The early electric power industry was developed using direct current
transmission, a system in which a relatively low voltage of electricity could
travel only over short distances.
Typically, numerous power plants were built within a small densely populated
area, usually a city, and consumers were able to choose their service provider.
This structure created much competition within a local marketplace.
This paradigm began to change as technology rapidly transformed the industry.
Newer machines, such as steam turbines, were smaller and less complex, and
could create a greater amount of power with a much smaller capital investment.
The discovery of alternating current transformers allowed companies to
transport power over longer distances at a higher voltage.
Savvy entrepreneurs, such as Samuel Insull of Chicago Edison, realized that
they could exploit the greater economies of scale afforded by these new
technologies, and maximize profits by consolidating the smaller utility
companies. Fueled by the rapid growth of electricity consumption, the
utilities boomed during the early 20th century.
By 1907, Insull had acquired 20 other utility companies and renamed his firm
Commonwealth Edison. He and others argued
that electric utilities were a "natural monopoly" because it would be
inefficient to build multiple transmission and distribution systems due to the
great expense of capital investment. Therefore it was inherent that only one
company would dominate the market. The emerging utility monopolies were
vertically integrated, meaning they controlled the generation of electric
power, its transmission in real time across high-voltage wires, and its
low-voltage distribution to homes and businesses. Reformers of the Progressive
Era tried to govern these emerging utility monopolies through state regulation.
By 1914, 43 states had established regulatory polices governing electric
As their businesses grew, the new electric power barons such as Insull began to
restructure their companies, largely through the use of holding
companies. A holding company is a company that controls a partial or
complete interest in another company, and it can be a useful tool in consolidating
the operations of several smaller companies. However, the electric utilities of
the 1920s began to exploit the use of holding companies to buy up smaller
utilities in an effort designed not to improve the company's operating
efficiency, but as a speculative attempt to maximize profits. The growing
utility monopolies then exploited this structure, pyramiding holding company on
top of holding company, sometimes such that a holding company was as many as
ten times removed from the operating company. Each new holding company would
buy a controlling interest in the holding company below it and the additional
costs and fees for the operating companies were passed along in a higher rate
base for the consumer.
While the operating companies were subject to state regulation, the holding
companies were not; therefore each holding company could issue fresh stocks and
bonds without state oversight. The abuse of holding companies allowed for the
consolidation of utilities such that by the end of the 1920s, ten utility
systems controlled three-fourths of the United States' electric power
The size and complexities of the holding companies were proving state
regulation of utilities ineffective and soon caught the attention of the
federal government. In 1928, the Federal Trade Commission began a six-year
investigation into the market manipulations of the holding companies. The
booming utilities of the 1920s traditionally had been seen as relatively secure
investments, and utility stocks were held by millions of investors. The
pyramidal holding company structure allowed the holding companies to inflate
the value of utility securities, which eventually were decimated by the 1929
stock market crash.
Elected to the presidency in 1932, Franklin Delano Roosevelt fought vehemently
against the holding companies, calling them "evil" in his 1935
State-of-the-Union address. After a hard-fought campaign by the president and
his allies, and in the face of bitter opposition from the utilities, Congress
passed the Public Utility Holding Company Act (PUHCA) in 1935. PUHCA outlawed the
pyramidal structure of interstate utility holding companies, determining that
they could be no more than twice removed from their operating subsidiaries. It
required holding companies which owned 10 percent or more of a public utility
to register with the Securities and Exchange Commission (SEC) and provide
detailed accounts of their financial transactions and holdings. Holding
companies that operated within a single state were exempt from PUHCA. The
legislation had a dramatic effect on the operations of holding companies:
Between 1938 and 1958 the number of holding companies declined from 216 to
18. This forced divestiture led to a new
paradigm for the electricity marketplace which lasted until the deregulation of
the 1980s and 1990s: a single vertically-integrated system which served a
circumscribed geographic area regulated by either the state or federal
Roosevelt made the fight for public power an integral part of his New Deal
campaign and pushed for other important legislation to that end. In the same
year as PUHCA, Congress passed the Federal Power Act of 1935, which gave the Federal Power
Commission (FPC) regulatory power over interstate and wholesale transactions
and transmission of electric power. The FPC had been established under the
Federal Water Power Act of 1920 to encourage the development of hydroelectric
power plants. The Commission originally consisted of the secretaries of war,
interior and agriculture. The Federal Power Act changed the structure of the
FPC so that it consisted of five commissioners nominated by the president, with
the stipulation that no more than three commissioners could come from the same
political party. The Federal Power Act gave the FPC a mandate to ensure
electricity rates that are "reasonable, nondiscriminatory and just to the
Another component of FDR's fight for public power was the creation of federal
agencies to distribute power to those who were neglected by the traditional
utilities, particularly farmers and other customers in rural areas. His
administration created the Tennessee Valley Authority (TVA) in 1933 and the
Rural Electrification Association (REA) in 1935 to create and finance rural
utility companies. The end result of the New Deal era regulatory intervention
into the electric industry led to four primary types of service providers:
private investor-owned utilities (IOUs) with stock freely traded in the
marketplace by shareholders; publicly owned utilities, such as those owned by
municipalities; cooperative utilities which were usually found in rural
communities; and federal electric utilities, such as the TVA and REA.
After the tumult of the Roosevelt years and the end of World War II, the
electric power industry enjoyed a period of steady growth, driven by both
technological and efficiency advances that were reflected in lower prices.
