condemned to repeat? ious, history and green markets

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© 1998, Elsevier Science Inc., 1040-6190/98/$19.00 PII S1040-6190(98)00005-0

The Electricity Journal

Condemned to Repeat? IOUs, History and Green Markets

Seventy-five years ago, America’s utilities dawdled in serving rural customers, and lost out on a sizable potential market. Are they making a similar miscalculation with renewable energy today?

Adam H. Serchuk and Richard F. Hirsh

I. Will Green Power Survive?

uring the past half-decade, policymakers have under-

taken a comprehensive—but so far incomplete—restructuring

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of the American electric utility system, characterized by the introduction of market-based principles. Com-petition now pervades the whole-sale market, and may invade the retail market in many states. Driven by the political clout of large industrial power users, the natural gas industry and low-cost utilities, and facilitated by some politicians’ ideological fervor for deregulation, restructuring will change the way a once-staid and boring industry produces and dis-tributes a pervasive commodity.

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Supporters of the restructuring

process proclaim that customers will benefit from lower electricity prices and a greater variety of elec-trical services from which to choose. Other participants harbor misgivings. Among several grounds for concern, some fear that electric-ity purchasers in the coming mar-ket will base their decisions solely on the short-term cost of power, while ignoring both long-term considerations and the total social costs of their energy decisions.

In particular, such an outcome could damage or even destroy the renewable energy industry. These technologies, while comparatively safe for the environment and se-cure from fuel-price volatility, of-ten have higher up-front costs than those relying on conventional fuels. Though the cost of power from re-

Adam Serchuk

is the researchdirector of the Renewable EnergyPolicy Project, which explores the

emerging relationships among policy,markets, and public demand for

renewable energy. He also teacheshistory of technology as an adjunct

professor at Virginia Tech’s NorthernVirginia Center.

Richard Hirsh

is a professor ofhistory of technology, and of science

and technology studies at Virginia Techin Blacksburg, Virginia. He has writtenextensively about the American electric

utility system. In 1989, he published

Technology and Transformation inthe American Electric Utility

Industry

(Cambridge UniversityPress), and will soon complete a newbook dealing with the events leading

to the current restructuring of theutility system.

The authors presented a version of thispaper at the 1997 meeting of theEconomic and Business History

Society in Richmond, VA. They thankthe audience members for their useful

feedback, and Dr. Richard Keehn for his

thoughtful written comments.

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newable resources has declined appreciably since 1980, the price of electricity generated with efficient combined-cycle combustion tur-bines burning natural gas has de-clined as well, and the latter re-mains substantially cheaper.

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Power from old, depreciated coal plants exempt from the Clean Air Act may also prove competitive in a restructured environment. In the past, state regulators cajoled or forced some utilities to buy power from green suppliers. But as man-agers of the nation’s IOUs prepare for the new electricity market, they may forsake their minuscule (and often grudging) commitment to green power.

tilities err in ignoring (or at least showing tepid inter-

est in) the potential market for green energy. While this stance makes apparent short-term busi-ness sense, it disregards

the long-term potential of this market for play-ers willing to act aggressively

, and it underestimates the

regulatory risk

of government action to promote green power. We attribute the IOUs’ conservative and essentially passive stance toward the green energy market to a combination of institutional forgetfulness and a tendency (solidified by decades of monopoly status) to view markets as static.

This situation echoes the utility industry’s position in the early part of the twentieth century, when utilities largely declined to offer service to rural customers. As a re-sult of that sensible business strat-egy, federal and consumer-owned power companies today serve a substantial portion of the retail

electricity market. These players also own an appreciable fraction of the nation’s generating capacity.

We identify four general reasons why most IOUs eschewed rural electrification in the 1910s and 1920s: the short-term economic appeal of this business strategy; a failure to forecast correctly the po-tential of the rural market; a failure to anticipate accurately coming technological changes; and the possible influence of inappropriate cultural and ideological attitudes.

not internalize environmental and other social costs. Ideally, we would like to see all varieties of power priced properly; such a pricing regime would narrow the gap between “green” and “brown” power. But currently, most states seem unlikely to retain or adopt the practice of adding environ-mental externalities to electricity prices for purchasing or even plan-ning purposes. Hence, we find it worthwhile to show electricity providers that they ought to con-sider the green market for its own sake.

