97-154 ENR
CRS Report for Congress
Received through the CRS Web
Electric Utility Restructuring:
Overview of Basic Policy Questions
January 28, 1997
Larry B. Parker
Specialist in Energy and Environmental Policy
Environment and Natural Resources Policy Division
Congressional Research Service ˜ The Library of Congress

---

Electric Utility Restructuring:
Overview of Basic Policy Questions
Summary
Proposals to increase competition in the electric utility industry involve
segmenting electric functions (generation, transmission, distribution) that are currently
integrated (or bundled) in most cases (both in terms of corporate and rate structures).
This report identifies five basic issues this effort raises for the Congress to consider
as the debate on restructuring proceeds. These are:
Who should determine the boundaries and pace of restructuring efforts? The
restructuring debate is filled with potential state-federal jurisdictional disputes. An
increasingly dynamic market situation challenges current regulatory demarcations and
suggests a complete re-evaluation may be in order.
How should transitional issues be handled? Transitional issues, such as
stranded costs (costs assumed under the existing system that may not be recoverable
under a more competitive system), involve classic policy questions: How much
stranded cost recovery is reasonable? and Who should pay?
How should the market be structured to ensure a smooth operating electric
system in its hybrid competitive-regulated form? Reliability is crucial to any electric
system. However, the system’s need for careful coordination may conflict with the
goal of a competitive generating sector to encourage market forces and consumer
choice with respect to supply and demand.
How should the electric utility industry be structured or restructured to
encourage and safeguard a more competitive system? In many ways, the existing
regulatory structure is the outcome of the events of the 1930s where a less
comprehensive regulatory system failed to maintain competitive forces against the
threat of monopolistic practices, and financial solvency against the threat of unsound
business practices. Also, the need to smoothly integrate competitive and regulated
segments adds additional complexity to determining appropriate industry structures.
How should non-economic regulatory factors be integrated into the envisioned
hybrid system? Over the past 25 years, electric utilities have acquired a number of
important non-economic tasks, including environmental standards, consumer-oriented
programs (demand-side management programs (DSM), conservation incentives), and
encouraging alternative sources of energy. The status and future of these activities
must be determined. In addition, competition may alter individual powerplant
operations, creating new social conflicts or environmental concerns that may need to
be addressed.
Overall, Congress may wish to consider whether the time is ripe for federal
intervention in the continuing evolution of the electric utility industry or whether a
“wait and see” attitude toward state proceedings is more appropriate. Separately,
Congress may wish to consider whether certain impacts of restructuring, such as air
pollution, should be addressed as part of the restructuring debate, or in the legislative
context in which those concerns arise.

---

Contents
Introduction: Segmenting an Integrated Industry . . . . . . . . . . . . . . . . . . . . . . . . 1
Background: How We Got Where We Are . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Basic Policy Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Who should determine the boundaries and pace of restructuring efforts? . . 7
How should “stranded costs” and other transitional issues be handled? . . . 10
How should the market be structured to ensure a smooth operating electric
system in its hybrid competitive-regulated form? . . . . . . . . . . . . . . . 12
How should the electric utility industry be structured or restructured to
encourage and safeguard a more competitive system? . . . . . . . . . . . . 14
How should non-economic regulatory factors be integrated into the envisioned
hybrid system? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Final Observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

---

Electric Utility Restructuring:Overview of Basic
Policy Questions
Introduction: Segmenting an Integrated Industry
After many decades of operating in a comprehensive, regulated market structure,
the electric utility industry is facing significant change, both from new generating and
transmission technology and shifting policy perspectives with respect to competition
and regulation. tn#1
1
2 The continuing policy response to this change is likely to affect
just about every consumer in the country. The industry is massive, with 1994 assets
totaling $689 billion, retail sales of $203 billion, and wholesale sales (sales for resale)
of $43 billion. It consists of 3,204 utilities — 250 investor-owned, 2005 publicly
owned, 939 cooperatives, and 10 federal entities. It is difficult to overestimate the
importance of electric service to the country’s economy and individuals’ quality of
The
1
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

