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cc >> I've know Richard for over 23 and when I met him I had already been in the industry for almost 20. And in the 20 years that I've been in the industry, nobody had mentioned to me even once this notion of the utilities social contract with regulators. And so I was like dumbfounded to listen to this talk from him and discover this concept of a social contract. And it totally changed the way that I thought about the utility industry. So tonight, you have the privilege of hearing my asthma voice, of actually having Richard spend about an hour and a half or so or more with us tonight talking about how the social contract came about, how commissions came about, and to some degree we're going to try and talk about where they're going because they're definitely having a change in their responsibilities and the kinds of things that they're responsible for having authority over. So with no further ado, I'm going to turn this over to Richard. >> Well, thank you very much, Sam. Let me just get this going again. >> Oh, I nearly forgot the most important thing. Why he knows about this is he actually is a professor at Virginia Tech, and he is a regulatory historian among other things. So he has actually two books out about this very industry. So I just thought I would make sure to get that part in. >> It doesn't hurt. Thank you. Yes, indeed. Thank you very much for coming. I love coming back to Madison. I went to grad school here, and in fact, here's more information than you'd ever want to know about me. As Sam pointed out, I've written two books on electricity history and policy. One book on astrophysics, but that doesn't really relate much to what we're talking about here. The latest book is this book called Power Loss, published at the end of 1999, actually, though there is an updated version of part of it. It makes great summer reading. If you're going to the beach or something, you can buy a copy and help me send my son to college. My degrees are largely from Madison. Physic degree and history of science degree. I do work on energy policy, renewable energy, stuff like that. And there's a picture of me standing inside-- What is that device, by the way? What am I standing in? Yes, a wind turbine blade. Obviously not one that's being used. I did, I started off in this business by serving as a volunteer citizen rate maker for the Gainesville Regional Utilities System in Gainesville, Florida. And it was a great experience for me. I knew very little about the utility industry, but I learned a lot very quickly. And I worked as the chairman of a citizen committee that came up with the new rate structure for the city of Gainesville. The problem at the time was that the rates were going up dramatically for this city-owned utility system, and that's because the city had just finished building a power plant. And the power plant was very expensive, built in 1978,1979, or completed then, and the city and rate payers then would have to pay for this new power plant. So there is this big hearing, and citizens came and complained to the city commission that the rates were going to go up to pay for this new power plant. And because I had gone to graduate school here in Madison in the 1970s, I was very, very young at the time... Thank you, Sam.

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You're the only one who caught the irony there. So because I was aware of new rate structures, time of day rate structures, a focus on marginal cost based pricing systems that really got started here in Wisconsin, I suggested that maybe we need to change rate structures in the city of Gainesville. And we actually came up with a rate structure that looks like this. An incline block rate structure. The more electricity you use, the higher the unit cost. And I argued at the time that this would be a way to discourage wasteful use of electricity and perhaps stall or forestall the need to build a new power plant in the near future and then see rates go up again. Well, the city commission accepted this idea, started this policy, and I like to think, I can't prove it, that I had something to do with changing the culture of Gainesville and the Gainesville Regional Utility System. In fact, some of you may know that a few years ago they actually even started a new type of tariff, a feed-in tariff, to support solar photovoltaic installations by people who owned houses in Gainesville. So it was a really neat experience for me and got me into this whole business of electric utility stuff. So here's what I'm going to talk about today. First, start by talking about the origins of regulation in the American Electric Utility System, and tie that to the notion of technological innovation. The two are very tightly coupled. I'll tell briefly the story of that because I know some of you have already heard about this in other talks. I'll talk about how challenges in the '60s and '70s, I'm sorry, challenges affected the notion of regulation and traditional regulation. We'll talk about how deregulation started. And people started talking about the justifications to deregulate a formally regulated industry and then explain why that didn't really work out as well as some people had hoped. And then, at the end, talk about some possible futures that deal with both technology and regulation. And I understand that there's this very controversial plan to change rate structures in Madison, and in Wisconsin in general, and some people think that would have a very detrimental effect on things like renewable energy in this state. So, for the fun of it, let's just have a little pretest. And the first question you can

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regulation is bad, yes or no. >> So vote A for yes, B for no. >> So regulation is bad. >> So most people are saying no for that one. >> No. Okay. Do we have any Republicans in the audience here? Okay, next question. Regulation is imposed by government on industries, like the railroad industry in the late 19th century, that take advantage of monopoly to exploit customers or other participants who have little power in markets, yes or no. Long question. Regulation basically is imposed on evil industries, like the railroad industry which was exploiting farmers, for example, in the late 19th century and so on. Okay, sort of evenly matched there, right? Okay, and then my last question. One could argue the answers to all of these, but I'm going to talk a little bit about those questions and those themes as they apply to the utility industry. So, let me just go, and I'm not going to give you the answers right now, but you'll see them showing up here. So I'll start by talking about the very beginnings of the electric utility industry. Most of you or many of you may be familiar with this history. The technological basis emerged when Thomas Edison built a system in New York City around 1882. And he built the generators, the steam turbine, I'm sorry, steam engines, and then the generators. He had the wiring system and the wires went to people's businesses largely, where they had mostly electric lights. And that's how it started. It was a system that used direct current electricity because that's pretty much all there was at the time, and the direct current could only be transmitted about a mile without degrading severely. So Edison's view of the future of electrification was to have power plants every couple of miles serving customers in a city, for example. So New York City might have 10, 15, 20 of these power plants serving the people of the city. Okay, that worked okay for a little while, but there were people who thought that there might be better ways, in particular people like Westinghouse and a company called Thompson-Houston that developed generators that made alternating current. And alternating current worked fine for things like lights, but at first they didn't work well for electric motors. There were only direct current motors at first. But the big advantage of alternating current is that you can transmit power over long distances without a loss of much of the power. And we won't go into the physics of it, but the big point to make to be aware of is that the alternating current system eventually dominated and predominated over the direct current system of Edison. And ultimately, the Thompson-Houston system took over, bought out the Edison electric system to create a company that was known as, maybe you've read about it in the history book somewhere, do you know what that company is called today? Or was called back then, rather? >> General Electric. >> General Electric. And the beautiful thing, of course, is that General Electric loves to advertise that Edison was the founder of the company. Actually, it was Thompson and Houston, and they bought out Edison. But so it goes. History may not be perfectly told all the time. Okay, so the technological basis for the modern electric power system did not depend on these reciprocating steam engines, like on the left. Rather, they depended on a new innovation, a steam turbine, such as what you see on the right. And Charles Parsons in England came up with a steam turbine. Basically you just blow steam through these blades and it causes rotary motion. And the beauty of these things is that the steam turbines are quieter, they don't vibrate as much, and you can scale them up dramatically. The picture in the upper right shows an early steam turbine from Parsons that was used to make electricity. You can see my 50 millimeter lens cap next to it. It was very compact and yet produced a good amount of power. And, again, the beauty of these things was that you could scale them up. So you could use twice the material but get like three or four times as much power out of these devices. And they were scaled up dramatically. So if you look at this graph here, you can see that in the early years when they were just getting going, they were relatively small. So like in 1912 or so, it wasn't uncommon to see maybe a five-kilowatt, I'm sorry, a five-megawatt steam turbine, but they were scaled up to about 200 megawatts by around 1930. And then they slowly got better, but some of the pacemakers, some of the premier, some of the really novel machines got bigger and bigger. And you can see that by about 1965 companies were producing thousand-megawatt steam turbines, steam turbine generators. And they really did take advantage of these economies of scale so that you could get more power out of a relatively small unit. Also going on technologically was that companies like General Electric and Westinghouse found ways to take advantage of higher temperature and higher pressure steam to get greater thermal efficiency out of these steam turbines. So back when Edison built his power plant system, he was getting about two and a half percent efficiency. Meaning that you put in or you used a pound of coal and about 2.5% of all the energy in that coal was ultimately turned into electricity. By the '20s, '30s, a higher temperature steam, using materials that could withstand higher temperatures and pressures and so on, allowed the industry to move up this scale such that by the '50s and '60s, in particular, the average power plant got about 30% or so thermal efficiency. The best plant, under 40% or so. So, what you're seeing here is that the best power plant converted now 40% of the energy from a pound of coal or any other source of energy to electricity versus about 2%-3% back when the industry started. The beauty of these, well, yeah. Okay, let's just stop here. Just as an aside, if you are converting 40% of the energy into electricity, what happens to the other 60%? >>

