FEATURE ARTICLE
Reengineering the Electric Grid
Deregulation places new demands on one of the world's largest engineered structures—and presents new opportunities for educated consumers
Thomas Overbye
From Pearl Street to Open Access
The modern electric utility industry got its start back in the early 1880s with the opening of Thomas Edison's Pearl Street station in Manhattan, which initially provided a grand total of 59 customers with direct-current, or DC, electricity. Suddenly the night could be banished by the brilliance of electric light, rather than held at bay by a flickering flame. The popularity of the new invention soared: By the end of the 1880s, DC electric systems were common in many cities.
However, direct current could only be distributed over a few city blocks because of the inefficiencies that then limited DC transmission. The reason lies in two simple laws of physics. The power transmitted through an electric line (commonly expressed in watts, kilowatts, megawatts and so on) is proportional to the voltage times the current. But power lines are not perfect conductors, and there is always power lost to resistance. This loss is proportional to the square of the current. Hence, the way to transmit power efficiently over a long distance is to keep the voltage high and the current low. But in a DC network voltage cannot easily be stepped up or down; hence the early distribution systems had to maintain low voltages throughout in order to provide low-voltage power to the end user.
Edison's DC networks, therefore, were doomed to obsolescence. George Westinghouse championed a better idea: alternating current, or AC. With AC systems, the voltage on a line can be changed by a simple device, the transformer. Electricity can be transmitted at high voltages, with transformers stepping up the voltage at the generator and then stepping it down to relatively low voltages for household use. By 1896, AC lines delivered electricity from generators at Niagara Falls to Buffalo, some 20 miles away. The AC transmission grid was born.
A problem quickly developed. Electric power was a natural monopoly. Centralized systems with larger generators that reduced costs and attracted business customers were clearly more efficient than specialized generators and masses of wires. Private monopolies began to emerge, and states stepped in to regulate them, establishing public commissions with the authority to grant a private investor-owned utility an exclusive franchise to serve all the customers in a particular geographic location. Interstate holding companies began buying up these utilities and were in control of most of the power market by the 1920s. After several of these holding companies collapsed, Congress passed the Public Utility Holding Company Act of 1935 (PUHCA), and a national regulatory system was born. Electric utilities were established as vertically integrated natural monopolies serving captive markets. In return for their exclusive franchise the utilities had an obligation to serve all existing and future customers within their service territory, with many aspects of their business operations, including their electric rates, regulated by the states. It was a cost-plus business: The utility and regulators determined the allowable expenses, which were used to determine the customer rates, which the customers (known then as ratepayers) had to pay.
Control of the electric transmission grid was centralized, with the grid shared by utilities that functioned more as colleagues than competitors, all operating under the same monopolistic paradigm. Private, investor-owned utilities provided electric service to the vast majority of consumers, with municipal systems, rural cooperatives and federal systems (such as the Tennessee Valley Authority) meeting the needs of the rest.
Until the early 1970s there were few complaints with this system. Electric rates were steadily decreasing while electric usage skyrocketed, with average annual growth rates above 10 percent during the first third of the century and then in the seven to eight percent range until 1970. The vertical monopoly structure provided a stable basis for building an extensive and fairly reliable system. In an era where economic progress was tied to economies of scale, large power plants, and the high-voltage transmission system needed to move the power from these plants to the customers, could be engineered, built and operated with the assurance that legitimate costs could be passed on to the ratepayers. By 1970 transmission lines crisscrossed the continent, with operating voltages up to 765 kilovolts.
Today the North American power grid consists of four large subsystems. Each is a synchronous AC system, meaning all of the electrical generators and motors are operating in phase with one another. The Eastern Interconnect supplies power to most users east of the Rocky Mountains. The Western Interconnect supplies most users west of the Rockies and portions of northern Mexico. Two subsystems operate with relative independence: The Quebec Interconnect covers that Canadian province, and the Texas Interconnect makes Texas the only state whose electricity is not regulated as interstate commerce. The problem of connecting these systems so as to allow specified power transfers among them has been solved, as it happens, by bringing back direct current. With the development of high-voltage DC transmission technology, DC lines with power-conversion facilities at each end have turned out to be highly economical for transferring power asynchronously between subsystems.
Change came suddenly to what seemed a fairly efficient regulated system. The 1970s brought inflation, increased fossil-fuel prices, calls for conservation, growing environmental concerns and fears about the safety of the nuclear power industry. Expected increases in electric demand never materialized. But the new generation capacity, planned a decade earlier, did. The era of ever-decreasing electric rates ended abruptly, replaced by regular increases.
Some utilities, with few plants under construction, weathered this period with relatively minor rate increases. But neighboring utilities that had the misfortune of having too many plants under construction, particularly nuclear plants, saw their costs and their rates skyrocket. For retail power consumers, the result was a growing disparity in electric prices. Meanwhile Congress was pressured to respond to political concerns, including U.S. dependence on foreign oil and interest in alternative generation technologies. The result was the Public Utility Regulatory Policies Act of 1978 (PURPA). PURPA mandated that each investor-owned utility had to purchase power at its avoided cost from a new class of generators, known as qualifying facilities, located in its service territory. These nonutility generators had to meet certain ownership, operating and efficiency criteria. The implementation of PURPA was left to the individual states, resulting in nonuniform definitions of avoided costs. The new players could only sell to the local utility at rates controlled by the regulators. PURPA therefore introduced competition into the generation end of the industry but did not dismantle the system of investor-owned utilities.
The opening of the rest of the industry to competition is taking place as a result of the Federal Power Act of 1992, and Orders 888 (Promoting Wholesale Competition Through Open Access, Nondiscriminatory Transmission Services by Public Utilities) and 889 (Open Access Same-Time Information System) issued by the U.S. Federal Energy Regulatory Commission (FERC). The aim of these changes was simple: to provide nondiscriminatory access to the high-voltage transmission system so as to open the grid to true competition in the generation market. That is, the transmission-owning utilities now must treat power from other generators the same way they treat their own power. The goal of these changes has been to develop bulk electricity markets, providing customers with their choice of electricity supplier. This is certainly more easily said than done.
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