American Geological Institute

Government Affairs Program

Update on Electricity Deregulation (11-30-98)

105th Congress Wrap-Up
Although no bills were passed, there was no shortage of action on the deregulation issue in the 105th Congress. Many hearings were held in the House, and the Senate held several workshops to address the effects of deregulation and the legislation introduced. In addition, the Federal Facilities Council released a conference summary report on "Competition in the Electric Industry: Emerging Issues, Opportunities, and Risks for Facility Operators" that is available from the National Academy Press at 800-624-6242 and on the NAP web site. This update also includes background information from the Congressional Research Service.

Administration Actions
On June 26th, Secretary of Energy Federico Pena delivered to Congress the Clinton Administration's proposal to implement the Comprehensive Electricity Competition Plan. Pena remarked that it is important to bring competition and choice to the utility industry. According to Pena, competition will yield environmental benefits by fostering efficient fuel use and increasing chances to market energy efficiency services. Promising consumer savings of $20 billion per year, the President's plan would require states to decide by January 1, 2003 whether or not to adopt a system allowing consumer choice of energy suppliers. The plan would also create a $3 billion "public benefits fund" to match state spending for research and development in renewable energy and energy efficiency and for assistance to low-income consumers. The proposal would create a system that would set limits on emissions of nitrogen oxides and allow power companies to trade emissions credits. It does not, however, include a limit on carbon dioxide emissions. The Administration's plan also emphasizes recovery of stranded costs, reliability, and consumer information.

The following excerpt of a White House press release provides more detail on the six principle components of the Administration's plan:

Congressional Actions
The introduction of two bills early in the 105th Congress on deregulating the electric utility industry ignited a debate on the role of the federal government in the utility industry. S. 237, introduced by Senate Energy and Natural Resources Committee ranking member Dale Bumpers (D-AR) and H.R. 655, introduced by House Energy and Power Subcommittee Chairman Dan Schaefer (R-CO), are fairly similar. They both issue deadlines to introduce competition in the electric energy market and offer tradable credits to encourage these renewable energy sources. Another environmentally conscious bill, HR 1960, was introduced by Representative Edward Markey (D-MA). It has been praised by environmentalists for its renewable energy credit trading system and by consumer groups, who support its low-income consumer provisions. Industry reception, however, has not been as positive.

Congressional members in favor of deregulating the $200 billion-a-year industry -- the last government-protected monopoly -- argue that deregulation will reduce prices and provide consumers with better service in a manner similar to the deregulation of the airline and telecommunications industries. Reduction of prices comes not only in a consumer's electric bill, estimated to fall between 15-43%, but also in all goods and services, since electricity is a fundamental cost at the core of the economy. Similar savings in our nation's financially strapped school systems can be used for a variety of improvements, from hiring more teachers to purchasing new computers.

The argument for deregulating the industry is weakened by dissension from members on the best way to complete the process. Rep. Thomas Billy (R-VA), chair of the House Commerce Committee, supports Bumpers' and Schaefer's bills, which reflect his main goal of "ensuring that within a concise, definite period of time, all classes of electric consumers will have a choice of providers when they turn on the light switch." Other supporters of energy deregulation, such as Sen. Craig Thomas (R-WY), believe that states should not be subject to a deadline. He recently introduced S. 722, also known as "Eureca", Electric Utility Restructuring Empowerment and Competitiveness Act of 1997, to support a states rights position.

Debate continues with those who oppose deregulation, such as Rep. Frank Pallone (D-NJ) and Rep. Clifford Stearns (R-FL), who believe Congress should defer to the states and that a Congressional policy is an imposition of states rights. Rep. Pallone also contends that while some consumers will benefit from lower prices, an equal number will pay more as prices nationwide level off. Environmental groups are concerned that states with more stringent air standards will be penalized, as power could be produced more cheaply by electric plants in areas with little pollution control. The final argument against deregulation is how to handle the stranded costs in utilities that had heavily invested in plants and equipment that may prove ineffective in a deregulated market. The utilities are demanding that they be given the opportunity to recover these costs, but it is not clear if the utility shareholders or ratepayers will shoulder this burden. The opposing views of the congressional members combined with the enormous lobbying campaign on both sides, ensure this debate will remain in the forefront of congressional activity.

In the House, Representatives Frank Pallone (D-NJ) and Tom Campbell (R-CA) introduced a narrower bill, H.R. 2909, that focuses on clean air issues in a restructured environment. It specifically addresses coal power plants in the midwest that have been exempt from Clean Air Act regulations through grandfather clauses. The bill creates an allowance program and caps for nitrogen oxide and sulfate fine particles. Pallone commented, "I will work with members and groups to ensure that this legislation become part of any deregulation bill that comes before Congress."

