ABA INFRASTRUCTURE AND REGULATED INDUSTRIES SECTION

infrastructureVol. 57, No. 2, Winter 2018 A Century Plus of Power and Light By Casey Wren, Mark Strain, and Everett Britt

n September 4, 1882,1 the great Thomas Edi- son’s new business venture, Edison Illuminating Company, commenced operation of the first O 2 commercial central power plant in the world. Edison named it the Pearl Street Station because it was located at 255–257 Pearl Street in the downtown financial dis- trict of Manhattan. The plant ran on coal and could illuminate up to 1,400 incandescent light bulbs con- tinuously using direct current. History does not tell us whether there were lawyers stand- ing beside Edison when the Pearl Street Station commenced opera- tions. We do know, however, that bankers were present, for it is said that Edison inaugurated his commer- cial electric service by gathering the press and publicly switching on the 1882, some five years before Nikola Tesla, working with lights in the office of his financier, George Westinghouse, developed an induction motor J.P. Morgan.3 The electric current that that ran on current reversing its direction many times a Casey Wren the Pearl Street second—what would become known as alternating cur- Station supplied rent. While electrical lighting that ran on direct current was, for reasons was itself a great thing, it was the electric motor running of primitive tech- on alternating current that would become the muscle of nology, limited to mankind.4 illuminating Edi- In the early decades of the twentieth century, the son’s light bulbs, rapid commercialization of electricity would trans- thus the name form the way people lived, the industry that Edison Edison Illumi- created would transform the practice of law, and the nating Company. distribution of electricity would come to be seen as an This was, after all Mark Strain Everett Britt essential public service. Even at this early date, over 100 years ago, the leaders of the new industry had a Casey Wren ([email protected]) is a partner with Duggins need for lieutenants who could supervise increasingly Wren Mann & Romero, LLP in Austin and chairs the Electricity narrow and specialized forms of work, including legal Committee. Mark Strain (mstrain@dwmrlawcom) and Everett services. For the electric industry, bond lawyers created Britt ([email protected]) are also partners with Duggins the first open-ended mortgages to finance the phenom- Wren Mann & Romero, LLP. enal growth of capital, political lawyers were necessary

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 1 intermediaries between the growing industry and the “regulatory compact” for private electric utilities mod- state, and labor lawyers mediated the often contentious eled somewhat on state and federal regulation of relationships between management and the emerg- railroads. He did so in a famous speech he gave in ing unions. Among the legal specialties required and Chicago on June 7, 1898, before the National Electric most valuable, however, were the public utility admin- Light Association (now the Edison Electric Institute). istrative lawyers, who dealt with the various regulatory The speech began with Insull’s highlighting the advan- authorities that almost all states established in the first tages of private ownership of utilities compared to two decades of the twentieth century to supervise municipal ownership and with a criticism of munici- the accounting, financial, territorial, and rate aspects pal regulation.7 However, the next part of the speech of electric utility service. In the 1880s infancy of the must have surprised Insull’s audience of utility manag- industry, however, there was hardly a need for such ers and entrepreneurs. For having just questioned the specialized talent, legal or otherwise. Electric utility competence and trustworthiness of municipal legislative service was expensive and dominated by residential bodies, Insull went on to say that competition was not lighting service. Electric service was, in other words, the answer and that what was needed was a regulatory something of a luxury service and available primarily compact—that is, a state grant of a monopoly franchise to the wealthy. to power companies in exchange for cost-of-service reg- ulation of pricing. Insull and the Business Model of Affordable Electric Power It is not surprising perhaps that Insull’s idea in 1898 If Edison was responsible for creating “light” technology of rejecting competition in favor of a state regulatory and Tesla and George Westinghouse were responsible compact would have considerable appeal. There was the for inventing “power” technology, it was another person, personal authority his argument carried by virtue of his Samuel Insull, who more than anyone was responsi- accomplishments and leadership of the fledgling indus- ble for the business model that made light and power try. But this was not all. This was the beginning of the affordable. Insull saw that reducing electric rates was Progressive Era. Many progressives believed that gov- the critical path to growth and profitability. In his own ernment regulation at the state and federal levels could unique way, Insull was the Jeff Bezos of his day, and curb the abuses of monopoly power and municipal his company, Chicago Edison, his Amazon. Insull real- corruption and thereby mediate commercial arrange- ized that he could not achieve the necessary economies ments between powerful corporations and the consumer of scale to offer cheap service because of the multi- in a scientific and professional manner. In 1908, Wis- ple competing franchises and private competitors that consin and New York became the first two states to fractured the potential customer base and made plan- establish regulatory authorities to supervise electric util- ning and financing of large capital-intensive plant both ities. By 1917, when the Public Utility Section (now, extraordinarily difficult and risky. When Insull arrived the Infrastructure and Regulated Industries Section) of in Chicago in 1892, Chicago Edison had over thirty the American Bar Association was formed, forty-three competitors. Municipal regulation, moreover, was incom- more states had followed the example of New York and petent, if not corrupt, so that a non-exclusive municipal Wisconsin.8 As early as 1917, most progressive intellec- franchise was not the solution to exploiting scale but tuals believed that the basic organization of the new rather part of the problem.5 Insull was also the first per- state agencies and the principles of regulation had been son to appreciate that the capital-intensive nature of mostly settled. Writing in the Michigan Law Review in the business had certain pricing and marketing conse- 1917, Professor Edwin C. Goddard stated: quences, primarily due to the fact that electricity could not be stored. Insull realized that the night-time “peak- “And so it comes to pass that now, after about ing” nature of residential lighting service needed to twenty-five years of experimentation, we have a be complemented with extremely low rates for certain pretty well defined field of public service prob- industrial and commercial applications, like electric rail- lems, and an elaborate and measurably well ways, that had a steadier and more consistent use for adapted organization of commissions, with expert electricity throughout the day. The resulting load diver- lawyers, engineers and economists, working under sity that Insull pioneered improved profits and lowered a body of fairly well understood principles. . . . rates. It is noteworthy in this regard that the basic price It is also to the public interest to assure, as far as of Insull’s power fell from 20 cents per kWh in 1892 to possible, to the investor in public utilities, a return 2.5 cents by 1909.6 on what is really put into the utility, in good faith and with prudence and good judgment.”9 The Regulatory Compact and Early Principles of Regulation For lawyers and the regulatory paradigm they would In fact, looking back, it is amazing to observe to help define, perhaps the most significant of Insull’s what extent and how fast the basic principles of pub- early achievements was his popularizing the idea of a lic utility regulation had been established by 1917.

