Examining the impacts of the Energy Policy Act of 1992.

• Author: Radin, Alex

Two years after passage of the EP Act, the impact of the most important legislation in 15 years has been greater than expected. The rate of increased competition has been accelerated due to the Act with the growth in the number of IPPs and EWGs, power brokers, and access to transmission for those utilities which are transmission dependent. EPAct also has stimulated more demand for retail wheeling.

In the Fall 1993 Management Quarterly, I described the anticipated impact on the electric utility industry of Congressional adoption of the Energy Policy Act (EPAct) of 1992, the single most important energy legislation enacted for almost 15 years.

As I write this a year later, it is clear that the act has had an even greater impact than was anticipated. It has affected all sectors of the electric utility industry in every region of the United States. Although expansion of competition already was proceeding at a rapid pace when EPAct was being considered, enactment of the legislation has greatly stimulated competition in the wholesale market, and has brought about greater demands for competition in retail electricity sales.

Two provisions have been principally responsible for the upsurge of competition:

First, EPAct permitted the formation of Exempt Wholesale Generators (EWGs) that are not subject to certain provisions of the Public Utility Holding Co. Act.

Second, EPAct gave transmission dependent utilities access to transmission, and hence to wholesale markets that they formerly could not reach.

The Federal Energy Regulatory Commission (FERC) has played a pivotal role in breathing life into provisions of EPAct affecting electric utilities. The Commission has taken seriously the mandates it received from Congress, and has taken steps to implement the act in a way that responds to the spirit as well as the letter of the law.

The Commission at first took a rather strict view of requirements for certifying EWGs, but later changed course and made it relatively easy for an EWG to be formed. Thus far, more than 170 applications for the formation of EWGs have been received by FERC, and most have been approved.

FERC's most important contribution to competition in the electric industry has been the policies it has adopted in acting on petitions filed with the Commission for transmission access.

The number of actual cases thus far has been relatively limited. Only four were filed in 1993, and thus far, about eight this year. However, FERC decisions on these petitions have sent a message to the industry that the law was being administered forcefully. Consequently, a number of utilities voluntarily adopted policies consistent with the act, without being ordered to do so by the Commission.

The change in the competitive environment fostered by EPAct has already had tangible results for wholesale customers. The American Public Power Association cites the case of the city of Butler, New Jersey, which for nearly seven decades had been buying power from Jersey Central Power and Light at an annual wholesale cost of about $7 million. This year, after shopping for alternate power supplies and choosing among seven bids, the city is being served by Penelec at a cost of about $4.1 million--a savings of 41%.

Savings of a similar magnitude have been achieved by Cap Rock Electric Cooperative of Midland, TX. About two years ago Cap Rock acquired Hunt-Collin Electric Co-op. Because of the transmission access provisions of EPAct. Cap Rock was able to have power for this load wheeled by Texas Utilities from Lower Colorado River Authority. This arrangement reduced wholesale power costs for the Hunt-Collin load from about $3 million to $2 million annually.

However, in an era of increasing competition, there are losers as well as winners. Some consumer-owned utilities which have been saddled with higher cost generation could be adversely affected, as least in the near term, by competitive pressures stimulated by EPAct.

FERC Policies Accelerate Wholesale Competition

Two important...