The Rural Electrification Act Brings Electricity to America’s Farms

Rural Life Without Electricity

It did not take long after Edison invented the first incandescent light bulb for private companies to commence providing electric service to most urban communities in the United States. Modern appliances like refrigerators, vacuum cleaners and radios were soon transforming the lives of urban residents. But rural electrification was not occurring at the same pace.

In the early 1900s electricity was not available in rural areas. Private electric companies claimed that it was too expensive to string their lines over the miles between farms. And where electricity was available to farms it cost almost twice as much as in urban areas.

By the mid-1930’s only 10% of rural areas had access to electricity. The lives of rural residents were not being transformed by electricity. In fact, most lived just like their parents and grandparents had. Farmers milked their cows by the light of a kerosene lamp. Their wives cooked their meals and warmed their water on a wood-burning stove. And their produce was vulnerable to spoilage because of lack of refrigeration.

Federal Support for Rural Electrification

Franklin Roosevelt understood the plight of the farmers. When he was governor of New York he had promoted development of the New York Power Authority, a state agency that produced low cost hydropower on the St. Lawrence River for use in rural areas in New York. When Roosevelt was elected President he invited Morris Cooke, who had led Giant Power, the Pennsylvania rural electrification program, to develop a federal government response to the lack of electricity in rural America.

Based on Morris’ recommendations Roosevelt created the Rural Electrification Administration (REA) in 1935. The REA was given authority to loan funds at low interest rates for construction of the infrastructure required to provide electricity to rural areas. It was initially thought that REA would loan the funds to private utilities for construction of the infrastructure. However, the private utilities continued to show little interest in serving rural areas.

Formation of Rural Electric Cooperatives

In 1936 Congress passed the Rural Electrification Act. The Rural Electrification Act gave the REA additional funding and directed it to make the low cost loans to cooperatives made up of residents of the rural communities. After passage of the Rural Electrification Act local residents joined together to form Rural Electric Cooperatives. The residents became both the owners (or members) and the customers of the Rural Electric Cooperatives. The Cooperative members elect a Board of Directors which hires the management team and employees to run the cooperative system.  

The Rural Electric Cooperatives used the funds borrowed from the REA to construct their own electric distribution systems. Their cost for construction was far less than it would have been if the private utilities had provided the same service.  Where available the Rural Electric Cooperatives purchased their electric generation from federal hydroelectric power projects or from private electric utilities. Where generation was not available from other sources the Rural Electric Cooperatives joined together to form Generation and Transmission cooperatives that built generation facilities for their cooperative members. 

The Rural Electrification Act was one of the most successful federal programs ever implemented. By the mid-1950s over 90% of rural homes in the country had electricity. In 1994 Congress replaced the REA with the Rural Utility Service which continues to make low cost loans to Rural Electric Cooperatives.  Today 99% of rural homes have electricity. Most are served by one of the 900 Rural Electric Cooperatives that continue in operation today.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

The Electric Current War

Thomas Edison Uses Direct Current for his Lighting System

Thomas Edison’s wanted to grow rich while “lighting the world.” He could not, however, achieve his goal until he fought and won the Electric Current War.

On September 4, 1882 Edison flipped a switch and lit 400 electric light bulbs in an office building in New York’s financial district. He had beaten all other inventors that were trying to develop a usable incandescent light bulb.

Thomas Edison used a direct current system to power his light bulb
Thomas Edison
Source: renewableenergyworld.com

Edison was already known as the “Wizard of Menlo Park” for his work with the phonograph and the kinetoscope. But Edison wanted to be more than just an inventor. He wanted to be one of the industrial titans of the age.

Edison lit his first 400 bulbs with electricity generated at a dynamo located just across the street from the bulbs. Edison had no choice but to place his generator close to his point of use. His system used direct current in which electricity flows in a single direction. Direct current electricity operates at very low voltages and low voltage electricity loses its effectiveness over short distances. If he located his generator too far from the point of use the generated electricity would be too weak to light the bulbs. 

None of this bothered Edison. He just sold lighting systems that relied upon generators located close to the point of use. Each time that Edison wanted to light a factory or an office building he had to install a new generator for that facility. 

George Westinghouse Uses an Alternating Current System to Compete with Edison

George Westinghouse made his fortune off of his invention of the train air brake system. While Edison was expanding his lighting business George Westinghouse was living in his Pittsburgh mansion looking for his next business opportunity. He well understood the inefficiencies of Edison’s direct current system.

