Drunk with Power

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."