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public vs. private power: from fdr to today
The accusations of "market manipulation" hurled at many of today's power companies echo the criticisms made in the 1920s by FDR, who made reining in the power monopolies an integral part of his New Deal. Here's an overview tracing the rise and fall of state and federal intervention in the U.S. electricity industry.
Competition in the Early Electric Power Industry

The early electric power industry was developed using direct current transmission, a system in which a relatively low voltage of electricity could travel only over short distances. Typically, numerous power plants were built within a small densely populated area, usually a city, and consumers were able to choose their service provider. This structure created much competition within a local marketplace.

This paradigm began to change as technology rapidly transformed the industry. Newer machines, such as steam turbines, were smaller and less complex, and could create a greater amount of power with a much smaller capital investment. The discovery of alternating current transformers allowed companies to transport power over longer distances at a higher voltage. Savvy entrepreneurs, such as Samuel Insull of Chicago Edison, realized that they could exploit the greater economies of scale afforded by these new technologies, and maximize profits by consolidating the smaller utility companies. Fueled by the rapid growth of electricity consumption, the utilities boomed during the early 20th century.

State-Regulated Monopolies and the Rise of the Holding Company

By 1907, Insull had acquired 20 other utility companies and renamed his firm Commonwealth Edison.[1] He and others argued that electric utilities were a "natural monopoly" because it would be inefficient to build multiple transmission and distribution systems due to the great expense of capital investment. Therefore it was inherent that only one company would dominate the market. The emerging utility monopolies were vertically integrated, meaning they controlled the generation of electric power, its transmission in real time across high-voltage wires, and its low-voltage distribution to homes and businesses. Reformers of the Progressive Era tried to govern these emerging utility monopolies through state regulation. By 1914, 43 states had established regulatory polices governing electric utilities.[2]

As their businesses grew, the new electric power barons such as Insull began to restructure their companies, largely through the use of holding companies. A holding company is a company that controls a partial or complete interest in another company, and it can be a useful tool in consolidating the operations of several smaller companies. However, the electric utilities of the 1920s began to exploit the use of holding companies to buy up smaller utilities in an effort designed not to improve the company's operating efficiency, but as a speculative attempt to maximize profits. The growing utility monopolies then exploited this structure, pyramiding holding company on top of holding company, sometimes such that a holding company was as many as ten times removed from the operating company. Each new holding company would buy a controlling interest in the holding company below it and the additional costs and fees for the operating companies were passed along in a higher rate base for the consumer. While the operating companies were subject to state regulation, the holding companies were not; therefore each holding company could issue fresh stocks and bonds without state oversight. The abuse of holding companies allowed for the consolidation of utilities such that by the end of the 1920s, ten utility systems controlled three-fourths of the United States' electric power business.[3]

FDR Fights for Federal Regulation of Utilities

The size and complexities of the holding companies were proving state regulation of utilities ineffective and soon caught the attention of the federal government. In 1928, the Federal Trade Commission began a six-year investigation into the market manipulations of the holding companies. The booming utilities of the 1920s traditionally had been seen as relatively secure investments, and utility stocks were held by millions of investors. The pyramidal holding company structure allowed the holding companies to inflate the value of utility securities, which eventually were decimated by the 1929 stock market crash.

Elected to the presidency in 1932, Franklin Delano Roosevelt fought vehemently against the holding companies, calling them "evil" in his 1935 State-of-the-Union address. After a hard-fought campaign by the president and his allies, and in the face of bitter opposition from the utilities, Congress passed the Public Utility Holding Company Act (PUHCA) in 1935. PUHCA outlawed the pyramidal structure of interstate utility holding companies, determining that they could be no more than twice removed from their operating subsidiaries. It required holding companies which owned 10 percent or more of a public utility to register with the Securities and Exchange Commission (SEC) and provide detailed accounts of their financial transactions and holdings. Holding companies that operated within a single state were exempt from PUHCA. The legislation had a dramatic effect on the operations of holding companies: Between 1938 and 1958 the number of holding companies declined from 216 to 18.[4] This forced divestiture led to a new paradigm for the electricity marketplace which lasted until the deregulation of the 1980s and 1990s: a single vertically-integrated system which served a circumscribed geographic area regulated by either the state or federal government.

