Keeping the Lights On

By Kai N. Lee

In September 2017, two hurricanes struck the US island of Puerto Rico, crippling its electric power grid. Because Puerto Rico is a major manufacturing site for medical supplies, the nation’s hospitals soon developed acute shortages of the intravenous bags used to administer medicines. By early 2018 the Food and Drug Administration was cautiously optimistic that the shortages would be alleviated. Even so, at that point more than half of the people in Puerto Rico still had no electricity. The role of electricity in modern life is one we take for granted—until the power goes out, with repercussions distant as well as local.

The electric power system is a subject of basic importance to Americans because universal instant access to electricity is both assumed and turns out to be unexpectedly at risk. Mason Willrich’s Modernizing America’s Electricity Infrastructure is a sophisticated policy statement by a longtime energy sector professional and analyst of high stature and deep experience. Willrich, a former executive at Pacific Gas and Electric, California’s largest utility, calls for a comprehensive response to the system’s risks, structured within the existing complex scheme of utility regulation and organization. This is a reasonable approach in principle but implausible in the existing governmental situation. Willrich is an intelligent visionary, yet he may not avoid the fate of Cassandra, whose foresight is remembered because it was not heeded.

Electric power systems have been shaped over time by three principal forces: technology, economics (including, importantly, finance), and politics (including regulation). These forces have acted in concert, though not coherently. Electrical supply began with a start-up phase, in the last years of the nineteenth century, in which alternating current technology and service monopolies at and above the metropolitan scale emerged as dominant; both endure today.

During the twentieth century, a growing grid enjoyed a long period of declining rates, lasting until the 1970s. Falling rates and rising demand reinforced one another, as technology, regulation, and the mechanisms of cost-recovery took shape in a nationwide—but not quite national—industry. There followed a period of increasing rates, in which we still find ourselves. Rising rates have in turn contributed to a sharply slowed increase in demand. This change in economic circumstances is reshaping (at times disruptively) a capital-intensive, highly regulated industry.

The electric power system now is operated by more than 3,000 entities. The retail utilities seen by consumers include nearly 50 investor-owned companies, serving more than two-thirds of the nation’s ratepayers. In addition, there are more than 2,000 publicly owned utilities controlled by a variety of public bodies, including major cities such as Seattle, cooperatives that began by serving rural areas, and regional agencies such as the Tennessee Valley Authority. Publicly owned utilities serve fewer than one-third of the customers. (The remainder of the power system includes a diverse set of owners: independent power providers, small-scale sources such as rooftop solar, and transmissions systems. These are regulated via a hodgepodge of rules and laws that vary by state.) These components of the national electric supply system are linked by transmission lines administered mainly by regional independent system operators overseen by the Federal Energy Regulatory Commission (FERC).

Customers spend, on average, somewhat under 11 cents per kilowatt-hour of electricity. This provides revenues of nearly $400 billion per year, on an asset base of over $1 trillion. Electricity accounts for about 5% of US economic output. Thanks to mobile phones charged from outlets, electricity is now a presence in every hour of most Americans’ existence. The reliability of the grid and the cost of power, as a result, matter much more than might be supposed from the quantitative contribution of the electric industry to gross domestic product.

Electric power has been a network phenomenon all along, shaped by independent sources of authority and economic and political power—never unified but coherent enough to allow interconnection of different geographic provinces and technological systems. The result today is a collection of electric utilities, technologically connected to one another, that is regulated in an intricate scheme of laws and policies administered by multiple state and national regulatory bodies. Whether owned by shareholders or governmental entities, an electric utility operates under economic and political forces unlike those facing conventional businesses or government agencies. As this thumbnail sketch indicates, Willrich has undertaken a formidable task in describing and analyzing this unusually complicated industry; a reader needs some fortitude to follow the author’s guidance through this labyrinth.

Electric power began as a vertically integrated industry, with a single firm owning the wires going into customers’ homes and businesses, as well as the distant power plants that generated the current flowing in the lines. Over the past generation a series of policy and financial changes—loosely grouped under the term “deregulation”—has shifted much of the ownership of generating resources onto independent power providers.

The generation of electricity was in the midst of a technological transition by 2015. One-third of power came from coal; this was a steep decline from nearly half less than a decade earlier. The change is driven principally by the availability of low-cost, relatively clean natural gas. This transition away from coal is unfolding with unprecedented speed, in an industry where major investments are planned to last many decades. Another significant component of electricity generation is the US nuclear fleet, which is still the largest in the world, as Willrich points out, even though there have been few additions since the 1980s.

Under policy mandates adopted with strong support from environmentalists, most jurisdictions are moving toward a system of mixed but coordinated power supply that includes efficiency and renewable sources, notably wind and solar. Largely unnoticed is the challenge of integrating the new, often decentralized sources of power into a transmission and distribution system designed around large central-station power plants. The policies that induce renewable resources frequently do not include provisions for rebuilding a grid that can distribute the power they provide. The retail utilities are left with the mandate of providing electricity whenever it is needed, but with revenue streams poorly aligned with the technological realities of this task.