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 2 But as we know, not everything established one day experts who championed the virtues of central planning. is settled the next, and so for the next 100 years the In 1917, American Electric Power had built the first big regulatory compact has evolved, sometimes slowly mine-mouth power plant, called Windsor Plant, at the and sometimes, due to crises and market disruptions, Windsor Coal Mine in West Virginia. The company built rapidly. Notwithstanding Professor Goddard’s confi- the first long-distance transmission line to take power dence that the principles of the regulatory framework from the Windsor Plant to Canton, Ohio, fifty-five miles were well understood circa 1917, it would take almost away.10 As the technology of transmission continued to thirty years to resolve the utility valuation issue in set- improve throughout the 1920s, it became possible to ting rates; within that thirty-year timeline, many new imagine the expansion of power to impoverished rural issues would emerge in need of answers, such as: communities. During this same period, mergers and con- • Are state regulatory authorities in a position solidations reduced the number of electric utilities and to regulate sprawling, interstate electric utility vastly expanded the reach of single utility owners and empires? talented management. The public utility holding com- • How is the state to ensure universal electric ser- pany form of organization facilitated the merger boom. vice, especially for those living in poverty in rural Insull’s holding companies alone would eventually pro- America? vide service in thirty-two states and • Is there a need for federal con- account for one-eighth of the nation’s trol over utilities? total output of electricity and gas.11 • If so, what is the nature of that Samuel Insull, The success and reach of new control relative to the states? electric technology, such as long-dis- • And is there a danger of “regula- more than anyone, tance, high-voltage transmission lines, tory capture” by the utilities? would fuel concerns about monop- Beyond these matters of pub- was responsible oly power. The new technology, as lic policy were issues that remain well as the widespread presence unsettled today, such as alterna- for the business of underserved rural communities, tives to administrative control over caused some reformers to tout the pricing and market entry, and ques- model that made advantages of more social control tions regarding the alignment, or over the electric utility industry. The lack thereof, of utility incentives and light and power reform movement had a name, “Giant regulatory and market designs with Power,” and it was not above using social concerns such as the environ- affordable. scary rhetoric to make its point: ment. Separate and apart from the question of administrative control “Combinations of power compa- over pricing and market entry— nies . . . have raised in the public and what would come to be called mind the fear of an all-powerful “externalities”—there were then monopoly—a monopoly which (though unrecognized), as there has been pictured for the future as are to some extent today, impor- “reaching into every household” tant questions concerning how and “dominating the industrial life government should mediate appro- of the nation.”12 priate risk, leverage, and disclosure concerns for the electric power com- The reform movement enjoyed panies that perform vital public services. Finally, as we some prominent leaders, none more so than Gover- shall see, some sixty years after Professor Goddard’s nor Gifford Pinchot of Pennsylvania. In 1924, Pinchot article appeared, market disruptions and the prudent wrote a three-page pamphlet called “Giant Power,” utility standard that he mentions would transform the promoting the societal planning of utility systems lim- electric utility industry and set the stage for a funda- ited only by technical considerations.13 One year later, mental rethinking of the regulatory compact. in 1925, the Power Survey Board of the Pennsylva- nia General Assembly issued a report at the behest Giant Power and the Federal of Governor Pinchot. Among other things, the report Power Commission criticized utilities for maintaining an unreasonable And so, notwithstanding the optimism of the Progres- disparity in electric rates between commercial and res- sives, the decades after 1917 were far from a time of idential customers. The report also blasted utilities stability and political and regulatory consensus. Tech- for not extending service to rural America and urged nology broadly increased the operational footprint of “the rescue of the regulation of electric service from utilities and fired the imaginations of politicians and the deconstruction now threatened by its conversion

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 3 into interstate commerce.”14 For those like Gover- Insull was brought to trial in October 1934 on charges nor Pinchot holding to the belief that federal action of mail fraud. On November 24, 1934, the jury retired was urgent, the U.S. Supreme Court added fuel to the and after two hours of deliberations announced their fire. In Public Utilities Commission of Rhode Island verdict of not guilty on all charges. In 1935, Insull was v. Attleboro Steam & Electric Co., the Supreme Court acquitted of state and federal charges of embezzlement. held that states were constitutionally prohibited from Insull’s biographer, Forrest McDonald, summed up the regulating power that was produced in the state but meaning of the verdicts thus: “For his fifty-three years sold across state lines.15 President Hoover eventually of labor to make electric power universally cheap and took action in response but did not fill the regulatory abundant, Insull had his reward from a grateful people: gap. In 1930, he proposed that Congress create a full- He was allowed to die outside prison.”19 time, independent Federal Power Commission (FPC). The result was the Federal Power Act of 1930, which Depression Era Reforms Frame a established the FPC as a five-member, bipartisan body Changing Regulatory Scope appointed by the president with the advice and con- Much like the early twenty-first century Enron scan- sent of the Senate.16 But the powers and duties of the dal, the Insull scandal created headlines in newspapers FPC were limited and in the view of across the country and changed progressives, ineffectual. attitudes about electric power regula- tion. Franklin Roosevelt campaigned Stock Market Crashes and a Man for president in 1932 as a champion Without a Job of public power.20 In a campaign For electric utility lawyers, the politi- address on “Progressive Govern- cal skirmishes and controversies of “Well, gentlemen, ment” at the Commonwealth Club the early 1920s did not much change in San Francisco on September 23, the practice of law. But then, the here I am, after 1932, Roosevelt famously vowed deepest depression of the 20th cen- to fight “the Ishmaels and Insulls, tury struck the United States with a 40 years a man whose hand is against everyman’s crash in the stock market in October . . . ”21 Roosevelt won the election 1929. In the immediate aftermath of without a job.” in a landslide, but he did not pro- the stock market crash, many electric ceed to nationalize the electric utility and gas utility businesses continued industry, as some had feared. Instead, to expand and prosper. With a grow- —Samuel Insull in 1935 Congress passed a series of ing business, Insull, for example, landmark legislation that fundamen- continued to raise capital to finance tally changed the regulatory scope of expansion, using mostly debt because the electric utility industry and trans- of dysfunctional equity markets. How- formed the practice of utility law: ever, in 1930, Insull made the mistake • Public Utility Holding Company that would seal his fate and, in its Act of 1935 (PUHCA)22— PUHCA ripple effects, vastly expand the prac- was intended to ensure that finan- tice of utility law. That summer Insull, cial arrangements like Insull’s would using a portfolio of stock in his own never be allowed to exist again. The companies as collateral, borrowed meat of the Act required electric util- heavily from Chicago and New York ity holding companies to register banks to finance the purchase of Cyrus Eaton’s stock with the Securities and Exchange Commission and interests in Insull’s businesses.17 The bankers had urged to operate in a single state or, if operating in more the purchase, knowing that Insull distrusted Eaton and than a single state, to operate as a single integrated viewed him as something of a corporate raider. system. In September 1931, England went off the gold stan- • Federal Power Act of 193523—The 1935 Act closed dard, and the stock markets again collapsed. With the the regulatory gap that the Supreme Court had cre- collapse of the markets, Insull’s portfolio of stock col- ated in Public Utilities Commission of Rhode Island lateral fell under water and the bankers moved in for v. Attleboro Steam & Electric Co. by expanding the the kill. After a brief fight to survive, Insull acceded to FPC’s jurisdiction to include rates and market entry the demands of the bankers. On June 6, 1932, Insull in connection with the transmission of power in dictated and signed papers resigning from over sixty interstate commerce and the sale of power for corporations. Afterwards he had a single sentence resale. statement for the press: “Well, gentlemen, here I am, • Rural Electrification Act—President Roosevelt after 40 years a man without a job.”18 issued Executive Order 7037 in 1935 establishing