Roosevelt made the fight for public power an integral part of his New Deal campaign and pushed for other important legislation to that end. In the same year as PUHCA, Congress passed the Federal Power Act of 1935, which gave the Federal Power Commission (FPC) regulatory power over interstate and wholesale transactions and transmission of electric power. The FPC had been established under the Federal Water Power Act of 1920 to encourage the development of hydroelectric power plants. The Commission originally consisted of the secretaries of war, interior and agriculture. The Federal Power Act changed the structure of the FPC so that it consisted of five commissioners nominated by the president, with the stipulation that no more than three commissioners could come from the same political party. The Federal Power Act gave the FPC a mandate to ensure electricity rates that are "reasonable, nondiscriminatory and just to the consumer."

Another component of FDR's fight for public power was the creation of federal agencies to distribute power to those who were neglected by the traditional utilities, particularly farmers and other customers in rural areas. His administration created the Tennessee Valley Authority (TVA) in 1933 and the Rural Electrification Association (REA) in 1935 to create and finance rural utility companies. The end result of the New Deal era regulatory intervention into the electric industry led to four primary types of service providers: private investor-owned utilities (IOUs) with stock freely traded in the marketplace by shareholders; publicly owned utilities, such as those owned by municipalities; cooperative utilities which were usually found in rural communities; and federal electric utilities, such as the TVA and REA.

The Golden Era of Electricity

After the tumult of the Roosevelt years and the end of World War II, the electric power industry enjoyed a period of steady growth, driven by both technological and efficiency advances that were reflected in lower prices. Between the years of 1947 to 1973, the growth rate for the industry held steady at about 8% per year[5] and there was little change in the industry structure. The industry began to promote increased electricity usage through advertising campaigns with slogans such as GE's "Live Better Electrically" campaign begun in 1956. As the industry grew and prices continued to decline, there was little need for state and federal regulatory intervention. IOUs were the primary service providers for most Americans and their continued growth and low rates satisfied both consumers and investors.

The Energy Crisis of the 1970s and the Beginning of Deregulation

The energy crisis of the 1970s is often symbolized by images of long lines at gas pumps all over the United States resulting from the 1973 OPEC oil embargo. Oil, coal and natural gas shortages, as well as declining public confidence in the nuclear power industry, contributed to rate increases for consumers throughout all the energy industries, including electricity. Elected in 1976, President Jimmy Carter made energy concerns one of his top priorities. In attacking the demand side of the problem, he waged a public campaign focused on conservation to reduce the American public's high rates of energy consumption. To combat the supply side, he sought to cultivate the growth of new sources of energy, including nuclear power and renewable resources such as solar and wind power. These two approaches were crystallized in the five-part National Energy Act, which Carter signed into law in 1978.

The Public Utility Regulatory Policies Act (PURPA), was the piece of Carter's National Energy Act that affected the electric power industry. It was designed to encourage efficient use of fossil fuels by allowing non-utility generators (known as Qualifying Facilities or QFs) to enter the wholesale power market. PURPA designated two main categories of QFs: cogenerators, which used a single fuel source to either sequentially or simultaneously produce electric energy as well as another form of energy, such as heat or steam; and independent power producers (IPPs), which use renewable resources including solar, wind, biomass, geothermal and hydroelectric power as their primary energy source. Although intended to be an environmental statute, a primary effect of PURPA was to introduce competition into the generation sector of the electricity marketplace, thus challenging the utilities' claim that the electricity market encouraged a "natural monopoly."

