Introduction
Electricity is an integral part of life in the
United States. It is indispensable to factories, commercial establishments, homes, and even
most recreational facilities. Lack of electricity causes not only inconvenience, but also
economic loss due to reduced industrial production. Various aspects of the electric power
industry are provided in this overview.
Traditional Electric Utilities
The more than 3,170 traditional electric utilities in the United States
are responsible for ensuring an adequate and reliable source of electricity to all
consumers in their service territories at a reasonable cost. Electric utilities include
investor-owned, publicly owned, cooperatives, and Federal utilities. Power marketers are
also considered electric utilities--these entities buy and sell electricity, but usually
do not own or operate generation, transmission, or distribution facilities. Utilities are
regulated by local, State, and Federal authorities.
Generally, interstate activities (those that cross State lines) are
subject to Federal regulation, while intrastate activities are subject to State
regulation. Wholesale rates (sales and purchases between electric utilities), licensing
of hydroelectric facilities, questions of nuclear safety and high-level nuclear waste
disposal, and environmental regulation are Federal concerns. Approval for most plant and
transmission line construction and retail rate levels are State regulatory
functions.
State public service commissions have jurisdiction primarily over the
large, vertically integrated, investor-owned electric
utilities that own more than 75 percent of the Nation's generating and transmission
capacity and serve about 75 percent of ultimate consumers. There are 239 investor-owned
electric utilities, 2,009 publicly owned electric utilities, 912 consumer-owned rural
electric cooperatives, and 10 Federal electric utilities. Approximately 20 States
regulate cooperatives, and 7 States regulate municipal electric utilities; many State
legislatures, however, defer this control to local municipal officials or cooperative
members.
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Nonutility Power Producers
The approximately 2,110 nonutility power producers in the United States
include:
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facilities that qualify under the Public Utility Regulatory Policies Act
of 1978 (PURPA);
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cogeneration facilities that produce steam and electricity, but that are
engaged in business activities other than the sale of electricity;
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independent power producers that produce and sell electricity on the
wholesale market at nonregulated rates, but do not have franchised service territories;
or
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exempt wholesale generators under the Energy Policy Act of 1992
(EPACT).
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The U.S. electric power industry is composed of traditional electric
utilities, including power marketers, and nonutility power producers.
Traditional Electric
Utilities
Consumer Sectors. Utility service territories
are geographically distinct from one another. Each territory is usually composed of many
different types of consumers. Electricity consumers are divided into classes of service or
sectors (residential, commercial, industrial, and other) based on the type of service they
receive. Sectorial classification of consumers is determined by each utility and is based on
various criteria such as:
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demand levels,
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rate schedules,
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North American Industry Classification System (NAIC) Codes,
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distribution voltage,
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accounting methods,
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end-use applications, and
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other social and economic characteristics.
Electric utilities use consumer classifications for planning (for example,
load growth and peak demand) and for determining their sales and revenue requirements (costs
of service) in order to derive their rates. Utilities typically employ a number of rate
schedules for a single sector. The alternative rate schedules reflect consumers' varying
consumption levels and patterns and the associated impact on the utility's costs of providing
electrical service. Reclassification of consumers, usually between the commercial and
industrial sectors, may occur from year to year due to changes in demand level, economic
factors, or other factors.
The residential sector includes
private households and apartment buildings where energy is consumed primarily for:
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space heating,
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water heating,
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air conditioning,
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lighting,
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refrigeration,
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cooking, and
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clothes drying.
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The commercial sector includes
nonmanufacturing business establishments such as:
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hotels,
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motels,
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restaurants,
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wholesale businesses,
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retail stores, and
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health, social, and educational institutions.
Sometimes the commercial sector includes small manufacturing facilities as
well.
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The industrial sector includes:
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manufacturing,
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construction,
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mining,
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agriculture,
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fishing, and
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forestry establishments.
An electric utility may classify commercial and industrial consumers based
on either NAIC codes or demand and/or usage falling within specified limits, set by the
electric utility based on different rate schedules.
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The other sector includes:
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public street and highway lighting,
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railroads and railways,
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municipalities,
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divisions or agencies of State and Federal Governments under special
contracts or agreements, and other utility departments, as defined by the pertinent
regulatory agency and/or electric utility.
