IB10006: Electricity: The Road Toward Restructuring (pdf)

Amy Abel and Larry Parker

Resources, Science, and Industry Division

September 7, 2001

SUMMARY

The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal Power Act (FPA) were enacted to eliminate unfair practices and other abuses by electricity and gas holding companies by requiring federal control and regulation of interstate public utility holding companies. Prior to PUHCA, electricity holding companies were characterized as having excessive consumer rates, high debt-to-equity ratios, and unreliable service. PUHCA remained virtually unchanged for 50 years until enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA, P.L. 95-617). PURPA was, in part, intended to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Utilities are required to buy all power produced by qualifying facilities (QFs) at avoided cost. QFs are exempt from regulation under PUHCA and the FPA.

Electricity regulation was changed again in 1992 with the passage of the Energy Policy Act (EPACT, P.L. 102-486). The intent of Title 7 of EPACT is to increase competition in the electric generating sector by creating new entities, called "exempt wholesale generators" (EWGs) that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. This title also provides EWGs with a way to assure transmission of their wholesale power to its purchaser. The effect of this Act on the electric supply system is potentially more far-reaching than PURPA.

On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Orders 888 and 889. FERC believed these rules would remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets. Order 2000, issued December 20, 1999, established criteria for forming transmission organizations.

Comprehensive legislation involves three issues. The first is PUHCA reform. Some electric utilities want PUHCA changed so they can more easily diversify their assets. State regulators have expressed concerns that increased diversification could lead to abuses including cross-subsidization. Consumer groups have expressed concern that a repeal of PUHCA could exacerbate market power abuses in a monopolistic industry where true competition does not yet exist.

The second is PURPA's mandatory purchase requirement provisions. Many investor-owned utilities support repeal of these provisions. They argue that their state regulators' "misguided" implementation of PURPA has forced them to pay contractually high prices for power that they do not need. Opponents of this legislation argue that it will decrease competition and impede development of renewable energy.

The third is retail wheeling. It involves allowing retail customers to choose their electric generation supplier. Currently, this is under state jurisdiction, and 24 states and the District of Columbia have moved toward retail wheeling. However, some have argued that the federal government should act as a backstop to ensure that all states introduce retail wheeling, preempting state authority if necessary. Several stand-alone bills have been introduced in the 107^th Congress, but no comprehensive bills have been introduced.

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