This is another essay in Civic Way’s series on Texas’ recent energy crisis. Our last newsletter introduced the issue and our last essay addressed the storm’s aftermath. This essay summarizes the status of deregulation and the next essay will outline possible strategies for improving energy management. 

Highlights:

• Our nation’s energy infrastructure, not just in Texas, requires major investment and modernization
• Until the 1990s, our electricity industry operated in a stable, state-regulated environment
• Starting in the mid-1990s, many states began deregulating their power utilities, adopting a variety of regulatory models with a range of risks and rewards for their customers
• Our energy system is more patchwork than network with about 60 percent of all power delivered via deregulated models and 1/3 through regulatory models
• We cannot reform our energy system without first restructuring our power grid for all states

Where We Are

With hundreds of power plants and over 700,000 miles of long-distance transmission lines, the US power grid is a remarkable achievement. Our lives are unimaginable without it—lights at night, heat in the winter, cool air in the summer, refrigeration for food, and functioning appliances, computers, machinery and life-saving equipment. The US National Academy of Engineering (NAE) even recognized the US power grid as the 20th century’s greatest engineering achievement.

Regrettably, the American power grid is aging. Built mostly during the 1950s and 1960s (with an anticipated 50-year life expectancy), much of the grid has outlived its useful life. And the world for which it was designed is vastly different. From 1950 to 2019, America’s electricity demand grew at least 13-fold. Demands for power are changing—electric vehicles are only one example. And, as our demands for power evolve, climate change is compelling us to increase our use of new energy sources like renewables (e.g., solar and wind).

It would be some consolation if our power grid investment kept pace with our fluid energy landscape, but it has not. The American Society of Civil Engineers (ASCE), in its most recent Infrastructure Report Card, estimated that grid infrastructure needs will outpace spending by nearly $200 billion through 2029. While the ASCE bumped the US power grid grade up from D+ in 2017 to C- in 2021 (due to new energy technologies and large transmission and distribution investments), grid modernization is overdue. And our governments, public utilities, investo-owned utilities and other energy firms may not be up to the challenge.

Why does the grid’s condition matter? Like anything else, an aging, unmaintained grid poses risks. More frequent (and longer) power outages. More unexpected business and personal disruptions. Rising damages, losses, injuries and fatalities. And these disruptions will likely be exacerbated by severe events, like Texas’ winter storm or California’s drought. One reinsurance company—Munich Re—estimates that severe US weather damages totaled $95 billion in 2020, up from $67 billion in 2019.

While Texas and California have received the most headlines, other states are experiencing issues. Maine, where a 2017 windstorm left 500,000 without power (some for days), has experienced the nation’s most power outages and second longest outages. This record, coupled with reportedly slow restorations by the state’s largest utilities, has not helped the state’s economic development efforts. A state problem can quickly become a national issue.

How We Got Here

From the outset, in 1882, when the Edison Illuminating Company, America’s first investor-owned electric utility, delivered power to its initial customers in Manhattan, we tried to regulate the power industry. During the Progressive era, states gave investor-owned power companies a public monopoly over designated service areas in return for a commitment to reliable, affordable service and a steady rate of return (as regulated by state public service commissions).

Under most state regulatory schemes, electricity utilities were vertically-integrated. That is, they owned the power plants and distribution and transmission lines, controlling the entire electricity supply chain from generation to transmission to delivery. State regulators (public service commissions) oversaw infrastructure investments, approved customer rates and allowed utilities to recoup their costs and earn profits. Utilities often pursued other strategies for maximizing profits (e.g., lobbying and mergers).

By the early 1930s, after years of consolidation, a few utilities controlled half of the nation’s electricity. By 1935, after the collapse of the Commonwealth Edison empire, FDR signed the 1935 Public Utilities Holding Company Act (over fierce utility opposition). The new law imposed new limits on markets and rates, forced utilities to divest assets and established the Federal Power Commission (now the Federal Energy Regulatory Commission) to regulate power and infrastructure across state lines.

Energy generation, transmission and distribution continued to be largely one-way, with power moving from a small number of large power plants to our homes and businesses. Power plants generated electricity and then transmitted the power via transformers and high-voltage transmission lines across long distances to local transformers. Utilities then transmitted power through smaller, lower-voltage lines to poles along public roads and streets and distributed the power (after another voltage reduction) into homes and businesses.

Until the 1990s, state Public Utility Commissions (PUCs) continued to regulate most investor-owned electric utilities. PUCs approved utility rates to ensure that utilities received a reasonable return for investing in peak demand capacity. This policy reduced the risk of service disruptions, but shifted the risks of ill-conceived or untimely investments to customers (e.g., the stranded costs of unbuilt nuclear plants).

The Allure of Deregulation

In the early 1990s, states (encouraged by the Edison Electric Institute) began exploring ways to promote competition and reduce power costs.  Many states adopted deregulation. One popular strategy was to force electric utilities to sell their generating assets, but retain power line assets (thereby becoming transmission and distribution utilities). This approach spawned independent energy suppliers with their own power plants. Some states continued to regulate power lines, but created new retail (customer choice) and wholesale markets.