2 The advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.

This technological advancement has been combined with legislative initiatives, such as
the Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces
into the electric generating sector. This shift in policy continues with the promulgation of
FERC Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-2
life. In 1994, the average residential customer paid $827 to buy 9,549 kilowatt-hours
(796 Kwh monthly) of electricity.3
The policy shift underlying the changes occurring in the electric utility industry
is a growing belief that the rationale for the current economic regulation of electric
utilities at both the federal and state levels — that electric utilities are natural
monopolies — is being overtaken by events, and that market forces can and should
replace some of the current regulatory structure. Regulation and rate-of-return
ratemaking arguably exist as a partial substitute for the marketplace. The emerging
trend in the industry suggests that regulation is an imperfect substitute for the
marketplace and that with emerging new generating and transmission technology, real
self-regulating market forces are now able to replace government regulation in many
instances. This substitution could result in a more efficient allocation of the country’s
resources, and provide consumers with more accurate price signals regarding the
actual cost of electricity.
The restructuring effort attempts to reduce and alter the role of government in
electric utility regulation by identifying transactions, industry segments, regions, or
specific activities that might no longer be the subject of economic regulation. In those
areas where the marketplace cannot supplant regulation, existing regulation could
remain as it is or be modified to be more performance-based. Thus, the government’s
role in regulation of electricity would play a more limited role in identified areas, such
as antitrust enforcement. The current focus of the restructuring effort is the electric
generating sector where experience under the Public Utility Regulatory Policies Act
of 1978 (PURPA) and the Energy Policy Act of 1992 (EPACT) suggests that
competition is possible.
The purpose of restructuring the electric utility industry is to promote economic
efficiency, not simply to create competitive markets. As noted by former Federal
Energy Regulatory Commission (FERC) Commissioner Charles G. Stalon:
“Competitive markets are not ends in themselves.”4 Competitive markets are a
The
3
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
4
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
(continued...)

---

CRS-3
vehicle to increase economic efficiency by relating costs and prices. Proponents
argues that the events of the last 15-20 years demonstrate the regulatory system has
not provided consumers with the proper price signal regarding the current relationship
between costs and prices. Restructuring those segments of the electric system that
5
can sustain viable competitive markets would at least partially restore the necessary
price signal to consumers and suppliers.
With enactment of PURPA, the federal government unwittingly opened up the
restructuring debate by lifting barriers in the electric generating market to non-utility
entrants; by 1994, non-utility generating capacity was about 8% of the U.S. total.
Introducing competition in the wholesale generation market was formalized by
Congress with the passage of EPACT. This process continues with FERC Orders
888 and 889, which provide for open access to the transmission grid at the wholesale
level for all generators, and for recovery of costs incurred under the existing
regulatory regime that may not be recoverable in a more competitive market (i.e.,
“stranded cost” recovery). Concurrently with these actions at the federal level, some
states have began addressing restructuring issues at the retail level, with some states
moving aggressively toward retail competition (also known as retail wheeling) and
other choosing not to actively pursue such a course.
(...continued)
4
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
5
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-4
Background: How We Got Where We Are
The Federal Power Act (FPA) and the Public Utility Holding Company Act of
1935 (PUHCA) established a regime of regulating electric utilities that gives specific
and separate powers to the states and the federal government. State regulatory
commissions address intrastate utility activities, including wholesale and retail rate-
making. State authority currently tends to be as broad and as varied as the states are
diverse. At the least, a state public utility commission will have authority over retail
rates, and often over investment and debt. Some state regulatory bodies also oversee
many facets of utility operation. Despite this diversity, the essential mission of the
state regulator is the establishment of retail electric prices. This is accomplished
through an adversarial hearing process. The central issues in such cases are the total
amount of money the utility will be permitted to collect and how the burden of the
revenue requirement will be distributed among the various customer classes
(residential, commercial, and industrial).
Under the Federal Power Act, federal economic regulation addresses wholesale
transactions and rates for electric power flowing in interstate commerce. Federal
regulation followed state regulation and is premised on the need to fill the regulatory
vacuum resulting from the constitutional inability of states to regulate interstate
commerce. In this bifurcation of regulatory jurisdiction, federal regulation is limited
and conceived to supplement state regulation. The Federal Energy Regulatory
Commission (FERC) has the principal functions at the federal level for the economic
regulation of the electricity utility industry, including financial transactions, wholesale
rate regulation, interconnection and wheeling of wholesale electricity, and ensuring
adequate and reliable service. In addition, to prevent a recurrence of the abusive
practices of the 1920s (e.g., cross-subsidization, self-dealing, pyramiding, etc.), the
Securities and Exchange Commission (SEC) regulates utilities’ corporate structure
and business ventures under the Public Utility Holding Company Act (PUHCA, Title
1 of the Federal Power Act).
This regulatory regime changed little between 1935 and 1978. Beginning in
1978, primarily in response to the energy crisis, laws were passed to encourage the
development of alternative sources of power. The Public Utility Regulatory Policies
Act of 1978 (PURPA) was enacted in part to augment electric utility generation with
more efficiently produced electricity and to provide equitable rates to electric
consumers. Specifically, PURPA encouraged the development of small power
production and cogeneration of electricity and steam (called qualifying facilities or
QFs). In addition to PURPA, the Fuel Use Act of 1978 (FUA) helped QFs become
established. Under FUA, utilities were not permitted to use natural gas to fuel new
generating technology. QFs, which are by definition not utilities, were able to
combine the availability of natural gas and new, more efficient generating technology,
such as combined-cycle, with a regulatory system (specifically, section 210 of
PURPA) that provided them with a captive market that priced their product at their
local utility’s “avoided cost.” The introduction of new generating technologie
6
s
The
6
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
(continued...)