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 4 the Rural Electrification Administration (REA), and Atomic Energy Act of 1954, which permitted for the first Congress followed by enacting the Rural Electrifi- time the broad use of atomic energy for peaceful appli- cation Act in 1936.24 The REA provided federally cations. Consistent with the optimism of the period, guaranteed loans to public agencies and coop- Atomic Energy Commission Chair Lewis Strauss, in a eratives for the construction of electrical supply 1954 address to science writers, famously predicted that infrastructure in rural regions.25 nuclear energy would become “too cheap to meter.” The This legislation created for the first time the need for meaning and context of that phrase would be much dis- a federal electric utility practice, focusing on administra- puted over the years, with Strauss’s defenders explaining tive law and the intricacies of compliance with PUHCA that the chair was referring to fusion technology, not fis- and wholesale power regulations. Meanwhile, the rapid sion technology, and that in context he did not intend to proliferation of electric cooperatives expanded the pub- suggest that meters would go the way of the horse and lic utility practice in the states by creating hundreds of buggy industry any time soon. new entities in need of legal representation. The post-World War II era also saw the beginnings of regulatory dysfunction in the fuel markets, which ironi- The “Golden Age” of Electric Utilities cally enough created a dramatic expansion in legal work The early 1940s brought world war for public utility lawyers. In 1954, the but relative peace between private Supreme Court ruled that natural gas industry and public power advo- producers that sold natural gas in cates as America united to win the In 1935, Congress interstate commerce to pipeline com- war. After the war’s end, the SEC panies are “natural gas companies” finished the work of divesting util- passed a series of and therefore subject to the regu- ity holding companies. By 1948, the latory oversight of the FPC.29 This number of subsidiaries that holding landmark legislation meant that wellhead prices would be companies controlled fell from 1,983 regulated as public utility rates under to 303.26 The electric utility indus- that changed the the “just and reasonable” standard, try then entered a golden age that much the same as for natural gas that would last until the early 1970s— regulatory scope interstate pipelines sold to local dis- “an age of build and grow.” In this tribution utilities. The decision caught period of prosperity and stability, of the electric industry and its lawyers by surprise, however, new legal specialties none- and it would have a far-reaching theless emerged. Economies of scale utility industry. impact on the electric utility industry. and improvements in plant efficiency Faced with the Supreme Court’s man- served to accelerate the reduction in date to set the price of fossil fuels, the cost of electricity and the rates the FPC experimented with different customers paid.27 Transmission sys- forms of price control for produc- tems also became more efficient in ers of natural gas over the next two moving power, allowing utility com- decades.30 These various methods panies to pool their power systems, for setting “just and reasonable” rates which enabled them to reduce fuel had two things in common. First, costs by dispatching the most fuel- each relied on the cost of providing efficient plant regardless of the owner the service, rather than the mar- of the plant. The increased inter- ket value of that service, to establish connectivity of the grid also enhanced the reliability of the regulated price of production. Second, no matter customer service by allowing utilities to back each other what the methodology, the price the FPC set was often up during emergencies. All of this created the need for below market value as measured by what economists utility lawyers to handle the increasing regulatory work refer to as the opportunity cost of producing natural occasioned by the proliferation of interstate wholesale gas. The result took some twenty years in coming, but transactions and their impact on retail rates.28 in the delay it was no less consequential in its effect: Even more consequential for the utility bar, perhaps, uncertain, changing, and inaccurate price signals fol- was the development of nuclear power. Hiroshima and lowed by disruptive changes in fuel markets and power Nagasaki demonstrated the horror and the power of plant investment metrics. By the 1970s, the industry had nuclear weapons, as well as the vast potential of nuclear entered a period of crises. fission as a source of electric power. In the early 1950s, national pride and a fear of falling behind opened the The 1970s: Opportunities and Crises door for the commercial development of nuclear power The decade of the 1970s began, however, with new stations by private industry. Congress adopted the opportunities for the electric utility bar premised on the

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 5 twin hopes that new environmental legislation would Act encouraged utilities to burn the more environmen- clean up the air and water pollution that industry had tally friendly crude oil that was produced overseas. caused and that nuclear power would provide a new, However, the screw began to turn in 1971, when the low-cost, and clean resource to significantly reduce pol- FPC, concerned with dwindling reserves of natural gas, lution. In 1970, President Richard Nixon created the raised price ceilings in an effort to stimulate produc- Environmental Protection Agency to fix national guide- tion. Then the OPEC oil embargo from October 1973 to lines for environmental protection and to monitor and March 1974 caused sharp increases in the price of fossil enforce them,31 and in the same year, on April 22, 1970, fuels and disruptions in supply. Five years later, in 1979, the first Earth Day demonstrations were observed. Sen- a second shock occurred in the wake of the revolution ator Gaylord Nelson of Wisconsin was the inspiration in Iran and the hostage crisis. Crude oil prices again for the first Earth Day, which in keeping with the early rose sharply with more supply disruptions. civil rights and antiwar demonstrations, he conceived At the time of these disruptions, crude oil and nat- as a consciousness raising teach-in.32 Barry Commoner, ural gas were substitutes for each other, with both Paul Ehrlich, and many other notable environmental- being capable of fueling the production of electric- ists spoke at different locations throughout the country. ity, so that the opportunity cost—the market value—of Echoing today’s climate change natural gas increased with the price debate, the speakers emphasized that of oil. Natural gas prices increased the issue was a matter of survival and especially sharply in the intrastate that time was running out. CBS news- The emerging markets, which the Natural Gas Act caster Walter Cronkite, the nation’s did not reach and did not control. preeminent anchor at the time, hosted fuel crises of the The upshot was that gas sold in the an hour-long special that night, “Earth interstate market became scarce as Day: A Question of Survival.” The 1970s were as producers withheld their supplies program opened thus: from the price-controlled interstate momentous to the market and sold to intrastate pipe- Professor Barry Commoner: This lines that could pay unregulated planet is threatened with destruc- utility industry as prices. In response, the FPC ordered tion and we who live in it with pipeline companies doing business death. The heavens reek, the new environmental in interstate commerce to adopt cur- waters below are foul, children die tailment plans to ration the use of in infancy, and we and the world legislation. natural gas. Electric utilities, however, which is our home live on the were given the lowest priority among brink of nuclear annihilation. We users of natural gas because other are in a crisis of survival.33 customers of natural gas pipelines, such as local natural gas distribution It is said that an estimated twenty companies, had no alternative ways million people gathered at the Earth to serve their customers; electric utili- Day teach-ins.34 On the CBS broad- ties that lacked access to intrastate cast, however, Cronkite reported that supplies of natural gas were forced the gatherings did not attract the to find alternative fuels in a crises broad cross-section of America that environment. its sponsors wanted,35 a reference The electric and natural gas perhaps to the fact that the participants were mostly public utility bar was on the front lines of the contro- anti-war and anti-Nixon youth. Regardless, Earth Day versies that would ensue. At the time, many scientists was a tremendous success. In 1972, Congress adopted and other professionals were predicting an age of pro- the Clean Water Act36 and the Clean Air Act.37 found scarcity in which oil and gas would soon become However, the emerging fuel crises of the 1970s were unavailable on reasonable terms. Industry saw nuclear as momentous to the utility industry as this new envi- power and coal as the best, if not the only option, ronmental legislation. Responding to incentives created to keep the lights on and keep up with the growing by federal regulation, in the late 1960s and early 1970s, demands for electricity that industry anticipated. Accord- the electric utility industry increased its utilization of ingly there was a rush to order new nuclear and coal crude oil and natural gas to produce electricity. What plants, which gained additional impetus when Congress was once a source of peaking power, price-capped nat- adopted the Fuel Use Act (1978)38 with its prohibi- ural gas was being used more and more broadly so that tion on new power generators using natural gas except usage of gas doubled from 10 percent to 20 percent of as a peaking resource. Rates for the average residen- electricity production. In the same way, the Clean Air tial customer doubled from 1969 to 1977 and continued

