How politics, economics, and institutions shaped electric utility regulation in the United States: 1879–2009

Abstract

The history of electric utility regulation at both the state and national level from the beginning of the industry through the aftermath of the California energy crisis of 2000–01 is presented. That history was partly determined by the economics of the industry – on the supply side by its cost structure, network characteristics, and lack of storability – on the demand side by its price inelasticity for all but the largest consumers, and partly by politics. These factors influenced the institutions that were created to regulate the industry, a process also complicated greatly by US federalism. The intensity of regulation waxed and waned in response to real or perceived problems in the industry.

Keywords:

• regulation
• public utilities, US
• public utilities, history
• utility restructuring

Notes

 1. Despite these variations, the majority of electric power sold in the United States for most of the twentieth century was provided by privately-owned, vertically integrated utilities subject to the control of state regulatory agencies.

 2. A two-volume effort to catalogue franchise terms was published in 1910 and 1911 (Wilcox, 1910, 1911).

 3. Some of the latest franchises did include such provisions (Priest, 1993).

 4. For more extensive discussion of quasi-rents and corruption, and evidence that they led to state regulation, see Neufeld (2008).

 5. It is not clear whether Insull gained ownership of the existing utilities or simply enabled them to stop their own generation and become involved only in distribution.

 6. Compare the automobile industry. The first modern automobile company, Ford, pursued a policy of extreme vertical integration taking on such things as smelting steel and even growing rubber trees for tires. By contrast, modern automobile companies depend heavily on outside companies for many components.

 7. Energy, unlike power, has a time dimension. The gigawatt is a measure of power. The use of one gigawatt (GW) for one hour provides one gigawatt – hour (GWh) of energy. The same amount of energy can be provided by lower power for a longer time period, for example, one half gigawatt of power for two hours.

 8. Fuel costs are determined by energy use, but these can be much less than capital costs.

 9. This is the same mechanism producing quasi-rents as was responsible for the problem of municipal corruption prior to the adoption of state regulation.

10. In the case of electricity it is also possible for conditions to increase the bargaining power of the owner of a generator resulting in opportunistic behaviour on his or her part. The construction of a generating plant can take years, and this may give the owner of a generating plant significant leverage arising from the threat to withhold the plant's power. Here again, the transaction cost arising from that risk is eliminated if both sides of the transaction are under common ownership.

11. The financing difficulties faced by the early electric utilities caused many equipment manufacturers and technical consulting firms to accept part of the utilities' risk by accepting stock in payment for the equipment or services the utilities needed to operate. These securities were held by subsidiaries that evolved into holding companies (US Federal Trade Commission, 1928, pp. 166–169).

12. In 1929 over 82% of all generation from privately-owned utilities was from ones controlled by holding companies. The three largest holding companies controlled utilities accounting for over 45% of all generation from privately-owned utilities (US Federal Trade Commission, 1935a, p. 38). The position that regulated utilities ‘captured’ their regulators so that the regulation effectively protected the utilities from competition but did not otherwise constrain their actions to maximise profits may also have affected perceptions over the effectiveness of regulation.

13. For a somewhat later, but clear, exposition of this position, see Olds (1935).

14. Some power production was already occurring on a relatively small scale at dams operated by the Reclamation Bureau. Notable was the Theodore Roosevelt dam on central Arizona's Salt River. By 1923 there were a dozen such projects.

15. Actual duplication of service was rare, and, in 1938, the PWA would provide funds for a duplicate system only if the municipality had tried unsuccessfully to purchase the private utility at a reasonable price (The Twentieth Century Fund, 1948, pp. 387–388, 395–398).

16. Wendell Willkie ran as the Republican candidate against Roosevelt in the 1940 presidential election.

17. The industry's lobbying activities were so intense that the Senate undertook an investigation of those activities before the bill was passed (Senate Special Committee to Investigate Lobbying Activities, 1935a, 1935b).

18. The original text of the bill can be found in (US Senate Committee on Interstate Commerce, 1935). The position of state regulators was made by the chairman of the legislative committee of the National Association of Railroad and Utilities Commissioners, pp. 725–731.

19. For example, the report suggested that main transmission lines be operated by the federal government (The Twentieth Century Fund, 1948, p. 694).

20. Sections 11 and 12 of the Tennessee Valley Authority Act of 1933.

21. Duke Power cancelled one plant on which sunk expenditures amounted to over 30% of the company's pre-cancellation net worth (Hearth, Melicher, & Gurley, 1990, p. 102).

22. On the dominant rate structure for industrial users see Neufeld (1987).

23. Evidence of this can be found in the public statements made during the bill hearings (US Senate Committee on Energy and Natural Resources, 1977). On the position of state regulators see the statements of officials from NARUC, pp. 760–800. On the views of large industrial electricity users see the statement of the executive director of ELCON, an association of 12 of the nation's largest industrial users of electricity (pp. 494–511). Several large industrial electricity users issued booklets or articles attacking marginal cost concepts including Air Products & Chemicals and Kaiser Aluminum (Kaiser Aluminum & Chemical Corporation, 1976; Sherry, 1977).

24. The Department of Energy (DOE) was created in 1977 and the Federal Power Commission was renamed the Federal Energy Regulatory Commission (FERC) with status as an independent regulatory agency within the DOE.

25. Co-generation was the basis of more of these facilities than renewable power. In some cases the prices utilities had to pay for this power was so high that some argued this created ‘PURPA machines’, companies that, in order to qualify as co-generators, undertook some other production that was not economically justified on its own, but whose losses could be covered through the profits made from selling power at prices above the cost of production (Barclay, Gegax, & Tschirhart, 1989, p. 226).

26. Non-utility generation also accounted for 20% of all generation in Texas and 27% in Louisiana.

27. Decesaris, Leonard, and Zona argue that not all of these strategies were pure market manipulation but that most of them at least gave false information. They argue that FERC's market manipulation rules are difficult to apply. This raises the question: what kind of market is it that requires detailed and complex written rules to work? (DeCesaris et al., 2005, p. 177).

28. Texas has been committed to restructuring. Even though it had relatively low utility rates, the state welcomed freewheeling competition and there are over 100 electricity retailers in the state. The process, however, hit a bump in late May and early June 2008, when, for unknown reasons prices spiked to as high as $4,000 per mWh, and actual retail rates rose to almost 19 cents per kWh. Again, congestion and strategic (but not illegal) bidding drove prices up. It was stated that some generators expected to receive prices in the $2500 mWh range for at least a few hours since they claimed that receiving these occasional prices were needed to survive.

29. Other municipal utilities in the United States (e.g., water, transit) are owned and operated by local governments in some areas and private companies in others.