Restructuring: The story continues

Moving the electricity industry from a government-regulated monopoly to a market-driven enterprise is no simple matter. Every American uses electricity. Yet when we turn on a light or toast a bagel, few of us are aware of the numerous, complex public policy issues associated with this everyday commodity. Awareness, however, may soon increase as the electricity industry is restructured--deregulated is the more common, but less accurate, term--to allow market forces rather than governmental edicts to manage it. As was the case with natural gas and telecommunications--industries that have already undergone deregulation--restructuring of the electricity industry will hopefully lead to competition, a more efficient market, and lower prices. But the path to a restructured electricity market is complex and marked by widespread confusion. Meanwhile, the ultimate benefits remain unclear. From Monopoly to Market Historically, the electricity industry has been viewed as a natural monopoly; it was thought that the cost of electricity would be lower if only one firm in a defined region undertook generation, transmission, and distribution of electricity. Natural or not, monopoly status required government approval, and with approval came regulation and the demand that the industry meet certain social goals, such as providing service to everyone. That industry structure has recently come into question, however. To begin with, technological changes have created alternatives to the vertically integrated power company, thus eroding the rationale for a natural monopoly. Second, in the 1970s, utilities incurred enormous cost overruns building and operating nuclear power plants, and this led many people to question the regulatory system. And third, large industrial and commercial electricity customers saw the potential for lower prices in a competitive market and began to call for restructuring. In 1992, Congress and the president responded. Several key federal laws form the legal basis for electricity restructuring. In addition, many states have passed, and still others are contemplating, their own restructuring laws. * Public Utility Holding Company Act of 1935. PUHCA changed a complicated industrial structure into the current system of state-regulated utilities. It also gave the Securities and Exchange Commission power to limit acquisition of assets to geographically contiguous areas and to prohibit certain loans and contracts among the operating subsidiaries of an electricity holding company. Critics, however, suggest that PUHCA has protected utilities from competition to the detriment of consumers by restricting the actions that holding companies can take. For example, because each operating subsidiary must be managed independently, there is little incentive to exploit potential scale economies, especially since each subsidiary's regulated level of profit is simply a function of its costs. * Public Utility Regulatory Policies Act of 1978. Enacted by Congress to reduce dependence on foreign oil, PURPA requires utilities to buy power from nonutility companies that generate excess power in the course of another process, such as generating steam to operate industrial equipment. Proposed legislation in Congress would repeal those mandated purchases because they are seen as inconsistent with an open market. * Energy Policy Act and FERC Order 888. The Energy Policy Act of 1992 empowers the Federal Energy Regulatory Commission to require that transmission-owning utilities transmit power from generators to other utilities and to electricity wholesalers at reasonable, nondiscriminatory rates based on the transmitters' costs. Thus, under the act, a utility company in the Southeast can buy power from a utility in the Pacific Northwest, and the intervening transmission-owning utilities are required to send--or wheel--the electricity from the seller to the buyer. To implement the legislation, FERC issued Order 888, which describes the terms and conditions for open access to the transmission system. …