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When regulation of electric utilities began in the first decade of the 20th century, environmental protection was not a priority. Rather, state and municipal politicians were concerned that the electric utility industry, which originated in the 1880s, seemed bent on consolidating small firms into large ones and eliminating competition. In their defense, company managers argued that large firms could serve customers more efficiently by realizing the economies of scale associated with extensive transmission networks and large steam-turbine generators—in other words, that power providers were "natural monopolies."1 Accepting this logic, in 1907 state legislatures in New York and Wisconsin gave electric utilities the right to operate in defined geographical areas without competition. But to ensure that the companies passed the benefits of consolidation on to customers through "fair" prices and good service, they also established regulatory commissions. These bodies were authorized to examine the companies' books, to approve or reject proposed rates for electricity, and even to pass judgment on the construction of new generating and transmission facilities. By 1922, 37 states had created regulatory commissions to deal with this new type of business that provided a vital service to society.2 Overall, the public perceived regulation to be effective: Instead of gouging their customers, utilities were generally seen as offering good service at reasonable prices. Prices, in fact, have declined dramatically over this century (see Figure 1).3 For their part, many utilities were equally satisfied: Regulation removed the threat of competition, made their securities attractive to investors, and freed them from the threat of municipal takeovers. With few exceptions, state regulators did not deal with the environmental impacts of generating, distributing, or using electricity. That situation changed in the 1970s, however, largely as a result of the burgeoning environmental movement, which had gained widespread popular and political support. Utility managers could no longer build power plants with minimal concern for local environmental conditions; rather, they needed to submit environmental impact statements and win approval from new federal bureaucracies (such as the Environmental Protection Agency) as well as from state environmental regulators. In California, for example, the legislature created the California Energy Resources Conservation and Development Commission (more commonly known as the California Energy Commission (CEC)) in 1974. Among other goals, CEC sought to help the state meet its energy needs in an environmentally responsible fashion.4 As part of this effort, regulators began to steer utilities away from building new fossil-fuel and nuclear power plants that they felt would pollute or otherwise degrade local air and water. In 1978, for example, the Wisconsin Public Service Commission established a moratorium on the construction of nuclear power plants in the state.5 Taking a different approach, California regulators in the 1980s and 1990s required utility companies to purchase a set amount of power produced by wind turbines, solar generators, and other renewable technologies. At the same time, they encouraged utilities to pursue research on these technologies so that their use would increase and their cost would decrease.6 A federal law, the Public Utility Regulatory Policies Act of 1978 (PURPA), mandated even further efforts to protect the environment. The law instructed state commissioners to establish mechanisms that would encourage nonutility companies (and even homeowners) to generate electricity from wind, sun, water, and geothermal sources and required utility companies to purchase such electricity for distribution to their customers. It also spurred manufacturing companies to obtain a double benefit from fossil fuels through a process known as cogeneration. (In this process, the burning of coal, oil, natural gas, or biomass produces steam that drives electricity-generating turbines before the energy is directed to the manufacturing processes themselves). Congress hoped the law would stimulate the use of technologies that produce electricity more efficiently and in more environmentally benign ways than those employed by electric utilities. (For more on PURPA, see Box 1.) State regulators were also concerned about energy efficiency, though more because of the changing market conditions of the 1970s than because of a desire to enhance environmental quality. Electricity rates increased dramatically in the middle of the decade when the Organization of Petroleum Exporting Countries (OPEC) sharply curtailed shipments of oil. The resulting pressure on regulators to reduce electricity bills led them to realize that energy conservation could benefit consumers financially. Even more importantly, in the late 1970s utilities began reducing their investment in new generating capacity owing to high interest rates and popular opposition to utility construction, both of which increased the cost of building power plants. Although the demand for power was rising much more slowly than in previous decades (about 2.3 percent per year as opposed to 7.0 percent per year—see Figure 2), regulators were seriously concerned about shortfalls. To head off problems, regulators in a few states (notably California, Wisconsin, and some of the New England states) gave utilities financial incentives to encourage less consumption of power. In Wisconsin, for example, utilities were allowed to earn higher profits if they met predetermined goals for lowering demand. The utilities responded to this carrot by offering rebates to customers who purchased energy-efficient appliances such as improved refrigerators and air conditioners.7 In California, regulators in 1990 allowed utilities to share the savings they helped customers achieve. If a business saved $100,000 by installing high-efficiency lighting and cooling equipment, for example, the utility would earn a $15,000 reward.8 Such regulatory incentives helped motivate utilities to encourage energy efficiency in ways that benefited both them and their customers while helping to reduce the environmental impact of electricity production and use. |
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