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Electric Worlds / Mondes électriques

Creations, Circulations, Tensions, Transitions (19th–21st C.)

Series:

Edited By Alain Beltran, Léonard Laborie, Pierre Lanthier and Stéphanie Le Gallic

What interpretation(s) do today’s historians make of electrification? Electrification is a process which began almost a hundred and fifty years ago but which more than one billion men and women still do not have access to. This book displays the social diversity of the electric worlds and of the approaches to their history. It updates the historical knowledge and shows the renewal of the historiography in both its themes and its approaches. Four questions about the passage to the electrical age are raised: which innovations or combination of innovations made this passage a reality? According to which networks and appropriation? Evolving thanks to which tensions and alliances? And resulting in which transition and accumulation?

Quel(s) regard(s) les historiens d’aujourd’hui portent-ils sur l’électrification, processus engagé il y a près de cent cinquante ans mais auquel plus d’un milliard d’hommes et de femmes restent encore étrangers ? Le présent volume rend compte de la diversité des mondes sociaux électriques et des manières d’enquêter sur leur histoire. Il actualise les connaissances et témoigne du renouvellement de l’historiographie, dans ses objets et ses approches. Quatre points d’interrogation sur le basculement des sociétés dans l’âge électrique jalonnent le volume : moyennant quelles créations ou combinaisons créatrices ? En vertu de quelles circulations et appropriations ? Selon quelles tensions et alliances ? Et produisant quelles transitions et accumulations ?

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“Lord, We Don’t Want to Hurt People”. The Decline and Fall of the American Electric Utility Industry in the 1970s

← 460 | 461 →

“Lord, We Don’t Want to Hurt People”

The Decline and Fall of the American Electric Utility Industry in the 1970s

Robert LIFSET

Abstract

This paper describes the electrical energy crisis of the 1970s. The energy crisis of the 1970s is commonly understood as an oil crisis emerging from the OAPEC embargo of 1973. This paper argues that the energy crisis of that decade, as it was experienced in the United States, was far more complex; for in the early to mid-1970s the American electric utility industry faced a crisis in which several large publicly regulated monopolies teetered on the verge of bankruptcy. While the oil crisis contributed to the problems faced by the electric utility industry, the industry would have experienced these problems with or without the Arab oil embargo. Question is: how and why the industry found itself in such dire straits?

Keywords: energy crisis, 1970s, electric utilities, environmentalism, conservation

*

Introduction

On March 18, 1974 an angry crowd of 600 electric consumers and local political leaders gathered at New York’s Westchester County Courthouse to oppose Consolidated Edison of New York’s application for a 22.6% rate increase. Consolidated Edison was the investor-owned utility serving New York City and Westchester County, a suburban enclave north of the city. A picket outside included housewives pushing strollers and protesters carrying signs that read, “Re-Volt,” “Take the Con Out of Ed,” “Misled by Con Ed” and “Con Ed Has Us By The Bulbs.”1 This latest request for a rate increase was taking a toll. The company’s average electricity consumer lived in an apartment and used 250 kWh of electricity per month. Between 1945 and 1970 the monthly bill rose from $7.95 to $11.05, a rise of 34%. Between 1971 and 1974 the average ← 461 | 462 → monthly bill rose from $10.95 to $20.63, an increase of 88% (from $64.30 to $99.51 in 2015 dollars).2

Figure 1. A button protesting Con Ed price hikes

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Source: In the author’s possession

While the average customer in an apartment used 250 kWh per month the average all-electric homeowner used three to five thousand kWh of electricity per month. There were roughly ten thousand all-electric homes in Westchester County. Con Ed had helped build these homes, as a method of increasing consumer demand. This meant electricity bills from $146 to $236 per month ($781.97 to $1,264.01 in 2015 dollars).3 These were the customers who picketed outside the hearings conducted by the company’s regulator, the Public Service Commission (PSC).4 They protested Con Ed’s latest rate increase, attended the hearings in force, and would occasionally engage in shouting matches with PSC commissioners. One homeowner from White Plains told a reporter that her January 1974 electric bill was $250 a month with her thermostat set at 50. This nearly equaled her mortgage payment and was making her home unaffordable.5

Protesters were also upset about the company’s fuel adjustment charge. This charge allowed Con Ed to automatically pass along increases in fuel prices. One homeowner described his frustration with a fuel adjustment charge of 2.1785 cents per kWh while his neighbor across the street, ← 462 | 463 → serviced by New York State Electric & Gas Corp., paid a fuel adjustment charge of 0.001 cents per kWh.6 To add insult to injury the company’s latest rate increase was spurred by the success of its conservation program, “Save-a-Watt.” As a result of successfully persuading consumers to use less electricity, the company experienced a decline in revenue. One irate protester, the spokesmen for an all-electric senior citizens housing development, said that raising rates to compensate for the success of the conservation program “is like someone murdering his parents and then pleading for mercy as an orphan.”7

The following day, at a PSC hearing in New York City, angry participants threatened the commission with charges under the Nuremberg statue for “war crimes” against the public. Company executives were described as “greedy animals” engaged in “ripping off the consumer.” When the hearing became unruly and was suspended by its chair, protesters swarmed the dais, took over and held their own hearing for over an hour.8 When company executives tried to explain that it cost them more to produce electricity because environmental restrictions prevented them from burning coal and that recent increases in price were due to the Arab oil embargo, they were loudly booed. Many local political leaders blamed Con Ed’s regulator, the PSC, and called for its commissioners to resign. Others called for the abolition of the Commission and its replacement with a state agency.9

Facing an assembly of students at a Westchester high school Charles Luce, the soft-spoken, mild-mannered chairman of Con Ed, frankly admitted, “we blundered into the energy crisis.” Luce pointed toward the rise in fuel costs as the driving factor in the recent rate increases. Taking to heart the weathering criticism that had been directed at him and Con Ed, Luce pleaded, “Lord, we don’t want to hurt people.”10

