The future of electricity.

When one thinks of the industries that will undergo the most rapid change over the next five years, the computer, software, telecommunications, and health care industries immediately come to mind. However, the one industry that is likely to experience the most dramatic transformation is the once

sleepy electric utility industry. Over most of their history, electric utilities have operated as regulated monopoly suppliers of services. Now the electric utility industry stands as the last major remaining remnant of the regulated monopoly era. During the past fifteen to twenty years, deregulation has come to the oil, natural gas, banking, airline, trucking, telecommunication, and cable TV industries. The United States now stands on the threshold of a sweeping deregulation of the electric utility industry that will drastically reshape its structure, increase consumer choice, and lower costs. The net result of this restructuring will be fewer firms, less vertical integration, and a much lower cost structure.

This article provides an overview of the current state of electric utility regulation in the United States-and a look at how deregulation has reshaped the industry in other countries. The challenges associated with the transition to a competitive world are reviewed, with emphasis on the problem of stranded costs. A vision of the future of the electric utility industry is offered.

A BRIEF HISTORY OF ELECTRIC UTILITY REGULATION IN THE UNITED STATES

The most important federal statutes regulating the electric power industry, the Federal Power Act and the Public Utility Holding Company Act, were both enacted in 1935. Under the Federal Power Act, the Federal Energy Regulatory Commission (FERC) regulates the rates and conditions for the sale of wholesale power in interstate commerce. The FERC also regulates the interstate transmission of electricity. The Public Utility Holding Company Act gave the Securities and Exchange Commission broad authority to regulate interstate utility holding companies, including the issuance of securities by these companies and the purchase and sale of holding company assets. These two acts provide a vehicle for utility regulation that extends beyond the jurisdiction of state public utility commissions.

State public utility commissions regulate the generation and local distribution elements of regulated electric utilities. The traditional mode of regulation has been a cost recovery system, whereby a utility is permitted to set rates such that they will recover all prudently incurred costs, including a return of the capital invested in the firm and a return on the utility's invested capital. Once a regulatory commission establishes the full cost recovery level of revenues that an electric utility is entitled to collect, it then works to develop a rate structure for the pricing of utility services to the regulated company's various classes of customers.