DOE/EIA-0562(98) Distribution Category UC-950 The Changing Structure of the Electric Power Industry: Selected Issues, 1998 July 1998 Energy Information Administration Office of Coal, Nuclear, Electric and Alternate Fuels U.S. Department of Energy Washington, DC 20585 This report was prepared by the Energy Information Administration, the independent statistical and analytical agency within the Department of Energy. The information contained herein should not be construed as advocating or reflecting any policy position of the Department of Energy or of any other organization. Contacts This report was prepared by the staff of the Electric telephone at (202) 426-1180 or by Internet at Market Assessment Branch, Office of Coal, Nuclear, [email protected]. Specific questions regarding Electric and Alternate Fuels. General information the preparation and content of this report should be regarding this publication may be obtained from Robert directed to Dr. Suraj P. Kanhouwa, Project Manager, by M. Schnapp, Director, Electric Power Division, by telephone at (202) 426-1257 or by Internet at telephone at (202) 426-1211 or by Internet at [email protected]. Questions regarding [email protected], or from Betsy O'Brien, specific chapters of the report should be directed as Chief, Electric Market Assessment Team, by follows: Chapter Name Telephone Internet Chapters 1, 4, and 5 Dr. Suraj P. Kanhouwa (202) 426-1257 [email protected] Chapter 2 John W. Makens (202) 426-1165 [email protected] Dr. Suraj P. Kanhouwa (202) 426-1257 [email protected] Chapter 3 William D. Liggett (202) 426-1139 [email protected] ii Energy Information Administration/ The Changing Structure of the Electric Power Industry: Selected Issues, 1998 Preface Section 205(A)(2) of the Department of Energy Organi- The legislation that created the EIA vested the organ- zation Act of 1977 (Public Law 95-91) requires the ization with an element of statutory independence. The Administrator of the Energy Information Administration EIA does not take positions on policy questions. (EIA) to carry out a central, comprehensive, and unified energy data information program. Under this program, The EIA's responsibility is to provide timely, high- the EIA will collect, evaluate, assemble, analyze, and dis- quality information and to perform objective, credible seminate data and information relevant to energy re- analyses in support of deliberations by both public and sources, reserves, production, demand, technology, and private decisionmakers. Accordingly, this report does related economic and statistical information. not purport to represent the policy positions of the U.S. Department of Energy or the Administration. To assist in meeting these responsibilities in the area of electric power, EIA has prepared this report, The Chan- Charles Smith supervised the editing of this report and ging Structure of the Electric Power Industry: Selected Issues, Rebecca McNerney supervised production with 1998. This report is one in a series of reports meant to assistance from Terry Varley, Lisa Kinner, and Sandra provide a comprehensive analysis of key issues brought Smith. Theresa Simonds provided invaluable research forth by the movement of the U.S. electric power assistance. industry toward competition. This report can be accessed from EIA's World Wide Web This publication is intended for a wide audience, in- site at http://www.eia.doe.gov. cluding Congress, Federal and State agencies, the electric power industry, and the general public. Energy Information Administration/ The Changing Structure of the Electric Power Industry: Selected Issues, 1998 iii Contents Page Executive Summary ..............................................................................ix 1. Introduction .................................................................................. 1 2. An Overview of Electricity Trade ................................................................ 5 Background ................................................................................. 5 The Supply Side: Generation and Transmission .................................................... 5 The Demand Side: Residential, Commercial, and Industrial Users .................................... 9 The Wholesale Market: Trade and Price Issues .................................................... 15 Emerging Issues ............................................................................. 24 Conclusions ................................................................................ 26 3. Development of Independent Transmission System Operators ..................................... 29 Introduction ................................................................................ 29 An Overview of the Bulk Power Transmission System ............................................. 29 Emergence of the Independent System Operator Concept .......................................... 31 Status of ISO Proposals ....................................................................... 32 Responsibilities of ISOs ....................................................................... 37 Summary and Conclusion ..................................................................... 50 4. Ratesetting and Consumer Choice Issues in Electricity Restructuring ................................ 51 Background ................................................................................ 51 Treatment of Stranded Costs by States .......................................................... 59 Performance-Based Ratemaking (PBR) .......................................................... 64 Pilot Programs .............................................................................. 80 Conclusion ................................................................................. 85 5. State and Federal Restructuring Initiatives ....................................................... 93 Background ................................................................................ 93 Congressional Initiatives ...................................................................... 94 Administration Proposal ...................................................................... 97 States’ Perspectives on Federal Legislation ....................................................... 98 Stakeholders’ Perspectives on Federal Legislation ................................................. 99 State Initiatives .............................................................................. 99 Appendices A. Selected Provisions of The Energy Policy Act of 1992 and The Federal Power Act ................... 101 B. Average Revenue per Kilowatthour by Sector, 1988-1996 ....................................... 119 C. Data on Electric Trade Data in the United States, 1996 ......................................... 123 D. Fundamentals of Electric Power Transmission and Integrating Nonutility Generators ............... 137 E. Treatment of Stranded Costs in States as of April 30, 1998 143 F. Electricity Restructuring Bills Introduced in the 105th Congress as of May 31, 1998 167 Energy Information Administration/ The Changing Structure of the Electric Power Industry: Selected Issues, 1998 v Tables 3DJH 1. Major Characteristics of U.S. Electric Utilities by Type of Ownership ............................... 6 2. Composition of Generating Capability and Generation in the Electric Power Industry, 1996 ............ 8 3. Number of Retail Customers by Sector in the United States, 1990-1996 ............................. 11 4. Retail Sales, Revenue, and Average Price Paid by End-User Sector, 1990-1996 ....................... 12 5. End-User Sector Shares and Annual Growth Rates, 1990-1996 .................................... 13 6. Average Retail Electricity Prices by End-Use Sector, 1990-1996 ................................... 14 7. Retail Sales, Revenue, and Price by Requirement, Partial Requirement, and Non-Requirement Utilities, 1990-1996 ................................................................................ 16 8. Market Share of Wholesale Trade, Various Years ............................................... 21 9. Sales for Resale and Purchases by Investor-Owned Electric Utilities, 1990-1996 ...................... 22 10. Cost of Firm and Non-Firm Purchases by Investor-Owned Electric Utilities ......................... 22 11. Revenue from Firm and Non-Firm Sales for Resale by Investor-Owned Electric Utilities .............. 23 12. Average Price of Electricity for Wholesale Trade by Investor-Owned Electric Utilities ................ 23 13. Average Wholesale Price for From and To Trade by Investor-Owned Electric Utilities ................ 25 14. Electricity Purchases and Sales by Federal Utilities, Fiscal Year Ending September 30, 1995 ............ 26 15. Summary Information on Approved and Planned Independent System Operators as of March 31, 1998 . 34 16. Major Categories of Information on the Open Access Same-Time Information System (OASIS) ......... 50 17. Treatment of Stranded Costs by States as of April 30, 1998: A Summary ........................... 65 18. Retail Pilot Programs as of April 30, 1998 ..................................................... 86 19. Proposed Legislation Influencing the Restructuring of the Electric Power Industry During the 105th Congress as of May 31, 1998 ............................................................ 95 B1. Average Revenue per Kilowatthour for Industrial Customers, 1988-1996 .........................