Regulation, Energy Market, Energy, Power, Electricity, Electric Power, US, North America Market Research: US energy regulation is not repeating itself, just changing its color

US energy regulation is not repeating itself, just changing its color

By Aiman El-Ramly,ZE datawatch

When charting important U.S. energy market developments from the Progressive Era to present, it becomes clear that the boom and bust cycles that have characterized industry developments have had deleterious effects.

It Has Been a Long Time

135 years after Thomas Edison formed the Edison Electric Light Company in 1878 and the subsequent patent for an electricity distribution system in 1880, a lot has changed for the electric power industry in the U.S. and the global energy sector in general. The industry has moved from hazardous bare copper wire installations and opportunistic pricing to hazardous market models and manipulated pricing. During this period, access to unfettered amounts of energy has been tremendous for U.S. national security, but at the same time, the wild abandon of energy to the open markets has had just the opposite effect. When charting important U.S. energy market developments from the Progressive Era to present, it becomes clear that the boom and bust cycles that have characterized industry developments have had deleterious effects.

Agitated and Motivated: The Progressive Era, 1890s-1920s

Amidst the political agitation of the U.S. Progressive Era, the idea of regulating natural monopolies, including electric utilities, gained momentum as the U.S. became motivated to develop its industrial base and global superiority. In this period, Samuel Insull, who was at one time Edison’s right-hand man, helped usher in the regulation of the industry through utility franchise agreements and business conducted under a cost of service model. Regulations provided the nation with significant economies of scale, as well as energy and transportation security. The central role that electricity played in national security soon led to the federalization of power in 1920 through the Federal Water Power Act. While the original purpose of the Act was to coordinate the development of large hydroelectric projects in the U.S., it also gave the country a massive energy and industrial advantage. The Federal Power Commission would come into being to regulate hydropower dams. The country was on its way to a New Deal.

New Deals and Free Meals: 1930s-1940s

Through Roosevelt’s exceptionally forward-thinking New Deal, energy became an important means of exiting the depression and feeding a hungry populace. The Public Utility Holding Company Act, Rural Electrification Act, and Natural Gas Act were passed in 1935, 1936, and 1938, respectively. Roosevelt pushed the legislation forward, which allowed him to dismantle utility monopolies and thereafter regulate the sale and transportation of electricity and natural gas. The country moved from progression to an era of “just and reasonable” wholesale electricity prices that supported country wide electrification, energization, and ruralification. Everybody had access to cheap energy.

By the time the Second World War began, the U.S. had a sizeable economic base underpinned by access to natural resources, a healthy industrial complex, tightly controlled energy infrastructure, and the ability to develop substantive surpluses of both energy and goods on demand. These advantages allowed the U.S. to play a pivotal role in the Second World War. The Second World War cemented energy’s role as a means to ensuring economic prominence, global influence, and national security. Shortly after, the Atomic Energy Act would place nuclear energy at the forefront of U.S. energy infrastructure.

The First Nuclear Age: 1950s-1960s

The period of time between the 1940s and 1960s expanded the role of the Federal Power Commission to include the regulation of natural gas facilities. The Commission thus established a large swath of domain over interstate commerce and intra-state energy sales. The Atomic Energy Act of 1946, established under the administration of Dwight D. Eisenhower, ushered in the first nuclear age in the U.S. Naturally, during the post-war period the U.S. clamped down on the dissemination of any private use of nuclear technology. The awesome power of nuclear energy had to be protected. A pervasive fear existed that foreign powers would gain nuclear technologies and drop a bomb on the U.S., forcing individuals to “Duck and cover” or lock themselves in their backyard bomb shelters.

As this paranoia subsided, nuclear energy became enmeshed in the U.S. strategy for energy security, as it was a viable alternative to coal and reduced reliance on foreign oil. The Atomic Energy Act was amended in 1954 to allow domestication of nuclear energy. The nuclear age was upon the U.S. The advancement of nuclear, along with the opening up of natural gas, spawned the progression of planned infrastructure developments and a backlog in natural gas permits. The U.S. began to be mired in inefficiencies and chronic brownouts. The climax of this was the Northeast Blackout of 1965, which resulted in over 30 million people and 80,000 square miles going without electricity for up to 13 hours. Following the blackout in 1968, 10 regional reliability councils were formed to ensure the prevention of future blackouts and coordinate the operation of the nation’s transmission systems. Unfortunately, the nation went from having no power to no oil during the Oil Crisis of 1973.

