Electricity(redirected from Structure of the Industry)
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Electricity has been known since ancient times, but scientists could not make use of it safely until the eighteenth century. Thomas Edison's invention of the electric lightbulb in 1879 sparked the demand for electric power that continues to this day, ultimately resulting in the need for legislative and regulatory controls on the electric-power-generating industry.
By the end of the nineteenth century, the United States had completed its transition from using wood as a major energy source to using coal, and the next transition from coal to oil and natural gas was just beginning. By the early twentieth century, both homes and businesses increased their demand for electric power, and electric utilities obtained long-term franchises from municipalities.
In 1920, the Federal Power Act (FPA), 16 U.S.C.A. §§ 791a–828c, was passed in response to increased competition between electric utilities and a lack of consistent service to rural areas. The Federal Power Act gave the Federal Power Commission the authority to license hydroelectric plants. Later, President franklin d. roosevelt encouraged Congress to create part II of the act, which gave the Federal Power Commission the power to regulate the transmission of electric energy (16 U.S.C.A. §§ 824–824m). This legislation was necessary to guard against potential abuses of the utility companies' monopolistic structure and to ensure adequate and consistent service nationwide.
As more and larger electric generating plants were constructed and as more electric power lines were strung, legislators believed that through economies of scale, electric utility monopolies could actually offer lower costs to consumers than could competition between smaller utilities. Because of the capital-intensive nature of providing electric power, and the sunken costs of building plants and stringing lines, it is more cost-effective to spread these costs over the large and consistent customer base provided by a Monopoly.
Structure of the Industry
Modern electric utilities have three major organizational components: generation (power plants), transmission (high-voltage bulk power between utilities), and distribution (low-voltage power to ultimate consumers). Modern electric utilities not only produce the power they need for their consumers but also pool and coordinate excess electricity with other utilities.
In 2001, the United States had the ability to produce over 788 million megawatts of electrical energy. Pooling and coordination of electrical energy take place through high-voltage wires that are maintained and referred to as the national grid; high-voltage wires are used because they allow transmission at a lower current, which generates less heat and results in less energy loss. At regional distribution centers closer to the ultimate consumers, the electrical energy is transformed into the low-voltage, higher-current electricity delivered to homes and businesses.
Major electric utilities produce electric power by burning coal, harnessing the hydroelectric energy produced by dams, and initiating and maintaining nuclear fission. Smaller, independent power producers use hydroelectric energy in addition to wood energy, geothermal energy, and biomass, which are all forms of renewable energy. Nuclear electric generating plants were constructed after the passage of the Atomic Energy Act (42 U.S.C.A. § 2011), which removed the government's monopoly over Nuclear Power, in 1946, and the Price-Anderson Act (42 U.S.C.A. § 2210), which allowed for private ownership of uranium, in 1957.
Commercial nuclear energy expanded in the 1960s and the early 1970s, and most consumers welcomed what was thought to be a safe and inexpensive source of energy. From the late 1970s to the 1990s, the dangers of nuclear energy and the expense of environmental contamination and lack of safe waste storage contributed to the end of nuclear power plant construction. No U.S. nuclear power plants have been ordered since 1978. Coal and hydroelectric energy continue to be the principal sources of commercial electric power.
Modern Legislation and Regulation of the Industry
The generation, transmission, and distribution of electric power are heavily regulated. At the federal level, the transmission of electric power between utilities is governed by the Public Utilities Regulatory Policies Act (PURPA) (Pub. L. No. 95-617 [codified in various sections of U.S.C.A. tits. 15, 16]). In PURPA, Congress gave the Federal Energy Regulatory Commission (FERC) jurisdiction over energy transmission. PURPA requires that independent power producers (IPPs) be allowed to interconnect with the distribution and transmission grids of major electric utilities. In addition, PURPA protects IPPs from paying burdensome rates for purchasing backup power from major utilities, and sets the rate at which the utilities can purchase power from IPPs at the major utilities' "avoided cost" (market cost minus the production costs "avoided" by purchasing from another utility) of producing the power.
The primary regulation of the generation, distribution, and transmission of electric power occurs at the state level through various state public utility commissions. Because the production of electric energy is connected with a public interest, states have a vested interest in overseeing it and working to guarantee that electricity will be produced in a safe, efficient, and expedient manner. In exchange for a monopoly in a particular geographic region, an electric utility must agree to supply electricity continuously and has a duty to avert unreasonable risks to its consumers. Electric utility companies must provide electricity at applicable lawful rates, and must file rate schedules with the public service commissions. Sometimes these rates are challenged, and administrative hearings are held to allow the utilities to petition for rate increases. Electricity rates must be high enough to cover the cost of production and must allow a fair return on the current value of capital investment. Rates that would allow significantly more than a fair return may be struck down as unreasonably high.