One year prior to the National Energy Act, President Carter signed the Department of Energy Organization Act. The act created the Department of Energy by consolidating organizational entities from a dozen department and agencies. Under this legislation, the Federal Power Commission (FPC) was replaced by the Federal Energy Regulatory Commission (FERC) as the federal agency that establishes and enforces wholesale electricity rates.

Deregulation Fever

The free-market mania of the 1980s and 1990s further challenged the notion of the electric power industry as a "natural monopoly." Many politicians and economists argued that regulation had outlived its value, and that the market should determine prices. The telecommunications and transportation industries were deregulated, and the natural gas industry followed suit. Advocates for deregulating the electricity industry argued that the implementation of PURPA had proved that non-utility generators could produce power as inexpensively and effectively as the regulated utilities. Large industrial consumers searching for lower prices also chimed in and urged federal regulators to pursue deregulation.

In 1992 Congress passed President Bush's Energy Policy Act (EPACT), which opened access to transmission networks to non-utility generators. EPACT further facilitated the development of a competitive market by creating another category of qualifying facilities known as exempt wholesale generators (EWGs), which were exempted from regulations faced by the traditional utilities. To assist in the implementation of PURPA and EPACT, FERC issued Order No. 888 and Order No. 889 in April 1996. The two orders provided guidelines on how to open electricity transmission networks on a nondiscriminatory basis in interstate commerce.

The passage of EPACT led states which had historically high electricity prices, such as California, to investigate whether competitive deregulated markets would benefit their consumers. In 1996, both California and Rhode Island passed deregulation legislation, giving the consumer the right to choose his electricity supplier. As of May 2001, 24 states and the District of Columbia either have passed legislation or issued a comprehensive order to restructure their electric power industry. Eighteen states currently are investigating deregulation. View the Department of Energy map depicting the status of state electricity industry restructuring activity.

How Has Deregulation Changed the Industry?

As a result of the deregulation movement of the 1990s, the electric power industry is changing from a structure of regulated, local, vertically-integrated monopolies, to one in which competitive companies generate electricity, while the utilities maintain transmission and distribution networks. In the face of increased competition, investor-owned utilities (IOUs) have sought to make themselves more competitive through mergers, acquisitions and asset divestitures, leading to the industry becoming much more concentrated. By 1998, the ten largest IOUs owned almost 40% of IOU-held electricity generation-capacity.[6] Increased competition has also led to the rise of two new participants in the electric power marketplace, who buy and sell electricity without owning or operating transmission or distribution operations: power marketers, which are considered to be utilities and therefore regulated by FERC, and power brokers, which are unregulated.

Links

More on the new power business

A chronology of energy-related milestones
published by the Energy Information Administration.

"Powering A Generation of Change"
This web site includes a number of essays on the history of regulation in the electric power industry.



[1] Dr. Richard Hirsh. "Emergence of Electrical Utilities in America." From Smithsonian Institute exhibit "Powering a Generation of Change" http://americanhistory.si.edu/csr/powering/.

[2]Dr. Richard Hirsh. "Emergence of Electrical Utilities in America." From Smithsonian Institute exhibit "Powering a Generation of Change" http://americanhistory.si.edu/csr/powering/.

[3]Arthur Schlesinger, The Age of Roosevelt. (Boston: Houghton Mifflin, 1960) 118.

[4]Dr. Richard Hirsh. "Emergence of Electrical Utilities in America." From Smithsonian Institute exhibit "Powering a Generation of Change" http://americanhistory.si.edu/csr/powering/

[5]Dr. Richard Hirsh. "Post World War II Golden Years." From Smithsonian Institute exhibit "Powering a Generation of Change" http://americanhistory.si.edu/csr/powering/

[6] "The Restructuring of the Electric Power Industry: A Capsule of Issues and Events" (Energy Information Administration, 2000) 22. http://www.eia.doe.gov/cneaf/electricity/chg_str/booklet/electbooklet.html

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