Energy Trends and Effects on
Utility Regulation in the United States

By Rajnish Barua, Ph.D¹

Abstract

Currently, there is extensive public discussion on possible energy legislation at the federal level in the United States. Such legislation is expected to have far-reaching effects on every person in the nation. This article takes a brief overview at some energy indicators that have been reported and raises some general issues that regulatory community may face in the future. While this article focuses on the U.S. experience, the issues could apply to any nation that is confronting changes in its energy requirements.

I. Overall Trends

Recently, the U.S. Energy Information Administration (EIA) released its Annual Energy Outlook 2005 (AEO2005) (for the full report, please follow this link). This report included several interesting trends and projections in energy supply and demand for the next two decades that should be off vital interest to policymakers and regulators. Some of the key findings in this report are:

• Energy prices see a gradual increase in the next 20 years.
• While coal prices will be stable, there will be increase in electricity, petroleum, and natural gas prices.
• During this same period, energy consumption will increase dramatically in the transportation and industrial sectors while there will a gradual increase in the residential and commercial sector.
• Most of these increases will be reflected in the rapid increase in use of primary fossil fuels - petroleum, natural gas, and coal. Use of resources such as nuclear and renewables (including hydro) will remain at current levels.
• There will be a steady increase of electricity from coal and natural gas but use of petroleum, nuclear, and renewables will remain flat.
• Domestic production of coal and natural gas will increase in the next 20 years but petroleum will decrease. While there will be a slight increase in overall production, consumption will increase rapidly, thus resulting in greater imports.

II. Effects on Regulation

The information in the EIA report raises some relevant issues for utility regulators in the U.S. Since the restructuring of the electric utility industry beginning with the Energy Policy Act of 1992 and subsequent Orders 888 and 889 from the Federal Energy Regulatory Commission (FERC) in 1996, generation at the wholesale level has been deregulated. Furthermore, nearly a third of the states implemented restructuring laws such that end-use customers have or will soon have access to different electric suppliers that are not the traditional electric distribution company/utility. Utility regulators - even in states that have restructured - still have the requirement of ensuring that there is safe and reliable electric service. With data and forecasts that show greater reliance on energy imports and related higher costs, it will be a challenge for regulators to ensure that the consumers, especially the residential and small business customers, are not affected by rate/price shocks. For a third of the states with no direct control over generation matters, regulators in these states have to rely on certain policy directions that will effectively channel the industry towards optimal and efficient use of domestic as well as alternative energy resources.

Several states have promoted renewable energy resources by mandating that a certain portion of the electricity be generated from resources such as solar, wind, hydro, biomass, etc. Another effective policy direction is to encourage the use of distributed resources (DR) that is smaller in capacity size. Such DR tends to serve a very local need or customer. While regulators in many states may not have direct control over electricity prices in the traditional sense, their policy actions could allow for choices that customers can make to alleviate long-term price increases.

III. Challenges Ahead

The biggest challenge for state regulators under the current energy environment is to meet their individual state legislative mandates while trying to operate in a regional (as well as national) energy market. To that end, a regulator has to be cognizant of various factors that may not be under that regulator's direct control. Examples of such factors are the trend towards increased energy imports and its effect on domestic electricity prices, issues and imbalances in a region that can affect the states, and the need to ensure reliable service for the end-use customers. The issues raised in this brief article leads the author to believe that there is a need for comprehensive energy legislation at the federal level that will take into account the requirements of the states.

For comments or questions, you may reach Dr. Barua at: raj525@comcast.net

¹All views expressed in this article belong to Dr. Barua and does not reflect any position or view of his employer; employment affiliation is stated for information purpose only. All data used in this article are taken from publicly available sources.

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