Spectrum - Volume 20 Issue 04 September 18, 1997 - Hirsh presentation to subcommittee shows value of history

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Hirsh presentation to subcommittee shows value of history

Spectrum Volume 20 Issue 04 - September 18, 1997

Richard Hirsh, professor of history and science and technology studies, likes the fact that his historical expertise is of value in the "real world."

Hirsh was invited to give a presentation July 15 to the Virginia General Assembly's Joint Subcommittee Studying Electric Utility Restructuring in Richmond. His presentation provided a brief history of events leading to restructuring efforts being made in other state legislatures and in Congress. "I explained the technological, political, and economic assumptions behind regulation in the utility industry early in the 20th century and the events since then--especially from the 1970s to the present time--that have challenged the basic assumptions," he said.

Restructuring of the electric utility industry is occurring throughout the United States and the world, Hirsh said. "At one time, electric power was viewed as a `natural monopoly'--a business that tended toward monopoly because of economies in production or distribution of a product," he said. "In the utility business, electricity used to be produced most economically when only one vertically-integrated firm generated it. And only one company distributed power to customers to avoid duplication of facilities and wasted resources. To deal with possible monopoly excesses, however, state governments started regulating investor-owned utilities, beginning in 1907. Through regulation, it was hoped, the benefits of monopoly would accrue to customers."

Starting in the 1970s, however, the rationale for regulation started to wear thin, Hirsh said. The large steam turbine generators that previously showed economies of scale then became uneconomical. And they no longer proved more able to convert fuel into increasing amounts of electricity. However, motivated by a 1978 federal law passed in the wake of the energy crisis, non-utility companies used small-scale "co-generators" (units that produced electricity as a by-product of making steam for industrial processes) and small-scale gas-burning turbine generators to produce power more cheaply than could regulated utilities.

"This fact made people question one rationale for regulation of the utility business--especially the generation aspect of it," Hirsh said. "If non-utility companies could produce power more cheaply than regulated utilities, then natural monopoly does not exist any more and neither is there a reason to regulate companies."

Other events stimulated efforts at deregulation and restructuring, Hirsh said, such as the high cost of utilities' power plants and the general attitude, becoming popular in the 1970s, that market forces rather than regulation could be more efficient for allocating resources, encouraging innovation, and providing good customer service. A 1992 federal law, responding to the Gulf War's disruption of oil supplies, also encouraged less regulation in the electric-power industry and more reliance on market forces.

Hirsh said states have begun pilot programs, have passed laws restructuring the business, or are studying ways to introduce more market forces into a formerly regulated industry. Many people are concerned that restructuring could increase rates for some customers and cause severe environmental damage, Hirsh said. The Virginia State Corporation Commission and members of the legislature have begun studying restructuring, and they are concerned about the many possible consequences of restructuring. "Perhaps most importantly," he said, "they wonder whether customers will benefit in a state where rates are already lower than the national average."

Hirsh's presentation led off a day of discussion on restructuring. Members of the State Corporation Commission are moderating working groups of various parties interested in restructuring around Virginia.

Hirsh has been working on the recent history of the electric-utility industry since 1980. In 1989, he published his first book on this subject, having published an earlier book dealing with another topic. The 1980 book, Technology and Transformation in the American Electric Utility Industry , was published by Cambridge University Press and dealt with the managerial and technological forces that altered the utility business from World War II to around 1980.

In addition to this research, Hirsh has spoken often at utility conferences about the industry's history. He and Virginia Tech alumnus Adam Serchuk taught a one-day short course in May 1997 on electric-utility restructuring through Virginia Tech's Energy Management Institute in the mechanical-engineering department. Because of the success of that course, Hirsh and Serchuk will teach it again in October in Richmond.