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 6 increasing at rapid rates, due in part to rising costs but weak Gerald Ford succeeded him. Nixon’s last Attorney also due to lower usage of electricity and the resulting General, William Saxbe, was persuaded that the AT&T distribution of fixed costs over fewer billing units. The lawsuit had merit. On November 24, 1974, when Pres- latter especially shocked industry and regulators because ident Ford was on a visit to Japan, the DOJ filed the up until the mid- to late-1970s most everyone believed lawsuit. Apparently, President Ford had not been briefed the demand for electricity was fairly unresponsive to or given advance notice of the filing.41 price changes. Of course, we understand today as we did in 1974 As electric rates increased, however, the industry was that telecommunications and electric service are two surprised by the efforts that customers made to curb very different industries with different antitrust issues. consumption.39 The country had entered a new cultural Nonetheless, the biographies of Alexander G. Bell and world where, increasingly, small was beautiful and con- Thomas A. Edison and the industries they created are servation was chic. In what would become a symbol of similar in many respects. Bell was an inventor like Edi- the time, President Carter, wearing a sweater, famously son. Bell organized AT&T in 1885; just three years urged Americans to turn down their thermostats. The earlier, Edison flipped the switch on his Pearl Street Sta- lower growth rates and higher costs of electric service tion. The famous Menlo Park laboratory of Edison is would lead to all sorts of controver- said to have been the model of the sies in the 1980s regarding imprudent equally famous Bell Labs. Having planning of utility generation and started their own transformative per- excess capacity. Nuclear prudence As electric rates sonal commercial revolutions in the proceedings would go on for months 1880s, both were succeeded by entre- and even years as regulatory authori- increased, the preneurs who grew the business and ties and customers resisted the price exploited the technology they created increases. But the resistance would industry was under the protection of a regulatory also trigger new legislation and compact and with the assumption the beginnings of deregulation and surprised by of a natural monopoly. More impor- restructuring of the electric industry. tantly, the industries they invented the efforts that still enjoyed tremendous prestige in The DOJ Lawsuit Against AT&T: the early 1970s after a near century Nothing is Sacred customers made to of productivity gains and consistently In the electric industry, restructuring lower and lower costs of service and would expand the practice of pub- curb consumption. commercial progress. Thus the AT&T lic utility law, not shrink it as some lawsuit was a shock and a signal that feared. Restructuring of the electric changes were not only possible but and natural gas pipeline industries would be forthcoming. Nothing is was borne of restructuring reforms sacred, least of all in the commercial in other infrastructure industries. world of free societies.42 In April 1974, MCI filed an antitrust lawsuit against AT&T because the “Marginal Costs with Wings” communications monopoly refused In 1976, two-and-a-half years after to provide MCI’s telecommunica- the AT&T lawsuit was filed, Jimmy tions network reasonable access to Carter was elected president. In one the local networks of the Bell Oper- of his early acts, Carter appointed ating Companies. The lawsuit had been in the works Alfred Kahn, the former chair of the New York Public for some years because new technologies had lowered Service Commission, to be head of the Civil Aeronau- the technological barriers to entry by would-be com- tics Board. Kahn was a former economics professor petitors to the Bell System.40 Throughout the spring of and a vocal supporter of deregulation. The academic 1974, the Department of Justice had been exploring its in him had little patience for politics or tradition, and own antitrust lawsuit against AT&T. The DOJ attorneys he believed in seeing the big picture. Even though that anticipated that AT&T would urge that such a lawsuit picture was often abstract, he had a great wit. He once was not in the public interest and that consumers had referred to airplanes as “marginal costs with wings.”43 been well served by AT&T and the monopoly status that Later in the Carter administration, he would refer to protected it from competition, i.e., the regulatory com- the economic bad times as a “banana,” having been pact. The attorneys for the DOJ also assumed that the admonished to never refer to an economic downturn Department would never obtain the political support to as a depression. To the great shock of the establish- file such a momentous action. In August 1974, however, ment, Kahn engineered the deregulation of the airline President Nixon resigned from office, and the politically industry. Although Kahn would later claim his role in

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 7 deregulation was exaggerated and that others, includ- disruptions in the supply of fuel to electric utilities, in ing President Ford and Stephen Breyer, deserved equal its simplest and most direct form, PURPA was intended credit, another brick had fallen from the walls that pro- to reduce and conserve fossil fuel costs; utilities would tected the natural monopoly industries. Before Carter reduce their consumption of fossil fuels by buying more left office in 1980, two more bricks would fall, these fuel efficient PURPA power instead of dispatching their with a more direct and significant impact on the electric own units with higher fuel costs. At the time, the QFs utility industry. The Natural Gas Policy Act of 1978 pro- were not widely seen as avoiding the long-term, fixed vided for the immediate deregulation of some supplies capital cost of new generation. of natural gas, such as “new” gas, and it provided for a All of that was about to change. The petrochemical phased, seven-year deregulation of certain other sup- and refining industries had some experience building plies of natural gas. Two years later, the Staggers Rail large-scale generation for self-use. They were good at Act of 1980 deregulated the American railroad industry it. These industries looked at the economics of power to a significant extent, replacing the regulatory structure plants and quickly discovered that they could build that had existed since the 1887 Interstate Commerce Act. very large-scale cogeneration units, sometimes deroga- tively referred to as “PURPA Machines,” that would meet The FPC becomes FERC, and PURPA the efficiency standards of FERC. As Makes Waves the QF industry saw things, com- For the electric industry and its utility pensation should be premised on lawyers, the oil embargo, fuel short- For the electric investment costs avoided by the util- ages, and sharp price increases had ity rather than just short-term avoided changed everything. The public was industry, the fuel costs—even though PURPA demanding action, and President power was arguably no substitute for Carter was committed to the ideas oil embargo, utility-controlled generation because of conservation and energy security. oftentimes the PURPA power was Most boldly, the Carter administra- fuel shortages, non-firm and unscheduled and it tion wanted to make the regulatory could not be freely dispatched when functions of the FPC subject to the and sharp price needed to serve electric load. The QF control of the executive branch. This business model, however, was greatly was too much for Congress, but the increases changed advantaged by some fundamental agency’s name was changed to the changes in markets. Federal Energy Regulatory Commis- everything. sion (FERC). The End of the Golden Age In 1978, Congress adopted the It had always been understood that Public Utility Regulatory Policies nuclear and coal plants were more Act (PURPA), which appeared at the expensive to build than natural gas time to be a fairly modest piece of or oil plants. During the fuel cri- legislation. The intent was to pro- ses of the 1970s, however, nuclear mote energy efficiency and the use power and coal plants had been con- of domestic energy. It did so, how- ceived as cost effective, despite this ever, by opening the electric grid cost disadvantage, by avoiding the for the first time to non-utility gen- expensive, unreliable, and dwindling eration, with utilities required to supplies of fossil fuels involved in purchase power at a price no greater than the utility’s operating a natural gas or oil-fired electric plant. Even if “avoided cost.” To effectuate the must-buy obligation, it were assumed that fossil fuels would continue to be PURPA identified two classes of non-utility generators, available—an assumption contradicted by the Fuel Use called Qualifying Facilities (QFs), for special, preferen- Act in 1978—it was believed that the fuel savings from tial treatment. In the first category were “small power operating nuclear and coal plants compared to the fos- production” facilities, which operated on renewable sil fuel costs of oil and gas generation would “pay for” fuels like hydro, wind, solar, geothermal, municipal the incremental capital costs of nuclear and coal power. solid waste, or landfill gas. In the second category were With the benefit of time, this belief proved to be an cogeneration facilities, which were industrial facilities epic mistake. On January 29, 1981, President Reagan that, consistent with certain efficiency standards that lifted the last price controls on oil. Two years later, he FERC (successor to the FPC) established by rule, com- announced the accelerated deregulation of all catego- bined the production of electricity from a petrochemical ries of natural gas to be completed in 1986. Meanwhile, or other industrial facility with the production of steam. the proliferation of nuclear and coal plants and the lin- Bearing in mind that the 1970s saw multiple crises and gering effects of high prices and a sluggish economy

