Energy LawElectricity

The following multiple choice questions are intended to guide future students through the basic concepts detailed in Chapter 13, Electricity.

Questions 1-5 provide a review of the basic concepts related to electricity. Questions 6-10 provide a review of basic concepts behind the structure of the modern electrical system. Questions 11-15 provide a review of the basic entities that form the electric industry. Questions 16-21 provide a review of the current movement towards deregulated utility marker. Questions 22-25 provide a review of state actions to restructure their retail utility markets.

A. REVIEW: BASIC ELECTRICITY CONCEPTS

Question 1. Electricity is one of our major energy sources. What is the fundamental distinction which separates electricity from other major energy sources discussed in my text, such as water in Chapter 8, coal in Chapter 9, petroleum in Chapters 10 and 11, and natural gas in Chapter 12?

a. Unlike the other major sources of energy in Chapters 8-12, electricity does not naturally occur and is considered a “synthetic,” as opposed to “natural”

energy source

b. Electricity cannot be imported, exported or traded on the open market, as the sources of energy in Chapters 8-12 may be

c. Unlike the other major sources of energy in Chapters 8-12, electricity is usually unable to be utilized directly from nature as energy and is considered

mainly a “secondary,” as opposed to “primary” energy source

d. Unlike the other major sources of energy in Chapters 8-12, electricity cannot be easily reduced to a solid or liquid state and is considered to be an

“intangible,” as opposed to “tangible” energy source

Answer to Question 1: Choice c is the correct answer.1 An important background concept to consider when studying electricity its role as a “secondary” energy source generated by one of the four “primary” energy sources (i.e. water, coal, petroleum and natural gas). One way to remember this distinction is looking at the alternative and oft used term for water power, hydroelectric power. “Hydro” refers to the “primary” energy source, water, which harnessed to produce electricity, the “secondary” energy source.

1 FRED BOSSELMAN ET AL., ENERGY, ECONOMICS AND THE ENVIRONMENT 563-564(3d. ed. 2010) [hereinafter “BOSSELMAN”]

Choice a is incorrect because electricity does occur in nature (remember Benjamin Franklin’s kite experiment) and is also incorrect because electricity is not commonly referred to as “synthetic” energy source. That being said, the concept behind choice a is similar to the primary/secondary energy source distinction. Choice b is incorrect because electricity is constantly imported and exported across jurisdictional boundaries and also traded on the open market. Choice d is incorrect because it is more of an observation about the nature of electricity than a “fundamental distinction” between primary sources of energy and electricity.

Question 2. In 1994, author James Trefil wrote A Scientist in the City, a book focusing on English scientist Michael Faraday and his early contributions to the development of modern electricity. Which passage from A Scientist in the City would best describe the “secondary” energy source concept relating to our study of electricity?

a. “To get electricity from a power plant to your house, it may require that it travel through many miles of wire. . .”

b. “When you turn on a light or use an electric tool, you don’t need the source of the energy in the same building. . .”

c. “When electricity was first produced commercially in the late nineteenth century, however, it was far from clear that it would prevail over its competitors.”

d. “In a series of experiments in 1831, [Michael Faraday] discovered that when a magnet is moved, an electric current will flow in wires near it.”

Answer to Question 2: Choice b is the correct answer.2 Choice a generally relates to the “secondary” energy source concept but the choice is more an observation about how electricity, this “secondary” energy source, is delivered. Choice c is a historical observation and does not relate to the “call” of the question. Choice d may seem to involve this primary/secondary distinction (i.e. the “primary” magnet generates a “secondary” electric current) but it does not; this question relates to early developments in conducting electricity, not producing it from a “primary” energy source.

