History of Utility Regulation 1
In 1905, Robert M. LaFollette, a Wisconsin politician and lawyer, signed legislation establishing a three-member state Railroad Commission; in 1907, an amendment authorized that body to regulate public utilities.
The 1907 law required the commission to:
- Determine the valuation (for rate-making purposes) of utility property.
- Be informed of all utility construction.
- Prescribe mandatory uniform systems of accounts.
- Provide examinations and audits.
- Keep itself informed of the conduct of utility management.
1 The following commissioners and staff contributed to the contents of this section: Chairman Willie L. Philips (PSC of the District of Columbia) and Dr. Raj Barua (Chief of Policy & Development, PSC of the District of Columbia).
- Regulation determines the role of utilities in providing service.
- Traditionally, utilities provided electric service through bundled rates, which recovered the cost of the three basic "products" of electric service.
- Generation - the creation of electric energy through various means
- Distribution - local "wires" service, metering, billing, customer services, purchase of power and tariff administration.
- Transmission - the transportation of electricity over high-voltage wires between generation sources and distribution centers
- Since 1978, state and federal legislation (and FERC) have promoted competition.
- Utility commissions created by state legislatures.
- Monopoly franchises given to utilities to provide a public service.
- Rates and services approved by state commissions.
- State commissions:
- Ensure safe and reliable service at just and reasonable rates
- Balance needs of ratepayers (service provided) and utilities (financing required)
- Fields of expertise include law, economics, accounting, engineering, policy, etc.
- Resultant work affects nearly all utility customers.
- Public utility: “enterprises which supply … continuous or repeated services through … permanent physical connections between the plant of the supplier and the premises of the consumer.” 2
- Two characteristics of these industries are private ownership and the existence of public regulation. 3
- Obligations:
- Obligated to serve all who apply for service.
- Render safe and adequate service.
- Serve all customers on equal terms.
- Charge only a just and reasonable price.4
- Rights:
- Legal protection of private property.
- To collect a reasonable price for services rendered.
- Subject to reasonable rates and regulations.
- Protection from competition.
- Eminent domain to properly conduct business with just compensation to landowners.5
2 Bonbright, James C. 1961. Principles of Public Utility Rates. New York: Columbia University Press; p.3.
Out of print; available for free download from - http://media.terry.uga.edu/documents/exec_ed/bonbright/principles_of_public_utility_rates.pdf
3 Philipps, Charles F, Jr. 1993. The Regulation of Public Utilities. Arlington, VA: Public Utilities Reports, Inc.; p.4.
4 Philipps, 1993; pp. 118-119.
5 Philipps, 1993; pp. 119-120.
The regulator grants a protected monopoly, essentially a franchise, for the sale and distribution of utility service to customers in its defined service territory. In exchange, companies agree to the regulatory oversight.
- Traditional electric utility business model is based on centralized generation (a model built around fossil generation/nuclear).
- The grid has power plants supplying electricity to homes/businesses through wires connecting the two.
- Principal Agent Model.
- The importance of regulatory policy is that it guides the utility’s activities and determines the role of the utility in everyday life and the economy.
Just and reasonable rates typically have the following four features:
- They reflect the costs of an efficient or prudent utility.
- They reflect the cost of serving different customer classes and of providing different services and different levels of services.
- They allow the efficient or prudent utility a reasonable opportunity to earn a return sufficient to attract new capital.
- They avoid undue discrimination against any customer class (or customers within a class) or service.
Agencies with Oversight of the Utility Industry
Commodity Futures Trading Commission (CFTC)
The mission of the CFTC is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. See https://www.cftc.gov/.
Department of Energy (DOE)
The mission of the DOE is to ensure America’s security and prosperity by addressing its energy, environmental and nuclear challenges through transformative science and technology solutions. See https://www.energy.gov/.
Environmental Protection Agency (EPA)
The mission of EPA is to protect human health and the environment; among others, but not limited to, the EPA works to ensure that environmental stewardship is integral to U.S. policies concerning natural resources, economic growth, energy, and transportation. See https://www.epa.gov/.
Federal Communications Commission (FCC)
The FCC is an independent federal agency regulates interstate and international communications by radio, television, wire, satellite, and cable in all 50 states, the District of Columbia, and U.S. territories. The FCC is the federal agency responsible for implementing and enforcing America’s communications law and regulations. See https://www.fcc.gov/.
Federal Energy Regulatory Commission (FERC)
FERC is an independent federal agency that regulates the interstate transmission of electricity, natural gas, and oil. FERC also reviews proposals to build liquefied natural gas (LNG) terminals and interstate natural gas pipelines as well as licensing hydropower projects. Among others, the FERC also regulates the wholesale sales of electricity in interstate commerce; reviews certain mergers and acquisitions and corporate transactions by electricity companies; regulates the transportation of oil by pipeline in interstate commerce; protects the reliability of the high-voltage interstate transmission system through mandatory reliability standards; and monitors and investigates energy markets. See https://ferc.gov/.
Nuclear Regulatory Commission (NRC)
The NRC licenses and regulates the Nation's civilian use of radioactive materials to protect public health and safety, promote the common defense and security, and protect the environment. Specifically, the NRC regulates commercial nuclear power plants; research, test and training reactors; nuclear fuel cycle facilities; and the use of radioactive materials in medical, academic and industrial settings. The NRC also regulates the transport, storage, and disposal of radioactive materials and waste, and licenses the import and export of radioactive materials. While the NRC only regulates industries within the United States, the agency works with agencies around the world to enhance global nuclear safety and security. See https://www.nrc.gov/.
Pipeline and Hazardous Materials Safety Administration (PHMSA)
PHMSA is located within the U.S. Department of Transportation and its mission is to protect people and the environment by advancing the safe transportation of energy and other hazardous materials that are essential to the daily lives in the U.S. To do this, PHMSA establishes national policy, sets and enforces standards, educates, and conducts research to prevent incidents. PHMSA also prepares the public and first responders to reduce consequences if an incident does occur. See https://www.phmsa.dot.gov/.
Rural Utility Service (RUS)
The U.S. Department of Agriculture provides much-needed infrastructure or infrastructure improvements to rural communities. These include water and waste treatment, electric power, and telecommunications services. All these services help to expand economic opportunities and improve the quality of life for rural residents. See https://www.rd.usda.gov/about-rd/agencies/rural-utilities-service.
Other than utility commissions, each state has an agency that is the equivalent of the federal EPA, i.e., deals with environmental issues. Also, several states have separate siting authorities for power plants, etc. Whereas utility commissions tend to be independent agencies, environmental and siting agencies are usually a part of the respective state’s executive branch.
There are several municipalities across the U.S. that provide utility services to its residents. Services can vary from electricity, natural gas, water, and wastewater and these are known as municipal utilities. Most of them may not own the generating resources or power plants and buy bulk power and then serve the residents at a distribution level.
In a large part of the U.S. that is rural and farmland, utility services are provided by cooperatives. This movement began in the 1930s when investor-owned utilities did not serve the thinly populated rural areas. Soon after the end of World War II, the number of rural electric systems increased and, by the mid-1950s, more than 90 percent of U.S. farms had electricity. As of now, nearly 99 percent of the nation’s farms have electric service. The federal Rural Utilities Service (RUS), which is part of the U.S. Department of Agriculture, had a large role in the growth of cooperatives. See https://www.electric.coop/