Historically, electricity service has been defined as a natural monopoly, meaning that theindustry has (1) an inherent tendency toward declining long-term costs, (2) high thresholdinvestment, and (3) technological conditions that limit the number of potential entrants. In addition,many regulators have considered unified control of generation, transmission, and distribution as themost efficient means of providing service. As a result, most people (about 75%) are currently servedby a vertically integrated, investor-owned utility. As the electric utility industry has evolved, however, there has been a growing belief that thehistoric classification of electric utilities as natural monopolies has been overtaken by events and thatmarket forces can and should replace some of the traditional economic regulatory structure. Forexample, the existence of utilities that do not own all of their generating facilities, primarilycooperatives and publicly owned utilities, has provided evidence that vertical integration has notbeen necessary for providing efficient electric service. Moreover, recent changes in electric utilityregulation and improved technologies have allowed additional generating capacity to be providedby independent firms rather than utilities. The Public Utility Holding Company Act (PUHCA) (1) and the Federal Power Act(FPA) of 1935 (Title I and Title II of the Public Utility Act) (2) established a regime ofregulating electric utilities that gave specific and separate powers to the states and the federalgovernment. A regulatory bargain was made between the government and utilities. In exchange foran exclusive franchise service territory, utilities must provide electricity to all users at reasonable,regulated rates. State regulatory commissions address intrastate utility activities, including wholesaleand retail rate-making. State authority currently tends to be as broad and as varied as the states arediverse. At the least, a state public utility commission will have authority over retail rates, and oftenover investment and debt. At the other end of the spectrum, the state regulatory body will overseemany facets of utility operation. Despite this diversity, the essential mission of the state regulator in states that have notrestructured is the establishment of retail electric prices. This is accomplished through an adversarialhearing process. The central issues in such cases are the total amount of money the utility will bepermitted to collect and how the burden of the revenue requirement will be distributed among thevarious customer classes (residential, commercial, and industrial). Under the FPA, federal economic regulation addresses wholesale transactions and rates forelectric power flowing in interstate commerce. Federal regulation followed state regulation and ispremised on the need to fill the regulatory vacuum resulting from the constitutional inability of statesto regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation islimited and conceived to supplement state regulation. The Federal Energy Regulatory Commission(FERC) has the principal functions at the federal level for the economic regulation of the electricityutility industry, including financial transactions, wholesale rate regulation, transactions involvingtransmission of unbundled retail electricity, interconnection and wheeling of wholesale electricity,and ensuring adequate and reliable service. In addition, to prevent a recurrence of the abusivepractices of the 1920s (e.g., cross-subsidization, self-dealing, pyramiding, etc. ), the Securities andExchange Commission (SEC) regulates utilities' corporate structure and business ventures underPUHCA. The electric utility industry has been in the process of transformation. During the past 25years, there has been a major change in direction concerning generation. First, improved technologieshave reduced the cost of generating electricity as well as the size of generating facilities. Priorpreference for large-scale -- often nuclear or coal-fired -- powerplants has been supplanted by apreference for small-scale production facilities that can be brought online more quickly and cheaply,with fewer regulatory impediments. Second, this has lowered the entry barrier to electricitygeneration and permitted non-utility entities to build profitable facilities. Recent changes in electricutility regulation and improved technologies have allowed additional generating capacity to beprovided by independent firms rather than utilities. The oil embargoes of the 1970s created concerns about the security of the nation's electricitysupply and led to enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA). (3) For the first time, utilitieswere required to purchase power from outside sources. The purchase price was set at the utilities'"avoided cost," the cost they would have incurred to generate the additional power themselves, asdetermined by utility regulators. PURPA was established in part to augment electric utilitygeneration with more efficiently produced electricity and to provide equitable rates to electricconsumers. In addition to PURPA, the Fuel Use Act of 1978 (FUA) (4) helped qualifying facilities(QFs) become established. Under FUA, utilities were not permitted to use natural gas to fuel newgenerating facilities. QFs, which by definition are not utilities, were able to take