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>> Goes up the stack or it goes into, no this is just in the generation, not transmission. Though, that's a good point as well. So the 60% is waste, right? And some people, some countries, some companies will use the waste heat to heat buildings, for example, or for industrial processes, and that type of system is known as... >>

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>> Co-generation or combined heat and power, and we'll get back to that later. But in general, as these plants got bigger and got moved away from city centers, they basically wasted or threw away the 60% energy. And yet, that was okay. Okay, so let me jump back a few years now and talk about natural monopoly and regulation. This whole idea of natural monopoly started in the late 1800s and actually was developed by some people here in Wisconsin. The notion was that customers benefited when one company served all customers rather than allow for what people naturally preferred, namely competition. In the railroad industry, for example, in the early years, in the 1830s, there was competition between several companies. They would string lines near each other going from Madison to Milwaukee, for example. Well, these lines and the equipment needed, the locomotives, the cars, these were very expensive. Required a huge amount of capital investment, and when you had competition between two companies, neither company could necessarily get enough business to make those lines profitable. Wouldn't it be better to just have one line, and one company gets the business and can invest and take care of the customers. Well, that's actually what happened. In the railroad industry, competitors merged, they combined so that there would be de facto monopoly. And indeed, the railroad companies that acted this way made very nice profits and certainly were able to do business. Of course, the big problem was a monopoly rents. You had monopolies that took advantage of their customers. If customers became dependent on the railroad, then they had to pay whatever the railroad wanted them to pay. Well, the idea was or the question was, how do you deal with this situation? How do you deal with the technology and a business system that tends toward monopoly without hurting customers terribly? And indeed, one answer was regulation, and I say another answer was government ownership. And indeed, that's what happened for a while. There was this dual system in the United States in which you had, in the electric utility industry, some power companies that were owned by cities, municipal utilities. And then you had other systems that were ultimately regulated. Well, again, here in Wisconsin, you had John Commons, a professor here. You had this other guy, Robert La Follette, who was very big into, in the progressive era, thinking about ways to enable natural monopolies to coexist with protection of consumers. And indeed, they suggested that regulation, having a public service commission that had people on it who could use the latest scientific and economic principles to make sure that companies would earn enough money to stay in business but also not so much money that they would hurt customers. And indeed, there were some people in the utility industry who saw regulation as a great positive. One of them was this guy, Samuel Insull, and he realized that if the utility industry were regulated, it would provide several benefits to the power companies themselves. Because the utility commission was required to make sure that the utility companies stayed intact financially, that meant that they would get rates that were high enough to protect the company, and then the company would be able to go out and sell bonds and stock and say, look, our securities are secured by the rates that the Public Service Commission is going to guarantee. Before Insull started advocating for regulation, before the early 1900s, the first decade of the 1900s, investments in electric utility companies were like high tech investments today. Kind of risky, not too secure. After regulation became imposed or adopted in this industry, securities for the utility industry became known as securities for widows and orphans. They became very safe and secure and conservative. That allowed the utility companies to float bonds at relatively low interest rates. So they were saving money as well. By regulating the utilities as well, the utility companies could avoid being taken over by, for example, the city or a city that was trying to protect its customers. And indeed, regulation legitimated the notion that the utility industry was a natural monopoly, one that could serve its customers best by allowing only one company to exist. And we see that it became very popular around the country. Starting in Wisconsin and New York in 1907, utility regulation swept the country. By 1912, almost all states had regulatory bodies. And indeed, they became quite popular. They were viewed as ways to protect both the consumers against abuses of monopolistic utilities but they also were there to protect utility companies, making sure that they would have enough capital to build these new power plants that were showing greater and greater efficiency and greater and greater economies of scale. So regulation protected consumers and utilities. This is the theory. Okay? One could argue that in practice didn't really happen that way. But indeed, back in the early days of the utility industry, during this progressive era of great enthusiasm for the role of some type of government regulation, this is what people were thinking. And as a social institution, regulation enabled utility companies to exploit these technological innovations that were occurring at incremental levels. Remember the slides of the growing scale of power plants and the growing or the increasing thermal efficiency of power plants. I'll show you in a little while what the consequence of all that was. So, to reiterate a point that you will hear later, regulators work for both companies and consumers. And sometimes there are conflicts, right? Sometimes, historically, there weren't many conflicts until the 1970s or so. But indeed, utility companies, I'm sorry, utility regulatory commissions are, in theory, supposed to protect both consumers and the utility companies, balancing the needs. Yes? >> What does the phrase regulatory capture really mean? >> Okay. >> Does that mean take back the utility that's not doing... >> No. Regulatory capture is the phenomenon in which the regulatory, I'm sorry, regulatory officials are essentially captured by the industry that they regulate. There's been a lot of academic work and empirical work over the years showing, suggesting maybe is the better word, suggesting that regulators align their interests often with the bodies that they are supposed to regulate. Okay? One of the ways they do this is by, I'm sorry, one of the ways this occurs is by having the utility industry tell a regulator near the end of his or her term that, hey, we could really use you in our company to serve as a vice president or on the board of directors or whatever. Yes? >> Are you willing to tell us if this has happened in this state? >> I can tell you the short answer is no. >> Okay. >> I don't know. But Peter Bradford, who was regulator for New York, and he was on the Nuclear Regulatory Commission, he has documented this quite nicely in other states. Okay? Okay, another point just to make here because it'll come back to us later. Rate making is not a science. When I worked as a rate maker for Gainesville Regional Utilities, I learned that to make rates you have to know what the costs are. And that seems fairly easy. But to allocate costs between different customers, classes, between different parts of the electricity production system, I'm sorry, yeah, the system in which you are generator power and you are transmitting power and you're distributing power to ultimate customers, the allocation of those costs is very difficult to assess, and, quite frankly, a lot of it depends on your philosophy, your politics, whatever. And what I discovered turns out to have been nothing really novel. James Bonbright, who was one of the people who wrote extensively about rate making in the 1960s, pointed out that rate making was like 90% philosophy and 10% math. Other people have said similar things. And all I'm saying here is that there's a lot of subjective knowledge, subjective assessments that go into making rates. Okay, well, this electric utility system, in the early 20th century, was a regulated monopoly that was using incrementally improving technology. The technology was becoming more efficient. It was getting bigger, and, as a result, you have what some people have called a grow and build strategy that became quite popular among electric utility managers. Basically, what you have is demand increasing, and as demand for electricity increased, the managers realized they had to build new power plants. When they built new power plants, they took advantage of the newer technology, which was more efficient and bigger, and, as a result, the cost per unit of electricity actually declined. The cost declined and then because the cost declined, the utility companies could reduce the price of electricity. And indeed, they were supposed to reduce the price because the regulators said you're allowed a certain profit margin but not much more than that profit margin. If your costs go down, then the prices have to go down. From economics 101, we know that when the price of something goes down, very often the demand goes up because people see that they can take advantage now of cheaper electricity to use for their appliances, air conditioners, heaters, water heaters, electric stoves, you name it, and they, therefore, use more electricity but their bill doesn't really go up. Their consumption goes up, but because the price per unit has declined, the overall bill may remain somewhat about the same. Okay, so more people are using more electricity. That means the demand goes up, and if the demand goes up, then the power companies have to build new power plants, and they're using new technology which reduces the cost and so on and so on. So this grow and build strategy proved incredibly successful. There is this nice reinforcing spiral that people really enjoyed. After World War II, the utility industry continued encouraging electrification and selling electricity in a way that seemed like everyone benefited. So here I have a few advertisements from the 1950s and 1960s. Here, in the upper right-hand corner, you can see a medallion home. A medallion home was a home that was all electric. So you didn't have any gas or oil for heating or for heating water. Everything was electrified. You have a couple of ads here. There's this spokesperson for General Electric. I can't read his name very well. But he started out, he was a movie star and he was hired as the spokesman for General Electric, and he went on to do a few other things that some of us are familiar with. But here he's advertising all electric homes. Here are a couple of other advertisements I like. The ad on the left asks how high is your standard of living, and then it has a whole list of appliances that you can check off, and if you have selected a certain number, hard to see, 30-44, your standard of living is very good. If it is fewer than 15, you are missing a lot. Okay? The other ad is typical of the Live Better Electrically campaign starting in the 1950s. Everyone clearly is happy because everything in their house is electrified, and people are using electricity left and right. Here is the cover of the Virginia Electric and Power Company from 1968. And even though you might imagine that I Photoshopped this word growth on it, that was there on the annual report cover. VEPCO was very proud of the fact that its growth rate of demand among its customers was about twice the national average. The average growth rate from the 1940s to 1968, 1969, up to about 1973 actually, was 7% to 8% per year. But VEPCO was seeing its growth rate at 14% per year. How many of you are getting 14% per year on your savings accounts these days? When did you? Some of you may remember when you did get 14%. When was that? >> Early '80s. >> Early '80s. Very good. So just to break up the monotony here, you can get out your clicker and answer this math question. How long does it take for demand to double if the growth rate of demand is 7% per year? Here are your four choices. About 14 years, which obviously, I shouldn't say that. 100% divided by seven. 28 years, 200% divided by seven. Or about 10 years and who knows why? Or none of the above. So, approximately, you have 7% growth per year, how long does whatever you're growing at 7% per year take to double? Or you put your money in the bank, you put $100 in the bank, 7% per year, how long does it take to get to $200? Okay? One, two, three, or four. >> While people are doing that, could you tell us why electricity usage was higher in some parts of the country, or what parts of the country, like Virginia, were higher? >> The Virginia Electric Power Company, for example, served the eastern part of Virginia. Washington, DC, northern Virginia area, all the way down to Richmond, to Norfolk, to areas where there was huge development of businesses, homes, naval facilities. >> So it's population density? >> Density and the businesses that were going in there, yeah. >> So Chicago would be higher than the national average, for example? >> Probably. Although, I don't know the actual statistics. Yes? >> Some of that has to do with fuel choice? >> As well. In New England where oil was used but oil was pretty cheap in this period. Okay, so most people, even the majority of people actually know their math. Very good. It's 10 years. So you're doubling in 10 years, and I will just, once we get back to here, the answer indeed was 10 years. There's a formula that uses exponents and stuff like that. The rule of thumb is basically take the number 72 divided by the interest or growth rate per year, and that will take care of compound interest. So if you have $100, after one year you have $107 at 7%, but now the interest of 7% on $107, not on $100, is such that the next year you'll have $115 or so, and you get to double, you get to $200 in about 10 years. This is amazing if you think about it. You're doubling every 10 years. You're basically duplicating your entire electric utility system capacity every 10 years. And I'll show you some more graphs. In the case of VEPCO, you have doubling every five years. Can you imagine providing the facilities, raising the money to be able to double the capacity in five years? Well, back in the '60s, that was okay because the companies were still able to take advantage of this incrementally improving technology to reduce the price and cost of electricity. This graph shows you in the blue line the average, I'm sorry, the growth rates nationally. And you can see that it sort of comes down a little bit. It comes down from right after World War II, from about 8% or even higher for a couple of years, and it sort of averages or comes down to about 7%, 8% per year. This was the norm. Earlier in the century, the growth rate actually was something like 12% per year but then drops down to only 7%, which means you're doubling, again, in 10 years. Amazingly rapid growth. But that was the norm. And better yet, and this is perhaps the most impressive graph that the utility industry could make and show, that because, not in spite of, but because of this incredibly rapid growth rate, the cost and price of electricity dropped dramatically. So if you go back to 1882 and see what Thomas Edison charged and then you consider inflation all the years since and then you go back or go down to about 1969, you see that the cost of electricity dropped from about $5.50 per kilowatt hour down to about two cents per kilowatt hour. Okay, so you're talking about 99 point something percent decline in the cost of electricity. And that is incredibly impressive. Here you see, on the right side, an advertisement for Duke Power in 1959. While the cost of living has doubled since 1940, the cost of electricity has decreased one-third. So everything else in daily life has gone up in cost except electricity. It's declined in price. That's amazing. You can buy today, or I'm sorry, in 1959 it was apparently expensive that two loaves of bread cost 15 cents, but we've had a little bit of inflation since then too. Again, the point is electricity prices declined and things were looking good. If you were an investor and you invested money in electric utility stocks and if you could sort of buy in 1932 or 1933 rather than in 1929, you would have done very, very nicely. And indeed, around 1965 there was a peak in the price of electric utility stocks. Okay, I'm going to disappoint Sam here because Sam introduced me by talking about the fact that I'd given a talk once on the whole idea of the social contract, and indeed I did. I even wrote and article on the usefulness of this notion of the social contract for understanding regulation. I've since retracted that, I'm sorry to say, because this notion of the social contract has some use but it really does break down if you get into it using a little bit of, I don't know, if you go farther with the logical arguments of the social contract. The notion of a social contract or a social compact actually goes back to enlightenment thinkers, Rousseau, Hobbes, Locke and others. It was an agreement between the rulers and the ruled. In the 1970s and 1980s in particular, utility people started picking up this notion as a way to suggest that the regulatory commissions had an obligation based on this social contract to make sure that the utilities were making enough money, or even more money than perhaps the rate payers wanted to pay. And the utility companies in certain cases were saying, hey, our costs have been going up in the '70s and '80s due to inflation and other things I'll talk about in a moment, and the regulatory commissions should be obliged to raise rates and help out the utility companies. It was all one-sided. And the way I argued earlier today is that the utility industry, I'm sorry, utility regulatory commissions are supposed to be protecting both the customers and the utilities. So there was this balance that the regulatory commissions were supposed to enforce, not the obligation to make sure that the utility companies were remaining very, very financially solvent. Was there a question back there? There was. Yeah, go ahead. >> I never quite understood why they originally went to a monopoly for profit rather than this is in the public interest, it should be municipally owned, not for profit, why they're paying for advertising and this kind of thing, why they're --, rather than simply --. >> Right. >> Can you repeat the question? >> Okay, yes. So why, in the first place, was regulation set up for for-profit companies? Why didn't you just have government entities, like cities, take over these companies and operate for the benefit of the cities? Actually, up until about 1907 things were moving in that direction, and then there was a financial crisis at the time and cities were trouble and the public power movement actually declined after that. There was, in this period in the early 1900s, the whole idea of government running a business was not very popular. It reeked of socialism. It reeked of, well, of Europe. Okay?

