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The power makers: the inside story of America's biggest business and its struggle to control tomorrow's electricity.

The Power Markers

The nation's electric utility companies are the great icebergs of the American economy. Their vast, largely submerged bulk eludes the attention of the public. Last year, electric utilities accounted for one-half of all new common stock issued in America and one-third of all new corporate financing. Annually, the utilities spend four times more on new equipment than all U.S. automakers. The industry has a long-term debt of $100 billion, on which annual interest payments, passed on to ratepayers, exceed $10 billion.

The danger posed by these icebergs is reflected in some different numbers. The nation's utilities are currently awash in excess power, having gone on a construction binge in the last two decades that has left them with 40 percent more capacity than needed to meet current demand. This is dispite the industry's abandonment, since 1973, of more than 150 unfinished nuclear-and coal-powered plants.

One consequence of this colossal economic miscalculation is that monthly utility bills for the typical consumer have tripled since 1973. More rate shocks lie ahead. For example, customers of the Public Service Company of New Hampshire, owners of the troubled Seabrook nuclear power plant, soon will see their bills leap 182 percent when the $4.5 billion plant is finally completed.

If this suggests the wisdom of refraining from further construction, you'd never know it from the multimillion-dollar advertising campaign the utilities are now waging under the auspices of the Edison Electric Institute. The ubiquitous ads warn of devastating power shortages in the near future unless Americans face up to the challenge at hand. According to industry planners, that challenge demands the building of 438 large central generating stations in the next 15 years. That's almost two new plants a month, at a total cost of $1.8 trillion.

Such a lopsided use of the nation's limited pool of investment capital might be palatable if the industry's premise that more electricity use equals more progress were true. Experience and logic, however, suggest just the opposite. What happened to the consumption of another key source of energy--oil--during the 1970s? As its price rose tenfold, consumption plummeted. Consumers found countless ways to conserve, and the government put a healthy dent in oil consumption by mandating fuel-efficient automobiles. While two OPEC price shocks clearly damaged our economy, they did not destroy it; real economic growth during the 1970s still was greater than during the 1950s.

What's happening now with electricity is similar to what happened with oil. It's also something any Economics 101 student could have predicted. As prices have spiraled upwards, consumers have moderated or even reduced their demand. The specialty steel and aluminum industries, for example, have discovered that investing in modern equipment that lowers electricity costs is one of the best strategies for survival in a competitive market. As for the electricity-equals-progress equation, less of the former often means more of the latter. Modern microchip computers are an excellent example. Less expensive, more compact, and far more capable than their transistorized ancestors, these computers also use far less electricity.

There is nothing sacred in a perpetually climbing demand curve for any commodity. Yet for utility executives who have based their multi-billion-dollar construction programs on the inviolate truth of such a curve, doubting its validity is a bit like asking an archbishop to question the existence of God. It's unpleasant enough having to explain to irate ratepayers that, yes, rates are going up, and yes, it's largely to pay for an abandoned nuclear plant that will never produce a watt of power. People caught in such a position understandably would prefer to believe that somehow, someday, the dire shortage will come and that once ungrateful customers will suddenly recognize them for having been lonely prohets without honor.

This helps explain the ads, which are nothing more than an effort in the age-old game of self-fulfilling prophesy. And even if electricity demand does continue to rise, the industry has a second, even more terrifying, nightmare: a dramatic change in how consumers get their power.

For example, a single technological break-through in photovoltaic cells, which convert sunlight directly to electricity, could allow customers to bypass utilities entirely for most, if not all, of their power needs. Imagine what would happen if homeowners could purchase photovoltaic cells at their local Pay and Pak and install them on their roofs. Consolidated Edison might soon go the way of the iceman in the age of the refrigerator.

Public insulation

Richard Munson's The Power Makers* is a sober and thoughtful analysis of the troubled electricity business. The book has the virtue of being more fair-minded than what some might expect from a former executive director of the Solar Lobby. Munson's style is not elegant, but that is a small complaint. He also makes his account more interesting by devoting considerable space to a lively history of the electric utility industry that sheds light on how the industry reached the current crisis.

* The Power Makers: The Inside Story of America's Biggest Business and Its Struggle to Control Tomorrow's Electricity. Richard Munson. Rodale Press, $16.95.

