7/15/2014
DECODING THE ENERGY INDUSTRY
A HISTORY OF POWER AND POLITICS
• Cara Lee Mahany Braithwait, WPUI
• Scott Patrick Williams, WPUI, Energy Institute
• Guest Speaker: Terry Hottenroth, Attorney
Summer Series: Decoding the Energy Industry
July 15: A History of Power And Politics
July 17: Reading your Energy Bill and Understanding
Rate Design
July 22: Just How Much Energy Is Out There?
July 24: The Pile On – Should We Really Be Adding
Electric Vehicles?
WPUI Summer Series
WPUI Summer Series
Summer Series: Decoding the Energy Industry
(cont.)
EMPIRES OF LIGHT: EDISON, TESLA,
AND WESTINGHOUSE
July 29: Our Non-Carbon Based Technologies
July 31: How does power get delivered to my switch?
August 5: Under Siege? The Social Contract that
Created the Monopoly
August 7: You are in Charge: Create an Energy
Portfolio
WPUI Summer Series
FROM ONE FORM OF HP TO ANOTHER –
THE SECOND INDUSTRIAL
REVOLUTION AND ELECTRICITY
WPUI Summer Series
• My townspeople, though skeptical as to the dangers to
be encountered when going near the lights, rejoiced
with me” The newspaper marveled how inside the stores
the electric lights were so powerful and so perfectly
white the green and blue can be readily distinguished.
By the end of the month I had several dozen new
customers, including a handful of local doctors, the
billiards parlor, the post office a stove store a shoe store,
and L.B. Brusie’s restaurant. The Edison people were not
sitting back, but they still had only half a dozen
customers. They were limited by distance as I was not.
• William Stanley, March 1886
WPUI Summer Series
THE FOUR MOTIVATORS OF THE
SECOND INDUSTRIAL REVOLUTION
WPUI Summer Series
1
7/15/2014
WHAT MOTIVATED EDISON – THE
TINKERER
• “Addled”
• The Light bulb December 1879 –
“So Cheap…”
• August 1882, First Central Station
Powered Wisconsin
• Established the First Energy
Research Center
• Sell!
WHAT MOTIVATED WESTINGHOUSE –
SCALE
•
•
•
•
•
•
WPUI Summer Series
WPUI Summer Series
WHAT MOTIVATED TESLA
• Labor vs. learning, dreaming and doing
College Drop Out
Gas
Rail
Electricity
1886 First AC station
Connected Networks
THE BEGINNINGS 1878-1900
•
•
•
•
1878 Edison Electric Light Co
1879 Incandescent lamp
1882 World’s first hydroelectric system at Appleton, WI
1882 Pearl Street Station, NY (DC system)• First coal plant 85 customers with 400 lamps
• Economic to distribute w/in 1 mile of station
•
•
•
•
1886 First AC Central Station
1888 Tesla’s AC system prevails
Note: Early city franchises were nonexclusive!
29 franchises in Chicago alone granted 1882-1905—
expensive duplication resulted
WPUI Summer Series
WPUI Summer Series
YOUR UTILITY BILL 1882
BREAK HERE FOR SCOTT
• Residential Rate: $7.00/lamp ($159 in 2010)
• A 16 hp lamp cost $1.70 ($38 in 2010)
• Supplier: Appleton Edison Light Company
WPUI Summer Series
WPUI Summer Series
2
7/15/2014
AND SO IT BEGINS
• Inventors and investors establish many different,
competing companies
• Competition by locality and by technology
• Major uses:
REGULATORY HISTORY:
MONETARY SPEED BUMP IN 1907
• JP Morgan became King—
• Bankruptcy led to consolidation and market power
• City street lighting
• Streetcars
• Interurban railways
WPUI Summer Series
WPUI Summer Series
LEADS TO…
AND THEN TO…
• Cycles of success and failure, new entrants into
business, consolidation of the players
• Expansion into providing power for commercial and
industrial uses, residential appliances
• An understanding of extremely capital-intensive
nature of providing electricity—
• An understanding of need to serve load across
multiple sectors – evening lighting and residential,
daytime commercial and industrial – to make the
enterprise economically efficient
• Squeezing out competition
• Concerns over corruption and struggle between
local and state political control
• Concerns over economic and political power of
corporations
• Concerns over economic inefficiency of
decentralized competitive model
WPUI Summer Series
WPUI Summer Series
GRAFT
SAMUEL INSULL—THE INDUSTRIALIST
THIS IS A NATURAL MONOPOLY
Detective Burns trapped Supervisor Lonergan in a
sting operation and forced him to confess about the
graft operations at City Hall. Lonergan exposed the
Home Telephone, Bay Cities Water, PG&E, Pacific
Telephone Co., United Railroads, and the Parkside
Realty bribery scandals.
