Initially utilities were not regulated. Early utilities would often compete for the same customers including building duplicate distribution systems. Naturally, competition was greatest in urban areas. It was cheaper to compete in densely populated areas & wealthy customers more likely to use power.
Historical Perspective
Historically, the cost of generating power declined as utilities built ever-larger power plants, which increased efficiency and reduced production costs. Increased electric demand required more & larger plants, which reduced costs further as well as increasing the utility rate base. This era was a win-win for everyone. Consumers had abundant, low cost power; regulators oversaw declining rates, increased electrification, & economic growth; & utilities & stockholders gained financially.
Utility Functions
The common vision of a utility embodies three functions:
- Generation - production of electricity supply.
- Transmission - movement of that electricity from the generation facility to the local distribution system.
- Distribution - the delivery of purchased power to your business or home.
Facts are that only a small fraction of the 3,200 or so electric utilities, in the U.S., perform all three functions & virtually no utility exists in isolation. Major investor owned utilities (IOUs) do own generation, transmission, & distribution. Very few of the publicly owned utilities (POUs) own their own generation or transmission.
US Structure Outline
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PUHCA -- 1935Since state regulation was not sufficient to control the action of interstate holding companies headquartered out-of-state, Congress passed the Public Utility Holding Company Act of 1935 (PUHCA).
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North American Electric Reliability Council (NERC)
The New York blackout of 1965 was a wakeup call to the power industry. The industry responded to the blackout by creating a voluntary, utility-managed reliability organization, the North American Electric Reliability Council (NERC).
NERC divided the nation into ten reliability regions. The largest council is the Western Systems Coordinating Council (WSCC). The smallest is the Mid- Atlantic Coordinating Council (MAAC). Each reliability council promulgates system planning & operating criteria that are intended to ensure that each utility with generation or transmission assets builds & operates them in a way that allows system controllers to preserve bulk power reliability.
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1970’s Oil Embargo
The Oil Embargo of the 1970s changed things in a hurry. Rapid increases in the cost of fuel to operate power plants translated into equally large jumps in retail power prices. Continued increases in oil prices & unstable fuel supplies led electric utilities to construct new power plants that relied on domestic coal and uranium. These plants cost much more to build than simple oil or natural gas-fired generators. Consequently, the fixed costs of utility operations increased, further increasing retail electricity prices. The natural consequence was consumer complaints & increased regulatory oversight.
PURPA -1978
Federal Public Utility Regulatory Policies Act of 1978, Section 210, (PURPA). This legislation created a new legal category of power plants known as qualifying facilities, QFs, & new market entrants called independent power producers, IPPs. Contracts for power from QFs typically covered the life of the plant, because the only outlet for power from a QF was the local utility. Subsequently, utilities asked Congress and state PUCs to reform the power purchase requirements of PURPA. Although Congressional action is still pending, PURPA did create a new category of power producers.
Transmission and Distribution
The transmission grid moves wholesale power from generators to distributors. The distribution system moves retail power from distributors to customers. Transmission will continue to be regulated at the federal level by FERC. Distribution will continue to be regulated at the state level by state commissions.
IRP (Integrated Resources Planning)By the early 1980s, the situation appeared to be out of control, with most utilities requesting routine, often significant, rate increases and several utilities on the verge of bankruptcy. As a result, regulators began to take a much more active role in utility planning. One response was for regulators to require utilities to evaluate conservation and other alternatives rather than automatically building new plants. This process, called integrated resource planning (IRP), was successful in keeping retail rates in check, although rates were still thought to be too high.
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Why Regulation?Regulation of utilities is based on the inherent risk that a single monopoly supplier will overcharge consumers due to the lack of competition and high demand. In the United States, state PUCs regulate retail electricity prices while FERC regulates wholesale prices.
