There has been a large number of changes in the electric power sector over the past two decades. These changes have introduced a number of new types of players into the electricity industry and have reorganized how different types of companies and regulators function. In this last subsection in the lesson, we will meet these players, both new and old.
The figure below shows the three segments of the electricity supply chain - generation, transmission, and distribution. For nearly a century in the United States, there was one type of vertically integrated company performing all three of these functions. This company, called the "electric utility," generated its own electricity, moved that electricity over its own transmission lines within its geographic service area, and then delivered the power to its customers using its distribution lines. The electric utility usually had its prices, investments and business practices tightly regulated by individual states. The federal government in the United States did not have a dominant role in the electric utility business until the process of deregulation and reorganization began in the 1990s.
Prior to the process of electricity restructuring, the primary players in the electric power business in the United States were vertically integrated utilities and their state regulators.
Electricity reforms in the United States began in the 1990s. Not all states elected to reform their electric utilities. Most states in the northeastern U.S., along with California and Texas, chose to reform and restructure the electric utility business. Most states in the southern and western US did not choose to undertake electric utility reforms and still have vertically integrated utilities with tight state regulation. This is a marked difference between the United States and other countries. In much of the rest of the world that has undertaken electricity reforms (like Australia and the United Kingdom), those reforms have been implemented uniformly across the country.
Broadly, the process of electricity reform (sometimes called "deregulation" and sometimes called "restructuring") consisted of the following:
- The vertically integrated electric utility was broken up into three separate companies - one each for generation, transmission, and distribution. Often times the same parent company owned all three businesses as independent subsidiaries.
- Price regulation on power generation was removed or substantially loosened. Rather than charging regulated prices, power generation companies could charge whatever price the market would bear. These new electricity markets would be regulated by the Federal Energy Regulatory Commission rather than by the individual states.
- Electric transmission would mostly retain its regulated pricing, but much responsibility for setting transmission prices was shifted away from the states, into the hands of the Federal Energy Regulatory Commission.
- Some financing processes for power plants were loosened, allowing for faster accounting depreciation of new equipment.
The process of electricity reform has dramatically widened the number of types of companies and regulatory agencies involved in electricity supply. (There is some irony that we often call this process of reform "deregulation" even though it actually increased the amount of regulation on the power business.) Let's meet these new players, many of which we will encounter over and over again throughout the course.
- Regional Transmission Organizations (RTOs) operate the high voltage transmission grid and run electricity markets. They also engage in system planning to ensure that there is sufficient generation and transmission to avoid blackouts. Most of them operate as non-profit corporations and do not actually own power plants or transmission wires. How they ensure a reliably functioning power grid without actually owning any equipment is a complex process that we'll learn more about in this course. RTOs currently operate in over half of US states, representing around 75% of all electricity consumption in the country, as shown in the figure below.
- Independent Power Producers (IPPs) are for-profit companies that own and operate power plants. Their business model primarily involves selling electricity into the markets run by RTOs. Some IPPs were formed as start-up ventures following electricity reforms in the 1990s while others were formed with the breakup of the vertically integrated utility.
- Curtailment Service Providers (CSPs) are for-profit companies that are involved in "demand response," which is basically the practice of getting paid to reduce electricity consumption. CSPs compete directly with each other and with IPPs in electricity markets run by RTOs.
- Electric utilities exist in different forms in those places that have and have not engaged in electricity reforms. In places that chose not to reform their electricity sectors (primarily the places not covered by RTOs in the map above) the electric utility continues to operate as a vertically integrated company regulated by state public utility commissions. In places that did choose to reform their electricity sectors, the "electric utility" is only in charge of the distribution grid. In this case, we will sometimes refer to the utility as a "distribution utility."
- Balancing authorities, which we met earlier in the lesson, continue to operate different portions of the power grid. In those places where RTOs operate, the RTO generally serves as the balancing authority. In places where RTOs do not operate, the balancing authority is often an electric utility.
- The Federal Energy Regulatory Commission (FERC) regulates RTOs and sets some prices for electric transmission. It is also in charge of approving the construction of hydroelectric dams and some types of transmission lines.
- The North American Electric Reliability Corporation (NERC) is the entity in charge of developing standards for reliable power grids. Its standards are legally enforced by the FERC.
You may be able to appreciate by now how complex the supply chain in the electricity business has become. The figure below illustrates this complexity by comparing flows of power and other electricity services (blue arrows) and money (green arrows) before and after electricity reforms were put into place. The figure shows not only the complexity of transactions in the new electric power industry but also the central role of the Regional Transmission Organization.
Prior to electricity reforms, the electric utility generated power, moved it over its own transmission lines, and delivered it directly to consumers. In exchange, consumers paid money to the electric utility.
Following electricity reforms, IPPs compete to produce power in an electricity market run by the RTOs. IPPs sell power to the RTOs, who then immediately re-sell it (with no markup - remember that the RTO does not earn any profit) to the distribution utility. The distribution utility then re-sells that power to end-use consumers. The RTO also charges the distribution utility fees for the use of the transmission grid. These fees are passed on to customers by the distribution utility.