History of Electric Utility Industry
Most
utility customers today are limited to a single power provider, but this wasn't
always the case. In the early days of the electric power market, independent
generators and distributors competed with each other for customers turning
streets into a jungle of power lines. Confusion gave way to consolidation in
the 1920s. This decade also saw the rise of large electric power holding
companies. By 1932, the eight largest holding companies controlled 73% of the
nation's investor owned electric business. Holding companies typically owned
several local subsidiaries in different states. Because there was little
effective state regulation, and no federal regulation, national holding
companies were effectively unregulated. Some holding companies overcharged subsidiaries
for equipment and service knowing that the subsidiaries had to pass their
expenses on to customers. These abuses were corrected with the passage of the
1935 Federal Power Act and the Public Utility Holding Company Act (PUHCA).
The Regulatory Compact
National legislation dating back to the New Deal created a uniquely
structured market for electric power. Nearly seventy-five percent of the power
in the
The concept governing this structure is the "Regulatory Compact."
The Regulatory Compact is a covenant - essentially a contract - between the
authority of state governments, represented by public utility commissions, the
FERC and in some cases local government and investor owned utility companies.
In exchange for the obligation to provide service to all customers in that
territory, investor owned electric utilities are given a territorial monopoly
on service and allowed to earn a limited profit. State regulators have
historically set prices at rates that reflect the cost of building power plants
and putting up the wires. Profits have reflected the cost of capital.
Electrifying
As part of the New Deal legislation that established the regulatory compact
and established the current structure of the industry, President Franklin
Roosevelt also proposed an ambitious federal initiative to build large public
utilities to bring electricity to small town and rural
An unintended consequence of these huge Depression-era projects was the creation of a multi-tiered energy market with no uniform regulatory mechanism for all providers of electricity. While investor owned utilities are regulated by state commissions and the Federal Energy Regulatory Commission, almost all publicly owned utilities are regulated by state and/or federal laws or are "self-regulated" through boards accountable to consumers or elected officials, and some answer to state commissions. In addition, the Rural Utility Service (RUS), a federal entity which provides funding to many publicly owned utilities, exerts regulatory authority over its borrowers. Federally owned facilities provide subsidized power to some of the publicly owned.
TVA is the one energy provider with virtually no federal, state, or local regulatory oversight (except for transmission service where FERC has limited authority). TVA is the primary energy provider to over 8 million customers in parts of Tennessee, Alabama, Mississippi, Kentucky, Georgia, North Carolina and Virginia, is operated as a wholly-owned and financed corporation of the United States with its own authority and regulatory schedules and is regulated solely by its own three-person governing board, each having staggered 9-year terms. Although congressional oversight hearings are periodically held, and congress does have control over appropriated funds provided to TVA to carry out its non-power programs, such as being caretaker of certain federal properties along the Tennessee River, the three-person TVA board is under no obligation to carry out any mandate of any congressional committee. Board members are appointed by the President and confirmed by the Senate. Removal of a board member requires a concurrent resolution of the Senate and the House of Representatives. This lack of regulatory oversight has recently become problematic as the electric power market has become more competitive.
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Types of Electric Utilities |
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Type |
Number |
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Investor Owned Companies |
265 |
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Municipal Systems |
1,818 |
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Public Power Districts |
75 |
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State |
68 |
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5 |
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Rural Electric Co-Ops |
922 |
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37 |
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Non-Utility Generating |
44 |
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Federal and Municipal Energy Entities |
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Today, there are over one hundred federally owned facilities that generate
or transmit electricity in the |
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Along with federal power providers and marketers, there are many hundreds of Municipal Utility Districts (MUDs), Public Utility Districts (PUDs) and Rural Electrical Cooperatives (COOPs). MUDs, PUDs and COOPs get most of their financing through low-interest federal loans (RUS), or by issuing tax-exempt bonds. These entities do not pay federal or state income taxes on their revenues. |
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Investor Owned Utilities |
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In comparison to government sponsored power providers, privately owned
utilities are financed by the contributions of their shareholders as well as
by funds borrowed on the open market at competitive rates. There are
approximately 265 investor owned utilities in the |
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The Role of Public Priorities |
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One consequence of the regulatory compact is that electric utilities are obliged to respond to public priorities that would not otherwise be considered the responsibility of a business or corporation in an open market. |
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For example, public priorities have been translated into federal, state and local regulations requiring utilities to invest in alternative fuels, to build and decommission nuclear power plants and to buy power from independent producers. Public priorities have also required utilities to provide assistance to low income households for power purchases and to promote a variety of worthwhile environmental, social and even educational programs. In the process, investor owned utilities have become important de facto social service agencies in many communities. |
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Some recent examples of how public priorities have affected market structure and determined significant powerplant and industrial decisions for utilities include: The Power and Industrial Fuel Use Act of 1978 - In response to an artificial shortage of natural gas produced by federal price controls, this legislation limited utilities' ability to use oil and gas to generate electricity. PURPA - The Public Utility Regulatory Policies Act of 1978 required utilities to sign long-term contracts to purchase power from non-utility alternative energy generators at a rate that reflected projected future energy prices. When many of these contracts were signed, future energy prices were expected to be much higher than they are now and PURPA contracts have locked in an inflated energy price. State and Local Initiatives - Electric power rates have served as alternative sources of public funding for programs that would ordinarily have been supported through taxes such as conservation programs, R&D and discounts for low-income customers. |
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The Electric Utility Industry |
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Revenues (1994) |
$219 billion |
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Assets |
$688 billion |
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Jobs |
475 thousand |
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Estimated Stranded Costs |
$100-200 billion |
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