Electric Industry Restructuring
Electric energy is vital to the economic vitality of communities and nations. The regulatory compact that fostered this vital service provided a utility with an exclusive service territory in exchange for the obligation to serve all customers upon demand in a reliable and safe manner. Investor-owned utilities (private firms) were vertically integrated enterprises that bundled the generation, transmission, and distribution functions. Customer rates were regulated to ensure that the utilities received a guaranteed rate of return (i.e., profit margin). These monopoly arrangements conflict with the trend for consumer choice in market transactions.
Because electricity cannot be stored, an extensive system of interconnection provides utilities the opportunity to buy and sell energy from one another in order to gain efficiencies and to enhance reliability. However, this same interstate grid permits a problem in one community to ripple across entire regions.
Based on the Public Utility Holding Company Act of 1935 and the Energy Power Act of 1992, the Federal Energy Regulatory Commission (FERC) regulates the practices directly affecting the resale of electricity (wholesale) but is prohibited from mandating retail competition. Starting in 1996, FERC required electric utilities providing transmission facilities to treat their system as a toll road with posted nondiscriminatory tariffs and, in effect, required all utilities to restructure into separate generation, transmission, and distribution services. The goal was to facilitate the transfer (or “wheeling”) of electric energy from a supplier to a bulk-purchase customer over the electric lines owned by a third party without discrimination. While still outside the ambit of FERC, retail competition, in contrast, refers to the use by one energy supplier of another’s transmission and/or distribution system to reach the end customer.
Despite opening the wholesale market to competition, Congress continues to respect state interest in controlling retail competition. States have regulated electric utilities since the early twentieth century. Unraveling the state regulatory structure to introduce customer choice is not easy. Change requires reopening decisions that ensure universal service, provide affordable energy for low-income ratepayers, promote economic development, protect the environment, preserve network reliability, control the siting of energy facilities and power lines, and maintain a flow of tax revenue from one of the largest industries in a state. For example, states have established opaque tax structures with the burden hidden in regulated electric prices. In a violation of tax neutrality, competing energy providers face different tax burdens. State actions to promote retail competition was active until California’s pathbreaking deregulation structure collapsed in 2001. States now vary in the use of the traditional vertically-integrated monopoly provider, the deregulated model with competitive wholesale and retail markets, or a hybrid where the retail market remains a monopoly but the wholesale market is competitive. State regulatory powers are vulnerable to Congress broadening the scope of national interest in this network economy.
Richard F. Hirsh, Power Loss: The Origins of Deregulation and Restructuring in the American Utility System (Cambridge, MA: MIT Press, 2001); Bruce Seaman and W. Bartley Hildreth, “Deregulation of Utilities: A Challenge and an Opportunity for State and Local Tax Policy,” in State and Local Finances under Pressure, ed. David L. Sjoquist (Cheltenham, UK: Edward Elgar, 2003), and William Boyd and Ann E. Carlson, “Accidents of Federalism: Ratemaking and Policy Innovation in Public Utility Law, 63 UCLA Law Review 810 (2016).
W. Bartley Hildreth
Last updated: December 2017
SEE ALSO: Deregulation