In This Chapter, You Will Learn About

Chapter 12

Electric Power

Chapter collaborators:
Meeren Amin (WF ’12)
Scott Douglass (WF ’12)
Cameron Hill (WF ’12)
Derrick Lankford (WF ’12)
Lea Ko (WF ’13)

[LK: intro here] Electricity is the flow of electrical power or charge. US EIA, “Electricity Explained.” Electric power is the rate at which electric energy is transferred by an electric circuit. Wikipedia, “Electric Power.” Electricity is a secondary energy resource, unlike coal, oil and natural gas, which are primary forms of energy. Bosselman, 563. Thus, electricity is created through the conversion of primary energy sources. Fossil fuels generate most of the electric power in the United States. US EIA, “Electricity Explained.”

In this chapter, you will learn about:

• The distinction between primary energy sources and electric power

• The current three-part model for electric power production and consumption

• The lifecycle of electric power from its generation at a power plant to its delivery to the consumer

• The current corporate business structures which comprise the electric power industry

• The five types of entities, some public and some private, which produce and administer electric power in the United States

• The market structure and regulation of the electric power industry

• The basics of competition in electric power markets

• The traditional and emerging electric power market paradigms

• The delivery and pricing issues associated with the newer wholesale electric power market paradigms brought about by Order No. 888 and other federal regulations

• The federal jurisdiction and regulatory issues associated with power marketers

• The delivery and pricing issues associated with newer retail electric power markets

• The role of state governments in restructuring these emerging markets

[this chapter is intro to electric power, regulation of utilities, market-based models / re-do headings and roadmaps]

Chapter 12 – Electric Power
12.1Electricity as a Secondary Energy Source
12.2How a Modern Electricity System Works
12.2.1Generation
12.2.2 Transmission
12.2.3 Distribution
12.3 Current Structure of the Electric Industry
12.3.1 Investor-Owned Utilities (IOU’s)
12.3.2 Federal Agencies
12.3.3 Public Power
12.3.4 Rural Electric Cooperatives
12.3.5 Power Marketers
12.3.6 Independent Power Producers
12.4 Antitrust Law and Regulating Market Power
12.5 Evolving New Topics
12.6 Competition in Electric Power
12.6.1 The Growth of Wholesale Competition in Electric Generation
12.6.2 PURPA and the Growth of Independent Power Producers (IPPs)
12.6.3 Market Based Rates and Other Reforms to Rate Regulation
12.6.4 Market-Based Rates
12.6.5 Incentive Regulation
12.6.6 The Seeds of Wholesale Supply Competition
12.7 Emergence of New Wholesale Power Markets
12.7.1 Implementing Open Access for Wholesale Transmission
12.7.2 Price and Reliability in Competitive Wholesale Power Markets
12.8 FERC’s Jurisdiction over Power Marketers
12.8.1 The Evolution of Electricity Trading Mechanisms
12.9 Retail Competition in Electric Power
12.9.1 History and Rationale of Retail Restructuring
12.9.2 Common Features of Restructuring Plans
12.9.2.1 Choice of alternate provider
12.9.2.2 Standard offer or default service and protections for customers not selecting alternate provides
12.9.2.3 Stranded costs
12.9.2.4 Consumer rate protections
12.9.2.5 Other consumer protections
12.9.2.6 System benefits charges
12.9.2.7 Exit fees and switching penalties
12.9.2.8 Functional separation (unbundling)
12.9.2.9 Common Law “Duty to Serve” and Protection of Consumers in Competitive Retail Public Utility Restructuring
12.10 State Restructuring
12.10.1 Pennsylvania
12.10.2 Texas
12.10.3 California
12.10.4 The Future of State Restructuring

12.1Electricity as a Secondary Energy Source

Water power, coal, oil and natural gas are primary energy resources. Bosselman, 563. They are found in nature and may be directly utilized as usable energy. Bosselman, 563. While electricity is also found in nature, it is considered a secondary energy resource. Bosselman, 563. Secondary energy sources, also known as energy carriers, move energy in a useable form from one place to another. US EIA, “Energy Explained.” Our ability to harness natural electricity has been limited; thus our electricity comes from one of the four primary energy sources listed above or from nuclear fission, which will fully be explored later in its own chapter. Bosselman, 564.

