Implications for Utilities of the National Energy Policy Act and Other Developments

By Radin, Alex | Management Quarterly, Fall 1993 | Go to article overview

Implications for Utilities of the National Energy Policy Act and Other Developments


Radin, Alex, Management Quarterly


The electric industry today is undergoing fundamental change and restructuring--perhaps more so than at any time in its history. The industry that will emerge will be tar different from the one we have known.

The subjects I will address today--revisions to the Public Utility Holding Company Act (PUHCA), the role of independent power producers, transmission access, retail wheeling, and demand side management--are covered by the National Energy Policy Act of 1992. They are both a reflection of changes already occurring in the electric industry, and a stimulus to additional changes. All of these issues have a common theme: competitiveness, which must be an essential ingredient of the successful electric utility of the future. By competitiveness, I refer not only to competition between electric suppliers, but also between electric utilities and other energy suppliers. This competition will take place at the retail as well as wholesale level.

Two provisions of the National Energy Policy Act will be especially important in encouraging competition and advancing restructuring of the industry. They are (1) amendments to PUHCA to permit formation of generating utilities which would not be subject to regulation by the Securities and Exchange Commission, and (2) amendments to the Federal Power Act to give utilities greater access to transmission.

PUHCA Amendments to Stimulate Growth of IPPs

The PUHCA amendments permit establishment of a new breed of independent power producers, called exempt wholesale generators (EWGs), which will be freed from certain restrictions of the Holding Company Act. Relaxing such restrictions is expected to encourage the formation or strengthening of truly independent power producers (IPPs) or IPPs affiliated with existing power companies.

There is a popular conception that the amendments to PUHCA "deregulated" the electric utility industry. I believe this is incorrect. The PUHCA amendments did free some utilities from provisions of the Public Utility Holding Company Act, and they will encourage new entrants into the wholesale generating business. However, the wholesale power sales of EWGs and other independent power producers are still subject to regulation by the Federal Energy Regulatory Commission. Also, the transmission access provisions of the National Energy Policy Act will extend FERC's regulatory authority. Although the National Energy Policy Act will facilitate competition, it by no means freed utilities from federal regulation.

Even without the PUHCA amendments, non-utility generation had been expanding rapidly in recent years. Although non-utility generation today comprises only about 6 percent of total capacity, growth of non-utility generation in recent years has been significant. Even more impressive are estimates of future growth.

According to a recently published study by the consulting firm of RCG/Hagler, Bailly Inc., the total IPP capacity in service now totals 47,597 megawatts, representing an investment of about $50 billion. Another 93,000 megawatts of IPP power are under development or construction, and as much as 78,000 megawatts could be on-line by the end of the decade, according to the report.

The National Independent Energy Producers (NIEP) reports that IPPs have supplied about 20 percent of all new electric generating capacity since 1978, and have brought on-line 50 percent of all new capacity since 1989.

Growth of IPPs has sparked considerable debate about their long-range impact on the electric industry and its customers.

IPP proponents assert that utilities, by requesting bids for new power production, stimulate competition among power suppliers, resulting in lower prices and greater innovation. By giving utilities a larger spectrum of choice in obtaining new capacity, IPPs are said to offer utilities more opportunities to comply with federal and state environmental standards.

It is also claimed that utilities can shift some of the risk from themselves to their IPP suppliers when they purchase wholesale power from IPPs. …

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