advantage of newlyabundant natural gas as well as new generating technology, such as combined-cycle plants that usehot exhaust gases from combustion turbines to make steam to generate additional power. Thesetechnologies lowered the financial threshold for entrance into the electricity generation business aswell as shortened the lead time for constructing new plants. FUA was repealed in 1987, but by thistime QFs and small power producers had gained a portion of the total electricity supply. This influx of QF power challenged the cost-based rates that previously guided wholesaletransactions. Before implementation of PURPA, FERC approved wholesale interstate electricitytransactions based on the seller's costs to generate and transmit the power. But, as non-utilitygenerators typically do not have enough market power to influence the rates they charge, FERCbegan approving certain wholesale transactions whose rates were a result of a competitive biddingprocess. These rates are called market-based rates. This first incremental change of traditional electricity regulation started a movement towarda market-oriented approach to electricity supply. Following the enactment of PURPA, two basicissues stimulated calls for further reform: whether to encourage nonutility generation and whetherto permit utilities to diversify into non-regulated activities. The Energy Policy Act of 1992 (EPACT) (5) removed several regulatory barriers to entry into electricitygeneration to increase competition of electricity supply. Specifically, EPACT provides for thecreation of entities, called "exempt wholesale generators" (EWGs), that can generate and sellelectricity at wholesale without being regulated as utilities under PUHCA. Under EPACT, EWGsare also provided with a way to assure transmission of their wholesale power to a wholesalepurchaser. However, EPACT does not permit FERC to mandate that utilities transmit EWG powerto retail consumers (commonly called "retail wheeling" or "retail competition"), an activity thatremains under the jurisdiction of state public utility commissions. PURPA began to shift moreregulatory responsibilities to the federal government, and EPACT continued that shift away from thestates by creating new options for utilities and regulators to meet electricity demand. EPACTallowed for a robust wholesale market in electricity. The transmission system is now usedextensively for bulk-power transfers between utilities, even though the physical system was designedto handle primarily intra-utility transfers. Utilities now depend on a combination of self-generation,merchant generators, and other utilities to meet their retail electricity demand. Shortly after enactment of EPACT, states began considering whether to allow retail choice. It was argued that retail prices would decline with additional competition. Most state plans have notmet initial expectations. Few alternative suppliers have remained in the market, consumers arereluctant to switch suppliers, and default service rates set by the states are generally equal to or lessthan wholesale market prices plus retail margin needed to cover retail service costs. (6) Currently, 24 states and theDistrict of Columbia have either enacted legislation or issued regulatory orders to implement retailaccess. California had the first active retail program. However, California suspended itsrestructuring program following the California energy crises in 2001 that was marked by retail andwholesale price spikes as well as a decrease in reliability. Eighteen states have active restructuringprograms. Six states, Arkansas, Montana, Nevada, New Mexico, Oklahoma, and West Virginia,have delayed implementation of retail access. Since 2000, no additional states have announced plansto introduce retail competition. Electric utility provisions are included in comprehensive energy legislation( H.R. 6 ) that was signed into law by President Bush on August 8, 2005. In part, this law repeals the Public Utility Holding Company Act (PUHCA). The electric utilityindustry has long been a proponent of such a repeal while consumer groups have been opposed. Asa compromise, a provision was included that strengthens FERC's merger review authority. Inaddition, language is included that is intended to prevent cross-subsidization. The mandatorypurchase requirement under the Public Utility Regulatory Policies Act (PURPA) is repealed. AnElectric Reliability Organization(ERO) is created and the ERO will promulgate mandatory,enforceable reliability standards for the electric industry that includes cybersecurity protection. Alsoincluded in the law is a Sense of Congress that FERC should carefully consider the states' objectionsto the locational installed capacity (LICAP) mechanism for New England. In addition to creating a new type of wholesale electricity generator, exempt wholesalegenerators (EWGs), the Energy Policy Act (EPACT) provides EWGs with a system to assuretransmission of their wholesale power to its purchaser. However, EPACT did not solve all of theissues relating to transmission access. As a result of EPACT, on April 24, 1996, FERC issued Orders888 and 889. (7) In issuingits final rules, FERC concluded that these orders will "remedy undue discrimination in transmissionservices in interstate commerce and provide an orderly and fair transition to competitive bulk powermarkets."