Reshaping the electric power industry.

• Author: Flavin, Christopher

INTRODUCTION

As the twenty-first century approaches and the world enters the information age, it is important to ask how the electric power industry can prepare for this dramatically new era of more efficient, cleaner, and more decentralized technologies.

During the past decade and a half, many industries, from telecommunications to natural gas, have been extensively de-regulated and reshaped. Although none of these transitions has gone smoothly, it is clear that the process of deregulation has lowered costs for most customers, and offered a plethora of new technologies and services.

Today, the electricity industry is in the early stages of an equally profound transformation, but the stakes are even higher. Electric power is a $180-billion-a-year business in the United States - larger than any of the sectors above - and central to many of our most vexing environmental problems, from acid rain to nuclear waste and global climate change. However, the basic issues facing the industry are similar to those faced during the earlier transitions: how to shift from a monopolistic and heavily-regulated industry to one that is more competitive and flexible.

The reshaping of the electricity business promises to be complex and contentious. Already, various classes of electricity customers - large factories and small residential users, for example - are competing fiercely for access to the least expensive power. At the same time, many electric utilities are burdened with some $50 billion worth of "stranded assets," nuclear and fossil-fueled plants that are too expensive to compete in an open power market against some of the highly-efficient new generating technologies now being built by independent power producers. Environmental and consumer groups fear that hard-won gains such as utility investments in energy conservation - estimated at $2.8 billion in 1993 - and renewable energy generators that rely on wind and solar power will be sacrificed to the demands of a cut-throat market for low-cost kilowatt-hours of electricity.

While these concerns are legitimate, and none can be dismissed lightly, they are hardly a reason for stopping the process of change or stepping back to the electric utility structures of yesteryear. If done well - drawing on the lessons of earlier deregulatory efforts - the restructuring of the power industry could end up being good for everyone - small and large customers, utility shareholders, new technology developers, and even the environment.

The key is to make a rapid and clean transition to a truly competitive system in which power generation, transmission, and distribution are separate businesses that deal with each other via open, arms-length transactions. If today's power plants are quickly forced out onto the competitive market, and the uneconomic ones written off and shut down, consumer bills will fall, and a host of environmental problems reduced.

Through their continuing regulation of the transmission and distribution "wires" business, federal and state agencies will still have a mechanism for valuing environmental "externalities" and favoring demand-side management and renewable energy investments where appropriate. Indeed, under this model, it is likely that, as in the first decade of telecommunications deregulation, the next decade could see an unprecedented surge in new power generation, storage and control technologies, most of them small, modular and efficient, and all of them far less expensive than the power systems we rely on today.

ROOTS OF MONOPOLY

When Thomas Edison started the world's first electric power company in New York in 1880, it looked like a typical under-financed start-up venture, not much different from hundreds of other small businesses. In a Wall Street warehouse, Edison connected a coal-fired boiler to a steam engine and dynamo, then linked the plant by underground wire to a block of nearby office buildings. When the switches were flipped, 158 light bulbs (also designed by Edison) flashed on, and the Edison Electric Illuminating Company made converts of its carefully chosen first customers - J. P. Morgan and the New York Times.

Edison viewed electricity as a competitive service business, initially even selling lighting to his customers by the bulb. Without government regulation or other controls, electric power companies quickly proliferated, offering both direct and alternating current at various voltages, and often running competing electric lines down opposite sides of the same street. Four dozen power companies served Chicago alone at the turn of the century.

Some of the industry's early leaders envisioned a system of stand-alone, mass-produced generators, but they were opposed by a competing vision: central plants selling power to hundreds of customers. The latter eventually prevailed, driven in part by the advent of alternating current and the transformer, which made it possible to raise the voltage of electric current and thereby transmit it over long distances. And within a few decades, single utilities were serving whole cities, then entire regions.

The era of small companies competing fiercely lasted only a short while, for as the industry grew, companies merged and monopolies expanded. With monopoly control came an implied public responsibility, and beginning in 1907, state regulatory commissions formed in the United States to determine a fair price for electricity, and to provide financial stability for utilities. Then in the thirties, in response to the growth of large power conglomerates serving multiple states, Congress passed the Federal Power Act and the Public Utility Holding Company Act, limiting the reach of electric utility companies, but further cementing their right to monopolize most of the business in their service territories.

For more than five decades, these developments were resoundingly vindicated: the size and efficiency of power plants grew, and the price of electricity fell, spurring the growth of the American economy. Between 1945 and 1975, the use of electricity rose fivefold.

Beginning in the seventies, though, the fairy tale came to an end: fuel prices soared, the cost of new power plants (particularly nuclear ones) skyrocketed, and the growth in electricity demand fell from nearly 8% per year to less than 3%. This series of problems caused a consumer backlash and spurred state regulatory commissions to challenge utilities' frequent requests for rate increases. By the late eighties, utility companies had abandoned scores of partially completed nuclear plants, and some firms were on the verge of bankruptcy. Environmental and consumer groups were in the vanguard of those...