Electricity Deregulation

WHAT’S THE ISSUE?  

The U.S. electric industry is undergoing a sea change in the way it delivers electricity to millions of households and businesses nationwide. The $220 billion industry, which has been called the last great government-sanctioned monopoly, is slowly but surely being deregulated and opened to competition, giving consumers the power to choose their electricity provider in much the same way they choose telephone carriers.

Advocates of deregulation say reducing government control of the industry will benefit consumers – lowering prices while expanding services and giving the public a say in who supplies the power that runs their computers, toasters, lamps, and more. But among the 24 states that have enacted electricity deregulation plans, results are mixed. Rising prices, skyrocketing demand, and limited supply in some areas have raised questions about the viability of deregulation. At the same time, Congress has been unable to agree on a measure to introduce competition to the electricity market nationwide.  

 

HOW IT MAY AFFECT YOU
 

Whether or not electricity deregulation delivers the benefits touted by its supporters – including lower prices and more services – is an open question. Pennsylvania’s deregulation experiment, enacted in 1998, has been a rousing success by most accounts. Nearly 500,000 consumers – more than 11 percent of ratepayers – had chosen to leave their utility company as of Oct. 1999, reports The Washington Post. In the Philadelphia area, residential customers who chose the least-expensive electricity supplier were saving about $10 per month. 

The story is much different in California, which in 1996 became one of the first states to enact an electricity restructuring plan. Not long after the plan went into effect, price increases began to whittle away public support for deregulation in the Golden State. Just two years after deregulation was enacted, California consumer groups succeeded in putting on the ballot an initiative that would have thrown out the state’s deregulation plan. The measure failed. Criticism of deregulation intensified in the summer of 2000, when limited power supplies and increasing demand caused the wholesale price of power to soar throughout the state. In San Diego, where the retail price of power fluctuates directly with the wholesale market, electric bills doubled. The problem grew markedly worse in the winter of 2000/01, as the state's electric utilities faced a financial crisis and consumers were met with electricity shortages and skyrocketing prices.

 

HOW THE INTEREST GROUPS SEE IT
 

Virtually everyone involved with the issue seems to agree that electricity deregulation can work. The major question is how. The drive for electricity deregulation is being led by seven groups, each of which advocates changes to the current system that provide the greatest benefit to their members, reports Congressional Quarterly. The groups have spent a combined $50 million lobbying lawmakers, according to their own reports to Congress, which are believed to contain extremely conservative figures.

The groups vary in their approach to deregulation. The first point of contention is whether Congress should repeal the 1935 Public Utility Holding Company Act (PUHCA), which gave big utilities a monopoly in their geographic area but prevented them from expanding their reach. The law was enacted to prevent national conglomerates from dominating the electricity industry, and some groups -- namely large investor-owned power companies -- contend that the law now stands in the way of increased competition that could lower prices and improve services. Other groups, including utilities owned by government agencies and municipalities, are concerned that repealing PUHCA would do away with important consumer protections. 

There are other ways the groups vary in their approach to deregulation. Some groups want to make sure they aren’t squashed by the large investor-owned electric companies in a deregulated system. The American Public Power Association, which represents utilities owned by municipalities or other government agencies, wants the ability to compete fairly with the large investor-owned electric companies. It also favors government monitoring of the electric market to ensure fair pricing and access. Other groups want deregulation to come free of additional government oversight that would favor rural, independent, and government-owned utilities. Edison Electric Institute, the giant trade association of investor-owned electric companies and utility holding companies, opposes additional federal regulations on investor-owned electric companies that would curb the market power of those companies. It supports giving consumers a choice of electricity providers – including their present providers. A third category of groups is concerned about deregulation’s overall effects on small electricity providers and consumers. The National Rural Electric Cooperative Association, a national service organization that represents consumer-owned cooperative electric utilities, is worried that electricity deregulation could have a negative impact on residential customers, small businesses, farmers and ranchers. It wants Congress to give regulatory authority to states, and to allow electricity cooperatives to regulate themselves.

 

HOW IT ALL BEGAN
 

The origins of the current system of energy production and delivery date back to the New Deal era, when Congress brought an end to the tight reign of large interstate holding companies that controlled more than 75 percent of the country’s electric generating capacity. The Public Utility Holding Company Act of 1935 (PUHCA) forced the holding companies to break up, and gave utilities a government-sanctioned monopoly over a limited territory. In exchange, utilities agreed to provide reliable electric service to all customers at a regulated rate. The law resulted in the formation of nearly 300 power systems and 800 rural cooperatives, reports Congressional Quarterly. 

