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Drunk with Power

The energy villain in your neighborhood

In 2001, an entrepreneur named Tom Casten traveled down to southern Louisiana, near the small town of Franklin, with a clever idea. For decades, the area had sustained a pair of chemical plants that produced carbon black, a grimy powder used in printer ink and tire rubber. But the owner of one of the plants, Cabot Corporation, was struggling to compete against cheap tire imports from abroad, and desperately seeking ways to cut costs. That’s where Casten came in. He pointed out that the gas left over from the carbon-black process was just getting wasted--burned off and flared up into the sky. He proposed building a recycling facility that could capture the gas and use it to generate electricity. Not only would this make the plant slightly cleaner--carbon-black plants are notorious polluters--but there’d be enough juice to run Cabot’s operations, and for less than it cost to buy power from the local utility. In all, the company could save up to $1.3 million per year.

The notion that a factory could run on its own waste may seem fantastical. And, as it turned out, Casten’s scheme was too good to be true. Only the plan didn’t fail for technical reasons. Recycling waste energy is perfectly doable--in the nineteenth century, Thomas Edison sold exhaust heat from Manhattan’s first power plant to warm neighboring buildings. Instead, the proposal got ensnared in the thicket of rules and incentives that shape the way electricity is produced in the United States--rules that mainly benefit existing power companies, while leaving our energy system dirtier and clunkier than it ought to be.

Casten’s original plan was to sell one-third of the recycled power to Cabot’s plant, and the rest to an industrial facility just down the road for around $45 per megawatt-hour--cheaper than the $55/MWh that electricity cost in the area, yet still high enough for the project to be profitable. But, in Louisiana, as in most of the United States, state law forbids anyone from stringing up private wires across a public street. Casten couldn’t market his power directly--he could only sell it to the local electric utility. And, because the utility, due to state rules, chiefly earned a profit from the power plants it built and ran itself, it refused to offer anything more than rock-bottom prices for Casten’s recycled power--prices too stingy for the project to work. After many months of bitter wrangling, Cabot gave up entirely. As a final insult, the utility later won approval from regulators to build a brand new fossil-fuel plant, a pricier way to generate electricity that would also add more carbon to the air.

The Louisiana utility wasn’t doing anything evil--it was just responding rationally to the rules laid down--but the end result was perverse. "It’s like we’re forcing citizens to pay extra to heat the planet," Casten bristles. And similar roadblocks stand in the way of recycling across the country, with jaw-dropping consequences: One study for the EPA found that harnessing industrial waste energy had the potential to meet 19 percent of the country’s electricity needs--equal to 95 nuclear plants--while slashing fossil-fuel use in the power sector by one-quarter.

The problem goes well beyond energy recycling. Right now, Congress is crafting legislation to curb U.S. greenhouse gases in order to avert a climate catastrophe. The centerpiece of that bill is a cap-and-trade system that would place an economy-wide limit on carbon-dioxide emissions and let companies trade permits among themselves--in essence, letting the free market decide how best to make cuts. But the electricity sector, which is responsible for roughly 40 percent of the country’s emissions, is anything but free or flexible. Instead, it’s governed by a bewildering patchwork of regulations that depress innovation, thwart efficiency improvements, and hinder the adoption of cleaner forms of energy. That means our best efforts to solve the climate crisis could fall short, unless we revamp the rules that shape the way we get electricity. If health care reform seems nightmarish, just wait for the fight over the grid.

To grasp why we have the system we do, you have to travel back to the 1920s. At the time, the U.S. electric industry was dominated by just 16 large "power trusts" that controlled 85 percent of the nation’s electricity. The trusts were infamous for charging bloated rates and providing uneven service. Consumer protections were unheard of. "Nothing like this gigantic monopoly has ever appeared in the history of the world," fumed Gifford Pinchot, who railed against the oligarchs as governor of Pennsylvania in the 1920s and ’30s. "Nothing has been imagined before that remotely approaches it in the thoroughgoing, intimate, unceasing control it may exercise over the daily life of every human being within the web of its wires." And maybe the only thing worse than being abused by the trusts was not being abused: Ninety percent of rural Americans had no electricity at all, since utilities scorned them as unprofitable customers. At the height of the Roaring Twenties, millions were still sweating over wood stoves and hand-scrubbing laundry.

