Following the Public Utility Regulatory Policies Act (PURPA), the concept of independent power producers (IPPs) became a trend in the utility industry. Due to issues with construction of nuclear units and other big utility projects, regulators in some states began to favor units built by non-utility IPPs that were contracted to the utilities for the life of the unit. By 1992, IPPs were building 60% of the new capacity in the U.S. But opportunities were limited since sales could be made only to the incumbent utility. Congress moved to address this issue with the Energy Policy Act of 1992. Provisions of this legislation included:
- A new category of generator was created called exempt wholesale generation (EWG). These generators were not restricted by size or fuel type as in PURPA, were not subject to state jurisdiction, but also had no guaranteed right of sale at the avoided cost.
- Owners of EWGs were exempt from the provisions of the Public Utility Holding Company Act (the 1935 law that restricted ownership of utility assets by holding companies).
- Owners of EWGs had no rights to sell directly to end-use customers.
- FERC was authorized to compel utilities to transmit a third party’s power across the utilities’ lines (wheeling).
- Utilities were ordered to develop integrated resource plans (IRPs) to determine future resource requirements, file such plans with their state regulator, and include in the filings plans for implementation of the IRP.
- FERC was prohibited from ordering or approving retail access or choice programs.
- State regulators were required to implement rate structures that would remove profit disincentives for utilities to support demand side management programs.
The key points of the Energy Policy Act, which laid the groundwork for restructuring, are that it created the legal framework for IPPs to sell to someone other than the local utility, it gave FERC the authority to order wheeling, and it put in place the IRP process that required utilities to consider purchased power as well as construction of power plants.
While the Energy Policy Act furthered the movement toward competitive generation, it was not enough. Provisions in the bill limited wheeling by requiring a case-by-case analysis of wheeling requests to ensure, among other things, that reliability was not unreasonably impaired, that the interests of the transmitting utilities’ own customers were not unduly disadvantaged, and that existing contracts were honored. And, by preventing generators from selling directly to end users, the bill ensured utilities remained the sole buying customers.
Following the Energy Policy Act, industrial customers began pushing for direct access to purchase electricity, while generators and utilities became increasingly antagonistic as to whether utilities were providing fair access to wheeling, and when they did, whether they were charging fair rates for wheeling services. IPPs accused the utilities of making it difficult to wheel. Utilities became increasingly concerned with stranded costs and the possibility that power from outside their area might be brought in more cheaply than power could be provided by some of their own more expensive units.