The new electric powerhouses: will they transform your life?

• Author: Kelly, Suedeen G.

1. INTRODUCTION

   I originally titled this talk: "Nothing Shocks Us Anymore, Including Electricity." Although this statement is arguably true, upon reflection, I thought you might be put off by it, thinking my presentation would involve disclosing some of the shocking revelations by Monica Lewinsky or Jerry Springer. So, instead, the title of my talk is, "The New Electric Powerhouses: Will They Transform Your Life?" This title sprang from a conversation I had last May with my often-wise, always blunt, best friend, Barbara. She was also once my student. I told her I was coming here to speak about the restructuring of the electric industry and I was wondering whether to talk about the issue of stranded costs or market power or both. She looked at me with horror in her eyes and blurted out, "Don't talk about either of those topics, talk about something interesting."

   "Oh," I thought to myself. "I thought they were interesting."

   I left for a beach vacation several days later, determined to think of something "interesting" to say tonight, and still without a title. Serendipity struck. In the Summer Fiction issue of The New Yorker magazine, which I had picked up for beach reading, was a fascinating article by the playwright Arthur Miller, about--amazingly enough--how his life had been changed by electricity.(1) My decision was made. If the editors of The New Yorker thought how our lives have been changed by electricity was interesting enough to publish an article on it, then Barbara would have no choice but to approve my topic: how our lives will be changed by the new electricity. In reaching this decision I thought it appropriate to overlook the fact that I am not Arthur Miller, and The New Yorker has not accepted this talk for publication. And I have one more confession to make: I am going to sneak in some stuff on stranded costs and market power.

   1. Where the Electric Industry Is Today, and Where It Has Come From

      Before we get into the future of the electric industry, I think it is important to set the scene of where the industry is today and review where it has come from. Also, I'd like to pay some tribute to Arthur Miller who has described the electric industry so endearingly. Miller begins his article, which he titled Before Air-Conditioning, in the summer of 1927 in New York City. He tells us how kids would cool themselves off on hot summer afternoons: by jumping on the back steps of horse-drawn ice wagons and stealing a few chips--which smelled vaguely of manure but cooled the tongue.(2) Families would try to keep cool at night by dragging their mattresses out to the fire escapes and sleeping there in their underwear.(3) Hundreds of people would spend the night on the grass in Central Park next to their big alarm clocks that tick-tocked all night until they rang a cacophony in the early morning so people could head home for a shower before work.(4)

      Another way of looking at life in New York City in the summer of 1927 is that, although Thomas Edison opened his first electric lighting plant in 1882,(5) electricity had not yet begun to change our lives--because the infrastructure to deliver it efficiently to us had not yet evolved.

   2. 1940s: Electricity Is a Big Business

      Miller forwards his story to the summers before the War when there were open-air electric trolley cars on Broadway, but still no air-conditioning. People unable to endure their apartments at night in 1940 had another option: they could pay a nickel and ride aimlessly through the city for hours to cool off in the breeze caught by the open trolley.

      Another way at looking at this situation is that, by 1940, electricity had become a big business. Indeed, across the country, every town had an electric utility that generated, transmitted, and distributed electricity in its franchised area.(6) Sometimes the utility was owned and operated by the municipality; today we call it "public power." More often, the franchise was given to an investor-owned, private company.(7) In return for a monopoly to serve, the company would agree to serve everyone, without undue discrimination, and have its rates regulated by the municipality.(8)

      By 1940, many rural areas also had electricity because the Rural Electrification Administration, which was created during the Depression, offered low-interest capital to individuals in rural areas who wanted to join together to bring electricity to their homes, farms, and ranches.(9) These rural electric cooperatives live on today, though many now serve large cities and industrial customers.(10) In all these utilities, the business of generating, transmitting, and distributing electricity was bundled into one company: a fully integrated monopoly.

   3. 1960s: The Electric Industry Has Matured and Is Successful

      Miller ends his chronicle with the recollection that summers really began to improve in the early 1960s when the first air-conditioners were installed in the best hotels in the city.(11) Actually, at first they weren't really "installed." They rolled about the room on casters. And they needed to be filled regularly with water poured from pitchers. However, on the initial filling, the machine would spray water all over the room, so you had to face it toward the bathroom rather than the bed.(12)

      Another way of looking at this slice of life in the 1960s is that the electric industry had matured and was on a roll. The municipal electric systems had expanded and formed a pretty efficient, nationwide grid. Municipal regulation had given way to state regulation.(13) Power moved routinely across jurisdictions over the high voltage transmission wires, and these wholesale transactions were regulated by the federal government through the Federal Power Commission, now the Federal Energy Regulatory Commission.(14) Both federal and state regulation were successful and the postwar electric industry grew steadily, like our overall national economy.(15) Technology improved too. The utilities built larger generating stations, capturing economies of scale.(16) Electric rates were low.(17) The industry was established, reliable, and efficient. It enabled the invention and widespread distribution of air-conditioning and other marvels of an electric age: refrigerators, dishwashers, and even Disneyland-at-night.(18)

      This is where Miller ends his story: with the transformation of our summer lives through air-conditioning. But this is where the story of the impending transformation of the electric industry begins. And the question is, will it happen and will it change our lives yet again? In ten years, will Arthur Miller be able to write a sequel to Before Air-Conditioning? A lot of people hope so, and that is what is driving the efforts in so many states to restructure the electric industry.

2. BACKGROUND: THE PUSH TO RESTRUCTURE THE INDUSTRY TO ACHIEVE COMPETITION IN GENERATION

   1. 1960 to 1998: Prices Rise and Competition Evolves in an Effort to Keep Prices Down

      In the last thirty years, electric prices in many service areas have gone through the roof. It began with the lure of cheap nuclear power in the 1960s, which turned out to be very expensive.(19) It was aggravated by inflation, high interest rates, and high energy costs in the wake of the Arab oil embargo of 1973.(20) These cost increases led to consumer conservation just at the time new long-lead-time electric generation was coming on-line and also needed to be financed.(21) The glut of expensive generation capacity, which consumers nevertheless had to finance, shot up electricity prices.(22) People looked for new ways to bring them down. Experimentation with competition in generation, which had long been a monopoly of the electric utility, began (Figure 1).(23)

      [Figure 1 ILLUSTRATION OMITTED]

   2. Independent Generation Grows from a Small Beginning in 1978 to a Real Presence by 1996

      In 1978, after the Arab oil embargo, Congress passed the Public Utility Regulatory Policies Act(24) to encourage the creation of nonutility generators of electricity that were small and efficient or used alternative energy resources like wind and hydropower.(25) Congress required the local utility to buy the power these independent generators put out.(26) This was a real change for the electric industry, although, on balance, the change was small. Only a small class of generators qualified for this treatment. While these generators could sell their power to the local utility, they did not have access to the utility's transmission lines to wheel their power to any other utility.(27)

      The big change occurred in 1992 when Congress passed the Energy Policy Act.(28) This legislation spurred increases in the building of nonutility generation by effectively requiring utilities to give these generators access to their transmission lines to wheel their power to other utilities.(29) However, the new market for independent generators is not without limit. These generators can only sell wholesale power; they cannot sell retail power.(30) This means that while they can sell power to utilities, they cannot sell power to individual consumers. Congress did not expand...