That all changed after the crash of 1929. As it turned out, many utility holding companies had been perched atop Enron-style accounting schemes that collapsed with the stock market. The New Dealers swooped in with a new regulatory regime that broke up the trusts and replaced them with local monopolies that were vigorously regulated by the states. Under the new system, electric utilities could only charge rates that allowed them to earn a reasonable return on their power-plant investments; the path to boosting profits was to sell more electricity. This gave them incentive to build large central plants and run wires into every last cranny of the country. Utilities gained a knack for convincing Americans to get plugged in: A typical ad from the 1950s offered magazine readers a checklist of available home appliances, from electric shavers to waffle makers, with the unsubtle tagline, "How High Is Your Standard Of Living?

This arrangement may have proved effective at supplying affordable, reliable power to every home in America, but it also had downsides. Because they were shielded from competition, most utilities saw little reason to innovate or upgrade their lumbering fossil-fuel plants, since they’d just be forced to pass on any savings to consumers. A Fortune article in 1969 savaged utility executives as "generally unimaginative men, grown complacent on private monopoly and regulated profits." After the OPEC crisis in the ’70s exposed the industry’s clumsiness in the face of adversity, Congress tried to promote competition on the generation side in some states. But deregulation was only partial, and most Americans still have little, if any, choice of utility. "When it comes to electricity, we’re still living in the era of black rotary phones," says Kurt Yeager of the Galvin Electric Initiative, alluding to AT&T’s old monopoly in the telecom sector.

Today, the country’s 3,200-plus electric utilities stand as America’s largest industry, and the private companies that crank out roughly 75 percent of the nation’s power reward their investors with tantalizing returns each year. Yet problems abound. Most power plants are scarcely more energy-efficient than they were in the 1960s. (As it happens, environmental laws have exacerbated the situation: When the Clean Air Act was written, it exempted older plants, spurring utilities to keep their dinosaurs on life-support for decades.) The nation’s electric grid--from high-voltage transmission lines to distribution wires--has fallen into disrepair, with blackouts and disruptions costing the economy up to $150 billion each year. And, though electricity prices have stayed low in recent decades, that’s not likely to last: The average power plant was built in 1964, and between that and the grid, replacing our aging fleet will, according to the consultants at The Brattle Group, cost some $1.5 trillion in coming decades, making rate hikes inevitable.

What’s more, upending this state of affairs is no small task. Due to their size and geographic reach, utilities have plenty of political sway. The power sector spent $161 million lobbying Congress in 2008--more than anyone but Big Pharma--and has, in recent years, fought hard against everything from clean-air laws to renewable-electricity mandates. Back in 2001, Southern Company, the coal-burning behemoth in the South whose lobbyists have been dubbed "kneecap-breakers," enlisted Haley Barbour to persuade George W. Bush to reverse his pledge to regulate carbon-dioxide. "Utilities have a strong lobbying presence," one congressional staffer told me. "Usually, all they have to say is that rates will go up or the system will be less reliable--it’s not hard for them to throw those flags up and get what they want."

In recent years, however, reformers have begun sketching out a brighter, more alluring future for our electricity system. Rather than the old set-up in which power flows from a central plant miles away, distributed sources like rooftop solar panels and small gas plants would provide a greater share of power in towns and cities, lessening the need for costly transmission lines, while waste heat from industrial facilities and onsite generators could get recycled. Families could earn money by owning backyard wind turbines and selling power to neighbors. Meanwhile, an electronic smart grid would do the work of juggling all of these inputs: Network devices could tell non-essential appliances like hot-water heaters and dishwashers to shut off during high-demand hours and then run when the sun was shining or the wind was blowing, curtailing the need for the hundreds of peaking plants that roar to life for just a few hours each month.

Utilities would still operate the grid and, in many cases, power plants, but they’d also be providing a broader menu of services, such as selling energy-saving devices to help customers waste less power. The overall system would run more efficiently and cleanly, emitting less carbon. And, since our power would come from a dispersed array of sources, the system would be far more reliable, with fewer interruptions and blackouts.

This grand vision is hardly an idle fantasy. In Gainesville, Florida, homeowners can already earn a tidy income by lining their roofs with solar panels and selling electricity to the grid. In Boulder, Colorado, utility Xcel Energy is building a pilot smart grid, in which electricity prices freely fluctuate every few minutes and homeowners can use Internet apps to adjust energy use accordingly--shutting off appliances during periods of peak demand, or programming their plug-in hybrids to charge when electricity is cheap. And, in Austin, Texas, the municipal utility plays an active role in helping customers see how much energy they’re needlessly wasting and financing fixes, such as duct repair and attic insulation for leaky homes. (Austin embarked on this program in 1982 after outcry over plans for a new coal plant; thanks to efficiency gains, the plant was never built.)

