History and Development Of The Industry

An Industry in Transition

The electric power industry in the United States has entered an era of dramatic change. Largely due to the Energy Policy Act of 1992, the industry is rapidly joining the deregulated natural gas, railroad, trucking, airline, and telecommunications industries in becoming intensely competitive. As Edwin Lupberger, CEO of New Orleans-based Entergy Corporation, put it when he addressed a group of economic development executives in Baton Rouge on April 28, "Nowadays, everywhere and everybody is our competition, whether we like it or not".¹ Another CEO, Gregory Nesbitt of Pineville-based Central Louisiana Electric Company (CLECO), in an address to shareholders on April 22, stated that under the traditional cost-plus regulatory pricing mechanism "the price of electricity was driven by the cost of producing it, but now it is just the opposite-the market price of electricity drives the cost of production". The underlying message is that management must keep costs in line if the state's electric utilities are to succeed in today's competitive business climate.

Last October, Standard & Poor's, a prominent bond rating agency, expressed a lack of confidence in the industry when it downgraded the "ratings outlook" of 40 electric utilities because it felt they were in a declining industry with meager growth prospects accompanied by intense competition and mounting costs of compliance with environmental regulation.²Since then, electric utility stock prices have plummeted over 30%, on average, from their peaks. The stocks of Entergy and CLECO have fallen about 38% and 14%, respectively, from their 1993 peaks,³even though both companies are looked upon favorably by Wall Street analysts.

Organizational Structures of Electric Utilities

Louisiana's electric utilities are represented by a number of different types of organizational structures. The termelectric utilityconsists of all enterprises engaged in the production, transmission, and/or distribution of electricity for use by the public and includes the following types of ownership:

--Investor-Owned are organized as tax-paying businesses, usually financed by the sale of securities in the capital market. They are required or have the right to supply electric service in a designated service area,Publicly-heldinvestor-owned utilities are those whose common stock is owned by the general public and traded in the open market. A holding companyusually means a corporation (parent company) that directly or indirectly owns a majority or all of the voting securities of one or more electric utility companies which are located in the same or contiguous states.

-Cooperatively-Owned are legally established to be owned by and operated for the benefit of those using its service. The utility company will generate, transmit, and/or distribute electricity to a specified area not being serviced by another utility.

-Government-Ownedinclude municipal systems, federal agencies, state projects, and public power districts.

The retail operations of Louisiana investor and cooperatively-owned utilities are regulated by the Louisiana Public Service Commission (LPSC) or the City Council of New Orleans, depending on the utility. The Federal Energy Regulatory Commission (FERC) regulates wholesale sales to other utilities, municipalities, and cooperatives.

The Louisiana utilities discussed in this report are those that are engaged in the production, transmission, and/or distribution of electricity within the state. Some of them own all or portions of generating plants located in other states as well as Louisiana. Others only distribute power purchased from others.

The Birth of the Electric Power Industry^4,5

The early development of the electric power industry in the South can be traced to the ice manufacturing business. Ice was a necessary utility long before electric lights, natural gas, or running water were considered necessities. The application of the principles of mechanical refrigeration began about 1880 with the invention of machines for making artificial ice. Before then, natural ice was harvested from frozen lakes in the North, stored in insulated buildings, and then shipped by boat to southern cities. It was an expensive process. When ice began to be manufactured locally in the South, it became more affordable and demand for it increased.

At first, the machinery that ran ice plants was powered by electric motors that used direct current (DC) electricity. Small steam or internal combustion engines were used to generate the electricity to run the motors. Ice companies also used this power to light their plants and distributed excess energy to nearby homes and businesses. The electricity could not be transmitted very far because of high power losses inherent with the transmission of DC electricity.

As demand for lighting increased, more generating facilities were needed. Small, isolated generating plants sprang up to serve nearby areas. These small systems experienced many problems due to inefficiency and poor technology. It was common for a local power plant to shut own for a week or more while waiting for a replacement part. Generating units were expensive to install and maintain, and there were few people qualified to operate them. The price of electricity provided in this haphazard manner was very expensive to the few consumers who had access to it.

As the industry began to develop, it became apparent that better and more economical electric service could be provided if a single company supplied an area. By Joining several small operations, economies of scale were achieved and costs were lowered by eliminating unnecessary duplication. As the merged companies themselves became larger, they began to purchase the smaller companies. When these small, isolated systems were purchased, it was the electric properties that were the most sought after. However, the acquiring companies were frequently required to buy affiliated water, ice, dairy, bottling, and other businesses in order to obtain the electric properties. Other unrelated businesses that were acquired included ice cream, timber, natural gas, streetcars, telephone, and even a meat market.

