The Role of the Public Utility in the Deregulated 21st Century
by Craven Crowell, Chairman
Thank you, Sir Eldon, for that very kind introduction, and good evening ladies and gentlemen. It is indeed a great pleasure and an honor to be here. I'm grateful for this opportunity to discuss some of the significant issues surrounding deregulation with Chairman Bryson of Southern California Edison, and with such a distinguished group of thoughtful and concerned Americans.
Thank you to the World Affairs Council for inviting me here this evening. I'm going to want to talk about the role of public utilities in the new, deregulated economy, and I'll try to keep my remarks general. But I'm most familiar, of course, with the Tennessee Valley Authority, so I hope you'll forgive me for spending a little time during the course of my remarks talking specifically about TVA.
We've come together this evening to focus our attention on the central issue confronting electric utilities at the end of this century: deregulation -- the movement from government control to market control of electric power, and in a way, there's no better place to have this discussion than here, in California, where deregulation is being "beta tested", as the computer folks would say. Let me say first that I think it's too early to draw sweeping conclusions. Furthermore, it would be unfair and inappropriate for me, as an outsider, to try to sum up California's experience with deregulation.
But I think it's safe to say -- at least from what we read back East -- that deregulation has been something of a mixed blessing here in California. Promised cost savings have, apparently, been slow to materialize, and customers appear to be reluctant to shop around for competitive electric rates. Power outages have shaken consumer confidence, and set-up costs have been high.
Much of this, I'm sure, can be chalked up to "growing pains," or, at least, transition costs, as California moves ahead with deregulation. It's not my intention to make judgments or point fingers. But your role as a laboratory for deregulation makes your experience here especially valuable to the rest of the nation as we contemplate deregulating our industry on a national scale.
So what, then, does California teach the rest of us? What can we learn from your experience? Well first, I think, California's experience with deregulation reminds us that every major public policy change is freighted with unintended consequences.
No surprise there. We shouldn't assume that deregulation will automatically or immediately result in consumer benefit. We deregulated our telecommunications industry and, while we'd hoped to see new competition result in lower rates, the results -- so far at least -- have been mixed.
The cable TV bill keeps going up. The same with banks. Deregulation has, theoretically at least, made it easier for new banks to compete with established banks. But while many new banks have opened their doors, many established banks have merged . . . meaning, for many people, less consumer choice, not more.
So, after about a decade of experience, I think we've learned to approach deregulation carefully. Rushing headlong into a deregulated marketplace can, we've found, usher in new problems, even as it solves some of the old ones.
California has also shown us, I think, that the real benefits of free market competition depend, ultimately, upon educated, price-conscious consumers . . . buyers who are willing to change providers to get a less expensive, more reliable -- or environmentally cleaner -- energy supply. Here in California, fewer than 100,000 customers out of a total of 9 million households have switched electric companies so far. I think that tells us that consumer education may be an under-appreciated component of the deregulation process.
Proposition 9 will probably test the public's satisfaction or dissatisfaction with deregulation so far -- and again, as an outsider, I won't presume to take a stand on this California initiative. But it is clear, I think, that there would be no Proposition 9 on the ballot if deregulation had smoothly delivered on all its promises. There have been bumps on the road.
So how do we view all this in the Tennessee Valley? What do we expect deregulation to mean to us? I know many of you are probably familiar with the Tennessee Valley Authority, but for those of you who aren't, let me offer just a brief sketch of TVA's history -- or at least that part of our history that's relevant to the issues we're discussing this evening.
We are, of course, a public utility. 100% government owned. We're the largest supplier of electricity in the United States, and we're also a major employer, with about 14,000 employees. We were created by the United States Congress in 1933, under the administration of President Franklin Roosevelt.
FDR said that the Tennessee Valley Authority was to be "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise." So you can see, from the start, that TVA had something of a dual identity -- public ownership and public responsibilities, but the expectation that the company was to be fast on its feet, nimble and flexible, like a private corporation. TVA was created, you'll recall, at a time when our nation, and much of the world, faced enormous hardships.
The "era of big government" may be over now in 1998, but it was just starting back in 1933 when FDR launched the New Deal . . . a collection of programs based on the idea that committed leadership -- and large-scale government works programs -- could conquer hardship and adversity, reclaim the land, rebuild the shattered economy, and restore hope. These New Deal bureaucrats -- I guess that's what we'd call them today -- believed that a public corporation like TVA could save the poor and the destitute of the Tennessee Valley. So TVA was not created principally to provide electric power to the Appalachian farmers who lived in the remote hills of the Tennessee Valley -- in fact, electric power was not even part of its original mission.
TVA was created to rebuild a broken society, and that's exactly what it did. Farmers needed to learn new methods of conservation so they could restore fertility to their barren farmland. Agricultural experts from TVA taught them.
The rivers, prone to flooding and hazardous to navigate, needed to be tamed so they could serve the people who lived in their valleys. Engineers from TVA tamed the rivers. TVA trained tens of thousands of poor farmers and gave them new skills.
They built huge hydroelectric dams and sent electric power lines into parts of America that had never seen an electric light or used an electric appliance, and when electricity became a part of everyday life, experts from TVA helped teach energy conservation to the consumers of the power TVA produced. Think about that. Long before conservation became fashionable, TVA was teaching people how to use less of what we make -- not exactly part of a standard commercial business plan, but part of what we see as our public responsibility.
Back in the '30s, TVA served the public good in thousands of ways and, most people would agree, helped break the stranglehold of the Great Depression. I like to think that TVA played a significant part in creating the modern economy of the United States and the prosperity we've enjoyed in the second half of this century. But what about the next century?
