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The Growth of Electric Monopolies
"Then there is electricity, the demon, the angel, the almighty physical power, the all pervading intelligence!"
—Nathaniel Hawthorne, The House of Seven Gables
For most Americans it is hard to imagine life without electricity. Yet in the span of one lifetime, technologies that produce, deliver, and use electricity have spread to nearly every community across this country. This bundle of technologies has changed the culture and the economy of the United States in ways that would have been unimaginable to Thomas Edison.
Personifying this remarkable transformation is the life of blues musician B. B. King. In a speech to the National Press Club, broadcast on C-SPAN in early 1996, the 70-year-old King said he had lived without electricity until he was 18 years old. During those years, without the distractions of radio or TV, he learned to play the guitar. Fifty-two years later King has released a CD-ROM that with sound and images documents his life and the history of the blues in America.
It is not hard, of course, to identify the many ways that electricity has changed modern life for the better. It lights up the night, creates comfort in inhospitable climates, and frees men and women from much drudgery. It has made it possible for much of humanity to have immediate access to enormous quantities of information. It is not an exaggeration to say that electricity has even changed our very conception of space and time.
Yet electric power is not without costs. It has transformed the physical environment we inhabit. Dealing with the by-products of electricity challenges our imagination and creativity. The waste created from nuclear fission will remain hazardous for periods of time far longer than the history of civilization. The massive combustion of fossil fuels has already altered the chemical composition of the earth's atmosphere, changing global weather patterns in unpredictable and perhaps frightful ways. The correlation between rising carbon emissions and increases in average global temperature raises alarm (see Figure 1-1). While humans may be able to adapt to these changes, the effects on many species of plants and animals could be irreversible.
At a regional level, power plants burning coal in the Midwest affect the acidity of lakes in New England. Huge bodies of water, like the Great Lakes, are threatened by mercury contamination. In our urban metropoli, the health of millions is harmed by the smog created by the combustion of fossil fuels. These environmental issues loom large in the debate about how to continue wiring the world for electricity.
The per capita consumption of electricity in many developing countries is less than one-tenth of what it is in the United States. If our current patterns of electricity production and consumption are extended to these places, children born today could live in a world with five times as many large power plants. Two billion people, today, live in unelectrified villages. It is morally untenable, and politically impossible, to deny people living in the developing world the benefits of electricity. The challenge for humankind is to create institutions and policies at the local, national, and international level that can stimulate models for sustainable electrification. The wisdom needed to create these models will come, in part, from understanding how the electric service industry evolved in a democratic society like the United States and how it is being transformed by the forces of competition and citizen action.
Electricity Comes to America
The electrification of the United States did not occur overnight. It has a history. There were the early inventors who envisioned uses for electricity; entrepreneurs who struggled to create markets for electricity; engineers who patched together the webs of power lines and sought out improvements in power plants; and the large corporations that financed and organized the growth of the industry. In the six decades it took to wire America, the country was transfigured. People moved to cities, assembled huge factories, organized labor unions, built trolleys and subways, developed systems of instantaneous communication, and created new forms of mass entertainment, including radio, television, and computer networks.
A new institution was also born in these times, the electric utility. At first, electric service was a neighborhood affair. Hotels, department stores, and theaters were among the first establishments to be electrified. Often, power plants were located at the site where the electricity was used. Early electric grids were haphazard and outages were common.
During the heyday of Thomas Edison, the demand for electricity was so little and sporadic that it was difficult for power plant owners to make a profit. Edison and others spent much of their time coming up with new ways for customers to consume electricity. Growth in electric power consumption didn't take off until power lines were hooked up to trolleys. By the 1890s there was fierce competition among hundreds of companies to build trolley lines and electric power plants all across America. In just a few years electric trolleys were operating in 850 cities. Each city, of course, has it own story of electrification.
Electricity was first delivered in Sacramento, California, in 1895. On July 13th, electrons vibrated over a 22-mile power line from a hydroelectric power plant stationed by the town of Folsom on the American River to downtown Sacramento. The Journal of Electricity proclaimed Sacramento to be "the first American city to demonstrate ... long-distance transmission at high voltage." Thirty thousand people came to Sacramento on September 9th—California Admission Day—to see the rotunda of the State Capitol building emblazoned by electric lamps.