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Revenue. The revenue associated with sales to
ultimate consumers is the operating revenue reported by the utility. Operating revenue
includes energy charges, demand charges, consumer service charges, environmental surcharges,
fuel adjustments, and other miscellaneous charges. Among other costs of service, utility
operating revenues include State and local taxes, Federal income taxes, and other taxes paid
by the utility. State and local authorities tax the value of plants (property taxes), the
amount of revenues (gross receipts taxes), purchases of materials and services (sales and use
taxes), and a potentially long list of other items that vary extensively by taxing authority.
Federal taxes are for the most part "payroll" taxes. Taxes deducted from employees' pay, such
as Federal income taxes and employees' share of Social Security taxes are not a part of the
utility's "tax costs," but are paid to the taxing authorities in the name of the employees.
These taxes are included in the electric utility's costs of service (for example, revenue
requirements) and are included in the amounts recovered from consumers in rates and reported
in operating revenues.
Electric utilities, like other business enterprises, are required by various
taxing authorities to collect and remit taxes assessed on their consumers. In this regard,
the utility serves as an agent for the taxing authority. Taxes assessed on consumers, such as
sales taxes, are called "pass through" taxes. These taxes do not represent a cost to the
utility and are not recorded in the operating revenues of the utility. However, taxing
authorities differ on whether a specific tax is assessed to the utility or to the consumer, a
difference that in turn determines whether or not the tax is included in the electric
utility's operating revenues.
Average Revenue per Kilowatthour (Price).
Average revenue per kilowatthour is defined as the cost per unit of electricity sold (a
reasonable proxy for price) and is calculated by dividing retail electric revenue by the
corresponding sales of electricity. The average revenue per kilowatthour is calculated for
all consumers and for each sector (residential, commercial, industrial, and other). The
average revenue per kilowatthour discussed in this primer represents a weighted average of
consumer revenue and sales within each sector and across sectors for all consumers. Average
revenue per kilowatthour is affected by changes in the rate schedules used by the electric
utilities and by changes in the volume of electricity sales. Because fixed charges remain
constant regardless of the volume of sales, average revenue per kilowatthour decreases as the
volume of sales increases. A change in average revenue per kilowatthour may occur when the
volume of electricity sales changes (because of an increase/decrease in the use of
electricity by individual consumers or an increase/decrease in the number of ultimate
consumers) across all sectors or within a specific sector. Generally, the rate schedules used
by electric utilities are designed so that as the volume of sales increases, the revenue
increases at a slower rate, lowering the average revenue per kilowatthour. Average revenue
per kilowatthour is also affected by class of utility ownership and by class of service
(sector).
Classes of Ownership. The electric utility
industry in the United States includes 3,170 investor-owned, publicly owned, cooperative, and
Federal electric utilities. Historically, investor-owned electric utilities have been most
successful in serving large, consolidated markets where economies of scale afford the lowest
prices. However, publicly owned, cooperative, and Federal electric utilities all have a role
in producing, transmitting, and distributing electricity.
Figure 3. Electric Industry Generating Nameplate
Capacity by Type, 1998
Investor-owned electric utilities are
privately owned entities. They represent 8 percent of the total number of electric utilities
and approximately 75 percent of electric utility generating capability, generation, sales,
and revenue in the United States. Like all private businesses, investor-owned electric
utilities have the fundamental objective of producing a return for their investors. These
utilities either distribute profits to stockholders as dividends or reinvest the profits.
Investor-owned electric utilities are granted service monopolies in certain geographic areas
and are obliged to serve all consumers. As franchised monopolies, these utilities are
regulated and required to charge reasonable prices, to charge comparable prices to similar
classifications of consumers, and to give consumers access to services under similar
conditions. Most investor-owned electric utilities are operating companies that provide basic
services for the generation, transmission, and distribution of electricity. The majority of
investor-owned utilities perform all three functions. They operate in all States except
Nebraska, where electric utilities consist primarily of municipal systems and public power
districts.
Publicly owned electric utilities are
nonprofit local government agencies established to provide service to their communities and
nearby consumers at cost, returning excess funds to consumers in the form of community
contributions, increased economies and efficiencies in operations, and reduced rates.
Publicly owned electric utilities include:
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municipals,
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public power districts,
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State authorities,
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irrigation districts, and
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other State organizations.
