The electric power industry comprises three different components: the generation of electric power, the transmission of electric power from generators to local utilities, and the distribution of electricity by local utilities to commercial and residential customers. All three segments of the industry are currently subject to some state and federal regulation. Competition has generally been regarded as unlikely in the transmission and local distribution of electricity, given their natural monopoly characteristics. However, competition has emerged in the wholesale generation of electric power, and regulators now face the question of how to foster and encourage such competition.
The ability to buy and sell electric power permits utilities to efficiently employ existing capacity. By buying power from unregulated sources, utilities can meet peak-load demands on hot days or during winter storms and avoid the need to invest in additional production facilities. When utilities purchase power from others, the Federal Power Act of 1935 requires the Federal Energy Regulatory Commission (FERC) to ensure that prices charged on interstate sales are "just and reasonable" in light of necessary costs. With the emergence of competition in the electric power generation market, however, the need for FERC regulation of all interstate sales on a cost-of-service basis has diminished.
When purchasers of electric power have a number of alternative sources, a competitive market can develop, and market prices can take the place of prices based on cost-of-service regulation. Indeed, by the early 1990s, the availability of alternative power sources had encouraged more than a dozen states to use competitive procurement policies for intrastate acquisition of electric power, rather than cost-of-service regulation. Competition in the electric power generation industry can be promoted by allowing local utilities access to transmission facilities that link them with alternative energy sources, provided that the owners of transmission facilities are compensated for their use. In addition, federal legislation may be required to repeal sections of the Public Utility Holding Company Act of 1935, which creates barriers to entry and obstacles to the development of new wholesale power sources.
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