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Which Americans did not necessarily like. Business were entities that did something, whether you want to say it's good or not, but they were the innovators. There were also progressive politicians who were very worried about municipal utility corruption, which did exist in several cities already. So the utility, the people who ran the utility would take kickbacks, or they wouldn't invest money in improving the system or maintaining the system properly. There were some problems with public utilities, I'm sorry, with municipal utilities as well, dealing with corruption and so on. So the trend sort of went the other way. Presidents, I'm sorry, campaigners, presidential campaigners like President Wilson and Teddy Roosevelt both viewed, in 1912, businesses as the entities that should do things but they don't always do things in the public interest but certain businesses really are dealing with the public interest. Those companies need to be regulated one way or another. Okay? >> Los Angeles still has --. How many other large entities out there? >> There are still quite a few. Gainesville Regional Utilities, where I was, city of Austin, city of Radford, Virginia. >> Is 14 large? >> 14 large, yeah. Los Angeles, Department of LAPW, yeah. There are still lots of them out there. And then you have these federal agencies, like the Tennessee Valley Authority, Bonneville Power Authority, that are producing power that gets sold to municipal utilities and cooperatives. The American Electric Utility System from an ownership perspective is really weird because you have publicly owned, I'm sorry, you have city owned, you have state owned, Nebraska, you have privately owned or investor owned utilities. And it's crazy in a way. And it's all because of history. It's all because a hundred years ago there were these debates and these discussions and you ended up not with the movement to one system, one federal system or one municipal system, but you had this hodgepodge of systems. And it got added on to in the 1930s with the federal government really getting involved as well. So it's all historically contingent. It's why we need historians to explain these things.