Most municipal electric utilities simply distribute power, although some large
ones produce and transmit electricity as well. There are 2,009 publicly owned electric
utilities in the United States. They represent about 63 percent of the number of electric
utilities, supply approximately 10 percent of generation and generating capability, and
account for about 15 percent of retail sales and 14 percent of revenue. They obtain their
financing from municipal treasuries and from revenue bonds secured by proceeds from the sale
of electricity. Public power districts and projects are concentrated in Nebraska, Washington,
Oregon, Arizona, and California. Voters in a public utility district elect commissioners or
directors to govern the district independent of any municipal government. State authorities,
like the Power Authority of the State of New York or the South Carolina Public Service
Authority, are agencies of their respective State governments. Irrigation districts may have
other forms of organization. In the Salt River Project in Arizona, for example, votes for the
board of directors are apportioned according to the size of landholdings.
Cooperative electric utilities are
owned by their members and established to provide electricity to those members. These
electric utilities operate in rural areas with low concentrations of consumers because these
areas historically have been viewed as uneconomical operations for investor-owned utilities.
There are 882 cooperatives operating in 47 States; none operate in Connecticut, Massachusetts, Rhode
Island, or the District of Columbia. Cooperative electric utilities represent about 27
percent of U.S. electric utilities, 10 percent of sales and revenue, and around 4 percent of
generation and generating capability. Cooperatives are incorporated under State laws and are
usually directed by an elected board of directors, which in turn selects a manager. The Rural
Utilities Service (formerly the Rural Electrification Administration), the National Rural
Utilities Cooperative Finance Corporation, the Federal Financing Bank, and the CoBank ACB are important sources of debt financing for cooperatives.
The 10 Federal electric utilities in
the United States are part of several agencies in the U.S. Government:
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the Army Corps of Engineers in the Department of Defense,
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the Bureau of Indian Affairs and the Bureau of Reclamation in the Department
of the Interior,
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the International Boundary and Water Commission in the Department of
State,
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the Power Marketing Administrations in the Department of Energy (Bonneville,
Southeastern, Southwestern, and Western Area), and
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the Tennessee Valley Authority (TVA).
Three Federal agencies operate generating facilities:
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TVA, the largest Federal producer;
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the U.S. Army Corps of Engineers; and
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the U.S. Bureau of Reclamation.
The TVA markets its own power while generation by the U.S. Army Corps of
Engineers (except for the North Central Division, for example, Saint Mary's Falls at Sault
Ste. Marie, Michigan) and the U.S. Bureau of Reclamation is marketed by the Federal power
marketing administrations: Bonneville, Southeastern, Southwestern, and Western Area. The four
power marketing administrations also purchase energy for resale from other electric utilities
in the United States and Canada. Alaska, the fifth power marketing administration, owned and
operated two hydropower facilities (Eklutna and Snettisham). On November 28, 1995, President
Clinton signed a bill authorizing the sale of these projects. Final transfer of title to the
State of Alaska and three Alaskan utilities occurred August 1998 after which the Alaska Power
Administration ceased to exist. Federal electric utilities represent less than 1 percent of
all electric utilities, provide approximately 10 percent of all generating capability and
generation, and account for about 1 percent of total sales to ultimate consumers and less
than 1 percent of the associated revenue. Federal electric utility generation is primarily
sold for resale to municipal and cooperative electric utilities and to other nonprofit
preference consumers, as required by law. Federal power is sold not for profit, but to
recover the costs of operations. Federal electric utilities operate approximately 180 power
plants. Most of the power plants are Federal hydroelectric projects initially designed for
flood control and irrigation purposes.
Nonutility Power
Producers
Qualifying Facilities. PURPA
facilitated the emergence of a group of nonutility electricity-generating companies called
qualifying facilities or QFs. Under PURPA, small power producers and cogenerators
receive status as a QF by meeting certain requirements for ownership, operating methods, and
efficiency. Those requirements were established by the Federal Energy Regulatory Commission
(FERC).
Cogenerators. Facilities which produce
electricity and another form of useful thermal energy through the sequential use of energy
(usually heat or steam for industrial processes or heating/cooling purposes) are called
cogenerators--many of which have status as QFs. Cogenerators are primarily engaged in
business activities (such as, agriculture, mining, manufacturing, transportation, education).
