Electric Services

Industry Snapshot

The electric service industry is less than 150 years old, but it runs America. In the span of a century, electricity replaced gas as a preferred means of lighting and succeeded steam engines in many growing industries. Electric service utilities comprise the nation's largest business, gauged according to capital investment and market value. Electricity is so widely available in modern American society that service disruptions are newsworthy. Throughout the twentieth century, its use consistently increased. Although industry forecasters disagree about how rapidly demand will continue to grow, they generally agree that demand for electricity will continue to increase into the foreseeable future.

Electricity is measured in watts. A watt is a basic unit of electrical power equal to about 1/746th of one horsepower. A kilowatt is equal to 1,000 watts; a megawatt is equal to one million watts; a gigawatt is equal to one billion watts. Electricity is sold in kilowatt-hours (kWh). One kWh equals the amount of electrical energy needed to keep ten 100-watt bulbs burning for one hour. Not all the electricity generated is available to be sold. Some is used by the power plant and some is dissipated during transmission and distribution. Furthermore, because electricity cannot be stored, it must be used or lost.

The Energy Policy Act of 1992 marked the beginning of the deregulation of the electric services industry. By 1999, almost half the states had passed, or had pending, new legislation that provided for restructuring of the industry, open access to transmission lines, and wholesale/retail competition among producers, transmitters, and distributors of electricity.

At the beginning of the twenty-first century, the electric power industry in the United States was in disarray. Service reliability became a serious issue during 2000 when segments of California experienced power shortages and outages. Later, questions were raised concerning whether power companies had artificially engineered the shortage to drive up prices. Accounting scandals made headlines when power-giant Enron was forced to declare bankruptcy after its accounting practices were revealed as fraudulent. The fallout from the Enron scandal brought on a sudden and severe lack of trust in the public trading of power. In turn, the industry experienced debilitating liquidity and capital problems. These difficulties all took place in the midst of fragmented and inconsistent state-led deregulation efforts conducted in the middle of a recessive economy. Profits fell, and those companies able to stay afloat reported very slim profit margins.

According to 2009 statistics from the U.S. Census Bureau, the electric power industry, including generation, transmission and distribution services, generated more than $442 billion in 2007 revenue. The electric power industry represents nearly five percent of the nation's GDP and is one of the country's largest industries in terms of gross output.

Organization and Structure

There are several kinds of electric service establishments in the United States. Investor-owned companies are owned by shareholders; cooperative utilities are owned by their members and are operated to meet members' needs. Public utilities are nonprofit government agencies such as municipalities, public power districts, and irrigation districts. The federal government also produces electricity under the direction of agencies such as the U.S. Army Corps of Engineers and the U.S. Bureau of Indian Affairs. The largest federal producer is the Tennessee Valley Authority, which provides electricity to both wholesale and retail markets.

Although public utilities and rural cooperatives account for about 90 percent of the nation's more than 3,200 electricity utilities providers, they are generally small. Cooperative electric utilities provide service to their members, who are usually in rural areas where investor-owned electric utilities would find it uneconomical to operate because of low population densities. In 1999, there were 932 cooperatively owned utilities; about 2,010 non-profit publicly owned utilities; 10 federally owned utilities; and 267 for-profit, investor-owned utilities.

Electricity providers differ by class of ownership and vary greatly in size, services, profitability, and organization. An integrated utility may operate its own generation plants and maintain its own transmission and distribution lines. Other companies may distribute electricity to customers but buy it from other producers rather than generate it. Some rural cooperatives operate with less than 100 employees and own less than $1 million in total assets. Some corporations supply electricity to customers through subsidiary companies in several states. These giant organizations may employ tens of thousands.

The North American Electric Reliability Council (NERC) was established in 1968 by the electric utility industry and consists of 10 regional reliability councils. The councils are responsible for setting and maintaining standards to foster reliable service within the three power grids that supply electricity to the contiguous United States: the Eastern Power Grid (also known as the Seven Interconnected Regions Power Grid), the Western Power Grid, and the Electric Reliability Council of Texas Power Grid. As of the early 2000s, the U.S. operated about 157,000 circuit miles of high-voltage transmission lines in the three power grids.