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I'm trying to justify my existence. This notion of the social contract, again, is useful to a certain extent. Although, there was this court of appeals judge who observed, humorously, "Since Rousseau was neither a public service commissioner nor an executive of electricity de France, it was not clear to me why his social contract should be of interest to utilities." So basically I'm now somewhat debunking this whole idea of the social contract because it has been used in recent years too much on the side of utilities to justify that one leg of the seesaw. So, that's background largely. I said I would do it quickly, but maybe it wasn't so quick. But we're here until what, nine, 10 o'clock? >> Yes.

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>> 10 o'clock. Okay. And about eight o'clock, 7:30 or so, you break out the wine and cheese, right? >> At eight o'clock there's a break.

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>> Okay, we'll do that. >> Everyone leaves and goes home. >> Okay, so next I'll talk about some of the challenges that the industry encountered in the '60s and '70s, talk about something I call technological stasis, the energy crisis, new technologies and so on. So, here we have this same graph of thermal efficiency improvement. However, we don't see the curve going up anymore. In fact, due to some technical problems, such as some metallurgical problems, you have some, well, mostly technical problems but some managerial problems, basically what happened is you have this thermal efficiency plateau that you could not, in an economic way, make these power plants more thermally efficient. Just hit this wall, basically. Turbine capacity also hit a wall. When companies tried to increase the size to get scale economies of these turbine generators, they ran into huge problems. And effectively there was a plateau at about a thousand to 1400 megawatts for these turbine generators. Some have been built a little bigger, but in terms of the economic use of really big turbine generators, things plateaued in the '60s. And the big significance of this was just as when other things were about to occur, which I'll talk about in a moment, the technology, the traditional technology of the utility industry no longer improved. So, remember the trend? Bigger plants, more thermally efficient plants, lower cost of electricity. It confounded inflation. But not anymore. And in the early 1970s, a few things happened, such as the energy crisis, that caused the raw materials for making electricity to go up in price dramatically. And, of course, the energy crisis of '73, spurred by the western countries support of Israel during the Yom Kippur War, there was an embargo by the Arab members of the organization of petroleum exporting countries, and once the embargo ended a few months later, the cost of oil, the price of oil rather, from these countries has risen fourfold, and it continued going up. Oil was used to make electricity and quite a bit of electricity in the United States, and the alternative fuels went up in cost as well because supply and demand. If people wanted to get off of oil and go to coal, the coal manufacturers, the coal miners, realized they could raise the price of coal as well. So the energy crisis was severe. Some of you look like you're old enough to have endured this, gone through this. You may remember the long lines for fuel, gasoline for example. You may have seen your investments decline in value in the stock markets. In other countries, the stock market drops were considerable and quite severe as well. We were rationing gasoline and we were seeing that the price of fuel increased dramatically. Because the technology that made electricity was not getting any better because of this plateau or technological stasis, staying the same, it didn't improve, because the technology could no long mitigate price increases, the price of electricity increased as did the price of energy. Okay? So we see, starting in about actually 1969, 1970, 1971 was the low price for electricity for residential electricity on average in the United States, and it started going up such that by 1984 the cost, or I'm sorry, the nominal price of electricity had increased more than 240%. Since 1882, the price went down. In 1970 or so, it's now going up. And that's not very nice, obviously. When the price was going down, everyone benefited. Customers benefited, the utility companies benefited. Even though the price was going down, they were selling more kilowatt hours, profits were going up. The utility companies were making lots of money and doing well. And even the regulators were benefiting because they could say look at this wonderful industry that we are overseeing. Where the price goes down and confounds inflation and everything else. Yes, sir? >> When they changed the commodities law about being able to trade contracts...

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>> Okay, the question dealt with when did commodities laws change so that you could trade contracts instead of actually taking possession of oil or coal or whatever. I really don't know. Okay? I'm glad I repeated the question so well to just say, I don't know. And I'm not sure how much effect that had. Most of the stuff that I have read explains the higher cost of energy due to, I'm sorry, the higher prices for energy due to the fact that the suppliers could hold back on the oil and raise the price at will. The United States was not importing more than about 30% of its oil from abroad, and not all of that oil was coming from OPEC. But the oil market was very tight such that if a small portion of the market were disturbed, the price would go up dramatically. >>

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>> That's what we were told, yeah. >>

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>> We showed them. Yeah.

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Okay, so the energy crisis, the first one, 1973, Presidents Nixon and Ford instituted policies that they said would make America independent of energy, I'm sorry, we would be independent of foreign suppliers of energy by 1980. We all remember how successful that was. President Carter came into office in 1977 with a different energy policy, one that encouraged, actually, conservation, which he said was the quickest, cheapest, most practical source of energy. Among the first things he did as president was to pursue a bunch of laws, a new national energy plan. That plan was weakened by congress. Some of you may remember that the plan actually included a tax on gasoline of as much as 50 cents a gallon if Americans didn't reduce their consumption of gasoline. That 50 cents a gallon would have been imposed over a five- to 10-year period, but congress said we can't do that. We can't tax gasoline at that level. If you read the Constitution, it says cheap gasoline is a Constitutional right.

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And it seemed that way, right? Because it had been cheap for a long, long time. Anyway, President Carter eventually did pass, or get passed, a set of laws, a set of laws that made up the national energy plan, but it was greatly watered down. Okay, as an aside, conservation and efficiency. I think President Carter did a great disservice to Americans by making people think that conservation was the equivalent of deprivation and sacrifice. He made this great speech on TV, talked about the moral equivalent of war, and he encouraged people to conserve energy. Drive less, turn the thermostat down in the winter, put on sweaters. Americans don't like to sacrifice, right? We like to have a lot. A lot of anything, right? A lot of everything. And he was not terribly successful. What he should have encouraged was greater efficiency, and he did that but not in television speeches. Efficiency means doing more with what you already have. So instead of driving less, why don't we just drive cars that get twice the mileage of the old cars. So you're going twice the distance on the same gallon of fuel. That is efficiency and that is something that maybe Americans could get behind. But it took a while before that happened, and, of course, you can't instantly go out and get new cars. Not everyone can afford them. They're not even being made. They didn't even exist. President Carter's energy plan also encouraged the switching from oil to coal for power plants, which was actually quite a turn around because in the late '60s there was a move away from coal to oil. Why would we move from coal to oil? >> Cleaner. >> It's cleaner. It burns cleaner than coal. And this is the beginning of the environmental movement in the 1960s. >>

