Electricity 101: A Brief History and Where We Are Today

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By Katie Gilman and Nate Kaufman In the 19th century there was money to be made in finding new ways to create light. The inauguration of Thomas Edison’s Pearl Street power plant in 1882 marked the beginning of the commercial electricity era. Over the 130 years since, the electricity industry has changed drastically, but in many ways it has remained fairly constant: centralized power plants, high voltage transmission lines, and regulated distribution companies with service and reliability requirements have dominated the electricity landscape for decades. In the last several years, however, the industry has seen some of its most fundamental changes to date, including deregulation and restructuring, energy efficiency mandates, portfolio standards, and competition from distributed generation resources.

The electricity industry is a unique one in many ways, perhaps most notably in its ‘natural monopoly’ structure, which requires that regulation replace competition as the determinant of prices. As a result of this structure, only one company runs electricity wires in a given territory in the United States, and customers have no choice in the company from which they buy power. However, utilities are required by law to provide safe, reliable electricity service to everyone in their service territory who pays their bills, in accordance with the rules established by their regulators.

Investor-owned electric utilities are not guaranteed a profit by their regulators, but their rate cases are informed by the expectation that they should be earning a reasonable rate of return, today usually on the order of around 10%. The rates that electric utilities are permitted by their regulators to charge their customers is determined by their rate base (or capital assets), their rate of return (or profit margin), their operating expenses (expenses utilities incur for which they do not earn a profit), and the projected demand for electricity. Other utility models, such as municipal utilities or rural electric cooperatives, do not seek to profit from their electricity sales or returns on capital expenditures; they are beholden to their customers or to the local government and are exempt from federal taxes.

While investor-owned distribution utilities are regulated at the state level, because electricity lines running across state borders are a clear instance of interstate commerce, FERC, a federal entity established under the Federal Power Act in 1920, is responsible for regulating wholesale electricity markets. Meanwhile, regional transmission organizations (RTOs) and independent operating systems (ISOs) are responsible for moving electricity over large interstate areas and coordinating, controlling, and monitoring the grid.

The 1950s and 1960s marked a ‘golden era’ for electric utilities, when demand was high, costs were low, and there was little to no competition. By the 1970s, however, the golden era was drawing to a close. With the energy crisis of that decade, demand was down, costs were rising rapidly, and electricity sales competition was beginning to surge in the form of qualifying facilities as sanctioned under the Public Utility Regulatory Policies Act of 1978.

In many states, the response to this era of decline was deregulation and restructuring, which began with the Energy Policy Act of 1992. In this new model, electricity generation and power sales were no longer regulated by states, utilities became free to buy and sell wholesale electricity competitively across state lines, and customers were given choice regarding the generation sources from which they wanted to buy their electricity.

The past decade has seen a flurry of regulatory changes in the electricity industry. Renewable portfolio standards and energy efficiency resource standards are now mandated in more than half of states, pushing electricity generation toward more renewable sources and requiring investments in demand management rather than just supply side resources. Additionally, obstacles to distributed generation resources have been increasingly diminished as tax credits and technology improvements have continued to drive investment in such resources. An increase in renewable capacity, energy efficiency, effective demand response programs, electric vehicles, storage technology, and distributed generation will continue to drive changes in the electricity industry in the years and decades to come. Competition on the distribution grid will likely lead to more people ‘cutting the wire’ and adding new entrants into the system. While there may be challenges ahead, including issues related to grid integration and modernization, the future of the electricity industry looks bright.