The electricity that they do generate is mainly for their own use, but any excess is sold to
the host utility.
Independent Power Producers. These
facilities (known as IPPs) must use renewable energy as a primary source for generation of
electricity. IPPs operate within the franchised territories of host utilities. They do not
possess transmission facilities or sell electricity on the retail market (that is, all their
sales are wholesale or sales for resale). By definition, a facility that has QF status is not
an IPP.
Exempt Wholesale Generators. EPACT
modified the Public Utility Holding Company Act (PUHCA) and created another class of
nonutility power producers: exempt wholesale generators (EWGs). EPACT exempted EWGs
from the corporate and geographic restrictions imposed by PUCHA. With this modification,
public utility holding companies are allowed to develop and operate independent power
projects anywhere in the world.
Electric Power Versus Electric Energy
Electric power is the rate at which electricity does work--measured at a point in time, that is, with no time dimension. The
unit of measure for electric power is a watt. The maximum amount of electric
power that a piece of electrical equipment can accommodate is the capacity or capability of
that equipment.
Electric energy is the
amount of work that can be done by electricity. The
unit of measure for electric energy is a watthour. Electric energy is
measured over a period of time and has a time
dimension as well an an energy dimension. The amount of electric energy produced or used
during a specified period of time by a piece of electrical equipment is referred to as
generation or consumption.
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Energy Sources Used To
Generate Electricity
Various sources of energy can be converted into electric energy or
electricity. The major or dominant sources include fossil fuels, uranium, and water.
Fossil fuels supply about 70 percent of the energy sources for the generation
requirements of the Nation. Coal, petroleum, and gas are currently the dominant fossil fuels
used by the industry. Other sources of energy can also be converted into electricity,
including:
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geothermal energy,
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solar thermal energy,
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photovoltaic energy, and
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biomass, includes
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wood,
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wood waste,
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peat,
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wood liquors,
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railroad ties,
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pitch,
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wood sludge,
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municipal solid waste,
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agricultural waste,
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straw,
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tires,
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landfill gases,
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fish oils, and
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other waste materials.
Environmental
Aspects
When fossil fuels are burned to generate electricity, a variety of gases and
particulates are formed. If these gases and particulates are not captured by some pollution
control equipment, they are released into the atmosphere. This overview provides a brief
summary of the gaseous emissions from U.S. electric utilities and the methods employed to
reduce or eliminate their release into the atmosphere. Among the gases emitted during the
burning of fossil fuels are sulfur dioxide (SO2), nitrogen oxides
(NOx), and carbon dioxide (CO2).
Electric Power Transactions
& The Interconnected Networks
Power Transactions
An electric power system is a group of generation, transmission, distribution,
communication, and other facilities that are physically connected and operated as a single
unit under one control. The flow of electricity with the system is maintained and controlled
by dispatch centers. It is the responsibility of the dispatch center to match the supply of
electricity with the demand for it. In order to carry out its responsibilities, the dispatch
center is authorized to buy and sell electricity based on system requirements. Authority for
those transactions has been preapproved under interconnection agreements signed by all the
electric utilities physically interconnected or with coordination agreements among utilities
that are not connected.
The Interconnected Networks
The U.S. bulk power system has evolved into three major networks (power
grids), which also include smaller groupings or power pools. The major networks consist of
extra-high-voltage connections between individual utilities designed to permit the transfer
of electrical energy from one part of the network to another. These transfers are restricted,
on occasion, because of a lack of contractual arrangements or because of inadequate
transmission capability. The three networks are:
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the Eastern Interconnected System,
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the Western Interconnected System, and
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the Texas Interconnected System.
The Texas Interconnected System is not interconnected with the other two
networks (except by certain direct current lines). The other two networks have limited
interconnections to each other. Both the Western and the Texas Interconnect are linked with
different parts of Mexico. The Eastern and Western Interconnects are completely integrated
with most of Canada or have links to the Quebec Province power grid. Virtually all U.S.
utilities are interconnected with at least one other utility by these three major grids. The
exceptions are in Alaska and Hawaii. The interconnected utilities within each power grid
coordinate operations and buy and sell power among themselves. The bulk power system makes it
possible for utilities to engage in wholesale (for resale) electric power trade. Wholesale
trade has historically played an important role, allowing utilities to reduce power costs,
increase power supply options, and improve reliability. Historically, almost all wholesale
trade was within the National Electric Reliability Council (NERC) regions, but utilities are
expanding wholesale trade beyond those traditional boundaries. U.S. international trade is
mostly imports. Normally, most imports are from Canada and the remainder are from
Mexico.
