By Rebecca McNerney, Electric Power Industry Specialist
Energy Information Administration

Today, more than 3,100 electric utilities in the United States provide approximately 3 trillion kilowatt-hours of electricity every year to about 109 million residential customers, 14 million commercial customers, and another half million industrial customers. The total annual cost: about $210 billion.

These numbers paint a picture of the enormous economic and social impact of the U.S. electric power industry. They also offer some perspective on the enormous challenge of restructuring the industry. Traditionally, electric power companies have operated as vertically integrated and regulated monopolies that generate, transmit and distribute power to the customer. Today, however, the industry is in the midst of a historic transition that will create a competitive market for power generation that allows retail customers to decide who supplies their electricity.

Why Is This Happening?

What’s behind this unprecedented restructuring of an industry that touches the lives of every American? Industry analysts generally agree that there are five major factors:

1. The industry needs to become more efficient. Dissatisfaction with the prevailing system of electric power regulation increased significantly in the decades since the late 1960s, when the inefficiencies of the system started to become clear. In particular, regulated rate setting was blamed for removing the industry’s incentive to lower prices by becoming more efficient. In response, economists and other public policy analysts stressed the advantages of competition over regulated monopolies and promoted the idea that free markets can reduce inefficiencies and drive down costs and prices as a result.

2. Deregulation in other industries has drawn new attention to the electric power monopoly. Many key industries-such as airlines, railroads, telecommunications, trucking and natural gas were deregulated in the 1980s. Many Americans believe it’s logical for the electric power industry-the last large monopoly in the United States-to join this deregulatory revolution.

3. Power prices vary substantially from state to state. Large industrial consumers in states where electricity prices are high in relation to other states sometimes even neighboring states have used their considerable influence to convince state legislators and regulators to take actions that will give them access to lower electricity prices.

4. Nonutilities are entering the business and can generate power for less. Technological improvements have prompted nonutilities-also known as independent power producers to enter the competitive power market. Using advanced gas turbine technologies, these companies can build new generating capacity and produce electricity more cheaply than utilities using fossil fuel or nuclear technologies.

5. Federal law opened the doors to competition. Although it was not the intention of the Public Utility Regulatory Policies Act of 1978 (PURPA), the law did lay the groundwork for competition by opening wholesale markets to non-utility producers of electricity. PURPA was part of the National Energy Act, which was passed after the Arab Oil Embargo of 1973-74 in part to reduce U.S. dependence on foreign oil. Under the law, utilities were required to buy power from qualifying non-utilities at the utility’s avoided cost, thereby guaranteeing the non-utilities a market for their electricity. Competition was encouraged even more by the Energy Policy Act of 1992 (EPACT), which created a new class of non-utility generators that are exempt from certain corporate ownership and geographic restrictions. EPACT also directed the Federal Energy Regulatory Commission (FERC) to order public utilities to provide open access for all electricity suppliers to the U.S. power transmission grid.

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