Regulation 101

Liese Dart

There are three main bodies responsible for electricity price and reliability standards in the U.S. These three entities, the North American Electric Reliability Corporation, the Federal Energy Regulatory Commission, and the state public utility commissions, work together to ensure affordability and maintain stability within the supply of electric power.

The Regulators

The federal government enacted a series of anti-trust laws in late 19th and early 20th century as an attempt to curtail anti–competitive schemes by utilities, laws such the Sherman Anti-Trust Act of 1890 and the Clayton Anti Trust Act of 1914. Important federal legislation to regulate the natural gas industry and the electric power industry led to the formation of the Federal Energy Regulatory Commission (FERC) housed today within the U.S. Department of Energy. The Federal Power Act of 1935 and the Natural Gas Act of 1938 both vested authority for wholesale prices, and in the case of natural gas, for the siting of interstate pipelines, to the FERC.

Every state in the U.S. has established a state regulatory agency known as the state "public service commission," or "public utility commission." The PSC (or PUC) is an independent regulatory agency made up of staff and a judicial body (appointed by the state legislature) which determines the "just and reasonable price" that a utility can charge for its service.

Utility proposals for new capital investments (new generation, transmission or distribution infrastructure) are presented to this regulatory agency for review to determine the necessity of a system upgrade before the utility may proceed with a building project. Public service commissioners are also tasked with determining the "rate base," or the rate at which utilities can charge each customer class (residential, industrial, commercial) for electric power, while recognizing a reasonable return on their investment and ensuring that the quality standards for service are met.

Why is electricity regulated? A few points to consider:

1) Historically, electric utilities have been natural monopolies.

A natural monopoly is an industry dominated by only one provider, due to the fact that the cost of capital is so high that only one producer can afford to provide the service. A natural monopoly exists when there are sufficient economies of scale such that a product can be produced at a lower cost by a single firm than by multiple firms. In electric utilities, economies of scale are imbedded in the cost of infrastructure, in generation (the bigger the power plant, typically the cheaper the kwh), transmission, and distribution facilities.

2) Electricity is considered a public necessity, and governments need to ensure "just and reasonable pricing" to all consumers.

It wasn't until the 1930s and 40s that much of the rural United States was electrified. As a result of policy decisions like the establishment of the Rural Electrification Administration, electrification became widespread. One of the tasks of state regulatory agencies became determining appropriate costs for supplying electric power. Today, public service commissions across the U.S. are tasked with using this metric to determine necessity—what utilities should build—determining what utilities can bill the rate base (customers). The task of keeping prices low is the primary reason that large (frequently old) coal fired power plants continue to supply about 67% of the electricity used in Wisconsin.

3) Electricity production causes negative externalities.

The term "negative externality" refers to the negative costs, or impacts of a good or service to society at large that is not included in the price of that good or service. A commonly known example of a negative environmental externality for electricity is pollution, a byproduct of energy production. Through the Clean Air Act of 1970, the Environmental Protection Agency established National Ambient Air Quality Standards (NAAQS) for six pollutants in the United States. By regulating electricity, states and the federal government can enact and uphold laws that put limits on the amount of pollution individual generators can produce.

4) Interstate commerce is essential for reliable and inexpensive electricity supply.

Transmission lines and gas pipelines cris-cross all over America. This infrastructure serves two purposes: first, to bring inexpensive sources of electricity to distant markets, and second, to ensure the reliability of the electricity grid. Since all regulated utilities are tasked with ensuring reliable electricity supply, one way utilities ensure that electricity demand is met is by interconnecting generation and transmission sources: in essence, the grid. For an interesting and interactive map of our grid, see this amazing NPR web graphic called Visualizing the U.S. Electric Grid.