Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System

by Richard F. Hirsh

In the late 1990s, the formerly staid and monopolistic electric utility industry entered an era of freewheeling competition and deregulation, allowing American consumers to buy electricity from any company offering it. In this book, Richard F. Hirsh explains how and why this radical restructuring has occurred. Hirsh starts by describing the successful campaign waged by utility managers in the first decade of the twentieth century to protect their industry from competition. The regulated system that emerged had the unanticipated consequence of endowing utility managers with great political and economic power. Seven decades later, a series of largely unanticipated events, including technological stagnation in traditional generating equipment, the 1973 energy crisis, and the rise of the environmental movement, undermined the managers' control of the system. New players, such as academics, environmental advocates, politicians, and potential competitors, wrested control from power company managers by challenging utilities' standing as "natural monopolies" and by questioning whether their firms provided universal benefits. In other words, the once-closed system came under increasing pressure to transform itself. Hirsh follows the flow of power as this transformation occurred. He also examines the relationship between technological change and regulation, showing how innovations such as cogeneration and renewable energy technologies stimulated questions about the value of government oversight of the system. And he shows how the increasing prominence of ideas such as conservation, energy efficiency, and free markets helped propel the system toward open competition. Though the new electric utility system is still in its infancy, Hirsh's perceptive account of its birth will help readers think more rationally about its future.

Genres: Environment, History, Nonfiction

418 pages, Paperback

First published December 3, 1999

Reviews

[Emilia C · Rating 3 out of 5]

Finally made it through this textbook. A bit dense, a bit repetitive, but I learned a lot about the origin of the utility consensus and the rise of restructuring. How far we have come from the early 1900s when utilities wanted to be regulated and consumers did as well. Also enjoyed learning about California’s restructuring history without the Enron clout. Just a bit dry, though the ads, comics, and newspaper clipping did help.

[Titiaan · Rating 4 out of 5]

Power Loss covers the history of electricity deregulation and utility restructuring in the United States. It was gifted to me by my friend Ben Sumers.

I found chapters 10-14 on the 1970s, 1980s, and 1990s most interesting, as they covered the start of competitive generation and retail in power markets.

Similar books on the history of the electric industry in the U.S. include The Power Brokers, The Smartest Guys In The Room (specifically about Enron), and The Grid.

Some highlights:
- Retail competition in electricity markets was first introduced in 1996 in New Hampshire. Before that, for 70 years investor owned utilities (IOUs) ruled the U.S. unchallenged. This was referred to as the **utility consensus**. Deregulation of energy markets was halted due to Enron and the California Energy Crisis.
- Utilities came to prominence in the early 1900s because they made the case that their business was a natural monopoly and they asked for regulation. This is likely similar to what AI companies will do in the coming decade.
- The [Public Utilities Regulatory Policy Act](https://en.wikipedia.org/wiki/Public_...) (PURPA) was passed in 1978, as part of the Energy Policy Act. This was in response to the 1973 energy crisis. It allowed non-utility generators to sell power. It inadvertently became the starting point of deregulating power production in the United States.
- Large-scale nuclear fission ground to a halt in the late 1970s, before Three Mile Island. Construction times were mounting. As a result of high inflation, interest payments massively increased, making the plants' construction too expensive. For example, the Wisconsin Public Service Commission banned the construction of new nuclear plants in 1978 citing excessive costs, a year before Three Mile Island happened.
- Inspired by Ralph Nader, consumer advocacy groups were formed, of which the best-funded was Citizens Utility Board (CUB). A decade later, in 1983, Jon Wellinghoff would become the first consumer advocate for utilities in Nevada.
- In 1975, Governor Jerry Brown in California appointed two CPUC commissioners who were pro-energy efficiency. This led to the introduction in 1978 of the "supply adjustment mechanism"—the first structure in which utility revenue was decoupled from energy sales—in this case, gas. This was followed in 1981 by the electric revenue adjustment mechanism, or ERAM, which did the same for electric power. ERAM was voted out in 1987 by the CPUC, but then this decision was reversed in 1989, following the work of Ralph Cavanaugh of the NRDC, with speeches by Amory Lovins and Art Rosenfeld. As a result, California utility spending on energy efficiency grew from less than $50M in 1981 to $100M in 1983.
- In 1987, the Wisconsin PSC offered Wisconsin Electric an extra 1% return for every 125 MW of demand savings they realized. Three years later, the utility had delivered 300 MW of demand reduction, earning it more than 2% additional annual profit.
- Energy efficiency morphed into demand-side management, which turned into least-cost planning and later integrated resource planning.
- The debate about "cost-shifting" for rooftop solar played out before with demand-side management (DSM). In the 1990s, some large commercial and industrial customers received only small subsidies for energy efficiency, but they saw their utility bills increase by hundreds of thousands of dollars to pay for utility DSM programs. In 1993, the New York PSC approved an opt-out program for the largest C&I customers of Niagara Mohawk.
- The Energy Policy Act of 1992 laid the basis for retail choice. It included open access to transmission networks. It also further enabled independent power production, included from companies that were highly reliant on debt and had larger power generation facilities. Retail choice became possible with the Blue Book published in 1994, and put into California law by Governor Pete Wilson in 1996. It led to the plummeting of California utility stock prices.

