A Short History of Energy Deregulation and the Future of Localized Energy

When Ben Franklin torched himself with a key on a string, he did it free from any regulations, rules, or restrictions. Nobody cared if those sparks were renewable or not. Times change, and the energy regulatory environment is moving back towards a freer environment for modern entrepreneurs.

Movers and shakers in the energy industry, in particular, can benefit from a look back. For one thing, it’s a fairly short history and won’t take much time. What it lacks in length it makes up for in drama. The Teapot Dome debacle over oil leases in the 1920s remains the biggest scandal to come out of Washington. Bribery, corruption, gambling, illegal liquor, fake news, and murder-suicide all were included in the salacious details of the saga.

It makes the Enron fiasco look positively JV by comparison. That was just some creative accounting.

The Origins of the Energy Sector in the US

One day there were horses and buggies, kerosene lamps, and the telegraph for emergency communication. That day, industrious tinkerers were working on the inventions that would bring about the automobile, light bulbs, and telephones within a few short years.

Thomas Edison’s  Edison Illuminating Company  (ConEd today) opened the first electric power plant in the United States in 1882, the Pearl Street Station in New York. Edison went on to build electric power plants in Pennsylvania, Boston, and Maryland. The company was well on its way to bringing electricity to major cities along the Eastern seaboard when the chief engineer, Henry Ford, decamped to Detroit in 1899 to work on his internal combustion engine. Ford thought an alcohol-based natural fuel would run his engine, while other auto pioneers were developing steam and even electric-powered cars.

All that changed in 1901 when the gigantic Spindletop oil strike redefined the energy game in the US. The discovery of all that cheap “black gold” just down the road (relatively speaking) in Texas sent Ford and GM’s Charles Kettering back to the lab to redesign their automobiles to run on the refined gasoline derived from raw petroleum.

Natural gas was first discovered on this continent around 1626, around Lake Erie. A few commercial natural gas companies operated in the Mid-Atlantic in the 1820s, providing lantern fuel for local customers. Distributing natural gas was too much of a challenge in the early days for those ventures to access more than close customers.

When the Great Depression hit full force in 1929, the US economy had evolved from a marginal dependency on coal, steam, and kerosene to one that was rapidly becoming dependent on electricity and gasoline. Both industries were entirely unregulated, and by 1932, eight holding companies owned 73% of the electricity in the US.

Regulating Utilities

Franklin D. Roosevelt, the US President during the Great Depression and through most of World War II (1932-1944), thought that those eight companies had entirely too much influence and were skating close to the edge of monopoly status. So Congress passed the Public Utilities Holding Company Act (PUHCA) in 1935. The PUHCA tightened up the way holding companies did business and gave the SEC significant oversight powers.

That was all well and good in the pre-war environment. The US was still relatively isolated economically, and PUHCA restrictions on the energy sector wasn’t a huge deal.

Post-war, everything changed. Demands for energy across all platforms skyrocketed — industries from commercial aviation to appliance manufacturers were soaking up all that military-industrial technology and reinventing life as we knew it. For a while, we could power all this new stuff with native sources, but along came the 1970s and the energy crisis. You might remember sitting in the backseat of your mom’s Country Squire gas guzzler waiting for it to fill up, grateful to be in the car where you could crank up the heat since President Carter suggested keeping the thermostat at a frosty 66.

PUHCA regulations discouraged investing in energy, and it was repealed in 2005 with the Energy Policy Act. The new act had two fundamental goals:

1. Encouraging investment in the energy sector, particularly in the outdated and inadequate transmission grid.
2. Bringing energy companies under the friendlier aegis of the Federal Energy Regulatory Commission (FERC), from the somewhat hostile SEC.

The First Deregulation Domino to Fall: Natural Gas

In 1938, still in a New Deal legislative frenzy, Congress passed the highly restrictive Natural Gas Act, which effectively capped prices and shut off interstate commerce in the industry. The 1978 Natural Gas Policy freed pricing constraints, which, among other goodies, allowed natural gas trading to modernize from old-school contracts of up to 20 years to spot trading. These were contracts that would execute in as little as a month.

The last domino fell in 1986, when the Federal Energy Regulatory Commission (FERC) broke the pipeline monopoly, requiring the lines to transport natural gas for any customer. The FERC regulates almost all the energy the US produces — electricity, natural gas, oil pipelines, and hydroelectric projects — and controls over 70% of the electricity produced here.

When the FERC stepped in, it allowed the local distribution companies (LDCs) to contract directly with the wellhead or brokers. Until then, gas companies were primarily local since they were hamstrung by the pipeline monopolies. The Natural Gas Policy forced the pipelines to became common carriers to any LDC. The free market wins again, and natural gas prices have been historically low for years.