II. This Has Happened Before

A. Rural Electrification: A Lost Opportunity

Utility managers considering their future would do well to pon-der their past. Decades ago, execu-tives and managers of IOUs thought they also pursued eco-nomically sound and justifiable reasons when they opted to forgo a potentially large but—they judged—financially unattractive group of potential electricity pur-chasers: rural families and busi-nesses, only 10 percent of which enjoyed utility-provided electric service by 1930. (Additionally, some farmers generated their own power with wind turbines, water wheels and gasoline engines.) In general, though, utilities gave up an opportunity to garner a large and lucrative market.

When the federal government re-solved, for non-economic reasons, that rural America must receive service, consumer-owned and public entities, and not IOUs,

Decades ago, utility managers ignored rural America for “economically sound

and justifiable” reasons.

In general, we find a good (though imperfect) match between these factors and managers’ reasons for underestimating the value of green power today. We conclude that if IOUs wish to maintain their domi-nant position as generators and marketers of power, they ought to heed the lessons of the past and re-evaluate their positions on green power.

e stress that the reason we need to encourage

IOUs and others to market green energy is that market prices gener-ally do not account for the total cost of producing and using energy. That is, energy prices do

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emerged to prove the market via-ble. While we do not expect the government to establish a “Federal Green Power Service,” we suggest that today’s IOUs may be on the point of consigning another sub-stantial fraction of their market to non-IOU players in a way that sug-gests striking parallels.

B. Four Interconnected Reasons for Utilities’ Dismissal of the Rural Market

Utilities declined to extend ser-vice to rural districts for several related reasons. Most important were the following intertwined factors.

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Business strategy:

Utility man-agers opted not to pursue the rural market for apparently cogent busi-ness reasons. Rural service would have earned utilities meager prof-its compared to urban service, since an equivalent investment in transmission and distribution fa-cilities could be spread over many more tightly clustered city-dwellers. At the very best, utility executives viewed rural service as a market to exploit later, after pick-ing the urban plums. In this sense, the decision reflected a sound short-term business strategy.

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Market vision:

Underlying this strategy, however, was the belief of many managers who reckoned that poor, rural communities would never purchase enough electricity to earn their firms a profit, especially given that rates (barring cross-subsidies from urban customers) would have to include the higher percentage of fixed costs due to the scattered nature of the market. While urban

residential customers used elec-tricity as a luxury good, rural families seemed unlikely ever to enjoy enough disposable income to purchase electric appliances or the power to operate them. In this sense, managers evinced a failure to envision the potential market.

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Technological change:

Managers failed to see that farming—the pri-mary occupation of rural fami-lies—could benefit from electrifica-

mained of the old Jeffersonian ideal of the farmer as the moral core of the country, a simple coun-terweight to modernity. To use modern terminology, some conser-vative social critics insisted that farms were not profit centers but family and social units. Historian David Nye cites protests as late as 1926 against the electrification and (by implication) industrialization of the American farm: “will those whose hardest labor has been to press a button or jerk a switch,” asked one such author, “acquire those sterling qualities which have made us what we are?”

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In short, while we doubt that utility manag-ers consciously refused rural service for such reasons, we con-sider it plausible that vestigial nineteenth-century attitudes to-ward pastoral life might have in-fluenced twentieth-century busi-ness decisions. To the extent that they did, the IOUs’ failure to ex-ploit the rural market may have re-flected outdated cultural attitudes and ideology.

n sum, America’s utilities largely ignored the rural mar-

ket for power.

C. Regulatory Risk: Governments May Act For Non-Economic Reasons

The situation changed in the early 1930s. Newly elected Presi-dent Franklin Roosevelt viewed the lack of electricity in much of rural America as the denial of a basic right. His administration responded by commissioning power producing and marketing agencies including, most notably, the Tennessee Valley Authority

In the 1930s, newlyelected President

Franklin Rooseveltsaw lack of electric-

ity as denial of a

basic right.

tion. While farming required sub-stantial amounts of energy, many people at the time considered farming less amenable to “ratio-nalization” by electrical equipment than industrial production. In this sense, the decision reflected a fail-ure to anticipate technological change.

