The Changing Structure of the Electric Power Industry 2000: An ... - EIA

5. Factors Underlying the Restructuring
of the Electric Power Industry
Introduction
In recent years, economists and public policy analysts
have extolled the advantages of competition over regulation
and have promoted the idea that free markets can
drive down costs and prices by reducing inefficiencies.
Competitive industries may also be more likely to spur
innovations with new technologies. Recent actions with
regard to electric power by legislators and regulators in
the United States are evidence of the changing approach
to dealing with what until recently has been a regulated
monopoly. Originally, protecting consumers was a primary
motivation for decisions to impose regulatory
constraints on the industry. Today, legislators and
regulators are making laws and rules that promote
competition across the economy for the same purpose,
because they believe that consumers will benefit more
from an industry whose members must compete for
customers than from an industry composed of regulated
monopolies.
One example is the 1999 revocation of the Bank Act of
1933. Like the Public Utility Holding Company Act of
1935 mentioned in Chapter 2 and later outlined in
Chapter 4, it was another piece of Depression-era
legislation that was believed to have become obsolete.
That law had been passed to separate commercial
banking from investment banking (the underwriting of
securities). Subsequent pressure from both commercial
and investment bankers and from the insurance industry,
promoting synergies that the Act was ostensibly
constraining, led to its repeal.
The most important and controversial sections of the
Telecommunications Act of 1996, and the Federal
Communications Commission’s regulations implementing
it, concern the unbundling of the local phone
company’s network elements down to the level of
virtual space (bandwidth) within the individual
telephone line leading to a residence. The same thinking
is now being applied to the electric power industry in
that it is now a target for unbundling along similar lines,
with power generation and sales being untangled from
transmission and distribution services. 47 Other examples
of this changed climate can be found throughout the
State and Federal levels as well as other countries
around the world. In the United States, the Energy
Policy Act of 1992 (EPACT) was passed by Congress to
promote competition in electricity generation. The recent
spate of generating asset sales (some utilities with
enormous holdings of generating capacity have sold or
are planning to sell their entire inventories) is at least
partly a result of EPACT. In 1998, retail sales in
deregulated markets occurred in 11 States. 48 With the exception
of Missouri, all of these States had deregulated
market sales in the industrial sector and all but Idaho,
Montana, and Rhode Island had sales to commercial
customers in deregulated markets. Those that did not
have residential sales in deregulated markets were
Idaho, Missouri, Montana, and Washington. As of
July 1, 2000, 24 States and the District of Columbia had
passed legislation or issued regulatory orders to restructure
the electric power industries within their borders.
Only eight States have taken little or no action toward
restructuring (Figure 23). This changed climate and the
legislative and regulatory actions that have resulted are
one of the three factors underlying restructuring that are
outlined in this chapter.
For most of the industry’s history, consumers welcomed
the protection that regulation afforded them and felt that
this means of oversight assured them of fair prices for
electricity. Now, however, consumers themselves are
pushing for competition (to both lower prices and
increase the variety of suppliers such as green power
producers) and regulatory reform. The main thrust is
coming from large industrial users of electricity who, in
some areas of the United States, have been burdened by
high electricity prices while their competitors in other
areas pay far less for their electricity. These price differentials
are the second factor underlying the restructuring
of the industry.
47 P. Huber, “Is a Breakup Next? Not Likely,” The Wall Street Journal (April 4, 2000), p. A26.
48 California, Idaho, Illinois, Missouri, Montana, New Hampshire, New York, Oregon, Pennsylvania, Rhode Island, and Washington.
Energy Information Administration/ The Changing Structure of the Electric Power Industry 2000: An Update 41