Introduction to the Energy Industry

The characteristics of an industry often play a significant role in
antitrust cases, and this is particularly true in the energy industry. This
chapter provides a brief, nontechnical introduction to the energy
industry. It also defines some of the basic terms used in the chapters that
A. The Electric Power Industry
Unique Features of Electricity
Electricity is an unusual product. It cannot be efficiently stored or
inventoried. It must be produced by electric generators and
instantaneously delivered over transmission and distribution wires in
response to customer demand. Nor can the flow of electricity be readily
channeled. Once produced by a generator, electricity does not flow
directly from seller to buyer. Rather, it flows over the path of least
resistance (least impedance) according to the laws of physics.
For example, when an air conditioning compressor in a downtown
office building starts up on a hot August afternoon, electric power
generators t hat serve this load must instantaneously produce more
electricity to drive the compressor machinery. In all probability,
however, this electricity will not flow directly from the generator to the
city. Instead, it will flow along several different paths depending on the
configuration of the transmission network.
For these reasons, when analyzing competitive electricity markets it
can be difficult to determine whether a generator located at one point can
serve customer load located elsewhere.
The amount of competitively
priced electricity that can reach buyers in a particular area depends on the
customers’ demands, the generators that are in operation, and the
capacity available in the transmission network to deliver electricity to
customer destinations. This capacity, however, can vary from hour to
hour. In particular, “constraints” can arise on the transmission network,
which can affect the choice and output of generation units selected to run
. See, e.g., Comments of DOJ, Inquiry Concerning the Commission’s
Policy on the Use of Competitive Models in Merger Analysis, FERC Dkt.
No. PL98-6-000, at 2 (June 15, 1998).
2 Energy Antitrust Handbook
to serve load. Constraints do not necessarily correlate to peak-load hours.
Sometimes the transmission constraints arise during off-peak hours.
The fact that electricity cannot be stored and must be delivered over
a network that is greatly affected by customer demands and t he
generators available to respond to them has influenced both the historical
development of the industry and the evolution of competitive power
markets. Variable output associated with increasing amounts of
generation powered by intermittent wind and solar energy is another
factor affecting these markets.
Traditional Industry Structure
The growing industrialization of the United States at the end of the
19th and beginning of the 20th Centuries gave rise to a recognition of the
need to ensure reliable supplies of electric power. Private investors and
municipalities formed investor- and municipally owned utilities to fulfill
this role. Later, with encouragement from the federal government, rural
electric cooperatives formed as the use of electricity spread to rural areas.
Because electricity must be produced and delivered simultaneously,
most utilities took the form of vertically integrated f irms. In other words,
the utilities constructed and operated t heir own power plants, built high-
voltage transmission systems to transmit power from those plants to their
service areas,
and distributed the output of their plants to their customers
through local distribution systems. Some utilities, however, did not
vertically integrate and instead bought their electricity requirements from
other utilities.
Over time, it became clear that to bolster reliability individual
utilities needed to interconnect their transmission systems with the
systems of adjacent and nearby utilities. Eventually, t hree large
transmission areas, commonly referred to as “interconnections,” emerged
in the United States to facilitate the provision of reliable electricity
supplies: the Eastern Interconnection, generally covering areas east of the
Rocky Mountains, the Western Interconnection, generally covering areas
west of the Rockies, and the Electric Reliability Council of Texas
(ERCOT), which includes most of Texas except for areas in its
easternmost and westernmost parts. Historically, utilities within an
. Transmission generally refers to the system of higher voltage wires,
transformer substations, and computer co ntrol centers necessary to
transport and deliver power efficiently from plants generating electricity
to distribution systems, which o perate at lower voltages for ultimate
distribution to the consumer.

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