Chapter 12 Traditional Electricity Regulation: The Calm Before the Storm Part A Peter Schwarz Professor of Economics, Belk College of Business and Associate, Energy Production and Infrastructure Center (EPIC) UNC Charlotte of 16
Outline Introduction A Brief Economic History Overview of the Electric Industry Regulating the Electric Industry Alternative Forms of Regulation of 16
Introduction What would happen without regulation? Supreme Court case Munn v. Illinois (1877) Government can regulate industries affected with the public interest 1930s Electricity regulation begins throughout the U.S. Permitted a natural monopoly Economies of scale (EOS) yields benefits from having a single producer Regulation intended to pass benefits of EOS to consumers What would happen without regulation? of 16
Introduction: Prices An electric utility will periodically appear before its public utility commission (PUC) to determine rates PUCs allow for a normal rate of return Inefficient? P = AC P≠MC Averch-Johnson (1962) Indicates that firms will use too much capital compared to other inputs such as labor Stigler (1971) “Regulatory Capture” Regulators may face incentives to act on behalf of firms rather than consumers of 16
Brief History of Electricity and its Regulation 1879 Thomas Edison develops the incandescent bulb Patented 1880 1882 The first electric utility is founded (again, by Thomas Edison) Pearl Street Station, New York City Large scale electric lighting made possible for the first time of 16
History: “War of the Currents” DC Current Runs continually in the same direction Ex. Battery or Fuel Cell Difficult to increase or decrease voltage Loses energy when transmitted over long distances Developed and used by Thomas Edison When confronted with difficulties, Edison hired Nikola Tesla to find solutions Tesla proposed AC Current Rotating magnet results in a current that switches directions Voltage could be stepped up or down Lower electricity losses Edison found the idea “splendid,” but claimed it was impractical of 16
History: “War of the Currents” (cont.) George Westinghouse Hired Tesla from under Edison and purchased several of his patents Started using AC current to serve markets not yet served by Edison 1893 World’s Fair AC triumphed when Westinghouse won the bid to supply electricity to the worlds first all-electric world’s fair The bid was half that of the Edison Company What do we use today? Both! AC dominates grid. DC for solar systems, Electric vehicles, LED lighting. Require inverter to convert DC to AC. of 16
Early Days of Electricity Expensive due to having large centralized generating facilities and extensive infrastructure requirements Was more expensive than natural gas, the primary fuel for lighting at the time Required additional demand to take advantage of economies of scale At the time, electricity was only used at night to run lights With the addition of a sizable daytime demand from industrial motors and rail transportation, electric lighting supplanted gas as the leading source of illumination in the 1930s of 16
Brief History: The Beginnings of Electric Utility Regulation Lack of regulation in the early days resulted in high prices and redundant services Early 1900s States and municipalities began establishing public utilities commissions (PUCs) Foundation for rate-of-return (normal return) regulation introduced by the PUC in Wisconsin Federal Power Commission (FPC) 1920: Established to oversee federal hydroelectric projects 1935: Gained power over interstate transmission and wholesale prices 1944: Supreme Court case FPC v Hope Natural Gas Rate makers now had to balance the competing interest of stockholders and consumers of 16
Regulation: Continued 1960s Massive blackout in the northeast Led to the establishment of the North American Electric Reliability Council (NERC) Oversees the wholesale supply of electric power 1970s Saw dramatic price increases Due to higher fuel prices used for generation FPC replaced by the Federal Energy Regulatory Commission (FERC) 1978: Public Utilities Regulatory Policy Act (PURPA) Required electric utilities to buy electricity at avoided cost from qualifying facilities (QF) Avoided Cost: cost of building new capacity to meet demand Contributed to higher electricity prices Acted as an impetus for states to consider deregulation and restructuring of 16
Overview of Today’s Electric Industry Three Stages Generation Primary sources, such as fossil fuels, can be burned to produce electricity, a secondary source of energy Different countries depend on a wide variety of fuel mixes France: Nuclear Norway: Hydro Iceland: Hydro & Geothermal U.S.: Coal and Natural Gas United States Generation Mix of 16
Overview: (cont.) Transmission Distribution Transformers “step up” voltage before the electricity passes through high- voltage transmission lines Takes place over long distances FERC regulates lines that cross between states as well as those that serve multiple utilities Distribution Electricity then passes through another set of transformers used to “step down” voltage Smaller distribution lines are used to deliver electricity to end-use customers Takes place over short distances Can be either overhead or underground of 16
Three stages of the Electricity Industry: Source: http://marketrealist.com/2014/09/must-know-supply-chain-delivers-electricity/ of 16
Electricity: A Good Like No Other Electricity can not yet be stored economically in large quantities Therefore, supply must equal demand at all times Loss of Load Probability (LOLP) Developed Countries: One day’s worth of outages in ten years Developing Countries: Daily interruptions Prices do not typically reflect real-time conditions When demand threatens to exceed supply, customers do not receive price signals that would encourage them to cut back their use Excess capacity is therefore required Increases the average price of electricity of 16
Customer Sectors Industrial Commercial Residential Transportation Manufacturing, mining, agriculture, and construction Commercial Office space, retail, educational facilities, etc. Residential Homes/Apartments Transportation Subways, Electric Vehicles, etc. of 16
Global Trends in Electricity Use United States Electricity use growth rate slowing Declining industrial use Disruptive technologies Rooftop solar, electric vehicles, etc. China Increasing energy use Enough to offset declines in the U.S. Increases are leveling off after years of 10%+ growth India Increases expected to rise rapidly as the country continues to develop EU Flat or declining electricity use of 16