In 1996, the Federal Energy Regulatory Commission (FERC) issued Order 888, allowing states to restructure electric power industries, and California became the first state to deregulate power. Large industrial power consumers grew frustrated with the high rates of the state’s three largest private utilities. After selling their power generating plants and retiring the related debt, the utilities seized the opportunity to increase profits by expanding into other areas (e.g., energy trading and other states), essentially swapping regulated, guaranteed prices for market risks.

Texas followed California’s lead, adopting a laissez faire model that it hoped would reduce costs. With bipartisan support (and Enron’s guidance), Texas allowed their utilities to own and operate transmission and distribution lines, but forced them to relinquish any power generation assets. It assigned regulatory control for transmission and distribution lines to the Public Utility Commission of Texas (PUCOT), but transferred regulatory control for power generation to another entity. It created a retail market allowing customers to choose a power provider which would buy electricity from power plants, wind turbines and solar-panel farms.

Most other states adopted a deregulated, market-based model, but, after Enron’s collapse, state-level deregulation efforts stalled. California’s deregulation worked well until a 2001 convergence of weather, inadequate external power and investment gaps ignited wholesale prices. The utilities were forced to pay market prices for power, which led to rolling blackouts, crushing utility debt and Pacific Gas and Electric’s bankruptcy filing. Last summer, California’s severe heat wave caused more rolling blackouts. This year’s winter storm in Texas and the ensuing outages have raised more concerns about deregulation.

Perspective is needed. Depending on the form it takes, energy deregulation has risks and rewards. Under deregulation, power generators face a never-ending dilemma. Should they protect their customers against severe, but infrequent, weather events with the requisite capital investments that strain their financial condition? Or should they defer those investments and risk outages, litigation and financial disaster? In addition, without adequate controls, deregulation can increase opportunities for middlemen (like Enron) to seize windfalls and cause rolling blackouts and high prices.

Implemented with sensible regulatory guardrails, deregulation offers tangible benefits. A balanced deregulation strategy can promote competition, reduce costs and improve services. It can lead power providers to replace costly energy sources (like coal plants) with cheaper sources (like renewables) that diversify the state’s energy portfolio and reduce carbon emissions. And, unlike the Texas model, a balanced deregulation strategy can promote long-term planning, capacity markets and capital investments.

An Emerging National Grid?

The US does not have a national power grid. Rather, to facilitate commerce and improve reliability, its electricity network has slowly evolved from a patchwork of state and local grids to a regional network. For the continental US, that network comprises three independent systems:

• Eastern Interconnection – covering the eastern US from the Great Plains states (excluding most of Texas) eastward to the Atlantic coast
• Western Interconnection – covering the western US from the Rocky Mountains and Great Plains states to the Pacific coast
• Electric Reliability Council of Texas (ERCOT) – covering nearly all of Texas

Within those three systems, there are ten membership-based nonprofits that facilitate safe, efficient power distribution within regions. These entities, known as Independent System Operators (ISOs) or Regional Transmission Organizations (RTOs), were formed in the 1990s in response to the FERC’s competitive generation and open transmission policy.

In most regions, the RTOs and ISOs replaced utilities as grid operators, overseeing power flow across grids. They run the wholesale electricity market exchanges, using complex software to select the day-ahead and real-time bids from power generators that offer the most promising blend of affordability, safety and reliability. In the Northeast, RTOs evolved from power pools that coordinated power delivery for many years.

Since 2000, Congress has reinforced its commitment to deregulation, but without creating a truly national grid. In 2005, it repealed the Public Utility Holding Company Act of 1935 and created a retail choice system. It created the North American Electric Reliability Corporation (NAERC) to develop voluntary utility guidelines. It enabled the creation of market monitors to oversee power generation prices, but largely failed to reinforce national regulatory authority.

Today, due in part to Congressional and state legislative actions, the US electricity market is fragmented and a national grid aspirational. The markets vary widely by region:

• Traditional regulation – Some states, mostly in the Southeast and West, retained the traditional, vertically-integrated model, but some use wholesale bilateral trading and voluntary exchange markets
• Partial state-based deregulation – California formed its own RTO to operate the grid and wholesale markets, but chose not to offer a retail (customer) choice market; the California ISO (CAISO) coordinates about 80 percent of the state’s power delivery; the New York ISO represents another state-based example
• Partial region-based deregulation – there are several regional models, including PJM Interconnection, an RTO serving 13 states from Virginia to Illinois, the Midwest ISO (MISO), which serves the Dakotas, Minnesota, Iowa, Wisconsin and parts of Illinois, Indiana, Ohio and Canada, the New England ISO and Southwest Power Pool (SPP); most run capacity markets for peak demand power
• Deregulation – Texas created its own grid (for most of the state), its own RTO and a retail choice market, but opted not to create a capacity market

The result remains a patchwork. RTOs manage about 60 percent of all power supplied to load-serving entities in the US (in some deregulated states, like West Virginia, rates are regulated). States with traditional regulatory models serve another one-third of total demand. Some cities have their own utilities (e.g., Austin, Los Angeles and Nashville). Many rural areas are served by customer-owned cooperatives. Whether they live in regulated or deregulated states, most customers are served by investor-owned utilities.

Our energy bill is overdue. We can allow ourselves to be distracted by calamities in individual states, but we cannot reform our energy system—in Texas, California or any other state—without first restructuring our entire power grid.