---

CRS-5
lowered the financial threshold for entrance into the electricity generation business as
well as shortened the lead time for constructing new plants. FUA was repealed in
1987, but by this time QFs and small power producers had already gained a portion
of the total electric generating capacity.
This influx of QF power challenged the cost-based rates that previously guided
wholesale transactions. Before implementation of PURPA, FERC approved
wholesale interstate electricity transactions based on the seller’s costs to generate and
transmit the power. As more nonutility generators entered the market in the 1980s,
these cost-based rates were challenged. Since nonutility generators typically do not
have enough market power to influence the rates they charge, FERC began approving
certain wholesale transactions whose rates were a result of a competitive bidding
process. These rates are called market-based rates.
Most recently, the Energy Policy Act of 1992 removed several regulatory
barriers to entry into electricity generation to further competition of wholesale
electricity supply. Specifically, EPACT provides for the creation of new entities,
called “exempt wholesale generators” (EWGs), that can generate and sell electricity
at wholesale without being regulated as utilities under PUHCA. Under EPACT, these
EWGs are also provided with regulatory support to assure transmission of their
wholesale power to a wholesale purchaser. However, EPACT does not permit FERC
to mandate that utilities transmit EWG power to retail consumers (commonly called
“retail wheeling”), an activity that remains under the jurisdiction of state public utility
commissions.
In line with EPACT, FERC issued a Notice of Proposed Rulemaking, since
called the Mega-NOPR, that proposed ending the utilities’ transmission dominance
to allow more wholesale competition in the generation sector. On April 24, 1996,
FERC issued two final rules on transmission access — Orders 888 and 889. In
issuing its final rules, FERC concluded that these Orders would “remedy undue
discrimination in transmission services in interstate commerce and provide an orderly
and fair transition to competitive bulk power markets.” Under Order 888, the Open
Access Rule, transmission owners are required to offer both point-to-point and
network transmission services under terms and conditions comparable to those they
provide for themselves. The Rule provides a single tariff providing minimum
(...continued)
6
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-6
conditions for both network and point-to-point services and the non-price terms and
conditions for providing these services and ancillary services.
This Rule also allows for full recovery of so-called stranded costs. Stranded
costs can be viewed as a transition problem resulting from the movement from a
comprehensive regulatory regime to a more competitively based electric generating
sector. The utilities’ current investments in electric generating facilities are based on
a “regulatory bargain” between regulated utilities and their regulators,7 a situation
upset by the emergence of competitive forces in the electric generating system. As
a result, some utilities have costs that were prudently incurred under the current
system that are uneconomic or “stranded” by the transition to a more competitive
electric generation market. FERC Order 888 provides for utilities to recovery these
wholesale stranded costs with those costs being paid by wholesale customers wishing
to leave their current supply arrangements.
Order 889, the Open Access Same-time Information System (OASIS) rule,
establishes standards of conduct to ensure a level playing field. The Rule requires
utilities to separate their wholesale power marketing and transmission operation
functions, but does not require corporate unbundling or divestiture of assets.
Retail competition (also called retail wheeling) refers to the ability of retail
consumers to obtain their electric services from any one they choose. Currently, retail
competition involves a competitive generation market, but a transmission and
distribution system that is regulated so as to provide customers access to that
competitively based generation on a reasonable and nondiscriminatory basis. FERC
8
The
7
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
8
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
(continued...)

