Better Know Your Electricity History Series, Part Six: FERC and the Path to Deregulation

By Vernon Trollinger, July 20, 2015, News

The first incandescent light bulb lit up streets in 1879, but took 50 years for electrical service to enter only a fraction of American homes. Innovation and entrepreneurial genius expanded service across the country — only to be short-circuited in the 1920’s and 1930’s by hubris, greed, and a lack of rules. Government created the Federal Power Commission (FPC) to provide oversight and protection for  utilities and consumers alike, but these rules were ill-adapted for a society evolving from the Industrial Age and to the Electronic Age.

Better Know Your Electricity History Series, Part Six: FERC and the Path to Deregulation

Seal of the Federal Energy Regulatory Commission (FERC)

Expanding Use

The National Power Survey of 1964 predicted that the “expanding use of electricity is expected to more than double and perhaps triple by 1980.” The study urged the nation’s utilities to become “fully coordinated power networks covering broad areas of the country.” But the FPC could do little more than cheer-lead since it lacked authority to compel technical, operating, or policy standards for power interconnections. Congress was also ill-disposed to handing that authority to a federal entity.

The FPC’s jurisdiction oversaw and set wholesale rates for the little electric power transmitted between states in the 1940s and 1950s. When increased demand in the 1960s forced utilities to use interstate transmission lines to pool power and buy it from each other, the FPC’s regulatory authority and oversight of utilities expanded, adding more red tape to wholesale rate-setting.

As America grappled with the mid-’70s  Energy Crisis, public scorn barraged the FPC for its ineffectiveness against rising energy costs and large regional blackouts. Following the Department of Energy Organization Act in 1977, Congress insisted on the creation of a separate independent regulatory body to actively oversee the energy industry.

Out with the Old, In with the New

On October 1, 1977, President Jimmy Carter replaced the FPC with the Federal Energy Regulatory Commission (FERC) and tasked it with regulating the interstate transmission of electricity, natural gas, and oil.

FERC’s immediate goals were to first streamline the US natural gas market system, which had caused numerous wintertime shortages in northern states, and then encourage building of electric generation and transmission capacity. At the same time, it had to square this development with environmental protection laws.

Congress then passed The Public Utility Regulatory Policies Act (PURPA) in 1978. Utilities were considered natural monopolies, as it was believed that since one single company controlled generation, transmission, and distribution to the consumer, it was best suited to produce power more efficiently and economically. PURPA required utilities to grant non-discriminatory access to their transmission grids and to buy power from small non-utility generators (termed “Qualifying Facility,” or QF) using renewable energy sources or fuel-efficient technologies (such as co-generation). Prices were approved by state regulators.

While PURPA did provide a capacity development framework, the power industry had grown moribund due to the effects of stagflation that dried up investment and available capital. Costly nuclear plants and other big base-load plants had been constructed in response to the energy crisis with the expectation that consumers and higher usage would pay for them. However, when these big plants came on line, there was little or no load to service since conservation efforts or economic troubles had cut demand. Many utilities unexpectedly found themselves with excess capacity. Between 1970 and 1985, average residential electricity prices more than tripled. Angry consumers took their outrage to state commissions to fight unfair rate hikes.

Independent Power

New generation technology (such as “fluidized bed combustion” and “combined cycle”) created smaller plants that could generate power more efficiently and cheaply. Their lower capital costs, increased reliability, and smaller environmental impact made them very attractive to investors looking for lucrative generator projects that were exempt from regulation. Plants like these enabled the rise of independent power producers (IPPs). While IPPs owned no transmission or distribution lines and were not covered by PURPA’s mandatory purchase requirements, they were agile enough to compete in supplying the bulk power markets.

Utilities found it easier to partner with IPPs, choosing to organize them into affiliated power producers (APPs) instead of building new generation capacity of their own. FERC encouraged this development by authorizing market-based rates for their power sales on a case-by-case basis and by encouraging utilities to grant more transmission access.

The Energy Policy Act (EPACT) of 1992 formalized two major changes that promoted greater competition in bulk power markets.

  1. It created a new status for IPPs called the “exempt wholesale generator” (EWG). EWG’s were generator businesses not subject to the constraints of the 1935 Public Utility Holding Company Act (PUHCA). EWGs were exempt from PUCHA, allowing them to choose who they sold to and at what price, with the approval of state/regional regulators. In the 1990s, this ultimately contributed to the rise of gas-fired non-utility generators. More importantly, it allowed investor-owned public utility companies to spin off existing generating facilities as EWGs and build affiliated generation operations in areas outside their traditional service areas — all of which increased their profits.
  2. EPACT amended PURPA so that FERC could open the national electricity transmission system to provide wholesale transmission services to anyone (upon application) generating electricity for resale.
Better Know Your Electricity History Series, Part Six: FERC and the Path to Deregulation

Non-discriminatory access to transmission grids became the cornerstone of electric deregulation.

