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There was a time prior to the year 1900 when electric power generation was privately own and essentially free from political regulation. The development of the electric light bulb and the electrically powered streetcar encouraged the development of large-scale electric power generation. At the time, large reciprocating steam piston engines were already well proven in marine and railway transportation while hydraulic river turbines were well proven at mills and factories located along rivers and streams. The engines and technologies were easily adapted to driving electrical generators.
When potential investors were convinced that there was potential to install viable hydraulic power generation at Niagara Falls to supply power to markets at New York City, the project went ahead. By 1890, incandescent electric lights lit up the night at NYC and horse-drawn streetcars and were converted to electric propulsion in many cities around the world. The electric power market at NYC was sufficiently large to cover the construction, maintenance and operating cost of the transmission lines between Niagara and NYC. Events that surrounded the development of electric power in New York State were repeated at many other locations around the world.
Many towns and villages located near and along the transmission line gained access to electric power "at the flick of a switch" and at comparatively lower costs, replacing windmills and little steam engines that had previously provided local electric and mechanical power. While the citizens and many industries in NYC benefited from the electric power, so did citizens and businesses at various towns and villages located along the transmission line. It was often viable to connect a branch line from the main transmission line to a large community located several miles away from the main line.
The accountants at the time calculated the cost of providing power to such communities and set the tariffs accordingly, to cover all costs and realize a certain percentage of profit. As a result, people living in different communities often paid different rates per kW/hr. In some small towns located far from a main transmission line or a power station, it was often considered viable to continue operating the local windmills and small steam engines that generated electrical and mechanical power. Some rural folks had grown up with candles and oil lamps and were quite content to continue the lifestyle they had long known.
To some degree, the scenario that occurred in New York State in regard to the introduction of electric power repeated in many other locations across the USA and internationally. There were disparities in power prices between larger and smaller population centers and sometimes within the same county, all calculated to ensure that all customers covered the cost of their electric power. The pricing disparities attracted political attention and especially so at election time, when political candidates began to challenge power companies over the disparities in power pricing. They had the power bills from the big towns to make their case and they promised low power prices to the electorate following their election to public office. So began the practice of political-economic regulation of the electric power market, to assure low prices.
Just as regulated intercity transportation companies were required to transfer a portion of their high earnings from their main routes to sustain the operation of many local and rural services, regulation allowed power companies to realize high earnings in the large centers and internally cross-subsidize rural electric power. The regulated rates for rural customers rarely covered the maintenance cost of the lines that carried the power. Regulation realized a political objective of providing low prices to voters in the outlying areas. The low prices were often well below the actual market prices for the particular location. Governments in a few other nations owned the power stations and used the printing presses at their central banks to "subsidize" the low cost of electric power for their citizens.
While regulation may be workable in an unchanging economy that is free from any technological change, technological advancement ultimately causes change in the world of business and in the economy at large. When the pace of technological advance is slow, there may be scope to revise economic regulations to adapt to the ongoing change or in some way accommodate it. Ongoing technological change has continually changed the world of business and can do so at a pace where economic regulation becomes detrimental to progress. While market de-regulation along with the closure of the regulatory agency would be desirable, the method by which governments dismantle the regulatory regime may have serious pitfalls.
When an industry that has been subject to decades of market regulation, that regulation determined the evolution of the industry and may have led to possible mal-investment or misallocation of resources. A sudden dismantling of the regime of market regulation would likely precipitate an economic upheaval as market forces endeavor to rectify decades of mal-investment imposed by the regulatory regime. Any attempt to deregulate electric power during a time of a shortage of electrical generating capacity could result in skyrocketing power prices in some regions, along with possible power shortages in other regions. Such would be the result of decades of regulation aimed at meeting the political objective of providing voters with low power prices.
While some analysts may claim that deregulation has failed, it is equally possible that economic regulation of the power industry for political purposes was unsuitable for the power industry. The short-term alleged success of market regulation would likely culminate in failure over the long term. It is also likely that the very concept of power regulation was flawed from the outset. It served a short-term political purpose and had the potential to develop into a political debacle over the long term, when it would call out for a solution, perhaps many decades later.
The nature of power regulation restricted the introduction of additional generating capacity because the regulators may not have deemed the addition of such "obsolete" capacity necessary. At some future time, a later political regime would have to bring about change to rectify the mistakes of the past, mistakes that were driven by a short-term political strategy. Such change may become necessary when economic pressure is imposed on a government during a period of economic downturn, as is now underway in the world. Such pressure may actually force many governments to seek ways by which to extricate government from the regime of economic regulation of various sectors of national and regional economies.
At the present time, the governments of Greece, Iceland, Ireland, Spain, Portugal and Italy have come to realize that there is limit on government spending. At such time, spendthrift governments have to tighten the national budget, reduce national expenditures and even discontinue economic regulation over various once sacred sectors of the economy. Some governments may have to do this in order to save national economies as they lay off massive numbers of public sector workers and transfer many services to a regulation-free private sector. Some 40% of the Greek workforce is on the public payroll while the USA increased public sector employment increased from 6.4-million in 1990 to 38.4-million in 2010.