Defining the Energy Crisis

The energy crisis of the 1970s is commonly interpreted as an oil crisis brought about by the 1973 OAPEC (Arab members of the Organization of Petroleum Exporting Countries) embargo. But the energy crisis was much more than an oil crisis; as the above narrative indicates, it ran far deeper than gasoline lines. This is an overly simplistic understanding of ← 463 | 464 → the changes taking place within the energy economy of the United States in the 1970s since higher oil prices only partially explain, at best, the problems faced by America’s electric utilities. Americans in the 1970s suffered from an energy crisis marked by three distinct but related crises.11 First, there existed an oil crisis. This is the familiar story of a sudden spike in oil prices and gasoline lines. Second, there was an equally serious natural gas crisis characterized by shortages. Finally, a crisis in the electrical utility sector caused price spikes, blackouts and nearly led several publicly regulated monopolies to go bankrupt.12

All of these crises, while inter-related, were also exacerbated by each other. The electrical energy crisis, the subject of this paper, would have happened with or without the OAPEC embargo and natural gas shortages of the 1970s. Indeed, policy makers and journalists were openly discussing an energy crisis more than three years before the OAPEC embargo.13 The crisis in the electric utility sector of the economy deserves our attention because while it was exacerbated by significant increases in the price of oil and natural gas, as this paper will demonstrate, it also had roots in problems unique to the utility sector. Finally, the crisis in the utility sector had a uniquely ambivalent environmental impact: for while it pushed the utility industry toward conservation it simultaneously encouraged a greater reliance on coal.14 ← 464 | 465 →

The Electrical Energy Crisis

It was not supposed to be like this.

During the first half of the 20th century Consolidated Edison like many other utility companies had successfully met a demand for electricity that doubled every ten years while lowering rates. This was possible because as energy consumption increased, utilities installed new more efficient and larger plants that served a more diverse range of customers. This growth improved the economics of the utility business by evening out the peaks and valleys in daily and yearly energy use.15 It decreased the cost of producing electricity and these lower prices were passed onto the consumer, thereby spurring demand.16 Along with aggressive advertising, this created a downward spiral in costs and prices.17 This was the business model of the utility industry for the first six decades of the 20th century and its central lesson was that growth produced efficiency.

During this time electricity sales grew at a stable rate, fuel costs were stable, power plants were completed quickly and environmental laws and regulations were virtually non-existent. Electricity prices declined in relation to prices in the larger economy as well as compared to prices for competing fuels. As one analyst noted, “the ruler was the best tool for projection.”18 A 1964 Federal Power Commission (FPC) report on the state of the utility industry predicted that electrical energy demand would increase by 40% between 1965 and 1970; that the demand for electricity would continue to nearly double every decade as it had in the past.19 ← 465 | 466 →

Figure 2. Net Electricity Generation from All Sectors, 1949-2013

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Source: 1964 and 1970 National Power Survey, Federal Power Commission; “Table 7.2a Electricity Net Generation: Total (All Sectors),” September 2014 Monthly Energy Review, U.S. Energy Information Administration.

The FPC actually underestimated demand growth in the late 1960s, which increased 45%. As a result, many utilities, lulled into a false sense of security, were desperately trying to build new plants in the late 1960s and early 1970s. But the experience also led the FPC and utilities to overestimate future demand growth. An FPC survey in 1970 projected electrical energy consumption to rise from 1,484 to 5,828 million MWh by 1990, an increase of 293%. Half of this power was to be supplied by nuclear plants. As figure 2 demonstrates, electrical energy consumption never came close to these projections.20 While electrical demand continued to increase in the decades since this FPC report (until 2007), the pace slowed down considerably. Electrical energy use in the U.S. increased between 1970 and 1990 from 1,535 to 3,038 million MWh, an increase of only 98%.21

What happened?

The industry’s business model was premised on several factors that began to change in the 1960s and 1970s: fuel prices rose, sales declined and power plants became more difficult to site and build. The historian Richard Hirsh points to the energy crisis, technological stasis and environmentalism as explanations.22 Let’s look at each one in turn. ← 466 | 467 →

The Energy Crisis

The crisis in the oil and natural gas sectors of the energy economy both increased the prices for these fuels and made them more difficult to acquire. In the 1960s and 1970s utility companies began using oil to generate a larger percentage of electricity. Oil was a cheap fuel; domestically produced oil dropped 30% in price from 1957 to 1970. It was also cleaner burning than coal, an important consideration for urban utility companies striving to meet new air pollution requirements. In 1973, 17% of the nation’s electricity was generated by burning petroleum. But the United States reached peak oil production in 1970.23 As oil consumption continued to rise, Americans became more reliant on imported oil from the Middle East. As a result, in the early 1970s both the price and supply of oil become destabilized. In the fall of 1973 the Organization of Arab Petroleum Exporting Company’s (OAPEC) declared an oil embargo against the United States. The OAPEC oil embargo tripled the price of a barrel of crude from $5.60 in October of 1973 to $12.92 by the following summer (from $29.99 to $69.20 in 2015 dollars).24 Increased costs led American utilities to quickly turn away from oil as a fuel source; by 1985, 4% of the nation’s electricity was generated by burning petroleum.25

Natural gas was also cleaner burning, producing less air pollution, than coal or oil. Not surprisingly, natural gas also became an increasingly popular fuel for electric utilities. In 1950 electric utilities burned 650 billion cubic feet (bcf) of gas, by 1970 they burned 3,932 bcf, an increase of 525%.26 In 1950 the electric utility industry produced 13% of its electricity from burning natural gas; twenty years later it produced 24% of its electricity from burning natural gas.27 Like oil, natural gas prices were also relatively stable in the decades after the Second World War. By the late 1960s, the FPC acquired the power to regulate natural gas prices at the wellhead. But shortages of natural gas materialized in the early 1970s and the FPC became increasingly sympathetic to the claims of natural gas producers that only increased prices would spur new exploration and production. Natural gas prices, for the electric power ← 467 | 468 → sector, increased from 29 cents per thousand cubic feet (tcf) in 1970 to $2.27 tcf in 1980.28

The crisis in the oil and natural gas sectors of the energy economy increased the cost the industry paid for the fuel it used to produce electricity. From 1955-1969 the average fuel cost ranged between 27 and 30 cents per kWh of electricity. By 1982 it had increased to $2.25 per kWh. The biggest increase can be seen between 1973 and 1974 where the industry’s fuel costs nearly doubled from 49 cents to 87 cents per kWh, an obvious effect of the OAPEC embargo.29 Since many states allowed for automatic fuel adjustment charges, for many utilities, these increased costs were quickly passed on to consumers. The average residential consumer saw their electricity bills rise from $2.20 per kWh in 1970 to $5.40 in 1980, an increase of 145%.30 With these kinds of fuel costs, the utility industry was no longer able to reduce prices.