The Successive Accumulation of Energy Regulations: 1970s and 1980s

During the OPEC Oil Embargo in October 1973, members of OPEC (plus Egypt, Syria, and Tunisia) created an oil embargo in response to the U.S.’s involvement in the Yom Kippur War. The embargo sent shockwaves across the world and led to a significant increase in oil prices, with barrels rising from $3 each to nearly $12. Naturally the event sparked a flurry of reaction from the U.S., where the need for energy security generated a critical new direction. The accumulation of broad-based U.S. energy policies in subsequent decades was thus shaped by internal pressures and reactions to global events, as the U.S. engaged in a frenetic effort to secure energy supplies and maintain its dominant position in controlling energy resources.

A series of new acts that intended to reduce the country’s reliance on foreign energy began with the 1975 Energy Policy and Conservation Act. Then from 1978 to 1980, 13 separate energy Acts were introduced, including the National Energy Act and the Energy Security Act, with the balance being more resource-specific. The Energy Policy Act was revised in 1992 and 2005. Next came the Energy Independence and Security Act (aka Clean Air Act) in 2007, the American Recovery and Reinvestment Act in 2009, the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, and the Clean Energy Standard Act in 2012. Throw in FASB 133, Sarbanes Oxley, and a plethora of state, regional, and national regulations around renewable portfolio standards, air quality, and environmental management, and the regulatory landscape that is currently underpinning the U.S. energy industry becomes clearer. What becomes mired in all these regulations are the often conflicting objectives of energy security, energy conservation, industrial liberation, free market principals, and sometimes, the right to just and reasonable rates.

The End of the Franchise Era: Deregulation in the 1990s

Prior to 1996, the following mantra for utilities best summarized the U.S. power market: “Safe and reliable supply at fair, just, and reasonable rates.” The utility franchise agreement, meant to control the economic necessity of monopoly for the utility, ensured a trade–off–a regulated fair rate of return in exchange for the certainty and security inherent in dependable and abundant supply. Strategically located generation facilities, interconnected transmission systems, healthy reserve margins, and redundancy and regional coordination gave the U.S. a tremendous industrial advantage during times of peace or conflict. Roosevelt’s New Deal and the federalization of large hydropower facilities accelerated the U.S.’s recovery from the depression and ascent to world dominance. The U.S. economy expanded rapidly, and the country’s role as the world’s dominant super power continued throughout the 1990s, to the end of the Cold War. The U.S. model of democracy and capitalism paved the way for worldwide corporate expansion and the heyday of globalization.

Perhaps prematurely, the idea of free markets and the desire to release the mechanisms of capitalism on the power industry incited the call for deregulation in the electric power markets. Soon after, the first electricity future was listed on the New York Mercantile Exchange. As well, power indices were developed by Dow Jones and Platts McGraw Hill; the first Power Pool was opened in January 1, 1996 in Alberta; the pivotal FERC Mega NOPR 888 was introduced; OASIS began offering transmission rights; and the rise of the power marketer and open electricity exchanges such as Enron Online and Intercontinental Exchange (ICE) started. For much of the country, the era of the utility franchise agreement was at an end, though some would soon regret the possibly ill-conceived and premature imposition of free market principals on an inelastic and necessary public service.

Cracks in the Veneer: Early 2000s

By the end of 2001, the first cracks in the U.S. economic veneer began to appear when one epic market failure after another erupted. There was the Tech Bust, which reached its climax on March 1, 2000; the California Energy Crisis on May 22, 2000; and the Enron Scandal, which was revealed on October 21, 2001. Since 2001, the U.S. has witnessed the 10 largest bankruptcies in its history. Certainly the crises and scandals of the day contributed significantly to WorldCom’s, Enron’s, and PG&E’s declarations of bankruptcy. Perhaps the most dramatic of these was PG&E’s, in that it represented the post-deregulation demise of what had been a bastion utility of the Franchise Era.

During this time, the most populous state in the nation, California, was in dire straits. The California Power Exchange had gone bankrupt, major state and municipal utilities were struggling, industrials were near collapse, the economy was spiraling, and the population was in revolt. California was in a political mess. The state elected the Governator, Arnold Schwarzenegger, perhaps seeking a miraculous Hollywood recovery. Meanwhile, the call for re-regulation was loud. The movement towards ISOs/RTOs covering the nation halted completely. Along with FERC Order 2000, the idea of ISO consolidation died quietly and quickly.

Where Is Market Confidence?

If that was not enough, market confidence was at an all-time low. The 1990s seemed to be a time of unrivaled and protracted economic growth–any dot.com venture was a sure seller. Just as suddenly, though, the electricity market crisis took place, as did the dot.bomb in 2000 and the September 11th attacks in 2001. The country’s confidence in its security and economy was completely undermined. Everything was turned on its head, all assumptions were proven wrong, and there was no reliable intelligence. The population at large attacked the economic policies of Greenspan, while President George W. Bush attacked Iraq. The phrases “irrational exuberance” and “Either you are with us, or you are with the terrorists” became part of the country’s often-quoted common vernacular.