The main efforts for reform occurred in the House Commerce Committee, where Reps. Steve Largent (R-OK) and Bill Paxon (R-NY) floated a draft bill. When that bill failed to gain support, they combined provisions in H.R. 655, introduced by House Energy and Power Subcommittee Chairman Dan Schaefer (R-CO), with their draft to create another draft bill. Specifically, the legislation couples the renewables portfolio from H.R. 655 with the grandfathering language of Largent-Paxon bill. In addition, the new draft confronts the issue of market power, provides the notion of labeling provisions, and delegates to states the authority to decide on stranded cost, except in dealing with contracts under the Public Utility Regulatory Policies Act (PURPA). The bill did not move forward. The Alliance for Competitive Electricity (AFCE) and the  Edison Electric Institute (EEI), the trade group of investor-owned utilities, would have liked the Commerce Committee's proposal and the Administration's bill to include detailed stranded cost recovery provisions. EEI is also displeased with the 5.5% renewable portfolio standard and the authority given to the Federal Energy Regulatory Commission to order divestiture.

In the House, efforts to deregulate the utility industry by the 105th Congress were declared dead in early summer. On June 22, 1998 House Commerce Committee Chairman Thomas Bliley (R-VA) wrote Commerce Energy and Power Subcommittee Chairman Dan Schaefer (R-CO), concurring with Schaefer's decision not to mark up any deregulation bills this year. Bliley blamed the short legislative session and lack of minority support for the end to these efforts, but stated: "We will hit the ground running early next year and complete the task in early 1999".

Debate in the summer of 1997 shifted from total reform of the electric utility industry to the merits of repealing PUHCA, the Public Utility Holding Company Act of 1935. PUHCA established a regime of regulating electric utilities which gave specific and separate powers to the states and the federal government. Senate Banking, Housing, and Urban Affairs Committee Chairman Alphonse D'Amato (R-NY) introduced S. 621 to repeal PUHCA in April, which was marked up by his committee and reported to the Senate. The bill, which has 21 cosponsors, will not likely see floor action because Senate Energy and Natural Resources Committee Ranking Member Dale Bumpers (D-AR) placed a hold on it, which requires 60 votes to move it to the floor. Bumpers favors PUHCA repeal, but prefers that it take place as part of a comprehensive reform bill to safeguard consumers. Bumpers' position is echoed by House Commerce Committee Chairman Thomas Bliley (R-VA), House Energy and Power Subcommittee Chairman Dan Schaefer (R-CO), and the Administration.  Although supporters want to see floor action taken on PUHCA, the bill stalled as of May since Sen. Murkowski claimed that S. 621 did not have the 60 votes needed to come to the floor.

Just before recessing for 1997, Senators Dale Bumpers (D-AR) and Slade Gorton (R-WA) introduced S. 1401. The bill is similar to S.237, a bill introduced by Bumpers earlier in the session, but differs primarily in the deadline for competition (Dec. 15, 2003 rather than Jan. 1, 2002) and allows states to impose reciprocity requirements. Gorton, in the interest of his low energy cost Pacific Northwest constituency, added a requirement that utilities with stranded costs must reimburse customers for increases in the cost of their power.

On June 17, 1998, Sen. Slade Gorton (R-WA) introduced S. 2182 as a response to Murkowski's own utility tax bill, S. 1483, introduced in November 1997. Gorton's Private Use Competition Act allows public power systems to grant other power producers access to their transmission lines and to move control of these transmission areas to an independent system operator without endangering the position of their tax-exempt bonds. The day after Gorton introduced his bill, Sen. Don Nickles (R-OK) introduced legislation concerning electricity deregulation, S. 2187.  Sen. Nickles' legislation allows electric energy providers and consumers a way to participate in retail choice by Jan. 1, 2002 and utilizes federal anti-trust laws to encourage unlimited access. In addition, his draft bill eliminates the protection given to certain state regulations by the Federal Power Act.

The House Commerce Energy and Power Subcommittee held a series of six hearings on the issue of electricity deregulation. The subject areas of these hearings as well as links to additional information are as follows:  

The Senate Agriculture, Nutrition and Forestry Committee held a hearing on July 8, 1997 that focused on the impact of utility deregulation on rural America and the financial condition of the Rural Utilities Service electric loan portfolio. Witnesses included representatives from U.S. Department of Agriculture Rural Utilities Service, U.S. General Accounting Office, Federal Energy Regulatory Commission, Edison Electric Institute and the National Rural Electric Cooperative Association. Their testimony is available on the Senate Agriculture home page.