Still, these innovations won’t spread without major regulatory changes--and, since current rules often benefit some powerful companies, that could mean serious state-by-state brawls.

Perhaps the most urgent state-level reform would be to alter how electricity rates are structured, so that utilities’ profits don’t just hinge on pumping as many electrons as possible through their wires. After all, there’s broad consensus that the cheapest, fastest way to reduce carbon-dioxide emissions is to use power more prudently. Lawmakers have usually tried to do that through a blizzard of government mandates--from building codes to appliance standards. But these mandates only do so much if utilities are constantly trying to sell more power. So, a handful of states have tinkered with an approach called "decoupling," in which utilities are guaranteed a fixed revenue each year, and can increase profits by cutting costs and selling less power. In California, which pioneered decoupling back in 1982, energy use per capita has flattened (even as it’s ballooned in most states), and utilities spent nearly $1 billion in 2008 on things like helping customers trade in their creaky, power-hogging fridges or promoting green buildings.

Yet many utilities and regulators are wary of abandoning a business model that has persisted for nearly a century. At a recent Edison Electric Institute event, when utility execs were asked to raise their hands if they were in favor of decoupling, the room was evenly split. "It’s an intriguing idea, but it can be very difficult to explain to people," says Mike Morris, the CEO of American Electric Power and a decoupling opponent, who says he’s skeptical regulators would allow utilities to keep revenues up even if sales plummeted. "You can almost hear the outcry down the road: ‘You mean we’re still paying you for fewer sales?’" Indeed, two years ago, in North Carolina, Duke Energy proposed its Save-A-Watt program, in which the utility would get paid for every power plant it could avoid building by resorting to efficiency measures. But the plan has so far been held up. In the meantime, without other ways to meet growing demand in the state, Duke is building a new coal plant--and asking for a hefty rate hike to finance it.

Next on the chopping block are barriers to local generation. Those large, remote power plants that utilities have long relied on are actually a fairly unwieldy way of making power: Not only is energy lost as electricity trundles through long transmission lines, but nearly two-thirds of the fuel used in power plants is squandered as heat. Many of those inefficiencies could be squeezed out if our system relied on a variety of smaller plants closer to population centers that reused their waste heat--say, to warm nearby buildings. Last December, a study from Oak Ridge National Lab found that these "combined heat and power" plants are roughly twice as efficient as our current plants, and a concerted push to deploy them could save the equivalent of half our current household fossil-fuel use.

Doing so wouldn’t require glittery new technology. But, as Tom Casten found in trying to harvest Cabot’s waste gas, the legal barriers are substantial. "The system is set up to encourage central generation," Casten says, pointing to rules like the ban on private wires, fees imposed on facilities that try to produce their own power, and the fact that regulators don’t rightly value benefits from distributed generation, such as lower transmission costs or less pollution per unit of output.

The same goes for renewables. Thirty-one states now require utilities to get a fraction of their electricity from clean sources like solar and wind. So far, utilities have mostly trained their eyes on gigantic wind farms or vast solar arrays in the Southwest. Those plants will surely play a key role in a low-carbon future, but they also require pricey and unpopular new transmission lines, while desert solar projects have bogged down amid concerns they might spoil local ecosystems. That’s why many companies now wonder if micropower--rooftop solar panels or small turbines, say--could help deliver a green-energy future faster than large projects alone. "It’s long been conventional wisdom that it’s much easier and cheaper to build those big plants," says Allan Schurr, v.p. of strategy and development at IBM’s energy and utilities group. "But, when we interviewed customers, we found a strong appetite for individuals having control over their own energy future." Schurr points to Germany, where incentives for small-scale renewables transformed the cloudy country into a solar leader in just a few years.

Alas, here in the United States, state laws often make it difficult for small generators to connect to the grid, or for homeowners to get credit on their meter for energy they produce from rooftop panels. The nonprofit Network For New Energy Choices reports that, although 41 states allow some version of "net metering," most put up subtle roadblocks that make participation an undue hassle.

That’s no accident. In many states, utilities aren’t keen on individual producers muscling in on their turf. In New Mexico, the state’s biggest utility, PNM, has filed a request to pare back tax incentives that help homeowners and businesses install their own solar panels. Even progressive utilities that are comfortable with local solar, like San Francisco’s PG&E, have haggled over caps on net metering. Power companies, says Adam Browning, who directs the Vote Solar Initiative, "basically move along the five stages of grief--first there’s denial, then bargaining, and, finally, acceptance. Getting to that final stage takes a big cultural shift."

One reform that most utilities do seem open to is the effort to develop an advanced smart grid, which would help them manage a more diverse power supply and identify grid failures more easily. But creating broad national standards remains a challenge, given the thousands of utilities and tech firms that all have their own ideas about what a smart grid should look like. And, at the state level, regulators often frown upon ventures into risky new technologies, such as Internet energy monitors or self-adjusting thermostats. "Utilities have historically made business decisions on new plants that last for twenty or thirty years," says Schurr. "We need to move to a set of rules that don’t penalize them for adopting technologies that are likely to change very rapidly and may not always pan out."

That hardly exhausts the wish list of reformers, some of whom even talk about fostering competition among utilities, so that customers can choose from different retail providers. "The Enron debacle in California really poisoned the waters for that debate," says the Galvin Initiative’s Kurt Yeager, who argues the lesson of California is that deregulation needs to be done properly, not that it shouldn’t be done at all. "We need to understand that we could have a much better power system than the one we have now."

The climate bill currently percolating through Congress won’t necessarily get us there--at least not on its own. It’s true that a price on carbon will push the country toward a cleaner energy future, a hugely positive step. Yet many observers fret that the bill could cement the status quo in our antiquated, maddeningly inefficient power sector.

Consider the cap-and-trade portion of the legislation, in which the nation’s emissions are capped at an overall limit and individual companies are given tradable pollution permits. The good news is that utilities are on board with this basic concept--if they weren’t, the bill might not stand a chance in Congress. "About two-and-a-half years ago, we decided we wanted to take a proactive position on dealing with climate change," says Tom Kuhn, who heads the Edison Electric Institute, which lobbies on behalf of investor-owned utilities. "We had our CEOs working intensely on fleshing out what technologies would enable us to do this job, how the economics would work, how we’d mitigate costs to our consumers."

Partly because they played a central role, the bill that passed the House in June reflects a fairly parochial, utility-centric view of how best to move to a low-carbon future. The power industry lobbied to receive some 40 percent of the available permits for free from now until 2025. Not only that, but utilities will be allowed to buy offsets--paying someone else to plant trees or capture methane at landfills--in lieu of making reductions. "An electric utility burning coal will not have to reduce emissions at the plant site--it can just keep burning coal," conceded Virginia congressman Rick Boucher, who helped craft the legislation. That will buy utilities time until technology to sequester carbon from coal plants arrives--an uncertain prospect, but one that would let them maintain their existing business model. "They made a deal to try to freeze a reality that may or may not be able to be frozen," says Dave Hamilton, who runs the Sierra Club’s global-warming program. (To be sure, the bill has mandates on utilities to buy renewable power and pursue efficiency, but they are fairly lenient--and the power sector has resisted attempts to strengthen them.)

To get a sense for what this path might look like, consider a recent study by the Electric Power Research Institute (EPRI), a think tank funded by the utility industry, which examined what it would take to reduce U.S. carbon emissions 80 percent below 1990 levels by 2050. The report predicted that utilities would rely heavily on centralized "clean coal" and nuclear plants, with only a modest role for efficiency or renewables. That could turn out to be a more expensive, inefficient way of reducing emissions--EPRI projects that electricity prices could end up rising 80 percent by 2050. Still, there’s plenty of reason to think utilities could win approval from regulators for such large, clunky plants--especially in the South, where state commissions tend to be fairly solicitous toward utilities.

Is this really the only way forward? I asked Yeager, who used to head EPRI before he left to work on reforming the grid, what he thought of the institute’s report. "I think it’s fair to say those projections are based on the idea that we’ll see very marginal reforms to our electricity sector," he said. "The current regulatory model isn’t at all being questioned.

While a carbon cap will certainly be a necessary start, fixing that model will involve far more laborious changes--at both the state and federal level. "I think that’s one reason why, as a follow-on to cap-and-trade, we will likely see further discussions about utility regulatory structures," says Mark Brownstein, a former utility official who now works for the Environmental Defense Fund. "There’s a lot of reason to think we’re not done with that conversation."

Bradford Plumer is an assistant editor at The New Republic.