The electric power industry went through a long and stable period of being a regulated industry, centrally planned and operated by vertically-integrated utilities, before market liberalization and restructuring became the global trend since the 1990s. In that traditional regulatory environment, electric utilities were given a monopolistic franchise to be the sole producer and distributor of electricity over a defined service territory. The service territory may be over the entire country, a province or a state, or a portion thereof. However, the demand for electricity and the economics of producing and transmitting electricity over a suitable distance had generally limited the size of an electric utility to some distance around load centers or clusters of load centers in its service territory. In the case of countries with large areas, these natural sizes may fall within the footprint of a single province or a state, whereby the natural regulatory power would lie with the provincial or state government, as the representative of people or consumers within their province or state.
In the even earlier times of the electric industry in the U.S., the Public Utilities Holding Companies Act (PUHCA) was passed to address the natural monopolistic problems and large holding companies that control non-contiguous service territories were required to divest.
After decades of success with the regulatory model for the electric industry, cost-overrun and/or over-capacity problems surfaced. The maturing economy resulted in a tapered-off electricity demand from the 7% a year in the 1960s to the 3% a year in the late 1970s and 1980s. Combined with the long lead time of large but economical power plants and the high cost or penalty to utilities of plant cancellations, non-optimal decisions were made and over-capacity resulted. The consequence was that the electricity rates were increased to cover the overrun costs. This coincided with the rapidly increasing oil prices by OPEC, driving up further the electricity rates to all customers. The large electricity customers then sought to reduce their electricity rates by influencing politicians and regulatory commissions to allow them to shop for wholesale power outside of the franchise territory served by its local utility. In an effort to reduce the cost of electricity and encourage renewable generation, tax preferences and new regulations were introduced by governments, e.g., the U.S. Public Utilities Regulatory Policy Act (PURPA) encouraged the independent power producers by requiring the regulated utilities to pay them avoided costs. Thus, competition was introduced.
Regulatory changes in North America continued in the U.S. with FERC Order 888 in 1997 which required open access to the naturally monopolistic transmission grid. Unfortunately, the incremental approach towards the power market has not produced a system with properly balanced market and regulatory power. The California power market meltdown in 2000 was the first and major failure. The PJM market model has been relatively stable; however, there seems to be some reliability problems due to the lack of transmission investment and the lack of incentives by generators to provide reactive power for voltage support. While they are not direct causes for the major blackout in North America on August 14, 2003, one could argue that these reliability problems contributed to the likelihood of such blackouts. However, in two years after the blackout, not much, if any, has been implemented in the regulatory and financial areas to fundamentally induce more transmission capacity to be built, until the U.S. Congress passed the U.S. Energy Policy Act of 2005, which has provided tax incentives (e.g., accelerated depreciation) for transmission, required mandatory reliability standards with penalties, gave FERC the backstop power to approve transmission projects in a national-interest corridor, and repealed PUHCA. However, it remains uncertain whether this is all that would be needed to have a healthy and robust power market.
Looking back in the history of the electric utility industry, one could say that it went from “central planning” towards a “free market” with mainly the generation supply side providing the competitive bidding of the supply and the wholesale buyer side bidding for lower prices. Today, after some major power market failures, debates about the solution are polarized around either reverting to the previous structure or more market liberalization on the rest of the supply-demand chain.
"The large electricity customers then sought to reduce their electricity rates by influencing politicians and regulatory commissions to allow them to shop for wholesale power outside of the franchise territory served by its local utility."
This is key. The present attempts at de-regulation are solely targeted at benefiting the large customers. It is time to open the market to ALL electricity customers with IMEUC.
With reference to your article, I posted in the EWPC Blog the article "Free Market and Central Planning, Under R1E2," which I suggest yourself and other readers should look at.
Best regards,
José Antonio Vanderhorst-Silverio, PhD
I have one general comment on the allegation that the maturing economy resulted in a tapered-off electricity demand.
I am now and was then a utility engineer during that period.
Reviewing the annual peak demand shows that an annual increase of 7% was true in the 60s. In fact it never dropped below 5% since 1955 and averaged 7.5% from 1955 until 1973. It changed abruptly in 1974 to 2% and never exceeded 7% from then on. The average from 1974 to 1992 was 2.5% and in fact went negative in three years; 1979, 1982, and 1989.
The reasons for the abrupt and irreversable change may be debated as well as the wisdom of some utility decisions following 1974, however it should not be concluded that the load change was a tapering off. The load decrease from doubling every decade to a paltry 2-3% a year could not be reasonably matched with ceasation of most generation and transmission building in so short a time frame.
One result of this situation was a steady increase in the real price of electricity per kwh in 1974 following a long period of price decline. This changed again in 1984, beginning another steady decline in real electricity prices until leveling off in 2000 until 2004 and beginning another upward cycel.
Thank you for your comments. I try to understand how human decisions are made and can be influenced by incentives, so that individual "selfish" decisions can lead to "public" benefits. Load growth is an example of how individual decisions about consumption of electricity add up to the aggregate demand. These individuals include firms and companies as well. The availability and attractiveness of products that use electricity is another factor. As an individual user of electricity, I do not think consciously about the real cost of electricity. To the institutional users of electricity, I agree that the cost of electricity may affect their consumption patterns or decisions to build another factory or not. My general comment about the relationship between declining load growth rate and the maturity of a nation's economy comes from the observation of the electricy growth rates of developing countries. It was not meant to be the only plausible explanation. I appreciate the comments though because every comment is an opportunity for me to think. Thanks.