Energy Policy: Electricity Restructuring

Since the early 1990s, the electric utility industry has
experienced a major transformation. Formerly the nationwide electricity system consisted
of vertically integrated utilities with defined service areas, which they were responsible for
supplying with power to meet demand. The rates they charged were set for the most part by
state utility commissions, as were some other activities. Most power generating capacity was
owned by the utilities themselves, as were transmission lines and power distribution systems.
Utility commissions determined rates based not only on the cost of power but also on the
need to fund additional plants to meet future power demand.

Starting in the 1980s, a number of unregulated entities began producing power for sale
to utilities at wholesale, and in 1992 the Energy Policy Act (EPACT, P.L. 102-486) removed
some of the regulatory barriers to such unregulated electricity generation. At present many
regulated utilities have sold their generating capacity and become essentially transmission
and distribution entities, and an increasing share of generating capacity across the nation is
owned and operated by companies not regulated as utilities. Many states have joined in
Regional Transmission Organizations (RTOs) to distribute independently produced power
to local utilities, but the details of these systems vary widely. The principle behind the
restructuring has been that power produced by a competitive market of independent
generators should be cheaper than that produced by a regulated monopoly.

Most state restructuring plans have not immediately met initial expectations, and many
have faced serious problems. In California in particular, a combination of several factors,
including demonstrated manipulation of the market by some independent power producers,
resulted temporarily in power shortages and extremely high prices to some consumers. The
California experience slowed down the process of restructuring in many other states, and also
raised barriers to an effort in the Congress to produce a uniform national restructuring
system. A massive power failure in much of the Northeast in 2003 added demands for
improving the reliability of power transmission systems between regions. As a result of
these various developments, the electricity provisions of major energy policy bills have been
a source of major controversy. The main issue is not whether utility restructuring should take
place; it is the federal role in guiding a restructuring process that is already taking place.

The major legislative issues in electricity restructuring are:
- enforceable standards for transmission system operation and reliability;
- repeal of Public Utility Holding Company Act (PUHCA), which utilities say
they need in order to operate in the new competitive market, but which
critics fear will threaten consumer interests;
- the role of the Federal Energy Regulatory Commission (FERC) in setting
rules for marketing independent power production; and
- access to utility-owned transmission lines by independent producers.

Measures to improve the reliability of the transmission grid have gathered wide support,
and all the major energy legislation contained reliability provisions. However, as the broad
energy legislation foundered in the 108th Congress, a split developed between those who
wanted to push a stand-alone reliability bill and those who insisted on keeping it in the
comprehensive bill.

PUHCA was enacted in the 1930s to keep speculation in utility stocks and finances
from affecting the utility’s ability to provide power to its service area. Utilities are under
regulation from the Securities and Exchange Commission (SEC) and can invest in non-utility
activities only if SEC finds that it will improve efficiency and service to utility customers.
Advocates of PUHCA repeal argue that the statute is outdated and burdensome to utilities
in the new competitive environment, and point to the abuses that led to the bankruptcy of
Enron. The company had declared itself exempt from PUHCA regulation, and its selfdeclaration
was not challenged until after the abuses were discovered, when an SEC
administrative judge denied it. (For details, see [http://www.sec.gov/spotlight/enron.htm#
enron_exempt].) Because these events occurred with PUHCA still on the books, repeal
advocates contend that the statute is ineffective. But PUHCA repeal still has many
opponents, who point out that utilities are still responsible for distributing power to
customers, and their ability to do so could be adversely affected by unregulated and
unsupervised activities and investments.

Until the restructuring and rise of unregulated power generators, FERC had the rather
minor role in the power industry of regulating wholesale interstate transfers of power.
Restructuring has thrust FERC into a much more important role of regulating the distribution
of power from generators, some of them out of state, to utilities. FERC’s activities during
and following the California crisis have been highly controversial. In addition, FERC has
proposed a rulemaking on “standard market design” (SMD) to create wholesale power
markets that would allow sellers to transact easily across transmission grid boundaries
(FERC Notice of Proposed Rulemaking, Docket No. RM01-12-000, 18 C.F.R. Part 35, July
31, 2002). This proposal has also raised concerns in some states that have resisted or delayed
restructuring.

These issues were dealt with differently in the various bills considered in the 108th
Congress. All the major bills contained some reliability measures, but issues of consumer
protection, of market design and the role of FERC, and numerous other questions remained
unresolved. All the major bills in the last Congress repealed PUHCA, as did the version of
H.R. 6 in the 109th Congress passed by the House. The Senate bill also included PUHCA
repeal language, but in markup a provision to give FERC additional merger review authority
was added. The House-passed merger review provision gave FERC jurisdiction over
transmission transactions. FERC merger review authority would also apply to natural gas
utilities and generation-only transactions. In addition, the bill passed by the Senate required
FERC to determine that cross-subsidization would not result from a merger.

Most other electricity provisions in the House- and Senate-passed bills were essentially
those contained in the electricity title as approved by the conference committee on H.R. 6 in
the 108th Congress. Amendments to make major changes in this title of the bill were rejected
during markup by the House Energy and Commerce Committee. One feature of that title,
Sec. 1242, providing for “participant funding” of transmission projects, raised opposition
from a number of interested parties as being inflexible and potentially inequitable, and was
dropped in markup.

The conference committee came to an agreement on a large part of the electricity title
on July 21, 2005. In the conference bill, PUHCA would be repealed, and FERC’s merger
review authority is strengthened. In addition, language is included that is intended to prevent
cross-subsidization. The mandatory purchase requirement under the Pubic Utility Regulatory
Policies Act (PURPA) would be repealed. An Electric Reliability Organization would be
able to promulgate mandatory, enforceable reliability standards for the electric industry that
include cybersecurity protection. Included in the conference report, but not in either the
House- or Senate-passed versions of H.R. 6, is a Sense of Congress that FERC should
carefully consider the states’ objections to the locational installed capacity (LICAP)
mechanism for New England.

(For additional information, see CRS Report RL32925, Electric Utility Provisions in
House-Passed H.R. 6, 109th Congress, by Amy Abel, and CRS Report RL32728, Electric
Utility Regulatory Reform: Issues for the 109th Congress, by Amy Abel.)