George Westinghouse competes with Edison in the Current War with his alternating current system
George Westinghouse
Source: westinghousenuclear.com

Westinghouse learned that some European inventors had invented something called a transformer. He knew transformer could be used to increase the voltage of alternating current and transmit it for many miles. Westinghouse developed an alternating current system consisting of large central station generating plants, transformers and high voltage transmission lines. The following video explains the differences between direct current and alternating current:

There was, however, a problem with Westinghouse’ system. The motors of the day were designed to operate on direct current rather than alternating current. Westinghouse teamed up with an eccentric Serbian genius named Niclola Tesla to develop motors that could operate on alternating current.

Nicola Tesla designs a motor that helps Westinghouse compete in the Current War.
Nicola Tesla
Source: nationalmaglab.org

Beginning in the mid-1880s Edison and Westinghouse engaged in a competition for customers with their respective direct current and alternating current systems. Their competition was well publicized. The press called it the Electric Current War.  

The End of the Electric Current War

Westinghouse’ system was more efficient and less costly than Edison’s. Edison could have acknowledged the benefits of Westinghouse’ system and adopted a form of the alternating current system for himself. In fact, Edison’s investors encouraged him to abandon his direct current system. But Edison stubbornly fought for his direct current system. To try to defeat Westinghouse he engaged in a public relations campaign that accused Westinghouse’ high voltage system of endangering the public. 

The Electric Current War ended in 1892 when, without Edison’s knowledge,  J.P. Morgan engineered a merger of Edison’s company with another firm that was already using a form of the alternating current system. The merged firm was renamed the General Electric Company. Those who like cinema may also like to know that this story has been made into a major motion picture called The Current War in which Benedict Cumberbatch plays Thomas Edison.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

Senator Norris vs. Henry Ford – Prelude to Federal Hydropower

Government Owned Hydroelectric Power

Today there are over 600 Federal hydropower plants located mostly in the Northwest and the Southeast Unites States. Together, these plants produce approximately 3% of the nation’s electric supply. Most of the output from these plants goes to reduce the cost of electricity for publicly-owned municipal utilities and rural electric cooperatives.

Federally owned TVA Norris Dam
Source: tva.gov

But Federal hydropower and its support of publicly owned utility systems was not pre-ordained. It did not occur until after a brutal 1920s era battle between a Senator from Nebraska and one of the richest men in America.

History of the Mussel Shoals Generating Plant

The Federal Government got into the power generation business during World War I when it began construction of a hydroelectric generating facility on the Tennessee River, at Mussel Shoals, Alabama. The Government planned to use the Mussel Shoals electric production to power a nearby munitions facility. But the War ended before the munitions plant was completed and construction on the hydroelectric plant was cancelled.

Congress had to decide what to do with the partially completed generating plant. George Norris, Senator from Nebraska, knew that, in the 1920s, privately-owned electric utilities were not extending service to the very poor rural communities of the Tennessee River Valley.  So residents of those communities were living without the benefits of electricity. Their day-to-day lives were much like the lives of their parents and grandparents in the 18th and 19th centuries. Norris proposed that the Federal government complete construction of the Mussel Shoals generating plant and deliver the low-cost electricity to the surrounding communities.

Senator George Norris
Source: georgenorris.org

But Norris received little support from his fellow Senators. This was the era of the Bolshevik revolution in Russia. And there was fear that that revolution could come to the United States. The Senators were sympathetic to the argument of the utility industry that Government participation in the electric power industry would bring this country one step closer to Communism. Therefore, Congress solicited bids from private entities seeking to take over ownership of the Mussel Shoals generating plant.

Henry Ford Seeks Control of the Mussel Shoals Plant

The highest bidder was Henry Ford. He promised to use the production from the Mussel Shoals plant to industrialize the Tennessee River Valley. He suggested that the Tennessee River Valley would become a “Little Detroit”. Once Ford’s plans became public, land speculators bought up the land near Mussel Shoals and sold it in small lots to local residents. They thought Henry Ford was going to make them rich.

Henry Ford sought control of the Mussel Shoals hydropower project
Henry Ford
Source: biography.com

But George Norris was not ready to give up his fight. He did whatever he could to postpone Congress’ approval of Ford’s proposal. Even though he was fighting to bring a better life to the residents of the Tennessee River Valley those residents were more interested in Ford’s promises of economic development than in Norris’ promises of the availability of low cost electricity. During the years of his fight with Ford, Norris received death threats from residents of Mussel Shoals and, whenever he visited the area, he had to be accompanied by an armed bodyguard.