March, 7, 1907 Sacramento Bee
WPUI Summer Series
• And Adam Smith says it is ok….
• One of the largest Holding
Companies in the US
• Vision of electric utilities as natural
monopolies and necessary for
economic development
• But, he was an industrialist who
saw that a workable competitive
market was disappearing
WPUI Summer Series
3
7/15/2014
THERE WERE BENEFITS FROM
MONOPOLIES
• Systems require coordination for efficient productivity
BUT FOR THE EARLY 20TH CENTURY
• Corruption
• Concerns over economic
and political power of
corporations
• Concerns over economic
inefficiency of decentralized
competitive model
• And dependence on
energy had become
common and a common
good
WPUI Summer Series
WPUI Summer Series
HOW TO MANAGE COMPETING
SOCIAL GOALS
STEP BACK: LEGAL FOUNDATIONS
• More people
employed—cash
increased demand for
goods
• Education was moving
forward in all classes of
people
• BUT at what cost?
• Enter “Public Good”
• English common law (1600s) – Notwithstanding the
rights associated with private ownership of property,
sometimes a private owner’s business becomes
“clothed with a public interest” and ceases to be
solely private; the government assumes a role in
protecting that public interest.
WPUI Summer Series
WPUI Summer Series
1907 WISCONSIN STEPS FORWARD
ACCORDING TO WISCONSIN
STATUTES
• 1905: Three-member Commission appointed –
inadequate for the purpose
• “reasonably adequate service and facilities” be
available at “rates that are reasonable and just.”
• July 9, 1907: Wisconsin becomes first state in nation
to regulate utilities
• Wisconsin Railroad Commission is restructured as the first
state commission with authority to regulate electric utilities’
rates, set standards of service, and regulate issuance of
securities.
• 1930: Every state except Delaware has a utility regulatory
commission.
WPUI Summer Series
WPUI Summer Series
4
7/15/2014
ELECTRICITY WAS NOW OFFICIALLY
A PUBLIC GOOD
VOCABULARY: HOLDING COMPANIES
• One moved goods, the other made goods
WPUI Summer Series
1935 PUBLIC UTILITIES COMPANY
HOLDING ACT (PUCHA)
• Trust-busting initiatives that were
enacted in response to the
government investigations of the
Wall Street Crash of 1929 and
ensuing Great Depression,
• By 1932, the eight largest utility
holding companies controlled 73
percent of the investor-owned
electric industry.
• Their complex, highly leveraged,
corporate structures were very
difficult for individual states to
regulate.