Question 3: A Scientist in the City also discusses the benefits of electricity as a secondary energy source. The book traces “a steady progression of nickel-and-dime developments that made it possible to generate electricity in large amounts and send it out over long distances—a better valve on a generator here, a better switch on a transmission line there.” Which major benefit(s) of electricity as a secondary energy source does the passage refer?

a. The economies of scale which can be exploited when electricity is produced at a central power plant and distributed to consumers

2 Id. at 564.

b. The ability of electricity to be more easily modified and improved upon through technology than primary energy sources

c. Both a & bd. Only be. None of the above describes a major benefit of electricity as a secondary energy

source

Answer to Question 3: Choice a is the correct answer.3 The ability to centrally produce and distribute electricity in a cost-efficient manner underlies the entire United States electrical system. The importance of this “central station” paradigm to the development and transmission of electricity to the masses cannot be understated. As such, Choice e is clearly incorrect.

Choice c is incorrect because Choice b is not necessarily true. Developments in the fields of coal, natural gas and other primary sources may be more or less difficult, based on the facts and circumstances, than developments in the electrical field. Given that fact, Choices c and d can be eliminated as incorrect. {everyone hates these]

Question 4: Question 3 references the predominant “central station” electric model utilized in the United States. To review, this “central station” model refers to the fact electricity is generated at central station A and then distributed to consumers for use at locations B, C, D, etc. Which primary energy source is used to generate 49% of all electricity generated in the United States?

a. Natural gasb. Coalc. Petroleumd. Watere. None of the above

Answer to Question 4: Choice b is the correct answer.4 According to the National Academy of Sciences, 49% of all electricity generated in the United States came from coal, with natural gas generating 20% of our electricity, petroleum producing 1.6% of our energy and water producing 7% of our energy.

To reinforce this point, a pie-chart from Chapter 12 is reproduced below to provide a graphic representation of the primary sources used for electrical generation in the United States in 2008.

3 Id. at 567.4 National Academy of Sciences, Our Energy Sources: Electricity, 2010, available at http://needtoknow.nas.edu/energy/energy-sources/electricity.php.

Question 5: This “central station” electric model has made electricity widely available and affordable for American consumers. The access to such energy in urban environments has formed the backbone for the growth of the economy and business sector. Outside of cities, 99 out of 100 rural households have access to electricity as of today. Much of this progress is due to the “cheapness” of electricity. Returning (for the last time) to a passage from Trefil’s A Scientist in the City, the author states:

“Let’s face it: there’s something very attractive about having energy available when you want it, while someone else has to deal with the pollution and other social costs of its generation.”

What concept is Trefil’s observation trying to get at when he references our willingness to have “someone else” deal with the “pollution and other social costs” of electricity generation?

a. The concept of “internality,” meaning that all the costs of electricity production have been factored into its price and the consumer pays the true cost of

electrical serviceb. The concept of an “externality,” meaning that all the costs of electricity

production have not been factored into its price and the consumer pays less than

the true cost of electrical servicec. The concept of “distributed generation,” where the costs of electricity production

are distributed equally throughout a societyd. Both b and c

Answer to Question 5: Choice b is the correct answer.5 Trefil’s observation indicates his belief that centralized electricity production creates “externalities” (i.e. costs) which all of society must pay for and which are not factored into the price of electricity. Choice a is the antithesis of Choice b; if Trefil had said that no one else would have to deal with pollution and social costs of electricity generation, then he would have consider those costs “internalized.”

Choice c is incorrect because “distributed generation” relates to the delivery of electricity and not how the costs of electrical generation are paid for. As such, Choice d is also incorrect.

5 See Jonathan Macey, The Limits of Legal Analysis: Using Externalities to Explain Legal Opinions in Structured Finance, 84 TEX. L. REV. 75, 79 (2005) (“An externality occurs when private activities have an effect on third parties who receive no compensation for the effects generated by these private activities. Pollution creates negative externalities.”).

