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Book Review Power Loss by Richard Hirsh

Richard Hirshs Power Loss provides a detailed historical account of the evolution of
the electric utility system of the United States. As suggested by the subtitle of the
book, he traces out the origins of deregulation in the power industry in a well
written narrative spread over the 20th century.
He tracks back to the early 1900s when the growing size and power of the electric
companies triggered by Insulls Commonwealth Electric ate away competition and
forced in political corruption. In wake of such growing anti-market monopolization of
the power sector, cries for government regulation to control such growth for the
betterment of the society gained strength. Hirsh refers to the progressive era and
the emergence of an institutionalist approach which brought about a regulatory
ideology that aimed to use the monopolistic nature of the power sector and regulate
it in a way best suited for both the public and the prominent utility managers and
elites. He ascertains that, much like the railroad industry marked with tough
competitions, destructive rate wars and redundant capacity, economists of the time
deduced that such businesses could only operate profitably while ensuring quality
and fair prices for the people only in the presence of a government regulatory body
which could contain such natural monopolies and ensure the safety of the public
against their increasing returns. He refers to the following regulation of power
utilities as the utility consensus where utility managers and state regulators
joined hands to use regulation for ensuring guaranteed returns on investment for
utilities and low prices for end consumers. With an industry hungry for capital, the
consensus allowed for a grow and build strategy which strengthened these
natural monopolies
This institutionalist approach picked up in the progressive era which marked the
emergence of a regulatory ideology that aimed to use the monopolistic nature of
the power sector and regulate it in a way best suited for both the public and the
prominent utility managers and elites. With the 1905s Wisconsin Idea for the
railroad industry as a pilot for regulation in the power industry, the efforts of the
National Civic Federation and its Public Ownership and Operation Commission laid
the foundations for the acceptance of these companies as natural monopolies and
the fact that free markets seemed unable to yield lowest costs and best services to
customers. Little support for municipal ownership paved the way for state
regulatory commissions which assigned specific obligations and rights such as
rate-of-return regulations ensuring profitability for utilities, legitimating their
businesses. Therefore, regulation gave the growing electric industry a huge boost.
An astronomical rise in monetary investment in the power sector due to riskaversion caused by government regulation saw many players emerge as
stakeholders for the utility regime. The advent of holding companies, manufacturers
profiting from the expansion of utility networks, consulting engineering companies,
universities and academia aiming to capitalize on the potential research
opportunities all got on board in support of the system. On the other hand, utility
managers used public relations, education systems, print media and political
influence to disseminate positives about the system, ensuring its safety after the

1930 jolt of corruption charges against holding firms. The state regulators conceded
to these managers, partly to allow a system providing cheaper power to flourish and
cash accolades for it, and partly due to lucrative future job prospects with such
utilities. With such regulatory commissions, the utility managers rose to power and
control the natural monopolies, safely concealed by the veil of government
regulation against the power of the people. And to ensure their power and
dominance was to stay, the grow and build strategy allowed them to spread
benefits of technological advances across the board, by increasing profitability for
holding firms and investors, allowing greater research opportunities to academia,
and providing increasingly cheaper electricity to consumers. By allowing this
downward spiral of electricity prices and an upward pressure on power usage by
promoting use of new electric powered machines that aimed at improving the living
standards of Americans, they managed to build a controlled closed system. While all
those involved profited from the grow-and-build strategy, these managers
strengthened their grip of the system.
But the 1970s saw a great shift in the way utilities did business. With technological
advances dried out in manufacturing and thermal efficiency of generation capacity
it became impossible to keep pace with the growing demand and expectation of
cheap electricity. To make matters worse the energy crises of 1973 increased fuel
and financing costs manifolds and revealed the wasteful ways Americans had been
producing and consuming energy in prior years, fueling legislations and the
environmental movement aimed at energy conservation for preservation of the
environment. This resulted in legislations to curb pollution caused by generation
capacities further tightening the screws for these utilities. With the EPA established
in the 1970s, awareness about environmental hazards of technology hindered
progress on newer ways of energy production like nuclear energy.
Following the energy crisis, the Carter Administration set out to reform the countrys
energy policy to incorporate changes that could promote energy conservation and
enhance federal intervention in power utility regulation process. Carters original
energy plan saw little support from the people, who had moved on from the energy
crisis and disregarded radical policy changes, and more importantly utility
managers who saw their powers undermined by the plan. As a result, by making use
of lobbyists, these managers trimmed and butchered the original plan into several
bills that were later adjusted by the Senate according to their wishes. The marginalcost model of rate setting, which came to be known as the rate reform portion of
the plan received the greatest opposition from utilities as they lobbied to prevent
such a legislation. As a result, the output, the Public Utilities Regulatory Policies Act
(PURPA) of 1978 mainly allowed for some conservation through promotion of
independent and small power producers and co-generation to increase production
capacity and efficiency. While the utility managers failed to foresee the free hand
and incentives given to such power producers as a real threat at the time of its
enactment, the PURPA Section 210 which made such power producers significant
shareholders in the national power system, proved to be the turning point for
regulated monopolistic power utilities.

Implementation of the section 210 after few years of court hearings regarding price
settlements for qualifying facilities (QFs), the avoided costs model was approved
and to be implemented by state regulatory bodies in light of the regulations and
guidelines provided by the FERC. Of all the states, California saw the greatest
change in power sector as many private power producers showed up to be active
players in the power sector game. The Interim SO4 contracts, which provided such
QFs with lucrative payments based on forecasts predicting an increase in oil prices
over the next decade lured many private investors to the system, pinning them
down as direct competitors with the utilities. While fuel prices declined, opposed to
the forecasts, these QFs continued to draw payments according to the SO4
predictions, turning them into profitable power producers, at the expense of the
utilities who ended up buying power from them, many times when they did not even
needed to.
Building on the relatively easy terms of the PURPA, these independent power
producers invested in more radical technologies of power production to compete
with the existing utilities. This saw cogeneration, due to its small scale, cheap
equipment and multiple output uses, become one of the most favorite and adopted
ways of power generation by QFs. With high potential for profits, cogeneration
power plants burgeoned during the 1980s-early 1990s period. Other technological
advances boosted by the PURPA included improved gas turbines and extensive use
of natural gas, and renewable energy source utilization, in particular wind power,
brought electricity production costs for QFs to levels competitive with those of the
utilities.