3. The U.S. Electric Power Industry Infrastructure: Functions and Components (Continued)

Distribution

Distribution is the delivery of electric power from the transmission system to the end-use consumer. The distribution systems begin at the substations, where power transmitted on high voltage transmission lines is transformed to lower voltages for delivery over low voltage lines to the consumer sites. The system ends at the consumers' meters. Distribution is considered a "natural monopoly" and is likely to remain a regulated function because duplicate systems of lines would be impractical and costly.⁽⁷⁾

Distributed generation is a growing part of the restructured electric power industry. Distributed generation is defined as small generators located near or at the consumer site, within the distribution system. Distributed generators are not directly connected to the transmission grid.⁽⁸⁾ The amount of distributed generation is expected to increase in the future, with the technological and economic improvements in small generators. Fuel cells and photovoltaic systems are becoming more available as alternative or supplemental power sources.

Net metering arrangements are increasingly being offered in some States to consumers that install distributed generation units using renewable resources at their homes or businesses. The owners may use all or most of the power produced, but at times the distributed generator produces more power than the owner uses, and excess power flows out onto the distribution system. The consumer's meter "runs backwards," and "nets out" the portion of the electricity delivered to the consumer.

Regulation of Distribution and Retail Sales
The distribution of electric power is an intrastate function under the jurisdiction of State public utility commissions (PUCs). Under the traditional regulatory system, the PUCs set the retail rates for electricity, based on the cost of service, which includes the costs of distribution. Retail rates are set by the PUC in ratemaking rulings. The rates include the cost to the utility for generated and purchased power, the capital costs of power, transmission, and distribution plants, all operations and maintenance expenses, and the costs to provide programs often mandated by the PUC for consumer protections and energy efficiency, as well as taxes. As the industry restructures, in some States the PUC will eventually no longer regulate the retail rates for generated or purchased power. Retail electricity prices will be open to the market forces of competition. The PUCs will continue to regulate the rates for distribution of power to the consumer. They also have a say in the siting of distribution lines, substations, and generators. Metering and billing are under jurisdiction of the PUC and in some States are becoming competitive functions. As the industry restructures, the PUCs' responsibilities are changing. The goal of each State PUC remains to provide their State's consumers with reliable, reasonably and fairly priced electric power.

The Components of Electricity Supply - Utilities and Nonutilities

Introduction

This section provides a basic understanding of the infrastructure of the electric power industry, i.e., the components that carry out the generation, transmission, and distribution of electricity. The components consist of two broad categories of energy providers--utilities and nonutilities.⁽⁹⁾ Their ownership characteristics, their current role in electricity supply, and how some roles have shifted since passage of the Energy Policy Act of 1992 (EPACT)⁽¹⁰⁾ are explained in the following sections. In most cases, the data presented are for 1998, although in some cases, data for earlier years are compared with 1998 data to show changes.

Utilities
Electric utilities in general are defined as either privately owned companies or public agencies engaged in the generation, transmission, and/or distribution of electric power for public use. Utilities can be further classified into four subcategories based on ownership--investor-owned, Federally owned, other publicly owned, and cooperatively owned (Tables 2 and 3).

Under the traditional system, utilities are given a monopoly franchise over a specific geographic area. In return for this franchise, the electric utility is regulated by State and Federal agencies. Some electric utilities have service territories extending beyond a single county or parish. Others just serve a municipality or part of a county. Many counties in the United States are served by more than a single utility, and some parts of the country (such as Kossuth County, Iowa and Fillmore County, Minnesota) have more than 10 electric utilities operating in a county.

To move electricity among utilities, an extensive system of high-voltage transmission lines is owned and operated by the Nation's larger utilities. This transmission network permits electricity trading between utilities. Without transmission facilities, electricity could not be moved from power plants to the thousands of distribution systems serving millions of consumers of electric power.

Utilities can also be categorized in a different manner, i.e., the number of companies that generate, transmit, and/or distribute electric power. It is interesting to note that only about 27 percent of the Nation's 3,169 utilities actually generate electric power. Many electric utilities (67 percent) are exclusively distribution utilities, purchasing wholesale power from others to distribute it, over their own distribution lines, to the ultimate consumer. These are primarily the utilities owned by State and local governments and cooperatives. Conversely, all nonutilities generate power but do not own or operate transmission or distribution systems (Table 4).