Electric service producers operate several types of generating stations in order to meet customers' constantly changing energy demands. Three classes of power plants are base-load, intermediate-load, and peak-load stations. Base-load plants meet the normal minimum demand of a company's customers. They are usually the largest and most efficient of a company's generating units. Intermediate-load plants handle increases in demand that are less than the highest, or peak, demands. They perform as transitional power providers and can function as standby units when unexpected problems arise. Peak-load generating stations are used to meet short-term high demand. Peaking units are usually quick starting but the least efficient.

Electricity is created by electric generators that convert mechanical energy into electric power by rotating a magnet within coiled wires. The mechanism that causes the magnet to rotate is called a "prime mover." Different kinds of prime movers are used to generate electricity in different circumstances. Most generators are turbines that are spun when a liquid or gas is forced against their blades. Steam, hot air or combustion gases, and water are the most common prime movers.

Steam turbines produce most of the electricity generated in the United States. The steam required to operate the turbines is created through burning fossil fuels, such as coal, petroleum, and gas, or through nuclear fission. Steam turbines generally operate in base-load power stations. Gas turbines and internal-combustion engines are most frequently used as peaking units. A type of gas turbine that operates in conjunction with a steam turbine is called a combined-cycle generating unit and is typically used for intermediate-level generation. Hydroelectric-generated power is created when flowing or falling water is used to spin a turbine. Hydroelectric units can serve as base-load or peaking stations.

Background and Development

The U.S. demand for electricity began during the last two decades of the nineteenth century. In October 1879, Thomas Edison created the first long-lasting incandescent light bulb. In December of the following year, he founded the Edison Electric Illuminating Company in New York for the purpose of building the nation's first centralized generating plant. The company's Pearl Street station took two years to build, and on September 4, 1892, its generator was turned on. It supplied electricity for 158 lamps: 52 at the editorial office of the New York Times and 106 in the office of financier J. P. Morgan. A year later, the company served 513 customers. By the end of the decade, Edison's companies had constructed 500 isolated-generating units and 58 centralized-power stations.

Edison faced competition from George Westinghouse, a proponent of alternating current, which purchased the United States Electric Light Company. Alternating current, shunned by Edison who preferred direct current (DC), gradually emerged as the preferred form of electricity because it could be transmitted at lower costs. The industry expanded as new companies began producing the products innovators created, including longer-lasting light bulbs, different kinds of generators, and motors.

By the turn of the century, 1 of every 13 factories utilized electric motors. Cities replaced gas street lamps with electric lights. Electric trolleys became a preferred mode of transportation. Generators became larger and more efficient. Technologies to transmit power over longer distances were developed. Increased production created economies of scale and lower prices. In 1892, the cost per kilowatt-hour from a centralized station was 22 cents, and 30 years later the cost was 7 cents.

In 1907, Wisconsin and New York became the first two states to establish independent regulatory commissions. By the end of World War I, 26 other states had established similar commissions. Under the direction of state regulators, electric service companies became public utilities instead of competitors. Regulators established service territories and granted specific companies monopolies within the territory. One motivating factor that led to the establishment of monopolies was the goal of eliminating the expense of duplicate transmission systems.

During the 1920s, holding companies acquired the largest portion of America's generating capacity. By the middle of the decade, 16 companies controlled about 75 percent of the nation's electricity. Many companies continued to operate independently, while others cooperated with neighboring utilities to form power pools, agreements under which companies shared resources to achieve greater efficiency and reliability.

In 1920, Congress enacted the Federal Power Act to regulate licensing of nonfederal hydroelectric ventures; the Federal Power Commission was created to enforce its provisions. The act was amended in 1935 to include regulations for interstate transmission, and monitoring rates for wholesale transactions of electric power.

By the mid-1930s, electric services were commonplace in urban but not rural areas. An estimated 85 percent of farms still had no electricity. On May 11, 1935, President Franklin Roosevelt created the Rural Electrification Administration to fund projects undertaken by rural cooperatives. In 1935, Congress passed the Public Utility Holding Company Act (PUHCA). PUHCA outlawed pyramiding and limited holding companies to single-integrated operating systems. The act was opposed by the nation's large holding companies, which had to reorganize in accordance with its provisions.

