White House Chronicle

News Analysis With a Sense of Humor

Misadventures of Howard Hughes Can Teach Electric Utilities

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By Llewellyn King

Howard Hughes, a pioneer in movie making and aviation (which informed his cantilevered underwire bra design for actress Jane Russell), was blindsided by disruptive technology. Electric utilities might want to heed Hughes’s history as they deal with future shock.

Hughes believed that his 1930 silent movie “Hell’s Angels” — which has some of the finest flying sequences ever shot — could make it even as the age of talkies was dawning. But he was in error; he had remake the movie with a sound track at huge expense.

Something similar happened to Hughes with the H-4 Hercules, the giant, wooden flying boat — nicknamed the “Spruce Goose” by the press — which he built during World War II. Eight reciprocating engines were no match for the potential offered on the horizon by jet engines. And spruce was no match for the superior aluminum alloys that had been developed during the war.

Leaders in the electric utility industry know full well that times are changing. But are they making brilliant silent movies when the talkies are around the corner, so to speak?

Dealing with change is especially hard for utilities because they are in a real-time business. The juice must flow 24-7, which means the new has to integrate seamlessly with the old. Shutting down to retool, as Hughes did with “Hell’s Angels,” is not an option.

Yet in the 46 years that I’ve been writing about the utility industry, I’ve never seen such upheaval, ergo such challenges. There is no aspect of the industry which isn’t beset by technology at the gate: computing and artificial intelligence; drones for line surveillance and security; 3D printing (additive manufacturing) for repairs; superior data from smart meters; and aggressive growth from competitors on the roof – in the form of solar panels — and in the marketplace.

But, to my mind, the most-daunting challenge facing the industry is flat or declining electric demand. For investor-owned utilities, which provide 80 percent of the nation’s electricity, this challenge, this reality has been masked by the good performance of their stocks on Wall Street, which owes a lot to low interest rates and volatility in the market, not to the long-term prospects for investor-owned companies. For now, it is the utility paradox.

The industry, through the Edison Electric Institute, has built a superb lobbying arm that can seek legislative remedies for its troubles — as it did when dividends were under attack. But there are no legislative fixes for an industry in market turmoil, abetted by technological disruption.

There is more hope for relief from regulators. Increasingly, the industry is focused on state commissions: it wants relief from the downside of rooftop solar; relief from intrusive and misleading marketers of solar products; and, above all, protection of the grid’s existing infrastructure.

Additionally, not all technology is disruptive. Utility solar farms are an economic and technological success. Storage is attracting innovators and may yet get a breakthrough. There is the hope that new load may come through electric vehicles — although growth there could be stunted by cheap oil. It behooves the industry to push for better recharging, particularly inductive charging, and to advertise more electric consumption as a remedy for air pollution from the automobile tailpipe.

In 1974, I worked with the then chairman of the Atomic Energy Commission, the late Dixy Lee Ray, on an energy study for President Richard Nixon. The study advocated more electrification of transportation – and we had railroads in mind first and foremost. The United States has a few miles of electrified railway in the Midwest and the Amtrak corridor from Washington to Boston – far less electrified railway than other developed countries.

The railroads got away from the electric utilities, and they won’t be corralled now. But there is a powerful environmental and social case for electrifying cars; creating a moral imperative to drive electric, if refueling is solved — and I don’t mean hanging an extension cord out the kitchen window. South Korea has buses that refuel through induction-charging plates at bus stops; smaller batteries, frequent charging.

It will be a lot easier for utilities to argue for regulatory relief to protect their social and shareholder responsibilities if they are extending their social value. — For InsideSources

Wind of Change Challenging Utilities

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On Feb. 3, 1960 in Cape Town, British Prime Minister Harold Macmillan shook up what was still the British Empire in Africa by telling the Parliament of South Africa that “the wind of change is blowing through this continent.”

His remarks weren’t well received by those who that thought it was premature, and that Britain would rule much of Africa for generations. The British ruling class in Africa – the established order — was shaken.

But Macmillan’s speech was, in fact, a tacit recognition of the inevitable. It was the signaling of a brave new world in which Britain would grant independence to countries from Nigeria to Botswana and Kenya to Malawi. Britain would not attempt to hold the Empire together. His speech was seminal, in that Britain had signaled that things would never ever be the same.

To me, the appearance of investor and entrepreneur Elon Musk at the Edison Electric Institute’s annual convention in New Orleans was a “wind of change” moment for the august electric utility. It was a signal that the industry was coming to terms, or trying to come to terms, with new forces that are challenging it as a business proposition in a way that it hasn’t been challenged in a history of more than 100 years.

But whereas Britain could swallow its pride and start a withdrawal from its former possessions, the electric industry faces quite a different challenge: How can it serve its customers and honor its compact with them when people like Musk, who is the non-executive chairman of the aggressive company SolarCity, and a passionate advocate of solar electricity, and Google are moving into the electric space?