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Cost Based RegulationThe historic standard for wholesale power exchanges has been that the price of electricity be cost-based, not market-based & that savings associated with the exchange be shared. In other words, the extra income the seller reaps and the reduced costs the buyer receives are shared between the two utilities & passed on to consumers in lower rates. The cost based regulatory approach was adopted by FERC to stimulate so-called economy exchanges & to protect buyers (small utilities) from the inherent advantage the sellers (large neighboring utilities) had in the transaction.
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Electric Industry Restructuring in the 1990’sBy the early 1990s it was becoming apparent that electric industry regulatory approaches were not working. IRP was successful in holding rate increases in check & stimulating consumer choice, but the process was highly adversarial, time consuming, & expensive. Rates were still high & significant difference among adjacent electric utilities & between gas & electric utilities caused problems.
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Introduction to RestructuringUntil recently the local utility set a price, called a rate or tariff. Next, it metered the energy used & sent the customer a bill based on the rate. Finally, the customer pays the bill. Facility managers can participate in the regulatory process through which rates are set, but individual consumers have little influence over final prices. Now, however, this structure is undergoing a profound change. State legislators & utility regulators are now letting consumers choose among a variety of new energy suppliers on the basis of competitive prices & products.
This trend is called deregulation, or restructuring. |
A Utility DefinedWhat is a utility? Typically, a utility provides a commodity or service that is considered vital to the general public such as power, water, or natural gas. Utility service is a vital need. It is deemed by state & federal lawmakers to be in the public interest to regulate its provision. To prevent price gouging & encourage widespread access, the government has granted individual utilities certain monopoly rights, accompanied by the right to regulate price as well as service terms & conditions.
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IOUs & PUCsUtilities are defined differently by each state & in federal legislation. Generally, there are two types of utilities, private and public. Private investor owned utilities, IOUs, issue stocks, sell bonds, & are regulated at the state level by regulatory commissions. Regulatory commissions have a variety of names although the names Public Utilities Commission (PUC) & Public Service Commission (PSC) are the most common. These commissions, or PUCs, set the retail rates charged by IOUs for their services. Commissions also ensure that IOUs respond to customer service requests & are properly maintaining utility infrastructure.
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Publicly Owned Utilities (POUs)POUs, are member-owned cooperatives or government or municipally owned utilities. Publicly owned utilities are generally exempt from regulation by state regulatory commissions because they are assumed to have the customers’ (who are also the owners or voters) best interests in mind when setting rates & service standards. A few states do subject publicly owned utilities to regulatory oversight.
There are approximately 3,200 utilities operating in the United States, roughly 200 of them are IOUs. The IOUs provide power to almost 70 percent of all consumers. |
Federal Power Marketing Agencies (PMAs)PMAs, include the semi-autonomous Tennessee Valley Authority, TVA, & the four DOE power marketing administrations:
Examples: New York Power Authority, the Lower Colorado River Authority, TX, the Platte River Power Authority, CO, & the Salt River Project, AZ. |
Regulated Utility Features
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Transmission & DistributionThe distinction between transmission & distribution for a utility is not so obvious. The industry has tried to draw a so-called bright line between the two. Such a line is needed to clarify FERC and State jurisdiction over power line regulations & rates. In general, transmission lines are high-voltage lines, those with kilovolt-ampere (kVa) ratings of 750, 500, 230, & 115. Distribution lines have lower voltage ratings, such as 69, 34, & 13 kVa. Many in the industry refer to ratings of 115 kVa & above as transmission.
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Utility Planning and Generating Reserve MarginsCustomer demand growth is uneven and somewhat unpredictable but utilities are required to provide for all customer demands. The amount of reserves is set through industry standards, & are reviewed & approved by regulators. Typical reserve margins are in the 15% to 20% range, usually based upon the need to have power available if two of the utilities’ largest plants are out of service at the same time during peak demand.