To understand the significance of this distinction between a primary and secondary energy source, consider a passage from James Trefil’s A Scientist in the City:

“Electricity is different from other kinds of energy. When you turn on a light of use an electric tool, you don’t need the source of energy in the same building. In fact, the energy that drives the lights that allow you to read this book was probably generated some tens (if not hundreds) of miles from where you are sitting. Electricity provides a way of separating the generation of energy from its use.” Bosselman, 564.

12.2How a Modern Electric Energy System Works

The physical equipment of a modern electric power system is divided into three basic categories: 1) Generation; 2) Transmission; 3) Distribution. Bosselman, 579.

12.2.1Generation

Most electric power plants use coal, oil, natural gas or uranium as fuel for energy generation. Bosselman, 580. Some electric power plants use renewable resources, such as hydroelectric power. Bosselman, 580. Fossil fuels, such as coal, natural gas, and petroleum, generate most U.S. power. US EIA, “Electricity Explained.” The type of fuel, its cost and generating plant efficiency determines the way a particular generating plant is used. Bosselman, 580. A large electric systemwill usually contain many different types of generating plants. Bosselman, 580. The system operator will try to keep the mix of plans with the lowest operating costs running at any time. Bosselman, 580. The chart below illustrates the sources of U.S. electricity generation in 2011:

Chart: US EIA

To determine which type of generating plant will run at a given time, these “power plants” are generally classified into four categories:

• Base load “must run” plants (mostly nuclear or clean coal, which have low fuel costs and cannot be turned off and on quickly)
• Variable “must run” plants (mostly water or wind, which have almost no fuel costs but can only operate if enough water/wind is available)
• Intermediate load plants (often older coal plants that are costlier than new coal plants to operate)
• Peaking plants (usually fueled by natural gas or diesel and have higher operating costs but are relatively inexpensive to build and can be taken online or offline quickly). Bosselman, 580.

This balancing among power sources is needed because energy cannot be stored easily. Bosselman, 580. This means that whenever a customer turns power on or off, the generating load must be increased or decreased almost instantaneously to avoid affecting voltage significantly. Bosselman, 580-81. Technologies are being developed to better store electricity, but these new technologies are expensive and it will take time for them to become cost-efficient for widespread use. Bosselman, 581; SeeEnvironment 360, “The Challenge for Green Energy: How to Store Excess Electricity.”

12.2.2Transmission

Power plants are large and immovable. Bosselman, 581. While the development of smaller scale power plants may be in our future (such a concept is known within the industry as “distributed generation”), the current model of large, immovable power plant production will remain the paradigm for the foreseeable future. Bosselman, 581; See Wikipedia, “Distributed Generation.” Given this current paradigm, a transmission system is needed to transport the electricity from the generating source (power plant) to the consumer. Bosselman, 581. This is accomplished through an interconnected system of lines, distribution centers and control systems. Bosselman, 581.

Transmission lines are commonly “high voltage” lines that are carried on high towers along wide rights of way. Bosselman, 581; See Energy Vortex, “Energy Dictionary.” They form a web-like pattern on the landscape with many points of interconnection. Bosselman, 581. When newly generated electricity is introduced into the network, it will flow in whichever direction the lines are most lightly loaded. Bosselman, 581. Where lines intersect, the electricity will flow through the lines in as even a manner as possible. Bosselman, 581. This “loop flow” concept will be further explored later in the chapter.

This transmission network must be operated in a way that keeps the voltage and frequency constant within very narrow limits. Bosselman, 581. All systems keep a certain ratio of “spinning reserve” plants (i.e. plants in operation and ready to supply the network if needed). Bosselman, 581. A system also needs an “operating reserve” (i.e. generation equipment that can be brought online or offline within around ten minutes). Bosselman, 581. Finally, to operate properly, the transmission system needs voltage control equipment dispersed where support is needed and an overall system operator with authority to determine which generating units go online and offline at any time. Bosselman, 581. In the transmission system, these types of operations are “ancillary services.” Bosselman, 581-82.

[LK: expand here – how do these work in conjunction with each other to make the system operate properly?]

