51.html

If you are having technical problems with this site please contact the EIA Webmaster at mailto:wmaster@eia.doe.gov