The Evolution of the Electric Utility Industry

This article examines the evolution of the electric utility industry in three parts: I. Discovery, Innovation, and Expansion; II. Increased Demand, Improved Technology, and Increased Regulation; and III. Diversification, Regionalism, and Deregulation. Part I begins with an examination of how the electric industry came to be, starting with incandescent light. The power industry at this time consisted of three segments that still exist today; generation, transmission, and distribution. Municipalities initially issued franchises and charters to power cities, which resulted in fierce competition to provide power at the lowest rates. Through 1880 to 1900, electricity-use increased rapidly, attracting private companies to begin generating power. The influx of private providers resulted in government-owned power companies becoming privatized or discontinued. To counter the market dominance that private companies were developing, states created commissions to regulate them. To avoid regulation, holding companies were formed to consolidate all three segments of the industry under one corporation. State regulators were left powerless when interstate power generation companies began charging excessive prices. The Commerce Clause, as then interpreted, prevented state regulation. By 1935, nine holding companies controlled the entire electric power industry. Part II examines federal efforts to increase regulation, beginning in 1933 with a reorganization of the Federal Power Commission (FPC). Reporting by the FPC found that any benefits conferred on the public resulting from holding companies controlling all of the electric power production were outweighed by their detriments, and the FPC considered these holding companies to be organized in a dangerous pyramidal structure. As a result of the FPC reporting, Congress passed the Public Utility Act of 1935 which was designed to prevent further industry practices injurious to investors, consumers, and the general public. The Act required holding companies, defined as owning 10% or more of a public utility, to register with the SEC and helped to dismember them. The Act also gave the FPC regulatory power over the transmission of electric power in interstate commerce and the sale of wholesale energy. Its regulatory power covers the oversight of mergers and acquisitions within the industry, allowed it to set electric rates, and gave it the power to order electric companies to provide adequate service. Part III looks at the establishment of nationwide power grids and increased cooperation, brought in part by industry self-regulation that began with the North American Electrical Reliability Council (NERC). In 1977, Congress created the Department of Energy and replaced the FPC with the Federal Energy Regulatory Commission (FERC). Legislation was also passed that created the Public Utilities Regulatory Policy Act (PURPA) which gave FERC jurisdiction over the operation of power pools and the ability to order interconnections, coordination efforts, and wheeling. While FERC regulated rates for power, it also allowed companies to charge add-ons that gave utilities another way to raise rates. Furthermore, PURPA did not drastically affect the structure of the industry, despite federal concerns about monopolization. This paper concludes with the introduction of the Energy Policy Act of 1992 (EPAct) and examines how it affected the energy industry.