B. REVIEW: THE STRUCTURE OF A MODERN ELECTRICAL SYSTEM

Question 6: What are the three components of a modern electrical system?

a. Production, Filtration and Distributionb. Generation, Filtration and Distributionc. Production, Transmission and Recyclingd. Generation, Transmission and Distributione. Transmission, Generation and Disposal

Answer to Question 6: Choice d is the correct answer.6 A central, modern electric power system begins with Generation, where the primary energy source is converted to electricity. Next, the Transmission phase transports the electricity from Generation source to power lines and other similar forms of infrastructure. Finally, Distribution transforms the high-voltage energy in the Transmission process into energy fit for residential and commercial use, namely through substations, poles, wires and other localized infrastructure.

A graphic model from Chapter 12 illustrating this process has been reproduced below to reinforce these points for your convenience.

Question 7: In the Generation phase, certain types of power plants are operated more often than others. There are “must run” plants, which usually have low operating costs, are usually

6 BOSSMANN, supra note 1, at 580-583.

fueled by a coal or nuclear source and cannot be taken online or offline quickly. There are also “peaking” plants, which have higher operating costs, are usually fueled by natural gas or diesel and can be taken online or offline relatively quickly. What is the reason for these distinctions?

a. The type of fuel used to generate electricity may be more or less expensive; factoring in a fuel’s cost-effectiveness may determine which plants make the most business sense to run

b. Demand for electricity is varies widely, both daily and yearly

c. Power plant operators have to balance using the most cost-efficient plant with the need to make sure electricity can be taken online or offline quickly, due largely to the fact electricity cannot be stored easily

d. All of the above

Answer to Question 7: Choice d is the correct answer.7 The cost of fuel and the varying demand for electricity are both major factors in determining which plant to run. Choice c summarizes the cost-benefit analyses which power plant operators must take into account in the real world. If the generating plant did not have a duty to the public to provide stable electricity, it would likely choose to only utilize the “must run” plants, as they are the cheapest. On the other hand, if a generating plant did not have to worry about cost, it would likely always run a “peaking” plant, as this type of plant can generate electricity in a more flexible manner, but is more expensive. These distinctions indicate a balancing between cost-efficiency and the duty to provide a stable source of electricity to the public.

Question 8: In the Transmission phase, electricity is produced centrally and the carried on “high voltage” lines throughout a city, state or country. What does it mean when our text discusses the possibility of moving away from the current Transmission paradigm toward a future paradigm of “distributed generation”?

a. “Distributed generation” refers to more effectively coordinating electricity production at a central power plant, thus making the current Transmission paradigm much more efficient

b. “Distributed generation” refers to a system of federal and state government incentives encouraging small business to enter the utility sector, thus reducing the role of the centralized Transmission paradigm

7 Id. at 580.

c. “Distributed generation” refers to the process of developing smaller scale power plants for more localized and “on-site” generation of power, thus reducing the role of the centralized Transmission paradigm

d. “Distributed generation” refers to a progressive system of transmitting electricity to those locations which most urgently require it, thus suggesting major modifications must be made to the current Transmission paradigm

Answer to Question 8: Choice c is the correct answer.8 “Distributed generation” is a foil to the current centralized Transmission paradigm. While the current paradigm takes advantage of excellent economies of scale, its need to develop infrastructure to transmit electricity over long distances has negative social and environmental consequences. In contrast, “Distributed generation” is a de-centralized Transmission model, reducing the amount of energy lost in the transmission process because the electricity is generated locally, perhaps even in the same building.

Question 9: Apple, Inc. was recently issued permits to begin construction of a 171-acre solar farm which will completely power a Maiden, NC data center. The center will not rely on any coal and nuclear power sources for its energy needs. The company also has similar facilities in Cork, Ireland; Elk Grove, California and Austin, Texas. These facilities are concrete examples of “distributed generation” in action: True or False?

Answer to Question 9: True. The Maiden, NC data center, as well as the facilities in Ireland, California and Texas all embody the concepts fundamental to “distributed generation.” These facilities generate and transmit energy locally; the Maiden, NC data center will generate the electricity locally (i.e. through on-site photovoltaic panels) and then transmit the energy through its localized infrastructure.9

[maybe some images – company website? Press release?]

