Economic Report President

larger coal plants. In 1994 these technologies contributed to a 35 percentfall in the average size of new fossil-fuel generating plants relativeto that of existing plants. These changes mean that large users canthreaten to generate their own electricity if their utilities do not offerlower rates. Technologies on the horizon promise further reductions inthe efficient size of electricity generation, to the point where even residentialusers may some day find it economical to generate their ownpower (Box 5-10).The development of an interconnected electricity system, and animproved understanding of how to operate generating plants and thetransmission grid independently of each other, have made competitionfeasible. As the market for electric power grew, individual systemsbegan to interconnect, making it physically possible for consumers inone utility’s service area to receive electricity from generators in another.To maintain the integrity of the electric power grid, the quantity ofelectricity supplied must always match the quantity demanded. Withquantities demanded fluctuating constantly, the output of generatorssupplying power to the grid must be closely coordinated. Until recently,this was taken to mean that generation, transmission, and distributionservices needed to be jointly owned. Recent technological and institutionalinnovations, however, such as computerized controls and independentsystem operators (ISOs), offer ways to coordinate unaffiliatedgenerators and provide fair, open access to transmission lines whilemaintaining their integrity.Today the electric power industry is governed by a mix of State andFederal regulation. But a series of Federal actions beginning in 1978has begun to introduce competition at the wholesale level. The PublicUtility Regulatory Policies Act of 1978 (PURPA) first opened the doorby requiring public utilities to purchase power from renewable sourcesand from sources using cogeneration (see Box 5-10). The price of this“qualified power” was determined by State regulators and tended to begreater than the utility’s average cost of generation. Although thisrequirement saddled some utilities with high-cost, long-term contracts,it also demonstrated that generators not owned by the public utilitycould be integrated into the electric power system, and it helped spurthe development of smaller scale generating technologies. The EnergyPolicy Act of 1992 went further, creating a new class of independentgenerating companies that could sell power directly to utilities.In April 1996 the Federal Energy Regulatory Commission (FERC)issued Order 888, requiring public utilities to provide access to theirtransmission lines at reasonable, nondiscriminatory rates.At the State level, to further these policies and reap the benefits ofcompetition, many utilities are collaborating to create regional orstatewide ISOs to manage their transmission grids. ISOs set transmissionprices and can contract for network services (to provide backuppower, for example). There are currently four ISOs in operation214