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Cultural attitudes:

By the turn of the century, mechanization and industrialization had begun to shape American agriculture. Farm-ers themselves often led these shifts, as they sought to increase yields and decrease drudgery. Yet, although it sounds implausible al-most a century later, vestiges re-

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(TVA)

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in 1933, and by creating the Rural Electrification Administra-tion (REA) in 1935 to provide low-interest loans to consumer-owned electric cooperatives.

The TVA proved startlingly suc-cessful at establishing a rural mar-ket for electricity generated from hydropower. In 1933, the agency’s rates started at 3 cents/kWh, drop-ping to 0.4 cents/kWh for usage over 400 kWh per month; the na-tional average cost for residential electricity stood at 5.5 cents/kWh. The TVA used these low rates to build a market for huge quantities of power.

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The federal agency pro-vided extensive training for cus-tomers in how to exploit the new power source, and it made avail-able electric irons, milkers, grind-ers, churners, washers, wringers and the like on easy credit terms.

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e do not argue counter-factually that the IOUs

might have done what the TVA did, if only they had seen the situa-tion more clearly. Obvious advan-tages facilitated the Federal agency’s success. Most notable, the TVA could charge less than most IOUs because it did not seek to make a profit on its sales, nor did it have to pay dividends to stock-holders. The TVA also benefited from lower interest expenses than IOUs. Finally, because the dams that produced power from cost-free water had multiple uses, part of their cost could be charged to flood control and navigation activities.

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Nevertheless, the TVA proved, albeit as part of a controversial comprehensive development pro-gram, that there existed a huge la-

tent demand among rural families for electricity. More pertinent to our discussion, TVA brought forth this market not by selling small quantities of expensive electricity to the most attractive customers, those willing to pay premium prices, but by pricing the product low enough for the largest pos-sible market, and then working hard to show potential customers the value of the product. The story of the TVA suggests to us that

those willing to work actively to shape the market, rather than merely picking the bits of it already able to show a profit, can reap enormous rewards.

eanwhile, the REA proved that once initi-

ated, the rural power market could be served economically. By 1959, the REA had extended loans at at-tractive 2 percent interest to 1026 rural cooperatives that delivered power to 4.3 million customers, leaving only 4 percent of rural families without electric service. Some REA co-ops produced their own power, others purchased from IOUs, and some bought from Fed-eral power marketing authorities. (For example, co-ops enjoyed pref-erential access to TVA power.) Nearly all of the co-ops repaid their loans, often before they came

Those seeking opportunity sometimes find it close at hand.

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due. While the co-ops undoubt-edly benefited from interest rates below the market standard, once established, most proved to be viable businesses.

he early REA provoked a vi-tuperative response from

the nation’s IOUs. Utilities mounted aggressive legal cam-paigns to keep the co-ops out of their territories, even areas they had previously not demonstrated much enthusiasm for serving. Often, IOUs won court orders pro-hibiting the formation of an REA co-op by claiming that they had been on the point of entering the area. In some cases, on hearing that local farmers planned an REA co-op, the local utility would run a “spite line” through the area to pick off the most attractive cus-tomers, without whom the co-op could not survive financially. In other cases, they attempted to buy the co-ops. Thus, the REA ex-tended rural coverage not only through its own efforts, but also by scaring the territorially jealous IOUs into action.

The TVA and the REA proved extremely successful and accom-plished several elements of their original missions. Each has grown increasingly controversial with the passage of decades. The massive social engineering undertaken by the TVA has long fallen from favor, and critics of all ideological stripes have objected to certain elements of the agency’s activity over the years. Meanwhile, policymakers and others have wondered whether, as American demograph-ics changed and poverty increas-ingly became an urban phenome-

non, rural co-ops should still receive subsidized government loans. We do not take a position on the TVA or REA as public agen-cies. Rather, we make a historical point: sixty years ago, American IOUs chose not to serve a market for what appeared to be good rea-sons. Nevertheless, they underesti-mated what we now call regula-tory risk: the possibility that government policymakers would

cooperative entities own 12 per-cent of the nation’s generating ca-pacity, which represents resources not contained in the “rate base” on which utilities earn profits.

