Restructuring in the electric utility industry: old and new paradigms.

• Author: Collier, Steven E.

To undestand the potential future courses of the electric utility industry, one must understand the traditioonal industry paradigm and the reasons for the collapse of this paradigm. Mr. Collier then discusses the formulation of a new industry paradigm based on competition for retail customers, resources and return for investors.

Summary

The electric utility industry began in the late 1870s, and was characterized by rapid technological development. The industry was essentially technically mature by the early 1900s, and operated within a constant and stable paradigm for some sixty years into the 1970s. That longstanding paradigm involved a regulated, monopoly structure with sustained growth and significant economies of scale. Utilities operated essentially as organizational islands, serving their own loads with their own resources. However, a dramatic paradigm shift is occurring as a result of a series of disruptions and changes in the industry in the 1970s and the 1980s.

A long-time, stable, growth industry went through a period of disruption and regulation in the 1970s and 1980s. Now the industry is restructuring as competition becomes the order of the day. Not only has the old paradigm largely crumbled, one or more new paradigms are forming. This is causing profound restructuring in the industry at large and in individual utility companies. The new paradigms involve increased competition in retail markets, resource markets and investment markets. An increasingly complex business environment is affecting all aspects of utility operations. New approaches are required for planning, financing, operations, service and pricing. New objectives must be met, including better anticipation and satisfaction on the customer's side of the meter, acquisition of the best and most flexible resources, and reorganization of the management and even the ownership of utility companies.

Understanding the Old Paradigm

A Period of Technological Development

The first significant electric experiments began in Europe in the 1730s, and the first practical applications began to be invented in the early 1800s. By the mid 1800s rotating dynamos were being demonstrated, and arc lighting was being used in industries. The first commercial electric utility in the United States began with arc lighting service in downtown San Francisco in 1879 at the California Electric Light Company.

About this same time, Thomas Edison perfected the incandescent light bulb. Within three years he had the Pearl Street Station providing reliable lighting service in downtown New York City. According to his journals, much of Edison's motivation to develop commercial electric service stemmed from dissatisfaction with the service he had received from the gas company!

A period of rapid technological development followed these initial events. By the turn of the century, there were some 3,000 electric utility companies. Self generation by industry accounted for about sixty percent of the installed capacity in the country and about forty-eight percent of annual energy production. Central station power was the prevailing technological paradigm by the 1920s. The industry was essentially mature technologically by this time, and several decades of sustained growth followed.

The Regulated Monopoly Structure

Samuel Insull was a key figure in the development of the most important industry paradigm. He can properly be deemed the founder of the investor-owned, regulated monopoly structure of the industry. Having begun in the industry as part of the Edison team, a falling out resulted in his relocation to Chicago where he formed the Chicago Edison Company. By 1929 his electric utility holding company empire controlled some 65 utilities in 13 states. His electric utility holding companies, along with others, were major contributing factors to the stock market crash of 1929.

Electric utilities formed as monopolies from the very start. The investment intensive nature of the business precluded proliferation of competitors. The possible abuse of these developing monopolies was a public policy concern. Monopolies might gouge on price, and would not always provide adequate service to every customer. On the other hand, Insull and other industry leaders were equally concerned that they not have to face profit eroding competition.

Insull led in the...