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Energy Deregulation Special Report
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 OVERVIEW: What's Changing And Why
By Rebecca McNerney, Electric Power Industry Specialist
Energy Information Administration

Today, more than 3,100 electric utilities in the United States provide approximately 3 trillion kilowatt-hours of electricity every year to about 109 million residential customers, 14 million commercial customers, and another half million industrial customers. The total annual cost: about $210 billion.

These numbers paint a picture of the enormous economic and social impact of the U.S. electric power industry. They also offer some perspective on the enormous challenge of restructuring the industry. Traditionally, electric power companies have operated as vertically integrated and regulated monopolies that generate, transmit and distribute power to the customer. Today, however, the industry is in the midst of a historic transition that will create a competitive market for power generation that allows retail customers to decide who supplies their electricity.

Why Is This Happening?

What's behind this unprecedented restructuring of an industry that touches the lives of every American? Industry analysts generally agree that there are five major factors:

1. The industry needs to become more efficient. Dissatisfaction with the prevailing system of electric power regulation increased significantly in the decades since the late 1960s, when the inefficiencies of the system started to become clear. In particular, regulated rate setting was blamed for removing the industry's incentive to lower prices by becoming more efficient. In response, economists and other public policy analysts stressed the advantages of competition over regulated monopolies and promoted the idea that free markets can reduce inefficiencies and drive down costs and prices as a result.

2. Deregulation in other industries has drawn new attention to the electric power monopoly. Many key industries-such as airlines, railroads, telecommunications, trucking and natural gas were deregulated in the 1980s. Many Americans believe it's logical for the electric power industry-the last large monopoly in the United States-to join this deregulatory revolution.

3. Power prices vary substantially from state to state. Large industrial consumers in states where electricity prices are high in relation to other states sometimes even neighboring states have used their considerable influence to convince state legislators and regulators to take actions that will give them access to lower electricity prices.

4. Nonutilities are entering the business and can generate power for less. Technological improvements have prompted nonutilities-also known as independent power producers to enter the competitive power market. Using advanced gas turbine technologies, these companies can build new generating capacity and produce electricity more cheaply than utilities using fossil fuel or nuclear technologies.

5. Federal law opened the doors to competition. Although it was not the intention of the Public Utility Regulatory Policies Act of 1978 (PURPA), the law did lay the groundwork for competition by opening wholesale markets to nonutility producers of electricity. PURPA was part of the National Energy Act, which was passed after the Arab Oil Embargo of 1973-74 in part to reduce U.S. dependence on foreign oil. Under the law, utilities were required to buy power from qualifying nonutilities at the utility's avoided cost, thereby guaranteeing the nonutilities a market for their electricity. Competition was encouraged even more by the Energy Policy Act of 1992 (EPACT), which created a new class of nonutility generators that are exempt from certain corporate ownership and geographic restrictions. EPACT also directed the Federal Energy Regulatory Commission (FERC) to order public utilities to provide open access for all electricity suppliers to the U.S. power transmission grid.

What's Happening Now?

In the years since the Energy Policy Act became law and FERC responded by opening up access to power transmission throughout the country, the number and size of nonutility electricity generators have increased significantly. At the same time, the federal government and the states have taken additional actions to open electricity markets to competition:

In the States. Recent years have seen a surge of activity on this issue in the states, which regulate distribution services and retail rates for electricity within their borders. Some states have moved faster than others by passing restructuring legislation and instituting pilot programs (see map). States with high electricity rates, such as California and northeastern states, had compelling reasons to promote competition in the hope of making lower rates available to their consumers. In 1996, California and Rhode Island passed landmark legislation to restructure their power industries and give their consumers the right to choose the supplier of their electricity. To date, 24 states have passed legislation or regulatory orders that will allow some level of retail competition. Most of the remaining states have investigated restructuring, and some may enact laws in the next few years. However, some states where retail prices are currently well below the national average have decided that restructuring may not be in their best interest at this time.

In Washington. At the federal level, Congress has been examining the issue of electric industry restructuring for a number of years. Twenty-five legislative proposals dealing with this issue have been introduced in the current Congress alone. Some of these deal with one or two issues, but the majority are considered comprehensive electric competition bills and deal with multiple issues such as: consumer protection; service reliability; the recovery of the stranded costs that utilities have paid for power plants; mergers and acquisitions; environmental concerns; the use of renewable fuels; and much more. If Congress mandates a national approach to the industry's competitive evolution, the states may be given the prerogative to opt out.

What's in it For You?

Probably the most significant restructuring issue for the average consumer of electricity is the potential for lower prices. Many price studies using different prediction techniques have been completed or will be soon. One study recently completed by the Energy Information Administration indicates that, between 1998 and 2020, the average price of electricity in real 1998 dollars is projected to decline by 0.6 percent a year as a result of competition among electricity generators. That would mean the average residential consumer who today pays $71.40 per month for electricity can expect to pay about $63.00 (1998 dollars) in 2020.

Industry changes brought on by this movement are ongoing. Many issues will continue to be identified, evaluated, and debated in the state capitals and Congress. The outcome and the real-world impacts of these debates are, as yet, impossible to predict. However, there is no doubt that the electric power industry will remain in its current transitional state for the next few years or more.

EmailRebecca McNerney

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