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III. Parallels With the Present

What parallels can we draw from the established rural power market to the potential green power market? Although we see no possibility of the government establishing a “Federal Green Power Service,” we can envision a future in which the government judges

for non-economic reasons

that power producers and marketers willing to establish and serve a green power market must emerge, and takes action to ensure that they do so.

he most likely cause of such a determination will be a

concern to preserve the global cli-mate. Addressing the growing threat of climate change will require lowering atmospheric concentra-tions of greenhouse gases; this will in turn require substantial substi-tution of low- or zero-emission re-sources for fossil fuel in the electric power sector.

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Future administra-tions, acting unilaterally or, more likely, in concordance with interna-tional treaties, may act to promote renewable energy. For instance, they might institute a renewables portfolio standard, requiring that a minimum percentage of electric-ity sold come from renewable resources.

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However, as policy-makers search for ways to combine policy with market-oriented solu-tions, they may act more decisively to encourage the emergence of

determine, for non-economic rea-sons, that the rural market must be served. Again, we do not argue that IOUs somehow should have pursued this opportunity (or threat); we merely note that they did not.

The result for IOUs was signifi-cant. Today, IOUs sell 76 percent of the nation’s electricity to end-use customers. Rural electric coopera-tives sell another 8 percent and federally-owned utilities sell 2 per-cent.

In effect, the IOUs’ failure to predict and exploit the rural power market led them to concede one-tenth of their market. Looked at from a different angle, Federal and

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players willing to market green power on a large scale.

This possibility constitutes a reg-ulatory risk to IOUs. Well-managed utilities should hedge against this threat with the same care that they devote to the management of tech-nological and financial risk. If they fail to do so, they will repeat the errors (as we judge in hindsight) of their managerial ancestors of the 1920s. In that era, the congeries of judgments, attitudes and strategies pursued by utility managers led, in effect, to the ceding of some 10 per-cent of the potential retail market. Today, the size of the green power market is unknown, but judging by recent surveys of public opin-ion, it is potentially large. More-over, like the market for rural power, it is not a static entity to be “discovered”; its ultimate size will depend on the effort that goes into establishing it.

In the following sections, we suggest reasons why today’s IOUs have been slow to exploit the mar-ket for green power.

A. Ignoring Green Power Seems to Make Short-term Business Sense

Environmental and social pro-grams cost money. In the old days, utilities passed these costs directly to their customers. But in the future, customers will have the opportu-nity to bypass their local utility and purchase power from other suppli-ers. So, who will pay for these pro-grams? It seems unlikely that share-holders will shoulder the burden.

Indeed, most of today’s IOUs base their entire business strategy on lowering short-term costs. In

general, utilities have been trim-ming non-essential programs, laying-off workers, re-organizing their internal structures, and merg-ing in an effort to cut costs and pre-pare for competition.

nother path utilities take to accomplish their cost-cut-

ting goals has been the attempted abrogation of contracts with re-newable energy providers. In 1995, for example, California utilities

tricity customers and for the Cali-fornia state economy.”

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aken as a group, such mea-sures indicate the perceived

need to cut costs immediately; all business functions judged a hin-drance to the production of cheap power in the near future are to be jettisoned. Indeed, the whole point of restructuring, according to some of its supporters, is to use competi-tion to trim fat out of the system to the benefit of consumers. Never-theless, we wonder if this strategy, unassailable from a short-term perspective, makes as much sense in the long term.

B. Competitive Firms Create New Products and Markets Simultaneously

We suspect that the IOUs’ con-servative stance toward the market for green power represents a mis-understanding of how firms in a competitive environment simulta-neously create new products and new markets. Today’s utilities tend to see markets as static, perhaps due to their history as the sole pro-vider (in each franchise area) of a commodity that nearly everyone used. As we will explain below, we consider this stance more passive than that of most players in nor-mal, competitive markets, and we believe this stance is not likely to serve IOUs well as electric markets become competitive. But even on their own terms, we wonder if IOUs are correct in their assessment of the market for green power.

It is hard to reckon the size of this market. Two types of data in-dicate that even without further nurturing, it may be quite large.

successfully appealed to the Fed-eral Energy Regulatory Commis-sion (FERC) to relieve them of the requirement, imposed by the state commission, to buy large amounts of power from renewable produc-ers. FERC’s decision threw the Cal-ifornia renewables industry into a tailspin, but it gave utility manag-ers hope that they could retain large industrial customers who com-plained about high prices. Rates had been inflated, they argued, by the expensive renewable contracts. Southern California Edison Chair-man John Bryson spoke favorably of the FERC ruling, claiming that it was “clearly the right one for elec-

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First, several years of public sur-veys demonstrate public support for the environment generally, and for increased energy efficiency and utilization of renewable energy in particular.