Restructuring Electricity — or Deregulating?

Although retail power providers still exercise monopolies that would make the robber barons of old blush (although Duke Energy would make old JB proud), there has been some restructuring. This could also be considered substantial deregulation. It’s primarily at the wholesale level, but in wide swaths of the US, there is some retail competition.

In short, the power behemoths have split their business lines into three parts: generation, transmission, and distribution. The old vertical integration is gone. Current federal regulations encourage “open access” transmission so that generators can choose their carrier; in-house generators don’t get a price break. The idea is that regional competition will provide better service at lower prices to consumers.

The jury is still out on whether this restructuring of the power industry is successful.

The Diversity of Self-Supply

Self-supply is not moving to a yurt and living off the grid. Rather, it’s the concept of green power that’s owned and used by the individual (usually a corporation like Ikea or the University of Missouri) who has the right to sell any leftover power to another user.

Self-suppliers work through the EPA and their Green Power Partnership. They can choose their preferred power source — solar, wind, and geothermal are the preferred options — and own and maintain the generating system. A self-supplier needs a Renewable Energy Certificate (REC) to be considered self-supplied green power, sell to others, and take advantage of tax benefits and other incentives.

Whether the incentives are really committed to green power is a topic for another day, but suffice to say that the Power Purchase Agreements (PPAs) between participating companies and the government don’t guarantee localization or a carbon-neutral energy footprint.

Here are some other green energy sources.

• Hydroelectricity isn’t new, but it’s still green. The Hoover Dam is the biggest hydropower source, but communities along waterways are installing micro-hydroelectric systems to generate their own energy.
• Bioenergy — harnessing biomass through a mechanical rather than natural means — has the potential to create ethanol and biodiesel fuels, or to convert steam to electricity. Farmers can use methane from their livestock to electricity with equipment upgrades.
• Hydrogen can also be converted into energy. But at the moment, it’s too expensive to be a practical energy source. Once the technology improves, hydrogen fuel cells can power cars, ships, and provide emergency backup for commercial buildings like hospitals.

Oceanic energy conversion is in the early stages, but the possibilities of the seas are dazzling. Since the oceans cover 70% of the earth’s surface, finding ways to utilize their natural resources for energy only makes sense. The oceans can be converted into thermal or mechanical energy — the heat from the sun on the water creates thermal energy, and the action of the waves and tides can also be harnessed and converted. Cold water from deep below the surface can be used to cool buildings.

Newer oceanic technologies focus on ocean currents, winds, and salinity gradients as sources of power conversion.

Localized Energy and Community Choice Aggregation

Energy self-suppliers are providers of localized energy — like in San Diego, where the city is heading towards 100% green power sustainability. The city generates the electricity and distributes it to residents through San Diego Gas and Electric, who handles the billing. San Diego County is also on the green wagon, adopting a plan to offer Community Choice Energy  (CCE) to all 18 towns in the county.

At the EPA, CCE is known as CCA — community choice aggregation. Whichever acronym you prefer, CCAs are government programs that allow a municipality to contract for power from an alternate source, while still receiving the power from the legacy carrier’s transmission and distribution lines.

Eight states so far have approved CCA legislation — the list is California, Ohio, Illinois, Rhode Island, New York, New Jersey, Massachusetts, and Virginia — and several more are actively considering CCAs. CCAs not only offer lower rates to participating communities, but there are also several other benefits, like:

• Reducing greenhouse gas emissions.
• Establishing new revenue streams to support local energy endeavors.
• Boosting the local job market.
• Reflecting community values.

Even though only eight states are committed to clean energy through CCAs, 200 cities and counties, 11 states, Puerto Rico, and Washington, DC, all have 100% clean or renewable energy commitments or achievements.

Matching Energy Technology to Policy

What’s the future of energy? Renewables are the current darlings of the industry — entrepreneurs, investors, and the big energy companies are working towards finding the next big thing that’s a game-changer. As outlined above, New Deal legislation that lagged on the books decades past its sell date is indicative of the way policy lags behind technology. The good news is that there is a comprehensive bill for accelerating technical innovation on the docket for the 2020 Congress; this bill addresses clean energy, carbon capture, energy storage, and renewables, among other issues. The bill already has bipartisan committee support and should pass in this session.

Regardless of how fast Congress acts, the evolving energy technologies are a huge part of our future. So go ahead and invent or invest — the money and markets will find you. This is especially true in Houston, which has a long history of being the oil and gas capital of the world.