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>> Pardon me. >>

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>> Okay, that would make sense. And you don't have to have all the scrubbing equipment and all the clean up equipment to be sure. But now we were moving in the opposite direction. Also a part of this national energy plan was to reduce the consumption of natural gas because natural gas was not terribly abundant, it was a premium fuel, and it couldn't be used, according to this law, for power plants. Okay? One other element of the national energy plan was something called the Public Utility Regulatory Policies Act, PURPA. And it was indeed a separate law, but it was something that no one really paid much attention to. It was designed to reform the rate structures of utilities to encourage people to use electricity more wisely. So here you have a fairly standard declining block rate structure, like we had in Gainesville, Florida, and the rates went down. The more electricity you used, the cheaper per kilowatt hour it became. And it was designed to encourage electricity use, and it was encouraged to recover some fixed costs early in the usage of customers and then get to a point at the end of the curve there where you're basically just paying for energy, which was cheap. One part, one tiny part of PURPA actually dealt with co-generation and alternative energy. This Section 210 encouraged non-utility companies to sell electricity that they were already producing back to utility companies. So imagine if you are a company that needs a lot of steam for chemical processes. You generate the steam, but you first send the steam through a steam turbine and you make some electricity and you use that electricity at you chemical plant. And if there's excess electricity, you can sell that now to the utility. You could actually do that before, but the utility was not obliged to pay you very much for it. Under this law, the utility was required to pay something known as the avoided cost, the cost it would have been for the utility to make the electricity itself. And that was quite a bit higher than what utilities were paying when there was some excess electricity from these co-generation processes. So again, you have steam being generated for industrial purposes, the steam went through the turbine generator, you have waste steam that you can use for the industrial processes, but now you're making some electricity as well. And PURPA encouraged this as a way to get double duty out of the fuel that we had. So if you're burning oil or coal, you're getting above that 30% to 40% range in which you have useful energy coming out. You have electricity and you have steam. So this was pretty neat. There was very little debate about this, very little discussion, and it passed. The law created these new so-called qualifying facilities, and these qualifying facilities would produce the excess electricity that the utilities had to buy. And there were, especially in California where there were also a bunch of laws passed to encourage this type of energy production. It became kind of popular. The Section 210 also provided for incentives for renewable energy. Something that wasn't very big back in the 1970s but, nevertheless, could be become big. President Carter realized that if you can produce electricity from the sun or from the wind, you don't have to burn oil or coal or anything, and you can reduce dependence on foreign suppliers of energy. So this PURPA also provided incentives for wind and solar, and once you had, in California, also some other incentives, some of which were greatly abused, but nevertheless you had companies in California and elsewhere that were really pushing the envelope to develop new types of solar and wind technologies in particular. And partly as a result of this small part of the law, there was a lot of development in renewable energies, such that the cost of producing electricity declined. These graphs, actually, are from about 2005. But it shows a general decline in the cost for many of these sources. Look at wind coming down into the range of five, six, seven cents per kilowatt hour, which was getting competitive with companies that produced, utility companies that produced electricity at about the same price with the traditional technologies that they had been using for 50 to a hundred years. >> Can I ask you a question? You said that some of the alternative energies were abused. By whom and why? >> Okay, in California, for example, there were laws that provided, and there were federal laws too, that provided for investment tax credits. >> Oh, okay. >> And it wasn't the renewable energy, there were companies that bought the renewable energy and then set up these wonderful financial structures, such that you could build a wind farm and recover your investment without any energy being produced. Okay? And then once the energy was being created, you got these very favorable rates that enhanced your investment. I can tell you stories. One quick story was that one company was required, by law you had to get the tax credits for a certain year you had to have the turbine up and it had to be up by December 31st. In one case, a company put up a cardboard wind turbine and was able to claim that they had gotten their turbine up, and they took the credits. People called these not wind farms but tax farms. And there was a good amount of abuse. >> Does that still go on anywhere in the United States today? >> Abuse? Abuse of financial structures?

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I'd be shocked. Shocked.

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To hear of such things. Okay, well, why do I tell you this story? Because PURPA unintentionally had the effect of reducing or ending the rationale for a monopoly in one part of the utility business. Okay, so you have these other generators of power. Co-generation, which actually was quite economically efficient, and you have some of these renewable energy systems that are becoming a little cheaper and cheaper. >> Okay, just one thing about this cost with the QFs, the qualifying facilities. At the time when they were required, the utilities were required to pay avoided cost, the avoided cost at that time was gas. Gas at that time was very expensive. >> That's right. >> And so a lot of utilities got, basically, hauled into long-term contracts with this very, very expensive gas price only to have gas then fall through the floor two years later. >> In the '80s. That's right. Gas prices declined dramatically. And the reason I paused there is because I saw Sam just getting terribly agitated there and eager to jump in. But what happened was some of these companies were required to pay rather high prices and the cost of some of these renewables, yes, for 10, 15 years in California and beyond. And also, the avoided cost was sometimes the cost of nuclear, which was skyrocketing as well. Anyway, the point here, and we can fight about avoided cost, and indeed lots of people fought it back then. The point here is that there were other companies that were out there making electricity. Not just utility companies anymore but non-utility companies. And utility companies were becoming aggregators of power, not the only producers. And, among other things, utility managers were a bit upset because they lost control over the system that they created, that they had managed for 70, 80 years before this. And that wasn't something that they really enjoyed, obviously. Some policymakers were saying, wait a second, if smaller scale, non-utility companies can make electricity about as cheaply as utilities, then why are we considering utilities as natural monopolies? Natural monopolies existed, our natural monopoly status existed when competitors could not produce electricity as cheaply as a monopoly. But now we have these other entities there that are producing electricity in some cases as cheaply as utility companies, why do we have regulation? The rationale for natural monopoly doesn't exist anymore. And here you have a Federal Energy Regulatory Commission commissioner saying, wait a second, the traditional defense of regulation has been economies of scale, but the economies of scale don't exist anymore, so why do we have regulation? I'm trying to suggest here that people were beginning to think about this rationale for natural monopoly and regulation, and some people were saying we really shouldn't have this regulation anymore. The justification for regulation did not exist. So, we have here a bunch of things happening. You have stasis in traditional technology, which meant that utilities could not produce power any more at declining cost and at declining prices. The energy crisis of 1973 and the political repercussions inadvertently spurred the creation of new policy that also motivated development of new technologies. Co-generation actually was an old technology, but new technologies such as wind, solar, and so on. The result was people started thinking about deregulation and whether the traditional structure of the electric utility system made sense anymore. The context is important as well. When we're talking about events going on in the 1980s and that GE spokesman became president of the United States, and he and others, including President Carter, were talking about and actually deregulating industries because regulation of other industries didn't seem like it was bringing benefits as it was supposed to. So maybe deregulation is the way to go. So in the '70s, you actually had deregulation of the airline business, trucking business securities, banking, telecom. In the '80s as well, you have more deregulation. The goal, of course, was allow competition, allow private businesses to create new services, new products, and not deal with regulation. Of course, the goal too was to get lower cost. And indeed, in the telecommunications business, for example, the telephone business, the price of making long distance phone calls, for example, really declined. It declined dramatically in the '80s and '90s as you got competitors in the business. And that's what we wanted to see or some people wanted to see in the electric utility business. Some companies, in particular, complained that they paid for very expensive electricity. It was hurting their bottom line. And as Sam suggested, the price of natural gas collapsed in the 1980s due to increased supply, and also making electricity from natural gas became much more efficient though the development of new types of gas turbines in the 1980s. So, big industrial customers wanted to take advantage of making their own electricity using gas turbine, for example. Or buying from a company that made electricity from gas turbines somewhere else. But you couldn't do that with a regulated system in which every element of electric power, production, and transmission was regulated. If we deregulated all that, then a company in Wisconsin could buy electricity generated by a non-utility company in Illinois if it was cheaper. Why not? Free market. Regulation. These are good things. And indeed, there were other incentives as well. President Bush, after the first Gulf War, pushed through and was successful at pushing through the National Energy Policy Act, 1992. Basically, he encouraged the use of free market mechanisms in the wholesale sector so that you could produce electricity, put it on the grid, and sell it to other wholesale buyers, which included, in many cases, big companies. And indeed, this was part of the law. As another element of the law, individual states could decide if they wanted to deregulate the retail sector of the utility business. So to the ultimate customer. To residential customers. Yes, sir? >>

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>> I don't know anything about that.