The North American Electric Reliability Council (NERC) has set standards for the operation of transmission systems. Bosselman, 582. NERC was founded in 1968 by the electric utility industry to develop and promote rules and protocols for the reliable operation of the bulk power electric transmission systems of North America. NERC, “Company Overview: Fast Facts.”

[LK: expand here on relevant NERC standards]

Transmission systems of the United States and Canada are divided into three giant networks:

1. Western Interconnection (begins at the Rocky Mountains and extends throughout the Western United States and Canada; operated by Western Systems Coordinating Council)
2. Texas Interconnection (extends throughout most of Texas; operated by the Electric Reliability Council of Texas)
3. Eastern Interconnection (extends to the rest of the United States and Canada; not centrally operated but instead by seven separate regional reliability councils). Bosselman, 582.

12.2.3Distribution

Substations are located at various points throughout the transmission system. Bosselman, 582. These substations contain transformers that reduce the electricity on the “high voltage” lines and send them to the 120-240 volt lines that service homes and businesses. Bosselman, 582. The distribution system consists of substations, poles and wires common to many neighborhoods, as well as underground lines found in many other areas. Bosselman, 582.

The distribution system also consists of billing customers, reading meters, customer service and many of the common activities that the average person associates with their residential or business’ electrical service. Bosselman, 583. Below is a graphic model illustrating the three different stages of electric power production and consumption.

Diagram: San Diego Gas & Electric

[LK: more here under distribution – states what the system consists of but doesn’t explain how electricity is actually distributed or why these substations are significant]

12.3Current Structure of the Electric Industry

The electricity industry is comprised of five major entities:

1. Investor-Owned Utilities (IOUs)
2. Federal agencies
3. Publicly owned systems (“municipals” or “public power”)
4. Rural electric cooperatives
5. Power marketers. Bosselman, 583.

12.3.1Investor-Owned Utilities (IOUs)

Although referred to as public entities, an IOU is a private, shareholder-owned company that is a commercial, for-profit utility. Bosselman, 583; Energy Vortex, “Energy Dictionary.” These IOUs may be small, serving only a couple of thousand customers, or giant, such as multistate corporations that serve millionsof customers. Bosselman, 583. The larger IOUs are usually vertically integrated, owning all the generation, transmission and distribution systems. Bosselman, 583-84. IOUs are found in every state except Nebraska. Bosselman, 584.

While IOUs encompass only a small minority of the total number of utility companies in the United States, they serve more than two-thirds of the US population. Energy Vortex, “Energy Dictionary.” IOUs are normally subject to different regulations than publicly-owned utilities. Energy Vortex, “Energy Dictionary.” IOUs local operations are highly regulated by State Public Utility Commissions, which includes the setting of retail rates. Bosselman, 584. IOUs’ wholesale power sales and power transmission contracts fall under the jurisdiction of the Federal Regulatory Energy Commission (FERC), which oversees regulation of the wholesale sale of electricity and transmission of electricity in interstate commerce. Bosselman, 584; FERC, “Overview of FERC.”

12.3.2Federal Agencies

The Federal Government produces hydroelectric power, primarily as a wholesaler. Bosselman, 584. Examples of federal entities in the electric power industry include the Tennessee Valley Authority and facilities owned by the US Army Corps of Engineers. Bosselman, 584; See TVAUS ACE. Jurisdiction over federal power systems operations and the rates charged to their customers is established in the various authorizing legislation in Title 16 of the US Code. Bosselman, 584. [LK: which specific sections of the US Code?]

[LK: expand here – what is the significance of federal agencies generating, transmitting or marketing power? What is the difference between the federal agencies and IOUs? Is the Department of Energy relevant here? What percentage of electricity is generated by federal systems? Are federal systems for-profit like IOUs?]

12.3.3Public Power

Public power utilities are not-for-profit electric systems owned and operated by the people they serve through a local or state government. American Public Power Association, “Frequently Asked Questions.” There are more than 2,000 public power systems throughout the United States, including local, municipal, state, and regional public power systems that range in size from tiny municipal distribution companies to giant systems like the Los Angeles Department of Water and Power. Bosselman, 584. The Los Angeles Department of Water and Power is the largest municipally owned system, serving 1.4 million customers.

