Originally Published: 4/22/2008
PUBLIC UTILITY DEREGULATION
By The Issue Wonk
The Public Utility Holding Company Act (PUHCA) of 1935 pro-hibited market manipulation, specifically to prevent super-sized utility conglomerates, from forming monopolies and overtaking geographic regions. “For over 70 years, federal laws have played a vital and critical role in the operation, production, distribution and protection of the U.S. electrical power grid. Federal laws in concert with state laws and regulations have necessarily dictated that the power grid be shielded from market manipulation and criminal behavior.”1 However, utility companies, since 1935, have never stopped lobbying heavily for a repeal of the PUHCA. In the 1980s and 1990s they succeeded in eroding it significantly and PUHCA was finally completely eliminated with the passage of the Energy Policy Act of 2005.
The PUHCA led to 4 primary types of service providers: “private investor-owned utilities (IOUs) with stock freely traded in the marketplace by shareholders; publicly owned utilities, such as those owned by municipalities; cooperative utilities which were usually found in rural communities; and federal electric utilities, such as the TVA [Tennessee Valley Authority] and the REA [Rural Electrification Association].”2
According to Frontline:2
After the tumult of the Roosevelt years and the end of World War II, the electric power industry enjoyed a period of steady growth, driven by both technological and efficiency advances that were reflected in lower prices. Between the years of 1947 to 1973, the growth rate for the industry held steady at about 8% per year and there was little change in the industry structure. The industry began to promote increased electricity usage through advertising campaigns with slogan such as GE’s “Live Better Electrically” campaign begun in 1956. As the industry grew and prices continued to decline, there was little need for state and federal regulatory intervention. IOUs were the primary service providers for most Americans and their continued growth and low rates satisfied both consumers and investors.
National Energy Act
Then the energy crisis of the 1970s hit. It came primarily from the 1973 OPEC oil embargo (see The Price of Gas) and resulted in long lines at gas pumps and oil, coal, and natural gas shortages. All of this, along with eroding public confidence in the nuclear power industry, contributed to rate increases for consumers throughout all the energy industries, including electricity. President Jimmy Carter, elected in 1976, made energy concerns one of his top priorities. He first created the Department of Energy by consolidating organizational entities from a dozen departments and agencies. “Under this legislation, the Federal Power Commission (FPC) was replaced by the Federal Energy Regulatory Commission (FERC) as the federal agency that establishes and enforces wholesale electricity rates.”2
Carter went further to address the energy problem. “In attacking the demand side of the problem, he waged a public campaign focused on conservation to reduce the American public’s high rates of energy consumption. To combat the supply side, he sought to cultivate the growth of new sources of energy, including nuclear power and renewable resources such as solar and wind power. These 2 approaches were crystallized in the 5-part National Energy Act, which Carter signed into law in 1978.”2
Part of the National Energy Act was the Public Utility Regulatory Policies Act (PURPA) which was designed to encourage efficient use of fossil fuels by allowing non-utility generators (known as Qualifying Facilities or QFs) to enter the wholesale power market. PURPA designated 2 main categories of QFs. One was “cogenerators,” which used a single fuel source to either sequentially or simultaneously produce electric energy as well as another form of energy, such as heat or steam. The other was independent power producers (IPPs), which use renewable resources including solar, wind, biomass, geothermal and hydroelectric power as their primary energy source. “Although intended to be an environmental statute, a primary effect of PURPA was to introduce competition into the generation sector of the electricity marketplace, thus challenging the utilities’ claim that the electricity market encouraged a ‘natural monopoly.’”2 Understand, if the electric market is viewed as a “natural monopoly,” then it follows that it must be regulated. If the perception is changed, the need for regulation no longer exists.
Free Market Mania
In 1981 Ronald Reagan became president. He immediately starting implementing his ideas of free market and deregulation. The “free-market mania” further challenged the notion of the electric power industry as a “natural monopoly.”
Many politicians and economists argued that regulation had outlived its value, and that the market should determine prices. The telecommunications and transportation industries were deregulated, and the natural gas industry followed suit. Advocates for deregulating the electricity industry argued that the implementation of PURPA had proved that non-utility generators could produce power as inexpensively and effectively as the regulated utilities. Large industrial consumers searching for lower prices also chimed in and urged federal regulators to pursue deregulation.2
Deregulation became the name of the game and, during the 1980s and 1990s the movement resulted in the electric power industry “changing from a structure of regulated, local, vertically-integrated monopolies, to one in which competitive companies generate electricity, while the utilities maintained transmission and distribution networks.” All of this led to increased competition, the free market mantra. However, competition also resulted in an increase in investor-owned utilities (IOUs) which sought to make themselves more competitive through mergers, acquisitions, and asset divestitures, “leading to the industry to becoming much more concentrated.”