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Enron you asked about? Stay tuned. Two more slides. Okay, so as a result of all these things going on because of the context of deregulation, the questioning of the rationale of the regulation in the electric utility industry, the 1992 Energy Policy Act. By 1996, four states passed laws to restructure and to deregulate their electric utility industry. This map shows that by March, I'm sorry, by 2001 those blue states had also passed restructuring legislation and looked like the utility industry was just moving toward heavy deregulation. Okay? But some things happened that didn't really encourage more deregulation. This is a funny cartoon. Here, this is what some people imagine deregulation and competition might have meant. You're plugging in your vacuum cleaner and you have all these sockets on the wall from different companies and some company, today the price of electricity from ZAPCO was cheaper than from Captain Jolt Electricity. Here the woman who's using the vacuum cleaner has to decide which outlet to plug her vacuum into. Anyway, this isn't really how it worked. Basically, if you were a homeowner or residential customer, you looked at what the competitors offered in terms of price and service for electricity, and you signed up for a certain period. You didn't see anything different. There weren't 20 lines going into your house. There was just one. But you were buying, in theory, from a generator of this company that was offering you electricity or other services at a rate that you liked. Unfortunately, the California law, which was among the first passed in 1996, certainly the biggest state to pass a deregulation law, it was a flawed law. It was a politically contrived law. The law, I'm sorry, the bill that went through the California Assembly was passed unanimously in both houses. There were political deals left and right for environmentalists, for the utility companies, blah, blah, blah. There were a whole bunch of elements of this law that look good on paper but in practice not very good. For example, you could have no long-term contracts. A utility company or a company that was distributing electricity couldn't go to a wholesale generator and say sell me a block of power for 10 years at a certain rate. That was not allowed. And because of that, you couldn't hedge long-term contracts and short-term contracts. Everything was basically on the spot market. And indeed, there were real problems here. One of the problems was that marketers who were intermediaries between customers and the companies making electricity sometimes took shortcuts, sometimes did things that were ethically, and ultimately legally, improper, such as Enron, and caused prices to skyrocket, and the ability to get the power to customers diminished. Maybe I didn't say that right. Prices went up, and the amount of power available actually decreased because of some of the things that these marketers were doing. Huge problems, electricity crisis in California in 2000-2001. The state ultimately halted deregulation, imposed government regulation, government management of the utility system for a while. Pacific Gas & Electric, previously a very huge, successful company, went bankrupt and so on. Beyond that, in other states that saw deregulation, you saw problems such as prices going up instead of down. You saw shortages of power where you thought, well, the free market would provide power or capacity. Lots and lots of problems. In my state of Virginia, in 2007, we re-regulated. So deregulation efforts not only were halted but we went back to re-regulating. And this graph or this pair of graphs shows, on the right you'll see those yellow states. Those are states that previously were deregulated and then went back to regulation. The green states show a little bit of active deregulation, and then all those other states in white, nothing. So whatever efforts were being made in the legislature, in the utility commissions, to start the process of deregulation, those were all halted. There still are elements of deregulation restructuring in certain states, but the trend has been opposite. So, in summary, utilities are still deregulated at the wholesale level. This is largely now managed by the Federal Energy Regulatory Commission. You can have different companies selling into the grid, and that electricity is being distributed throughout the grid to different customers, big customers, wholesale customers. But there's not as much retail deregulation, as you saw like in California. But there were a bunch of new opportunities and challenges for utilities that we can talk about, but you said you want to take a break at some point? >> No. Keep going. >> Oh, okay. So, remind me then of the schedule. >> We do end at eight o'clock. >> Oh, I understand that, yeah. I thought there was a break in between. Okay. So, let's talk about possible futures here. The old system of the electric utility, the old utility system depended on this incrementally improving turbine generator technology that stopped improving. And so what are you going to do? Demand continues to grow, right? So you've got to provide electricity one way or another, and there are several ways you can do that. One way, actually, is not dealing with increased supply, rather it's dealing with reducing demand, energy efficiency. Distributed generation and more renewables, another option. Smart grid technologies, another option, and we'll talk about these briefly now. Energy efficiency is just what Carter was pushing, basically, even though he called it conservation. Energy efficiency means doing more with less. Instead of asking or trying to get more supply of electricity, you reduce your demand for electricity. It's the seesaw here, but you're just emphasizing the other side of the seesaw. Because of market forces to be sure, as prices for energy went up, people looked for ways to reduce consumption of energy. Your next car gets 30 miles a gallon instead of 20 miles a gallon. That's efficiency. And over time, people moved in that direction. In the electric utility business, I'll point out, there were several ways to increase efficiency. Stricter building codes since the energy crisis such that by law builders, when they built new buildings, had to have more insulation in them, for example. That added upfront cost but overall lifetime cost decreased dramatically. And overall, we see the reduced growth in the rate of demand since 1973. And here's a graph that suggests that from the 7% per year rates up until about 1973 or so, the rate of growth for demand of electricity has dropped dramatically, such that in the last couple of years we're averaging close to zero growth in demand for electricity. Here's the headline from the Wall Street Journal from last

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Electric Utilities Get No Jolt From Gadgets Improving Economy. The article dealt with companies like one that serves me in Virginia, American Electric Power Company, which thought that when the economy tanked in 2008 and then started recovering that the demand for electricity would increase accordingly, and it didn't happen. Yes? >> Given that you're showing us this Wall Street Journal headline, could I ask -- how does that connect to, you're telling us a couple of weeks ago when you were lecturing us that people are improving our energy efficiency where the jolt is coming from is from our gadgetry. >> Repeat the question. >> No. The question is I had said that EIA had pointed out that while there is a decline in electricity as you're seeing in this chart here, the reality of it is that our electric gadget portion of our utility bill is going up. So as a percentage of your bill, it used to be that it would have been your heating and air conditioning perhaps or, actually, I'm a walking historian since I was 1973, and I was PURPA, thank you very much. But when we were doing energy audits back then, the biggest electric consumer in a house was the refrigerator. Okay, so that has now been totally reversed. >> I'll show a nice slide of that. >> The refrigerator has gone down, gadgets have gone up. >> All right. Thank you. >> This is a graph not of electrical energy but of energy overall in the American economy. And it is something called energy intensity, which is a ratio of the amount of energy needed to produce a dollar of gross domestic product. And you can see from the late '40s to about 1973, we were getting a little bit more efficient. More GDP, I'm sorry, we were increasing, I'm sorry, decreasing the amount of energy needed to produce a dollar of GDP. From '73 until about 2010 or so, that has accelerated so that today we get about twice as much GDP value out of a unit of energy. There are a bunch of reasons for that, one of which is that the economy isn't as big in manufacturing as it used to be. And we can discuss some of that or I can send you paper I've written on that, whatever. But the point is, energy intensity has decreased. Here's an example of why the energy intensity has decreased. Sam very conveniently prefaced this by talking about refrigerators. If you look at this graph, and it's a little bit busy, 1973, 1974, refrigerators used a lot of electricity at that peak there. 1800 kilowatt hours. Yeah, 1800 kilowatt hours or so. Is that right? I'm not exactly sure if the unit is right. 1800 units, okay? Actually, yes, it is 1800 kilowatt hours per year of electricity to run a standard refrigerator at the time. And then you can see how the price went down of refrigerators. The usage of electricity in a refrigerator went down. And if you continued this graph to the present, and I did this last month, you go to Sears and you by this 21-cubic-foot refrigerator, it uses 410 kilowatt hours a year, and the price is $580, converted to 1973 dollars, I'm sorry, yeah, how come I wrote 1983? It should be '73. The fridge uses 79% less energy, and it costs 81% less. Okay? It's considerably cheaper. Okay? So every house has a refrigerator, right? The worst refrigerator you can buy today uses about a third or a fourth the energy of a standard refrigerator from 1973. Your beer, your milk, your ice cream is as cold as it was in 1973; it just costs a quarter of the amount and it uses a quarter of the energy. That is energy efficiency. Why? Well, obviously the technology improved, and one could argue the technology improved because the state of California mandated improvements in the technology. And after a while, then the federal government mandated energy improvements, energy efficiency improvements in the refrigerator. There are lots of other technologies like that. In lighting obviously there's lots of improvement in technologies that we can talk about. I'll show you very briefly here. Here's another way of looking at that same slower growth rate as a result of decreasing energy intensity. That red line there shows what people were projecting for energy use by the year 2000-2005. About 174 quad, quadrillion BTUs of energy. In fact, in 2005, we used about 100 quads of energy. Okay? The economy continued to improve. GDP improved dramatically, and yet we did not use as much energy as people were thinking back in the 1970s. Can people use less energy and still enjoy life? If you think that Californians are enjoying life, the graph on the left suggests that per person their consumption of electricity has remained pretty constant since the '70s. And again, a lot of this has to do with policy, incentives to encourage energy efficiency and all. The rest of the country hasn't been as good as California. And Virginia, my home, is even off this chart a little bit. But there are more people in California, so even if you have per capita use remaining fairly level, there are more capita so overall energy use has increased somewhat, or electricity use. But still, this is a significant plateau in electricity use. Yes, sir? >> Does that graph incorporate the self-generated electricity in California homes or not? >> Can you repeat the question? >> Okay, does this graph include the self-generated electricity of homeowners, for example? I am not sure, but I don't think it would make a big difference certainly in the '80s or so. >> A lot of people are off the grid. >> There are people who are off the grid. A significant amount? I'm not sure. I'm a little skeptical. Yes, ma'am? >> So, can you tell where this state is in terms of electricity use? >> Not too well. >> Okay. >> From the '80s or so, yeah, but not more recently. >> Okay. >> We can show that graph on Thursday. >> Yeah, that's what I meant to say.