Eventually, Ford grew tired of the fight and withdrew his bid. Congress then sought to make the plant available to privately-owned utility companies. But those efforts never went anywhere because, throughout the 1920s, Norris continued to fight for Government ownership.

President Roosevelt Makes Federal Hydropower a Reality

Norris finally got his wish in 1932 when Franklin Roosevelt was elected President. One of the first actions of the Roosevelt administration was enactment of the Tennessee Valley Authority (TVA) Act which provided for the Government to construct a series of dams generating Federal hydropower up and down the Tennessee River Valley.

Symbol of the TVA
Source: fineartamerica.com

Those dams control flooding, improve navigation and produce low-cost electricity for the residents of the Tennessee River Valley. The TVA Act was so successful that it was followed by numerous other Federal laws that provided for the construction of all of the Federal hydropower projects that are currently in operation throughout the United States.

The following videos provide additional information regarding Henry Ford’s effort to develop the Mussel Shoals project:

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

Government Oversight After the 2003 Northeast Power Blackout

Cause of the 2003 Northeast Power Blackout

The 1965 Northeast Power Blackout left 30 million people without power for up to 13 hours. It was the first time that the public understood that there could be such a large scale loss of this critical service. In response to pressure from the Federal Power Commission the utility industry implemented extensive operational and planning changes. Those changes were supposed to prevent future large scale power blackouts. But, on August 14, 2003, an even larger Northeast Power Blackout occurred.

The 2003 Northeast Power Blackout left 50 million people from Detroit, Michigan to Toronto, Canada without power. It left homes and businesses in the dark and without air conditioning. It stranded workers on subways and on elevators. Commuters were caught in gridlock as street-lights stopped working. And water supply was at risk as electric pumps used to transport the water had no power to operate.

Satellite image of 2003 Northeast Power Blackout
Satellite image showing the 2003 Blackout of the Northeast United States
Source: elp.com

The 9/11 attack on the World Trade Center was still fresh in the public’s mind in 2003. And this looked like another terrorist attack. But terrorists had nothing to do with the 2003 Northeast Power Blackout. It was, instead, caused by a combination of human error and an aging electric grid.

Utility Response to the 1965 Northeast Power Blackout

This was not supposed to have happened. After the 1965 Northeast Power Blackout the electric utility industry promised that they would take action to prevent future wide scale outages.  They created nine regional planning organizations. Those organizations coordinated transmission planning among multiple utility systems. In addition to the planning organizations the industry created the National Electric Reliability Council (NERC) whose role was to develop uniform reliability standards for the industry.  

Policy makers may have thought about government oversight of the utilities’ promises. But the utilities convinced the regulators that they understood the importance of keeping the lights on. They said that they were committed to doing whatever it took to prevent future wide scale outages. They promised voluntary compliance with the standards being promulgated by the NERC. There was no government oversight.   

Failure of Voluntary Compliance

Fast forward 38 years and it turned out that not all of the utilities shared the same commitment to reliability. Instead, many used this time to focus their efforts on maximizing profits in a rapidly deregulating electric industry. 

A prime example was FirstEnergy Corp. FirstEnergy is the current corporate name of what used to be Ohio Edison Company, a local electric utility headquartered in Akron, Ohio. During the late 1990s and early 2000s Ohio Edison acquired Centerior Energy Corporation (consisting of the old Cleveland Electric Illuminating Company and the old Toledo Edison Company) and General Public Utilities (consisting of the old Jersey Central Power and Light, Pennsylvania Electric Company and Metropolitan Edison). 

During the years that it was focusing on its growth FirstEnergy grew lax in its reliability obligations. The 2003 Northeast Power Blackout started when a FirstEnergy-owned high voltage line came into contact with a tree and went out of service. Had FirstEnergy complied with the NERC’s standards the tree in question would have been trimmed and the contact would never have occurred. 

But the failure to trim the tree was not the only issue. A computer system required by the NERC standards should have notified FirstEnergy operators when the line went out of service so that they could take action to prevent the spread of the outage. However, the computer system in question was out of service. And, even if the system had been in service, there have been suggestions that the FirstEnergy operators were not trained in how to respond to receipt of the computer signal.  

The 2003 Northeast Power Blackout was the result of a failure of voluntary compliance. Congress decided that, if we are going to be assured of the reliability of the transmission grid, compliance with reliability standards are going to have to be mandatory.