One of the main characters in that saga was Samuel Insull, a onetime assistant to Thomas Edison, who began building a utility empire in Chicago in 1892. At that time, the industry was characterized by the kind of entrepreneurial spirit that would send a George Gilder into raptures. The result, however, was not efficiency, but waste and high prices. Most companies had their own generating stations, which seldom operated at full capacity and frequently offered different kinds of power. Appliances set to operate on 40 cycles of electric current became useless if the owner moved across the street to a house serviced by 126 cycles. Insull's lasting contribution to the industry was to propose a deal: in exchange for receiving a monopoly to provide electricity that would be more efficiently generated and thus cheaper, he would submit to public regulation. This model became so successful that by the mid-1920s, Insull ruled an empire of utilities that stretched across the Midwest.

In one of the most spectacular failures in the history of American capitalism, Insull's great edifice collapsed during the Depression. The folding of his enterprise became a major issue in the 1932 presidential campaign. Herbert Hoover embraced Insull's model of private ownership and public regulation. FDR championed the public ownership of utilities as he had during his years as governor of New York, and he often attacked Insull as the epitome of capitalism run amok.

Within a month of his inauguration, Roosevelt made good on his promise to create a Tennessee Valley Authority. Many--especially executives of private utilities--saw the TVA as the beginning of the end for private power. Large public power projects meant cheaper electricity: the TVA's rate was half that of private utilities in the region. And if the eventual goal was a unified, national power grid, it made sense to many that such a vast network be publicly regulated and publicly owned, much like the nation's highway system.

The private utility industry didn't give up without a fight. The distractions provided by World War II and the Cold War helped its cause, as did such obscure figures as George Vennard, an engineer-turned-advertising director for the electric utility industry. Through marketing surveys, Vennard learned that "government-owned' had a far more sinister ring than "public utility,' and that "investor-owned' sounded a great deal more attractive than "private power.' He wrote ads accordingly. One that appeared in the Saturday Evening Post showed a proud father and his two children. "Sure I used to think it wouldn't do any harm to have the government run the electric business,' the man says, "but I've changed my mind. Because when government meddles too much in any business, you get socialism.'

Of course, it was not advertising that saved private utilities from nationalization. Technological advances and economies of scale were conspiring to make electricity prices drop steadily. And while the industry promoted the "all-electric home' as the ultimate symbol of modern living, utility executives busied themselves with plans for the small army of new plants necessary to meet the demand they were helping to fuel.

In retrospect, it appears the industry was setting a trap for itself that would spring shut during the 1970s with the utilities' headlong rush into nuclear power. Engineering and safety problems led to unexpected delays, interest rates rose, and utilities became the target of critics who wanted to halt the building of new plants. For the first time in decades, adding new plants to the power grid did not cause rates to fall. Now rates had to increase--a lot. And as rates increased, demand decreased. With the utilities passing more and more costs to the consumer, demand declined further, forcing a new round of rate hikes. This vicious circle--far more than environmentalists, government regulators, or Three Mile Island-- has brought America's nuclear industry to its knees and put electric utilities in difficult straits.

To his credit, Munson does not dwell on the oft-told tale of the nuclear industry's woes, nor does he think the obvious lesson is a return to public power. He wisely notes that the nation's most notorious nuclear debacle was caused by a public utility, the Washington Public Power Supply System, which has abandoned two plants, mothballed two more, and left behind $2.3 billion in defaulted bonds.

Munson instead attributes the industry's plight to its inflexibility. He also offers a sublime nugget of anthropological insight. For decades, Munson writes, the electric utility industry was considered the dumping ground for medicore executives, "who traditionally came from the bottom third of their engineering class and were protected from competition by regulatory bureaucracies.' These executives were scorned by others in the private sector, who saw them as "unimaginative laggards,' incapable of hacking it anywhere else. Accordingly, many utility executives saw a multi-billion-dollar construction program as a chance to prove their prowess as true captains of industry.

Hindsight, of course, is easy. Unnecessary plants were built, and somehow will be paid for. The appropriate question is where the electric utility industry goes from here.

Munson identifies two major strategies for the future. The first is familiar: greater reliance on "alternative technology.' There's nothing new here, though Munson does understand that not all alternative technologies make economic sense. He also demonstrates that there are alternative technologies that make more economic sense than large nuclear power plants, which typically take ten years to complete and are difficult to abandon if circumstances suddenly change. If electricity demand is volatile in an era of rising prices, Munson argues, it is far better to rely on conservation and large numbers of smaller generating facilities. Thus, if demand suddenly falls, the system has the flexibility to adapt.