---

CRS-7
Orders 888 and 889 represents FERC’s attempt to achieve this competition on a
wholesale level. However, FERC does not have jurisdiction over retail competition,
as explicitly stated in EPACT. Currently, that is under the jurisdiction of the states.
Several states, including California, Rhode Island, and Pennsylvania, have moved
aggressively toward retail wheeling; other states, such as Idaho and Virginia, have
decided not to move in this direction at this time. During 1995-96, 47 states
conducted formal or informal procedures considering electric industry restructuring,
illustrating that the issue is a dynamic one with momentum at the state level that is not
dependent on congressional action. However, the diversity of responses coming from
those differing processes may be an impetus for some to consider a uniform, national
response to the issue.
Basic Policy Questions
The questions now are whether further legislative action is desirable to
encourage competition in the electric utility sector and how a transition between a
comprehensive regulatory regime to a more competitive electric utility sector could
be made with the least amount of economic and service disruption. Determining those
segments of the electric system amendable to competitive forces and who should
make those determinations is the crux of the restructuring debate. The task falls into
five categories that are discussed below.
Who should determine the boundaries and pace of restructuring
efforts?9
The restructuring of the industry challenges the current state-federal division of
regulatory responsibilities because of the magnitude of potential impacts and the
(...continued)
8
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
9
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-8
dynamic nature of events. About 56% of total investor-owned electric utility plant
assets are involved in generating electricity (the remainder supports transmission and
distribution activities). Any change in the manner in which those assets are valued
10
would have a major effect on the rates that consumers would pay. Moving from a
traditional embedded-cost valuation scheme to a market valuation would increase the
value of some generating capacity and decrease the value of other generating capacity.
Competition would tend to move the value of generating capacity to the marginal cost
of constructing new capacity, generally represented at the current time by a new
natural gas-fired, combined-cycle facility. In general, older facilities that have been
fully depreciated would tend to have market values greater than their current book
value under regulation; whereas, newer, capital intensive facilities (such as some
nuclear plants) would have market values less than their current book value. Case-by-
case valuation would be affected by location, availability of alternatives, and electricity
demand. Thus, at least in the short-term, a specific locale could have higher or lower
electric rates resulting from a more competitive system, if its current generating
capacity is particularly expensive or inexpensive because of age, fuel source, or other
cost-related variable.
Currently, 80% to 90% of generating assets are under state jurisdiction. Given
the stakes involved, it is not surprising that state regulatory bodies believe they are the
most qualified to oversee any transition to a more competitive generating sector.
Transitional issues vary among states, and states believe that they should have the
flexibility to resolve those issues within their own context. Indeed, some states have
determined that the best transition for them is no transition, while other states have
moved aggressively to further restructuring.
11
The
10
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
11
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
(continued...)

---

CRS-9
Proponents of comprehensive generating competition argue that maximum
economic efficiency requires a national market and that a piecemeal approach is
inefficient. For them, federal legislation is necessary to preempt the state role in
regulation, if states are unwilling to move on their own. So the first decision point for
restructuring is “Who is going to take the lead?” FERC’s Order 888 uses an
expansive interpretation of existing authority to justify its wholesale open access and
stranded cost provisions.1 With FERC prohibited by the Energy Policy Act of 1992
2
(EPACT) from ordering retail competition, new legislation would appear necessary
for FERC to expand its role in retail issues. Arguably, to the extent that individual
states continue to work out their own solutions to restructuring challenges, broad
federal legislation arguably becomes either less draconian or less necessary.