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 8 had curtailed the demand for oil and gas. The FERC for rate cases with grave and potentially crippling financial its part eliminated the practice of “rolled-in” pricing of consequences on utility shareholders and customers. natural gas at the retail market, so that new gas sup- Thus, much of the electric utility industry lost prestige plies had to stand on their own value rather than being and the confidence of the public and state regulatory averaged with historically low cost, price-controlled vol- authorities in the 1980s. The outcome was a rethinking umes of gas. With the end of price controls, there was of utility planning and ratemaking and, in many states, a so-called “glut” of oil and the shortage of natural gas the adoption of integrated resource planning and so- vanished. called performance-based ratemaking. The era of “build The changing fuel landscape and lower cost of capital and grow” in the Golden Age was officially buried as borne of lower inflation was a boon for natural gas- conservation, load control, demand side management, fired electric generation facilities and the emergence of and energy efficiency took a featured place in utility an independent power industry. Power plants, like air- planning. planes, are “marginal costs with wings,” and so natural gas power plants took flight. The lift came at precisely PURPA’s Offspring: Independent Power Producers and the wrong time for utilities attempting to convince regu- Renewable Energy latory authorities to put their new and PURPA gave birth to the indepen- very costly nuclear and coal power dent power producer—a private plants in rate base. As interest rates generation-only company with no fell along with fossil fuel prices, the Power plants, ownership of wires and functioning capital-for-fuel trade off involved in independently of the electric utility. constructing coal and nuclear plants like airplanes, The success of large scale “PURPA began to look, at least in hindsight, Machines” demonstrated that there increasingly improvident. are “marginal were no scale barriers to entering On March 28, 1979, the Three the power generation business. Per- Mile Island (TMI) Unit 2 reactor, near costs with wings,” haps as important, the success of the Middletown, Pennsylvania, partially power generation developer allowed melted down. A combination of mis- and so natural regulators to separate in their minds takes and equipment failures caused and in the regulatory model the the TMI accident. In its wake, public gas power plants power generation function from the fear and distrust of utilities in gen- transmission, distribution, and sales eral and nuclear power in particular took flight. functions of providing electric ser- reached crescendo levels. The regu- vice. Until then, most private utilities lations and oversight of the Nuclear were vertically integrated on the Regulatory Commission became assumption that one company could broader and more robust, and the produce and deliver power more management of the plants and their efficiently and economically by pro- construction was scrutinized more viding all four functions of electric carefully. Public utility lawyers found service: generation, transmission, dis- themselves in lengthy and com- tribution, and retail sales. The PURPA plicated administrative hearings to experience, along with the success- obtain operating licenses for nuclear ful restructuring of the natural gas power plants that had been under pipeline industry into functionally construction for a decade with billions of dollars of sunk separate production, sales, and transportation compo- costs. One of the first responses to TMI on the state nents, established that electric utility functions could be level came from the Pennsylvania Public Utility Com- separated as well, and so challenged the business neces- mission, which issued an order on May 23, 1980, finding sity of the vertically integrated utility. Accordingly, many that Unit 1 of TMI was not “used and useful” in the pub- in and outside of industry conceived that the funda- lic service and should therefore be removed from the mental regulatory compact of the electric utility industry rate base of the utility. More generally, in the post-TMI needed to be re-evaluated. decade, changing safety designs for nuclear power pro- In the same vein, PURPA’s creation of a privileged sta- longed the construction of power plants and doubled or tus for the small power producer that used renewable tripled their cost. energy lit a fire of entrepreneurial ambition under that All of that was happening as growth in electricity industry. Indeed, it could be said that PURPA gave birth demand slowed dramatically and the changing fuel mar- to the renewable energy utility bar. Although today we kets and interest rates turned the economics of power think of renewable energy as the cornerstone of climate on its head. For utility lawyers, there were numerous change policies, in reality PURPA had nothing to do with

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 9 climate change. If anything, in North America, the 1970s granted exemptions to PUHCA, so they could spread had been a period of cool temperatures with alarmist far and wide geographically with few, if any, limits on reports of a coming ice age. Time and Newsweek maga- corporate structure or leverage. The renewable energy zines, among others, famously published articles about industry received a boost of its own with the adop- “ominous signs” that Earth’s weather patterns had begun tion of a production tax credit in 1992, the first of what to change and the planet was cooling. Four years before, would be many incentives to follow. Many state regula- in 1971, two researchers at NASA’s Goddard Institute tory authorities supported the new wholesale markets published a paper in Science warning that increas- and even began to investigate the possibility of retail ing concentrations of aerosols in the atmosphere may competition. be sufficient to reduce the Earth’s atmosphere enough In the wake of restructuring, the need to manage and “to trigger an ice age.” In 1975, however, a preface to a schedule the wheeling of power between remote enti- National Academy of Science report, “Understanding Cli- ties and purchasers of power while maintaining the mate Change, A Program for Action,” would cast doubt integrity of the grid created the need for regional Inde- on the fears of a new ice age. The preface stated: “[W]e pendent System Operators (ISOs), sometimes referred to do not have a good quantitative understanding of our cli- as Regional Transmission Organizations (RTOs). For the mate machine and what determines federal interstate grid, FERC created its course. Without the fundamental seven regional RTOs, while Texas, understanding, it does not seem possi- enjoying the only intrastate grid in ble to predict climate. . . .”44 the lower forty-eight states, created its By 1981, however, six years later, own ISO (the Electric Reliability Coun- the famous climatologist James Han- Many state cil of Texas [ERCOT]) and was allowed sen was lead author of a paper that to operate mostly independent of identified measured increases of regulatory FERC rules. Some states continued to atmospheric carbon dioxide and pro- experiment with performance-based jected global warming;45 in 1988, as authorities ratemaking, while controversies from head of NASA’s Goddard Institute, the 1980s involving stranded power he told Congress in a much publi- supported the plant costs and PURPA-pricing contin- cized appearance that human-caused ued. All these changes broadened the warming was a significant problem. new wholesale opportunities to practice “utility” law, In the same year, two United Nations which now seemed far too narrow a (UN) organizations, the World Mete- markets . . . word to define what electric industry orological Organization and the UN lawyers did. Environmental Program, established With the blossoming of the inde- the Intergovernmental Panel on Cli- pendent power producer, PURPA mate Change (IPCC). Two years later, began to lose much of its rele- the IPCC issued its 1990 Report,46 the vance except as a spur to renewable first of now five reports, predicting energy. To be sure, some disputes that, under the “business as usual” between utilities and QFs regarding scenario for emissions of greenhouse the application of avoided cost pric- gasses, the rate of warming over the ing would continue. These disputes, next century would exceed anything however, served as a reminder of seen in 10,000 years. After issuance the difficulties in administered pric- of the 1990 IPCC report, federal and state governments ing that many regulatory authorities and industry and regulatory authorities would adopt numerous laws participants hoped industry restructuring could avoid. and regulations to stimulate the development of renew- By the second half of the 1990s, the industry had able energy. undergone sweeping restructuring activity, including a movement by some states to develop retail compe- The 1990s: The Revolution Has Begun tition, the growing divestiture of generation plants by The wholesale market for electricity began to more traditional electric utilities, a significant increase in the fully emerge in the 1990s. In 1992, FERC gave inde- number of mergers among traditional electric utilities pendent power producers and QFs non-discriminatory and among electric utilities and gas pipeline compa- access to the national transmission grid so they could nies, large increases in the number of power marketers wheel their power as they saw fit to wholesale markets and independent generation facility developers enter- and utility customers outside of the service territory ing the marketplace, and the establishment of ISOs as of their local utility. FERC also broadened the scope managers of large parts of the transmission system. The of market-based rates. Power plant developers were 1995 Report of the Electricity Committee of the ABA