Implementation of Mandatory Reliability Standards

In the Energy Policy Act of 2005 Congress gave the Federal Energy Regulatory Commission (FERC) authority to enforce mandatory reliability standards adopted by the NERC (now renamed the North American Reliability Corporation). The Act also gave FERC authority to assess penalties of up to $1.0 million per day for failure to comply with the standards.  

Front of FERC building
Source: naturalgasnow.org

FERC established nine Regional Entities who are responsible for enforcing the NERC reliability standards. Those reliability standards include practices required to defend the system again cyber-attacks.

It is never easy for businesses to conform their operations to a new regulatory scheme. However, one would have thought that, when faced with potential penalties in the millions of dollars, the members of the utility industry would have done its best to comply.

FERC gave the industry a phase-in period of several years during which it assessed only nominal penalties for events of non-compliance. After the end of the phase-in period the utilities should have been up to speed. Compliance with the reliability standards should have been part of their day-to-day business. So industry watchers were surprised when, in February, 2019, Duke Energy, a utility owning and operating transmission facilities from Florida to Ohio, was fined $10 million for as many as 125 violations of the NERC standards going back over a period of three years. 

After the 1965 Northeast Power Blackout the utilities showed that they could not be trusted to voluntarily comply with reliability standards where there was no risk of penalty. Unfortunately, it is not yet clear that the utilities are any better with complying with mandatory reliability standards where the risk of penalty for non-compliance is significantly higher.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

Determining Just and Reasonable Electric Rates

The Process for Determining Regulated Electric Rates

The Post entitled What is an Electric Utility? explains why regulatory agencies establish just and reasonable electric rates for regulated electric service. This Post explains how they establish just and reasonable electric rates.

Prior to the 1990s regulated electric service consisted of all three components of service – generation, transmission and distribution. Since the 1990s, regulated service usually consists solely of the transmission and distribution components. The following describes the process for setting just and reasonable rates for the components of service that are regulated.

The regulatory compact, implemented under state public utility acts, requires the applicable state regulatory agency to set electric rates that are just and reasonable. The process for setting just and reasonable rates starts with the following formula that determines the total utility revenue for a 12 month period (referred to as the revenue requirement):

Revenue Requirement        =          Prudently incurred costs of operations + (Reasonable Rate of Return x Investment in Used and Useful Plant)

Therefore, to establish a utility’s revenue requirement, the regulatory agency must first determine the following three rate components:

  • Prudently incurred costs;
  • Reasonable rate of return; and
  • Investment in used and useful plant.  
Regulatory agency setting electric rates
Source: alcse.org

The regulatory agency makes its determinations in a judicial-like proceeding. In that proceeding the utility and other interested parties have an opportunity to present testimony and exhibits that support their respective interpretations of the above three rate components.

Prudently Incurred Operating Costs

Operating costs include things like labor, materials and fuels. The starting point for determining this component is the raw operating costs appearing in the utility’s books and records. Unless it makes adjustments the regulatory agency will use those raw costs in the formula to establish revenue requirement. However, parties participating in the ratemaking process will typically advocate adjustments to the raw data.

Operating costs are included in just and reasonable rates
Costs of operations are recoverable through regulated rates
Source: criticalinfonet.wordpress.com

For example, the utility might argue that the raw labor costs should be increased to reflect a negotiated wage increase that is going to take effect during the rate effective period. And customers might argue that the raw labor costs should be decreased to exclude costs that were incurred by the utility to repair some type of non-recurring equipment outage. Only the regulated agency can sift through these arguments to arrive at the number that will be used for setting rates.

Reasonable Rate of Return

The reasonable rate of return component is a weighted average of the utility’s cost of capital. It includes the interest rate on the utility’s long term bonds, the dividends on any preferred stock, the interest rate on any short term debt and a return on outstanding equity. 

The return on equity is the profit component of the utility’s revenue requirement.  Therefore, the return on equity component includes an adder for the taxes that the utility will pay on its profit. 

The cost of debt and the dividends on preferred stock are usually non-controversial. They can be taken directly from the utility’s books and records.

The return on equity is a bit more controversial. The United States Supreme Court has decided that the regulated return on equity should be equal to the return on investments that have risks that are comparable to the utility’s. Historically, the utility and the other parties presented extensive arguments for their preferred returns on equity. In recent years, however, regulatory agencies have found ways to reduce the contentiousness of this issue. 