Between the years of 1947 to 1973, the growth rate for the industry held steady
at about 8% per year and there was little
change in the industry structure. The industry began to promote increased
electricity usage through advertising campaigns with slogans such as GE's "Live
Better Electrically" campaign begun in 1956. As the industry grew and prices
continued to decline, there was little need for state and federal regulatory
intervention. IOUs were the primary service providers for most Americans and
their continued growth
and low rates satisfied both consumers and investors.
The energy crisis of the 1970s is often symbolized by images of long lines at
gas pumps all over the United States resulting from the 1973 OPEC oil embargo.
Oil, coal and natural gas shortages, as well as declining public confidence in
the nuclear power industry, contributed to rate increases for consumers
throughout all the energy industries, including electricity. Elected in 1976,
President Jimmy Carter made energy concerns one of his top priorities. In
attacking the demand side of the problem, he waged a public campaign focused on
conservation to reduce the American public's high rates of energy consumption.
To combat the supply side, he sought to cultivate the growth of new sources of
energy, including nuclear power and renewable resources such as solar and wind
power. These two approaches were crystallized in the five-part National Energy
Act, which Carter signed into law in 1978.
The Public Utility Regulatory Policies Act (PURPA), was the piece of Carter's
National Energy Act that affected the electric power industry. It was designed
to encourage efficient use of fossil fuels by allowing non-utility generators
(known as Qualifying Facilities or QFs) to enter the wholesale power market.
PURPA designated two main categories of QFs: cogenerators, which used a
single fuel source to either sequentially or simultaneously produce electric
energy as well as another form of energy, such as heat or steam; and
independent power producers (IPPs), which use renewable resources including
solar, wind, biomass, geothermal and hydroelectric power as their primary
Although intended to be an environmental statute, a primary effect of PURPA
was to introduce competition into the generation sector of the electricity
marketplace, thus challenging the utilities' claim that the electricity market
encouraged a "natural monopoly."
One year prior to the National Energy Act, President Carter signed the
Department of Energy Organization Act. The act created the
Department of Energy by consolidating organizational entities from a dozen
department and agencies. Under this legislation, the Federal Power Commission
(FPC) was replaced by the Federal Energy Regulatory Commission (FERC) as
the federal agency that establishes and enforces wholesale electricity rates.
The free-market mania of the 1980s and 1990s further challenged the notion of
the electric power industry as a "natural monopoly." Many politicians and
economists argued that regulation had outlived its value, and that the market
should determine prices. The telecommunications and transportation industries
were deregulated, and the natural gas industry followed suit. Advocates for
deregulating the electricity industry argued that the implementation of PURPA
had proved that non-utility generators could produce power as inexpensively and
effectively as the regulated utilities. Large industrial consumers searching
for lower prices also chimed in and urged federal regulators to pursue
In 1992 Congress passed President Bush's Energy Policy Act (EPACT), which opened
access to transmission networks to non-utility generators. EPACT further
facilitated the development of a competitive market by creating another
category of qualifying facilities known as exempt wholesale generators (EWGs),
which were exempted from regulations faced by the traditional utilities. To
assist in the implementation of PURPA and EPACT, FERC issued Order No.
888 and Order
No. 889 in April
1996. The two orders provided guidelines on how to open electricity
transmission networks on a nondiscriminatory basis in interstate commerce.
The passage of EPACT led states which had historically high electricity prices,
such as California, to investigate whether
competitive deregulated markets would benefit their consumers. In 1996, both
California and Rhode Island passed deregulation legislation, giving the
consumer the right to choose his electricity supplier. As of May 2001, 24
states and the District of Columbia either have passed legislation or issued a
comprehensive order to restructure their electric power industry. Eighteen
states currently are investigating deregulation. View the Department of
Energy map depicting the status of state electricity industry restructuring
As a result of the deregulation movement of the 1990s, the electric power
industry is changing from a structure of regulated, local,
vertically-integrated monopolies, to one in which competitive companies
generate electricity, while the utilities maintain transmission and
distribution networks. In the face of increased competition, investor-owned
utilities (IOUs) have sought to make themselves more competitive through
mergers, acquisitions and asset divestitures, leading to the industry becoming
much more concentrated. By 1998, the ten largest IOUs owned almost 40% of
IOU-held electricity generation-capacity.
Increased competition has also led to the rise of two new participants in the
electric power marketplace, who buy and sell electricity without owning or
operating transmission or distribution operations: power marketers, which are considered to be utilities and therefore regulated by
FERC, and power brokers, which are unregulated.
 Dr. Richard Hirsh. "Emergence of
Electrical Utilities in America." From Smithsonian Institute exhibit "Powering
a Generation of Change" http://americanhistory.si.edu/csr/powering/.
Dr. Richard Hirsh. "Emergence of Electrical
Utilities in America." From Smithsonian Institute exhibit "Powering a
Generation of Change" http://americanhistory.si.edu/csr/powering/.
Arthur Schlesinger, The Age of
Roosevelt. (Boston: Houghton Mifflin, 1960) 118.
Dr. Richard Hirsh. "Emergence of Electrical
Utilities in America." From Smithsonian Institute exhibit "Powering a
Generation of Change" http://americanhistory.si.edu/csr/powering/
Dr. Richard Hirsh. "Post World War II Golden
Years." From Smithsonian Institute exhibit "Powering a Generation of Change"
 "The Restructuring of the Electric Power
Industry: A Capsule of Issues and Events" (Energy Information Administration,
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