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 10 Public Utility, Communications and Transportation Sec- codified minimum characteristics and functions that a tion began transmission entity must satisfy in order to be consid- as follows: ered an RTO. Voluntary ISOs were formed in California (CAISO), the Southwest (SPP), the Midwest (MISO), the “The revolution has begun. During the past twelve Mid-Atlantic (PJM), New York (NYISO), and New Eng- months, the electric utility industry and its regula- land (NEISO), and, as indicated above, albeit outside of tors began ushering in the new era with varying FERC’s jurisdiction, Texas (ERCOT). degrees of caution. The industry appears to be headed for a near total restructuring, with the Fed- The 2000s: The Revolution Continues Despite Disruptions eral Energy Regulatory Commission (FERC or the The restructuring of the industry continued in the new Commission), state regulators, and industry partici- century, perhaps somewhat surprisingly in light of the pants all jockeying to have their say in determining two early century market disruptions involving California the ultimate shape of the industry. A number on the one hand and Enron on the other. The proximate of factions began to question seriously whether cause of the California events appears to have been the traditional, vertically integrated utility model basic defects in the regulatory model that California would or should survive the revo- used to restructure its electric indus- lution. The deconstruction of this try. In 1996, the California Legislature traditional model and the related restructured the industry with incum- advent of comparable open-access bent utilities being required to divest transmission has given rise to a generation.50 By design, under new host of related issues, such as allo- The restructuring and independent ownership, genera- cating responsibility for stranded tion would be subject to competition investment, the continued viability of the industry with power purchased and sold on of the obligation to serve, and the two exchanges and then passed on need for the Public Utility Holding continued in the to retail customers by the incum- Company Act (PUHCA) and the bent investor-owned utilities (IOUs). Public Utility Regulatory Policies new century, The rules of the exchanges, however, Act (PURPA). Contracts between discouraged hedging and long-term utilities and qualifying facilities perhaps somewhat contracting practices, resulting in a (QFs) continued to spawn litiga- wholesale market dominated by spot tion, because utilities recognized surprisingly . . . prices. To protect customers against that these often uneconomic con- volatile prices in the spot markets, tracts were hindering their ability California established bid caps in to compete.” the wholesale market. Retail prices were also deregulated but subject The revolution continued apace to a default price cap. Thus, Cali- in the late 1990s, when FERC issued fornia entered restructuring with a three orders that set the foundation market that would clear based on for “Open Access” competition. On spot pricing, but with bid caps in the April 24, 1996, FERC issued Order wholesale market and price caps in No. 888,47 a final rule that established the retail market that were designed the basic framework for electric to put the brakes on excessive price industry restructuring by requiring every transmission increases. owner to offer non-discriminatory, comparable trans- Numerous out-of-state independent power genera- mission service to others seeking such services over tion companies entered the new market by acquiring the its facilities. In conjunction with Order No. 888, FERC generation that the incumbent utilities were required to issued Order No. 889, requiring the posting of avail- divest. In early 2000, fuel prices spiked and wholesale able capacity on an electronic bulletin board, called prices followed, increasing beyond all expectations. The the Open Access Same-Time Information System, and result was to trigger the operation of the bid caps in the requiring Standards of Conduct that were modeled after wholesale market and a price squeeze on the IOU mid- similar regulations covering natural gas pipelines.48 dlemen that were subject to the retail price cap. As the And in 1999, FERC issued Order 2000,49 which required IOUs teetered on the edge of bankruptcy, payment con- that each public utility that owns, operates, or con- cerns spread among wholesale suppliers, and wholesale trols facilities for the transmission of electric energy in markets seized up. The out-of-state power generation interstate commerce make filings with respect to form- companies that had purchased the incumbents’ genera- ing and participating in an RTO. The Commission also tion were accused of manipulating the wholesale market

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 11 by engaging in such anti-competitive practices as with- market design (SMD).51 The proposed SMD, how- holding supplies. One of the out-of-state companies, ever, would have shifted more authority to the regional Enron, was accused of shutting down a critical natu- RTOs than some regions of the country supported. The ral gas pipeline and engaging in manipulative bidding SMD also introduced into the national policy conversa- and trading practices in the wholesale energy markets. tion such issues as real-time pricing, day-ahead pricing, Regardless of the cause, California suffered a critical transmission congestion pricing, and locational marginal shortage of electricity. The state experienced multi- cost pricing. All of this was too much for certain areas of ple large-scale blackouts, and one of the state’s largest the country, whose political leaders applied pressure on energy companies collapsed in bankruptcy. As bid FERC through their elected representatives in Congress. caps were eased to resolve the crisis, wholesale prices As 2005 approached, FERC suspended the SMD pending of electricity increased 800 percent from April 2000 to the expected adoption of federal legislation. FERC, how- December 2000. ever, would continue its reform efforts by more narrowly About a year later, the commercial face of natural pursuing adoption of SMD principles in a few regions of gas and electric deregulation, Enron, filed for bank- the country. ruptcy. Enron, like Insull’s Empire, was a victim of The anticipated federal legislation, the Energy Pol- leverage, a lack of transparency, icy Act of 2005, did not dramatically accounting irregularities, and even- restructure the industry as some had tually a crisis in confidence. Like hoped and others feared. The Act Insull’s Empire, the stock market The Energy Policy repealed PUHCA and allowed FERC had inflated the price of Enron’s to relieve utilities of the obligation stock premised on unrealistic growth Act of 2005 did to purchase power from QFs in cir- expectations. Executives, struggling cumstances where there was reason to meet those expectations, lev- not dramatically to believe the wholesale market was eraged the balance sheet to juice operating reasonably.52 The Act also earnings and increasingly engaged in restructure the offered tax and ratemaking incen- risky ventures. Executives were also tives for the development of bulk accused of hiding debt through so- industry as some transmission; addressed nationwide called off-balance-sheet financings. reliability standards in response to Ironically, the same accounting firm had hoped and the 2003 blackout that affected wide- that helped bring down the Insull spread areas of eight U.S states and Empire by questioning its accounting others feared. Ontario, Canada; and, for the first practices, Arthur Andersen, helped time, granted FERC siting authority bring down Enron and itself by sanc- for transmission located in so-called tioning what were said to be Enron’s national security corridors. The accounting irregularities. Neither Act also greatly enhanced FERC’s would survive the scandal. Just prior enforcement powers. FERC’s pen- to the scandal, Enron had become alty authority increased to $1 million the seventh largest corporation in the per day and, at the same time, FERC United States. Once Enron lost the was granted authority to impose per- confidence of the markets, the com- sonal sanctions on violators. FERC pany quickly unraveled and filed for would continue to make incremen- bankruptcy on December 2, 2001. tal changes to policy in such areas The Enron bankruptcy, at $63 billion in assets, was the as market pricing, transmission access, and incentive largest on record at the time. In the aftermath of Enron, rates for transmission investment. In 2011, FERC issued however, there was surprisingly little movement for Order 1000, which among other things sought to facili- reform of corporate structures and leverage. tate competition in the market for developing new bulk Despite these twin scandals in the early years of the transmission facilities.53 It did so by eliminating to some century, restructuring efforts continued, especially in the extent the preference that incumbent utilities sometimes wholesale markets. George W. Bush had become presi- enjoyed in connection with the development of new dent in 2001. As governor of Texas, Bush had signed transmission facilities that would be subject to regional restructuring legislation that would deregulate the cost allocation. wholesale and retail electricity markets in Texas. He and his appointees to FERC remained committed to restruc- Here and Now: Restructuring Status turing and deregulation, notwithstanding the California In the new century, the lower forty-eight states have and Enron debacles. In 2002, FERC began promoting restructured their electric industries at the retail level restructuring by proposing a “one size fits all” standard with different approaches, different market designs, and

