The Changing Structure of the
Electric Power Industry 2000: An Update

The U.S. electric power industry, the last major regulated energy industry in the United States, is changing to be more competitive. In some States, retail electricity customers can now choose their electricity company. New wholesale electricity trading markets, which were previously nonexistent, are now operating in many regions of the country. The number of independent power producers and power marketers competing in these new retail and wholesale power markets has increased substantially over the past few years. To better support a competitive industry, the power transmission system is being reorganized from a balkanized system with many transmission system operators, to one where only a few organizations operate the system. However, the introduction of these new markets has been far from seamless. California, where retail competition was introduced in 1998, has had problems recently. Electricity prices in some parts of the State have tripled and there have been supply problems as well. Although not as severe as California, New York’s electricity market has had price spikes which may be attributable to problems in the market design. While some observers argue that deregulation should be scrapped, others argue that deregulation is a noble endeavor and that these problems can be solved with structural adjustments to the markets.

This reorganization is actually the second major structural realignment in the history of the industry. The first occurred during the late 1920s and early 1930s. However, the changes then were mandated by a Federal law that was designed to stop holding company misconduct. Today, the changes that are occurring are not driven by misconduct, but rather by economic and technological factors. In fact, three primary catalysts are driving the current movement toward a restructured electric power industry. First is a general reevaluation of regulated industries and a rethinking of how the introduction of competition might improve efficiencies. The telecommunications and banking industries have been made more competitive, and the electric power industry is being evaluated for similar efficiency gain potential. The second factor driving the restructuring debate is the wide disparity of electricity rates across the United States (Figure ES1). In 1998, consumers in New York paid more than two and one-half times the rates that consumers in Kentucky paid for their electricity. In the western United States, the rates paid by consumers in California were well over twice the rates paid by consumers in Washington. Technological improvements in gas turbines have changed the economics of power production. No longer is it necessary to build a 1,000- megawatt generating plant to exploit economies of scale. Combined-cycle gas turbines reach maximum efficiency at 400 megawatts, while aero-derivative gas turbines can be efficient at scales as small as 10 megawatts. These improvements, involving less capital investment and less time to build capacity, are the third set of catalysts driving restructuring.

Because it provides the capability to move power over long distances, the transmission system is an integral component of the Nation’s electric power industry. Through regulatory reform, the Federal Energy Regula-tory Commission (FERC) has promoted the development of competitive wholesale power markets and opening the transmission system to all qualified users. Since the late 1980s, FERC has approved more than 850 applications to sell power competitively in wholesale markets. In arguably its most ambitious effort to date, in December 1999, FERC issued Order 2000 calling for electric utilities to form regional transmission organizations (RTOs) that will operate, control, and possibly own the Nation’s power transmission system. The potential benefits of RTOs are the elimination of discriminatory behavior in using the transmission system, improved operating efficiency, and increased reliability of the power system.

Contact:

William Liggett

William.Liggett@eia.doe.gov

Phone: (202) 287-1727