Question 10: The final phase of the modern electrical system, Distribution, doesn’t seem to be much different than the second phase of that system, Transmission. How can these two phases be distinguished from one another?

8 The Energy Policy Act of 2005 defines “distributed generation” as “an electric power generation facility that is designed to serve retail electric consumers at or near the facility site.” Energy Policy Act of 2005, Pub. L. No. 109-58, § 917(g)(3), 119 Stat. 594, 864 (2005).9 See generally Suzanne Goldenburg, “Apple hopes to turn green with solar power data centre”, The Guardian, November 23, 2011, available at http://www.guardian.co.uk/environment/2011/nov/23/apple-green-solar-data-centre.

a. Transmission refers to the process of transferring power from Generation to high voltage lines; on the other hand, Distribution refers to the process of using transformers to reduce the voltage of transmitted energy for use in homes and businesses

b. The Distribution phase encompasses functions that Transmission does not, such as billing customers, providing customer service and meter reading

c. Some smaller utilities only operate a Distribution phase by purchasing “wholesale” power from other utilities. Thus, these utilities have a separate Distribution model and do not involve themselves with either Generation or Transmission

d. Both a & b

e. All of the above [is there a way to make only one the right answer?]

Answer to Question 10: Choice e is the correct answer.10 While “transmitting” and “distributing” energy may be semantics to some degree, the phases are distinguishable. Choice a provides the clearest example of the technical differences between Transmission and Distribution. Choice b illustrates the broader nature of the Distribution phase when compared to Transmission, with the former including many administrative tasks the latter does not. Choice c distinguishes the two phases by noting that certain utilities may engage only in Distribution. As all these answer choices illustrate the differences between Transmission and Distribution, choice e is the best answer.

C. REVIEW: STRUCTURE OF THE ELECTRIC INDUSTRY

Question 11: The phrase “electric industry” is a broad term and does not shed much light on how the electric industry is structured. Is there a recognizable structure within the “electric industry”? Are there entities and organizations which tend to dominate the industry?

a. No. There are simply too many individuals and entities within the electric industry to identify any basic structure

b. Yes, the electric industry is comprised of five major entities (Investor-Owned Utilities, publicly-owned utilities, federal agencies, rural electric cooperatives and power marketers)

c. Yes; federal and local governments dominate the industry, typically producing over 75% of all of the United States’ energy

d. The mergers of traditional electricity companies with gas companies, energy marketers and a wide range of other businesses are redefining the once “traditional” structure of the industry

e. Both b & d [maybe this question should be broken into two]

10 BOSSELMANN, supra note 1, at 581-583.

Answer to Question 11: Choice e is the correct answer.11 Choice b identifies the entities which have traditionally dominated the electric industry. Choice a is overbroad; there are recognizable entities and organizations which provide the industry with some identifiable structure. Choice c is simply wrong; in 1998, investor-owned utilities produced 68% of the United States’ electricity, with local and state utilities producing approximately 17% of the nation’s energy. Choice d is also correct, as the deregulation of the electric industry is resulting in a vast array of new and unprecedented business structures. As both choices b and d are correct, choice e is the most appropriate answer. [work backward from this answer]

Question 12: What are some characteristics of investor-owned utilities, or IOUs?

a. IOUs are private, shareholder-owned companies

b. IOUs range in size from small companies to multi-national corporations

c. IOUs are found in 49 of the 50 United States

d. Most IOUs are regulated through state public utility commissions

e. Traditionally, IOUs have been “vertically integrated,” meaning they control the generation, transmission and distribution (i.e. the three phases of a modern electrical system) of their electricity

f. All of the above [kind of boring]

Answer to Question 12: Choice f is the correct answer.12 Choices a-e all contain a characteristic, or possible characteristic, of an IOU. As to IOUs, two final points should be made. First, although these companies are often referred to as public utilities, they are not in the traditional sense of the word. These IOUs operate under a private, shareholder-owned model as indicated in choice a. Second, nearly 25% of these IOUs were subsidiaries of utility holding companies. These holding companies were regulated under the Public Utility Holding Company Act of 1935 (PUHCA) until that statute was repealed under the Energy Policy Act of 2005.