Technological Stasis

Utility companies also lost the ability to lower prices because they hit a technological wall in the 1970s. For decades, greater efficiencies had been possible by building larger plants, thereby gaining from increasing economies of scale; these larger plants were also more efficient for they included steam turbine generators with improved thermal efficiency (the percentage of a fuel’s energy content actually converted into electricity). Thomas Edison’s first generating station, built in 1882, had a thermal efficiency of 2.5%. By 1965 the average thermal efficiency was 33%. Efficiencies were gained by increasing steam temperatures and pressures. Thermodynamic theory limits steam systems to a top efficiency of 48%. In the 1960s manufacturers began to discover that improving thermal efficiency began to produce diminishing returns with metallurgical problems appearing at around 40%. Less efficient plants could be run more reliably, and so an avenue of technological development that had helped fuel the downward spiral of costs and prices was now closed.31

Yet even if this technological limit to increasing the size of power generators did not place a brake on the industry’s ability to continually lower prices, the structure of the industry itself made larger power units problematic. Most electric utility companies were far too small to effectively deploy the biggest generators; the economies of scale gained ← 468 | 469 → from building larger plants were constrained by the size of the businesses that might deploy them. Of the 1,300 generating systems in the U.S. in 1970 only about a dozen could handle the new 1,000 MW units. One solution pushed by the FPC was for utilities to create power pools: to interconnect power systems, to pool their reserves, to coordinate planning and expansion as a regional group. But as one utility executive explained, “My people keep telling me, you’ve got to have the one-system concept, but the truth is, you can’t have the one-system concept unless you have one system.”32 Other possible solutions involved common ownership of an individual power plant with the owners sharing the power it produced or encouraging greater concentration through mergers and acquisitions. This last option was highly unlikely since, at that very moment, Congress was considering legislation that would prohibit even the union of electric and gas utilities.33 Critics of the utility industry (and the energy industry) were pointing to economic concentration as a cause and not a solution to higher prices. Yet without concentration, how could the industry attempt to achieve new economies of scale? The answer was it could not.

Environmentalism

Between 1969 and 1981 the U.S. Congress passed more than forty environmental laws. Because the production of energy is among the most environmentally intense activities engaged in by society, this new legislation had an especially powerful impact on the utility industry.34 The National Environmental Policy Act (NEPA) required an environmental impact statement before any part of the federal government could issue a permit that would result in a change to the landscape. Although there is no federal legislation requiring the licensing of fossil-fuel plants (unlike hydro or nuclear), if a federal decision were required the appropriate agency had to prepare an environmental impact statement. The same is true of states with their own NEPA’s when a state action was involved.35 The Clean Air Act ← 469 | 470 → Amendments of 1970 handed the newly created Environmental Protection Agency authority to establish and enforce stricter air quality standards for several pollutants commonly emitted by power plants, most notably sulfur dioxide, nitrogen oxides and particulates.36 The Clean Water Act of 1972 regulated discharges into the nation’s rivers and lakes. Written into the law was a provision classifying thermal discharges as a form of pollution subject to regulation. Since a large percentage of the nation’s power plants burn fossil fuels to produce energy, it had long been common practice to site power plants near lakes or rivers so as to take advantage of the available water to cool the plant. Now, for the first time, because the discharge of heated water can alter the local ecology, these discharges would be subject to regulation.37 The Edison Electric Institute, the industry’s trade association, estimated in 1974 that the industry was spending over $3 billion a year to comply with the new laws and regulations.38

But in addition to regulating power plant discharges and forcing utilities to ponder environmental considerations in siting new power plants, this new legislation expanded the zone of interests and legal rights environmentalists could sue to protect (as well as creating new forums in which environmentalists could oppose proposed power plants). Furthermore, many of these laws explicitly contained citizen suit provisions; environmentalists now had a statutory right to sue in federal court. The enforcement of these laws and regulations would not be left to government; citizens would play a role in their enforcement.39

Of course, this concern for the environment does not begin in the 1970s. The Clean Air Act of 1970 and Clean Water Act of 1972 were ← 470 | 471 → amendments strengthening earlier laws.40 Urban utilities, in particular, faced efforts by city’s dating back to the early twentieth century, to control air pollution by more tightly regulating the discharges of power plants.41 But these efforts intensified in the 1970s and were supported by a broader environmental critique that both called into question the increasing production and consumption of energy (a central component of the industry’s business strategy) as well as the technologies used to provide that energy.42

It is striking, that when we survey the iconic struggles that defined environmental activism in the decades after the Second World War, how many of these struggles were opposing forms of energy production. In the 1950s and 1960s environmental activists organized to oppose hydroelectric dams that the federal government attempted to site in Dinosaur National Monument and Grand Canyon National Park.43 At Glen Canyon (Arizona), Hell’s Canyon (Idaho) and Storm King Mountain (New York), environmental activists opposed dams that promised to alter a particularly beautiful landscape.44 In the 1970s environmentalists opposed nuclear power plants at Seabrook (New Hampshire), Bodega Bay (California), Diablo Canyon (California), Calvert Cliffs (Maryland), and Indian Point (New York). Interestingly, in the early and mid-1960s nuclear power garnered very little environmental opposition; nuclear power was accepted by some (as it is today) as part of an effort to reduce air pollution. However, by the end of that decade and throughout the 1970s environmental activists came to overwhelmingly oppose nuclear power at the very moment the utility industry was engaged in significantly ← 471 | 472 → expanding its nuclear capacity.45 The growing environmental opposition to the industry’s new favored form of energy production played a role in the industry losing the autonomy and freedom it once had in siting power plants. And new environmental laws and regulations forced the industry to spend money increasing the cost of producing electricity.

The Problem With Demand & Utility Regulation

But the energy crisis, technological stasis and environmentalism only go so far as explanations for the declining state of the utility industry in the 1970s. Two additional factors need to be examined: the decline in the growth of electricity consumption and the problems inherent in utility regulation.

First, as described above, the expected and planned increases in demand never materialized. In the 1960s and early 1970s electricity sales rose between 5.4% and 9% a year, with most of those years in the 7-9% range.46 As figure 3 demonstrates, in the 1970s and 1980s the percent change in kWh sales ranged between 0-5%. This can also be seen in the reserve margin. Reserve margin, the difference between peak load (the peak in electrical demand) and capacity as a percentage of peak load, held steady at around 30% throughout the early 1960s. In 1964, reserve margin declined to 24.7% and in 1969 it was as low as 16.6%, a result of the FPC and industry underestimating demand growth in the late 1960s.47 But a massive new building program placed new capacity on-line, at the very ← 472 | 473 → moment when demand growth slowed. By 1982, reserve margin was up to 41.3%! Nearly half of the nation’s electrical power was not being used for considerable periods of time.48

Figure 3. Percent Change in Kwh Sales 1945-1992

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Source: Lizette Cintron (ed.), “Table 38: Energy Sales: Total Electric Utility Industry,” Historical Statistics of The Electric Utility Industry Through 1992 (Washington DC: Edison Electric Institute, 1995), 243-4.

The electrical utility industry was and still is the most capital-intensive industry in the United States. Building new power plants requires spending large amounts of money up-front that will only be earned back over long periods of time. The industry, in the late 1960s and early 1970s, initiated a massive new build-out of new capacity (that never materialized) at the very moment when the cost of capital (interest rates) began to quickly rise. At the same time, the industry began to build larger and more expensive power plants, for this was the moment when the industry plunged into nuclear power.49 The industry had, in 1970, assets of $75 billion; this was 12% of the U.S.’s total invested capital.50 Yet in 1970 the FPC projected that by 1990, the industry would need to construct 920 new facilities, including 500 nuclear power plants!51 (As of March 2015, there were 99 operating nuclear power plants in the U.S.).52 This was expected to cost over $350 ← 473 | 474 → billion, one-third of the nation’s 1970 GNP!53 To be fair, it became very difficult to forecast electrical demand in the 1970s. For while higher prices and conservation programs could be expected to reduce demand, higher oil and natural gas prices were expected to increase the demand for electricity from those who would seek to use electricity in place of oil and gas.

There are a number of explanations for the decline in the growth of electrical demand in the 1970s. First, the price of electricity rose.54 And this was not simply a product of higher fuel prices and the costs of conforming to new environmental standards. Lower demand could by itself serve to raise prices. In an earlier era, when the utility industry’s traditional business model worked, lower prices spurred demand, which in turn allowed the companies to build larger more efficient plants which allowed them in turn to lower prices. With lower demand, the cost of new power plants had to be spread over a lower level of sales. And power plants had to be operated under suboptimal conditions (run less frequently than designed), which in turn reduced their performance, which increased operating costs, which led to higher prices. Now new plants were driving prices higher, which was lowering demand, which in turn was driving prices higher.55 Other factors that explain the decline in electrical demand include the fact that the economy grew slower than expected in the 1970s; and service industries, which are less energy intensive than industry, began to account for a greater share of the economy. Finally, utilities themselves, unable to raise the capital to fund their construction efforts (discussed below), and fearful that this inability would lead to chronic power shortages in five to ten years, began to do the unthinkable. Utility companies began to ask customers to use less electricity. By the mid-1970s conservation programs had become commonplace across the industry.56

With higher prices, among other factors, reducing demand, and with new underutilized capacity coming on-line, the private investor-owned utilities began to suffer a serious financial decline. To pay for all the new construction utilities had to raise money; the industry’s low rate of profits meant this money had to be raised from investors.57 One way to do this is to sell bonds. But in a climate of increasing interest rates, the cost of this ← 474 | 475 → capital became increasingly expensive. In 1965 the average interest rate for newly issued bonds was 4.61%. By 1981 this had increased to 16.3%.58 Since electricity sales slowed down, the industry’s debt rose at a faster rate than its income. As a result, the quality of this debt declined requiring even higher interest rates to raise the necessary capital. Utilities could also raise capital by selling new shares of stock. But the declining profitability of the industry (due to increasing costs, declining sales and a difficulty in raising prices) lowered the return stockholders received. As a result, the price of utility stocks declined. By the mid-1970s, as figure 4 demonstrates, virtually all investor-owned utilities were issuing new shares below their book value. Between 1965 and 1974 utility stocks declined in price on average from $117.08 to $48.26.59 As one business magazine noted, “how can you borrow money at 9% and 10% and invest it in a business that now is permitted by the regulators to earn little more than 6%?”60 The long-term answer is that you can’t. Something had to change.

