Progress of Electric Competition
The Public Utilities Regulatory Policy Act of 1978
The Public Utilities Regulatory Policy Act of 1978 started the industry on the road to competition by ending promotional rate structures, establishing unconventional qualifying facilities and encouraging conservation. The intention was that non-conventional sources of power from renewable sources – such as geothermal – would come on line. It was at this time that CalEnergy began to develop the first of its geothermal power generation facilities.
Unintentionally, PURPA started the competitive process because it enabled non-utility generators to produce power for use by customers attached to a utility's grid. PURPA broke the stranglehold on power companies' previous monopoly in the generation function because now, any unregulated co-generator or renewable energy producer could sell electricity into the power grid, and regulated utilities were unable to dictate terms.
Still, PURPA did not create a competitive market for power because qualifying facilities did not literally compete with regulated utilities, as those companies were required by law to purchase whatever power came their way from the co-generators and alternative power generators. The qualifying facilities sold power into the grid whenever they wanted, or whenever they had excess power remaining in a co-generation plant, and utility managers had to find ways to limit their own production, or boost it, to ensure that customers obtained the power they needed without interruption.
All of this served to create questions about the rationale for acceptance of utilities as natural monopolies and, consequently, the justification for regulation. Because of the huge capital investment required in operating expensive generating equipment and associated facilities, one company could produce power more economically than could competitive firms. If many companies were located in the same market, the customer base would be spread thin, and producers would be limited to using smaller and less-efficient equipment. Customers, therefore, would be deprived of the benefits that could be accrued if only one company produced power for an entire market.
The economic woes of the 1970s and 1980s, however, turned this argument upside down. Now, thanks to incentives provided by PURPA and innovation in small-scale technologies such as gas turbines, non-utility companies can produce power as inexpensively or for even less than regulated firms. In short, the existence and success of PURPA qualifying facilities appeared to destroy one important justification for regulation of utilities.
The primary reason for electric competition of the electricity industry is not to force monopolistic utilities to lose market share but to encourage the introduction of new services and better prices for customers.
The Energy Policy Act of 1992
The Energy Policy Act of 1992 helped spur production of domestic energy resources with credits for electricity generated from renewable resources and measures for creating greater numbers of producers of power along more conventional means. A new class of producers was created – Exempt Wholesale Generators – which could generate power any way they saw fit and without regard to energy efficiency concerns, as was the case for PURPA qualifying facilities. Essentially, EPAct increased competitive pressure on existing generating companies and utilities and forced them to become more efficient and cost-conscious.
Utility companies did, however, win some new rights under EPAct. The law allowed them to own some EWGs, even outside their franchise area. A utility on the west coast could own generating facilities on the east coast if it believed the practice made good financial sense. Moreover, utilities did not even have to keep all their business in the United States. If they saw profit opportunities abroad, they could purchase companies there, so long as customers of domestic operations were not disadvantaged.
Utilities also won a major concession on another front. The law required utilities to open their transmission systems to other companies, but only wholesale transactions were permitted. Lobbyists for large industrial electricity users sought to permit these retail customers to take advantage of this less expensive power, but the law limited sales to wholesale customers. These included other utility companies, municipal power systems and rural electrification networks, which would then resell the electricity to ultimate customers.
Though the federal law limited sales to wholesale customers, it left the door open for competition on the retail level. It did so by allowing state legislatures and regulatory commissions to allow suppliers to sell electricity to all customers – whether they be big factories or small residential households. Today, several states have taken the first steps to pass through that open door.