Investment in Used and Useful Plant

As with the operating cost component, the investment component starts with net investment in operating plant appearing in the utility’s books and records. Unless the regulatory agency makes adjustments, it will use the raw investment values in the ratemaking formula. However, once again, the parties in the ratemaking proceeding will generally advocate adjustments to these raw investment values. For example, the parties might advocate additions or subtractions for investments in facilities that are expected to be either added to, to removed from, service during the rate effective period.

Return on investment in plant is included in regulated rates.
Return on investment in plant is recoverable through regulated rates
Source: wisegeek.net

The Investment component was very contentious during the 1980s when large new nuclear plants were under construction and about to come on line. Because of diminishing customer electric usage, these plants looked like they might not be needed and were referred to as “excess capacity”. Parties representing customers argued that the investment in the new plants should be excluded from rates because they were not going to be “used and useful” in providing service. Because of the potential that they might not be able to earn a return on their investment in these plants many utilities cancelled plans for their construction.

Conversion of Revenue Requirement to Electric Rates

The regulatory agency uses the the revenue requirement as the total revenues that the utility may recover during any 12 month period. So how is that revenue requirement converted to the electric rates that a customer will see on his bill?

First, the regulatory agency will allocate the revenue requirement equitably among each of its rate classes, typically, industrial, commercial and residential. This is sometimes referred to as “dividing the revenue pie”.

Second, the regulatory agency will use projected customer usage for a 12 month period to convert each rate class’ share of the revenue requirement into electric rate components for that class. The components are, typically, a customer charge, a per-kW demand charge (usually only for industrial customers) and a per-kWh energy charge.

Electric rates approved by the regulatory agency will remain in effect until the regulatory agency changes the rates again. This could be for one year or it could be for many years. During the years that the rates are in effect, if the operating costs, return, investment and customer usage are the same as used in the ratemaking process the utility will earn the profit that was projected in that process.

However, in years when any of these components are different, the utility will earn more or less profit than that which was projected. If the changes reducing profits are sustained the utility will apply for a rate increase. If the changes increasing profits are sustained the regulatory agency or its customers may seek to reduce the rates.

Impact of Partial Deregulation on Electric Rates

Where the generation component of service is available on a competitive basis the customer is considered to be buying only transmission and distribution service from its utility. In that case the regulatory agency uses the above described ratemaking process solely to establish rates for those two regulated services.

However, even where the generation component of service has been deregulated the regulatory agencies have not been relieved of their statutory obligation to ensure that the generation component of electric rates is just and reasonable. Prior to deregulation the agencies applied the above described ratemaking process to determine just and reasonable rates for the generation component. Where the generation component of service has been deregulated they make sure that the rates for that component are just and reasonable by ensuring that the market for generation is truly competitive.

Utility invoices have also been affected by deregulation. Where the generation component has been deregulated the utility and the competitive generation supplier may each issue their own invoice to their customers. This means that customers may receive two invoices for their electric service – one from the utility for the delivery of the electricity and one from the competitive supplier for the actual electricity used. However, in some cases the utility becomes the collection agent for the generation supplier and includes the supplier’s charges as a separate line item on its invoice to its customers.

Even when given the option to purchase competitive generation services, some customers wish to continue purchasing generation from their utility. In these cases, the utility will purchase generation for those customers in the competitive market and include the cost of that generation component as a pass through charge on its invoice.

Additional information on electricity pricing can be found at the U.S. Energy Information Administration publication entitled Electricity Explained: Factors Affecting Electricity Prices.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describes a different aspect of the past, present or future of the electric industry. 

What is an Electric Utility?

Direct Current vs. Alternating Current

In the late 1800s and early 1900s there was no such thing as an electric utility. Anyone could become an electric and lighting service provider. A provider could serve one customer, a few customers or a large community of customers. Prices for service were set by private contract between supplier and consumer.

The first arrangements, pioneered by Thomas Edison, used direct current – meaning electricity flowed in one direction on the circuit. In Edison’s business model the direct current flowed a very short distance from a small generating unit to the electric lighting fixtures.

But Edison’s business model proved to be very inefficient. George Westinghouse pioneered a more efficient service model. He used alternating current and transformers to deliver electricity many miles from a remote central station generating station to multiple points of use.

The competition between Edison and his direct current system and Westinghouse and his alternating current system came to be known as The Current War. Westinghouse ultimately won the Current War and his remote central station generating facilities became the standard in the industry

The Emergence of the Monopoly Utility

Well financed suppliers built large efficient central station generating plants and reduced their operating costs. They undercut the prices of smaller suppliers and forced them out of business. And by the early 1920s most communities were served by a single monopoly electric supplier. The monopoly supplier owned the generating stations that produced electricity and the transmission and distribution facilities that delivered the electricity.