By 1998, the 10 largest IOUs owned almost 40% of IOU-held electricity generation-capacity. Increased competition has also led to the rise of 2 new participants in the electric power marketplace, who buy and sell electricity without owning or operating transmission or distribution operations: power marketers, which are considered to be utilities and therefore regulated by FERC, and power brokers, which are unregulated.2
In 1992 President George H.W. Bush got Congress to pass the Energy Policy Act (EPAct). EPAct was passed purportedly “to reduce our nation’s dependence on imported petroleum by requiring certain fleets to acquire alternative fuel vehicles, which are capable of operating on nonpetroleum fuels.”3 However:
The Act also amend[ed] the Public Utility Holding Company Act of 1935 to help small utility companies stay competitive with larger utilities. It also amended the Public Utility Regulatory Policies Act of 1978 and broadened the range of resource choices for utility companies and outlined new rate-making standards.4
EPAct opened access to transmission networks to non-utility power generators, “a new class of power generators, exempt wholesale generators (EWGs), that are exempt from the provisions of the Public Holding Company Act of 1935 and grant[ed] the authority to the Federal Energy Regulatory Commission to order and condition access by eligible parties to the interconnected transmission grid.”5
EPAct changed the way electricity was sold to local consumers. Energy companies were permitted to install their own plants and sought customers throughout the country, but not necessarily in the same geographic region. Energy brokers then entered into the picture and utilized the open market to buy and sell power. And thus began the potential unreliability of energy delivery.
At the same time, states which had historically high electricity prices, such as California, began to investigate whether competitive deregulated markets would benefit their consumers. In 1996, both California and Rhode Island passed deregulation legislation, giving the consumer the right to choose his electricity supplier. “As of May 2001, 24 states and the District of Columbia either [had] passed legislation or issued a comprehensive order to restructure their electric power industry. 18 states [were] investigating deregulation.”2
The Power Grid & Deregulation
The power grid is almost 100 years old. The population is growing. The demand for power is growing. However, with more and more power being delivered through IOUs, things like maintenance, technological upgrades, and research and development were nothing more than additional costs that decreased profits and, thus, decreased investor dividends. Therefore, deregulation has significantly contributed to the further deterioration of the power grid.1
The grid structure has more than 140 control centers, about 3,500 utility providers covering over 200,000 miles. There are two centers, one in the east and one in the west. Texas has its own grid.1
The grid operates in 2 and, usually, 3 systems. The main source provides power to the distribution centers. The distribution centers frequently send power to a network of sub-stations that feed electricity into neighborhoods via feeders which flow to transformers. It is at the distribution centers where most of the power failures occur and where the most time is required in order to make a repair. The feeders and transformers are a primary problem in local outages. All of these problems are exacerbated by equipment that has not been adequately maintained.1
With energy brokers buying and selling power on the open market, they were purchasing power from plants hundreds of miles away from a distribution region. This put unprecedented burdens on the aging and deteriorating power grid, “raising the likelihood of power failures at the local level.”1 Most importantly, the electrical grid, as it was originally envisioned, was never designed to absorb the transmission of high voltage capacity across the continent, and especially in absence of comparable and upgraded systems in place.” (1) Enron became the poster child for electrical power market manipulation, “which came to light after the rolling blackouts of California in 2000 and 2001.”1
Thus, deregulatory efforts of the 1980s and 1990s chiseled away at PUHCA and led to large increases in power costs as well as rolling blackouts and the 2003 Northeast Blackout. Then, in 2005, a new Energy Policy Act virtually eliminated all regulation. This will have “an unprecedented and profound impact . . . on how future transactions in the energy industry will be handled by the federal government.”1
1 Grassi, Diane M. Fallout From the Energy Policy Act of 2005, Part l. Michnews.com, February 28, 2008
2 Frontline. Blackout: Public vs. Private Power: From FDR to Today. PBS.org.
3 Energy Policy Act (EPAct). U.S. Department of Energy.
4 Kenney, Robyn. Energy Policy Act of 1992, United States. The Encyclopedia of Earth, Updated 9/18/06.
5 Energy Policy Act of 1992 (EPAct). TeachMeFinance.com.
© The Issue Wonk, 2008