This is the fourth installment of my article on why electric distribution cooperatives must be able to operate smart distribution grids with fiber optic networks because of the advent of fundamental electric utility industry restructuring from technology to infrastructure to business models.
Part 4 – THE LEGACY U.S. ELECTRIC UTILITY BUSINESS MODEL
Universally available, reliable and affordable electricity became associated with the United States’ improvement in quality of life for its citizens, increased productivity of business and industry, and national competitive advantage. Electric utilities were vertically integrated, owning and operating both the generation and the transmission and distribution networks, They operated for nearly a century with an exceptionally favorable business model. They were able to operate as regulated cost-plus monopolies in protected, defined service areas. They were allowed to recover all of their costs of doing business plus a profit (ROI, or DSC, or TIER) from their captive consumers. Customers were more than willing to pay because electricity so greatly improved their quality of life and productivity of business. And, they steadily increased their consumption of electricity as they found more uses for it.
National electric energy consumption increased exponentially, resulting in steadily growing electric utility size, sales and revenues. At the same time, the per kWh cost of providing electricity and corresponding sales declined exponentially as a result of economies of scope and scale, increasing efficiency of generation and continued growth in sales. Electric utilities thrived while their customers benefited from abundant, affordable electricity
Regulation was considered necessary in order to (1) allow electric companies to operate as monopolies and avoid waste of capital in duplicate infrastructure, (2) create a regulatory compact that included an obligation to serve within the monopoly service areas, (3) protect customers from monopolistic price, (4) stabilize the cost of capital by reducing risk, and ensure affordable and reliable electricity service to consumers. Regulators determined adequate quality of service, reasonable costs of doing business, and limited profit margins. Electricity rates started to be regulated first by local then by state governments. Federal regulation became relevant when grids grew larger across state borders, thus generating interstate commerce. Regulation tightened after the 1929 stock market crash that was caused in part by the collapse of electric utility holding companies’ stock value.
This industry structure began to change after the 1973 OPEC oil embargo and subsequent “national energy crisis”, and the resulting 1978 National Energy Act. This legislation included the first significant legislative and regulatory institution of industry competition via the Public Utility Regulatory PolicyAct (PURPA). Vertically integrated electric utilities, once the sole source of electricity were required to purchase power from private developers qualifying renewable and cogeneration generation facilities.
The next installment of this article, Part 5, will discuss further developments that resulted in the steady erosion of the fundamentals of this electric utility business model.