[LK: more here – how much electricity is generated by public power systems? Are the rates actually lower than other systems? If so, by how much?]

12.3.4Rural Electric Cooperatives

Electric cooperatives are electric systems that are owned by their members. Bosselman, 585. These members each have one vote and elect a board of directors. Bosselman, 585. The Rural Electrification Act of 1936, 7 USC § 901 et seq., created the Rural Electrification Administration (“REA”) to electrify rural areas. Bosselman, 585.

The effect of this Act can be seen today. In the early 1930s, 90% of rural households did not have electric service. Bosselman, 585. Today, only 1% of rural households do not have electric service. Bosselman, 585.

12.3.5Power Marketers

Since the passage of the Energy Policy Act of 1992, many new companies have been created to serve as marketers and brokers of electric energy. Bosselman, 585; SeeUS EIA, “Energy Policy Act of 1992.” These companies do not own or operate any electric facilities. Bosselman, 585. These companies buy and sell electricity on the open market. Bosselman, 585.

[LK: more here – what role do these “marketers” play in the electric industry and what impact from the buying and selling of electricity?]

12.3.6Independent Power Producers

Independent power producers began to emerge as a result of the Public Utility Regulatory Policies Act of 1978, 16 USC § 2601 et seq., (PURPA). Bosselman, 586; See Energy.Gov, “Public Utility Regulatory Policies Act of 1978.” PURPA required these independent power producers to purchase electric power from certain qualifying facilities (QFs). Bosselman, 586. PURPA prohibited facilities from owning a majority share of QFs. Bosselman, 586. As many state commissions encouraged these independent producers to bid on major generation projects, and as these producers could often underbid traditional utilities, such entities became more and more common. Bosselman, 586. The National Energy Policy Act of 1992 further facilitated the growth of these independent power producers. [LK: how? Expand on the Energy Policy Act regulations and impacts]

12.4Antitrust Law and Regulating Market Power

Electricity firms have been regulated as public utilities due to the assumption that a “natural monopoly” exists in the industry. Bosselman, 599. However, the availability of alternative energy sources (e.g. oil and natural gas) and competition between different electricity suppliers, have created a certain amount of competition in the market. Bosselman, 599. Nevertheless, antitrust regulation is sometimes necessary due to the potential for anticompetitive behavior by electricity suppliers. Bosselman, 600.

Antitrust laws are primarily designed to protect competition from monopolistic behavior. In Otter Tail Power v. United States(US1973), the defendant, Otter Tail Power, was accused of violating the Sherman Act by refusing to sell and transmit power to local municipalities. The Court found that Otter Trail used its monopoly power to foreclose competition, gain a competitive advantage, and destroy a competitor, all in violation of antitrust law. It held that the Federal Power Act, upon which Otter Tail relied, does the opposite of exempting electricity suppliers from antitrust legislation; instead it has an “overriding policy of maintaining competition to the maximum extent possible consistent with the public interest.” Otter Tail was therefore liable under the Sherman Act.See15 USC § 1 et seq.

Electricity firms however, may not always be subject to antitrust regulation. When an enterprise’s competitive activities are scrutinized under a particular regulatory scheme, courts will defer to such a scheme, rather than apply antitrust laws. Bosselman, 604. Courts will not defer to the regulatory scheme if it is not directly concerned with the anticompetitive implications of firms in the industry. Bosselman, 604.

12.5Evolving New Topics

Recent developments in electric power are changing the landscape of the industry. These issues are: wholesale and retail competition, environmental impacts and climate change, renewable energy, and conservation and efficiency. Bosselman, 607.

[LK: expand here – discuss each issue]

12.6Competition in Electric Power

Electric power used to be considered a public utility, in which a vertically integrated firm would form a monopoly in a given geographic location, and provide generation, transmission, and distribution services. Bosselman, 609. Regulation would be based solely on cost-of-service.Bosselman, 609. However, due to bad investments and the need for additional flexibility in the regulatory process, federal policy has shifted to promoting a competitive industry. Bosselman, 609. FERC’s core responsibility now is to “guard the consumer from exploitation by non-competitive electric power companies.” Bosselman, 610. While FERC’s goal has always been to find the best combination of regulation and competition, it has recently shifted that balance towards the side of competition. Bosselman, 610.