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Electric Utilities

Electric utilities

Utilities neither produce energy like oil companies nor consume it like households, but convert it from one form to another. The electricity created is attractive because it is clean and versatile, because it can be moved great distances nearly instantaneously. Demand for electricity has grown even as demand for energy as a whole has contracted, with consumption of electricity increasing from one quarter of total energy consumption in 1973 to about a third.

The major participants in the electric power industry are about 200 investor owned utilities that generate 78% of the power and supply 76% of the customers. The industry is very capital intensive and heavily regulated, and it has a large impact on other industries including aluminum , steel, electronics, computers, and robotics. The electrical power industry is the largest consumer of primary energy in the United States: consumes over one-third of the total national energy demand and only supplies one-tenth of that demand, losing from 6575% of the energy in conversion, transmission, and distribution.

The electrical industry has been subjected to pressures and uncertainties which have had a profound impact on its economic viability, forcing it to reexamine numerous assumptions which previously governed its behavior. In the period after World War II, the main strategy the industry followed was to "grow and build." During this period demand increased at a rate of over 7% per year; new construction was needed to meet the growing demand, and this yielded economies of scale, with greater efficiencies and declining marginal costs. Public utility commissions lowered prices which stimulated additional demand. As long as prices continued to fall, demand continued to rise, and additional construction was necessary. New construction also occurred because the rate of return for the industry was regulated, and the only way for it to increase profits was to expand its rate base by building new plants and equipment.

This period of industry growth came to an end in the 1970s, primarily as a result of the energy crisis. Economic growth slowed and fuel prices escalated, including the weighted average cost of all fossil fuels and the spot market price of uranium oxide. As fuel prices rose, operating costs went up, and maintenance costs also increased, including the costs of supplies and materials, labor, and administrative expenses. All this led to higher costs per kilowatt hour, and as the price of electricity went up, sales growth declined.

The financial condition of the industry was further affected as capital costs for nuclear power and coal power plants increased. As the rate of inflation accelerated during this period, interest rates escalated. The rates utilities had to pay on bonds grew, and the costs of construction rose. The average cost of new generating capacity, as well as installed capacity per kilowatt hour, went up. Net earnings and revenue per kilowatt hour went down, as both short-term and long-term debt escalated, and major generating units were cancelled and capital appropriations cut back.

During this decade, many people also came to believe that coal and nuclear power plants were a threat to the environment . They argued that new options had to be developed and that conservation was important. The federal government implemented new environmental and safety regulations which further increased utility costs. The government affected utility operations in other ways. In 1978 it deregulated interstate power sales, and required utilities to purchase alternative power such as solar energy from qualifying facilities at fully avoided costs. But perhaps the greatest transformation took place in the relationship electric power companies had to the public utility commissions. Once friendly, it deteriorated under the many economic and environmental changes that were then taking place. The size and number of requests for rate increases grew but the%age of requests granted actually went down.

By the end of the 1970s, the "grow and build" strategy was no longer tenable for the electric power industry. Since then, the industry has adopted many different strategies, with different segments following different courses based on divergent perceptions of the future. Almost all utilities have tried to negotiate long-term contracts which would lower their fuel-procurement costs, and attempts have also been made to limit the costs of construction, maintenance, and administration. Many utilities redesigned their rate structures to promote use when excess capacity was available and discourage use when it was not. Multiple rate structures for different classes of customers were also implemented for this purpose.

A number of utilities (Commonwealth Edison, Long Island Lighting, Carolina Power and Light, the TVA) have pursued a modified grow and build strategy based on the perception that economic growth would recover and that conservation and renewable energy would not be able to handle the increased demand. Some utilities (Consolidated Edison, Duke Power, General Public Utilities, Potomac Electric Power) pursued an option of capital minimization. They were located in areas of the country that were not growing and where the demand for power was decreasing. In areas of rapidly growing energy demand where regulations discouraged nuclear and coal plant construction, utilities such as Southern California Edison and Pacific Gas and Electric have had no option but to rely on their strong internal research and development capabilities and their progressive leadership to explore alternative energy sources . They have become energy brokers, buying alternative power from third party producers. Many utilities have also diversified, and the main attraction of diversification has been that it frees these companies from the profit limitations imposed by the public utility commissions. Outside the utility business (in real-estate, banking, and energy-related services), there was more risk but no limits on making money from profitable ventures.

See also Alternative fuels; Economic growth and the environment; Energy and the environment; Energy conservation; Energy efficiency; Energy path, hard vs. soft; Energy policy; Geothermal energy; Wind energy

[Alfred A. Marcus ]



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Three Mile Island: A Report to the Commissioners and to the Public, Volumes I and II, Parts 1, 2, and 3. Washington, DC: U.S. Nuclear Regulatory Commission, 1980.

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