Author: Ragan Davis Published: January 10, 2019 Red Clay
This post is part of our Industry 101 Series, an ongoing campaign to provide a foundation of knowledge about our unique industry. To learn more about this campaign, please click here.
4.1 WHAT IS REGULATION IN THE UTILITY INDUSTRY?
Regulation in the utility industry refers to the rules created by government or local bodies which the utility companies must adhere to by law.
Electric utilities are regulated by state, federal, and local agencies. These agencies govern the prices they charge, the terms of their service to consumers, their budgets and construction plans, and their programs for energy efficiency and other services.
4.1.1 REGULATED VS DEREGULATED MARKET
Regulated markets feature vertically-integrated utilities that own or control the entire flow of electricity from generation to meter. Examples in the U.S. include Florida, Colorado, Idaho, and Kentucky. Conversely, utilities in deregulated markets must divest all ownership in generation and transmission and are only responsible for:
- Distribution, operations, and maintenance from the interconnection at the grid to the meter
- Billing the ratepayer
- Acting as the Provider of Last Resort (POLR)
Deregulated markets feature grid operators that administer wholesale markets to ensure reliability on the grid and prevent blackouts. Multiple retail suppliers – or load serving entities, known as LSEs – buy generation and sell electricity to end users.
To the right is the USA map showing where electricity is regulated and where it is not.
4.1.2 THE EVOLUTION OF UTILITY REGULATION
For most businesses, the free market sets prices for products or services based on supply and demand. This open market provides companies the opportunity to provide a product or service and, if successful, earn a profit depending on costs, quality, and market factors.
Originally, that’s also how it worked for electric utility companies. When the industry was born, inventors and investors could request franchises to create electric companies with few barriers to market entry. Many did and competition determined the rate the customer would pay, however disorganization was a major issue. Lines and poles from multiple companies occupied the same streets, service was unreliable, and grids weren’t interconnected. It was inefficient and, at times, dangerous. This eventually led to the creation of state commissions to regulate electric utilities.
4.1.3 WHY IS REGULATION NEEDED?
The primary reason for regulation is that all utilities are natural monopolies, meaning that a single provider is often able to serve the overall demand in a region at a lower total cost than any combination of smaller entities. In absence of any competition among the service providers to set lower rates, the service provider might restrict output and set prices at levels higher than are economically justified. Regulation serves the function of ensuring that price structures are followed, that service is adequate, that companies are responsive to consumer needs, and that things like new service orders and billing questions are handled responsively.
Another reason for regulation is that the utilities must adhere to strict government safety standards, because their infrastructure runs throughout our communities and the public would be affected by sagging wires, ruptured pipes, and other problems.
The production and distribution of electricity also has environmental and public health impacts — through the emission of pollutants, use of land, and even creation of noise — that can adversely affect the public. Generating power often produces pollution; transmission lines have both visual and physical impacts on land use. Regulators may therefore impose environmental responsibilities on utilities to protect these public interests.
Finally, given utilities’ crucial role in the economy and in society’s general welfare, service reliability standards are often imposed.
The electricity industry remains one of the most highly regulated in the United States. It is regulated on both federal and state levels. Sometimes, local regulations also apply. Rules and regulations can provide protection for consumers, help keep workers safe, ensure businesses do not collude to raise prices, etc. However, some argue that too much regulation of markets is unnecessary and can lead to inefficiencies and unnecessary costs.
4.1.4 WHO ARE THE REGULATORY AUTHORITIES?
A range of federal, state and local level entities regulate the U.S. electricity sector. They are:
- Federal Energy Regulatory Commission (FERC), which regulates interstate electricity sales, wholesale electric rates, and hydroelectric facility licensing, among other energy matters affecting interstate commerce
- Environmental Protection Agency (EPA), which regulates certain emissions from power-generating facilities
- North American Electric Reliability Corporation (NERC), under FERC oversight, which ensures that the bulk electricity system in North America is reliable, adequate, and secure
- Nuclear Regulatory Commission (NRC), which oversees the safety and licensing of nuclear power plants
- Department of Energy (DOE), which is responsible for promoting energy security as well as scientific and technological innovation
Other relevant entities, but ones that are typically less directly involved in day-to-day electricity sector regulation, include:
- Commodity Futures Trading Commission (CFTC), which regulates certain commodity trades, including power hedges, and trade options
- Department of Justice (DOJ) and the Federal Trade Commission (FTC), which enforce anti-trust laws
- Securities and Exchange Commission (SEC), which regulates the issuance of corporate securities from energy companies, among other things
- Occupational Safety and Health Administration (OSHA), which regulates safety standards for certain power facilities
4.1.5 BASIC FUNCTIONS OF THE REGULATORY COMMISSION
Almost all regulatory authorities perform the same basic functions:
- Determining the revenue requirement
- Allocating costs among customer classes
- Designing price structures and price levels that will collect the allowed revenues, while providing appropriate price signals to customers
- Setting service quality standards and consumer protection requirements
- Overseeing the financial responsibilities of the utility, including reviewing and approving utility capital investments and long-term planning
Serving as the arbiter of disputes between consumers and the utility.
4.1.6 COMMISSION STRUCTURE AND ORGANIZATION
Most state commissions consist of three or five appointed or elected commissioners and a professional staff. Shown here is the organizational chart for FERC.
As an example, the Public Utilities Commission of Ohio (PUCO) lists their organization and their tasks as below on their website:
- Administration – The Office of Administration provides internal support, including docketing, necessary for the day-to-day operations of the agency.
- Attorney General – The Attorney General’s public utilities section represents the PUCO staff before the Commission and represents the Commission itself before the Supreme Court of Ohio, other state and federal courts, and federal administrative agencies.
- Business Resources – The Business Resources Department includes the Human Resources division, the Fiscal and Office Services division, and the Information Technology division.
- Commission Offices – The Commission Offices include the commissioners and their aides.
- Legal – The legal department’s attorney examiners conduct public hearings, issue procedural entries, and draft the opinions and orders issued by the Commission.
- Public Affairs – The Office of Public Affairs fosters the PUCO image by communicating utility information to Ohioans in a timely, accurate, and understandable manner.
- Rates and Analysis – The Rates and Analysis Department conducts independent energy forecast reports, participates in federal and state programs and investigations regarding energy policy, delivery and reliability, monitors and advises on utility conformance with prudent corporate oversight practices and procedures, monitors energy efficiency and portfolio compliance requirements, processes utility rate change requests, and performs technical investigations. The department is comprised of the administration; market and corporate oversight; policy and research; telecom; technology; regulatory services; and siting, efficiency, and renewable divisions.
- Service Monitoring and Enforcement – The Service Monitoring and Enforcement Department examines the quality of service provided by utility companies to ensure that safe, dependable and quality services are being provided. The department also handles requests for information, complaints, and attempts to resolve consumer problems without the need for a formal hearing.
- Transportation – The Transportation Department regulates railroad, trucking, bus, and watercraft companies across a broad range of activities.
If you enjoyed this article, click here to start from the beginning of our Industry 101 Series.
Or to continue your journey, click here to access the next installment of our Industry 101 guide.
Here is a list of relevant reading material our expert identified as sources for additional information: