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The Legacy Lecture SeriesIntroduction to a Changing World:

The Historical Context for the Commission’s MajorOrders on Competitive Reform

October 1, 2015

Presented to

The Federal Energy Regulatory Commission

By Craig R. Roach, Ph.D.

A.Look across time • Decades are not detached

B.Look across all the factors that drive change • Science and technology• Politics (and geopolitics) • Regulatory policy

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I. How History Helps

•Law and the courts •Business strategy•Culture

Source: Order No. 888 (April 24, 1996) at 5, 13-14, 18, 20-21, 28.

C. The Commission itself used history in Order 888

•The FPA of 1935 – an age of “vertically integrated electric utilities”•Economies of scale through the 1960’s – no “pressure” for regulatory reform•By the 1970’s “Bigger was no longer better”•New technology – “smaller and more efficient” NGCC•Public Utility Regulatory Policies Act of 1978 •“Open access” case-by-case

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A.The “Battle of the Currents” won (circa 1900)1.Thomas Edison’s Direct Current

System Lost • Neighborhood Power

2.George Westinghouse’s/Nikola Tesla’s Alternating Current System Won• Enabled economies of scale and scope

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II. The Golden Age (1900-1960’s)

B. Spectacular Results

Residential Service

Source: U.S. Department of Commerce, Historical Statistics of the United States, Colonial Times to 1970, Part 2, Series S, 108-119.

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Year Share of Homes with Service

Kwh Consumed per Home

Price Paid

1912 16% 264 9.1₵

1920 35% 339 7.5₵

1948 90% 1,563 3.0₵

C. Success relative to explicit goals

1.Make electricity available to and affordable by all•The First Democratization

2. Central proponent – Samuel Insull•Economies of scale and scope •Academia, industry, real world •Regulatory bargain with states (cost-plus rate regulation) •Goal driven, not ideological

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D. Federal regulation is born – the other side of Insull

1. Holding Companies • Three held 45% of generation in 19321

2. Great Depression• The “Insull monstrosity”2

3. Public Utility Act 1935 • Public Utility Holding Company Act (PUHCA)• Federal Power Act (FPA)

4. Natural Gas Act of 1938

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1 Utility Corporations: Summary Report of the Federal Trade Commission. 70th Congress, 1st Session. Document 92, Part 72-A. 36-38.2 Franklin D. Roosevelt. “Campaign Address in Portland, Oregon on Public Utilities and Development of Hydro-Electric Power.” The American Presidency Project, September 21, 1932.

E. Legacy: A belief in big government, big business, and big projects

1.Economies of scale and scope2.Dismantle the holding companies 3.Hoover Dam (public-private

partnership)4.TVA (state capitalism)5.And … World War II

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A.A different definition of success

• Not maximizing availability, affordability

• More or mostly about minimizing the harm from generation

• Created “pressure” for regulatory reform

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III. The Age of Harm (1970-2005)

B. The rise and fall of nuclear power

1. Atoms for Peace speech (1953)

2. Rickover’s nuclear navy (1950’s)

3. Nuclear accidents •Three Mile Island (1979)•Chernobyl (1986)

4.Cancellations, Shoreham5.Cost overruns and poor

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C. Rachel Carson’s Silent Spring (1962)

1.“Mother” of the modern environmental movement

2.Template for advocacy3.The “Episodes”4.1970 Clean Air Act 5.1990 Acid Rain Program

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D. The Chicago School•“What Can Regulators Regulate: The Case of Electricity” (1962)•Regulatory Capture

E. Natural Gas Shortage •Low fixed price encouraged consumption, discouraged investment

F. The Arab Oil Embargo (1973)•$3, $12, $40 … $100

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A.The Public Utility Regulatory Policies Act of 1978

•Qualifying facilities – cogeneration, renewables •Pay avoided cost •Eventually … price competition

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IV. The Path to Competitive Reform

B. Why PURPA is so important to competitive reform 1.Created competitors (inadvertently)

• Kick-the-tires alternative to monopoly utilities

2.Addressed concerns of the day • Nuclear’s cost overruns and poor performance• Coal’s air pollution

3.180° shift on technology • Shows the driving force of regulation

4.Created a voice for competitive reform 14

C. The Natural Gas Policy Act of 19781.A template for competitive

reform •Unbundling, comparability…•Order 436 (1985), Order 636 (1992)

2.Natural gas is fuel of choice for competitors •Enabled competitive advantage of NGCC

3.The Powerplant and Industrial

Fuel Use Act of 1978•A contradiction (then and now)

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D. Open Transmission Access – inevitable next step

1.The Commission’s case-by-case campaign (1990-1995)•Mergers and acquisitions •Market-based rates

2.Codify – Order 888 (1996)•Prevent undue discrimination •Combat vertical market power •Open access utility by utility 16

3. Greatly broaden market scope – Order 2000•Regional market brought down the walls of monopoly – free trade zones •Regional liquidity – can always buy or sell in transparent spot market

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E. The danger of being derailed (2000-2003)

1. California Electricity Crisis2. Enron’s collapse 3. The blackout of 20034. EPAct 2005 addressed all three

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F. Legacy: Amazingly, events did not derail competitive reform

•Why was competitive reform not derailed? •Specific explanations •Momentum: layered, long standing

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A. Plenty of bumper stickers •George Santayana•Aldous Huxley •Mark Twain

B.Two Rhymes •A second Battle of the Systems (Network vs. Microgrid/Powerwall)•A second democratization

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V. History’s Lessons

Craig R. Roach, Ph.D. is the founder and President of Boston Pacific Company, Inc., a consulting and investment services firm in Washington, DC.  He has forty years of experience with investments in, policies for, and litigation concerning the electricity and natural gas businesses.  Craig often leads the Boston Pacific teams advising state commissions on major power resource decisions for technologies including natural gas-fired combined cycle, clean coal, on-and offshore wind, solar, and storage.  He also guides Boston Pacific’s wide ranging work on auction and RFP design and monitoring, and has been an advisor to the SPP RTO Board of Directors for ten years.  Craig is a nationally recognized expert with experience as an expert witness throughout North America including before twenty six state commissions, three Canadian Provinces, and the FERC on more than thirty occasions. Craig earned his Ph.D. in Economics from the University of Wisconsin and served on the Advisory Board to its Department of Economics from 2007 to 2014.

Craig is the author of the forthcoming Simply Electrifying: A History of Electricity from Ben Franklin’s Kite to Elon Musk’s Vision. ______________________________________________________________________________________________________________________________

1100 New York Avenue NWSuite 490 East

Washington, DC 20008(202) 296.5520

croach@bostonpacific.com

www.bostonpacific.com21

Speaker Bio