Investor-Owned Utilities
Two basic organizational forms exist among investor-owned utilities (IOUs). The most prevalent is the individual corporation. Another common form is the holding company, in which a parent company is established to own one or more operating utility companies that are integrated with one another.

Figure 9. Service Areas of Investor-Owned Utilities, 1998

Most of the IOUs sell power at retail rates to several different classes of consumers and at wholesale rates to other utilities, including other investor-owned, Federal, State, and local government utilities, public utility districts, and rural electric cooperatives (Figure 9). They also have high-density service areas.

Federal Utilities
There are nine Federal electric utilities in the United States (Figure 10). They include four operating entities: the Department of Defense's U.S. Army Corps of Engineers (USACE), the Department of the Interior's U.S. Bureau of Reclamation, the Department of the Interior's U.S. Bureau of Indian Affairs (USBR), and the Department of State's International Water and Boundary Commission. These entities operate the Federal hydroelectric plants.

Figure 10. Service Areas of Federal Utilities, 1998

Also included in this category are four Federal power marketing administrations (PMAs): the Bonneville Power Administration, the Western Area Power Administration, the Southwestern Power Administration, and the Southeastern Power Administration (Figure 10). These Federal utilities exist to market and sell the power produced at Federal hydroelectric projects. They also purchase energy for resale from other electric utilities in the United States and Canada.

The ninth Federal utility is the Tennessee Valley Authority (TVA), the largest Federal power producer, which operates its own power plants and sells the power in the Tennessee Valley region in both the wholesale and retail markets. The TVA generates electricity from coal, gas, oil, and nuclear power as well as hydropower.

Of the Federal utilities, three are considered major producers of electricity: the TVA, the USACE, and the USBR. Generation by the USACE, except for the North Central Division (Saint Mary's Falls at Sault Ste. Marie, Michigan) and by the USBR, is marketed by the four PMAs.

Consumers of Federal power are usually large industrial consumers or Federal installations. Most of the remaining energy generated by non-profit Federal utilities is sold in the wholesale market to publicly owned utilities and rural cooperatives for resale at cost. These wholesale consumers have preference claims to Federal electricity. Only the surplus remaining after meeting the energy requirements of preference consumers is sold to investor-owned utilities.

Other Publicly Owned Utilities
Publicly owned electric utilities can be categorized as generators and nongenerators. (In contrast, virtually all investor-owned electric utilities own and operate generating capacity.) Generators are those electric utilities that own and operate generating capacity to supply some or all of their customers' needs. However, some generators supplement their production by purchasing power. The nongenerators rely exclusively on power purchases. Their primary function is to distribute electricity to their consumers. The nongenerators comprise over half of the total number of publicly owned electric utilities.

Figure 11. Publicly Owned Utilities in the United States, 1998

Other publicly owned utilities include municipal authorities, State authorities, public power districts, irrigation districts, and other State organizations. Municipal utilities tend to be concentrated in cities where the loads are small. They exist in every State except Hawaii, but most are located in the Midwest and Southeast. State authorities are utilities that function in a manner similar to Federal utilities. They generate or purchase electricity from other utilities and market large quantities in the wholesale market to groups of utilities within their States at lower prices than the individual utilities would otherwise pay. Large concentrations of publicly owned power districts are in the Midwest and Eastern regions of the United States (Figure 11). In general, publicly owned utilities tend to have lower costs than investor-owned utilities because they often have access to tax-free financing and do not pay certain taxes or dividends. They also tend to have high-density service areas.

Rural Electric Cooperatives

Figure 12. Service Areas of Cooperative Utilities, 1998

Most rural electric cooperative utilities are formed and owned by groups of residents in rural areas to supply power to those areas (Figure 12). Some cooperatives may be owned by a number of other cooperatives. There are really three types of cooperatives: (1) distribution only, (2) distribution with power supply, and (3) generation and transmission. Cooperatives currently operate in 47 States, and they represent 29 percent of the total number of utilities in the country. Most distribution cooperatives resemble municipal utilities in that they often do not generate electricity, but purchase it from other utilities.

The other type (generating and transmission cooperatives) are usually referred to as "power supply cooperatives." These cooperatives are usually owned by the distribution cooperatives to whom they supply wholesale power. Distribution cooperatives resemble Federal utilities, supplying electricity to other utility consumers from their generating capability.