The challenge is made more complex because the jurisdictional situation is not
static. The “bright line” between federal and state responsibilities is becoming
increasingly blurred by events. With increased competition, interstate transactions are
expected to increase, potentially increasing the amount of electric transactions under
the purview of FERC. On a more fundamental level, the basic concept of a contract
path — the transmission lines that power is contracted to flow over — has always
been a legal fiction, as electrons follow the path of least resistance and do not respect
political boundaries. With an increasingly dynamic market situation, it is not clear
13
(...continued)
11
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
12
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
13
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
(continued...)

---

CRS-10
that regulatory jurisdictions can be based on the assumption that they do. Thus, the
issue of who is going to control the transition is not a simple either-or; indeed, the
“bright line” between the two may have to be completely re-evaluated and redrawn.
Judging by state reactions to FERC’s attempt to clarify the bright line in FERC Order
888, this could be a difficult and contentious task.
14
How should “stranded costs” and other transitional issues be
handled?15
Changing the economic and regulatory conditions under which electricity has
been priced and provided for the last 60 years raises several transitional issues.
Perhaps the most contentious issue facing the policy community is the recovery of so-
called “stranded costs.” Stranded costs are defined by recovery proponents as those
costs that were legitimately and prudently incurred under the “old” regulatory regime
(...continued)
13
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
14
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
15
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-11
that are not economically recoverable under the “new” competitive regime that the
industry is entering. They view the utility as blameless, having made good faith
investment decisions to construct generating capacity and to make other commitments
the cost of which is now “stranded” by customers suddenly seeking to avoid the cost
of that capacity by demanding that the utility wheel them lower cost power supplied
by an outside competitor. In contrast, opponents of stranded cost recovery believe
that such costs are not “stranded” by customers seeking a better deal on power rates,
but rather represent poor foresight and business decisions on the part of some utilities
for which customers should not be held responsible. The magnitude of stranded costs
is disputed; FERC cites stranded cost estimates that range from “billions” to $200
billion.
FERC Order 888 agrees with the proponents of full stranded cost recovery, and
requires that those costs be recovered directly from the customers whose decision to
leave the utility system is stranding the costs; this calculation is based on a “revenues
lost” formula. However, FERC Order 888 focuses on wholesale stranded costs and
leaves retail stranded costs to state regulatory bodies (except for municipalization).
Wholesale stranded costs may comprise only a few percent of the total amount.
Thus, unless federal legislation pre-empts current state authority, the primary
regulatory body responsible for potential stranded cost recovery would be state
regulatory commissions. The states are proposing alternatives for stranded cost
recovery that range from full recovery paid for by all consumers (California) to
recovery limited by regional electricity cost considerations (New Hampshire). In
addition, states are proposing different bases for valuating stranded costs than
FERC’s “lost revenue” approach; for example, California defines stranded cost as the
net book value of uneconomic generation resources.
Although much of the debate on stranded costs revolves around uneconomic
generation plants, utilities have incurred other commitments or expenses in the
delivery of service to customers. Utility balance sheets contain a variety of “regulatory
assets,” such as nuclear decommissioning assessments; “liabilities,” such as PURPA
section 210 contracts, and “social costs,” such as low-income assistance programs.16
The ability to recover costs for these categories of stranded costs are potentially
The
16
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-12
endangered by the transition to a more competitive system, particularly if competition
is extended to the retail level.
In addition, utilities are not the only participants in the restructuring effort that
may face transition costs because of the revaluation of generating assets. Because of
the guaranteed pass-through of taxes, regulated utilities made good tax collectors for
state and local governments. Powerplants can also represent a sizeable source of
property taxes for some communities, taxes generally based on the plant’s book value.
In addition, some utilities have gross-receipts taxes. Competition would change the
assumption of automatic pass-through in the case of the generating sector, a
powerplant’s value, and a utility’s gross receipts. State and local government will
have to decide how to respond.
How should the market be structured to ensure a smooth operating
electric system in its hybrid competitive-regulated form?
Fundamental to the new more competitive electricity system is the notion that
electricity can be treated as a commodity that is transported to consumers, and not as