At EEI’s annual convention, Musk didn’t tell his audience what he thought would happen to the utilities as their best customers opted to leave the grid, or to rely on it only in emergencies, while insisting that they should be allowed to sell their own excess generation back to the grid. Musk also didn’t venture an opinion on the future of the grid — and his interlocutor, Ted Craver, chairman and CEO of Rosemead, Calif.-based Edison International, didn’t press him.

Instead Musk talked glowingly about the electrification of transportation, implying — but not saying outright — that the electric pie would grow with new technologies like his Tesla Motors’ electric car.

The CEOs of EEI’s board were ready for the press by the time they held a briefing a day after Musk’s opening appearance. They spoke of “meeting the challenges as we have always met the challenges” and of “evolving” with the new realities. Gone from recent EEI annual meetings was CEO talk of their business model being “broken.”

The great dark cloud hanging over the industry is that of social justice. As the move to renewables becomes a flood, enthusiastically endorsed by such disparate groups as the Tea Party and environmentalists, the Christian right and morally superior homeowners, and companies like SolarCity and First Solar, the poor may have difficulty keeping their heads above water.

The grid, the lifeline of U.S. social cohesion, remains at threat. Utilities are jumping into the solar business, but they have yet to reveal how selling or leasing rooftop units — as the Southern Company is about to do in Georgia — is going to save the grid, or how the poor and city dwellers are going to be saved from having to pay more and more for the grid while suburban fat cats enjoy their sense that they’re saving the planet.

My sense is that in 10 years, things will look worse than they do today; that an ill wind of change will have reduced some utilities to the pitiful state of Amtrak — a transportation necessity that has gobbled up public money but hasn’t restored the glory days of rail travel.

People like myself — I live in an apartment building — have reason to fear the coming solar electric world, for we will be left out in the cold. The sun will not be shining on those of us who still need the grid. It needs to be defended. — This column was previously published in Public Utilities Fortnightly.

Washington Can’t Save the Utilities from the Solar Onslaught

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Time was when New York dominated the collective and individual efforts of the electric utility industry. When the Edison Electric Institute (EEI) was founded in 1933, there was no question but that it would be located in New York. Likewise the Atomic Industrial Forum, which has morphed into the Nuclear Energy Institute, was founded there in 1952.

At least one large utility, American Electric Power, had its headquarters on Wall Street. In the early 1970s, I would travel from Washington to New York to interview AEP’s legendary chairman, Donald C. Cook. He believed in coal, and as the one-and-only fuel for electric generation. So much so that he kept a large piece of it on his desk. It was big and shiny and luminously black. In a twist of irony, Cook is remembered by his company through its only nuclear plant being named after him.

Electric utilities believed they had to be in New York because that is where they had raised their money — and they had needed to raise enormous quantities of money from the time of the first power plant.

Many myths attended the raising of capital. One was that to keep up with the blistering pace of electric demand, 7.5 percent per year at the end of the 1960s and the beginning the 1970s, utilities would drain the capital markets; take all the available money. It was said that Britain could not privatize the Central Electricity Generating Board because there was not enough liquidity in the London market to afford such a giant offering. (In reality, the public offering was oversubscribed when it was listed by Prime Minister Margaret Thatcher.)

It was clear by the 1970s, even before the energy crisis in the winter of 1973, that the U.S. government was going to be a bigger player in the future of the industry than the banks and investment houses. So gradually the trade associations moved to Washington, and the utilities moved their headquarters back into their service territories.

Washington was becoming all-important. It probably started with the National Environmental Policy Act of 1969, which was interpreted by the courts as having wide application. This was a lesson learned by the nuclear industry when it claimed exemption from NEPA under the Atomic Energy Act of 1954. No way, said the U.S. Court of Appeals for the District of Columbia Circuit. Afterward, the electric power industry realized that it had to be pro-active with legislation; it had to be in Washington and it had to lobby — and lobby hard.

The result has been that EEI, particularly under its well-liked president Tom Kuhn, has become one of the most effective trade association lobbying Congress. Its role was to prevent damaging legislation, to educate members of Congress, and to divert campaign funds to those who saw things its way.

Gradually, the whole industry came to look to Washington for redress; to ask for favors and stall damaging legislation. Its last great victory was in preserving dividends — so important to utility stockholders — from the taxman.

Now the industry is in a new crisis; a crisis that has arisen not because of policy, but of technology. Call it “the solar onslaught.”

The industry is fighting for its identity, its profitability, and its traditional role as the monopoly supplier of electricity. Solar rooftop installations are fraying the very fabric of the utilities and their business models and, for the first time in a long time, the powerful lobby that is EEI cannot help.

This is not a battle which will be fought in Washington. This is a state issue, and there are strange alliances ranged against the traditional utilities: the Tea Party with the greens, evangelicals with politically-correct Democrats.

Sadly, it is a battle in which the odds — as in journalism and telephony — are on the side of the new. Disruptive technology is at the gate. When rooftop solar is aligned with a really serviceable battery (the new Tesla offerings do not do the job yet), the utilities will feel like the makers of silent movies when the talkies came along.

The great star, Rudolph Valentino, did not survive the new technology. What of today’s utilities?  — This column was previously published in Public Utilities Fortnightly.