Non-Federal Power Marketers
The introduction of the competitive wholesale market for electricity has brought about a fifth subcategory of electric utilities--power marketers. They are classified as electric utilities because they buy and sell electricity at the wholesale and retail levels. However, they do not own or operate generation, transmission, or distribution facilities, and therefore, their data (primarily electricity purchase and sales data) are not included in this chapter. Although relatively small in terms of volume of sales, the power marketers are a growing segment of the industry. Currently, over 850 power marketers have filed rate tariffs with FERC to sell electric power, but only approximately 160 were actively engaged in retail and/or wholesale sales during 1998.⁽¹¹⁾

Nonutilities
Nonutilities are privately owned entities that generate power for their own use and/or for sale to utilities and others. Nonutilities can be classified in two distinct ways. One approach separates nonutilities into separate categories based on their classification by FERC and the type of technology they employ: (1) cogenerators and (2) small power producers, both of which are qualifying facilities (QFs) because they meet certain criteria set forth by PURPA;⁽¹²⁾ (3) exempt wholesale generators mandated by EPACT and designated by FERC, (4) cogenerators not qualified under PURPA, and (5) noncogenerators not qualified under PURPA (Table 5). As the industry furthers its transition to full retail competition in the generation portion of electricity supply, the distinctions between the nonutility subcategories are becoming less clear, and some may fade entirely within the next 10 years as a result of ongoing structural changes and the possible repeal of the Federal mandates that created them.

Figure 13. Shares of Nonutility Nameplate Capacity by Major Industry Group, 1998

A second approach for classifying nonutilities is based on the major industry group into which the nonutility company falls. Nonutility electricity generators are found in many different industries. In 1998, most nonutility generating capacity (52 percent) was in the manufacturing sector of the economy (Figure 13). Within the manufacturing sector, the chemical industry, the paper industry, and the petroleum refining industry account for 70 percent of the electricity generated by that sector. The manufacturing processes conducted at many of these plants can utilize the thermal energy produced when cogenerating electricity. After manufacturing, the largest portion of nonutility electricity generating capacity (23 percent) can be found in the electric, gas, and sanitary services sector. The entities that make up this sector are primarily engaged in producing, transporting, and/or distributing electricity, although they may be engaged in steam, gas, water, and/or waste disposal services as a primary business. Unlike nonutilities in other sectors, these nonutilities are engaged primarily in activities similar to the generation activities carried out by electric utilities. The remaining nonutility capacity is found either in the mining industry (3 percent) or in various other industries, including agriculture, transportation, and other services (21 percent).

A Comparison of Utility and Nonutility Roles
The relative contribution of utility and nonutility components to the supply of the Nation's electricity can be understood by looking at their shares of nameplate capacity,⁽¹³⁾ net generation,⁽¹⁴⁾ additions to capacity, and number of companies (Figure 14). The number of publicly owned utilities (i.e., those owned by State and local governments) far outweighs the number of IOUs (2,009 versus 239); however, in 1998 IOUs were responsible for the lion's share of capacity (66 percent) and generation (68 percent). On the other hand, the nonutility share of capacity and generation has been relatively small, but that trend is changing. The change began with the passage of PURPA when nonutilities were promoted as energy-efficient, environment-friendly alternative sources of electricity. More recently, FERC Order 888 opened the bulk power transmission grid to suppliers other than utilities. In response, nonutilities have been expanding their roles in wholesale power supply and are taking advantage of the divestiture activities of utilities by purchasing their generation assets. As a result, the nonutility share of total industry capacity rose from 7 percent in 1992 to 12 percent in 1998.⁽¹⁵⁾

Figure 14a. Share of Utility and Nonutility Nameplate Capacity by Ownership Category, 1998

Figure 14b. Share of Utility and Nonutility Net Generation by Ownership Category, 1998

Figure 14c. Share of Utility and Nonutility Capacity Additions by Ownership Category, 1998

Figure 14d. Share of Utility and Nonutility Number of Companies by Ownership Category, 1998

A yearly comparison of the above-mentioned four statistics (Figure 15) gives a clear picture of the significant shifts in ownership of electricity supply that have taken place in the relatively short period of time since passage of EPACT. A number of these shifts can be attributed to the strategic business plans companies are using to cope in a deregulated and competitive market. For instance, since 1992, the number of IOUs has decreased by 8 percent and  their  nameplate  capacity  has  decreased by 5 percent (Figure 16). The decrease in the number of IOUs is a result of recent mergers between IOUs. The decrease in generation capacity is evidence of the divestiture of generation assets. On the other hand, the fact that IOU net generation has actually increased by 11 percent since 1992 can be attributed to such factors as higher demand for electricity and efficiency gains stemming from competition and mergers.