The regulatory landscape began to change in the late 1990s, as FERC endorsed the concept of greater competition in the sale of electricity. Advocates of competition contended that the production and delivery of electricity were two distinct activities that should not be bundled into one charge for energy consumer. Instead, they argued for a free market system where electricity could be bought and sold at the wholesale level for the lowest price and then delivered anywhere in the country. National energy producers and wholesalers sought to end the dominance of state and regional utility companies, which controlled the power lines through which these new competitors wanted to transmit electricity.
FERC issued an order in 1996 that opened up the electrical transmission lines owned by state power utilities to other wholesalers of electricity. The order required that utility companies break out their wholesale electricity rates to show how much was being charged for the generation of power, the transmission of electricity, and other ancillary services. In addition, whatever these companies charged to transmit their own electricity was the maximum amount they could charge other companies that wanted to use their transmission lines.
These regulations were also extended to the retail transmission of electricity in interstate commerce. However, FERC rejected the calls of energy resellers (such as the Texas-based Enron Corporation) to permit this same type of open access to retail power sales. This would have meant that consumers and businesses could obtain their power from an out-of-state provider, much like they can choose their long-distance telephone provider. FERC rejected this approach because it feared that it would be costly and difficult to administer.
The order led some states to deregulate their utilities to permit competition in this new legal environment. However, New York and eight other states objected to the order, believing it usurped state authority. They filed suit in federal court challenging the legality of the order. Enron also filed suit, challenging FERC's denial of access to the retail transmission of electricity. The two lawsuits were consolidated and heard by the Circuit Court of Appeals for the District of Columbia. The appellate court rejected the arguments of the states and Enron, concluding that FERC had authority under the FPA to issue such an order.
The Supreme Court, in New York v. Federal Energy Regulatory Commission, 535 U.S. 1, 122 S.Ct. 1012, 152 L.Ed.2d 47 (2002), upheld the circuit court decision. The Court concluded that although the states had regulated electricity for 60 years, this did not mean they had the underlying authority to make such decisions. The federal government had merely allowed these practices to continue. FERC had the authority to issue the order and had exercised this power lawfully. Though FERC had the authority to allow Enron and other companies to enter the retail sales market, the Court held that FERC had acted within its administrative powers in declining to exercise its jurisdiction at this time. FERC's decision not to claim jurisdiction over the retail market could be changed in the future.
The likelihood of FERC changing its mind anytime soon seemed unlikely. In 2001, the state of California was in the midst of an electricity crisis. A shortage of electricity led to skyrocketing prices, blackouts and brownouts, and expensive long-term contracts by the state to secure a supply of electricity into the future. The price of electricity jumped from $30 per megawatt hour to $361 per megawatt hour. However, within months, allegations surfaced that wholesalers such as Enron had manipulated the market to create artificial shortages, which led to the sale of electricity at inflated prices. A FERC administrative judge ruled in November 2002 that rates in California had been too high and that the state should receive a $1.8 billion refund. This was considerably less than the $8.9 billion refund the state sought.
Dangers and Liabilities
Electricity, especially at high voltages or high currents, is a dangerous commodity. Faulty wiring, power lines that are close to trees and buildings, and inadequate warning signs and fences around transformer stations and over buried electrical cables can subject an individual to electric shock or even electrocution. Because of the ultrahazardous nature of providing electric power, states have many statutes and regulations in place to protect the public from electric shock.
Other dangers from electricity include stray voltage and electromagnetic field radiation. Stray voltage affects farm animals, especially dairy cattle. On dairy farms, it occurs when cattle drink from electric feeding troughs or are attached to electric milking machines, and small electric shocks pass through the cattle, through their hooves, and into the ground. Repeated shocks can inhibit or destroy the milk-producing capability of dairy cattle. Liability for stray voltage on farms can be attributed to public utilities when wiring is faulty or negligently connected to a farmer's equipment. Some juries have awarded thousands of dollars to farmers whose cattle have been damaged by this phenomenon.
Electromagnetic fields are created whenever current moves through power lines. The strength of these fields drops off exponentially as the distance from the power lines increases. Individuals whose homes or businesses are close to power wires must live and work in these fields. Some individuals who live or work near high-voltage power lines have developed brain cancer and leukemia, and blame their condition on the constant exposure to electromagnetic field radiation. Studies have shown a correlation between electromagnetic fields and cancer, but many of the studies have been challenged as methodologically flawed. By the mid-1990s, no conclusive Scientific Evidence proved an epidemiological relationship between cancer and the electromagnetic fields produced by highvoltage power lines.
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