What will be the role of a public utility like TVA and public power companies in general in the deregulated 21st century? Public power now supplies 24.4% of the kilowatt-hours consumed by individuals and industries in the US. Will we continue to supply a quarter of the nation's electricity under deregulation?
And what about rates? The cost of electricity in the United States can vary between 4 cents per kilowatt-hour in Kentucky, to about 9 and a half cents in California, to nearly 12 cents in New Hampshire. The political pressure to level the national rate structure will be enormous.
What role should public utilities play in that debate? As we wrestle with all of these questions, I believe the challenge for the public utilities will be to continue to embrace the dual identity Franklin Roosevelt envisioned sixty-five years ago. Public in fact, private in behavior -- solid and responsible, yet creative and competitive.
In this way TVA, and public utilities like ours, will set a standard for public responsibility against which private companies can be measured . . . even as we continue to provide our core product -- wholesale electric power -- at competitive prices. What will this mean in practice? The key to measuring the success of deregulation is, and will be, of course, the degree to which regulatory change benefits the public.
But how will this benefit be measured? And what should we look out for? I would suggest that one of the greatest services public utilities can provide in a deregulated marketplace is vision -- in this case, a vision that starts and ends with public responsibility, and a commitment to the public good.
Let me offer some examples of the vision of a public utility. As far back as 1933, when TVA was created, it was clear that the system of streams and rivers that feed the Tennessee River -- and the Tennessee River itself -- could be both friend and foe to the people in the Valley. TVA was charged with the responsibility of managing the river first as a natural resource . . . and second as a power resource.
In fulfilling this responsibility, our public utility has helped reclaim thousands of acres of farmland and stem the tide of seasonal flooding. Private utilities often count on other government agencies, like the Army Corps of Engineers, to handle land and river management . . . but in the Tennessee Valley, water resource management is the responsibility of TVA, a public utility. Today, we have new concerns.
It's no longer enough to produce economical power to run our machines and fuel our economy. We now know the impact that energy production has on our environment, and we know we must find new and better ways to protect the planet as we produce an ever-increasing supply of power. These environmental concerns will be raised again in just a couple of weeks when the next UN Conference on Climate Change meets in Buenos Aires . . . and I think we all know that it's time to start coming up with answers, instead of just finding new ways to re-state the questions.
At TVA, we fund research that will help us deliver cleaner energy at lower cost. Last year alone we contributed 17-and-a-half million dollars to the Electric Power Research Institute in Palo Alto for just this purpose. At Palo Alto, and in the Tennessee Valley, we're constantly looking for new ways to make coal, hydro, and nuclear power cleaner, safer, and more efficient.
As a public utility, we see this as part of our mission statement. TVA has also taken the lead on nitrogen oxide emissions. We announced in August that we will dedicate more than $500 million over the next five years to the reduction of pollutants that cause ozone and smog from our coal-burning plants.
168,000 tons of nitrogen oxide emissions will be cut each year between now and 2003, dramatically improving local and regional air quality. This new strategy for controlling NOX emissions is further evidence of TVA's commitment to being the energy industry's national leader in environmental stewardship. Our vision also includes business development.
TVA has helped hundreds of major industries in the Tennessee Valley grow and prosper. We've helped arrange loans for small businesses, we've helped locate industrial sites, and we've provided technical expertise to start-up companies and major corporations that have chosen to make the Valley their home. But as the deregulation debate heats up in the months and years ahead, I'm sure that some will question whether TVA or any public utility should continue to manage such a broad portfolio of public service.
"That was fine during the 1930s," some will argue, "but we're a long way from the Great Depression. We don't need a TVA for the 21st century." I would argue, in fact, that we will need public utilities more than ever.
With all of the uncertainties that attend deregulation, I believe public utilities will provide the benchmark by which all energy providers will be measured. Public utilities will continue to set the standards for service, reliability, environmental stewardship, research and development, and, yes, even cost efficiency, and let me be clear about this very important point. Public responsibilities cannot -- and should not -- absolve public utilities of the requirement to operate efficiently and to compete fairly in the deregulated marketplace.
At TVA, we're proud of the fact that our production costs are third lowest among the nation's top 50 utilities, and we're hard at work, every day, finding new ways to bring these costs down even lower. But we must never forget, whether we're a public utility or an independent provider, that lower electricity costs are not the sole measure of the public good. If energy companies degrade the environment to produce cheaper electricity, is that a net gain, or loss, for the people who use the power, and live on the land?
If a regional power company chooses to neglect its responsibilities to its local customers so as to make a bigger profit wheeling power to a distant market, is that a net benefit, or loss, for the nation as a whole? These are difficult issues now, and they will become even more difficult in the deregulated future. Public utilities, which serve the interests of the people -- not just corporate shareholders -- will provide a benchmark by which the performance of all power companies will be measured.
They will help to define "the public good" as it applies to energy production and distribution, and for this reason alone, they deserve their place in the deregulated marketplace of the next century. In the end, deregulation should lower energy costs for our citizens and our industries, so it is our responsibility to work together -- public utilities and independent providers, industry executives and political leaders -- to try to achieve this goal. But based on what we know so far, and what we have learned right here in California, I suggest we approach deregulation on the national level thoughtfully, and with careful deliberation.
Above all, I would suggest that we measure the success of our efforts in more than just pennies and dollars saved. We should, I believe, measure our ultimate success against the higher standard of the public good, and let me conclude by saying that I hope, as we advance down this path of deregulation, that all of us -- public utilities and independent providers -- will remember to balance our commitments to our various boards and shareholders with a commitment to the constituents who matter most . . . the publics we serve.
Thank you all very much for your kind attention, and thank you to the World Affairs Council of Orange County for inviting me here this evening..
Craven Crowell is Chairman of the Tennessee Valley Authority
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