Wolfpack Federalism: Regulatory Reforms in the U.S. Electricity Sector

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Mar 28, 1998 - vision of the industry, and his Pearl Street power plant sat next door to ..... states with below-average electricity prices, only Montana seems to.
Wolfpack Federalism: Regulatory Reforms in the U.S. Electricity Sector

Presented at the Association of American Geographers 94th Annual Meeting Boston, Massachusetts March 28, 1998

Clinton J. Andrews

Department of Urban Planning and Policy Development Rutgers University 33 Livingston Ave New Brunswick, NJ 08901 Tel 732-932-3822 x721 Fax 732-932-2253 Email [email protected]

Wolfpack Federalism: Regulatory Reforms in the U.S. Electricity Sector Abstract: Policy development in federal political systems is an intricate process worthy of metaphorical description. This paper examines the current restructuring of the U.S. electric power sector as a case study of regulatory policy development under federalism. Evidence suggests that a few states have led the way while most have waited for federal encouragement to begin reforms. Policy changes are taking place at both the federal and state levels of government. Early reformers are states with high electricity prices, a history of aggressive regulatory behavior, and Republican governors. Once federal encouragement is given, historical behavior and ideology diminish in significance while proximity to other reformers gains in explanatory power. This suggests a “wolfpack” metaphor for policy making in federal systems.

Federalism has wonderful dynamics, prompting scholars to offer various images as shorthand to describe how this complex system works. At different times, authors have described federal-state relations as being “permissive,” “cooperative,” or “competitive,” and images of the federal political system have ranged from the cybernetic to the organic. Policy development in the States sometimes seems like a migration of wildebeest, with leaders, a main herd, stragglers and strays. While the herd travels in one general direction, a small external stimulus can send it thundering off on a surprising tangent, and individuals’paths in any case weave and wander a great deal. Yet this image leaves out the central government. Perhaps a better analogy would be a flock of sheep and its shepherd, but what unruly sheep! This paper derives a new analogy based on behavioral evidence. It evaluates several competing explanations of policy development under federalism using the case of electricity sector regulatory reforms in the United States.

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Economic rationality, political culture, ideology, and infectious contact each could have a role in spurring the process of regulatory reforms. Public utility commissioners have actively participated in this search for metaphors, and the evolving organic community has replaced the well-oiled machine as their image of choice (NRRI, 1998). The remainder of this paper provides background on the electric power sector and federalism in the United States, offers evidence on the dynamics of recent regulatory reforms, and discusses the implications for the public interest. The paper closes by suggesting a better analogy to describe policy development in federal political systems. U.S. Electricity Sector Newspapers trumpet headlines about the deregulation of the electricity sector, some cheering that “the slumbering giant wakes” and others moaning that “this means nothing more than increased telemarketing calls at dinner time.” A cartoon in an electrical engineering newsletter shows a caveman talking to a visitor from outer space: ”No, we didn’t nuke ourselves back into the Stone Age, we deregulated our electricity industry” (IEEE, 1997). Restructuring an industry that is so essential to the operation of our economy is politically, financially, and technically risky. The dynamics of public policy development in this area are important in their own right while also providing intellectual grist of a broader sort. The private sector launched electricity production in the United States, starting with Thomas Edison’s Pearl Street Station in the financial district of New York City in

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1882. Today, 74% of U.S. electricity is still produced by investor-owned companies, although they are highly regulated (USDOE, 1997a). In a few parts of the country such as the Tennessee River valley, public power authorities dominate, in others, cooperatives play an important role. While ownership varies by locale, the industry has similar components everywhere. These include generation, transmission, distribution, and enduse service. In most places these functions have been vertically integrated in single firms that for many decades have enjoyed monopoly franchises within specific service territories. Generation Electricity is produced in power plants of several types. Fossil-fueled power plants burn coal, oil, or natural gas to heat water, which produces steam, which turns turbine blades, which turns magnets within spools of wire to generate electricity. Nuclear power plants heat the water by fissioning enriched uranium. Gas turbines, which are essentially jet engines strapped to the ground, force combustion gases through the turbine and skip the intermediate step of heating water into steam. Hydro plants rely on moving water to spin the turbine blades, while wind turbines rely on moving air. Some cutting edge generation technologies have fewer moving parts: photovoltaic arrays made of semiconductor materials transform sunlight directly into electricity, while fuel cells, which operate much like car batteries, use electrochemical reactions rather than combustion to transform purified natural gas directly into electricity. The generation function includes step-up transformers to allow efficient high voltage transmission of bulk power over long distances. The current U.S. generation mix is 56% coal, 5% level. ** Coefficient is significant at the p > 1% level.

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2 Aggressiveness in 3/98 52 2 4 45 10.9 44.7

0.03 (0.38) 0.12* (0.05) 0.21 (0.11) 0.33 (0.21) 0.44** (0.15)

Figure 4: U.S. Electric Power Sector Restructuring Activities After FERC Order 888 (March 1998) Source: Based on NRRI, 1998

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Under Study

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Some Activity

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Aggressive Action

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Implementation