As prevailing economic conditions compel governments to curtail expenses, they have no roadmap to guide them as to how to dismantle the regime of economic regulation of various sectors in the economy and terminate the regime of subsidies, including subsidized electric power. In the power sector, the prevailing economic reality may allow for no other choice than eventual power de-regulation along with the inevitable power shortages and/or skyrocketing power prices. The regime of cross subsidization of rural power has delayed for several decades, the emergence of viable decentralized power generation that otherwise could have supplied such markets. In Greece, future power prices may rise by over 1,000% as their government seeks ways by which to curtail spending.
It is possible that the power industry may have evolved very differently had political candidates of an earlier era respected private property rights and not sought to seek political gain by promising low-cost rural electric power. Market forces driven by the purchasing decisions of hundreds of thousands of customers would have guided the development and evolution of the early power industry from the outset. Small site and decentralized power generation actually existed around the time of WW1. Explosion-proof, coil mono-tube boilers generated steam for small steam engines of up to 100-Hp that drove electrical generators and a variety of machinery in mainly rural areas. A large number of small hydroelectric power dams actually generated power for rural markets in many smaller locations.
In a regulation-free environment, the development of rural electric power may have taken a very different path. The regime of economic regulation closed hundreds of small power stations and small hydro installations as governments pushed for larger, more centralized power generation that was easier to regulate. In a different economic regime, it is possible that small site power generation may have evolved continually over a period of decades from the 1930's era and resulted in the emergence of efficient, cost-competitive small-site power generation technology many years earlier.
It is likely that an absence of economic regulation may have discouraged nationalization of electric power in the UK during the 1950's and also in several other nations. Prior to 1965, electric power generation in Quebec was privately owned. As demand for power increased, it may have been possible for the private sector capital to have developed export-capacity hydroelectric power generation installations at various locations across Canada. Power nationalization and state subsidized development of mega projects ultimately serves to meet a political objective.
The regime of economic regulation of many sectors of national economies is likely to collapse in many nations during the present economic downturn that may last for several more years. Power prices may again skyrocket and power shortages may be inevitable as market forces seek to correct and liquidate much of the mal-investment caused by decades of market regulation. The power industry of many nations may have been very different had the industry evolved in a market that would have been free from economic regulation. Consumers may have been spared the occurrence of skyrocketing power prices and power shortages that were part of the transformation from a regulated power market to a nominally de-regulated market. The economic reality may now deliver a totally de-regulated market regime to a few nations,
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
Good account of Electric Power Regulation.It is an indepth analysis on the subject.
Dr.A.Jagadeesh Nellore(AP),India Wind Energy Expert E-mail: email@example.com
Joel Gordes 10.11.11
Thank you, Harry,
Agree, it was a good account of the early history of regulation. My own exposure to this topic came from Prof. Richard Hirsh of Virgina Tech at a NARUC conference circa 1995 and it was an eduction in itself. Recently (9/26/11) I tried to verbally recreate it in front of the CT legislatures Energy & Technologies Committee in a special hearing on the preparation, response and recovery to storm Irene. For those of you who may be interested you can find it at: http://www.ctn.state.ct.us/webstream.asp?odID=6992&odTitle=Irene%20Readiness%20%26%20Response%3A%20Joint%20Legislative%20Public%20Hearing%20Day%202&caption=true with timing of it at 5:09:17 to 5:31
bill payne 10.11.11
3 "Today, we’re looking at a century’s supply of domestic natural gas, and we have far more oil resources than experts had previously estimated.", writes American Petroleum Institute president Jack Gerard.
"But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells. ..." appeared in a New York Times Sunday front page article by Ian Urbina.
'PNM Expects to Meet Growing Electric Demand With New Natural Gas Plants, Increased Energy Efficiency and More Renewable Energy' coupled with SWEEP chart showing Electric Utilities consuming 26.1% of natural gas may argue that it is the responsibility of 2011 natural gas IRP to investigate to determine veracity of Mr Gerard's and Mr Urbina's apparent conflicting claims?
“Money is pouring in” from investors even though shale gas is “inherently unprofitable,” an analyst from PNC Wealth Management, an investment company, wrote to a contractor in a February e-mail. “Reminds you of dot-coms.”
“The word in the world of independents is that the shale plays are just giant Ponzi schemes and the economics just do not work,” an analyst from IHS Drilling Data, an energy research company, wrote in an e-mail on Aug. 28, 2009.
suggest financial and legal problems as well.
So, will New Mexico Gas Company assemble a panel of technically-competent engineers and scientists to investigate and issue a written report on future natural gas production as it relates to New Mexico Gas Company customers which likely includes PNM?
PNM may wish to reconsider its Natural Gas Plants 2011 irp conclusion depending on the outcome of the panel's report?
Gerry Runte 10.11.11
Even a brief summary of the history of electricity regulation is incomplete without mention of Samuel Insull and his efforts to achieve common regulation (however motivated out of his extreme self interest), as well as his invention of usage rather than flat rate tariffs.
Don Hirschberg 10.11.11
I cannot easily read this article or the comments because there are too many symbols per line and reformatting is quite awkward.