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In a 1995 poll conducted by Research/Strategy/Management, Inc. (RSM), 55 percent of respon-dents suggested that renewables and energy efficiency should re-ceive the highest funding priority at the Department of Energy. By contrast, 18 percent favored fossil fuels and 9 percent nuclear power.

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In 1994, Cambridge Reports/Research International found that 40 percent of respondents pro-fessed willingness to pay over ten dollars extra per month for elec-tricity that harmed the environ-ment less. In 1995, RSM reported that 19 percent of respondents claimed willingness to pay up to 10 percent extra each month for re-newables; 5 percent said they would pay 20 percent more.

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The Sacramento Municipal Utility District found in 1995 that 43 percent of its residential cus-tomers, 38 percent of business cus-tomers and 8 percent of industrial customers would pay 5 percent more for SMUD to invest in renew-ables. SMUD reported that 16 per-cent of residential and 10 percent of business customers (and no in-dustrial customers) would pay 15 percent more.

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till, some analysts doubt the significance of these findings,

pointing out that utility-sponsored green-pricing programs (see below) often attract only a small percent-age of the customer base. For that reason, data on retail access pilots

provides a useful counterpoint to public opinion polls. Unfortu-nately, only a few states have run such experiments so far, and the data remain sketchy. In the one case for which good data exist, however, the results augured well for green power. In Massachusetts, 4,458 residential and 269 small business customers received the opportunity to choose their elec-tricity supplier. Among residential users, some 65 percent chose ac-cording to price. Meanwhile, a

full 30 percent chose a green option

in-cluding renewable energy and/or energy efficiency resources.

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Nevertheless, the current size of the green market is not the only relevant criterion. More important is the ability of a competitive firm to create a product and to nurture the demand for it at the same time. To make our point, consider an idea that has received some atten-tion as a way for regulated utilities to sell environmentally-sound power: green pricing.

handful of utilities have re-ceived regulatory ap-

proval to sell a green product to in-terested ratepayers, with “green” defined in various ways. To satisfy the green subscribers, the utility

Will many customers pay more to go green?

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might install rooftop photovoltaic systems on the participant’s house, or perhaps serve them with the output of a large wind turbine. In other, perhaps more dubious cases, the participants’ money goes into a general utility-run green fund. In all cases, however, the green price is higher: the utility positions green power as a premium prod-uct. In this sense, green pricing programs aim their product at a super-conscientious elite with ap-preciable disposable income.

e find it laudable that utilities should explore

such programs. But, we worry that they are ultimately sterile. We liken green pricing to the spite lines used by IOUs in the 1930s and 1940s to pick off small, eco-nomically attractive rural niche markets without any effort to nur-ture a larger market. There exists today a small segment willing to pay premium prices for green power, just as there existed years ago a small number of rural fami-lies willing to pay high prices for electricity. But the true prize for green power—as it was for rural power—is not the low-hanging fruit that utilities are able to pluck with relative ease, but the moder-ate, middle-of-the-road consumer. If the lesson of rural power is in-dicative, the market for green power could be huge, but only for the firms willing to pursue it aggressively.

To demonstrate our point, con-sider the manner in which suc-cessful energy marketers have approached the general retail electricity market (i.e., not just the green portion of it). The big winner

in the Massachusetts pilot was San Diego’s Enova Corp. Enova’s

man-agers seem convinced that they can assure profits in future de-cades by (and only by) winning market share today; in Massachu-setts, the company sold electricity at 1.93 cents per kilowatt-hour, re-putedly below Enova’s cost of gen-eration. In response, Enova’s com-petitors have cut prices as low as

say, semiconductors, a few utilities seem content to present clean elec-tricity as a premium product inher-ently more expensive than dirty power. The remainder of the in-dustry evinces no interest in this potentially important product. We attribute this stance to their un-familiarity with a competitive marketplace, and to their basic conservative culture.