Figure 4. Financial Ratios: Investor Owned Electric Utilities 1945-1992

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Source: Lizette Cintron (ed.), “Table 80: Moody’s 24 Utility Common Stocks End-Of-Month Averages 1929-1992,” Historical Statistics of The Electric Utility Industry Through 1992 (Washington DC: Edison Electric Institute, 1995), 549; Hyman, America’s Electric Utilities, Tables 13-10, 14-7, 15-7. ← 475 | 476 →

The industry felt it was clear that it needed to charge higher rates for electricity. This was not due to higher fuel costs (in many states higher fuel costs were directly passed on to consumers through fuel adjustment clauses); it was a product of running a capital-intensive industry at a time when the cost of capital (interest rates) rose significantly while there existed the perception that it was necessary to greatly expand generating capacity.61 But as publicly regulated monopolies, they needed approval from State regulators before they could raise rates. The relationship between utility companies and State regulators was friendly in an era of declining costs and rates. This relationship became contentious when utilities found themselves frequently requesting large rate increases.62

From the perspective of the utility industry, regulators were subject to public pressure and frequently granted only a percentage of the needed rate increase, often after a considerable delay. During this delay, the economic conditions and assumptions that grounded the application for a rate increase could (and in the 1970s often did) change. As a result, even if the regulators granted the requested rate increase, this delay (or regulatory lag) could result in the utility needing yet another rate increase.63 Even when they did receive a rate increase, utility companies saw a healthy percentage of that new revenue taken back in the form of taxes. Taxes represented 17% of revenue, the largest single expense for utilities in 1974.64

But it was widely believed that the state commissions were understaffed and that the investor-owned utilities lobbied to keep them that way.65 ← 476 | 477 → Many public service commissions, especially in the South, were often seen as a stepping-stone to higher office; a place where young politically ambitious men could gain some policy experience. This inexperience or lack of expertise increased the chances that regulatory commissions grew over time to take on the interests of those being regulated and not the general welfare (a condition called regulatory capture).66 Additionally, many of these state commissions were tasked with regulating a number of industries beyond electric utilities. At the same time, regulating the utility industry became more complex as public scrutiny increased and the industry became financially weakened. Many state commissions did not respond well to the new pressure and scrutiny produced by an increasingly sick industry and an angry public.67

In one publicly embarrassing episode, in the spring of 1979, a thirty-three year old Georgia public service commissioner slipped past a crowd of reporters waiting outside his house and drove off to the mountains instead of attending a hearing on Georgia Power & Light’s latest rate increase. His absence forced a delay in the commission’s decision. The commissioner later explained that the pressure and “political warfare” were too much.68 The public had a hard time understanding precisely what justified such large and rapid rate increases. Many suspected that the commissions were simply blessing utility company mismanagement. One commissioner in North Carolina even received death threats before a pending vote on a Duke Power Company rate increase.69

By the mid-1970s state utility commissions began to require periodic management audits of the investor-owned utilities they regulated. These audits revealed an industry that had not developed the tools, procedures and organization to efficiently confront a business of growing complexity.70 One commissioner complained of “cost-plus planning” and “cost-plus rate making”; that the utilities were not sufficiently incentivized to strive for ← 477 | 478 → efficiency since whatever costs they incurred would eventually be passed on to the consumer.71 One economist, hired by an association of utility regulators, found a discrepancy between efficiency and profitability. Profitability was not a function of efficiency; it was instead more closely tied to the success a utility enjoyed in seeking increased rates.72 It was also not a well-kept secret that the management of the utility industry had a reputation for conformity and conservatism. In the early twentieth century, when the industry was new and cutting edge, it succeeded in attracting the best and brightest business and engineering students. By the 1950s this was no longer the case.73

Utility companies found a friendlier reception before Congress. In the summer of 1974, before the Senate Interior Committee, executives testified that the industry was experiencing its worst cash squeeze since the Great Depression. While utility executives complained about the fuel cost increases and OAPEC, they largely focused on the need for quick rate increases. One economist working for the utilities testified that they needed to see rate increases on average of 40%.74 Sen. Henry Jackson (D-WA), chairman of the committee, declared his commitment to ‘jawbone’ state regulators into accepting the need for higher rates. “I think the regulators must recognize that they are an important part of an international, economic, conglomerate problem…this is what some of us have tried over and over again to argue that on the petroleum issue it was not just the price of the gasoline at the pump”.75 At stake, according to Sen. Jackson, was the financial integrity of the Western World and the free enterprise system. The Ford administration also agreed that the industry simply needed higher rates. John C. Sawhill, the administrator of the Federal Energy Administration believed that delays in rate increases were interfering with the national goal of energy independence.76

But the utility commissioners appearing before Sen. Jackson’s committee were not budging. Alfred Kahn, chairman of the New York State Public Service Commission and a highly regarded economics professor and expert on regulation, testified that when one looks at return ← 478 | 479 → on equity, it does “not seem to justify such extraordinarily pessimistic predictions we are getting from the companies.”77 The rate increases were necessary to raise the capital to “fund construction programs that must be preserved at all costs” he sarcastically added.78 But Kahn was not convinced or impressed by the earlier testimony and pointed out the contradiction between requested rate increases to fund conservation programs (because they result in lower sales), and large construction programs (which anticipate large increases in sales). The problem with utility regulation was that the rate making process could become politicized in an environment of increasing costs and prices. But this regulatory regime also protected utility companies from competition. As a result, these companies could, and sometimes did, become inefficient and inept.

All of these problems manifested themselves in an industry many understood to be sick. In 1974, Consolidated Edison of New York narrowly averted bankruptcy when the state of New York agreed to an $800 million bailout package. That same year the Southern Company, the largest investor-owned utility in the Southeast made a stock offering at a price that provided a 50% discount on its book value. The Georgia Power Company nearly went bankrupt in January of 1975; the Consumers Power Company of Michigan was also believed to be close to bankruptcy.79 Savannah Electric and Power replaced its cash dividend with a stock dividend and Detroit Edison was reported to be in dire financial straights.80 Many utilities began to curtail or cancel planned construction.81 And automatic fuel adjustment charges, a big source of the anger detailed at the beginning of this paper, a virtual life-line for troubled utility companies facing increasing oil and natural gas prices, had been declared unconstitutional in 1974 by courts in West Virginia, Montana and Vermont. In 1975, courts in Alabama, Connecticut, Florida, Louisiana, Maryland, Ohio and North Carolina were also hearing cases challenging the constitutionality of the automatic charge.82 ← 479 | 480 →

Conclusion

The American energy crisis of the 1970s was much more than oil embargoes and gasoline lines; Americans began to pay more for the energy (and not just oil) they used. As the above story reveals, the problems facing the electric utility industry had many sources. But this crisis produced two principal consequences that define a central contradiction running throughout American energy policy of the last several decades. On the one hand, the industry’s business model was effectively dismantled and replaced with efforts to reduce demand through conservation and rate reform (these changes also helped open the door to the partial de-regulation of the industry in the 1990s) as well as support for new energy production technologies (i.e. solar and wind). Some of these reforms originated in environmental critiques and many of them had the support of the environmental community. On the other hand, in an effort to become less reliant on oil and natural gas, market forces and federal policy makers pushed the industry toward a greater reliance on coal and nuclear power. But the above described financial crunch largely led to the abandonment of nuclear in favor of coal. Indeed, perhaps the most impactful legacy of the above story is the extent to which the United States became reliant on domestically mined, cheap coal; how the world’s largest economy, that produces more electrical energy than any other country, committed itself to burning the dirtiest, most carbon-intensive fossil-fuel for the majority of its electricity.83


1 “600 Con Ed Foes Turn Fire on P.S.C.,” The New York Times, March 19, 1974.

2 “Con Edison’s Money Problems Are Serious and May Get Worse,” The New York Times, March 31, 1974.

3 “Con Edison Fuel Costs Raising Average Home Bill to $20.65,” The New York Times, March 12, 1974.

4 In the U.S., electric utilities are primarily regulated at the state level. The Public Service Commission was established in 1907 by the State of New York. It was designed to oversee the operations and rule on the reasonableness of rates charged by utilities located within the State.

5 “600 Con Ed Foes Turn Fire on P.S.C.,” The New York Times, March 19, 1974.

6 “500 Charged-Up Customers Condemn Con Ed, P.S.C.,” The New York Post, March 19, 1974.

7 “600 Con Ed Foes Turn Fire on P.S.C.,” The New York Times, March 19, 1974.

8 “Hearing of P.S.C. Disrupted Here,” The New York Times, March 20, 1974.

9 “600 Con Ed Foes Turn Fire on P.S.C.,” The New York Times, March 19, 1974.

10 “Luce: We blundered into the energy crisis,” The Reporter Dispatch (White Plains, NY), March 18, 1974.

11 This argument is developed in Robert Lifset, “A New Understanding of the American Energy Crisis of the 1970s,” Historical Social Research 39/4 (2014): 22-42.

12 There is some scholarship from the 1970s and 1980s that interprets the energy crisis as an oil and natural gas crisis but does not link that to an analysis of the electrical utility crisis. For examples, see Robert Stobaugh and Daniel Yergin, Energy Future: Report of the Energy Project at the Harvard Business School (New York: Random House, 1979); Martin Greenberger, Caught Unawares: The Energy Decade in Retrospect (Cambridge: Ballinger Publishing Company, 1983); a partial exception can be found in Franklin Tugwell, The Energy Crisis and the American Political Economy: Politics and Markets in the Management of Natural Resources (Stanford: Stanford University Press, 1988).

13 “Face-to-face with the power crisis,” Business Week, July 11, 1970, 52; “Danger Of More Power ‘Blackouts,” U.S. News & World Report, April 20, 1970, 48-50; Philip M. Boffey, “Energy Crisis: Environmental Issues Exacerbates Power Supply Problem,” Science 168/3939 (June 26, 1970): 1554-9.

14 This chapter draws upon and significantly expands work found in Robert Lifset, “Environmentalism and the Electrical Energy Crisis” in American Energy Policy in the 1970s, ed. Robert Lifset (Norman: University of Oklahoma Press, 2014) and Robert Lifset, Power on the Hudson: Storm King Mountain and the Emergence of Modern American Environmentalism (Pittsburgh: University of Pittsburgh Press, 2014).

15 An important component of increasing efficiency consisted of raising the load factor and improving the diversity of load. Serving a wide range of customers with different energy needs served this end. See Thomas Hughes, Networks of Power, Electrification in Western Society, 1880-1930 (Baltimore: The Johns Hopkins University Press, 1983), 217-225.

16 Joseph A. Pratt, A Managerial History of Consolidated Edison, 1936-1981 (New York: Consolidated Edison Company of New York, Inc., 1988), 14; Richard F. Hirsh, Power Loss: The Origins of Deregulation and Restructuring in the American Electric Utility System (Cambridge: MIT Press, 1999), 46.

17 On the effort of utilities to build demand see Harold L. Platt, The Electric City: Energy and Growth of the Chicago Area, 1880-1930 (Chicago: University of Chicago Press, 1991); Mark H. Rose, Cities of Light and Heat: Domesticating Gas and Electricity in Urban America (University Park: Pennsylvania State University Press, 1995) and Carolyn Goldstein, “From Service to Sales: Home Economics in Light and Power, 1920-1940,” Technology and Culture 38/1 (1997): 121-152.

18 Leonard S. Hyman, America’s Electric Utilities: Past, Present and Future (Arlington: Public Utilities Reports, 1994), 51.

19 Federal Power Commission, National Power Survey. 1964, Part I (Washington, DC: U.S. Government Printing Office, 1964), 35.

20 Federal Power Commission, The 1970 National Power Survey. Part I (Washington, DC: U.S. Government Printing Office, 1971), I-3-18.

21 “Table 7.2a Electricity net Generation: Total (All Sectors), 1949-2014,” September 2014 Monthly Energy Review (Washington, DC: U.S. Energy Information Administration).

22 Hirsh, Power Loss, 55.

23 “Table 5.1a Petroleum and Other Liquids Overview, 1949-2011,” Annual Energy Review 2011 (Washington, DC: U.S. Energy Information Administration).

24 This is the landed cost of crude oil imports. “Table 9.1 Crude Oil Price Summary,” September 2014 Monthly Energy Review.

25 “Table 7.2a Electricity net Generation: Total (All Sectors), 1949-2014,” September 2014 Monthly Energy Review.

26 “Table 4.3 Natural Gas Consumption by Sector,” Annual Energy Review 2011.