Mike Jacobs 10.12.11
I agree there is a tension between the technological innovations made by many, mostly private, players, and the political desire for control. This pattern was repeated in the US energy industry with regulatory control over oil, natural gas, and electricity. Tesla's "high voltage" transmission from Niagara to Buffalo, 20 miles, marked the beginning of the end for Edison's DC distributiion that lacked step-up voltage equipment. Large-scale hydro so often was a nation-building effort that preceded the demand for that electric power. In the US, the Depression-era hydro projects soon became the sources for atom-bomb production facilities. Will the trend of government involvement reverse, or will the regulators remain in place and adopt an agenda tuned to more local initiatives and differences?
Peter Platell 10.12.11
Yes Harry the energy businnes must be the most plan economic business we have in the western world and that doesnt bode well when we will face more and more severe energy and environmental problems
F.Allen Morgan 10.12.11
Power regulation also developed because many small independent power producers went out business due to economic panics and poor business practices. Also, because power infrastructure has such a long lead time, at least several years in most cases, it argues for an entity that has access to assured supply of capital, one that can take the long view to make the long term investment otherwise you'll see only investments that mitigate risk and maximize profit in the short term...if any investments at all. Having a regulated entity with a reasonably assured cash flow (ie. the monopoly) makes the capital markets willing to take the risks of a long term loan. Similarly, most utilities pay a dividend, that typically is paid out consistently every year...which entices stock owners to hold onto their shares even tho utilities are very highly leverage (typical 50%). Utilities can either issue new shares to obtain cash for infrastructure or borrow it (at a comparitively low rate). Since the markets are reasonably assured of a 'rate of return' they can count on getting their return over the long term. This is all because of deregulation and specifically 'rate of return'. The formula has served well to provide a 'society good' during a time that saw tremendous advances in power generation, transmission, and demand. The utility also was the prime mover for the expansion of manufacturing during the 20th century...some call the American Century.
It may be, that the same reason politicians got us into regulation are the same reason's to try to get us out....to get elected. We should perhaps examine their motive more, rather than speculate on their 'solution'
Len Gould 10.12.11
People involved need to carefully read and re-read the cogent post above by F.Allen Morgan.
Jerry Watson 10.19.11
Like everyone here I have my own opinion and have developed my interpretation of history. The argument that regulation has killed the small players ignores many of the facts. Were it not for antitrust regulation there would likely only be a handful of power companies or possibly only one in the US. Once certain players reached critical mass no others would have been capable of long term competition and a natural monopoly would have developed. If necessary they could have given energy away on there fringes to bankrupt competitors until only the one most powerful company remained. PUHCA (1935) was antitrust regulation that limited the scale of US utilities and preserved granularity not the opposite. Without established boundaries instead of the multiple regulated monopolies we currently have, there would likely be one US super-utility now owned by handful of individuals, that was avoided. I am not quite sure why FERC is moving away from this position by allowing mergers like CP&L and FPC and now allowing that monster to merge with Duke seems counterproductive, but it appears Progress and Duke have by some means secured FERC by in. How that monster will not weld market power is beyond me. I am beginning to think the folks are FERC are clueless at best. Sadly the energy sector is falling prey to giants on many fronts. The ISO’s are really functioning as super-utilities by the regulation all assets in its boundaries and everybody loves ISO’s it seems. The FED is just as well to assume control of the ISO’s and the entire grid and be done with it. At least the government would have the air of legitimacy rather than committees of the large players deciding the rules that all must obey to remain on the grid. As for small players self generation is legal, I have no problem with more regulatory modification to allow them to supply others but there is much more to it than simply over generating onto the grid and cherry picking a few customers and charging them retail rates or micro-generators getting the higher of the retail price or avoided cost. It will be difficult to include small vertical players without the host gird either subsidizing or bankrupting them. Even the requirement of them pulling their own wires and creating minigrids is not a solution it would still allow for cherry picking and create higher rates for the remaining customers which is still subsidizing. Anyway just my thoughts
Len Gould 10.22.11
"I am beginning to think the folks are FERC are clueless at best. " -- No Jerry, not clueless, simply buyable. It appears now that ALL higher functions of our western "democratic" governments respond only to money, whether corrupt direct payments or corrupting donations to political campaigns.
Its in the same basket as the recent move by the Conservative gevernemnt in Canada to abolish "per voter" party payments to political movements which are able to capture a small minimum percentage of votes. It used to keep the socialist opposition afloat, and combined with rational campaign donation limits, also abolished, had the potential to keep big money / business out of parliament. It is a huge step backward for Canadian democracy, and for me (and hopefully for any other thinking voter) means I will never vote Conservative again.
Steven Lerner-Wright 10.24.11
But isn't this discussion a bit dated? Based on the uneven experiences of deregulation in the 1990s, isn't it focused on a problem that no longer exists in current markets?
Regulation of the electric industry produced the same benefits as regulation of the airline industry in the 1930s: It kept underfunded businesses going by eliminating financial uncertainty for investors. It also helped businesses and consumers by improving reliability and price certainty. A societal good, as noted above.
This industry has matured, and I think the lessons learned are that re-regulation is what is required, not deregulation.