Filter Results CategoriesCart
Highlight Updates

1.2.2.3.1 Restructuring; reliability issues

Electric utility “restructuring” refers to “unbundling” (separation) of the package of supply, transportation, and distribution services traditionally offered by utility companies. The traditional utility company typically owned or controlled generating facilities, high voltage transmission facilities, and the wires, meters, billing, and customer service capabilities that together comprise distribution service. Under restructuring at the retail level, utility companies typically sell off or otherwise functionally separate generating and transmission assets from the distribution function and continue to provide distribution services under the regulatory oversight of the state utility commission.44

Congress started the competitive ball rolling in the electric utility industry with the Public Utility Regulatory Policies Act (PURPA) of 1978,45 which required utilities to purchase wholesale power from certain non-utility power producers.46 Congress extended wholesale competition with the Energy Policy Act (EPACT) of 1992,47 which authorized FERC to require wholesale wheeling48 so competitive generators would not be locked in without a way to transmit their power to their customers. Now, alternative wholesale power producers may sell power to utilities, who in turn resell it to their retail customers along with power that the utilities generate themselves or buy from other utilities.

Prior to deregulation, no entity other than the LDC could sell power directly to retail customers in a given utility’s service territory. Restructuring has changed that. In over dozen states, customers can, at least as a matter of law, purchase their power supply from generating companies that are not LDCs or from brokers or marketers acting as middlemen between a generator and the consumer. However, virtually all customers except the very largest industrial customers will still rely on the LDC to distribute that electricity to the customer’s premises and to carry out related tasks such as billing and customer service.49 Furthermore, in many states that legally allow competitive suppliers to sell to consumers, there have been few companies actually willing to sell to residential customers.

As noted, retail competition is now permitted in many states, and customers may buy directly from competitive suppliers. In many of those states, commissions have developed extensive rules and practices regarding the enrollment and billing of customers who choose competitive supply as well as the licensing of competitive suppliers. Those rules and practices address everything from the minutiae of the type of information the customer or competitive supplier must provide the LDC to effectuate a switch in generation supply (much like telephone consumers or their long-distance providers must inform the local telephone company of a change in long-distance carriers), to rules prohibiting “slamming” (unauthorized switching of a customer’s competitive supplier), to rules for the billing of charges that a customer incurs with a competitive supplier.50

FERC implemented EPACT’s wholesale wheeling mandate in its Order 88851 by requiring utilities to open access to their transmission lines while guaranteeing utilities recovery of prudent costs associated with customers who take advantage of the opportunity to switch suppliers (“stranded costs”). In a related order,52 FERC imposed standards of conduct to inhibit anti-competitive support of a utility’s wholesale power business by its still-regulated transmission business.

These efforts to promote competition among generators, both utility and non-utility, have been promoted as resulting in lower rates for consumers. However, the impact of deregulation on prices, while difficult to measure, has not been demonstrated to be positive. Investment in deregulated generation, without the protections provided by regulatory pre-approval and oversight, has been typified by increased capital costs that lead to higher consumer prices. In addition, “market clearing prices” that flow through to consumers as a result of structures implemented by regional transmission operators such as ISO New England often are much higher than generators’ actual costs.

Much of the discussion around “restructuring” in the utility industry refers to changes in the legal structures that support regulation of utility companies: the state laws and commission regulations or decisions allowing for competitive companies to sell electricity and requiring local distribution companies (LDCs) to sell off their own generating assets. However, there has already been a de facto restructuring of the electric industry underway for more than a decade, reflected in significantly reduced staffing levels, cutbacks in maintenance programs, and other efforts to reduce costs and increase profits. In several instances, the operational restructuring has directly affected the reliability of the system.

Between 1986 and 1998, employment at major investor-owned utilities dropped more than one-third, from just under 520,000 to 340,000 employees.53 Staffing cutbacks went hand-in-hand with cutbacks in scheduled maintenance, routine repairs of damaged equipment, and replacement of obsolete infrastructure. The results have been distribution-related outages of unprecedented scope. Historically, most large-scale outages were caused by the loss of major transmission lines, the lack of adequate generating capacity on peak summer days, and other generation-related problems. For example, the Great Northeast Blackout of 1965 started with the loss of a transmission line on the New York-Canadian border that eventually caused generators across the northeast to go offline, leaving 30 million customers without power for up to thirteen hours.54

The disinvestment in utility infrastructure that occurred during the 1990s resulted in outages that had nothing to do with loss of generating capacity but with the failure of local distribution cables and substations. During the summer of 1999, major outages hit New England, New York City, Long Island, New Jersey, Chicago, and other areas around the country. Investigations by the Department of Energy, the Attorney General of New York, and even some of the utilities involved all identified the failure to conduct routine maintenance and repairs as one of the major causes of these outages.55 Quite apart from any changes in the laws governing utilities, therefore, the de facto restructuring of the utilities industry, with its emphasis on cutting costs and increasing profits, threatens the reliability of electric supply.56 In addition, restructuring has been criticized for failing to result in cost-savings for the consumer. A new trend appears to be emerging in which states that have restructured are suspending retail competition (for example, Arkansas, Arizona, California, Montana, Nevada, New Mexico, and Oregon) or have passed legislation that allows the electric utility to once again build their own generation capacity (Delaware, Illinois, and Ohio).57

States must establish service quality standards for reliability, telephone response, billing, and a range of other measures to ensure that service after the advent of competition is not degraded from the level established prior to restructuring. No customer should be required to accept a standard of service below that which the customer enjoys under the current system.58

Footnotes

  • 44 {44} For the status of the state electric industry restructuring activity, go to www.eia.gov/electricity/policies/restructuring/restructure_elect.html.