27 “Table 7.2b Electricity Net Generation: Electric Power Sector,” Annual Energy Review 2011.

28 “Table 9.10 Natural Gas Prices,” Annual Energy Review 2011.

29 Hyman, America’s Electric Utilities, Tables 13-4, 14-8, 15-8.

30 “Table 9.8 Average Retail Prices of Electricity,” Annual Energy Review 2011.

31 See Richard F. Hirsh, Technology and Transformation in the American Electric Utility Industry (Cambridge: Cambridge University Press, 1989), 89-109.

32 “To Keep the Lights Burning…,” Forbes, July 15, 1970, 22.

33 See US Congress, Senate, Hearings before the Subcommittee on Antitrust and Monopoly, Committee on the Judiciary, S. 403 A Bill To Prohibit certain Combinations and Control between Electric and Gas Utilities, 92nd Cong., 1st sess. (May 11, 12, 18, June 15, 16, 17, 1971).

34 The idea that there exists a tension between a clean environment and energy production was widely recognized and remarked upon in the 1960s and 1970s. See especially Barry Commoner, The Poverty of Power: Energy and the Economic Crisis (New York: Random House Inc., 1976); for a study of this tension in federal policy across the twentieth century see Martin Melosi, “Energy and Environment in the United States: The Era of Fossil Fuels,” Environmental Review 11/3 (1987): 167-188.

35 Many States also passed power plant siting laws while simultaneously expanding the power of their utility commissions. See Al H. Ringleb, “Environmental Regulation of Utilities,” in Electric Power, Deregulation and the Public Interest, ed. John C. Moorhouse (San Francisco: Pacific Research Institute for Public Policy, 1986), 186.

36 On the issue of air pollution leading up to the passage of the Clean Air Act see Scott Dewey, Don’t Breathe the Air: Air Pollution and U.S. Environmental Politics, 1945-1970 (College Station: Texas A&M Press, 2000).

37 See Paul Milazzo, Unlikely Environmentalists: Congress And Clean Water, 1945-1972 (Lawrence: University of Kansas Press, 2006); see also J. Samuel Walker, “Nuclear Power and the Environment: The Atomic Energy Commission and Thermal Pollution, 1965-1971,” Technology and Culture 30/4 (1989): 976-979.

38 There is no question that the new environmental laws and regulations had a disproportionate impact on the electric utility industry. This industry was required to spend far more than any other (petroleum refining was a distant second) to be brought into compliance. Yet the EEI’s estimate may have been high. John Sawhill, the administrator of the Federal Energy Administration, estimated that the utility industry was spending between $1-3 billion per year in the mid-1970s to comply with the new requirements. See US Congress, Hearings before the Joint Economic Committee, on the Economic Impact of Environmental Regulations, 93rd Congress, 2nd Sess. (November 19, 21 and 22, 1974), 196, 4.

39 Lifset, “Environmentalism and the Electrical Energy Crisis,” 290-3.

40 On earlier versions of these laws see Karl Boyd Brooks, Before Earth Day: The Origins of American Environmental Law, 1945-1970 (Lawrence: University Press of Kansas, 2009).

41 See David Stradling, Smokestacks and Progressives: Environmentalists, Engineers, and Air Quality in America, 1881-1951 (Baltimore: The Johns Hopkins University Press, 1999).

42 This critique included but was not limited to: E.F. Schumacher, Small is Beautiful: Economics as if People Mattered (New York: Harper & Row, 1973); Denis Meadows and the Club of Rome, The Limits to Growth: a Report for the Club of Rome’s Project on the Predicament of Mankind (New York: Universe Books, 1972); Barry Commoner, The Poverty of Power; Amory Lovins, “Energy Strategies: The Road Not Taken?” Foreign Affairs 55 (Oct. 1976): 65-96.

43 Mark W. T. Harvey, A Symbol of Wilderness. Echo Park and the American Conservation Movement (Albuquerque: University of New Mexico Press, 1994); Byron Pearson, Still the Wild River Runs; Congress, the Sierra Club, and the Fight to Save Grand Canyon (Tucson: University of Arizona Press, 2002).

44 Russell Martin, A Story that Stands like a Dam: Glen Canyon and the Struggle for the Soul of the West (Salt Lake City: The University of Utah Press, 1989); Karl Boyd Brooks, Public Power, Private Dams: The Hell’s Canyon High Dam Controversy (Seattle: University of Washington Press, 2006); Lifset, Power On The Hudson.

45 There is a growing scholarship that examines the decline in enthusiasm for nuclear power within the United States. It reveals, in addition to environmental opposition, unanticipated engineering and technological challenges, regulatory and political obstacles and business and financial problems. See J. Samuel Walker, Three Mile Island: A Nuclear Crisis in Historical Perspective (Berkeley: University of California Press, 2004); J. Samuel Walker, The Road to Yucca Mountain: The Development of Radioactive Waste Policy in the United States (Berkeley: University of California Press, 2009); Daniel Pope, Nuclear Implosions: The Rise and Fall of the Washington Public Power Supply System (Cambridge: Cambridge University Press, 2008); Brian Balogh, Chain Reaction: Expert Debate and Public Participation in American Commercial Nuclear Power, 1945-1975 (Cambridge: Cambridge University Press, 1991); Thomas Wellock, Critical Masses: Opposition to Nuclear Power in California, 1958-1978 (Madison: University of Wisconsin Press, 1998); Henry Bedford, Seabrook Station: Citizen Politics and Nuclear Power (Amherst: University of Massachusetts Press, 1992); Donald Stever, Seabrook and the Nuclear Regulatory Commission: The Licensing of a Nuclear Power Plant (Lebanon: University Press of New England, 1980).

46 Hyman, America’s Electric Utilities, Tables 13-7, 14-3, 15-4.

47 Lizette Cintron (ed.), “Table 7: Capability – Peak Load – Kilowatt Hour Requirements Total Electric Utility Industry (Excluding Alaska and Hawaii),” Historical Statistics of The Electric Utility Industry Through 1992 (Washington DC: Edison Electric Institute, 1995), 51-52.