World War II brought increased demands for electric power. Following the war, further improvements in generators and transmission technologies increased the availability of low-priced electricity. Between 1945 and 1965, the average generating plant size multiplied sevenfold and demand increased at a rate of approximately 7.8 percent per year. The 1940s also ushered in the nuclear era. On December 3, 1942, Enrico Fermi created the first self-sustaining nuclear chain reaction. The first usable electricity generated by atomic power occurred at the Argonne National Laboratory in Idaho on December 20, 1951. In 1957, the Shippingport Nuclear Station in Pennsylvania became the country's first nuclear plant to supply electricity to a utility's power grid.

During the 1960s, nuclear power gained prominence. Seven new reactors were ordered in 1965, 20 in 1966, and 30 in 1967. Despite growing anti-nuclear sentiments among segments of the U.S. population, nuclear power continued to contribute a growing amount of electricity to the nation. In 1979, an accident at the Three Mile Island station in Pennsylvania led to increased scrutiny of the nuclear power industry and new regulations exacerbated the financial difficulties many nuclear projects faced.

No new domestic orders for nuclear power plants have been placed since 1978, but electric utilities have continued to complete plants that were under various stages of construction. From 1980 to 1990, the number of operating nuclear plants in the United States increased from 70 to 111.

Other transformations also challenged the electric service industry during the 1970s. The Arab oil embargoes of 1973 and 1979 disrupted fuel oil supplies and increased prices. Inflation and high interest rates caused base-load plant construction costs to soar. Measures necessary to protect the environment brought increased regulatory requirements. As prices increased and the economy slowed, demand dropped to under 3 percent per year.

In 1977, Congress created the Department of Energy. The Federal Power Commission was abolished and its responsibilities were split between the Department of Energy and the Federal Energy Regulatory Commission (FERC). In 1978, Congress passed the Public Utility Regulatory Policies Act (PURPA). One of PURPA's goals was to encourage conservation and efficiency in power generation. PURPA injected competition into the electric service industry by requiring utilities to purchase electricity from certain producers defined as "qualifying facilities" (QFs). As a result, cogeneration facilities (plants that produced electricity along with other forms of energy) and small producers relying on renewable resources such as water, wind, solar, and geothermal power began supplying power to the nation's power grids.

By 1988, nontraditional producers of electricity generated 6 percent of the electricity in the United States. Forecasters expected independent producers to play an increasing role and to provide as much as 15 percent of the nation's power by the end of the twentieth century.

As the electric services industry entered the 1990s analysts debated whether new generating capacity was necessary. Many older base-load plants were reaching the end of their licensed operating span. An estimated 25 percent of the country's fossil-fueled generating plants was scheduled to reach the end of their planned life span by the year 2000.

The approach of the twenty-first century left many problems unsolved and questions unanswered: the growth of non-utility generating companies led to questions about accessing transmission lines, a comprehensive national nuclear waste management program remained elusive, forecasters disagreed about whether the nation possessed sufficient generation capability to meet demands in the new century, and provisions of the Clean Air Act Amendments of 1990 required changes in generation technologies.

In addition to regulations on gaseous emissions, the Clean Air Act of 1990 listed 189 elements and compounds to be studied to determine regulatory requirements for their emission. One element was mercury. During normal operations in coal-burning generating units, mercury turns into a gas that can escape regular emissions collection systems. Because of the environmental problems inherent in fossil-fueled generation, some utilities expressed a renewed interest in nuclear generation. Nuclear fission creates heat without producing combustion by-products. Consequently, its proponents offered it as a clean alternative to fossil fuel.

Also in 1990, the Nuclear Power Oversight Committee identified 14 issues that needed to be addressed before substantial expansion of America's nuclear generating capacity would be practical. The areas included improving operations at existing plants, resolving waste storage issues, establishing consistent regulations and standardized reactor designs, political support, and available financing.

Non-utility generating companies represented a likely source of additional power production in the early 1990s. In 1992, Congress passed a comprehensive Energy Act that removed restrictions on independent power producers and opened wholesale markets to competition. Under the terms of the legislation, independent power producers were granted access to utility transmission lines. In addition, the act enabled large holding companies to operate in multiple states more freely.

