[BETA] Fortnightly

What are the essential characteristics of the system of governance that will be required for a new, North American electric industry with interconnected and interdependent transmission networks and trading areas?

Electric transmission networks are natural monopolies, as are the many independent network

control systems that coordinate the use of generators and loads and preserve system reliability. The organizations and assets necessary for the efficient exploitation of these natural monopolies are not likely to arise through the actions of rival firms.

Today we contemplate how to create organizations and rules that will permit unregulated, profit-maximizing generators in three nations to trade with users and distribution companies across complex transmission networks. Yet there exists no single governmental agency (or coalition of agencies) vested with the regulatory powers necessary to ensure the efficient planning, construction, and operation of transmission networks. Nor has such an agency existed in the past, ever since electric utilities first interconnected their systems across state lines.

The Electric Industry:

A History of Diversity

The absence of any suitable regulatory agency to take over the task of governance for the new electric industry stems from the historical development of individual companies and patterns of ownership.

Table 1 describes the diversity of the U. S. component of the North American electric industry. Although about 250 investor-owned utilities (IOUs) produce about 76 percent of all power produced for sale in the United States, the industry is composed of over 3,000 electric utilities.1 That diversity has been recognized in the current industry governance system and must continue to be recognized. In fact, persuasive arguments show that competition will increase diversity rather than reduce it.

In the 1930s, while the federal government was moving to

reverse the erosion of powers of the state public utility commissions (PUCs) over the IOUs by creating a complementary system of federal regulation, it was also expanding the role of federally owned (FOUs), publicly owned (POUs) and customer-owned (COUs) systems. Table 1 demonstrates current results. Since economic regulation was seen largely as a device for holding prices down rather than as gaining

efficient prices, PUC-type regulation was not imposed on FOUs, and seldom imposed on POUs.2 The Tennessee Valley Authority (TVA) was defined to be its own regulatory agency, and the power marketing agencies (PMAs) were executive branch agencies. The rural electric co-ops were regulated, but only lightly so, by the Rural Electrification Administration of the U. S. Department of Agriculture. Some state PUCs exercised limited jurisdiction over municipal and/or COUs in their state.

Since the TVA, the PMAs and the generation and transmission companies created by POUs and COUs built transmission lines for their own needs, and interconnected those lines with IOU transmission lines, transmission networks became economic entities that no government regulator (and no possible coalition of government regulators) had authority to oversee. The networks grew incrementally as pairs of utilities interconnected for their mutual

interests. The era following World War II saw an ever-growing number of utility interconnections. Not surprisingly, many of these interconnections connected IOUs and/or FOUs and/or COUs and/or POUs in different states and across the