Question 13: The second major “player” in the electricity industry is the federal government. What type of renewable energy source does it use to generate the electricity it produces and what type of role does it play in the electricity marketplace?

a. The federal government produces most of its renewable electricity with coal; it is primarily a wholesale source of electricity for other entities in the market

11 Id. at 580-584.12 Id.

b. The federal government produces most of its renewable electricity with coal; it is primarily a distributor of electricity

c. The federal government produces most of its renewable electricity with water; it is primarily a wholesale source of electricity for other entities in the market

d. The federal government produces most of its renewable electricity with water; it is primarily a distributor of electricity

Answer to Question 13: Choice c is the correct answer.13 Coal is fossil-fuel based and a “non-renewable” energy source, eliminating choices aand b. The federal government also serves mostly as a wholesaler of electricity, thus eliminating choice d.

Question 14: Local, municipal, state and regional public power systems another major entity within the electric industry. How are these public power systems regulated by their respective governments?

a. A state’s public utility commission will always regulate these public power systems

b. A state’s public power system will always be regulated by local government

c. A special state authority will always have jurisdiction to regulate the public power systems of their respective states

d. a & c

e. None of the above [maybe figure out a way of focusing on issue of levels of regulation]

Answer to Question 14: Choice e is the correct answer.14 The extent of regulation of public power systems varies among individual states. In some states, public power systems are self-regulated. While public utility commissions, local governments and special state authorities will usually have jurisdiction over such matters, none can be said to be mandatory in all 50 states. As such, choices a-d are incorrect.

13 See United States Bureau of Reclamation Power Resources Office, Reclamation Managing Water in the West: Hydroelectric Power, July 2005, available at http://www.usbr.gov/power/edu/pamphlet.pdf14 See, e.g., Michigan Municipal Electric Association, About public power, http://mmeanet.org/About%20Public%20Power.htm (“‘Public power’ is a term used to describe electric utilities like MMEA’s members, that are operated by a municipality, county, state or other public body including public utility districts. In the United States, public power systems number 2,007 and serve 14.3 percent of the U.S. population. Public power systems are accountable to the people they serve. Many are controlled and regulated locally by the city’s elected governing board, such as a city/village council. Others are governed by an elected utility board.”).

Question 15: Generally, an electric cooperative is one owned by its members. Rural electric cooperatives are a fourth major entity in the electric industry. Why did U.S. energy policy focus on rural, as opposed to urban, electrical cooperatives in the 1930s?

a. These electrical cooperatives were established in rural areas to aid local farmers in combating the effects of the “dust-bowl” environment [why put answers that just have to be wrong?]

b. Due to concerns that federal resources were being spent only on urban infrastructure, the federal government made a specific point to direct resources to these rural areas

c. The vast majority of rural residents were without electricity and policy aimed toward stimulating rural electricity access was greatly needed

d. None of the above

Answer to Question 15: Choice c is the correct answer.15 While choices a and b may have general elements of truth to them, the Rural Electrification Act of 1936 created the Rural Electrification Administration for the purposes of bringing electricity to rural areas. The Act authorized broad federal lending to stimulate rural electricity use. As 90% of those living in rural areas in the 1930s were without electricity, the Act authorized federal funds specifically for the purpose of providing “energy to persons in rural areas who are note receiving central station service.” As such, choice c is the best answer, eliminating choice d as well. {good question]

C. REVIEW: MODERN TREND OF DEREGULATION

Question 16: Independent power producers are a more recent “player” in the electrical industry. How did the Public Utilities Regulatory Act of 1978 (PURPA) spur the growth of these organizations?