WPUI Summer Series
VOCABULARY: WHAT IS A PUBLIC
UTILITY
• …not owned by the public, but working in the
public’s interest (Key difference is ownership and
cash flow)
•
•
•
•
Municipal
Rural Electric Cooperatives
Investor Owned Utilities
Federal Projects
WPUI Summer Series
WPUI Summer Series
THE REGULATORY COMPACTS OF 1935
BIG CHANGE
RESPONSIBILITIES
• Bargain between regulator and regulated
• Private property put to use in the public interest
• Government will protect the interests of both the
consumer and the supplier
• Supplier has both rights and responsibilities
WPUI Summer Series
• Obligation to serve all customers in territory
• No discrimination in providing service or in charging
rates (no favoritism)
• Provide safe and reliable service
• Do not build unnecessary facilities or incur costs for
unnecessary services
• Open the books to regulators
WPUI Summer Series
5
7/15/2014
RIGHTS
• Franchise to serve defined territory
• Can charge rates to cover the reasonable cost of
service
• Entitled to receive a fair and reasonable return on
investment
KEY POWERS
• State Commission reviews rates and approves new
construction projects
• Rates set to recover costs on capital investments
and operating expenses
• “Used and useful,” “Prudent investment” concepts
• “Allowed (to earn) a rate of return”
WPUI Summer Series
WPUI Summer Series
“DO NOT BUILD UNNECESSARY
FACILITIES OR INCUR COSTS FOR
UNNECESSARY SERVICES”
THE RULES CHANGED: 1977/78
SECOND BIG CHANGE
• 1936 Rural Electricification Act
• Targeted towns with
populations under 2,500
• In 1930 only 10% of farms had
electricity
• By 1945, 45% of farms had
electricity
WPUI Summer Series
PURPA—1977
END GENERATION MONOPOLY
• Required rates to be based on cost of service
• Encouraged time-of-day pricing – off-peak and onpeak
• Required interruptible rates
• Created incentive for small power producers –
“Qualified Facilities” (QFs)
• Required utilities to buy power from QFs if price is
below the utility’s “avoided cost”
WPUI Summer Series
• 1978 Public Utility Regulation Act (PURPA) passed as
part of National Energy Act.
• Utilities must seek advice from the public
• Walk soft and carry a big stick….
• 1987 Deregulation Begins:
WPUI Summer Series
THE BEGINNINGS OF DEREGULATION
ENERGY POLICY ACT OF 1992
• Open access to transmission system is required –
eliminate the transmission owner’s ability to assert
monopoly power over the grid
• Regulation moves to the Federal Level—Interstate
Commerce Rules
WPUI Summer Series
6
7/15/2014
WELCOME!
FEDERAL ENERGY REGULATORY
COMMISSION (FERC)
• Successor to Federal Power Commission
• Numerous orders designed to create competitive
wholesale power market:
• Functional separation of generation and
transmission
• Equal, open access to the transmission grid
• Regional transmission organizations (RTOs MISO)
• Reliability standards and penalties
IN SUM
12
12
10
10
11
11
WPUI Summer Series
WPUI Summer Series
IN SUM
BUT BEFORE WE LEAVE, ONE LAST KEY
PLAYER
WPUI Summer Series
WPUI Summer Series
METERS—THE CUSTOMER
CONNECTION—THE BILL PLEASE
1980’S NEW TASK—THE CUSTOMER JOINS
THE UTILITY
• 1889 — The Watt Hour Meter
• 1902 The Ball bearing meter—generally adopted by
all by 1930
• Average cost in 1925 - $0.65/KWH
• Average cost in 2008 - $0.08/KWH
• 1980s — Electronics enter
• 1984/5 work on transparent two-way
communication systems
WPUI Summer Series
1980—Automated Meter Reading (AMR)
- One-Way remote reading
Automated Meter Infrastructure (AMI)
•Two-Way Communications
•TOU
•Critical Tier Pricing
•Tamper Detection
•Remote Connect/Disconnect
WPUI Summer Series
7
7/15/2014
2005“SMART METERING” THE CUSTOMER
NOW MAY BE THE SELLER
Residential Metering
• Two-Way Communications
• TOU
• Critical Tier Pricing
• Local Area Network (LAN)
iClicker Question
The role of regulation is to:
A: Approve rates for investor owned utilities
B: Approve the siting of power plants in WI
C: Mimic market effects in the absence of
competition
D: Approve interstate transmission lines
E: Create regulatory rules that require a certain % of
renewable power to be built by IOUs
WPUI Summer Series
WPUI Summer Series
iClicker Question
iClicker Question
Are monopolies always counter to
the public good?
Are investor-owned utilities
guaranteed a rate of return?
A.Yes
B. No
A.Yes
B. No
WPUI Summer Series
WPUI Summer Series
8