The Power Game

The New York State electricity market is no longer a regulated monopoly. Consumers now have a range of choices when it comes to electrical power providers. This ongoing series will examine the reasons behind and the impacts of the new energy market on New York State residents and the possible implications for the future of the power industry in the entire Upper Delaware region.

	TRR photo by David Hulse NYSEG and Marcy South transmission lines are pictured at Coopers Corners along Route 17B. (Click for larger image)

A brief history of electrical power and regulation

By CHRIS CONROY

Most people who are now experiencing the de-regulation of the power industry clearly remember how things once were. There was a single company servicing the area. In Sullivan County and in New York State, that company was New York State Electric and Gas (NYSEG). NYSEG controlled it all—power generation, transmission and servicing.

This system, much like the now-decades-past Bell Telephone government-sanctioned monopoly, seemed to work just fine.

“Why change it now?” many wonder.

In order to fully understand the implications of and reasons behind the current deregulation, it is important to understand how the system got to where it was prior to deregulation.

Electricity has been known for hundreds of years. All school children are familiar with some of Benjamin Franklin’s experiments with the small-scale transmission and storage of electricity.

Early electrical experiments led to batteries, progressed to the discovery of the connection between electricity and magnetism and culminated with the invention of the electric motor and generator. Many of the common terms used to describe electrical interaction were coined by the men who discovered them. Names like Volta, Galvani, Faraday and Morse are still well-known even to those with a limited science background.

Up until the late 19th century, small-scale generation, transmission and storage of electrical energy were all that took place—lighting the only streets in cities like New York and Paris. Discoveries by Nicola Tesla brought useful electricity safely into the home for the first time in 1888.

The first spark that began the big business of power generation on a massive scale took place in New York State in 1895. It was on August 26 of that year when the hydro-electric power plant at Niagara Falls began producing power for a nearby factory. The generators, based on Tesla’s principles, were constructed by George Westinghouse. By 1896, the output of those turbines was increased and electricity from Niagara Falls was sent to Buffalo.

Westinghouse’s first ten-generator station was later supplemented by General Electric’s eleven-generator station. By 1904, when the General Electric station was completed, it was clear that large-scale generation, transmission and usage of electrical power was not only possible, but economically practical.

The beginnings of the public electrical utilities

Before the success of the Niagara Falls-to-Buffalo power transmission ushered in the possibility of long-distance power transfer, most power generation took place within about one mile of where it was used. In cities like New York and Chicago, this led to dozens of companies producing electricity, each for a small number of customers. Once technology allowed for useful electricity to be transmitted over greater distances, this began to change.

Samuel Insull, president of Chicago Edison in Chicago, IL, was one of the most successful men of his time when it came to implementing new technologies. By 1903, Insull already had a firm grasp of the concept of peak and off-peak hours, when electric usage is at its highest and lowest, respectively. Coupled with a sense of how to best balance the economics of meeting peak needs while still making a profit in off-peak hours, he knew that cheaper electricity leads to more usage.

Seeking to lower his production costs, thereby increasing his profits, Insull took advantage of the best technology General Electric had to offer and began to build his electrical empire. Able to transmit power over greater distances than his competition, Insull began to consolidate the diverse generating companies of Chicago. By 1907, he had purchased 20 former competitors, taken most of their generators off line, and was producing enough power from his main facility to easily meet the needs of his customers. This entrepreneurial spirit was soon emulated across the country, leading to the consolidation of power systems.

As the number of companies producing and transmitting power decreased, old fears of monopolies began to surface. The memory of the abuses suffered during the latter part of the 19th century at the hands of industrial monopolists, was still fresh in the minds of many. Could something be done to stop those abuses from occurring again?

Economic academics at the time had introduced the concept of “natural monopolies.” Some industries would never be able to effectively support healthy competition while serving the public. If only one company was in charge of the entire operation, the situation would be better for everyone. To make this ideal work in reality, certain controls had to be put in place. The first type of control was the municipal ownership; the second was governmental regulation.

Municipal ownership put the cities or other municipalities in charge of power generation and distribution. Not having to answer to stockholders, municipalities could pass savings directly on to the consumer. While never the norm, municipal ownership of utilities was still relatively common until the end of the 20th century.

New York and Wisconsin were the first two states in the country to impose strict governmental regulations on the electrical industry. The policies put forth by the two states in 1907 were so well received that, by 1914, 45 states in all were regulating power utilities. Government regulation was to serve as a balancing force, taking into account both the needs of the company generating and supplying the power and the customers paying for the use of the power.

The acceptance of government regulation allowed monopolies to flourish without the tremendous negative impacts experienced in the past.

Next time: the benefits and problems of the government-sanctioned monopoly.