a. PURPA required that at least 65% of the United States’ energy be produced by independent power producers and IOUs

b. The law changed the definition of “non-utility” to allow more independent power producers into the electricity industry

c. The law required public utilities to purchase power from “qualifying facilities” (QFs), which could not be majority owned by utilities, thus opening the door to more independent power producers15 See 7 U.S.C. §904 (authorizing low interest federal loans for the purpose of “financing the construction and operation of generating plans, electric transmission and distribution lines or systems for the furnishing of electric energy to persons in rural areas who are not receiving central station service.”)(Emphasis added).

d. Most professionals and academics in the energy field agree that PURPA did not have an effect on independent energy producers [too easy]

Answer to Question 16: Choice c is the correct answer.16 Since public utilities were required to purchase energy from QFs and since most post-PURPA QF’s were independent power producers, PURPA’s mandate that public utilities could not own a majority of a QFs necessarily meant the remaining QFs would be largely independent. In terms of choice d, most in the energy field believe that PURPA did have a significant impact on the growth of these entities. PURPA did not require either a certain percentage of power be produced by independent power producers, nor made a change to the definition of “non-utility,” thus eliminating choices a and b. [another good question, but make wrong answers plausible, thus teaching moments]

Question 17: Fourteen years after PURPA, the National Energy Policy Act of 1992 (NEPA) was passed. What effect did it have on regulating independent power producers?

a. It can generally be said to have further encouraged deregulation of the electric market

b. It can generally be said to have increased regulation of the electric market

c. It can generally be said to have given [do you mean state regulators?] public utilities greater jurisdiction to regulate such entities

d. None of the above

Answer to Question 17: Choice a is the correct answer.17 NEPA continued down PURPA’s encouragement of deregulated markets and established conditions under which an independent power producer could establish projects while avoiding regulation as a public utility. It did not give greater jurisdiction to public utilities to regulate independent power producers, thus eliminating choices b-d. [more details, an example?]

Question 18: In addition to impacting the growth of independent power producers, NEPA also affected other entities involved in the electric industry. NEPA was also the catalyst for major growth for which major, and fairly recent, entity involved with the electrical industry?

a. IOUs

16 See Hon. Richard D. Cudahy, PURPA: The Intersection of Competition and Regulatory Policy, 16 ENERGY L.J. 419 (1995)(observing that PURPA’s QF provisions and others like them were the first explicit endorsements by Congress of pro-competition energy policies).17 See, e.g., Florida Mun. Power Agency, 65 F.E.R.C. ¶ 61,125 (noting the agency’s goal of “encouraging the orderly development of plentiful supplies of energy” and “enhanced competition in the market for power supplies.”)

b. Electric cooperatives

c. Power marketers

d. State, but not federal, power systems

Answer to Question 18: Choice c is the correct answer.18 Since the passage of NEPA, the buying and selling of electricity on the open market has increased. As such, these marketers, often brokers, have had an increased role in the electric industry. While NEPA may have had incidental effects on choices a, b, and d, it is noted mainly for spurring the growth of power marketers.

[tell story of Enron?]

Question 19: Given the scale and centralized nature of the electricity industry, public and non-public utilities alone may be prone to anti-competitive behavior. Which federal act is most closely associated with the regulation of anti-competitive behavior the electricity industry and market? [what behavior do you have in mind?]

a. The Rural Electrification Act of 1936

b. The Public Utility Holding Company Act of 1935

c. The Energy Policy Act of 2005

d. The Sherman Act

Answer to Question 19: Choice d is the correct answer.19 Choices b and c are incorrect because the Public Utility Holding Company Act of 1935 was repealed by the Energy Policy Act of 2005 and provided for general deregulation of the electric market. Choice a is incorrect because, as review, the Rural Electrification Act of 1936 was aimed at providing rural residents with access to electricity, not to regulate anticompetitive behavior. However, the Sherman Act is specifically devoted to regulating anti-competitive behavior and has previously been applied in the context of energy regulation. [again details and examples]