The North American Electric Reliability Council estimated that national reserve capacities, a measure of unused generating ability, would drop below 20 percent by the end of the century and that in some areas reserve capacity would fall more. Some industry analysts calculated that high demand increases would accompany a recovering economy. They predicted reserves would be insufficient to meet the nation's needs in the twenty-first century. The Energy Information Association, an agency of the Department of Energy, projected demand increases between 1990 and 2010 in the range of 1.3 to 1.9 percent per year.

By the mid-1990s, the electric services industry had entered a period of radical change. Technological advances and an increasing demand for customer choice had prompted public utilities commissions in more than 20 states, as well as the FERC, to propose deregulation of electricity generation, slowly exposing existing monopolies to competition and giving consumers the opportunity to buy power from any broker or supplier, not just their local monopoly.

On April 24, 1996, the FERC officially opened the electric services business to competition with two separate rulings, Order Nos. 888 and 889. Order No. 888 required that public utilities offer to sell electric power to other providers or utilities at the same rates they charged themselves. At the same time, the utility providing transmission service (the "wheeling utility") would be compensated for the use of its lines. Order No. 889 required electric utilities to establish electronic systems to share information about available transmission capacity.

By 1997, competition in the industry had accelerated dramatically, spurred by the rise of a growing number of independent power producers, brokers, and energy marketers. In the third quarter of 1996, these tough new competitors sold enough electricity to power 31 million homes in from an industry that had not even existed a few years earlier. Independent producers and marketers came in all sizes, from small brokers such as California-based New Energy Ventures to Houston-based giant Enron. During 1998, California, Massachusetts, and Rhode Island added to the ranks of states that opened their retail electricity markets. As of April 1999, there were 19 states with legislation allowing retail competition.

The deregulation of the industry also created spin-off markets in wholesale auctions of electricity and the trading of electricity futures and options contracts on the New York Mercantile Exchange (NYMEX). Moreover, a new type of monopoly entered the market. In 1998, almost two-thirds of electric utilities did not have their own generating capacity; about 55 percent of domestically consumed electricity had been sold to the utilities by other utilities or non-utilities. When power producers began increasing their use natural gas, a new utilities super-power appeared on the horizon. Instead of natural gas companies buying out their smaller natural gas competitors, they began buying out electric utilities companies to provide multiple services to end-users. Thus, by the millennium, some of the largest utilities providers were in fact "hybrid" entities offering both electricity and natural gas services to their customers. Consequently, by 1999, the new monopolies were power companies that generated, transmitted, and distributed electricity, plus offered consumers their natural gas and sometimes their water, all on one monthly bill.

A newcomer to industry jargon in 1998 was the Independent System Operator or "ISO," which the industry set up to operate power transmission systems as the competition in the wholesale market intensified. Five ISOs operated across the nation in 1999, to ensure non-discriminatory access to transmission grids.

Sales of electricity to ultimate consumers increased 3.2 percent in 1998, for 3.24 trillion kWh. The industry generated $218 billion in sales for 1998, although the national average revenue per kWh decreased for the fifth year in a row. Coal remained the leading source for power generation, holding about 51.7 percent of the 1998 market, followed by nuclear power (18.6 percent) and natural gas (15 percent). Nuclear powered generation actually dropped between 1995 and 1998, but the nation experienced sustained above-normal temperatures during the summer of 1998, resulting in high demands for electricity. Seven nuclear units that had been out of service were restarted during 1998. Residential end-users captured the largest share of the market, at 35 percent, followed by industrial users at 33 percent and commercial users at 29 percent.

The environment continued to be of concern, and air emissions from electric utility fossil-fueled plants were estimated to have increased in 1998. The largest noxious agent, carbon dioxide, increased an estimated 3 percent in just one year.

The electric power industry got off to a rough start in the twenty-first century, with the dark cloud of distrust hanging over the sector after California experienced severe power shortages and outages during 2000 and 2001 and Houston-based Enron was accused of fraudulent accounting practices. Although energy merchants tried to stem the flow from the Enron scandal, in July 2002 El Paso Corp., Reliant Energy, Duke Energy, and Dynegy, among others, were accused of creating artificial shortages the previous year to drive up prices, causing another sharp decline in utility stocks and consumer and investor trust.