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 12 varied results. Many states have stuck more or less with to serve as a currency of sorts that would fluctuate in the traditional model of rate regulation for retail rates, value depending on the scarcity of renewable resources. augmented in some cases with some performance stan- As a sign of the rapid development of renewable energy, dards. Only a small minority of states have adopted the credits would lose value quickly in markets like retail competition. Texas has two regulatory models for ERCOT because of the plentiful supplies of renew- IOUs: (1) retail competition and an unbundled market able energy in relation to the mandated requirements. structure for customers residing in ERCOT, and (2) inte- In addition to direct incentives to support renewable grated electric service at regulated rates premised on energy in the form of mandates and credits, there were cost of service ratemaking for customers located in the notable indirect ones, including transmission pricing. state but outside of ERCOT. A few of the early states to FERC began experimenting with transmission policies adopt retail competition backtracked after controversy in the new century to encourage the regional develop- or failed experiments, particularly after witnessing the ment of bulk power and facilitate the access of remotely turmoil in California. Studies have compared the retail located renewable power projects to retail markets. cost of electricity in states with retail competition and Texas had its own unique experiment with transmis- those without, but with inconclusive results. As of today, sion pricing incentives. Texas had adopted postage-stamp the advantages and disadvantages ratemaking for transmission in ERCOT of retail competition continue to be in the 1990s as a way to facilitate debated. entry of new generation into the There is some regional variety The 21st century newly restructured market for whole- in the design and administration of sale generation. As its name implies, wholesale markets. At one end of would see the postage-stamp ratemaking is one the spectrum lies the ERCOT market basic charge for all, regardless of dis- in Texas. ERCOT is an “energy only” widespread tance concerns and costs of service. market, meaning that there is no In Texas, some of the best wind is separate capacity market for power, development of located in remote areas of the state, and the operator of the state grid, far away from load centers. The com- ERCOT, does not guarantee sufficient “utility scale” bination of great wind, postage-stamp long-term planning reserves through ratemaking, and production tax cred- administered capacity auctions or renewable energy its created an enormous boom for reserve requirements for load-serving wind farms in those remote areas; entities. Instead, ERCOT issues peri- power plants. however, the capacity of wind proj- odic reports on planning reserves, ects in those remote regions exceeded and otherwise private actors in the the ability of the transmission grid market are relied upon to respond to export the power to load centers. appropriately to those reports based Rather than curtailing their power and primarily on expected price and profit losing the benefit of the indispensable incentives. All other power pools production tax credit, wind develop- have some form of capacity market ers placed bids to sell their power at and administrative control over plan- negative values. The negative prices ning reserves. distorted the market and penal- ized traditional generation, which The Dawn of Utility-Scale Renewables was forced to operate inefficiently or The twenty-first century would see the widespread even be shut down. The Texas Legislature’s solution to development of “utility scale” renewable energy power the problem was the competitive renewable energy zone plants. In 1992, as we have seen, the federal govern- (CREZ) policy. Under CREZ, the state approved the con- ment adopted the first production tax credit. And in the struction by utilities of some $7 billion worth of projects aftermath of the first IPCC reports on climate change, to build out the transmission grid in the remote windy states began adopting various preferences for renewable areas. energy, including integrated resource planning rules, In the development of utility scale renewables, 2007 with set asides for renewables and renewable portfolio and 2008 were to be turning points. In 2007, the Nobel standards. By the early 2000s, most states had adopted Peace Prize was shared by the IPCC and Al Gore for renewable portfolio standards that either required or set their efforts “to build up and disseminate greater knowl- goals for load-serving entities to include in their gen- edge about man-made climate change, and to lay the eration portfolios a prescribed amount of renewable foundations for the measures that are needed to coun- energy to serve customers. These goals were effectuated teract such change.” The economy crashed in 2008, through renewable energy credits, which were designed and Barack Obama was elected president. The first

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 13 legislation to pass Congress was a stimulus bill that as is the potential for renewables to carve out a role of included direct grants, government guaranteed loans, independence and freedom for individuals, not quite liv- and tax incentives for renewable energy.54 The tax ing off the grid perhaps, but close, with solar panels, incentives included a 30 percent investment tax credit micro-grids, and community sourcing of power improv- (ITC) for the cost of renewable energy plant. It also ing quality of life. included accelerated depreciation of the plant over five years based on 80 percent of the cost of the plant. What Does the Future Hold? Developers would use the ITC and accelerated depre- We have reached the end of this short history and the ciation to leverage the scale of renewable generation, first centennial of the ABA Infrastructure and Regulated such as wind and solar, by using so-called tax equity Industries Section. Last year, we appropriately changed financings. The combined federal tax benefits of such our Section name to remove, as too narrow, the reference projects were large, roughly fifty-six cents on the dol- to “public utility” as a core organizing principle of what lar, and, as equity markets began to recover from the we do as lawyers. We are now infrastructure and regu- 2008 crash and the heavily subsidized capital costs of lated industries lawyers. As this report demonstrates, the renewable projects decreased, the scale and number name change captures the reality of lawyers practicing in of the renewable energy projects grew substantially. the electric industry today, even for those of us who rep- On February 12, 2017, the Southwest Power Pool set a resent vertically integrated electric utilities. To be sure, all wind-penetration record of 52.1 percent, becoming the of the market participants in the electric industry are per- first RTO in North America to serve more than 50 per- forming services that in one way or another are essential cent of its load at a given time with wind energy. Texas to the public welfare, so that in this respect we lawyers grid operator ERCOT also surpassed the 50 percent who represent them remain in heart, if not in name, pub- wind energy penetration level in 2017, reaching 54.22 lic utility lawyers. So, too, are the lawyers who serve the percent at one time on October 27, 2017. regulatory authorities or customers that play an impor- The increasing penetration of renewable energy tant oversight role in the electric markets. All lawyers has fostered challenges and disputes regarding ancil- who represent or monitor those market participants must lary services and congestion management. Renewable attend to the realities of restructuring, regional power energy is an intermittent resource that is difficult to pools, new entrants, and new competitors as well as the schedule. For this reason, grids with a high penetra- numerous and complex laws, regulations, and protocols tion of renewable energy need to invest in additional that supervise market behavior. With the field open to ancillary services, such as various types of quick- market disruptors and new forms of generation and com- response back-up generation. Traditional, base-load petition, we represent industries that are no longer the generation is not designed for load-following; thus it only game in town. is forced to operate inefficiently due to the very low, So what does the future hold? As we have seen in this short-term incremental cost of renewable energy. For history, for the first 100 years of the electric industry, the renewables that are often located in remote areas with future would be influenced by new technology and entre- weak transmission access, there is a frequent need for preneurship on the one hand, and cultural attitudes toward so-called congestion management services and a sig- control, planning, and distribution of opportunities and nificant investment in bulk transmission, such as the wealth on the other. The overall trend was one of techno- CREZ build-out in ERCOT. Often, renewable energy is logical progress followed in recent decades by a maturing not available during certain hours of the day, which has technology and eventually a reduction in growth and pro- given rise to the so-called “duck curve” phenomenon ductivity rates. Whether as cause or effect, the increase in in California—an expensive and potentially difficult to laws and regulations as well as micro-management of the manage steep increase in the need for power at the industry have accompanied a slowdown in productivity, peak hours of demand when the sun sets and solar but also achievements such as cleaner air and water, and power is not available. greater diversity of supplies and market participants. And Proponents of renewable energy, however, urge that, perhaps in response to the increasing number of laws and despite its ancillary costs and tax subsidies, renewable regulations, lawyers have become far more specialized in energy offers profound if not life-or-death benefits. Cli- what they do. Like the first 100 years, the next century of mate change, they believe, is a national emergency legal practice is likely to depend on changes in technology, with the survival of the planet at issue. For many, the entrepreneurship, and cultural attitudes, although of course decarbonization argument alone is enough to support we cannot know the particulars. Obviously, advances in an aggressive renewable energy build-out incentivized storage and renewable energy or other new technologies by targeted tax and regulatory policies. In addition, could be game changers, but so far it seems that entrepre- separate and apart from decarbonization, proponents neurs in these fields have mainly leveraged tax benefits urge that conservation, energy independence, and the and a different regulatory paradigm as opposed to game very low operating cost of renewables are real benefits, changing new technology breakthroughs. Changes in

