In the mid to late 1800s, the utility industry rapidly developed in an environment of open competition. Most cities and states believed that competition between utilities kept prices down, and it was not uncommon to find cities with numerous utilities operating in open competition. In fact, competition became so fierce that price wars were common, often leading to the demise of all but one utility, which would then take advantage of the lack of competition by raising customers’ rates. As the utility market evolved it became clear that its capital-intensive nature resulted in market inefficiencies (too much money spent on duplicative facilities) and allowed well-financed companies to push less successful ones out of the market.
To address this issue, local and state governments saw two options: municipal ownership of utilities or regulation of those that remained privately owned. In many states, it was the Railroad Commission (originally developed to oversee the expanding railroad industry) that was empowered to regulate the early gas and electric utilities. Established in 1885, the first energy-related regulatory agency was the Massachusetts Board of Gas Commissioners. Other states followed suit with the creation of their own public utilities commissions.
Natural gas
In the mid 1800s, natural gas was originally manufactured from coal, and it was common for local municipalities to regulate this business. As production of natural gas from underground reservoirs became more common, pipelines crossed multiple jurisdictions and state regulation of the pipelines became common. But as they began to cross state lines, the Supreme Court ruled that states could not regulate interstate sales of natural gas since such regulation violated the interstate commerce clause of the U.S. Constitution.
The federal Natural Gas Act of 1938 (NGA) gave the federal government the authority to regulate interstate transport and sales of natural gas. Because the NGA did not authorize regulation of intrastate gas services (i.e. gas services provided only within state borders) by the federal government, this regulatory responsibility remained with the states. State commissions are generally referred to as the Public Utilities Commission or Public Services Commission although they may have different names in different states. The Hinshaw Amendment to the NGA allows states to regulate gas transportation and sale of interstate gas as long as it is consumed within state borders (meaning that once gas enters the state in which it will be consumed it is no longer subject to federal regulation as long as it stays within that state).
Perhaps the most important thing to note regarding state regulators is that no two agencies regulate exactly alike. Thus companies who do business in all 50 states essentially must deal with 50 different ways of doing business. State regulatory agencies are also responsible for gas deregulation in the states they regulate. So just as with state regulation, deregulation of the gas industry is inconsistent, with different rules and varying stages of deregulation in every state.
Electricity
In the late 1800s, numerous small local electric companies emerged mostly in urban areas. Competition between multiple utilities was common, but most cities required utilities to obtain a franchise agreement from the city. As the industry grew, so did consolidation resulting in many cities growing dependent on one dominant provider. To address the issue, some cities decided to municipalize their electric utility, making it a department of the city government that could then control pricing and market behavior.
Between 1896 and 1906, the number of municipal utility systems more than tripled. This led investors who had created new shareholder-owned utilities to realize that they were at risk of losing the market to government entities. In 1907 the largest utility association (the National Electric Light Association) joined with the National Civic Federation (a turn-of-the-century big business advocacy group) in favor of state regulation of electric companies. Subsequently the states of Massachusetts, New York, and Wisconsin created the first state regulatory agencies.
By 1916, 33 states had created regulatory agencies to oversee electric utilities. By this time, the model of a vertically integrated utility owning generation, transmission, and distribution facilities and providing service in a specific franchise area under state or local regulation was well entrenched with two competing forms of regulation. Public utilities, including municipalities and public utility districts, were overseen by local political entities while investor-owned utilities were regulated by the state utilities commission.
In the mid 1930s a third form of electric utility emerged, the electric cooperative. Cooperatives are owned by their customers and oversight is provided by an elected board. In many states, regulation is left to the co-op board, but some functions are regulated by the state utilities commission.
In the mid 1990s many states chose to implement electric deregulation, but each state did it in its own way. So market structures and specific details of state regulation are different in each of the 50 states.