The patchwork efforts at deregulation added further to the industry's instability. When the industry deregulated, too many power plants were built too fast, causing a surge in the margin between supply and demand. Supply was at its highest since 1992, but in 2001, demand was at its lowest since 1987. As a result of lack of investor funding, continued construction of power plants was scaled back. Only one out of every seven proposed new plants that received government approval was actually under construction. Nonetheless, the supply-demand margin was rated as adequate in 2004. A rebound in the economy, a return of cold weather, and new standardized federal regulation were expected to help stabilize the industry in the upcoming years.

The NERC Board of Trustees met in response to the blackout on August 14, 2003, that affected residents in the northeastern United States and parts of Canada. On February 10, 2004, it approved 14 recommendations aimed at improving reliability in the electric system and increasing public confidence in that system. In April 2004, the U.S.-Canada Power System Outage Task Force's final blackout-related report concluded that the most important step to enhance reliability was for the U.S. Congress to enact reliability legislation.

Current Conditions

Early in April 2005, an unclassified version of a National Academy of Sciences study, along with a U.S. Nuclear Regulatory Commission (NRC) response, verified independent expert opinions that nuclear power plants continue to be the best-protected facilities in the U.S. industrial infrastructure, with more than $1 billion devoted to power plant security. Later that month, U.S. NRC Chairman Nils J. Diaz told a Senate committee that the agency had a "solid process" in place to handle licensing for new U.S. nuclear power plants. Diaz mentioned there might be challenges in assigning resources to handle a potential influx of license applications.

By 2008, the average nuclear power plant generated approximately 13 billion kWh. That same year, there were 65 nuclear power plants operating 104 nuclear reactors generating more than 800 billion kWh (or 20 percent) of the country's electricity. Although public service residential customers have steadily experienced increases in average monthly electric service, businesses with new plants have seen their rates stabilize with increases far below normal inflation.

Throughout the 2000s, including electric power generation, transmission and distribution, there were 9,642 establishments engaged in this industry in 2007, with 7,585 involved in the distribution of electricity, according to 2009 statistics from the U.S. Census Bureau. The utility industry employs people in four major areas: generation, transmission, distribution, and administration. The industry employed more than 515,000 individuals who earned $43.76 billion in wages while generating nearly $442 billion in revenue that year.

Dramatic world events made heightened security a major concern for the electric industry. NERC worked with all levels of government organizations and industry to monitor activities targeted at protecting physical and cyber elements of the North American electricity system.

Industry Leaders

Duke Energy is the leading energy marketer in the United States, with an array of power generation, transportation, and distribution capabilities. The company distributes power to 2 million customers in North Carolina and South Carolina. Duke Energy's franchised electric utilities produce more than 28,000 megawatts of capacity, serving approximately 3.9 million customers in the Carolinas, Ohio, Indiana and Kentucky. Revenue in 2008 was $13.2 billion. Duke Energy owns about 70 percent of Duke Energy Field Service (DEFS). DEFS is a leader in gas gathering, processing and marketing operations.

Duke Energy was busy in the mid-2000s, with a merger and sales of higher-risk businesses in 2006 and the completion of a spin-off of Spectra Energy at the beginning of 2007. The company also purchased the Rockingham Power Plant in North Carolina, and was awarded approval for nearly $260 million worth of future federal tax credits relating to future costs for two proposed new coal plants.

America and the World

In 1998 the United States led the world in net generation of electricity, with 3.6 trillion kWh produced, and Japan was second. Other leaders were China, Russia, Canada, Germany, and France. By the mid-2000s, the United States continued to lead the world in net generation of electricity, with more than double the generating capacity of any other country. At the end of 2005, the electrical system had a 987 thousand megawatt capacity to supply the U.S. electricity demand. Utilities owned 562 thousand megawatts or 57.5 percent. Independent power producers accounted for 349 megawatts (35.7 percent), and the combined heat and power sector owned 66.9 thousand megawatts (6.8 percent). Also in 2005, the industry added new generators, resulting in 18 thousand megawatts of capacity, which was just under the amount added in 2004 and less than half of what was added in 2003.

Although the United States led the world in fossil and nuclear generation, it was second in hydroelectric production. Canada was the world's top hydroelectric producer, with 319 billion kWh of hydroelectric power generated. Canada was followed by the United States (304 billion kWh), Brazil (225 billion kWh), Russia (173 billion kWh), Norway (118 billion kWh), and China (143 billion kWh).

