A Spotlight on Electric Deregulation

By Easter, Pamela S. | Public Management, February 1997 | Go to article overview

A Spotlight on Electric Deregulation


Easter, Pamela S., Public Management


Over the past decade, we have seen the deregulation of many previous monopolies, including the telecommunication, natural gas, trucking, and airline industries. Now, there is a national and state movement afoot to deregulate the $300 billion-per-year electric utility industry. What exactly is being proposed? How will the industry differ from what we have now? And finally, how do we learn more about deregulation and begin developing plans that benefit our individual local governments?

The purpose of this article is to start a discussion of electric restructuring and its potential impact on local government. Deregulation of the electric industry is currently unfolding; many major decisions, laws, and regulations still are being made and written. As new developments occur, ICMA and other organizations will be important resources in providing the information and support that managers will need in structuring the right programs for their local governments.

Where We Have Come From

For most of the twentieth century, the provision of electricity has been a monopoly, with privately and municipally owned utilities having their own exclusive service areas. With this situation has come the traditional obligation to serve all customers in their areas at regulated, "bundled" rates that include the cost of power generation and delivery. Most utilities - especially the investor-owned ones (IOUs) - have typically been vertically integrated, with the same provider owning and supplying generation, transmission, distribution, and metering/billing. Some municipal utilities, however, have chosen to focus on the distribution of power to their customers and to purchase power from others. Three-quarters of the electric power in America is provided by nearly 215 investor-owned utilities, with the remainder being supplied by municipal, rural cooperatives, or other government-operated entities.

Government has been heavily involved in the regulation of the electric industry. At the national level, the Federal Energy Regulatory Commission (FERC) oversees wholesale electric rates and service standards, as well as the interstate transmission of power. State commissions are responsible for regulating their IOUs' retail rates, safety standards, and relations with customers. For municipal-owned utilities, local government councils and boards set rates and oversee utility operations, with some interaction with FERC.

The current movement toward deregulation began in the 1970s. The Public Utilities Regulatory Policy Act (PURPA) of 1978 and the more recent Energy Policy Act (EPACT) of 1992 opened the generation portion of the industry to competition by requiring utility companies needing new capacity to entertain bids from alternative suppliers. FERC Order 888, issued in 1996, further opened up the wholesale electricity market, that is, power provided by utilities and FERC-approved power marketers. It mandated that all transmission-line owners offer transmission ("wheeling") services to any electric utility, as well as to any retail customer taking transmission service as part of a state-mandated, direct-access program. With these various aspects of electricity now open to competition, some states are considering "retail wheeling" or direct-access programs that would require all utility lines be made available to any customer.

Other factors leading to deregulation have included the movement away from government regulation and protected monopolies, advances in technology, privatization, and low-cost power generation. And finally, demand is increasing for lower utility rates, "direct access" to electricity, and wider customer choices.

More than 47 states currently are considering some form of electric deregulation/restructuring. No one, uniform structure is being proposed. Some states are looking at implementing statewide reform through their state public utility commissions, like New York. Other states, such as Michigan and New Hampshire, are conducting pilot programs in which some customers may choose alternate suppliers. …

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