The business of supplying electricity to cities like Sacramento would become quite profitable. Competition for those earnings spawned strife. At the turn of the century, conflicts between electric companies and with city governments were the rule of the day. Some local political leaders wanted to create municipal power systems. In some cities, fights were waged by private companies to obtain exclusive service franchises. Often, bribes were paid, or other favors granted, to local officials to secure the franchise. Politics was part and parcel of the electric power business from day one.
The specter of public ownership of electric systems and the oftentimes messy rivalries between private companies were seen as baleful developments by some leaders in the electricity business. They threatened the budding profitability of an industry that needed stability. The advent of alternating current made it possible to transmit power over long distances, enabling power plant owners to greatly expand the range of services offered.
Companies like Edison General Electric in New York, Chicago Edison, and Southern California Edison saw opportunities to build big markets for electricity by coupling large power plants to high-voltage power lines. This combination promised low-cost power to consumers and rich returns to utility shareholders.
State Regulation of Utilities
State regulation of electric utilities was the brainchild of Samuel Insull, a protégé of Thomas Edison and later the owner of Chicago Edison, now known as Commonwealth Edison. At the turn of the century, Insull told other utility executives that competition was not in the best interest of the electric business. He observed that competing power lines and power plants increased the costs of delivering electricity. The business of providing electricity was, in his judgment, a natural monopoly. The question at the time was who would monopolize the sale of electricity: local governments or private companies?
Insull told his colleagues that a reasonable alternative to public ownership was to grant state governments the power to regulate their businesses to allow for predictable profits. For many businessmen the idea of government regulation was anathema. But it was a view that soon prevailed. In 1907, the National Civic Federation, a group of prominent businessmen that included Insull and the well-known banker J.P. Morgan, released a study of the electric power industry. It called for the establishment of a system of electric monopolies that would be regulated by state public utility commissions. The idea of electric utilities as natural monopolies requiring state regulation soon dominated the way electricity was produced and distributed in the United States. State regulation created a stable legal and economic structure that assured the rapid growth of vertically integrated utilities that ran everything from power plants to high-voltage transmission to distribution wires in their exclusive service areas.
For almost 90 years this model of a regulated electric monopoly flourished in the United States. During its reign hundreds of large power plants were built and tied into grids of high-voltage transmission lines that eventually stretched across America's vast landscape. Most of the electricity sold today in the United States still comes from large coal, nuclear, and natural gas power plants located outside of urban areas and delivered to population centers over high-voltage transmission lines. Only recently has that structure begun to change.
Since electricity was introduced in the United States at the turn of the 20th century, the only serious challenge to control of the electric power infrastructure by private monopolies occurred during the administration of Franklin Delano Roosevelt. As governor of New York, Roosevelt was outraged by the high electric rates charged by the state's electric utilities.
An alternative to privately controlled electric utilities was needed, he thought. Roosevelt decided that the hydroelectric potential of the St. Lawrence River should be developed by a public agency. To accomplish this goal he created the Power Authority of the State of New York. This institution was to serve as a model for Roosevelt once he became president.
During Roosevelt's "New Deal" in the 1930s, the federal government launched a vast electrification program that included the creation of huge federal power agencies. These agencies were created to develop the most accessible renewable source of energy at the time—the nation's rivers. Large federal dams were also built by the U.S. Department of the Interior in the Southwest and in California. City and county utilities and other public power agencies were given the right to purchase electricity from these federal institutions before it could be marketed to private utilities.
For Roosevelt, public power systems were to be the "yardsticks" that could be used to measure whether private utilities were price gouging. He observed that public power could be used "to prevent extortion against the public and encourage the wider use of electricity." Campaigning in 1932, Roosevelt argued that if the citizenry was not satisfied with the service of a private utility, it had the right to set up its own governmentally owned and operated utility. Many communities did just that. Roosevelt's view that public power could be a tool for economic development was warmly embraced in the Pacific Northwest and the Tennessee Valley.
The development of a renewable source of electricity from the nation's waterways was also spurred on by the Federal Power Act, which had been passed by Congress in 1920. This law gave municipal utilities preferential treatment for hydroelectric development. The law encouraged community leaders in Sacramento to form a municipal utility for the development of water and power for California's capital city.