a service provided consumers through an integrated generation-transmission-
distribution system. This approach presumes that the product can be distinguished
17
from the service network, even though the physics of the network intertwines the
commodity and its delivery system into a fully integrated and indistinguishable whole.
In addition, this approach presumes it can deliver electricity more efficiently than the
regulated “natural monopoly” that it would replace. In short, electricity would enter
the world of markets and contracts and exit the world of integrated service and
natural monopolies.
Treating electricity as a commodity has several difficulties, primarily resulting
from the control requirements necessary to operate the system successfully.
Electricity is difficult to store for any period of time, requiring precise supply-demand
coordination; electricity is heavily dependent on a network infrastructure that must
be maintained within acceptable operating parameters to avoid overheating and
sagging of lines (thermal limits), loss of voltage stability from inadequate supply of
reactive power (voltage stability limits), and loss of system synchronization (power
stability limits); electricity does not follow contracted paths, but flows through the
The
17
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-13
path of least resistance, causing unintended loop flows; and, electricity is sent
instantaneously to market. These operational limitations are made more acute in a
18
more dynamic market situation because the system’s infrastructure is designed to
maintain reliability on a local level, not to promote large scale transfers between
different parties.
Thus, the need for system coordination tempers the desire for direct, bilateral
competition in the electricity debate, resulting in the proposed segmented industry of
competitive generation, but regulated, natural monopoly transmission and distribution.
The question is what balance between competition and control the new market should
embody. Under a hybrid system, the necessary control requirements to operate the
system successfully falls to the transmission entity to maintain. Several proposals
have been suggested for this entity, called by a variety of names, including “PoolCo,”
Independent System Operators (ISO), and “Gridco.” Some proposals focus on
19
a
mandatory spot market that all generators must sell to and all consumers buy from.
Others focus on bilateral transactions between generators and consumers along with
intermediaries, such as brokers. Transmission entities would also have the
responsibility and authority to ensure reliability (involving services such as spinning
reserves and coordinating transmission capacity expansions), and coordinating grid
operation (to manage congestion and avoid system overloads). Such control under
any proposal places a stress on insulating the “regulated” transmission entity from the
The
18
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
19
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-14
“competitive” generators. Thus, the physical control issues that must be addressed
by a hybrid system have implications for the industry structure issues that it must also
address.
This need for coordination and reliability is complicated by the current system’s
somewhat informal means of addressing the issue. There are an estimated 30
voluntary utility groups designed to improve reliability, promote coordinated planning
and development, and encourage economic dispatch. These groups range from
informal pools based on simple cooperation to fully integrated tight power pools.
These groups are supplemented by the North American Electric Reliability Council
(NERC), an organization formed by the electric utility industry to help coordinate
planning and assess system reliability. Whether this system is adequate for a new,
more fragmented industry is unclear.
How should the electric utility industry be structured or restructured
to encourage and safeguard a more competitive system?
In several ways, the existing regulatory structure is the outcome of a previously
less regulated electric system’s failure to maintain competitive forces against the
threat of monopolistic practices, and to preserve financial solvency against the threat
of unsound business practices. Arguably, the success of the current system for over
50 years is a testament to the Federal Power Act and the Public Utility Holding
Company Act in structuring a system that regulators could effectively oversee. The
current challenge is the maintain this success while transitioning to new industry
structures.
Segmenting the industry into competitive and regulated components raises new
issues with respect to industry structure and regulatory oversight. As identified
above, substantial tension between the different functional components, which must
coordinate their activities but not engage in anti-competitive practices, could exist
under a segmented system. However, besides the issue of network control discussed
above, this complex situation, involving unregulated, competitive generators and
regulated transmitters and distributors, raises the question of what should be
considered acceptable ownership patterns between the different entities. FERC has
determined that “functional unbundling” of wholesale generation and transmission
services, along with a code of conduct, is sufficient to protect non-discriminatory
open access transmission. Whether this arrangement would be sufficient under
20
a
The
20
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
(continued...)