C. Technological Change May Make Green Power Price-Competitive

The cost of green power is de-clining and should continue to fall. Due to inducements offered by Public Utility Regulatory Policies Act, related federal legislation, and individual states in the late 1970s and 1980s, research and develop-ment on green technologies flour-ished, with consequent cost de-clines. From 1978 to 1995, approximately 12,000 MW of non-hydroelectric renewable capacity has come on line. The cost of wind energy dropped from about 40 cents/kWh in 1980 to about 5 cents in 1995; geothermal electricity de-clined from about 9 cents per kWh in 1980 to about 4.5 cents in 1995; and photovoltaic electricity dropped from about 90 cents per kWh in 1980 to 20 cents in 1995.

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In some specialized niches, such as at the end of existing distribution lines that must service growing loads, these power sources make economic sense today.

ut as R&D continues on these technologies and as

production economies of scale ma-terialize, their costs will become more competitive with fossil fuel

possible and warned that “loss-leader pricing” violates anti-trust regulations. Nevertheless, this tech-nique is quite common in the busi-ness world. When semiconductor firms, for example, introduce a new microprocessor chip, they often price the product not at the actual cost of producing early models, but at a cost that assumes future econo-mies of mass production.

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In sum, we suggest that the IOUs may have mischaracterized the market for green power. Rather than aggressively seeking to domi-nate a market for a new product by applying the same marketing tools that competitive firms use to sell,

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generation technologies. By for-saking green technologies now, IOUs may be giving the market away to other players as the price differential erodes. In this respect, utility managers are again repeat-ing the error of earlier corporate generations, although in the case of rural electrification, managers misjudged potential change in demand-side technology, while to-day’s possible failure regards changes in supply-side technology.

Exemplifying an alternate strat-egy, the Sacramento Municipal Utility District recently announced that it would develop ten mega-watts of photovoltaic capacity be-tween 1998 and 2002. Over that pe-riod, SMUD expects economies of mass production to lower the cost of power from these units from 16.3 to 8.2 cents/kWh (inflation-adjusted price).

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Yet such commit-ments are rare, to say the least.

D. Cultural Attitudes Impede Full Consideration of Small-Scale Green Technologies

For decades, utility managers reveled in their ability to build large, centralized power plants that exploited scale economies and reduced the cost of power. Execu-tives at leading companies had an informal competition to see which could build the largest power units—plants reached 1,300 MW by the early 1970s. Big technology ruled, and by the 1960s, it had be-come part of management culture. As the growth rate of demand de-creased after the energy crises of the 1970s and as technological stasis set in, big plants went out of vogue, and were replaced with

relatively small power units that could be installed incrementally in additions of 100 MW or smaller.

evertheless, big power units remain the core of

the paradigmatic centralized power system. While some utility companies may collaborate with renewable energy developers (usu-ally with regulatory assurances that they will be compensated for

managers. Both attitudes were out of date, and both may have influ-enced managers to make flawed decisions—in this case about green markets and green technologies.

A second element of utility cul-ture that may partly explain utili-ties’ tepid interest in green power is most utility managers’ stodgy attitude toward markets. For sev-eral decades, utility sales were lim-ited not by demand for electricity but by supply. Selling electricity seemed easy: consumers generally agreed that increasing their elec-tricity use would make their lives more comfortable and make their businesses more efficient. The real challenge for managers was to build enough capacity to meet the market’s apparently limitless thirst for power. This marketing ap-proach of demand accommodation became somewhat more sophisti-cated in the 1970s and 1980s, as utility managers began to examine customer needs in detail to sell them demand-side management services.

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Nevertheless, as the green market emerges in the mid-1990s, most utility managers (with the prominent exception of SMUD’s executives) seem more in-clined to ask how many existing customers would pay the pre-mium cost of green power, rather than asking how their company might attract enough customers to lower drastically the price of a green power product.

n contrast, the emerging com-petitive electric sector is be-

having like a typical competitive business environment—which means markets will not merely be uncovered, they will need to be

the collaboration), most managers still feel leery of widely dispersed wind turbines that produce less than one MW each, or solar-thermal facilities that produce only 14 MW while taking up about 83,000 square meters of desert land.