Sacramento was originally a gold rush town. It grew at the confluence of two powerful rivers, the Sacramento and the American. The Sacramento was one of the West's largest navigable rivers, meandering from north to south through California's Central Valley. The three forks of the American rush down from the snow-capped Sierra Nevada mountains, depositing gold-laden sediment along river banks before merging with the Sacramento River. Summers in the valley could be miserable, especially when the American was low and the Sacramento was filled with the effluence of upstream towns. The people of Sacramento often complained of putrid drinking water. It was a desire for pure mountain water that convinced community leaders to form a municipal utility district. They hoped that the generation and sale of electricity would provide the revenue to pay for the dams needed to store water in between rainy seasons.
Sacramento's leaders wanted to take over the electric distribution systems of Pacific Gas & Electric (PG&E) and the Great Western Power Company and to construct a series of hydroelectric plants on the American River. But their hopes were blocked by litigation with PG&E, which, by the mid-1930s, had become the monopoly supplier of electricity in Sacramento. PG&E opposed every step Sacramentans took to form a municipal utility and to develop water and power supplies. After 23 years of legal wrangling, Sacramento citizens finally prevailed on New Year's Eve 1946, when the Sacramento Municipal Utility District (SMUD) took over the operation of Sacramento's electric distribution system.
The 1950s and 1960s were a time of building for utilities throughout the country. The American River offered an abundant supply of renewable hydroelectric energy for Sacramento. It took SMUD 13 years to build the Upper American River Project, a 40-mile stairway of power consisting of 11 major dams, 6 powerhouses, and 24 miles of tunnels. At the time these hydroelectric projects were built they generated electricity at a cost roughly equivalent to that produced in PG&E's large oil-fired power plants. But the dividends from the renewable energy project have proved to be long-lived. Today, these hydroelectric power plants provide the lowest cost electricity in the SMUD system.
Public power agencies such as SMUD developed many of the hydroelectric power plants now operating in this country. However, the potential for hydropower was largely tapped out by the mid-1960s. To obtain additional power most publicly owned utilities, like their investor-owned cousins, decided to build large nuclear and coal power plants.
The End of Stability
In the 1970s, after more than 50 years of stable growth, several disturbing trends developed that began to erode the way electric utilities, public and private, carried out their responsibilities. The utility strategy of building bigger and bigger power plants had made economic sense as long as the next plant was cheaper than the last one and as long as rapid growth in demand for electricity continued. By the 1970s these two conditions were beginning to change. Bigger was no longer better, and consumers of electricity were beginning to find ways to get more from less.
In the 1930s, the most efficient power plant produced about 50 megawatts of power, much more than any single consumer of power could use. It therefore made sense to serve many customers from one central power supplier. Engineers were finding that further economies could be achieved by building larger scale power plants. For the next 40 years regular improvements were made in steam turbines, which were the workhorse of power generation technology. More efficient, larger power plants steadily replaced smaller, less efficient facilities. It made sense for utilities to encourage customers to use more power in order to finance even bigger and cheaper power plants. It was a time of extraordinary stability. Rates were declining in real terms and profits were increasing.
By the mid-1970s, the lowest cost power plant was 20 times larger than one built in the 1930s. These gigantic dynamos could produce 1,000 megawatts of electricity, enough power to serve a good-sized city. Despite years of steady improvements, large thermal power plants are not very efficient. A large coal plant converts about one-third of the energy contained in the coal into electricity. The rest of the energy is lost as waste heat.
Engineers have worked hard to improve the efficiency of large-scale power plants that boil water to make highly pressurized steam that drives a turbine that is connected to an electric generator. The improvements over the last 20 years have been, nonetheless, marginal. During that time, the efficiency of all thermal power plants in the United States grew from 29 percent to just over 30 percent. That means that 70 percent of the energy contained in fuel is wasted.
As the efficiency of these plants leveled off, so did their costs. Utility executives and energy policymakers began to look for alternative ways of lowering the cost of electricity. Many believed they would be able to further drive down the cost of electricity by using nuclear fuel instead of coal to boil water to power the steam turbine. Among them was Paul Shaad, SMUD's general manager in the 1960s. He had been interested in nuclear power since the end of World War II and received a security clearance from the federal government to obtain classified information about the development of this new and promising source of electricity.
Excerpted from Reinventing Electric Utilities by Edward Smeloff, Peter Asmus, Amory Lovins. Copyright © 1997 Peter Asmus and Ed Smeloff. Excerpted by permission of ISLAND PRESS.
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