Nuclear power also was a method through which some countries were addressing pollution concerns. Lithuania produced a greater percentage of its domestic electricity (85 percent) through nuclear generation than any other nation. The United States produced the world's largest amount of electricity from nuclear power (673 billion kWh), yet nuclear generation accounted for only about 22 percent of its total production. Behind the United States, other top nuclear countries included France (358 billion kWh), Japan (286 billion kWh), and Germany (154 billion kWh).

Research and Technology

As the electric service industry prepared for the twenty-first century, researchers studied many potential technological innovations. Advanced light-water reactors (ALR) were under development by General Electric and Westinghouse. Another improvement over older, conventional reactors was the use of passive safety systems, which depended on natural physical laws (such as gravity) rather than human intervention to respond to problems.

Electric utilities implemented a number of methods to reduce sulfur emissions from burning coal. Some began using a process in which the coal was crushed and treated to reduce its sulfur content. Others switched from high-sulfur content coal to low-sulfur coal. Still other utilities invested in a process called "flue gas desulfurization" (commonly referred to as "scrubbing") to remove sulfur from the gases created by combustion. One promising innovation was the development of an integrated gasification combined-cycle (IGCC) power plant. The IGCC generator was designed to use partially oxidized coal as a fuel, a process that virtually eliminated air pollutants.

In the 1990s, the combined output from all other renewable sources, such as hydroelectric, wind, geothermal, and bio-fuels (which included wood, waste, and alcohol fuels), were only about 1 percent of the electricity generated in the United States. One hopeful experiment with solar generation was conducted in a California desert. Approximately 900 mirrors were set to focus light from the sun and generate 10 megawatts of power. In another solar project, Southern California Edison and Texas Instruments were testing a new type of solar cell using tiny silicon balls. The material, called "Spheral Solar," held promise for application in remote sunny areas, especially Third World nations.

Developments in wind generation technology also appeared to be encouraging. During the early 1980s wind generators produced power at an average cost of 30 cents per kilowatt-hour. By the early 1990s, costs had dropped to 11 cents per kWh. Researchers hoped that improved technology would produce wind-generated power at a cost of 6 cents per kWh by 2010. Site selection for wind generation was critical because even small differences in average wind speed had substantial effects on the amount of electricity generated.

Wind energy increased in 2005, when the U.S. installed more wind energy capacity (2,431 megawatts) than any other country. This new capacity was generated by more than $3 billion in equipment and brought the nation's total wind energy capacity to 9,149 megawatts, which was enough electricity to power 2.3 million households. The following year, an additional 2,454 megawatts were installed, bringing the U.S. wind energy capacity in 2006 to 11,603 megawatts. Utility-scale wind power plants exist in 27 states.

Another source of renewable energy under exploration was geothermal power. Most of the geothermal production in the United States was from a single plant operated by the Pacific Gas and Electric Company in California. Investigators were researching methods to extract heat from hot dry rock, which is found everywhere on earth at sufficient depths. One study underway in New Mexico during 1992 offered promising results. Scientists drilled a hole 12,000 feet deep and pumped water into it. They were able to extract 100 gallons of water per minute at temperatures high enough to generate electricity. Geothermal energy sources were still in development and gaining support in the mid-2000s.

Not all the research underway involved power generation. Many utilities were investigating robot technology for use in operations, maintenance, transmission, and distribution. Interest in robotics intensified when utilities realized that robots could be used in potentially hazardous situations. The use of robots helped reduce human exposure to radiation following the Three Mile Island accident. Robots also could work on lines carrying live current or inside vessels with toxic substances. A robot able to perform maintenance tasks on live wires was commercially introduced and another that was able to inspect high-voltage lines and towers was under development. A pipe-crawling robot, developed by Public Service Electric & Gas's Energy Technology Development Center, was able to inspect pipes where human access was impossible and perform some types of repairs.

In 1996, the world's first utility-scale molten carbonate fuel cell (MCFC) power plant began operation in Santa Clara, California. Generating two MW of power from natural gas without combustion and with very low emissions, the plant was part of a demonstration program closely monitored by more than 30 utilities that had signed tentative commitments to purchase commercial MCFC units.