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Okay, I'm giving Sam some homework here. Okay, even though energy efficiency has gone a long way, people argue it can still go farther. Amory Lovins, who I showed a picture of, Amory Lovins was shaking hands with Jimmy Carter in one of those earlier pictures. He's an energy efficiency guru. He says, for example, that we can still save three-quarters of electricity at a cost of about one cent per kilowatt hour. That's contested to be sure. EPRI, the Electric Power Research Institute, which is a research arm of the utility industry, said a few years ago that realistically and economically we can easily save a good chunk of electricity. So this isn't a wild assumption that we can continue to improve energy efficiency. Remember that energy, the electricity growth rate used to be seven plus percent a year, and now it's down to zero, 1% or so. And there are things like the LED lights, compact fluorescents which reduce consumption in the lighting sector considerably. I say what's this? What is that thing up in the upper right corner? >>

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>> It's a water heater, yeah. But why is it significant? >> Solar. >> No. >> Heat. >> Heat pump, right. So it can produce hot water about two to three times more efficiently than just an electric coil. They haven't seen, there are still some problems with them, though, and you don't see a lot of them around yet.

Another option

distributed generation. The definition of DG is small scale generation near the end user. So, this picture on the right shows a person standing next to a capstone company microturbine. It's a gas turbine, produces electricity and heat. The heat is used locally in the building. The electricity is used locally. The power source is natural gas. You're getting two products out of natural gas. It's great. And because you are getting double duty out of this device, the capital cost actually isn't that bad, and it can be economically sound. Here you have another co-generation set on the right side. And these units can be connected to the grid or they can be standalone. So you can have your distributed generation in your hospital, chemical plant, in your backyard, on your roof, whatever, and you could sell it, you can direct the power into the grid to be sold to other customers, or if you just happen to live in a lighthouse on an island somewhere, you can use distributed generation to get electricity for your locality, just for your building. This distributed generation concept differs from the traditional system in which there's a power plant miles away. Electricity is generated, transmitted, and then distributed. Ultimately it comes to your house or your business. So, different type of system conceptually and engineering-wise to be sure. There are a lot of advantages to distributed generation and renewable energy technologies Distributed generation means that customers don't need to depend on the grid and draw as much electricity from the grid. And that has benefits, especially on hot summer days when the grid is at its maximum capacity. Some of you may remember the 2003 blackout in the northeastern part of the country. I was near there. I remember it quite well. One of the causes of this blackout was a power line in Ohio that sagged because it was so hot and it was so full of power, it hit a branch that the deregulated company didn't trim on a tree because that's extra cost and you want to avoid costs in a competitive environment. And that caused a cascading, rippling effect that wiped out power, blacked out a good chunk of the northeast and part of Canada. But if you don't need to send all that power through the grid, well then you avoid congestion problems, overheating, and so on, and that's one of the benefits of distributed generation. A bunch of other benefits as well. You can imagine if you're a company and you depend on electricity for manufacturing or for service, for customers, whatever, if there's a blackout, that's not good because you're out of luck, you're out of business, basically, for a certain amount of time. Distributed generation systems will provide a back-up system to you as well. So that's very nice. There already is a good amount of distributed generation at public facilities. Emergency needs at my university, and no doubt here, there are gas turbine generating plants on the side of the buildings in many cases, at hospitals for sure, in case there is a blackout. Yes, ma'am? >> Is that Ohio energy company still in business? >> It was First, what was the company called? First something. It is still in business, yes. Yes. How come I'm not remembering the name of it? Okay. So distributed generation, at least large scale distributed generation, is out there. Remember I talked about co-generation, also known as combined heat and power. And it works. It's successful. It can provide many benefits. In recent years, we're seeing more and more residential self-generators, and this map, which you can get by going to dsireusa.org, shows you that there are these policies in place in many states that encouraged self-generation. And they do that for environmental reasons, for economic reasons, security reasons, and so on. So if you look at these laws or policies in some of the states, you'll see that in California, for example, the goal is to get about a third of the electricity from non-utility sources, from self-generation. The rabid liberal, no doubt Democratic, Governor Schwarzenegger, he was a Democrat, wasn't he? >> No. >> Oh. >> Married to a Democrat. >> Yes, indeed. I actually knew that. I'm just trying to be funny. Anyway, Schwarzenegger pursued this policy to help make the state much less dependent on centralized power plants. And indeed, there are a whole bunch of incentives in California to get to this 33% renewable portfolio standard. In Wisconsin, you have a law that says 10% of your electricity should be produced by renewable resources by 2015. Virginia has this renewable portfolio standard of 15%, but there is the caveat that it is a voluntary standard. Okay? It's crazy. And it also is based not on 15% of the demand in 2025 but 15% of the demand for electricity in 2007. And there's no teeth to the law because it's all voluntary. Anyway, there's these policies, renewable portfolio standards. Has anyone talked about that? >> Not particularly. >> Okay. But, basically, it is state by state, I'm sorry, state by state, the states individually determine how much of the electricity is going to be produced by renewable energy. And it's all over the map. And indeed, if you notice the south, the south is way behind on many of these policies that one might call progressive, environmentally sound. The southeastern states, in particular, are way behind other states. Southeastern state leaders would say they're way ahead because they're not following this bandwagon, but we'll let you decide. There are other types of policies that can encourage the use of renewable energy technologies. One policy is known as net metering. And, basically, net metering means that you, as a homeowner, produce electricity, and the electricity goes into the grid, it goes through an electric meter, but the electric meter, which previously showed how much energy you're drawing from the grid, now is running in reverse to show how much energy you're selling into the grid. And that's a policy that can encourage, indeed does encourage, renewable energy from the homeowner, any type of energy from the home being sent into the grid. Wisconsin has a limit, by law, depending on which utility serves you, between 20 and 100 kilowatts. So most homeowners are only going to build a solar PV system of maybe four or five, 10 kilowatts. So that's not a problem. California, the limit is much higher. In Virginia, the limit is on the low end, and there's also the requirement that overall renewable energy producers, distributed generators, can't produce more than 1% of peak demand. There are ways to do renewable energy and meet some of these portfolio standards in ways that you might not imagine. If you think you want renewable energy, if you want PV cells on your roof, you think, oh, I got to spend all this money to do it. There are some companies, some utilities that actually lease you the panels. You don't have to buy them yourself. You actually are paying the company less for electricity because they've paid for the cells than you would perhaps pay the utility company. So it's a way to get renewable energy and yet not have to put out as much money upfront for these PV cells. And there are several companies that are doing this. Mostly in southwestern and California, southwestern states and California. Here's a concept that's being tested out these days. Electric cars and plug-in hybrid electric vehicles are becoming more and more popular. And people say, but wait a second, if we have all electric car, you drive home at the end of the day, five o'clock on a hot summer day, you plug in your car, and you're drawing electricity from the grid at the worst possible time. When the grid is congested, when there's a huge demand for electricity. This is horrible. Well, some people were suggesting, and people are experimenting with this, you drive home your electric car and you plug it in, but the battery in the car isn't going to be drawing electricity from the grid. Assume that you have some electricity left in the battery. Instead of drawing from the grid, you actually sell into the grid. So your car battery that still has some power in it is now sending the electricity into the grid, reducing congestion, reducing the need to build or use power plants that are very expensive or that aren't terribly efficient during peak times of the day. Of course, you have to realize, I'm sorry, you have to determine that you're not going to go out driving in that car again at six o'clock. You charge the battery up at 3:00 in the morning instead of