---

CRS-15
more comprehensive retail competition scheme is arguable. More aggressive options
to prevent market abuses through industry structure could include complete
divestiture of generation or transmission/distribution assets or requiring separate
corporate affiliates for each function. The decisions depend on one’s evaluation of
21
the states’ and federal government’s ability to oversee financial transactions within
each of the possible corporate structures that may evolve as the industry becomes
more competitive. In one sense, unbundling raises the question of what kind of
“PUHCA-like” legislation is necessary under the new system.
Using competition as the determinant of electric generating rates places a high
premium on maintaining full and effective competition in that sector, and preventing
anti-competitive interactions between it and the regulated segments. Thus a
reappraisal of antitrust provisions and their implementation may also be appropriate
in determining acceptable industry structures. In particular, as noted by FERC
22
:
“The most likely route to market power in today’s electric utility industry lies through
(...continued)
20
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
21
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
22
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-16
ownership or control of transmission facilities.” Thus, part of the review of industry
23
structure policy may involve a re-evaluation of merger and acquisition policy as
embodied in PUHCA and FERC policy.24
Developing legislation to guide corporate structure raises the question of what
to do with the old legislation — PUHCA. If new legislation adequately dealt with
possible market abuses arising from corporate structures under the new segmented
system, the existing PUHCA could arguably be eliminated with respect to electric
utilities.25 If a less aggressive approach is chosen, then decisions must be made on
The
23
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
24
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
25
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
(continued...)

---

CRS-17
how much of the current PUHCA is appropriate to a more competitive environment,
and whether conditions should be placed on its repeal.
26
Likewise, a more competitive environment raises questions about the need for
PURPA, particularly the mandatory purchase requirement (section 210). If the
generation sector is structured competitively, any guaranteed access to generation
markets must be questioned as to whether the benefits it provides outweigh the
resulting distortion in the competitive market. Section 210 provides such access and
thus raises the question whether it is needed any longer or under what conditions it
might be modified or repealed.
The current structure of the electric industry includes investor-owned, customer-
owned (co-ops), and publicly owned entities generating, transmitting, and distributing
electricity. Among other things, the customer-owned and publicly owned entities
receive preference to low-cost federal hydropower through the Power Marketing
Administrations (PMAs). In addition, FERC has only limited authority over non-
jurisdictional utilities such as municipal power authorities or PMAs. A new, more
competitive market structure raises the question as to how much buyers of power
should be on the same footing. In particular, increased competition in the generation
section brings into focus public power’s federal hydropower preference. Arguably,
if the generation market is competitive, low-cost federal hydropower should not be
reserved for publicly and customer-owned entities (all else being equal). Instead, like
any other electric generator, the federal government should simply sell its power to
the higher bidder regardless of that entity’s ownership structure. Indeed, some public
power entities might gain more from being able to competitively bid for their power
supplies than to maintain their federal hydropower preference and current supply
(...continued)
25
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
26
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-18
arrangements.
27
Any attempt to address the federal hydropower preference issue is
likely to be very contentious.
28
How should non-economic regulatory factors be integrated into the
envisioned hybrid system?29
Over the past 25 years, electric utilities have acquired a number of important
non-economic tasks, including environmental controls and programs, consumer-
The
27
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
28
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
29
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-19
oriented programs (demand-side management, conservation incentives), and
encouraging alternative sources of energy. In addition, there are social welfar
30
e
aspects of electric supply that are unavoidable when dealing with a service that affect
people’s livelihoods, such as uncollectible expenses from customers who are unable
or unwilling to pay their bills.31
The status and future of these activities would have to be reassessed under a
more competitive system. Several alternatives exist to address these tasks, depending
on the specific function. For some functio
32
ns, such as demand-side management, the
The
30
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
31
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
32
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
(continued...)

