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| About Western Products Organizational chart Strategic planning History 30 years 25 years Utility industry develops Financial information Power projects 2006 Annual Report Frequently asked questions | 1978 to 1998: FERC calls utilities to deregulate, restructure |
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by Jeff Hein (Note: This is the sixth of a series about the history of the U.S. electric utility industry. Hein developed this material as part of his master's thesis research.) Between 1978 and 1987, other industries in the United States were deregulated, including the airline industry in 1978 and telecommunications in 1984. Further deregulation in the natural gas industry opened access to pipelines and created a "spot market" in 1986 and 1987. Many believed (because of previously deregulated industries) electricity deregulation would lower costs to consumers while increasing supply and improving reliability. The same was thought of the electric utility industry's generation sector. Energy Policy Act The primary intent of the Energy Policy Act of 1992 was to create open access to the transmission system for all generating companies—utility-owned as well as qualifying facilities, or QFs, and independent power producers. But, according to some, the playing field wasn't even. Some non-utility generators accused vertically integrated electric utilities of favoring their own generation and of control area operators giving preference to their company's resources. The Federal Energy Regulatory Commission and Congress believed that without open access to the transmission system, the nation would not realize the anticipated benefits of new generation technologies. Primary provisions of EPAct included FERC approval of exempt wholesale generators. The law also added Section 213 to the Federal Power Act. Under the FPA, exempt wholesale generators could sell electricity in the bulk power market. Section 213 extended FERC jurisdictional authority and oversight over transmission access issues. As a result of EPAct, transmission tariff structures improved, and utilities had to file open access tariffs with FERC before gaining access to lucrative market-rate contracts. In 1992, for the first time, generation added by non-utility generators exceeded that added by traditional utilities. After passage of the EPAct and through 1995, non-utility generators continued to report transmission system access discrimination by vertically integrated utilities. In response, FERC, acknowledging transmission was still a natural monopoly and should be treated as such, issued several policy statements. But these still did not achieve the goal of ensuring open access to transmission. To promote generation-sector competition and correct the open access issue once and for all, FERC issued Orders No. 888 and 889 in 1996. Orders No. 888, 889
These two orders, issued concurrently, were the first attempt at wide-sweeping changes to promote deregulation of the generation sector. Order No. 888 addressed open access to transmission, while Order No. 889 dealt with access to transmission system information by all interested parties. Deregulation applies only to the generation sector—moving it from a regulated sector to a competitive one. Restructuring refers to the overall industry, but primarily the transmission sector. Transmission had to be "restructured" to allow for open access. Transmission remains regulated. Why deregulate the U.S. electric utility industry, the world's most reliable and cheapest system? FERC cited three primary reasons:
Order No. 888's primary objective was to promote generation-sector competition and provide open access to the transmission system. FERC outlined six primary provisions to accomplish this:
Creating ISOs and functional unbundling requirements would restructure the industry by separating the vertically integrated utilities' ties between generation and transmission. Removing this means of discrimination ensured open access to transmission, promoting competition in the generation sector. FERC called for leaving the transmission sector regulated because of its natural monopoly status and economies of scale. Meanwhile, plans also called for deregulating the distribution sector on a by-state basis called retail choice where consumers would individually select their power provider. FERC outlined the second part of the plan in Order No. 889. This rule set out to correct insufficient sharing of transmission system information. It required utilities to create Open Access Same-time Information Systems with transmission system information posted on Internet sites and available for all interested parties at the same time. Order No. 888 also outlined 11 ISO operating principles and guidelines criteria. Primary ISO responsibilities were to include:
Under Order No. 888, FERC asserted it had jurisdictional authority over retail transmission service, specifically wholesale and unbundled transmission service as defined within Order No. 888. The state of New York and eight others disagreed and filed suit. The case went before the U.S. Supreme Court. On March 4, 2002, the U.S. Supreme Court ruled in FERC's favor. In dissenting remarks, three justices stated they believed FERC should also have jurisdictional authority over bundled transmission. ISOs proposed by the investor-owned utilities in response to Order No. 888 were typically organized along state boundaries or slightly larger areas. FERC also called for ISOs to be operating by July 9, 1996. This proved to be a very short timeframe for such a complicated task. (Note: Hein was a substation engineer in Western's Engineering group at CSO.) |
"Deregulation" would move the generation sector from a regulated industry to a competitive, market–based environment where utility and non-utility generating companies, or GENCOs, would compete for customers, or so FERC believed.
Order No. 888 mandated that jurisdictional utilities hand over control of their transmission facilities to an ISO, but these same facilities were still to be owned by the member utilities. Proposed ISOs had to prove they met these criteria to receive FERC approval.