In addition to hearings, several workshops have been held on deregulating the electricity industry. The first one was held March 6, and the testimony is available from the Senate Energy and Natural Resources Committee Web Page. The second workshop was held March 13, and was entitled Competitive Change In The Electric Power Industry -What is the role of public power in a competitive environment? The third workshop, held on March 20, focused on Competitive Change In The Electric Power Industry: Is federal legislation necessary?

The workshop on May 8 examined the effects of deregulation on the types of fuel generated and used. Donald Neimic, vice president of Union Pacific Resources, testified that Congress' role should be to ensure that the market, not the federal government, chooses winners and losers. While he supports the use of renewable energy, he opposed mandates and environmental regulations that show a preference for certain fuels. Sam Skinner, president of Commonwealth Edison Company, advocated for the role of nuclear energy, arguing that nuclear power is vital to the nation because of its cost efficiency and air quality benefits. He believes that control of the utility market should be left to state and local governments. Steven Leer, President and Chief Executive Officer of Arch Mineral Corporation, explained that the coal industry expects to gain market shares in a deregulated industry. He believes the fears of increased air pollution from this change are unfounded, since the Clean Air Act of 1990 addresses coal emissions. Brent Allen, Vice President and Land Manager of Alpar Resources, Inc. advocated natural gas as the "fuel of the future," and questioned why it was not the "fuel of the present." He supports restructuring with several conditions, including a timeline for states, the honoring of current contracts, and fuel neutral standards.

Lawrence Plitch, representing the Integrated Waste Management Service, the national organization of waste to energy facilities testified in support of requirements for renewable energy, such as those included in Bumpers' S. 237 and S. 687 by Senator Jeffords. Renewable energy has health, environmental, and economic benefits, and helps guard against price fluctuations. Julie Keil, Director of Hydro Licensing and Water Rights Portland General Electric, believes hydropower is in jeopardy as a viable energy source, predominately because of the numerous regulations surrounding the licensing process. It still provides 10% of the nation's energy supply, and 90% of our renewable supply. Dee Dee Hapner testified for Pacific Gas and Electric on t he process used in California during deregulation. To read the full testimony provided to Congress by the original witness list, which changed slightly, visit the Senate Energy and Natural Resources Website.

A workshop held on May 22, 1997, examined the financial implications of restructuring. For further information on this workshop, visit the Senate Energy and Natural Resources Committee on the web. The fifth Senate Energy and Natural Resources Committee workshop, "Competitive Change in the Electric Power Industry: The Benefits and Risks to Consumers and Communities," was held on June 12, 1997. The workshop was originally intended to provide the Administration an opportunity to share its position; however, Leslie Byrne, special assistant to the President, withdrew from the workshop at the last minute. The remaining witnesses, from diverse societies, emphasized the importance of reliability and consumer protection in a deregulated industry. The full testimony is available on the Senate Energy and Natural Resources Website. The Committee held its most recent workshop on June 24, 1997. The workshop focused on the reform of the Public Utility Holding Company Act (PUHCA). For further information, consult the Committee Website.

Congressional Research Service Background and Analysis

The following background information has been reprinted from a Congressional Research Service (CRS) report available on the Committee for the National Institute for the Environment (CNIE) National Library for the Environment web page, which contains additional CRS reports on this and other environmental issues. CRS reports are also available by calling your local representative or senator.

Historically, electricity service has been defined as a natural monopoly, meaning that the industry has (1) an inherent tendency toward declining long-term costs, (2) high threshold investment, and (3) technological conditions that limit the number of potential entrants. Similarly, many regulators have considered unified control of generation, transmission, and distribution as the most efficient means of providing service. As a result, most people (about 75%) are currently served by a vertically integrated, investor-owned utility.

As the electric utility industry has evolved, flaws with the natural monopoly theory have become apparent. First, there is nothing natural about a utility's monopoly to provide electric service: exclusive franchises in the utility's service area are granted by government. Second, many utilities, primarily municipals, coops and publicly owned utilities, do not own all of their generating facilities. For these utilities, contractual arrangements, rather than unified control, have been adequate to meet their obligation to serve their customers in an efficient manner.