Needless to say, the turn of the millennium saw the U.S. fall into a recession. And while many say the recession was short lived, it can also be argued that the U.S. never actually came out of it. The Subprime Crisis hit in 2007, a catastrophic event that resulted in the extremely unprecedented American Recovery and Reinvestment Act and President Barack Obama’s fevered attempts to restore the American economy and extract U.S. soldiers from Iraq. At present, well into the President’s second term, neither of his ambitious objectives has been reached; though, Iraq is now “old” news. These days, conversation revolves around arming Syrian rebels and bombing their strategic oil supplies. Even Egypt is nearly forgotten. And what was all that talk of Obamacare about, anyways?

Still Tiptoeing at the Edge: 2010s-Present

The Fiscal Cliff in 2013 did not mark the end of the road for the U.S. economy; however, it did highlight the very real economic difficulties the country finds itself in today. The Fiscal Cliff also forced the world to begin to measure the U.S. against the growth, economic power, and political strength of other nations, most specifically against the rise of the previously dismissed China. China has taken over the U.S.’s position of largest energy consumer and outpaces the U.S. substantially in many growth indicators. At the time of the U.S. debt crisis in 2011, China held $1.2 trillion of the U.S. $14.3 trillion in debt. Several years ago, Obama warned of a pending U.S. default if the debt ceiling was not lifted by Congress. Today, that debt is at $16 trillion. If you ask Donald Trump, he will tell you, “The U.S. is no longer a rich country [. . .] the country isn’t doing well.”

Since the U.S. is in an economic spiral, where is the country’s focus, presently? Funnily enough, its focus is on clean air. The U.S. seems to believe that achieving clean air at any cost, through any means (real or via some exchange-purchased credit) will somehow clean up the economy. The Clean Energy Standard Act of 2012 seems determined to eradicate any advantage the U.S. might have derived from the unexpected shale gas boom and abundance of coal.

From up above, George Mitchell must surely be looking down in disbelief at how such an economic boon was so quickly squandered. The Act essentially “taxes” the use of coal, thus encouraging organizations to export coal to China. It poses significant threats to further investment in and use of natural gas. Fracking is just fracked. Exporting black coal is not a sustainable means for achieving either economic or green objectives. Tiptoeing around the edge and creating policies that do not address all sides of issues are thwarting the U.S.

It Is Time to Free the Economy from Its Shackles

Taking a lesson from President Roosevelt’s playbook, one may have thought that the U.S. would have tried to use its newfound abundance of energy resources to boost its industrial base and invest in a second New Deal for the nation. Instead, regulations are making it increasingly difficult and costly for U.S. companies to compete globally. Federal acts, stringent state renewable portfolio standards, and state-specific regulations like the California Air Resources board’s AB 32 are shackles on the economy. The regulatory maze is simply too complex and risky to navigate. Energy market regulations increasingly seek to develop market-based mechanisms to meet objectives.

Ultimately, why should a mandatory cap-and-trade program in California be any more successful at reducing emissions than the now-defunct California Power Exchange was in lowering power prices? Free markets principles do not include mandatory participation in exchanges or differential treatment of in-state and out-of-state market participants. In California, they call these encumbered market participants Asset Controlling Suppliers. Why should the U.S. learn from the past and maximize the opportunities available from large U.S. and Canadian hydroelectric assets? Not that any should question the policies and programs of the California Public Utilities Commission, California Energy Commission, and California Air Resources Board, as they are surely by now experts in market reform and must know what they are doing. Here, it is useful to recall the early demise of the Chicago Climate Exchange (CCX) and the Emissions Trading System (ETS) in Europe. The fall of the CCX was lamented as a personal setback for President Obama.

Stifled on Consensus

It may be that the U.S. is simply unable to manage in a new paradigm and is stifled by an inability to reach internal consensus. This issue is broader than Republicans versus Democrats, Congress versus the Office of the President, haves versus have-nots, or environmentalists versus industrialists; rather, it is the result of a willful blindness to a critical change in state. The U.S., European Union, and China comprise more than half of the world’s GDP. Yet less than a decade ago few would have admitted that China’s economy may overtake the U.S.’s, an event which is now estimated to occur in 2020. Nor was it estimated that China would lead the world in the consumption of energy and raw goods. Ultimately, previous comparisons did not seem to account for the growth of China versus the stagnation and recession the U.S. and the European Union have fallen into. What does that say?

Political lines are being redrawn as economies fail and are remade. Historic alliances are no longer firm, but shifting. This shift in alliances is critically evident in the Middle East, as the Arab Spring reshapes the region and relations in it. Tensions are high, and there appears to be a fundamental gap in the U.S.’s understanding of the drivers in this critical oil-rich region. As a result, the Middle East is very ready to swing to the Far East.

