The evolving electricity sector and the case for reform

From taxis to television, nothing is safe from technological innovation and the resulting market disruption it leaves in its wake. Even Thomas Edison is not immune. The electricity model envisioned by Edison over 130 years ago at his Pearl Street Station – the nation’s first central power plant – is evolving. This shift comes despite the fact that the current system continues to function reasonably well in delivering affordable and reliable energy to millions of households and businesses. But in today’s innovation economy the old adage “if it ain’t broke, don’t fix it” no longer applies.

The nation’s electricity laws and regulations are in need of updating in order to address the many challenges facing the industry. Credit, therefore, should be given to the House Energy and Commerce Committee, which last week began what could be one of the most significant energy undertakings Congress has tackled in some time – reform of the Federal Power Act, the statute that controls how wholesale electricity is produced, sold, and delivered in the United States. From an underwhelming experiment with deregulation to significant technological advancements to major changes in consumer expectations to increasing environmental pressures, the power sector is witnessing a shift that requires careful congressional oversight, if not actual legislative reform.

{mosads}The Federal Power Act was first enacted in the 1920s to regulate the production of hydroelectricity. But as electricity demand increased to meet the needs of a growing nation and electrons began to cross state lines in greater amounts, it became evident that federal laws were needed to regulate the sale and transmission of electricity in interstate commerce. Congress acted to fill this regulatory “gap” and Part II of the Federal Power Act became law in 1935. Among other things, the Federal Power Act established a “bright line” between wholesale, interstate transactions to be regulated at the federal level and retail transactions to be regulated by the states.

The Federal Power Act saw significant revision with passage of the Energy Policy Act of 2005. But many of the issues the sector is facing today were never contemplated in 2005 because, simply put, they weren’t yet issues. The shale gas revolution wasn’t yet underway, renewables were too costly and variable for widespread deployment, distributed generation remained a peripheral technology, and coal was still king. Much has changed.

While cheap natural gas and stringent environmental regulations are the primary contributors to the decline of coal, it is technological innovation that may disrupt the centralized generation model and change how we produce, deliver, and consume electricity in the future. To be sure, according to Navigant Research, distributed energy resources (DER), such as rooftop solar, are growing 3 times faster than central station generation. Couple that with other advanced energy technologies, such as microgrids, demand-side management resources, and energy storage – a sector projected to exceed $13 billion by 2020 – and you have a recipe for disruption. The result is at least a partial – if not significant – shift from the centralized model of the past 100 years to a decentralized model in which distributed technologies are aggregated to form smaller, integrated local power systems.

Even a moderate shift from centralized to decentralized will require a fresh look into how electricity is regulated, including the blurring of federal and state jurisdiction, a.k.a., the “bright line” described above. Technologies such as DER and storage are “behind-the-meter” resources, meaning they are part of the distribution system and therefore subject to state jurisdiction, not federal. And yet as more of these resources are deployed or aggregated, such technologies inevitably will have an impact on wholesale prices as well as the operation of the bulk-power system, which could trigger federal jurisdiction. The courts are already struggling with these issues (see Federal Energy Regulatory Commission v. Electric Power Supply Association and Hughes v. Talen Energy Marketing, LLC).

In short, the “bright line” is blurring. But it is Congress, not the courts, that should be making these policy decisions. If our electricity laws and regulations fail to keep pace with this evolving sector, innovation will be stifled, litigation will persist, and reliability and affordability could be threatened. The Committee’s decision to begin this review and lay the groundwork for later efforts is a critical first step and one that we hope will be taken up in earnest in the 115th Congress. Efforts such as this one will set the tone for what direction the United States will take to meet the demands of our 21st century energy infrastructure needs.

 

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The views expressed by authors are their own and not the views of The Hill.