  • 45 {45} 16 U.S.C. §§ 2601–2603.

  • 46 {46} Utilities were required to purchase at prices at or below the price at which they could provide power for themselves (known as “avoided cost”). Qualifying facilities (QFs) included renewables and co-generators meeting defined characteristics. Some states expanded the requirement to include other independent power producers (IPPs, also known as non-utility generators or NUGs). See, e.g., Investigation of the Commission on Its Own Motion, D.P.U. 89-239 (Mass. Dep’t of Pub. Util. Nov. 1990).

  • 47 {47} Pub. L. No. 102-486, 102 Stat. 2776 (1988).

  • 48 {48} Wholesale wheeling is the transmission of power from a seller (for example, an IPP or utility) to a buyer using the transmission lines of a party that is neither the seller nor buyer. Prior to EPACT, transmission-owning utilities could block sales by independent generators who did not themselves own transmission lines.

  • 49 {49} See www.eia.gov/cneaf/electricity/page/prim2/toc2.html.

    The fourteen states in which electric utility customers can choose an alternative supplier if it serves the customer’s area are Connecticut, Delaware, the District of Columbia, Illinois, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island, and Texas.

  • 50 {50} See, e.g., 220 Mass. Code Regs. § 11.05 (“Competitive Supplier and Electricity Broker Requirements”); Model Terms and Conditions Governing the Relationship Between Electric Utility Distribution Companies, 182 Pub. Util. Rep. 4th 487, 1997 WL 868766 (Mass. Dep’t of Telecomms. & Energy Dec. 31, 1997) (Mass. D.T.E. 97-65). See also 940 Mass. Code Regs. §§ 19.01–19.07 (Massachusetts attorney general’s regulations on retail marketing and sale of electricity).

  • 51 {51} 168 Pub. Util. Rep. 4th 590, 1996 WL 295164 (Fed. Energy Regulatory Comm’n Apr. 24, 1996), published at 61 Fed. Reg. 21540 (May 10, 1996) (FERC final rule).

  • 52 {52} Order, Util. L. Rep. P5871, 1996 WL 355534, No. RM-95-9-000 (Fed. Energy Regulatory Comm’n Apr. 24, 1996), published at 61 Fed. Reg. 21737 (May 10, 1996) (FERC final rule).

  • 53 {53} U.S. Energy Info. Admin., The Restructuring of the Electric Power Industry: A Capsule of Issues and Events, DOE/EIA-X037, at 22 (2000).

  • 54 {54} For a brief summary of the great Northeast blackout of 1965 (based on a presentation made by Central Maine Power Company to the IEEE Maine Section), see www.rense.com/general40/95.htm.

  • 55 {55} See U.S. Dep’t of Energy, Power Outage Study Team, Findings and Recommendations to Enhance Reliability from the Summer of 1999 (Mar. 2000), available at certs.lbl.gov/certs-pubs.html; Office of the N.Y. Att’y Gen., Con Edison’s July 1999 Electric Service Outages: A Report to the People of the State of New York (Mar. 9, 2000); Commonwealth Edison, A Blueprint for Change: Executive Summary for the Investigation Report by Commonwealth Edison to the Illinois Commerce Commission (Sept. 15, 1999) (acknowledging that CommEd had disinvested in its distribution system and needed to spend as much as $2 billion to restore system reliability).

    The NSTAR Electric service territory centered in Boston, Massachusetts, also suffered repeated outages during the summer of 2001 due to disinvestment in maintenance and repairs, and NSTAR Electric prepared a thorough report as well. NSTAR Electric Company Report to the Department of Telecommunications and Energy in D.T.E. 01-65 (Oct. 29, 2001) (acknowledging that NSTAR had fallen millions of man-hours behind in routine maintenance).

  • 56 {56} At least one state commission has adopted standards for inspecting, maintaining, and repairing utility infrastructure. Order Instituting Rulemaking for Electric Distribution Facility Standard Setting, R. 96-11-004, Decision 97-03-070 (Cal. Pub. Util. Comm’n Mar. 31, 1997).

  • 57 {57} U.S. Energy Info. Admin., Electricity Power Industry Overview 2007, available at www.eia.gov/cneaf/electricity/page/prim2/toc2.html.

  • 58 {58} See Mass. Gen. Laws ch. 164, § 1E (mandating the adoption of service quality standards and setting benchmark staffing levels).

    The then Department of Telecommunications and Energy (now divided into the Department of Public Utilities and the Department of Telecommunications and Cable) adopted the mandated service quality standards in Docket No. 99-84.