Electricity: The Road Toward Restructuring

Publication Date: November 2004

Publisher: Library of Congress. Congressional Research Service

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Research Area: Energy

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Abstract:

The Public Utility Holding Company Act of 1935 (PUHCA) and the Federal Power Act (FPA) were enacted to eliminate unfair practices and other abuses by electricity and gas holding companies by requiring federal control and regulation of interstate public utility holding companies. Prior to PUHCA, electricity holding companies were characterized as having excessive consumer rates, high debt-to-equity ratios, and unreliable service. PUHCA remained virtually unchanged for 50 years until enactment of the Public Utility Regulatory Policies Act of 1978 (PURPA, P.L. 95-617). PURPA was, in part, intended to augment electric utility generation with more efficiently produced electricity and to provide equitable rates to electric consumers. Utilities are required to buy all power produced by qualifying facilities (QFs) at “avoided cost.” QFs are exempt from regulation under PUHCA and the FPA.

Electricity regulation was changed again in 1992 with passage of the Energy Policy Act (EPACT, P.L. 102-486). The intent of Title 7 of EPACT is to increase competition in the electric generating sector by creating new entities, called “exempt wholesale generators” (EWGs), that can generate and sell electricity at wholesale without being regulated as utilities under PUHCA. This title also provides EWGs with a way to assure transmission of their wholesale power to their purchasers. The effect of this act on the electric supply system is potentially more far-reaching than PURPA. On April 24, 1996, the Federal Energy Regulatory Commission (FERC) issued Orders 888 and 889. FERC believed these rules would remedy undue discrimination in transmission services in interstate commerce and provide an orderly and fair transition to competitive bulk power markets. Order 2000, issued December 20, 1999, established criteria for forming transmission organizations.

Comprehensive electricity legislation involves three issues. The first is PUHCA reform. Some electric utilities want PUHCA changed so they can more easily diversify their assets. State regulators have expressed concerns that increased diversification could lead to abuses, including cross-subsidization. Consumer groups have expressed concern that a repeal of PUHCA could exacerbate market power abuses in a monopolistic industry where true competition does not yet exist.

The second issue is PURPA’s mandatory purchase requirement provisions. Many investor-owned utilities support repeal of these provisions. They argue that their state regulators’ “misguided” implementation of PURPA has forced them to pay contractually high prices for power that they do not need. Opponents of this legislation argue that it would decrease competition and impede development of renewable energy. The third is retail wheeling. It involves allowing retail customers to choose their electric generation supplier.

Comprehensive energy legislation has passed the House and Senate. The House passed H.R. 6 on April 11, 2003. On July 31, 2003, the Senate suspended debate on S. 14, inserted the text of H.R. 4 (107th Congress) as a substitute, and passed H.R. 6. A conference agreement was reached November 17, 2003, and passed by the House the next day. H.R. 6 includes an electricity title that would, in part, repeal PUHCA, would prospectively repeal the mandatory purchase requirement under PURPA, and would create an electric reliability organization. On June 15, 2004, H.R. 4503, a comprehensive energy policy bill, passed the House.