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ReliabilityReliability is actually composed of two elements:
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ReservesTwo different types of reserves are required for system reliability:
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Control CentersWheeling power requires the use of transmission lines that are owned by multiple utilities. This use needs to be managed so that power can be tracked as it flows from utility to utility. Utilities manage the operation of generation, transmission, & transmission maintenance from facilities called control centers. Power that is wheeled through a system is coordinated between adjacent control centers. Although there are over 3,000 retail utilities, there are only 140 control centers in North America.
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Examples of U.S. Power PoolsOperation of pooled generation requires cooperative operation of transmission in the pool. Tight power pools have some form of centralized transmission dispatch. Usually, there is a control center for the pool as a whole that issues dispatch
instructions to the control centers of the larger utilities in the pool. Examples of tight pools include the New England Power Pool (NE Pool), the New York Power Pool (NY Pool), & the Pennsylvania, New Jersey, & Maryland Pool (PJM). PJM is the oldest U.S. power pool having been founded in the 1920s. |
Unbundling & ISOsIn the traditional system, although the utility may purchase power from neighboring utilities, it is primarily responsible for its own generation, transmission, & distribution of power to all of the retail customers in its service territory. In the deregulated supply system, generation & distribution are unbundled & customers are no longer captive but are free to purchase from any suppliers on the grid. Purchasing of power is done via market mechanisms like the power exchange and transmission scheduling is conducted by the Independent System Operator (ISO).
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Functions after Industry RestructuringConventional utility operations, prior to restructuring, consisted of generation, transmission, distribution, & service to captive customers. Deregulation can be rather narrowly defined as the substitution of market forces for regulated generation rates. In order to create an appropriate environment for consumers to participate in the generation marketplace, new rules & standards of conduct are needed to ensure truly competitive markets result. This process has launched a series of changes in utility management & institutions - revolutionary.
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Power Pools, Exchanges, & Wholesale MarketsIn a deregulated environment, the power pools that had existed are replaced by power exchanges (sometimes still called pools) for the wholesale marketing of power only. Tight power pools integrated the operation of wholesale markets & transmission operations.
New power markets require new rules & new methods for conducting transactions. Power trading has to be isolated from transmission operations to prevent collusion between the two or insider trading based on non-public information about plant or transmission line outages. |
Power Pool PricingA utility has generating resources that cost 3 cents/kWh & its neighbor has resources that produce power for 1 cent/kWh. It would be advantageous for the first utility to buy power from its neighbor rather than operate its own plants. Implementing this scheme creates two challenges.
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Pool ProceduresIn order to facilitate economy exchanges & collaborative generation development, utilities formed power pools. Pools have standard procedures for conducting power exchanges among members including arranging for wheeling. As a result, each transaction does not have to be submitted for FERC review.
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Power Pools and Regional Power MarketsIn addition to providing reliability reserves, adjacent utilities can also provide alternative sources of generation to meet routine loads & partners to jointly build new generation. Through these arrangements, utilities can collaborate to operate their collective portfolio of generation so that operating costs are minimized.
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Transparent PricingPrice deregulation requires open markets & transparent pricing. Transparent prices are prices that can be readily determined by market participants in an open environment. Exchange markets typically take the form of bid-offer auctions where sellers can bid against each other and market clearing prices are known by all parties, including consumers, buyers, and sellers.
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Pool TypesTwo types of power pools - tight and loose:
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Pool Concerns ~ Market PowerIn order to make all sellers comfortable that an incumbent utility does not have market power, or undue market influence, deregulation rules require local utilities to mitigate potential market power.
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Pool Concerns ~ Market ManipulationPrices in electricity markets can be manipulated through a variety of mechanisms, including restricting power generation, restricting transmission access, & manipulating power exchanges. Restricting power supplies has the effect of increasing prices in the short run, because prices are a function of supply & demand – difficult to detect manipulation.
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Independent System Operators (ISOs)Competitive generation & transmission markets merge in the ISO, despite the fact that the markets themselves operate independently. A central point of control is necessary to ensure system reliability. ISOs became the heart of the new competitive electricity industry & are required by FERC to be broadly representative of all market participants, not just transmission owners.
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