18 W. Lynn Gardner, Power Marketers: Let’s Make a Deal, Public Utilities Reports Inc., Feb 1995, available at http://www.pur.com/pubs/444.cfm. (“This sudden interest in power marketing can be directly attributed to the landmark Energy Policy Act of 1992, which amended Section 211 of the Federal Power Act and gave FERC authority to order wholesale wheeling if certain criteria are met. . .). [can all the footnotes be moved into answers – as text or hyperlinks?]19 See, e.g., Otter Tail Power v. United States, 410 U.S. 366 (1973) (holding an IOU liable for violation of the Sherman Act).

Question 20: One yet to be discussed law is the Department of Energy Organization Act of 1977, which established the modern-day Federal Energy Regulatory Commission (FERC). In the late 1980s, what types of regulatory policies did FERC promote and did it continue the trend of deregulated markets or reverse it?

a. FERC encouraged state and local governments to keep a closer eye on state and local utilities, threatening heavy-handed regulation if those state and local governments did not take action; it attempted to reverse the trend

b. FERC and local governments promoted market-based rates in the electric industry; it attempted to accelerate the trend

c. While FERC did accelerate the trend toward market deregulation, it has reversed its position due in part the Enron scandal and California’s energy crises in the 1990s [what kind of re-regulation?]

d. FERC was ineffective in promoting any sort of energy policy in the 1980s, leading to vast reform in the 1990s

Answer to Question 20: Choice b is the correct answer.20 In the late 1980s, FERC allowed independent power producers lacking significant market share to sale energy set by market-based rates and encouraged “light-handed” federal regulation of independent power producers. Choice d is incorrect because FERC did have an impact on energy policy. Choice c is incorrect because FERC has continued to promote its market-based policies. Choice a is the opposite of FERC’s policy positions in the late 1980s. [good question]

Question 21: FERC’s Order No. 888 in 1996 was one example of the Commission encouraging the deregulation of the energy sector. What part of the electric industry did Order No. 888 affect and what newer electric price-setting entity industry did it overlap with? [better to ask for summary of Order]

a. Wholesale transmission of electricity; Regional Transmission Organizations (RTOs)

b. Interstate transmission of electricity; additional IOUs.

20 See, e.g., Order No. 888, Promoting Wholesale Competition Through Open Access Non-Discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities, [Regs. Preambles 1991-1996] F.E.R.C. STATS. & REGS. ¶ 31,036, at pp. 31,639-31,651 (1996), 61 Fed. Reg. 21,540 (1996)

c. Wholesale transmission of electricity; Independent Service Operators (ISOs)

d. None of the above

Answer to Question 21: Choice a is the correct answer.21 Order No. 888 created tariff terms as related to the wholesale transmission of energy. However, such wholesale transmission was also largely regulated through RTOS. Choices b and c are incorrect because Order No. 888 did not focus on IOUs or overlap with ISOs. As such, choice d is also incorrect.

D. REVIEW: STATE RESTRUCTURING

Question 22: Deregulated markets have varied in success. One of the most notable failures of deregulated energy markets was the California energy crisis of the 1990s. By 2010, how many states restructured their retail electricity markets as a reaction to that aforementioned crisis? [what do you mean by restructuring – remember questions should inform, teach]

a. 14 states, along with the District of Columbia

b. 32 states, along with the District of Columbia

c. None of the states restructured their electricity markets

d. All of the states restructured their electricity markets

Answer to Question 22: Choice a is the correct answer.22 While the respective intrastate restructuring plans varied in scope, the number of jurisdictions in choice a took action in response to California’s 1990s energy crisis.