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In short, while managers may pay lip service to renewable technologies as energy resources of the future, their small scale and dispersed na-ture made them less appealing than the familiar large-scale fossil-fuel burning plants that they had operated for decades. The utility culture produced a mindset possi-bly similar to the Jeffersonian view of farmers taken by earlier utility

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created. Successful firms will be those that prove able to market their product to people who don’t yet consider themselves subscrib-ers. We find it significant that En-ron Corp., the nation’s largest gas marketer, has recently purchased Solarex, now the largest American-owned producer of photovoltaic panels, as well as Zond, one of America’s few remaining manu-facturers of large wind turbines.

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Enron points to climate change and the likelihood of eventual climate protection policies as a primary reason (along with burgeoning power demand in the developing world) for its aggressive venture into the zero-emission energy field. Meanwhile, most utilities have opted to ignore any strategy that might raise costs as too risky, while ignoring a substantial regulatory risk. Green pricing programs, while laudable, appear quite timid compared to Enron’s grand plans.

IV. Conclusion

Why do we care whether IOUs pursue the green power market? If IOUs neglect this market opportu-nity, non-IOU players will serve it. From an environmental point of view, that should suffice. Indeed, it can be argued that IOUs have been unremarkable innovators, regard-ing both technology or business structure. Thus, it might be envi-ronmentally beneficial to hasten their institutional demise.

But, we see two reasons to hope for IOU entry into the green mar-ket. First, green power will benefit from competition: more players, more investment, and more inno-

vation will mean more environ-mentally sustainable patterns of energy use. Indeed, we see the ca-pacity to innovate as perhaps the chief attribute to be sought in a re-structured electric system, and its lack as perhaps the chief failing of the current system.

econd, traditional energy in-terests enjoy considerable

political clout. During the first six

months of 1996, for example, en-ergy companies spent $37 million to lobby Congress and federal agencies on restructuring. Prior to the 1996 elections, energy produc-ers, energy consumers and unions representing electricity workers scattered almost $22 million in largesse through political action committees and “soft money” con-tributions. Renewable energy in-terests accounted for a tiny fraction of that money.

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Amid this melee of money, we would rather IOUs applied themselves to develop-ing green power than trying to thwart it.

To speak frankly, we doubt that

utility managers will change their tack until government action be-comes imminent. We offer our analysis in the hope that some IOU executives will become attuned to the possibility of employing more green technologies before being forced into the business, or ceding it to other players. They may see, as we do, that their current actions are shortsighted and reminiscent of earlier utility managers’ atti-tudes toward rural power. If man-agers alter their view, competition among green technology providers would grow. The larger group of players would likely stimulate in-novation, and that would lower prices faster than if the community of green producers remains static. Ultimately, society will benefit from the rapid, economically-efficient deployment of renewable energy technologies. We believe that IOUs can benefit as well. We encourage them to heed their own history, and not remain on the side-lines or, worse, fight the trend.

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Endnotes:

1.

We avoid the term “deregulation.” As the experience of Great Britain demon-strates, merely abolishing regulations without altering the market power of es-tablished players will not by itself lower prices, enhance performance or spur livelier innovation. We prefer to call the process now underway a “restructuring” of the electric system. The scope of this term comprises the elimination of ineffi-cient regulation, the heightened protec-tion of social goods insufficiently pro-vided by markets, and the cropping of existing monopoly power.

2.

While restructuring is undeniably un-derway, details of the electric sector’s fi-nal form remain in doubt, largely be-cause of the utility industry’s proven ability to integrate potential challenges.

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See

Adam H. Serchuk and Richard F. Hirsh,

Momentum Shifts in the American Electric Utility System: Catastrophic Change—or No Change at All?

Tech. and Cult.

37, 280–311 (April 1996).

3.

See Adam Serchuk and Robert Means, Natural Gas: Bridge to a Renewable En-ergy Future, Issue Brief No. 8 (1997) (Re-newable Energy Policy Project).

4.

A 1926

Literary Digest

article cited

in

David Nye: Electrifying America: So-cial Meanings of a New Technology

290 (The MIT Press 1990).

5.

The TVA also sought to make naviga-ble the region’s rivers, control flooding, manufacture fertilizer, and facilitate so-cial and economic development. Among its diverse goals, electric power genera-tion was the most important, as it pro-vided the basis for much of the TVA’s social and economic agenda.

6.

Richard F. Hirsh, Technology and Transformation in the American Electric Utility Industry

34 (Cam-bridge University Press 1989).

7.