Order 888

As more generation investment flowed and utility companies diversified, demand grew for more equitiable and fair transmission. At stake was a $208 billion industry affecting millions of Americans. However, many utilities still restricted access to their interstate transmission grids either by requiring separate contracts with every generator or imposing other restrictions.

On April 24, 1996, FERC used it’s authority under sections 205 and 206 of the Federal Power Act to issue Order 888:

  • All public utilities that owned interstate transmission lines were required to provide open access transmission service under nondiscriminatory transmission tariffs. Most municipal and cooperative utilities were exempt.
  • Utilities were required to functionally separate their generation, transmission, and distribution operations by quoting separate rates for earch service. The utilities also had to develop an open access same-time information system (OASIS) that gave users of the transmission system access to the same transmission information utility enjoyed.
  • Public utilities and transmitting utilities were permitted to seek recovery of stranded costs as a result of this restructuring. For example, Public Utility A supplies Very Big City. The city decides it wants to buy its power at a cheaper rate from Public Utility B, but it still needs to use Public Utility A’s transmission lines to get that power. Rule 888 lets Public Utility A assess the amount of income it lost to Public Utility B and then add that amount onto Very Big City’s transmission bill.

The order simplified the rate system by creating a tariff offering both point-to-point and network transmission services along with minimum terms and conditions of non-discriminatory access. All of the existing 166 public utilities were required to file a tariff on or before July 9, 1996, or request a waiver.

FERC also recommended successfully managing the bulk power market/system and suggested regional entities “…operate the transmission systems of public utilities in a manner that is independent of any business interest in sales or purchases of electric power by those utilities.” The existing power pools partnered with FERC to set up independent system operations (ISOs). ISOs operate a region’s electricity grid, administer its wholesale electricity markets, and provide reliability planning for the bulk electricity system. The first ones were the California ISO, PJM Interconnection, New York ISO, and New England ISO. FERC Order 2000 in 1999 created Regional Transmission Organizations (RTOs) which now facilitate open access to grid and ensure reliability.

Deregulation

With electric transmission access and non-utility power-generation enabling competition at the wholesale level, state governments began pushing to wholly deregulate their electric utility industry for end-use customers. Called “Energy Choice,” deregulating a state’s electricity market basically works by separating generation, transmission, marketing, and distribution into different businesses.

  • Generation companies sell power on the wholesale markets to marketers.
  • Marketers pay for it and arrange for transmission of that power with the ISO/RTO to the local utility.
  • The local utility handles the local distribution to end-use customers.
  • Customers must pay for the electricity commodity they buy and also for its transmission/distribution.

One energy company seeking to crack apart the old utility monopolies was Enron. It wielded enormous influence in favor of deregulation by lobbying legislatures and spending millions of dollars on campaign contributions in 28 states, including California.

In 1996, California and Rhode Island passed landmark legislation to restructure their electricity industries and were eventually joined by 22 other states, including New York, Pennsylvania, and Texas. Consumers in states with high energy prices thought competing energy companies would find ways to innovate and sell power cheaper in order to be profitable. The trick for each state was to find the best formula of laws that would be fair and equitable to both energy providers and consumers.

Deregulation grew so popular that bills buzzed around the US Capital and, according to the Clinton Administration, promised to save US consumers $20 billion. During 1999 and 2000, both the House and Senate passed deregulation bills, but they were unable to compromise on the versions due to two main differences: how much oversight to give FERC vs state regulators and what percentage (if any) of electric production should come from renewable sources. All the same, both Republicans and Democrats agreed that for deregulation to work, both PUHCA and PURPA had to be repealed.

That no deal was made on the issue of oversight would have dire repercussions in California in May 2000.

Stay tuned for Better Know Your Electricity History Series, Part 7: Crisis and Innovation

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About 

A native of Wyomissing Hills, PA, Vernon Trollinger studied writing and film at the University of Iowa, later earning his MA in writing there as well. Following a decade of digging in CRM archaeology, he now writes about green energy technology, home energy efficiency, DIY projects, the natural gas industry, and the electrical grid.

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