The Federal Power Act (FPA) and the Public Utility Holding Company Act (PUHCA) of 1935 established a regime of regulating electric utilities that gave specific and separate powers to the states and the federal government. State regulatory commissions address intrastate utility activities, including wholesale and retail rate-making. State authority currently tends to be as broad and as varied as the states are diverse. At the least, a state public utility commission will have authority over retail rates, and often over investment and debt. At the other end of the spectrum, the state regulatory body will oversee many facets of utility operation. Despite this diversity, the essential mission of the state regulator is the establishment of retail electric prices. This is accomplished through an adversarial hearing process. The central issues in such cases are the total amount of money the utility will be permitted to collect and how the burden of the revenue requirement will be distributed among the various customer classes (residential, commercial, and industrial).

Under the Federal Power Act, federal economic regulation addresses wholesale transactions and rates for electric power flowing in interstate commerce. Federal regulation followed state regulation and is premised on the need to fill the regulatory vacuum resulting from the constitutional inability of states to regulate interstate commerce. In this bifurcation of regulatory jurisdiction, federal regulation is limited 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 electricity utility industry, including financial transactions, wholesale rate regulation, interconnection and wheeling of wholesale electricity, and ensuring adequate and reliable service. In addition, to prevent a recurrence of the abusive practices of the 1920s (e.g., cross-subsidization, self-dealing, pyramiding, etc.), the Securities and Exchange Commission (SEC) regulates utilities' corporate structure and business ventures under the Public Utility Holding Company Act (PUHCA, Title 1 of the Federal Power Act).

The electric utility industry has been in the process of transformation. During the past two decades, there has been a major change in direction concerning generation. First, improved technologies have reduced the cost of generating electricity as well as the size of generating facilities. Prior preference for large-scale -- often nuclear or coal-fired -- powerplants has been supplanted by a preference 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 electricity generation and permitted non-utility entities to build profitable facilities. Recent changes in electric utility regulation and improved technologies have allowed additional generating capacity to be provided by independent firms rather than utilities.

Between 1935 and 1978, little change occurred in the way electric utilities were regulated. Beginning in 1978, primarily in response to the "oil crisis," laws were passed to lessen domestic dependence on foreign oil and encourage alternative sources of power. The Public Utility Regulatory Policy Act of 1978 (PURPA, P.L. 95-617) was established in part to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. In addition to PURPA, the Fuel Use Act of 1978 (FUA, P.L. 95-620) helped qualifying facilities (QFs) become established. Under FUA , utilities were not permitted to use natural gas to fuel new generating technology. QFs, which are by definition not utilities, were able to take advantage of abundant natural gas as well as new generating technology, such as combined-cycle. These technologies lowered the financial threshold for entrance into the electricity generation business as well as shortened the lead time for constructing new plants. FUA was repealed in 1987, but by this time QFs and small power producers had already gained a portion of the total electricity supply.

This influx of QF power challenged the cost-based rates that previously guided wholesale transactions. Before implementation of PURPA, Federal Energy Regulatory Commission (FERC) approved wholesale interstate electricity transactions based on the seller's costs to generate and transmit the power. As more non-utility generators entered the market in the 1980s, these cost-based rates were challenged. Since non- utility generators typically do not have enough market power to influence the rates they charge, FERC began approving certain wholesale transactions whose rates were a result of a competitive bidding process. These rates are called market-based rates. Most recently, the Energy Policy Act of 1992 (EPACT, P.L. 102-486) removed several regulatory barriers to entry into electricity generation to further competition of electricity supply. Specifically, EPACT provides for the creation of new entities, called "exempt wholesale generators" (EWGs), that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. Under EPACT, these EWGs are also provided with a way to assure transmission of their wholesale power to a wholesale purchaser. However, EPACT does not permit FERC to mandate that utilities transmit EWG power to retail consumers (commonly called "retail wheeling"), an activity that remains under the jurisdiction of state public utility commissions.

The question now is whether further legislative action is desirable to encourage competition in the electric utility sector and at what speed this change will occur. Issues discussed in this brief include repeal or alteration of both PUHCA and the Public Utility Regulatory Policy Act of 1978 (PURPA), transmission access and FERC's recent Orders 888 and 889, including stranded costs, environmental impact, and issues related to utility diversification.

Sources: Roll Call, The Hill, Environment and Energy Weekly, Congressional Research Service Brief - Electricity: The Road to Restructuring, The Department of Energy, Greenwire 

Please send any comments or requests for information to the AGI Government Affairs Program at

Contributed by Kasey Shewey White, AGI Government Affairs and Shannon Clark, AGI Government Affairs Intern. 

Last updated November 30, 1998

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