Better Know Your Electricity History Series, Part Five: Rules and Regulations

By Vernon Trollinger, June 17, 2015, News

Better Know Your Electricity History Series, Part Five: Rules and Regulations

President Franklin Delano Roosevelt. Image courtesty of https://en.wikipedia.org

Even though the first incandescent light bulb lit up streets in 1879, it took 50 years for electrical service to enter only a fraction of American homes. By 1920, only 35% of American homes had electricity. Through the ’20s and ’30s, innovation and entrepreneurial genius expanded expanded service across the country — only to be shorted-circuited by hubris, greed, and a lack of rules.

In the wake of Great Depression, the federal government stepped into help both the utilities and consumers alike. But regulation is only so good as its rules. When the rules can’t adapt, they often hinder more than help.

Ending the Evil Empire

In his 1935 State of the Union address, President Franklin Delano Roosevelt called for “…the restoration of sound conditions in the public utilities field through abolition of the evil features of holding companies.” Though public utilities were classified as natural monopolies and being shielded somewhat from financial problems, the investment machinery driving their expansion lay in ruins.

Throughout the country from 1929 to 1935, 53 public utility holding companies valued at $1.7 billion sank into bankruptcy. In spite of opposition from the companies and their influential investors, Congress passed the Public Utility Holding Company Act (PUHCA) of 1935, dismantling the pyramidal holding company structure and setting defined limits on its activities:

  • Holding companies could be no more than twice removed from their operating subsidiaries.
  • Holding companies owing 10 percent or more of a public utility must register with the Securities and Exchange Commission (SEC).
  • Said holding companies must provide detailed accounts of their financial transactions and holdings.
  • Those operating within a single state are exempt from PUHCA.
Better Know Your Electricity History Series, Part Five: Rules and Regulations

Seal of the Federal Power Commission. Image courtesy of http://www.arcticgas.gov.

The Federal Water Power Act (1920) was also reforged into The Federal Power Act of 1935. This law put teeth into the Federal Power Commission (FPC) which had originally been run by the Secretaries of War, Interior, and Agriculture. In 1935, the generation and transmission of electric power was essentially an intrastate business with little interconnection between power systems. While public utilities had grown and merged financially, the physical interconnection of their power lines was fairly limited regionally within their own state because they could manage the load.

This new law authorized the FPC to promote “an abundant supply of electric energy” by organizing the electric utility operating companies into regional power systems. The FPC was to encourage voluntary interconnection and coordination for the generation, transmission, and sale of electricity across state lines. The FPC was also to oversee the wholesale rates of electric power transmitted between states and to set wholesale rates, as well.

In June 1939, President Roosevelt appointed Leland Olds to the FPC, who served as chairman from January 1940 until 1949. Olds understood that consumers needed the utilities and that hurting the utilities would inevitably hurt consumers. All the same, under his leadership the FPC pushed utilities to extend power further into rural areas and also showed them that lowering rates increased the use of electricity.

This was borne out when rate reforms in Chicago produced such a dramatic increase of usage that the utility’s profits increased. Following World War II, the total electric power capacity reflected the increased demand, rising from 40 to 50 gigawatts in the first full peacetime year.

Completely dismantling the old public holding structure took 23 years, but it created a new post-war structure that (for the most part) ran quietly and smoothly for decades with a steady growth rate at about 8% per year. With such a high growth rate, there was little reason to rock the boat. Utilities respected each others’ boundaries, and competition all but vanished. No one saw the iceberg lying dead ahead.

New Challenges Break Old Rules

The National Power Survey of 1964 predicted that the “expanding use of electricity is expected to more than double and perhaps triple by 1980.” One policy change it urged was that the nation’s utilities had to become more integrated to become “fully coordinated power networks covering broad areas of the country.”

Yet, while most utilities were part of power interconnections operated by the industry, the FPC could do little more than cheer-lead or frown. It was not empowered to compel or enforce technical or operating or policy standards for power interconnections, and Congress was ill-disposed to changing that status.

The blackout in the northeastern United States and Canada on November 9, 1965 plunged some 30 million people into darkness was the distress flare that the regulatory structure was in trouble. While a regional coordinating council made up of 22 companies emerged to manage the northeast power grid, 22 more blackouts would occur with in two years — including a second blackout affecting 4 million people in the mid-Atlantic states on June 5, 1967.

As a result, many in Congress argued the FPC should be given the authority over building of adequate interconnections in the public interest. To head this off, the private utility power pools shifted to focusing on enhancing the reliability of interconnections during periods of peak power demand. The FPC submitted the Electric Power Reliability Act of 1967 to Congress, giving it reliability and interconnection authority. The measure died, but in response, the FPC urged regional utility organizations to form the National Electric Reliability Council (NERC).

Meanwhile, environmentalists and others bent on stopping new generating capacity — especially nuclear — and transmission lines were able to turn public opinion against utilities. Demand grew but building new capacity became a lengthy and expensive legal, regulatory, and political nightmare. The passage of the National Environmental Policy Act (NEPA) in 1969 extended the Commission’s permitting authority over environmental impacts of power plant, power line, and natural gas pipelines.

As America entered the 1970’s, oil prices became more volatile and effecting the price of fuel, heat, and electricity. When energy prices soared during the 1973 Oil Embargo, utilities had to pay more to fuel their oil and natural gas burning generators. They then requested rate hikes from federal and state regulators — which grew increasingly more difficult to get. Profits sagged and financing grew scarce.

The FPC, which also had authority over the natural gas industry since 1938, found itself under a steady barrage of public scorn — particularly when the General Accounting Office (GAO) identified top commission members who owned stock in companies that had been awarded rate increases by the commission. Rising energy costs, blackouts, and the inability to alleviate constraints in national energy supply occupied the nation’s interest during the 1976 elections. The FPC’s days were all but numbered.

The Department of Energy was created by the Department of Energy Organization Act in 1977. Congress insisted that a separate independent regulatory body needed to actively oversee the energy industry. On October 1, 1977, President Jimmy Carter replaced the FPC with the Federal Energy Regulatory Commission (FERC).

Stay Tuned for Better Know Your Electricity History Series, Part Six: Deregulation Comes to America.

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About 

A native of Wyomissing Hills, PA, Vernon Trollinger studied writing and film at the University of Iowa, later earning his MA in writing there as well. Following a decade of digging in CRM archaeology, he now writes about green energy technology, home energy efficiency, DIY projects, the natural gas industry, and the electrical grid.

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