[Cody Warner · Rating 3 out of 5]

Hirsh does an excellent job chronicling the history of the utility industry and how that history has contributed to the industry’s current struggles. I especially enjoyed the chapters on PURPA and how the legislation paved the way for the rise of QFs and independent power producers. However, the book is a bit inaccessible to those outside the industry and could certainly use an update for our contemporary times.

[Allison Campbell · Rating 5 out of 5]

I love this book! I wish there were more history books on electricity.

[Frank Stein · Rating 3 out of 5]

Although this book gets tiresome at times, and the writing can be circuitous and repetitive, it takes a much needed long-term look at how America's electricity system got de-regulated, or, as Hirsh shows it, how it got re-regulated in a different form.

He begins way back in the early part of the 20th century, when utility magnates like Chicago's Samuel Insull and insurgent Progressives like Robert La Follette and John R. Commons worked together to form a "utility consensus," whereby electric companies gave up their independence in exchange for a secure monopoly with regulated rates and a fair return on their investment. This consensus was fairly stable for 60 years, as larger and more efficient steam turbines kept lowering the cost of energy and provided steady profits to companies. Plants and production grew ever more centralized, with behemoth turbines reaching over 1,300 MW by 1972.

Of course it all broke down in the 1970s. The most commonly understood cause was the rise of oil and gas prices, which was true, but the centralized power systems had also reached the limits of their economies of scale, and productivity flattened out of the first time in a century. Environmental movements protested new plants, often successfully, and ratepayers saw their first hikes.

President Carter responded with his comprehensive National Energy Plan. When part of this was enacted in 1978 as the Public Utility Regulatory Policies Act, one seemingly inconsequential part of that act, Section 210, which was designed to help Wheelabrator-Frye, a New Hampshire company that burned garbage for electricity and heat, ended up restructuring of the entire energy sector in a way no one, including Carter, could have foreseen.

Under section 210 any electric company which met certain requirements for efficiency and could sell its excess steam as heat (a "co-generation" plant) could force utilities to buy its electricity at set rates. No one expected much of the cogenerators, but within 10 years they comprised almost 10% of electricity production, and showed that utilities weren't the natural monopoly many regulators and company executives had claimed. Soon state regulators, like the California Public Utilities Commission, worked to expand forced connections and the power of independent producers. At the same time, many energy mavens like Amory Lovins argued for more "demand-side management" and conservation programs, that would grant companies profits for conserving energy, and these were pushed by state regulators as well. The end result of much of this conflicting reform was George H.W. Bush's 1992 Energy Policy Act, which enshrined the free-market for wholesale electric prices, but forced more environmental strictures on utilities.

This book meanders, and it dawdles on certain seemingly irrelevant state issues, but it gives one a real sense about how this essential industry and its regulation changed from the 1970s to the 1990s. It's a great book for those interested in economic, environmental, or energy policy.

[Aimee · Rating 3 out of 5]

Edit. Came back to remove two stars because the more I think about it it's actually insane there was no mention of Enron or Texas legislation.

Despite taking me ages to finish, this was very well written and organized. And a super helpful pre-history of deregulation/restructuring. It would be very nice to own a copy of this, since I could imagine referring to it whenever I need a refresher of major utility legislation over the last 100 years and the sociopolitical context of how it came to be. Since this came out in 99 there is no analysis of the outcomes of deregulation (or even any mention of the more nefarious players' role in deregulation...*cough* Enron *cough* Bush associates.). Now I will search for a suitable follow up!!!

Note to self: Chapter 10 on conservation as a tool to avoid to "hidden energy crisis" of late 70's/early 80's (i.e., pending capacity shortages in light of less PUC-approved capital investment + growing projected demand.

[Eliot Yang]

good

[Aniruddh Mohan · Rating 4 out of 5]

Nice overview of developments in the US power sector over the 20th century