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 14 cultural attitudes are perhaps even harder to predict than 17. Henderson & Cudahy, supra note 5, at 67; McDonald, new technology. It is probably safe to say, however, that in supra note 3, at 287. the next century, electric power will remain the muscle of 18. McDonald, supra note 3, at 304. mankind, and lawyers will continue to play their essential 19. Id. at 333. role in representing people and whatever institutions are 20. Cantelon, supra note 16, at 66. in place to provide what will still be, in whatever form, an 21. Franklin D. Roosevelt, American Presidency Project, essential public service. http://www.presidency.ucsb.edu/ws/?pid=88391 (accessed Sept. 20, 2017). Endnotes 22. Codified at that time at 15 U.S.C. § 79 et seq. 1. How Electricity Grew Up, A brief history of 23. 49 Stat. 803. the electrical grid, Buzz: The Power2Switch Blog 24. 7 U.S.C. §§ 901–950(b). (Oct. 25. 2012), https://power2switch.com/blog/ 25. Lawrence J. Malone, Market Failure in Delivering Elec- how-electricity-grew-up-a-brief-history-of-the-electrical-grid/. tricity to Rural Areas Before 1930, EH.Net, https://eh.net/ 2. Global Edison Corp., World’s First Power Plant, http://www. encyclopedia/rural-electrification-administration/ (accessed globaledison.com/History_FirstPowerPlant.html (accessed Sept. 20, Sept. 20, 2017). 2017). 26. Timeline and History of Deregulation in the United 3. William J. Hausman & John L. Neufild, The Market for States, Electric Choice (Nov. 20, 2016), https://www.elec- Capital and the Origins of State Regulation of Electric Utilities tricchoice.com/blog/timeline-history-energy-deregulation/ in the United States, 62:2 J. Econ. Hist. 1050 (2002). See For- (accessed Sept. 20, 2017). rest McDonald, Insull, The Rise and Fall of a Billionaire Tycoon 27. Richard F. Hirsch & Bernard S. Finn, Post World War II 25–26 (1962). Golden Years, Smithsonian Inst., http://americanhistory.si.edu/ 4. See Thomas Commerford Martin & Joseph Wetzler, The powering/past/history2.htm (last updated 2002). Electric Motor and Its Applications (1891), which is the classic 28. Id. history of the early development of the electric motor. 29. Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672 (1954). 5. McDonald, supra note 3, at ch. III; see also William D. 30. FERC Students Corner Timeline, https://www.ferc.gov/ Henderson & Richard D. 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Steve Cole, The Deal of the Century: The Breakup of AT&T, Researcher, https://library.cqpress.com/cqresearcher/document. chaps. 5–6 (1986) (https://books.google.com/books?id=rZqxDg php?id=cqresrre1926010400 (accessed Sept. 20, 2017). AAQBAJ&pg=PT51&lpg=PT51&dq=saxbe+files+antitrust+lawsuit 14. Llewellyn Cooke & Judson D. Dickerman, Giant Power, +against+at%26t&source=bl&ots=qkPO2DT3T3&sig=OC120ClIJI The Report of the Giant Power Survey Board to the Pennsylva- bSGYIDB55bv7g3cX8&hl=en&sa=X&ved=0ahUKEwjC5OWXuK_ nia General Assembly of the Commonwealth of Pennsylvania WAhWJiVQKHTxgDt4Q6AEIVDAJ#v=onepage&q=saxbe%20 (1925), https://babel.hathitrust.org/cgi/pt?id=uc1.$b113619;vie files%20antitrust%20lawsuit%20against%20at%26t&f=false) w=1up;seq=5 (accessed Sept. 20, 2017). (accessed Sept. 21, 2017). 15. 273 U.S. 83 (1927). 42. See Robert J. Barro, Nothing is Sacred: Economic Ideas for 16. Id.; see also Philip L. 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Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 15 node/17956457 (accessed Sept. 29, 2017). (2000). 44. Understanding Climate Change, National Academy of 50. Electric Utility Industry Restructuring Act (Assembly Bill Sciences, https://archive.org/stream/understandingcli00unit/ 1890) (1996). understandingcli00unit_djvu.txt (accessed Sept. 29, 2017). 51. Remedying Undue Discrimination through Open Access 45. J. Hansen, D. Johnson, A. Lacis, S. Lebedeff, P. Lee, D. Transmission Service and Standard Electricity Market Design, Rind, and G. Russell, Climate impact of increasing atmospheric Notice of Proposed Rulemaking, 67 Fed. Reg. 55,452 (Aug. 29, carbon dioxide, 213 Science 957–66 (Aug. 28, 1981). 2002), FERC Stats. & Regs. ¶ 32,563 (2002). 46. Climate Change: The IPCC Scientific Assessment (1990). 52. Energy Policy Act of 2005, Pub. L. No. 109-58, 119 Stat. 47. Promoting Wholesale Competition Through Open Access 594 (2005). Non-discriminatory Transmission Services by Public Utilities; 53. Transmission Planning and Cost Allocation by Trans- Recovery of Stranded Costs by Public Utilities and Transmit- mission Owning and Operating Public Utilities, Order No. ting Utilities, 168 P.U.R.4th 590 (F.E.R.C.), 75 FERC P 61,080, 1000, 76 FR 49842 (Aug. 11, 2011), FERC Stats. & Regs. ¶ 31,036 (1996). ¶ 31,323 (2011). 48. Order No. 889, 75 FERC P 61,078 (1996). 54. American Recovery and Reinvestment Act of 2009 (Pub. 49. See Regional Transmission Organizations, Order No. Law No. 111-5). 2000, FERC Stats. & Regs. ¶ 31,089 (1999), 65 Fed. Reg. 810

Published in Infrastructure, Volume 57, Number 2, Winter 2018 © 2018 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 16