Figure 15a. Total Utility and Nonutility Nameplate Capacity by Ownership Category, 1992-1998

Figure 15b. Total Utility and Nonutility Net Generation by Ownership Category, 1992-1998

Figure 15c. Total Utility and Nonutility Additions to Capacity by Ownership Category, 1992-1998

Figure 15d. Total Utility and Nonutility Number of Companiesa by Ownership Category, 1992-1998

Figure 16a. Annual Growth Rate of Utility and Nonutility Nameplate Capacity, 1992-1998

Figure 16b. Annual Growth Rate of Utility and Nonutility Net Generation, 1992-1998

Figure 16c. Annual Growth Rate of Utility and Nonutility Additions to Capacity, 1992-1998

Figure 16d. Annual Growth Rate of Utility and Nonutility Number of Companiesa, 1992-1998

Although the number of nonutility companies decreased in 1997, the number of nonutilities grew by 9 percent during the 7-year period examined. Also, with nonutilities expanding by buying IOU generation assets and constructing new generation units, the result was an increase in nonutility nameplate capacity (up 73 percent since 1992) and generation (up 42 percent since 1992). Nonutility additions to capacity have been increasing at an average annual rate of nearly 7 percent since 1992.

Electricity Sales and Trade

Wholesale Sales and Trade

Figure 17. Electric Utility Wholesale Power Purchases by Ownership Type, 1998

The bulk power system outlined earlier makes it possible for utilities to engage in wholesale (for resale) electric power trade. Wholesale trade has historically played an important role, allowing utilities to reduce power costs, increase power supply options, and improve reliability. In quantity, it accounts for more than one-half of electricity sales to ultimate consumers. Since 1986, the total amount  of wholesale power trade (as measured by purchased power plus exchange received) among utilities and nonutilities has grown at an average annual rate of 4.7 percent, which is more than the rate of growth for retail sales by utilities (3.1 percent). In the past, wholesale trade has been dominated by utility purchases from other utilities. In 1998, utilities purchased a total of 1,669 billion kilowatthours of wholesale electricity from other utilities and a smaller but increasing amount (259 billion kilowatthours) from nonutility producers (Figure 17).

Wholesale power sales by nonutilities to utilities and wheeling (the transmission of power from one point to another via a third party) by utilities have both grown vigorously. Wholesale sales by nonutilities grew from 40 billion to 259 billion kilowatthours between 1986 and 1998, yielding an average annual growth rate of 16.8 percent. Wheeling, while not increasing as spectacularly, grew at an annual average rate of 8.3 percent over the same period. Utility sales to ultimate consumers, wholesale sales by nonutilities, and wheeling by utilities all grew more slowly between 1990 and 1998, with annual growth rates of 2.2 percent, 12.6 percent, and 4.3 percent, respectively.

International Trade

Figure 18. U.S. International Electricity Trade, 1985-1998

In recent years, U.S. international trade in electricity has returned to the levels of the mid-1980s (Figure 18). U.S. trade is mostly in imports, which were more than three times the level of exports in 1998. Most imports are from Canada (99 percent of total gross imports in 1998) and the remainder is from Mexico. Imported power is particularly important to the NPCC and MAPP regions of NERC,⁽¹⁶⁾ where gross imports were 7.2 and 6.5 percent, respectively, of retail sales by utilities in these regions in 1998. In contrast, gross imports for the Nation as a whole that year were 1.2 percent of retail sales by utilities.

