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Rules & (De)Regulations

As the debate over global warming and energy usage grows and the building industry increasingly turns toward ‘green’ approaches to design and construction, cost-benefit analyses of alternative building methods have become more significant. Because the cost of energy is a critical component in most of these studies, it is important to consider the impact that the deregulation of the electric and natural gas industries can have on that cost.

“In an attempt to encourage innovation and free-market competition, the federal government began the process of utility deregulation in 1978…”

The natural gas and electric industries are similarly structured in that they both deliver their product to the consumer through a three step process:

  • SUPPLY – The natural gas industry creates its supply by harvesting natural gas through mining operations similar to the oil industry. The electric industry creates its supply using fossil fuel-fired generation plants, hydroelectric facilities, windmill generators, and other lesser-used methods.
  • LONG-DISTANCE TRANSMISSION – Nationwide grids of pipelines and high voltage transmission lines are used to transport natural gas and electricity throughout the country.
  • LOCAL DISTRIBUTION – Local networks of pipes and power lines deliver natural gas and electricity from the national transmission grids to homes and businesses.

Much of this infrastructure was built in the first half of the last century, and by the 1950’s the federally and locally regulated natural gas and electric industries consisted of a limited number of large regional utility companies that owned and controlled all three components of energy delivery. Because the profitability of these companies was dependent upon increasing energy consumption and the use of fossil fuel was still at the heart of electric generation, there was little incentive for the utility companies to encourage energy conservation or the development of alternate and renewable energy sources.

In an attempt to encourage innovation and free-market competition, the federal government began the process of utility deregulation in 1978 with the first of several new laws that have been enacted over the past 30 years. The goal of these laws was to separate and restructure the three components of energy delivery by requiring the utilities to sell portions of their transmission infrastructure to other companies, removing federal price control of the energy supply, and introducing a variety of tariffs and incentives to support the utility companies financially during this transition.

As a result of deregulation, the local distribution of natural gas and electricity is still controlled by the local utilities, and the long-distance transmission is generally controlled by regional transmission organizations. The prices for these components are fixed by state and federally approved tariffs. However, the supply component of energy delivery is now, in many cases, open for competition. This allows individual consumers to shop among, and negotiate with, various energy suppliers in a free-market environment. While the possibility of lower costs is the primary benefit of this system, it also offers the possibility of improved price stability, the ability for consumers to negotiate long-term contracts at specified rates, and the opportunity for consumers to use more environmentally-friendly energy sources if they so choose.

The advantage of being able to shop for an energy supplier that best meets a consumer’s particular needs is clear and a short time spent researching options could pay long-term dividends. At this time, competition in the energy market is regulated by the Public Utility Commissions on a state-by-state basis. To see your options, link to the Public Utility Commission serving your state by clicking ‘State Commissions’ on the National Association of Regulatory Utility Commissioners’ website at www.naruc.org.

– Michael J. Lee, PE, LEED AP

Michael is a Senior Project Manager, Licensed Electrical Engineer, Lighting Designer, and LEED Accredited Professional. Please feel free to contact Michael for further details regarding the above information.