Munson's second strategy is further deregulation of the electricity industry. He argues that the arrangement pioneered by Insull--a guaranteed market for a utility's power in exchange for publicly regulated rates--no longer makes sense. To encourage cheaper, more flexible alternatives to large generating plants, there should be more competition in the electricity marketplace.

As an example of the potential, Munson points to California, where "energy entrepreneurs' sell power to the state's utilities, using cogeneration (a process that uses fossil fuels to produce both heat and electricity); small dams; windmills; solar energy; and even the incineration of garbage. Under a little-known law enacted during the Carter administration, the Public Utilities Regulatory Policies Act (PURPA), state regulators determine the price private utilities in California and elsewhere must pay for such power. California also allows independent producers to sell directly to large industrial customers, bypassing utilities entirely. In a few years, Munson notes, such independent producers will provide 25 percent of the state's electric capacity.

Munson urges even more deregulation. California's lead in letting independent producers sell directly to large customers should be followed on a national scale, he says. PURPA should be expanded to require public projects, such as the TVA, to purchase independently produced power. Private utilities should also be forced to relinquish their stranglehold on their portions of the nation's power grid, which includes 600,000 miles of high-voltage transmission lines. If state regulators could require these utilities to "wheel' (transmit and distribute) other utilities' power, customers in high-rate areas could buy cheaper power from areas that happen to have surpluses.

No blind enthusiast for the free market, Munson recognizes that public regulation of utilities is still vital to address concerns such as safety, which private businesses are prone to ignore. If a private producer should go bankrupt-- an occupational hazard in any deregulated market--consumers need assurance of minimum disruptions in service. There is also a danger, Munson notes, that the main beneficiaries of competition will be large, commercial customers, whose size gives them considerable clout in the marketplace. Experience in the recently deregulated telephone and airline industries illustrates this latter problem. Businessmen plying the Los Angeles-to-New York trade in both cases have fared far better than the Aunt Millies who want to visit their Sister Pearls in Dubuque or talk on the phone with their Cousin Selmas across town.

Indeed, Munson cites the AT&T breakup as an example of deregulation that came too fast and with too much disruption. He urges that deregulation of the electric utilities industry proceed more gradually and that it be confined largely to producing power. Responsibility for transmitting and distributing that power should remain in the hands of regulated utilities.

Needless to say, the partial deregulation of this industry has not been greeted with wild enthusiasm by utility executives, especially those struggling to peddle expensive, excess power. A more puzzling reluctance can be found among those whom one might expect to embrace deregulation with open arms: conservatives. The Reagan administration has not taken a clear stand on this question, doubtless realizing that further deregulation might well seal the fate of the moribund nuclear power industry.

The machinations of Senator Alfonse D'Amato are even more revealing of a certain double standard on the right. D'Amato recently convinced his Senate colleagues to approve a government bailout for the embattled Shoreham nuclear power plant on Long Island. The bailout, which came in the form of making the Long Island Light Company eligible for government-subsidized industrial development bonds, will cost the U.S. Treasury about $500 million through 1989. After succeeding in making the bailout part of the Deficit Reduction Act of 1984, D'Amato denounced the overall bill for its "total lack of spending curtailment.'

The ironies are glaring. Here are Republicans, championing an industry that is "private' in name but whose club-footedness and inflexibility reminds one of Soviet agricultural commissars working on their next five-year plan. Meanwhile, the nation's windmill operators, solar energy lobbyists, cogeneration enthusiasts, and others urge economic deregulation, using the arguments of Adam Smith. There is also a sizable political opportunity here waiting to be exploited, just as FDR did a half-century ago with public power. By promising to provide society with a basic commodity for a lot less money, further deregulation will free up billions in investment capital that can be channeled into such worthy causes as research and development, starting new businesses, and rebuilding our dilapidated infrastructure. Spending $1.8 trillion on those other purposes would do a lot more for economic growth than pouring it into more large power plants--especially ones that may never be turned on.
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Copyright 1985, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Keisling, Philip
Publication:Washington Monthly
Article Type:Book Review
Date:Dec 1, 1985
Words:2553
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