Deregulation: A History Lesson
Philip Mihlmester is an Executive Vice President at ICF and has thirty years of experience in the technical and management direction of engagements in the energy, environmental, and quantitative analysis areas.
I served on a panel discussing distributed energy resources at the Edison Electric Institute's 2017 Annual Convention. The recently retired and always provocative David Owens of EEI moderated the panel.
During the conversation, he asked two questions that really got my attention. First, he questioned why various DER actors needed access to the wealth of available grid data. Then, he went on to question whether the grid needs to be planned, rather than patchworked in a style Dr. Frankenstein would be proud to call his own.
At the time, I answered that there does need to be planning to ensure grid reliability and resiliency. Further, since DERs might be expected to fulfill certain grid needs, the developers of those DERs should expect some visibility into utility planning efforts in order to offer the proper solutions. Then, it dawned on me. The early days of DER mirror the early days of airline deregulation.
I started flying in the age of complete economic regulation of U.S. airlines by the federal government, specifically the now defunct Civil Aeronautics Board. It was very civilized and very carefully planned.
Certain routes were determined necessary to connect the country. A small number of airlines would be allocated to each route, and the Board would determine the appropriate cost-based tariff for that route.
The tariff was the same for each airline flying that route, effectively eliminating price competition. If you wanted to fly from Miami to Kansas City, you consulted the Official Airline Guide — a thick book with tiny print. The Guide would tell you which airlines flew the route, the times of departure and arrival, and the official tariff honored by every airline working the flight path. It was also typical for the regulated planes to fly half-full.
Then a prominent Cornell economist, Alfred Kahn, took over as the Board chairman. He felt that the carefully planned and regulated system was highly inefficient, and that market-based approaches would yield the most efficient routings and pricing.
As an economist, he believed in competitive systems based on supply and demand. As the Board chairman, he set out to deregulate the airline industry and successfully shut down the very organization he led. Economic regulation was history. The airlines, meanwhile, would still be regulated for safety by the FAA.
Immediately upon deregulation, many airlines dropped routes they believed would be unprofitable. Some smaller cities lost airline service completely - at least temporarily. Price competition on many well-traveled routes actually lowered prices for those routes, but many airfare prices went up on routes that were less in demand.
Several airlines moved to a hub and spoke system to drive efficiency and increase the passenger load factor — which grew from below fifty percent in the early 1970's to eighty-three percent today. Asset utilization has also increased with the average aircraft flying at least twenty-five percent more hours per day.
Equally important, deregulation opened the door to new entrants, new business models, innovations, and new efficiencies. Importantly, there is no central planning. Each airline behaves in what it believes to be in its best financial interest; dropping routes, adding routes, adjusting schedules, and changing pricing by the minute.
To bring the analogy back to energy, I believe the EEI moderator was referring to state-driven proceedings that envisioned a network of complementary DERs meeting grid needs for reliability and resiliency. Those are the so-called non-wires alternatives.
The line of questioning related to both the distribution system, which is regulated at the state level, and the bulk power system, which is regulated by FERC with reliability and resiliency standards enforced by NERC. Both are impacted by the increased penetration of DERs.
The key question then is: are there lessons and limitations to the airline analogy for the electric industry? I would argue there are two fundamental differences.
First, the electric industry for the most part still has an obligation to serve the public. Conversely, the airline industry has no obligation to serve anybody. A utility CEO cannot decide one day to cut off power to a small village at the end of the line because it's not cost-effective.
That could change in the near future — potentially through a subsidy-based approach like that used by airlines. For the time being, however, it is hard for me to see state regulators adopting an economist's approach to electric service.
Second, again in general terms, there is no overbooking or shortage allowed in the electric industry, though some larger customers might have interruptible rates. But, generally speaking, the lights need to stay on twenty-four hours a day, seven days a week, three hundred and sixty-five days a year.
Customers are protected by regulations and cannot be bumped, much less dragged off their electric service because of insufficient capacity, except under force majeure circumstances.
The industry must meet these two fundamental requirements: obligation to serve and no overbooking (in the energy context: not having enough capacity to serve all locational and temporal demand). So, my answer to David's question is yes, we do need planning at both the distribution and bulk power levels. This planning needs to increasingly be meshed because changes on the distribution system can affect transmission planning on the bulk power system.
Can DERs make us more economically efficient by reducing or deferring costs, increasing load factors, improving reliability, and other efficiencies? Yes. I believe they can in many, but not all, circumstances.
But to do so, careful grid planning is needed. Utilities and regulators need to give developers, owners, and operators of DERs some visibility into the utility planning process and its underlying data. They need that data to make economically justifiable decisions that benefit themselves and, ultimately, the grid that utilities are responsible for.
As the electric industry works through these important issues, give them some thought on your next flight.