Cold Wars as the Globe Warms

It is difficult to understand the drivers of U.S. foreign policy when the country’s internal situation is far from stable. What is the purpose of restarting the Cold War when the U.S. itself is mired in conflict? Is the distraction from the near and present endemic in the U.S.? Will tensions with Russia really prevent another $400 billion natural gas deal between Gazprom and the China National Petroleum Corp.? The U.S. is not the only nation with massive shale reserves. Is war a means for recovery from economic woes, or a simply a distraction from the economic woes of the present?

Russia is far from depleting its conventional natural gas reserves, and China has no need to embark on fracking while it can depend on Russia. Will other natural gas and LNG producers be squeezed out of the market? What relevance will WTI have if oil is priced out of Brent or Dubai? Basically, what is the risk of investing in U.S. energy infrastructure, given the incredibly restrictive regulatory environment in the U.S. relative to that of the world’s largest consumers and producers? Will other suppliers be looking east just as the U.S. attempts to develop more competitive prices? What happens when China achieves its own energy independence and security?

What is clear in China and Russia is that the government’s initiatives and energy resource optimization for economic growth are in lockstep. It is much more difficult to say that about the U.S. One can only hope that in the future the U.S. will be able to look at itself objectively and use its abundant strengths in a manner that promotes growth, rather than simply creating another market-based trading platform. While the answers may not lie fully in history, there is certainly a lot that can be learned from the study of U.S. energy regulation and its sometimes hasty implementation. History is not repeating itself, so much as just changing its color again. No one can predict the future’s hue, but it will certainly be tinted by the events and regulations of the past.

Timeline of U.S. Power Industry Events and Regulations

Year

Event

1878

Electric Light Company

1880

Electric Distribution System

1920

Federal Water Power Act

1935

Federal Power Act

1935

Public Utility Holding Company Act

1936

Rural Electrification Act

1938

Natural Gas Act

1939

Second World War

1946

Atomic Energy Act

1954

Atomic Energy Act Amended

1965

Northeast Blackout

1968

NERC Reliability Regions

1973

OPEC Oil Crisis

1975

Energy Policy and Conservation Act

1977

Department of Energy Organization Act

1978

National Energy Act

1978

National Energy Conservation Policy Act

1978

Power Plant and Industrial Fuel Use Act

1978

Public Utilities Regulatory Policies Act

1978

Energy Tax Act

1978

Natural Gas Policy Act

1980

Energy Security Act

1980

U.S. Synthetic Fuels Corporation Act

1980

Biomass Energy and Alcohol Fuels Act

1980

Renewable Energy Resources Act

1980

Solar Energy and Energy Conservation Act

1980

Geothermal Energy Act

1980

Ocean Thermal Energy Conversion Act

1982

Nuclear Waste Policy Act

1992

Energy Policy Act

1996

Alberta Power Pool

1996

FERC 888

1998

FASB 133

2000

Tech Bust

2000

California Energy Crisis

2001

911 Terrorist Attack

2001

Enron Scandal

2002

Sarbanes–Oxley Act

2003

War on Iraq

2005

Energy Policy Act

2007

Subprime Crisis

2007

Energy Independence and Security Act (Clean Air)

2008

The Energy and Tax Extenders Act of 2008

2008

Food, Conservation, and Energy Act of 2008

2008

Strategic Petroleum Reserve Fill Suspension and Consumer Protection Act

2008

America COMPETES Act

2008

Energy Improvement and Extension Act of 2008

2009

American Recovery and Reinvestment Act

2010

Dodd-Frank Wall Street Reform and Consumer Protection Act

2011

U.S. Debt Crisis

2012

Clean Energy Standard Act

2013

Fiscal Cliff

Data Sources: ISO/RTO

This article is republished by permission from ZE datawatch® All rights reserved.

 

Did You Like this Article? Get All the Energy Industry News Delivered to Your Inbox

Subscribe to an email newsletter today at no cost and receive the latest news and information.

 Subscribe Now

Whitepapers

Maximizing Operational Excellence

In a recent survey conducted by PennEnergy Research, 70% of surveyed energy industry professional...

Leveraging the Power of Information in the Energy Industry

Information Governance is about more than compliance. It’s about using your information to drive ...

Reduce Engineering Project Complexity

Engineering document management presents unique and complex challenges. A solution based in Enter...

Revolutionizing Asset Management in the Electric Power Industry

With the arrival of the Industrial Internet of Things, data is growing and becoming more accessib...

Latest PennEnergy Jobs

PennEnergy Oil & Gas Jobs