11.1 Effects of Deregulation on the Power Distribution and Generation Industry
Read the following articles:
- Lowering Electricity Prices Through Deregulation, Thomas Klitgaard and Rekha Reddy.
- The Failure of Electricity Deregulation: History, Status and Needed Reforms
Questions to Think About
Think about the following questions as you read these articles and be prepared to discuss.
Who were the real movers behind deregulation in the electric utility market?
What conclusions can you draw from the information here regarding deregulation?
In the wake of the oil crisis in the 1970s, a new federal government agency was created called the Federal Energy Regulatory Commission (FERC) (Established 1977).
The motivation behind the legislation should be viewed in the context of the time. A series of events occurred in the early 1970s that set the stage for large changes in the economic forces that ran world markets. The first occurred on August 15, 1971. The United States became the first industrialized country to leave the Bretton Woods Accord.
Based on concerns that had been growing for years, the United States abandoned the “gold standard” for currency which had been established by the Bretton Woods Accord. As with many things, there were unintended consequences. One of the contributing factors to the 1973 oil crisis revolved around the devaluation of the US dollar. Since oil is valued in dollars, it became difficult to set prices for oil that would allow for fair trade.
Two things happened in rapid succession. “On October 16, 1973, the Organization of Petroleum Exporting Countries (OPEC) raised the price of oil by 70% to $5.11 per barrel.” [ See Daniel Yergin's, The Prize: The Epic Quest for Oil, Money, and Power (New York: Simon and Shuster, 2008), p. 587. This book is the center piece of EGEE 120 - Oil International Evolution, another course in the Energy and Sustainability Policy Program at Penn State. ]
Over the following months, OPEC countries steadily decreased the amount of oil available on the market. This caused a series of shocks to the world economy. If you recall from Lesson 7, this was the trigger for Brazil deciding to find a way to stop oil imports. There were geopolitical concerns as well. The Cold War with the USSR was in full swing, as was the Vietnam War. Also, in October of 1973, the Yom Kippur War occurred.
This event should not be discounted in any way as a driver of OPEC’s embargo decision. However, economic drivers are always critical to understand when looking at dynamic changes in global policies.
The key thing to take away from the oil crisis in the 70s was that it saw the beginnings of government looking for ways to stimulate the development of alternative energy sources. In 1977, The Department of Energy was formed along with FERC.
“The Federal Energy Regulatory Commission (FERC) is the United States federal agency with jurisdiction over interstate electricity sales, wholesale electric rates, hydroelectric licensing, natural gas pricing, and oil pipeline rates. FERC also reviews and authorizes liquefied natural gas (LNG) terminals, interstate natural gas pipelines and non-federal hydropower projects.” [from Wikipedia]
Deregulation did not follow quickly. In the US, utilities are regulated by the states where they are domiciled. By 2001, twenty-four states had passed legislation. The objective from a regulatory perspective was to make transmission lines available to alternative energy sources and to promote their use. The process has also opened up opportunities to shop for power generation. Electricity Data - U.S. Energy Information Administration.
In most of the deregulated states, power transmission and delivery is now handled by utility entities that continue to be state regulated monopolies. Power generation companies now act as unregulated companies that technically compete to sell power on an open market. These “power markets’ are run by Regional Transmission Organizations (RTOs) that often control power markets across multiple states. [see the map below] The largest of these is PJM Interconnection which operates in all or part of thirteen states and the District of Columbia. (http://pjm.com/about-pjm.aspx) It is the largest privately run electric energy market in the world. All of the regulated utilities and larger energy generators that function within the RTO pay fees to maintain the existence of the RTO which operates as a non-profit entity.
Deregulation has had some interesting twists and turns. The very large disaster of a company called Enron is an example.
In its drive to control the energy markets in the 1990s, it drove energy prices up at record rates in California creating a crisis in 2000-2001.
As a consequence, California suspended deregulation.
As much as there has been a belief that deregulation would open the door to large increases in renewable production, the evidence is at best mixed. In deregulated states, there are now good systems for tracking the amount and types of alternative energy being produced. However, when you consider that the initial legislation was passed in the 1970s, a surprisingly small percentage of power in the US is being generated from alternative sources. [See chart below.]
In the wake of deregulation and customer choice, what has genuinely occurred? One word best describes the true process occurring in the power industry… consolidation.