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Highlight Updates The Electric Power Industry

Virtually every household in America is connected to the electric utility grid. The industry serves approximately 126 million residential and 17.6 million commercial customers.32 Utilities historically generated (or purchased from an affiliate) almost all of the power needed to serve their customers; distributed that electricity over company-owned lines; and performed all related billing and customer service functions. They are therefore often described as “vertically integrated” entities: entities that combine the generation, transmission/distribution, and customer/billing functions in one company.

Electric companies have been subject to regulatory control because they have been considered to be natural monopolies that render a vital service to the public. They received exclusive franchises to operate within a specified territory and the opportunity to earn a reasonable return on invested capital, in exchange for having the obligation to serve all customers without discrimination. However, since the late 1990s, many states have completely or partially severed the generation function from the distribution and billing/customer service functions. Independent generation companies, as well as independent marketers and brokers, may now sell electricity directly to consumer end-users in many states.

The types of organizations that provide electricity to consumers fall into one of three broad categories: investor-owned utilities, publicly owned utilities, and member-owned cooperatives.33 As policy changes of the last twenty years encouraged the development of non-utility generators, their numbers and the percentage they own of the nation’s generating capacity has increased. From 3.5% of total generation in 1978, non-utilities grew to 38.8% of generation in 2011.34 This trend will accelerate as restructured utilities divest their generation capacity, often to non-utility purchasers.

As of 2007, there were more than 3273 electric utilities in the United States, 210 of which are investor-owned utilities (IOUs).35 These IOUs own over 38% of the nation’s generation capacity, own 42% of generation, and serve 71% of ultimate customers.36 The vast majority of electric utilities neither generate nor transmit electricity on their own and, instead, they purchase electricity at wholesale for distribution to their retail customers. More common now among publicly owned utilities, it will become increasingly true of investor-owned utilities as well.

The 3273 utilities consist of the 210 IOUs mentioned, 2009 publicly owned utilities, and 883 rural electric cooperatives. (There are also nine federal marketing agencies that primarily sell at wholesale to other utilities, but not to end-users, and control approximately 11% of generating capacity.) Of the three categories that sell to end-users, IOUs are the largest sector financially. Despite representing less than 6% of the number of all electric utilities, they possess over one-third of utility-owned generating capacity.37 IOUs also receive three-quarters of all of the electricity revenues paid by all customers. Publicly owned utilities, which include public power districts, state agencies, and municipal enterprises, constitute roughly two-thirds of the number of all electric utilities but control only 9% of the utility-owned generating capability and receive 13% of total annual electric revenues. Rural electric cooperatives have only 4% of the nation’s generation and capacity and obtain 10% of total electric revenues.38