The following depicts utility owned facilities and how they were used to deliver electricity from a generating plant to the end-user customer:

The Need for Government Involvement

The existence of a monopoly electric supplier caused some angst for both consumers and suppliers. Consumers wanted to prevent the investor-owned monopolies from charging exorbitant rates. And the investor-owned monopolies wanted to make sure that they did not lose their monopoly status.

The investor-owned electric providers knew that they could not get away with charging excessive rates for long. So they considered giving up some control over pricing in exchange for some protection for their monopoly status. In other words, under the right conditions, they were willing to operate under government regulation.

The Regulatory Compact

Policy makers came up with a concept that balanced the interests of the investor-owned electric suppliers and their customers. They called it the Regulatory Compact.  

The Regulatory Compact is basically an agreement between the utilities and the government.  That agreement deals with both service and rates. The investor-owned electric suppliers agreed to use their facilities to provide service to the public under terms regulated by the government. They became public utilities.

In exchange for the suppliers’ agreement to provide service the government agreed that it would guarantee the utilities a protected monopoly service territory and that it would approve rates that covered the utilities’ operating costs plus a reasonable return on investment. 

Virtually every state has now incorporated a form of the Regulatory Compact into its state Public Utility Act. Each of those Public Utility Acts creates a state agency known as a Public Service Commission or a Public Utility Commission. †

Utility regulatory commission in session
Source: alsace.org

Those state agencies establish utility service territories and rates for retail electric service. The service territories protect the utilities’ monopoly. And the rates for service enable the utility to recover just and reasonable rates defined as their operating costs plus a reasonable return on investment. See Post entitled How Do Regulatory Agencies Set Just and Reasonable Rates? for an explanation of the regulatory rate setting process.

The state public utility acts deal solely with service between utilities and their end-use retail customers. In 1935, with passage of Title II of the Federal Power Act, Congress gave the Federal Power Commission (now named the Federal Energy Regulatory Commission or FERC) authority to set just and reasonable rates for wholesale sales between utilities. Between the state public utility acts and Title II of the Federal Power Act all activity of the electric utilities are subject to some level of utility regulation.

Who Owns the Electric Utilities?

Most of the early electric service providers were owned by private investors. Today, approximately 75% of the electric service is still provided by investor-owned utilities.

In many communities, where there was no private investor providing service, municipalities created their own electric systems. Today, approximately 12% of electric service is still provided by municipally owned utilities.

Electric service was available in most urban areas in the early 1900s. However, by the 1930s, most of the rural areas of the country still did not have electric service. Rural residents were operating their farms just like their parents and grandparents did in the nineteenth century. In 1935, with passage of the Rural Electrification Act, the Federal Government made low cost loans available for customer owned Rural Electric Cooperatives. Those Cooperatives used the borrowed funds to build the infrastructure needed to gain access to electricity. Today, the Rural Electric Cooperatives provide approximately 13% of all electric service.

Source: Sierrclub.org

By the 1990s policy makers determined that there was no longer any reason for the generation component of electric service to be considered a part of the regulated service. Therefore, in 1995 FERC issued its Open Access Orders requiring all utilities to unbundle their generation service from their transmission service and to provide non-discriminatory transmission to all generation owners. Since that time many utilities have sold their generation facilities and now own only transmission and distribution facilities. The transmission and distribution services, sometimes referred to collectively as the “wires service,” remains subject to regulation under the regulatory compact.

Who Owns the Generating Facilities?

photo-plant-gas

Source: sceg.com

Most of the country’s generation facilities are now owned by non-utility Independent Power Producers (IPP). The IPP industry expanded rapidly after 1995 when FERC issued its Open Access Orders. Members of this industry built new facilities and purchased the power plants that were being sold by the utilities. The members or the IPP industry are not utilities and are not governed by regulatory compact. They do not have monopoly service territories and their rates are not regulated by any government agency. Instead, IPPs sell their generated electricity into competitive power exchanges. See Post entitled Electricity Sales in the Power Market for an explanation of sales to these exchanges.

Author

I. David Rosenstein worked as a consulting engineer and attorney in the electric industry for 40 years. At various times during his career he worked for utility customers, Rural Electric Cooperatives, traditional investor owned regulated utilities and deregulated power generation companies. Each of his posts in this blog describe a different aspect of the past, present or future of the electric industry.