The role of New Deal agencies in mod-ernizing American homes and busi-nesses through electrification is explored in

Ronald C. Tobey, Technology as Freedom: The New Deal and the Elec-trical Modernization of the Ameri-can Home

(University of California Press 1996).

8.

Thomas McCraw,

Triumph and Irony—the TVA

,

Proc. of IEEE

64, 1376 (Septem-ber 1976).

9.

Publicly owned utilities sell the re-maining 14 percent of retail power. Re-garding generating capacity, 71 percent belongs to IOUs, 10 percent to public utilities, 4 percent to rural co-ops, and 8 percent to Federal utilities. Another 7 percent belongs to independent power producers.

Timothy Brennan et al., A Shock to the System: Restructuring America’s Electric Industry

20 (Re-sources for the Future 1996).

10.

Scientists now concur that human ac-tivity has a discernible impact on the cli-mate, but have yet to agree on the na-ture, speed and geographic distribution of the coming changes. Emerging inter-

national negotiations strongly endorse renewable energy technologies and in-creased energy efficiency as substitutes for fossil fuels as a source of electricity.

Robert Watson, Marufo Zinyowera and Richard Moss (eds.), Climate Change

1995

. Impacts, Adaptations and Mitigation of Climate Change: Scientific-Technical Analysis

(Cam-bridge University Press 1996).

11. In this system, sellers could meet that standard either by producing their own renewable energy, or by buying tradable

renewable energy “credits” from pro-ducers who generate a surplus. See Nancy Rader and Richard Norgaard, Ef-ficiency and Sustainability in Restructured Electricity Markets: The Renewables Port-folio Standard, Elec. Jour., July 1996 at 37–49. Rep. Dan Schaefer (R-CO) and other members of Congress have pro-posed such a scheme in their bills to re-structure the electric industry.

12. See Setback for Renewable Energy Seen in California Decision, Interna-tional Solar Energy Intelligence Report (March 6, 1995) (Dow Jones News Retrieval).

13. The polls are cited in Barbara Farhar, Energy and the Environment: The Public View, Issue Brief No. 3 (1996) (Renew-able Energy Policy Project).

14. Restructuring Roundup, Quad Rept., Jan./Feb. 1997, at 6.

15. Loss-leader pricing also occurs in the electric power sector. In 1963, General Electric sold the General Public Utilities Company of Parsippany, NJ a 515-MW nuclear power plant for the attractive price of $60 million. Initially hailed as proof that nuclear power was economi-cally competitive, the Oyster Creek Plant may actually have been, as Business Week described it, “the greatest loss leader in history.” General Electric appears to have been willing to lose as much as $30 million on the deal in order to establish the market for their new product. Daniel Ford, The Cult of the Atom: The Secret Papers of the Atomic En-ergy Commission 62, 63 (Simon and Schuster 1982). If loss-leader pricing could establish a product—nuclear power—with no apparent public constit-uency, its potential to sell roundly ac-claimed, environmentally sound energy must be enormous!

16. Richard H. Rosenzwieg, The Federal Interest in Electric Restructuring, Pub. Util. Fort., Nov. 1, 1995, at 17–18. Wind energy advances are described in Adam Serchuk, Federal Giants and Wind En-ergy Entrepreneurs: Utility-Scale Wind-power in America, 1970–1990 (1993) (Vir-ginia Tech); Robert Righter, Wind Energy in America: A History (U of OK Press 1996).

17. SMUD Board Approves 10 MW, 1998–2002 PV Program, Pv News, June 1997, at 2–3.

18. The figures on the solar facility refer to Luz International’s first plant. Michael Lotker, Barriers to Commercialization of Large-Scale Solar Electricity: Lessons Learned from the Luz Experience, San-dia Report SAND 91-7014 (1991).

19. Clark W. Gellings, Martha Grasty, and Marc Jacobson, Utility Marketing: The Past as Prologue?, Elec. Jour., Aug./Sept. 1990, at 20–29.

20. Wind Enrgy. Wkly., No. 729, at 1.

21. Nancy Waltzman, James Youngclaus and Jennifer Shecter, Power to the Peo-ple? Money, Lawmakers and Electricity Deregulation, 5 (1997) (Center for Re-sponsive Politics).

condemned to repeat? ious, history and green markets

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