More broadly, the cost of electricity is largely that of the equipment used to supply it, and much of that capital is funded through borrowing by utilities and power producers. The borrowed money is paid back over time—but more slowly than the competitive forces of natural gas or the policy mandates for renewables seem to allow.

Challenges loom accordingly. Stagnant demand restrains the revenues that power companies can collect. This is because end users can take steps to limit their own demand, but also because the regulatory authorities are reluctant to permit rate increases. Over the longer term, global climate change seems likely to require significant technological change: the provision of electricity currently accounts for 40% of the nation’s greenhouse gas emissions. How to pay for a large-scale rebuilding of the electricity supply and transmission system in order to reduce those emissions, in light of the modest returns on capital currently allowed, is not at all clear. California is wrestling with this problem now, learning lessons that may be illuminating (as was the case with the state’s unhappy experience with deregulating electricity markets nearly two decades ago). Closer to hand, perhaps, is the range of risks that accompany an essential resource of postindustrial life that remains so low in profile that difficulties gather out of sight.

In response to the real but underappreciated fragility of the electric power industry, Willrich argues that four goals are important national priorities:

• First, the grid must continue to be reliable, supplying power as it is needed. It should also be resilient in the face of the extreme weather events that are inevitable as climate change accelerates; resilience is what Puerto Rico lacks.
• Second, the component utility systems need to preserve interoperability while strengthening their security against cyberattack. That is, utilities must continue to respond to instantaneous changes in demand across their service territories while guarding against hackers.
• Third, the electric power system should continue to lower its emissions of greenhouse gases.
• And fourth, it is essential that electricity remain affordable. This needs to be done in such a way that the utilities can continue to finance their operations and the investment required to transition toward renewables and energy efficiency.

These goals are technical and intricate, even as they are important. Turning them into durable policy demands coordinated actions; so deep are the interdependencies that no simple strategy is plausible. To the discomfort of many environmentalists, addressing climate change may require long-term subsidies to nuclear power plants, which do not emit greenhouses gases in their operation. Wide-ranging changes to wholesale markets for electric power will be needed to facilitate the transition from fossil fuels to renewable sources and energy efficiency investments; consumers are unaware of the costs and institutional difficulties of doing so. Today’s populists continue to deny the economic reality that low-cost natural gas has doomed the coal industry. From all directions, the benign inattention that the public has lavished on electricity stands in the way of the changes needed to address the electricity we take for granted.

Willrich’s central message—although implicit—turns out to be that the institutional and technological complexity of the grid functions so smoothly on the surface, day to day, that consumers, voters, and nearly all leaders do not perceive its fragility. Neither do they understand the financial, political, and managerial burdens of conserving what is valuable. Unlike, say, national defense or health care, the energy system is a trillion-dollar nexus where public discussion is nearly impossible to marshal without a crisis to focus national attention. And it is sufficiently complex and delicate that a crisis is unlikely to be a good venue to make sensible choices: we need to rebuild the ship while it is underway, not head for the lifeboats as it sinks.

Willrich proposes policy reforms led by the federal government and involving the utility commissions of every state. Some states will continue to rely on deeply entrenched coal-fired generation, while others, such as Hawaii, aspire to a wholly renewable power supply. Many state commissions and regional operators chafe under the regulatory policies of FERC. The reform ideas that Willrich puts forth make sense conceptually, but require trust and careful choreography that currently appear to be in short supply. For instance, the decline of the coal industry has been blamed on attempts to lower greenhouse gas emissions, rather than on the technological innovations that made natural gas cheaper; this confusion has shifted debates about energy regulation in unproductive directions.

There are many, many more examples of the difficulties and confusions that must be surmounted. Doing so would be a formidable task even without the deep suspicions of government now embedded in US public life, and Willrich doesn’t acknowledge the scale of this challenge. But to citizens and leaders in business, civil society, and government who grasp the need for modernizing the nation’s electric infrastructure, Willrich’s book is a good way to begin learning about the tangle of wires and institutions behind the placid socket on the wall.

The erosion of the infrastructure of developed economies is a slow-gathering crisis whose scope and implications are hard to see until the costs of effective response become painfully high. In this electricity is not unlike other profound challenges facing the United States: streets and bridges, ever more congested, become structurally weakened and studded with potholes; public schooling is neglected until the workforce cannot keep up with economic change; central banks lower interest rates in order to prop up growth but then can no longer respond to downturns; and the electric power system weakens, invisibly, until a systemic outage exposes the limitations of its architecture.

The story of Puerto Rico is a worrying harbinger. The island’s recovery from the recent disastrous storms is hampered by an electric utility that was already bankrupt before the hurricanes struck. Puerto Rico’s government is moving to privatize the hapless public agency running the island grid. But federal assistance in rebuilding the electric power system has been limited by law to restoring what was there—which is quite different from a resilient system, in which solar and other renewables would play a significant role in a way that makes sense for users and the economy. The mismatch in Puerto Rico, between what is needed going forward and the economic and institutional structure that is responsible for doing so, resonates far beyond the island. More than 60 years ago, the musical West Side Story contained these bitter lines, sung by a Puerto Rican character: “Puerto Rico, you ugly island … always the hurricanes blowing.” The refrain that follows is “I like to be in America!” But today it is in America where the wind threatens to blow, hard.