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The electricity industry has been undergoing a major transition over the past decade. Utility power generation, transmission, and distribution used to be considered a natural monopoly. As a state-regulated monopoly, each local utility company was vertically integrated, meaning that it was responsible for providing its customers with the full range of electric services — including all aspects of creating, delivering, and metering electricity.
Today, there is a widespread view among legislators, regulators, industry analysts, and economists that the generation segment of power supply would be more efficient in a competitive market. Deregulation of many elements of gas and electric services at the federal (wholesale) level and in many states has led to the unbundling of electric services, and the power industry is in the process of being restructured to adapt to this change.
In some states, customers can now purchase their electricity from among competing energy suppliers. Suppliers can set their own price, effectively reselling electricity that they have purchased from various generation sources. Access to transmission, along with some aspects of rates, are being improved to encourage competition. Other aspects of transmission, and the entire distribution system, remain regulated and noncompetitive. The local distribution utility — whether it has been restructured or continues to own its own generation — continues to operate and maintain the power lines, delivering electricity to consumers as it did before.
The initial actions leading to change began in 1978, when the Public Utility Regulatory Policies Act (PURPA) made it possible for nonutility generators to enter the wholesale power market by building independent power generating facilities. In 1992, Congress voted to promote greater competition in the bulk power market with the passage of the Energy Policy Act. The Federal Energy Regulatory Commission (FERC) implemented the intent of the Act in 1996 with Orders 888 and 889, with the stated objective to "remove impediments to competition in wholesale trade and to bring more efficient, lower cost power to the nation's electricity customers." The FERC orders required open and equal access to utilities' transmission lines for all electricity producers. This action, combined with early state restructuring of the electric power industry, now allows retail customers a choice among power suppliers in some areas.
States have the ultimate responsibility for regulating distribution services and retail rates for electricity within their borders, so each state decides whether deregulation is in its best interest and, if so, in what form. Roughly half of the states have passed major legislation and/or regulations to restructure their electric power industry. Some of the states that historically had higher-than-average electricity prices have already opened their retail electricity markets to competition, allowing customers to choose their electricity supplier. Other states are beginning with pilot programs offered to a limited number of consumers. Problems with California's restructuring model and other energy industry developments have, however, added a cautionary note to the discussion. Many states have suspended or otherwise delayed their move to deregulation while issues faced by early adopters are addressed.
State restructuring legislation has typically either required or encouraged the divestiture of generation assets:
- To encourage competition among generating companies.
- To prevent a few companies from dominating the marketplace.
- As a condition for the recovery of stranded costs — costs incurred by utilities for power plants and contracts under a regulated environment that may not be recoverable in a competitive market for generation.
At the end of 2000, approximately 16% of all electric utility generating capacity had been sold to unregulated companies or transferred to unregulated subsidiaries which sell their power in competitive markets rather than under cost-of-service regulation. In some parts of the nation, such as New England, almost all generating plants have been sold to private companies.
Utility deregulation has the potential to bring greater customer choice among energy products and suppliers. Electricity rates could also drop, as the price of energy will be determined less by federal and state regulations and more by energy supply and demand.
For More Information
Pursue one of the following links.
Background Information on Restructuring
Restructuring Status and Issues
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