Restructuring of the electric power industry in the United States is continuing, with electricity generation markets being opened to competition. The initial impetus nudging the industry toward competition stemmed from the unanticipated operational impacts of the Public Utility Regulatory Policies Act of 1978 (PURPA), which encouraged the supply of wholesale power to electric utilities from nontraditional sources (i.e., renewable energy sources).(1) While the inroads made by nonutility power generators into the generation monopoly were a positive force, the impact on utilities and prices made the provision a mixed blessing.(2) The electricity-related provisions of the Energy Policy Act of 1992 (EPACT) then became the catalyst for accelerating the pace of competition in electricity trade at the wholesale level.(3)
More specifically, the EPACT provisions amended the Public Utility Holding Company Act of 1935, the Federal Power Act of 1935, and the PURPA provisions in the areas that govern, among other things, the future of nonutility power generation and the associated wholesale power transactions. Of the several EPACT provisions that affect electric utilities, the two designed to further industry competition are: (1) creating a new class of exempt wholesale generators (EWGs) and (2) expanding the authority of the Federal Energy Regulatory Commission (FERC) to order open transmission access under Section 211 of the Federal Power Act (see box on page 2 and Appendix A). The responsibility to determine the EWG status and to ensure the availability of transmission facilities in a nondiscriminatory manner was entrusted to the FERC.
Based on the above legislative mandate and with an intent to introduce wholesale competition in electricity, the FERC initiated appropriate rulemaking procedures.(4) Its two landmark rulings, Order No. 888 and Order No. 889, issued in April 1996, require all public utilities that own, control, or operate transmission facilities to file nondiscriminatory open-access tariffs that would be applied to all parties contracting for transmission service.(5) Since these Orders were issued, activity to open electricity markets to competition has increased significantly at the State and Federal levels.
| Amendments to the Public Utility Regulatory Policies Act (PURPA) of 1978:
Mandates that State utility regulatory entities evaluate new efficiency standards designed to encourage investments in conservation and energy efficiency by electric utilities. Included in the standards are:
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Amendments to the Public Utility Holding Companies Act (PUHCA) of 1935:
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Amendments to the Federal Power Act (FPA) of 1935:
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| aBased on Title I, Subtitle B, "Utilities," and Title VII, "Electricity," of the Energy Policy Act of 1992. |
The purpose of this report is to provide an analytical assessment of the changes taking place as the electric power industry moves along the road to competition. In view, however, of the magnitude and the multi-dimensional character of restructuring issues, this report covers only selected topics from three separate but interrelated issues: market structure, consumer choice, and ratesetting and transition costs. In addition, Federal and State initiatives in promoting competition are presented.
This report also satisfies requirements of the International Atomic Energy Agency (IAEA) in Vienna, Austria, concerning industry restructuring developments in the United States. The IAEA has been working since the early 1990s to provide enhanced modeling capabilities for comparative assessment of different electricity generation options to aid planning and decisionmaking in developing countries. Under the aegis of what has come to be known as the DECADES project, the IAEA is supplementing its earlier efforts by developing a sustainable energy and environmentally acceptable power development program as a part of its assessment process. Within this framework, the evolving U.S. experience is viewed as a valuable case study in lessons learned for application elsewhere.
Chapter 2 presents an overview of the existing patterns of electricity trade and average prices at the wholesale and retail levels. The electric utility industry has moved from a highly restricted but competitive wholesale market for traditional participants (primarily interregional trade between utilities or between utilities and independent power producers) to one that is now characterized by increased interregional trade, and to new generating and trading participants. One of the expectations for the future is that end users of electricity will be allowed to participate in a unified wholesale/retail market. Estimates of the existing customer classes help quantify the size of forthcoming markets that may be opened to retail customer choice. Analysis of time series data highlights existing patterns and also provides an insight into potential developments in the future.
Chapter 3 analyzes the emergence and the expected benefits and limitations of the regional independent system operator (ISO), a relatively new entity in the electric power industry. In Order 888, the FERC encouraged regions to create ISOs to eliminate discriminatory practices in bulk power transmission. The ISO concept has progressed far beyond that initial role, however, and now some ISOs are expected to play a significant role in promoting and encouraging wholesale competition. The chapter includes discussions of the status of each ISO proposal and the responsibilities being considered for the proposed ISO. A detailed discussion is presented on the importance of the ISO's governing structure, the role of the regional transmission tariff, the ISO's relationship to system reliability, its relationship to the Open Access Same-Time Information System (OASIS), and its role in monitoring market power.
Chapter 4 deals with ratesetting and customer choice issues. Promoting retail competition hinges on the pace of initiatives from the State regulatory authorities and the extent to which industry claims regarding stranded assets can be accommodated. Progress made in various States is summarized, with a focus on the critical information leading to the penetration of competition in the retail areas. The discussion focuses on the treatment of stranded costs, including recovery mechanisms, performance-based rates, and experiments with pilot programs.
Finally, Chapter 5 looks at issues still being discussed at the Federal and State levels. Summary developments at the Federal and State levels are provided, together with a discussion of potential problems confronting the enactment of legislation to promote industry competition.
Endnotes
1. PURPA's primary objective was to encourage improvements in energy efficiency through the expanded use of cogeneration and by creating a market for electricity produced from unconventional sources like renewables and waste fuels. While preserving the industry's vertically integrated structure, PURPA aimed at a modest modification by adding the obligation to look to nontraditional suppliers in conjunction with utilities' existing and proposed generating capabilities. No changes, therefore, were postulated to the cost-based pricing of electricity regulation. Yet, by encouraging nonutility power generation and by making such output easily marketable on a wholesale basis, PURPA's provisions introduced several, far-reaching operational and regulatory changes in the electric utility industry. In the evolving wholesale market for electric power, PURPA's most notable contribution was to introduce competition while taking future supply options into account. For a further discussion of this subject, see Energy Information Administration, The Changing Structure of the Electric Power Industry: An Update, DOE/EIA-0562(96) (Washington, DC, December 1996).
2. The investor-owned utilities complained that PURPA regulations forced them to purchase power even when the need for capacity did not exist. The long-term obligations imposed by such purchases tended to adversely affect the credit ratings of some of the investor-owned utilities. For a complete discussion of this topic, see Energy Information Administration, Financial Impacts of Nonutility Power Purchases on Investor-Owned Electric Utilities, DOE/EIA-0580 (Washington, DC, June 1994).
3. Energy Information Administration, The Changing Structure of the Electric Power Industry: An Update, DOE/EIA-0562(96) (Washington, DC, December 1996).
4. In fact, FERC issued policy statements in critical areas and initiated a number of proceedings in the period immediately following the passage of EPACT in 1992. These include: (1) Regional Transmission Group Policy Statement, Docket No. RM93-3-000 (July 30, 1993), (2) Docket No. RM94-7-000, Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Notice of Proposed Rulemaking (June 29, 1994), (3) Transmission Pricing Policy Statement, Docket No. RM93-19-000 (October 26, 1994), (4) Pooling Notice of Inquiry, Docket No. RM94-20-000 (October 26, 1994), (5) Notice of Proposed Rulemaking and Supplemental Notice of Proposed Rulemaking: (I) Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities, Docket No. RM95-8-000, and (ii) Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, Docket No. RM-94-7-001 (March 29, 1995), and Notice of Inquiry on Merger Policy, Docket No. RM-96-000 (January 31, 1996).
5. For additional details on these Orders, see Energy Information Administration, The Changing Structure of the Electric Power Industry:
An Update, DOE/EIA-0562(96) (Washington, DC, December 1996), pp. 51-75.