Retail Sales by Sector
Electricity is sold to four classes or sectors of retail (i.e., ultimate) consumers--residential, commercial, industrial, and "other." The residential sector includes private households and apartment buildings where energy is consumed primarily for space heating, water heating, air conditioning, lighting, refrigeration, cooking, and clothes drying appliances. The commercial sector includes non-manufacturing business establishments such as hotels, motels, restaurants, wholesale businesses, retail stores, and health, social, and educational institutions. The industrial sector includes manufacturing, construction, mining, agriculture, fishing, and forestry establishments. The "other" sector includes public street and highway lighting, railroads and railways, municipalities, divisions or agencies of State and Federal Governments under special contracts or agreements, and other utility departments.⁽¹⁷⁾

Sales to the residential sector in 1998 increased 20.1 percent from the 1992 level, to 1,128 billion kilowatthours, which represented 35 percent of sales to ultimate consumers. The 1998 commercial sector retail sales increased 25 percent and the industrial sector 8 percent from the 1992 levels. Together, these two non-residential sectors accounted for 62 percent of 1998 retail sales. Sales to the "other" sector were 104 billion kilowatthours in 1998, an increase of 25 percent over 1992 levels (Figures 19 and 20).

Figure 19. Sales to Ultimate Consumers by Sector, 1992 and 1998

Figure 20. Share of Sales to Ultimate Consumers by Sector, 1992 and 1998

Retail Sales by Ownership Category
Sales by investor-owned electric utilities in 1998 increased 15.6 percent over 1992 levels and represented 74.9 percent of sales to ultimate consumers. Publicly owned utility sales increased 25.6 percent over 1992 levels and represented 15.0 percent of total sales. Cooperative utility sales increased 26.7 percent over 1992 levels and represented 8.6 percent of sales. Federal utility sales experienced a decrease of 14.5 percent from 1992 levels and represented 1.5 percent of the total retail sales in 1998 (Figures 21 and 22).

Figure 21. Sales to Ultimate Consumers by Class of Ownership, 1992 and 1998

Figure 22. Share of Sales to Ultimate Consumers by Class of Ownership, 1992 and 1998

Conclusion
This chapter has outlined the infrastructure of the electric power industry by defining its components and their respective roles. In addition, it has provided statistics⁽¹⁸⁾ to clarify the roles and has compared current data to historical data to show how the roles are changing due to the opening of competition in the industry. In addition, information was given regarding wholesale and retail sales in an effort to more thoroughly cover the roles of the components of the current electric power industry. Some roles will continue to change throughout the transition from a vertically integrated and regulated monopoly to a functionally unbundled industry with a competitive market for power generation. Market forces will replace State and Federal regulators in setting the price and terms of electricity supply and are expected to lead to lower rates for customers. The individual States are moving toward opening their retail markets to competition. Chapter 8 details the role of the States in promoting competition. The following chapter outlines the Federal legislation that has affected the structure and operating procedures of the electric power industry since the 1930s.

• Table of Contents
• Chapter 2
• Chapter 3 Part I
• Chapter 4

Endnotes

7. Competition for the distribution of electricity is being evaluated in California.

8. Distributed generators are indirectly connected to the grid through their consumers' facilities which are connected for backup purposes or to sell excess power.

9. Nonutilities generate but do not transmit or distribute electricity.

10. As earlier stated, EPACT provided a Federal mandate to open up the national electricity transmission system to wholesale suppliers, marking the beginning of competition in the electric power industry, and was the impetus for significant structural changes. In 1996, the Federal Energy Regulatory Commission (FERC) issued its Order 888, which carried out the goal of EPACT. From the 1970s until 1992, little change had occurred in the industry, either structurally or operationally, with the exception of the creation of nonutility qualifying facilities brought about by PURPA.

11. Form EIA-861, "Annual Electric Utility Report," 1998.

12. QFs receive certain benefits under PURPA. In particular, they are guaranteed that electric utilities will purchase their output at a price based on the utility's "avoided cost."

13. EIA defines nameplate capacity as the maximum design production capacity specified by the manufacturer of a processing unit or the maximum amount of a product that can be produced running the manufacturing unit at full capacity.

14. EIA defines net generation as gross generation minus plant use from all electric utility-owned plants.

15. Energy Information Administration, Electric Power Annual 1998, Volume I, DOE/EIA-0348(98)/1 (Washington, DC, April 1999), p. 1.

16. Refer to Figure 7 for details on NERC regions.

17. There are some exceptions to the types of customers listed in each of the four sectors. For instance, some small manufacturers are classified as commercial while some large commercial establishments are classified as industrial.

18. Various additional industry summary statistics are provided in Appendix D.