48 Ibid.

49 On the “band-wagon” market for nuclear power plants in the 1960s see J. Samuel Walker, Containing The Atom: Nuclear Regulation in a Changing Environment, 1963-1971 (Berkeley: University of California Press, 1992).

50 “To Keep the Lights Burning…,” Forbes, July 15, 1970, 26.

51 The 1970 National Power Survey, Federal Power Commission, I-1-17.

52 “Table 8.1 Nuclear Energy Overview,” June 2015 Monthly Energy Review.

53 “Electric Utilities: The Heat’s On,” Dun’s, March 1971.

54 As late as the early 1980s economists were having trouble establishing a solid understanding of the elasticity of electricity demand, of the relationship between demand and price. See Jan Paul Acton, “An Evaluation of Economists’ Influence on Electric Utility Rate Reforms,” The American Economic Review 72/2 (1982): 114-9.

55 Hyman, America’s Electric Utilities, 31.

56 On Consolidated Edison’s conservation program see Robert Lifset, “Energy Conservation in America: The Case of New York,” in The Culture of Energy, ed. Mogens Rüdiger (Newcastle: Cambridge Scholars Publishing, 2008).

57 “Can Utilities Make It?” Dun’s Review, December 1974.

58 Cintron, “Table 78: Weighted Average of Yields On Newly Issued Domestic Bonds and Preferred Stocks,” 544.

59 Cintron, “Table 80: Moody’s 24 Utility Common Stocks End-Of-Month Averages 1929-1992,” 549.

60 “To Keep the Lights Burning…,” Forbes, July 15, 1970, 24.

61 This is one way to understand the decline in enthusiasm for nuclear power. Nuclear required the largest up-front investment, and effectively became the most capital-intensive form of power in the most capital-intensive industry at a time (mid-1970s) when the cost of capital was significantly rising.

62 There is some evidence to suggest that elected commissioners were more reluctant to approve rate increases. Of the eleven states with elected utility regulators, eight were in the South. Several southern utility companies teetered on the brink of bankruptcy by the end of the 1970s. Paul W. Sturm, “New Populists versus an old Target,” Forbes, July 9, 1979, 39-40.

63 There is some debate on the importance of regulatory lag. On the idea that regulatory lag was not significant see Seth W. Norton, “In Search of Regulatory Lag,” Quarterly Journal of Business and Economics 26/4 (1987): 3-16 and Willard T. Carleton, Donald R. Chambers and Josef Lakonishok, “Inflation Risk and Regulatory Lag,” Journal of Finance 38/2 (1983): 419-431.

64 William J. Gill, “The Power Companies’ Other Crisis: Whether or not the nation’s…,” Nation’s Business, February 1974, 30.

65 “Your Electric Bill: Who sets those Rates,” Changing Times, November 1972, 23. Sen. Lee Metcalf (D-Mt.) was a vocal critic arguing that state commissions did a poor job of regulating utility companies. See “The Invisible Senator,” The Nation, May 10, 1971, 584-7.

66 Studies from the 1960s revealed that state regulators were allowing utilities to earn monopoly profits. Werner Troesken, “Regime Change and Corruption: A History of Public Utility Regulation,” in Corruption and Reform: Lessons from America’s Economic History, ed. Edward L. Glaeser and Claudia Goldin (Chicago: University of Chicago Press, 2006), 273.

67 There exists a scholarship highly critical of investor-owned utilities. It includes: Ernest Gruening, The Public Pays: A Study of Power Propaganda (New York: The Vanguard Press, 1931); Lee Metcalf and Vic Reinemer, Overcharge (New York: David McKay Company, Inc., 1967); Richard Rudolph and Scott Ridley, Power Struggle: The Hundred-Year War over Electricity (New York: Harper & Row Publishers, 1986).

68 “Once Home of Cheap Power, the South is Battleground for Rising Utility Costs,” The New York Times, March 26, 1979.

69 “More Shocks in those Bills,” Time, February 24, 1975, 33.

70 “Opening utility management to public view,” Business Week, May 24, 1976, 72.

71 See US Congress, Senate, Hearings before the Committee on Interior and Insular Affairs, the Financial Problems of the Nation’s Electric Utilities, 93rd Cong., 2nd sess. (August 7 and 8, 1974), 309.

72 J. Edward Smith, The Measurement of Electric Utility Efficiency (Washington DC: National Association of Regulatory Utility Commissioners, 1975); “Does Efficiency count?” Forbes, October 15, 1975, 118.

73 “Utilities are Doffing ‘Old Hat’ Image,” Electrical World 164, July 19, 1965, 32; Hirsh, Technology and Transformation, 110-130.

74 US Congress, Senate, The Financial Problems of the Nation’s Electric Utilities, 62.

75 Ibid., 272.

76 “Maneuvering for utility rate hikes,” Business Week, August 17, 1974, 23-24.

77 US Congress, Senate, The Financial Problems of the Nation’s Electric Utilities, 280.

78 Ibid., 283.

79 “Investor Interest in Utilities Lagging; Low Earnings on Revenue Gains Cited,” The New York Times, November 11, 1974.

80 Fortune, March 1975, 101.

81 “Utilities Lights Grow Dim,” Newsweek, September 2, 1974, 55.

82 “Utilities ‘Adjustments’ for Higher Fuel Costs are under Attack,” The New York Times, March 31, 1975.

83 Another consequence was the degree to which the problems detailed in this chapter rekindled an older struggle between Giant and Super Power; between government-owned utilities and investor-owned utilities. At this point I’m not sure to what extent this older debate had any influence beyond the longing for some on the left to expand the reach of publicly owned power. See “Turning Back the Threat of Government Takeover,” Nation’s Business, August 1975, 63; on this older struggle between Giant and Super Power see Sarah T. Phillips, This Land, this Nation: Conservation, Rural America, and the New Deal (Cambridge: Cambridge University Press, 2007), 25-35.