Overall reliability planning and coordination of the interconnected power
systems are the responsibility of NERC, which was voluntarily formed in 1968 by the electric
utility industry as a result of the 1965 power failure in the Northeast. NERC's nine regional
councils cover the 48 contiguous States, part of Alaska, and portions of Canada and Mexico.
The councils are responsible for overall coordination of bulk power policies that affect the
reliability and adequacy of service in their areas. They also regularly exchange operating
and planning information among their member utilities. The boundaries of the NERC regions
follow the service areas of the electric utilities in the region, many of which do not follow
State boundaries. At present, the industry is in transition. Steady progress toward
competitive wholesale markets for electric power recently has been accelerated by FERC Order
888, which opens access to transmission lines and encourages greater wholesale trade.
The Changing Electric
Power Industry
The electric power industry is evolving from a highly regulated, monopolistic
industry with traditionally structured electric utilities to a less regulated, competitive
industry. PURPA opened up competition in the generation market with the creation of
qualifying facilities. EPACT removed some constraints on ownership of electric generation
facilities and encouraged increased competition in the wholesale electric power
business.
The EPACT amended the Federal Power Act (FPA) such that any electric utility
can apply to the FERC for an order requiring another electric utility to provide transmission
services (wheeling). Prior to EPACT, the FERC could not mandate that an electric utility
provide wheeling services for wholesale electric trade. This change in the law permits owners
of electric generating equipment to sell wholesale power (sales for resale) to
noncontiguous utilities.
In April 1996, the FERC issued two final rules, 888 and 889, implementing
EPACT's provisions for open access to transmission lines. Rule 888 addresses equal access to
the transmission grid for all wholesale buyers and sellers, transmission pricing, and the
recovery of stranded costs. Stranded costs are investments, mostly in generation, made by
utilities under the regulated environment that are presently recovered in cost-based rate
structures and may not be recoverable in a competitive environment with market-based rates.
Rule 889 requires jurisdictional utilities that own or operate transmission facilities to
establish electronic systems to post information about their available transmission
capacities.
In response to these rulemakings, utilities are proposing to form Independent
System Operators (ISOs) to operate the transmission grid, regional transmission groups, and
open access same-time information systems (OASIS) to inform competitors of available capacity
on their lines. The provision for open transmission access in EPACT has also facilitated the
creation of new participants in the electric power industry, power marketers and power
brokers. Power marketers are entities engaged in buying and selling wholesale electricity and
fall under the jurisdiction of the FERC, since they take ownership of electricity and are
engaged in interstate trade. Power brokers, who do not take ownership of electricity, are not
regulated by the FERC. A growing number of power marketers have filed with the FERC and had
rates approved. Power marketers generally do not own generation or transmission facilities or
sell power to retail customers. However, continuing deregulation of the industry is allowing
power marketers the possibility of entering retail electricity markets.
Many State legislatures and the Congress are considering legislation that will
allow competition in retail sales of electric power. In 1996, Rhode Island and California
passed bills that will allow end-use customers in their States to choose among competitive
generation suppliers. The plans allowed retail choice for some consumers as early as 1997,
and will phase in retail choice for all consumers by 2001. Transmission and distribution will
remain regulated functions with rules to assure open access to lines for all competitors.
Pilot programs for retail wheeling are underway in New Hampshire and at major utilities in
several States. This interest in retail competition points to an increasingly competitive
electric power industry. Presently, electric rates are based on embedded historical costs.
Future electric rates are likely to be dynamic, reflecting the current cost of providing
service. In a competitive environment, unbundling of electric power services and pricing that
reflects time-of-day and seasonal variations may become more common. Continuing deregulation
at both Federal and State levels is transforming the historically monopolistic electric power
industry into a competitive industry that will eventually increase competition in its
generation and service components, and change the nature of the way electricity is priced,
traded, and marketed in the United States.
Endnote:
1The Energy Information Administration publications,
used as input to this overview are accessible on the Internet at the following web site
addresses:
Contact:
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