Reshaping the Electric Power Industry

By Flavin, Christopher | Management Quarterly, Summer 1995 | Go to article overview

Reshaping the Electric Power Industry


Flavin, Christopher, Management Quarterly


INTRODUCTION

As the twenty-first century approaches and the world enters the information age, it is important to ask how the electric power industry can prepare for this dramatically new era of more efficient, cleaner, and more decentralized technologies.

During the past decade and a half, many industries, from telecommunications to natural gas, have been extensively de-regulated and reshaped. Although none of these transitions has gone smoothly, it is clear that the process of deregulation has lowered costs for most customers, and offered a plethora of new technologies and services.

Today, the electricity industry is in the early stages of an equally profound transformation, but the stakes are even higher. Electric power is a $180-billion-a-year business in the United States - larger than any of the sectors above - and central to many of our most vexing environmental problems, from acid rain to nuclear waste and global climate change. However, the basic issues facing the industry are similar to those faced during the earlier transitions: how to shift from a monopolistic and heavily-regulated industry to one that is more competitive and flexible.

The reshaping of the electricity business promises to be complex and contentious. Already, various classes of electricity customers - large factories and small residential users, for example - are competing fiercely for access to the least expensive power. At the same time, many electric utilities are burdened with some $50 billion worth of "stranded assets," nuclear and fossil-fueled plants that are too expensive to compete in an open power market against some of the highly-efficient new generating technologies now being built by independent power producers. Environmental and consumer groups fear that hard-won gains such as utility investments in energy conservation - estimated at $2.8 billion in 1993 - and renewable energy generators that rely on wind and solar power will be sacrificed to the demands of a cut-throat market for low-cost kilowatt-hours of electricity.

While these concerns are legitimate, and none can be dismissed lightly, they are hardly a reason for stopping the process of change or stepping back to the electric utility structures of yesteryear. If done well - drawing on the lessons of earlier deregulatory efforts - the restructuring of the power industry could end up being good for everyone - small and large customers, utility shareholders, new technology developers, and even the environment.

The key is to make a rapid and clean transition to a truly competitive system in which power generation, transmission, and distribution are separate businesses that deal with each other via open, arms-length transactions. If today's power plants are quickly forced out onto the competitive market, and the uneconomic ones written off and shut down, consumer bills will fall, and a host of environmental problems reduced.

Through their continuing regulation of the transmission and distribution "wires" business, federal and state agencies will still have a mechanism for valuing environmental "externalities" and favoring demand-side management and renewable energy investments where appropriate. Indeed, under this model, it is likely that, as in the first decade of telecommunications deregulation, the next decade could see an unprecedented surge in new power generation, storage and control technologies, most of them small, modular and efficient, and all of them far less expensive than the power systems we rely on today.

ROOTS OF MONOPOLY

When Thomas Edison started the world's first electric power company in New York in 1880, it looked like a typical under-financed start-up venture, not much different from hundreds of other small businesses. In a Wall Street warehouse, Edison connected a coal-fired boiler to a steam engine and dynamo, then linked the plant by underground wire to a block of nearby office buildings. …

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