Decades of regulation had and have allowed utilities to become monopolies.
Utilities are often considered monopolies as in regulated areas they control the entire energy process from generation to customer support and service. As of today, many customers across the United States do not have a choice over their utility. For many, there are only one to two utilities that provide service to a particular area.
Without customer choice, there’s no competition in the market. And without competition, utilities aren’t incentivized to keep rates low, provide the best customer service, etc. Customers — satisfied or dissatisfied — have no choice in a regulated market but to continue to be a patron to their utility as there are no alternative electric suppliers.
When a market transforms into a deregulated one, it breaks up a utility’s control over all elements of the energy process. This shift benefits customers because it allows organizations called retail electric providers to form and sell energy. When the market suddenly has multiple organizations competing for the same business, customers are flooded with different options. As a result, REPs have to make sure that they keep their rates fair and reasonable while providing quality customer service in order to retain existing and attract new customers. If not, customers have choices and can switch to another company that advertises better rates and service.
Energy deregulation has a long and interesting history within the United States. In order to explore this history in greater detail, we need to start with The Great Depression.
Energy During The Great Depression – 1929
When the Wall Street Stock Exchange crashed in 1929, the US fell into The Great Depression. During this time, many companies across America collapsed, including companies within the energy industry. An example of this includes the company owned by Samuel Insull, an America investor who had greatly contributed to the development of energy within the United States. His company collapsed during this time and he was accused of selling worthless stock to investors.
A few years after the stock market crash, the energy industry still remained difficult to regulate. By 1932, 73% of the investor-owned electric industry was owned by eight of the largest utility holding companies in the United States. This created a huge imbalance within the energy market.
It soon became clear that the government would need to step in to start putting regulation in place in order to prevent unfair practices from becoming common practice. Thus, the Public Utilities Holding Company Act was born.
Congress Passed the Public Utilities Holding Company Act (PUHCA) – 1935
PUHCA is an important energy act for the United States as it was the government’s first real attempt to bring regulation or rules into the energy industry. The act itself was one of many initiatives put into place, however it was and remains today one of the most important factors in how the energy industry conducts itself today.
At the time, the act was passed by Congress with many new rules regarding the way in which energy could be sold. Some of these rules include:
- The Securities and Exchange Commission became responsible for approving a holding company that wanted to participate in non-utility business.
- Non-utility business had to be kept apart from regulated utility business.
- All holding companies needed to register with the Securities and Exchange Commission.
- The Securities and Exchange Commission then had to limit the holding company to ownership of one integrated system. (They achieved this through divesting securities from other unrelated companies and other public utilities.)
Through PUHCA, the Securities and Exchange Commission also received the authority to remove layers of the utility corporate structure that were no longer needed. In addition, Service Companies also had to abide by these regulations.
PUHCA Benefits and Results
The goal of PUHCA was to prevent holding companies from being able to recover its expenses twice. This was something that occurred frequently when a utility operated in multiple states. The act achieved this goal through SEC approved formulas that helped ratepayers of a particular state to only pay for the share of common service company expenses.
By 1948, holding companies divested around $12 billion in assets due to the new regulations outlined in PUCHA. In addition, the subsidiaries controlled by holding companies lowered to 303 (from 1,983).
Another important effect that the PUCHA had on the consumer was that they prevented a utility from artificially raising cost-based regulated rates.
Energy Crisis – 1970s
The PUHCA itself was an important change to the way utilities could operate within the United States. However, the 1970’s Energy Crisis turned the industry on its head once again.
The energy crisis affected energy on a global scale when many countries including America, Western Europe, New Zealand, Australia, Japan and Canada all experienced a shortage in petroleum. These shortages, both real and perceived, caused a significant hike in the price of energy. For example, in America, the price of oil went from $3/barrel to $12/barrel. This caused major shortages in fuel and caused state governors to plead with citizens that they do everything in their power to try and conserve electricity.
The Impact of the Energy Crisis
Many energy conservation rules were in place until 1974. Despite this, the price of oil remained high. As a result, much of the legislation approved throughout the decade related to utilizing other forms of energy to reduce the United States dependence on oil or fossil fuels.
Some of this legislation includes:
- Emergency Petroleum Allocation Act – 1973
- Energy Policy and Conservation Act – 1975
One of the most important departments created from the energy crisis was the Department of Energy. This department was established in 1977 and continues to operate today. This state run department concerns itself with promoting and advancing technology related to energy within the United States.
National Energy Policy Act – 1992
The act itself created the outline for a competitive wholesale electricity generation market. It also created a new type of energy producer known as the Exempt Wholesale Generator (EWG). EWG’s did not have the same rules or regulations, making it simpler for them to enter the market.
This act states that, “Agencies are authorized and encouraged to participate in programs to increase energy efficiency and for water conservation or the management of electricity demand conducted by gas, water, or electric utilities and generally available to customers of such utilities.”
Benefits of the National Energy Policy Act
This act allowed for private market competition within the wholesale generation of electricity. This element alone truly helped to pave the way for energy deregulation within the United States.
Order 888 – 1996
This order required utilities to make available “open access non-discriminatory transmission services.” As a result, transmission services separated from power plants. This disrupted some of the vertical integration systems that utilities used within their business.
Due to these significant changes in the energy industry, several states adopted partial energy deregulation legislation within that same year.
In 1999, California, Texas, Rhode Island, New York, Pennsylvania, and Massachusetts were all at least partially deregulated. They all had legislation in place that gave consumers access to private power suppliers — retail electric service providers, or just commonly referred to as REPs.
Order 2000 helped to facilitate energy deregulation further by creating Regional Transmission Organizations (RTOs). These organizations replaced state operation and control over the transmission grid.
President Bush Signs Energy Policy Act – 2005
The Energy Policy Act, signed by President Bush in 2005, transferred the regulation of utilities from the Securities and Exchange Commission to the Federal Energy Regulatory Commission (FERC). This organization originated as a part of the Department of Energy. However, it was determined that it would better function as the primary regulator for energy within every state across America.
FERC has many duties and responsibilities including,
- Regulation of the wholesale sale and transmission of natural gas and electricity
- Reviewing interstate and natural gas pipelines, storage, etc. proposals
- Regulation of interstate commerce for the transportation of oil by pipeline
Due to the changes implemented by the Energy Policy Act, several amendments also had to be made to the PUCHA created in 1935.
By 2012, energy deregulation had arrived (at least in some capacity) to close to two dozen states. Some states have both have a deregulated electric market, others natural gas — a few with both. No state is entirely deregulated — Texas comes the closest at nearly 86% of the state being deregulated.
There are some states that have experimented with deregulation on a trial basis, but have since suspended these initiatives until the impacts of energy deregulation are better understood.