OPEC’s worldwide oil embargo in 1973 had a dramatic impact on the electric industry. Although the embargo was most famous for creating interminable lines at the gas pump, it also produced sharp increases in electric utilities’ costs. The result was a surge of interest in alternative forms of energy. In 1978, Congress passed the Public Utility Regulatory Policies Act (PURPA) requiring utilities to use "renewable" energy, which is produced from wind, solar, and other sources. Both PUHCA and PURPA would later be viewed as impediments to workable national electricity deregulation. By the 1990s, a growing chorus of voices within the electricity industry, Congress, and the federal government was pushing to bring competition to the industry. Congress opened the system to competition in 1992 with the National Energy Policy Act, which allowed power producers to compete for the sale of electricity to utilities. In 1996, the Federal Energy Regulatory Commission (FERC) issued what would become one of its most famous orders. Order 888 required utilities to open their transmission lines to competitors. Soon thereafter, New Hampshire launched a pilot program allowing competition, as did Arizona, California, Massachusetts, Pennsylvania, and Rhode Island. These actions at the state level fueled the fire for a national deregulation plan.

 

THE MONEY
 

As talk of national electricity deregulation intensified in the 1990s, electric utilities -- not surprisingly -- increased their political contributions to candidates and parties. In 1992, utilities contributed a total of $5.4 million in individual, PAC, and soft money contributions. That figure nearly doubled to $9.5 million in 1996. That figure could double again when the final statistics for the 2000 election cycle are known. The strongest area of growth in political giving from electric utilities has been in the form of soft money. In 1992, utilities contributed just $556,000 in unlimited, unregulated soft money to the Democratic and Republican parties. By 1996, soft money contributions increased by more than six times to $3.6 million. The industry's soft money contributions more than doubled in the 2000 election cycle to approximately $8 million. It seems that every major group within the electric industry is pouring money into political activities. In fact, there’s so much money being thrown around that some observers say Congress has little incentive to resolve the matter quickly. Lobbyists, too, are reaping the benefits of the issue. One lobbyist even called it the "two-Lexus bill," reports CQ Weekly. The undisputed lobbying leader in this issue is the Edison Electric Institute, which has spent tens of millions of dollars lobbying Congress on behalf of large investor-owned electric companies. Other types of electric companies are also in the game. Rural electric cooperatives are led by the National Rural Electric Cooperative Association, which is consistently among the industry’s top 10 contributors to candidates and parties. Municipal and government utilities, represented by the American Public Power Association, are also active in lobbying elected officials, albeit to a much lesser degree than the wealthy investor-owned utilities. And then there are the advertisers. As any Congressional staffer or lobbyist knows, publications aimed at Congress have been filled with ads from companies and groups staking out positions on the debate over electricity deregulation. These groups include Americans for Affordable Electricity, a coalition of large-scale business consumers of electricity; Citizens for State Power, a conservative coalition backed by investor-owned electric utilities; and the Electric Utility Shareholders’ Alliance, a coalition of cooperatives, investor-owned utilities and labor interests.

 

THE PARTY LINE
 

As late as 1994, electric utilities slightly favored Democrats over Republicans with their campaign contributions. But like many industries, electric utilities dramatically increased their preference for Republican candidates and committees following the GOP takeover of Congress in 1994. Between the 1994 and 1996 election cycles, the proportion of contributions from electric utilities going to Democrats dropped by nearly half, from 53 percent to 32 percent. During the same period, the proportion of contributions to Republicans leapt from 47 percent to 68 percent. Electric utilities continue to favor Republicans with their campaign contributions by more than 2 to 1.

 

THE ISSUE IN CONGRESS
 

Electricity deregulation has been the focus of pointed debate in Congress as far back as 1996, but the absence of consensus – among members of Congress and the various groups lobbying them – has resulted in little progress. 

The debate during 1999 and 2000 focused on whether the federal government (in other words, the FERC) or the states should be responsible for overseeing a deregulated system. Those who supported giving the FERC authority included Rep. Thomas Bliley (R-Va.), the retiring chairman of the House Commerce Committee, and Sen. Jeff Bingaman (D-N.M), ranking member on the Senate Energy and Natural Resources Committee. Favoring state control were Rep. Joe Barton (R-Texas), chairman of the House Commerce Energy and Power Subcommittee, and Sen. Frank Murkowski (R-Alaska), who heads the Senate Energy and Natural Resources Committee. Bliley and Murkowski each put forth deregulation proposals in the 106th Congress, but neither man got very far. In the House, Barton’s subcommittee approved a bill in Oct. 1999 that would grant states most of the power to oversee a deregulated system. The vote was 17-11. Bliley, wary of giving the states that much power, called the full committee together in the summer of 2000 to consider his bill, but adjourned the session without so much as a vote. Murkowski tried unsuccessfully to move his deregulation proposal through the Senate Energy and Natural Resources Committee. Instead, the panel approved a more limited measure that seeks to guarantee reliability of the nation’s power grid. The Senate passed the bill June 30, but the House did not act on it before the 106th Congress adjourned. The prospects for passage of national electricity deregulation in the 107th Congress are unclear. The fallout from California's failed deregulation experiment could dim the level of enthusiasm among deregulation proponents in Congress. Another question mark is how the issue will fare in the retooled House Energy and Commerce Committee. Rep. W.J. "Billy" Tauzin (R-La.), the committee's new chairman, has not taken a leading role in the deregulation issue thus far. But the electricity industry is very familiar with him -- Tauzin is one of the top 10 House recipients of money from electric utilities.

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