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This writing provides general introductory information concerning the evolution and development of the electric industry, and information concerning electricity purchasing, sourcing, delivery, and risk management decisions. In addition to this introductory material, we also recommend that readers review additional information sources concerning this subject matter, such as educational and instructional material and seminars provided by various educational and trade organizations.


Customers with a basic understanding of the electric utility industry can recognize market opportunities.

The electric industry is experiencing a vast transformation and is in the midst of radical reorganization, as the industry transitions from traditional economic regulation to market competition. The ongoing reorganization is the second major historic structural realignment of the electric power industry. The first reorganization occurred during the late 1920s and early 1930s, pursuant to changes mandated by federal law designed to modify actions by utility holding companies. The currently ongoing changes are being spurred by economical considerations and technology improvement. Generally, three primary catalysts are responsible for the present realignment. First, there is an ongoing general reevaluation of policy governing regulated industries and how competition may improve efficiencies and reduce costs. Second, there is a wide disparity in electric rates across the United States; for example, in 1998, New York consumers paid more than two and one-half times the rates of Kentucky consumers. Three, numerous engineering advances, notably gas turbines, have radically changed the economics of power production.

A number of states and the Federal Energy Regulatory Commission ("FERC") have played an active role in the transition to competition. States with relatively high-cost electricity were in the forefront of initiating the realignment of the electric power industry by enacting legislation to enable retail competition. Since the enactment of the Energy Policy Act of 1992 ("EPACT"), state legislatures and state pubic utility commissions have examined the various issues concerning the restructuring of the electric industry. States have been considering competition at the retail level. To date, retail competition has been an individual state matter, and every state has individually approached the need for and implementation of retail competition. States with high electricity rates, such as California and the Northeast states, had compelling reasons to promote competition with the hope of lowering rates, and have moved assertively towards retail competition. Other states are moving slower.

FERC has been actively promoting competition at the wholesale level since passage of the Energy Policy Act of 1992. The transmission system provides the capability to wheel power over long distances, and thus, the transmission system is an integral part of this realignment. FERC has promoted the development of competitive wholesale power markets by attempting to provide open access to the transmission system to all qualified users.

The onset of increased competition has caused electric utilities to reorganize and reposition themselves. This has resulted in increased merger, acquisition, and divestiture activity within the electric industry. For example, since 1992, Investor Owned Utilities ("IOUs") have been involved in approximately 35 mergers, causing the size of IOUs to increase. As an indication of the increase in the size of IOUs, in 1992, the 10 largest IOUs owned 36 percent of the IOU-held generation capacity and the 20 largest IOUs owned 58 percent of the IOU-held generation capacity. At the end of 2000, the 10 largest IOUs owned approximately 51 percent of the IOU-held generation capacity and the 20 largest IOUs owned approximately 72 percent.

IOUs are divesting power generation assets in unprecedented numbers, influenced heavily by state-level electric industry restructuring programs that emphasize the unbundling (separate ownership) of generation from transmission and distribution assets and, in some cases, motivated by a desire to exit the competitive power generation business. Since late 1997, IOUs collectively divested, or are in the process of divesting, 156.5 gigawatts of power generation capacity, representing about 22 percent of the total U.S. electric utility generating capacity. Divestiture includes both the sale of generation capacity to another company or the transfer of generation assets to an unregulated subsidiary within the IOU's holding company structure. These IOUs are strategically positioning themselves as "wires" companies by owning only the transmission and distribution delivery wires. Further, utilities historically dominated the addition of new generating capacity; however, utilities are now adding less capacity, while non-utility capacity additions are increasing at an average annual rate of almost 7 percent. For example, in 1998 alone, non-utilities' share of capacity additions was 5,396 megawatts, or 82 percent of the total added generation capacity, while utilities added 1,185 megawatts, or 18 percent of the total added generation capacity.

Moreover, the change in the electric industry is spurring changes in the natural gas industry. (See IEU-Ohio's Natural Gas Primer.) The increased competition within both the natural gas and electric industries has increased the convergence between the two industries. For example, on January 28, 2000, Dominion Resources Inc., the parent company of Virginia Power, completed its acquisition of Consolidated Natural Gas Co., the parent company of the East Ohio Gas Co., resulting in the fourth-largest electric and natural gas utility in the United States with approximately $8.8 billion in annual revenues. Since 1992, 23 convergence-mergers have been completed, while numerous more are pending. Some industry analysts believe that in a competitive environment, a company's ability to become a total energy provider, offering gas, electricity, and related products, may provide a competitive edge. Many electric companies are also diversifying into non-traditional businesses such as telecommunications, cable, Internet access, and home security systems. In 1999, diversified activities accounted for 43 percent of the total shareholder-owned electric company operating revenue, and furthermore, revenue from diversified activities increased by almost 29 percent from 1998.

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