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00 in the afternoon when there's not much demand for electricity, when electricity is cheaper to produce and, in some cases, cheaper to buy. So that's a neat concept that people are working on. You no doubt have heard about smart grids, smart grid technologies and all. Smart grid technologies basically use communications devices to gather information, act on it for the benefit of many stakeholders. So utilities can actually benefit greatly by reducing demand at certain times of the day. So, for example, you can have refrigerators, ranges, dishwashers, clothes washers, dryers, air conditioners connected to this smart grid in a way such that you are not drawing a lot of power at peak periods of the day. Now, this is a concept that's been around for a long time, actually. And my parents, who lived on Long Island when Long Island was running out of electricity, the Long Island Lighting Company paid my parents a few bucks a month to allow them to have the right to turn off their air conditioner for like 15 minutes out of an hour during peak periods. And my parents, yeah, that's okay. Turn off the air conditioner for 15 minutes. It's not going to get that much hotter in the house. It's okay. An indeed, that's basically what this is. But some of the newer technologies are considerably more sophisticated. So if the utility sends a signal to the refrigerator, let's say, to say, look, it's peak period, it doesn't turn off the refrigerator but it might delay the defrost cycle for a few minutes. Okay? It might not allow you to use your dryer for a few minutes when you're washing your clothes. And so on. There are some nice ways that the smart grid technologies can reduce energy consumption. Here's another idea that is working, that people use and it's more popular than you might imagine. That's known as demand response. So, a company, such as EnerNOC or Converge, can ask customers not to use electricity on a hot summer day at a certain amount of time. They reduce demand dramatically. That reduced demand can be sold into the market for companies that are producing electricity and who need to meet demand. So, basically, the electricity that would have gone to my university is now going to other customers. And EnerNOC and Converge aggregate this power, sell reduced demand, basically, and they also pay my university a few hundred thousand dollars a year, which my university is very happy to get. And that's another way of using some of these new technologies and new approaches to reduce energy consumption. I'm not going to hit all the points here. Basically, I will let you read this if you want. Utility companies, traditional utility companies aren't too thrilled with some of these approaches. And one reason, I would argue, is cultural. In the olden days, pre-'70s, utility managers basically controlled everything. Now they are not in control of everything. And as a result, they think, and there may be reason to think, that the overall risk of managing the system is greater, the reliability could decline, there are a lot of reasons why utility companies in general aren't too thrilled with some of these approaches. And indeed, as you folks have heard in this class about, right, Sam, that there are people, there are companies, there are states that are enduring this backlash over distributed generation, especially renewables. So here are a couple of items that suggest that these companies that may be supportive of the idea of energy efficiency, now they're beginning to think, well, you know, we're not able to recover our fixed costs very well anymore, and especially when you have people generating their own electricity. Well, we've spent over 30 years, let's say, a lot of money to build these distribution and transmission lines, and now we're not getting any income from it because people are producing their own electricity. So the bottom right headline from a local website from last week, Wisconsin Utility Companies Take Aim Against Solar Power. And you have talked about this, right, Sam? You haven't? Because you've sent me emails about all this, I though it's because, okay. Let me backtrack here now. Remember, I talked about how public service commissions, regulatory commissions are mediators. They are the organizations that stand between utility companies and customers, and one of their goals is to protect both sets of stakeholders. The regulatory commissions need to evaluate assertions and claims of both sides, both sets rather, of stakeholders. And doing that is a difficult task because there's a lot of politics, there is a lot of philosophy going on here. It is not a simple task to make rates. And you can argue different types of rate structures and different types of rates and higher rates for higher fixed charges and lower energy costs or higher energy costs and lower fixed rates depending on your goals. And that's what's going on here in Wisconsin and in several other states. Yes, sir? >> Where do commissioners come from?

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>> Every state is different. In some states, Texas I think still, commissioners are elected. Okay? So, very often in elected situations, the candidates are going to say, oh, I'm going to reduce your rates. If you elect me, I'm going to reduce residential rates. And then if they get elected and try to pursue that policy, they end up hurting utility companies, among other things, because the utility companies aren't getting the rates that they think they need to maintain a good balance sheet. In other states, in most states the regulatory commissioners are appointed, and sometimes they're appointed by governors. Sometimes they have to be approved by the legislature, other times not. And sometimes these people, at least historically in the period from the '30s, '40s, '50s, '60s, '70s, these were just political paybacks. The people who were appointed helped the governor get elected, and now you're a commissioner on the Public Service Commission. Does that answer the question of the origin of these commissioners? Read some stuff by Peter Bradford, this commissioner himself who has written quite a bit about this. Anyway, in Wisconsin, and I don't know much about the Wisconsin PSC in recent years, but I did quite a bit of research, came here, talked to a bunch of present and past Wisconsin commissioners from the '70s and '80s, and as I already hinted at, the Wisconsin commission led the country with this notion of marginal cost based pricing, time of day pricing. Very innovative back then. The commission instituted a moratorium on building nuclear power plants at a time when nuclear power plant construction was going up in cost dramatically. The commission pursued a bunch of policies that encouraged energy efficiency and ended up saving companies and customers billions of dollars by not building nuclear power plants and by reducing overall demand. There were some companies that actually went bankrupt as they tried to build nuclear power plants. That did not happen in Wisconsin. And indeed, if you look at the price increase, I'm sorry, the electricity prices in Wisconsin in the '80s while they were going up in other states dramatically, they actually went up slowly here and actually declined for a few years in the '80s because of a lot of these regulatory policies. I am not making apologies for the Public Service Commission I'm just suggesting that at least back in the '80s, and I know things have changed, the public service commission did things that the utility companies were not thrilled about at the time but ultimately were quite happy with. They did not get into the quagmire of nuclear power plants, as many other companies did, because the commission basically said you're not building any. Okay? So that was something. Okay, I'm going to end here by summarizing a couple of points. Utility companies sought regulation to stabilize the electric utility industry and to enable it to take advantage of incremental technological innovation. So that was the first part of the talk. Utility companies, as regulated monopolies, could invest in this technology that got better and better, more efficient over time, and you could see prices decline over time, which was a wonderful thing indeed. However, by the '60s and '70s, the traditional technologies plateaued and there was no way to improve the technology, the traditional technology, anymore, and the price of electricity, the cost of making electricity increased dramatically. There were a bunch of policy innovations and technological innovations in the '70s and '80s that contributed to the notion that deregulation might be the way to go. And indeed, we saw the deregulation movement peak around 2000-2001, and then because some of these deregulation laws were not so good, we saw the enthusiasm for deregulation subside dramatically. We have new opportunities here. New opportunities because of these new technologies. Energy efficiency technologies continue to improve. Distributed generation and renewable energy technologies are improving dramatically. The cost of solar PV has gone down like 30% in the last four or five years. The cost of making solar electricity is going down, the price as well. Smart grid technologies are improving and becoming somewhat more popular depending on where you are. Utilities and customers have a bunch of new opportunities and new challenges. How those opportunities and challenges are dealt with remains a question within a very politicized environment in which one cannot expect objective answers. Objective answers. I live in a very conservative state, and I know that regulators will play, I'm sorry, I know that the regulators will play decisive roles in maintaining the status quo. The regulators in Virginia, for historical and other reasons, have generally sided with utility companies. In California, the pendulum swings differently. Here in Wisconsin, it appears that you are at a critical juncture to determine what you future electric utility system looks like and will look like in the future. And I wish you good luck in that political process in deciding how these new opportunities and challenges will be met. I'll stop there. Thank you very much.

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