---

CRS-20
still-regulated transmission or distribution entity could be required to take the lead,
with possible financial assistance from local or state governments. Another possibility
would be to develop new programs that work with the new competitive markets to
provide appropriate incentives for the desired result. For example, in order to
encourage renewable energy generation, H.R. 3790 (introduced in the 104th
Congress) provided for a set-aside program with tradeable credits to ensure that a
small percentage of U.S. generation came from such sources. Finally, a review could
indicate that a particular function should be redefined as a government function (such
as uncollectible expenses) or eliminated as unnecessary. Some would put section 210
of PURPA in the latter category.
In addition to affecting the above social goals, deregulation is creating new social
concerns as its direct impacts on other values, such as clean air, are evaluated. As
noted previously, a competitive market would introduce new considerations in
powerplant operations. That older, fully depreciated powerplants, could be more fully
utilized under a more competitive generating sector would affect emissions of certain
air pollutants. In general, the Clean Air Act imposes its most stringent pollution
controls on new powerplant construction, permitting existing capacity to meet less
stringent and less costly standards. This decision may give some older facilities a
competitive operating cost advantage to compliment its low, depreciated, cost basis.
It also draws into further question an implied assumption of the Clean Air Act that
existing capacity would be retired after a fixed number of years (usually 30 years) and
replaced with new, less polluting, equipment. However, this is not definite, because
the economic and environmental advantages of new technology, such as natural-gas-
fired, combined-cycle technology (a very clean technology) may be sufficient in some
cases to overcome the existing plant’s advantages identified above.
Analyses suggesting that emissions of nitrogen oxides (NOx), a precursor to
ozone formation, could increase under FERC Order 888 resulted in substantial
controversy and to proposed legislation that would prevent implementation of the
Order until the environmental problem was addressed. The controversy is likely to
33
become more contentious as the debate expands into the area of retail competition,
(...continued)
32
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.
The
33
advent of new generating technologies, particularly gas-fired combined cycle, has both
lowered entry barriers to competitors of traditional utilities and lowered the marginal costs of
those competitors below that of some traditional utilities. As noted by FERC, smaller and
more efficient gas-fired, combined cycle generation plants can produce power on the grid for
between 3 cents and 5 cents a kilowatt-hour (Kwh). This is typically less than for the larger
coal-fired (4-7 cents a Kwh) or nuclear (9-15 cents a Kwh) plants built by traditional utilities
over the past decade. Indeed, it is less than the average costs of some utilities. Coupled with
advances in generating technology have been advances in transmission technology that permit
long distance transmission economically and permit increased coordinated operations and
reduced reserve margins.
This technological advancement has been combined with legislative initiatives, such as the
Energy Policy Act of 1992 (EPACT), to encourage the introduction of competitive forces into
the electric generating sector. This shift in policy continues with the promulgation of FERC
Order 888 and individual states implementation of retail wheeling initiatives.

---

CRS-21
and whether the issue should be addressed in the context of electricity restructuring
or in the context of Clean Air Act reauthorization.
Final Observations
Over its 100-plus-year history, the electric utility industry has evolved as
technology, economics, and regulatory policies have converged to force a re-
examination of the industry. These forces are at work again, creating a dynamism that
is changing the way in which the industry is structured and operated. The re-
examination is already underway. At the federal level, the passage of EPACT and the
promulgation of FERC Order 888 are moving to open up the wholesale generation
sector to market forces. At the state level, most states are reviewing their electricity
policies, with each state determining for itself the most appropriate response for its
utilities and their ratepayers.
At the federal level, this phenomenon raises two fundamental issues. First, who
will determine the pace and boundaries of any response to these forces? Electric
service is a vital component of a modern economy; national interests are at stake in
what direction restructuring takes. Concerns about economic efficiency and the
treatment of various participants (such as electric utilities) may suggest to some that
the federal government provide direction to current state initiatives. In contrast,
others argue that states, who have traditionally had responsibility over retail electricity
issues, have more of the expertise and experience necessary to handle the situation,
and that the national interest in electricity supply is neither threatened by state
initiatives nor a justification for federal pre-exemption of states’ rights. Congress may
wish to consider whether the time is ripe for federal intervention in the continuing
evolution of the electric utility industry or whether a “wait and see” attitude toward
state proceedings is more appropriate at this point.
Second, are there any national values threatened by the restructuring, that
Congress may want to address? Restructuring the electric utility industry may affect
environmental efforts, research and development and other energy-related programs,
and the quality of life for lower-income individuals. Electricity is more than a
commodity, it is a necessity of modern life. The system of environmental, energy, and
low income assistance programs are premised on electric utilities providing a service,
not just a commodity. Regardless of whether the federal government decides to take
a leading role in the restructuring efforts, it may have to examine many of its
programs to determine their appropriateness under a more competitive system and
decide whether those programs or the structure of the new electric system needs to
be altered to accomplish stated goals. As a corollary to this decision, Congress may
wish to consider whether these examinations should occur as part of the restructuring
debate, or in the legislative context in which those concerns arise (e.g., Clean Air Act,
Low-Income Home Energy Assistance program (LIHEAP), etc.).

---