Question 23: A significant focus of Chapter 13 is the movement from a vertically integrated (i.e. monopolistic) energy market to a deregulated (i.e. competitive) energy market. What is the theory about such a switch in terms of electricity rates? [should this be lead off?]

a. Non-competitive utility rates, while providing some baseline protection, cannot achieve the lower, market-based prices of a more competitive market

b. Non-competitive utility rates were often a product of undue influence21 Proposed Rules: Department of Energy Federal Regulatory Commission (FERC), 18 CFR Part 35, Regional Transmission Organizations; Notice of Proposed Rulemaking, 64 F.R. 31390, 6/10/1999., available at http://regulations.vlex.com/vid/utilities-schedules-filing-regional-23336546 (noting that FERC will establish “minimum characteristics and standards that a transmission entity must satisfy in order to be considered to be an RTO.”)22 PennFuture. Fact Sheet on Electricity Rate Caps 1. 2010., available at http://www.pennfuture.org/UserFilers/RateCapFactSheet.pdf

c. Non-competitive utility rates allowed grossly inequitable returns on investment for electricity producers

d. The switch to deregulated markets was more happenstance and not a result of a specific move towards more competitive markets

Answer to Question 23: Choice a is the correct answer.23 While non-competitive utility rates achieved “just and reasonable” results, the underlying paradigm behind deregulated markets is that market-based prices will surpass such non-competitive standards. While some may argue the problems articulated in choices b and c also factored into such a movement, choice a is the best answer. Choice d is incorrect because such a move did not occur by happenstance, as seen through both PURPA and Order No. 888.

Question 24: Pennsylvania was a state who restructured its retail energy market by introducing market-based rates. While this action may appear to be bad policy given the deregulation of California’s energy markets, Pennsylvania’s restructuring law included what consumer protection policy?

a. Rate caps for those who chose not to switch to its retail competition plan [interesting – more info / graphs? / results of new PA rates]

b. Stricter monitoring of anti-competitive activity

c. Both a & b

d. Neither a or b

Answer to Question 24: Choice a is the correct answer.24 Choice b is incorrect because the Pennsylvania law was not concerned primarily with anti-competitive activity but instead allowing new retail markets to decrease electricity rates for its citizens. As such, choices c and d are also incorrect.

Question 25: Along with Pennsylvania, Texas restructured its law based on theories of retail competition in 1999. Which passage from Senate Bill 7 summarizes the current trend in the United States electricity market over the past 40 years and the philosophies, true or false, behind that trend?

a. “Texas focused. . .on the transition from vertically integrated, regulated utility to an unbundled industry. . .”

23 See BOSSELMANN, supra note 1, at 640.24ANNUAL REPORT OF THE PENNSYLVANIA OFFICE OF SMALL BUSINESS ADVOCATE 3. 2010. William R. Lloyd, Jr., available at https://www.dced.state.pa.us/public/osba/OSBAAnnualReport2004.pdf. (stating “[a]t present, the rates most EDCs charge for that electricity are capped. However, once an EDC’s cap has expired, 66 Pa.C.S. § 2807(e)(3) requires that EDC to acquire electricity for POLR or default customers at prevailing market prices. Under Section 2807(e)(2), the PUC3 is required to promulgate regulations defining the obligation to acquire electricity after each EDC’s rate cap has expired.).

b. “The market design [in Senate Bill 7] focused on. . .behavior rules that shaped incentives. . .”

c. “[Senate Bill 7] successfully expanded choice for Texas consumers. . .”

d. All of the above

Answer to Question 25: Choice d is the correct answer.25 The passages from Senate Bill 7 in choices a-c reflect the trend toward competition in the electricity industry, as well as the purposes behind such a trend (i.e. to provide more choice to electricity consumers, to provide market-based incentives and to provide better service to customers by moving away from the traditional vertically-integrated energy paradigm). [more information in the answers?]

25 See, e.g.,Morgan Stanley Capital Group, Inc. v. Public Utility District No. 1 of Snohamish County, 128 S.Ct. 2733, 2733 (holding that FERC may only interfere with a “freely negotiated wholesale energy contract” if FERC concludes the contract would “seriously harm the public interest.”). This type of deference to the private market has been typical since the 1970s.