In 1886 the growth of the industry was given a big boost when George Westinghouse developed alternating current (AC) electricity. AC electricity allowed bulk power transmission over long distances at very high voltages with low power loss followed by highly efficient conversion to lower voltages for the consumer through the use of transformers. This technological breakthrough made it economically feasible to provide service to a vastly larger number of consumers that lived far away from a generating source, thus ushering in the moderm age of electricity in Louisiana and the nation.

Evolution of Electric Utilities in Louisiana ^4,5,6,7

From its inception to about 1910 the concept of a "utility" was nonexistent. From a hodgepodge of small, unreliable private systems unregulated by government, the industry evolved into mostly large, government regulated, private and public monopolies, some with multi-state operations. As the industry grew, unique organizational structures were created to provide electric service to rural areas and to ensure reliability of service. Now that the industry is exposed to competitive pressures as well as more government regulation, additional organizational restructuring is taking place to cope with the new business environment.

Like most other parts of the nation, Louisiana first had electric power in its major cities, notably New Orleans. The Southwestern Brush Electric Light and Power Company was incorporated in New Orleans June 11, 1881, and was the first company to generate and distribute electricity in the city. The company began operating January 8, 1882, and by the end of the year had installed 12 generators serving 480 electric arc lights mostly used for street lighting. The Edison Electric Illuminating Company was the first electric company in New Orleans to serve incandescent lighting and other power needs. It was chartered in 1886. Other companies were formed, operated for a while, and then went out of business. By the close of 1925 a total of 43 companies had supplied the New Orleans area with electricity at one time or another. On January 1, 1926, the companies serving New Orleans were consolidated into one company chartered by the city to provide utility services, the New Orleans Public Service Inc. (NOPSI).

In 1892 electric service to Algiers, across the Mississippi River from New Orleans, began. It was offered by the Algiers Ice Manufacturing Company, which was organized in 1891 to manufacture and sell ice. The company was one of the forerunners of today's Louisiana Power & Light Company (LP&L).

At about the same time, up the road from New Orleans in Baton Rouge, the Baton Rouge Electric Light and Power Company was formed. Similarly, in Beaumont, Texas, the Beaumont Ice, Light and Refrigeration Company was selling a little bit of everything, including electricity. Through a series of expansions, acquisitions, and mergers from 1925 through 1938, the present day Gulf States Utilities (GSU) service area took shape. At one time more than 60 different power companies served the area.

Meanwhile, on the other end of the state, on June 29, 1912, three Shreveport area gas and electric utilities merged to form Southwestern Gas and Electric Company, a predecessor to present day Southwestern Electric Power Company (SWEPCO). And in 1911 Harvey Couch, who had just sold his successful north Louisiana telephone company to the Bell Telephone Company, started buying up small utilities in Arkansas. In 1913 he incorporated the Arkansas Power Company, and in 1915 he changed the name to Arkansas Light & Power Company. During the 1920s Couch bought up utilities in Mississippi and Louisiana and eventually formed Mississippi Power & Light Company in 1923 and Louisiana Power Company in 1924. These three companies and NOPSI combined in 1949 to form Middle South Utilities(MSU), which later changed its name to Entergy in 1989. On December 31, 1993, Entergy merged with GSU, making GSU Entergy's fifth operating electric utility subsidiary and Entergy one of the nation's largest utility holding companies.

Electric service in the central part of the state began in Bunkie in 1914, also in conjunction with ice manufacturing. Expansion to the surrounding area began in 1926 when the Bunkie system and other small systems in the surrounding area were consolidated. The company went bankrupt in 1933, but it was reorganized in 1934 as the Louisiana Ice and Electric Company, Inc. The company grew, and in 1945 changed its name to Central Louisiana Electric Company (CLECO) and concentrated on its electric, water, and gas businesses. In 1951 CLECO doubled in size through a merger with Gulf Public Service Co., Inc., a larger utility. Oil and gas exploration and transmission subsidiaries were organized, and a diversified energy holding company was formed in 1978. In 1981 the regulated utility businesses and the unregulated oil and gas businesses were separated, and CLECO became an independent public utility again. Shortly thereafter the company divested itself of its water and gas businesses and became solely an electric utility.

Following World War II some municipalities decided to own and operate their own systems rather than continue to purchase their power from the investor-owned utilities. They reasoned that they could provide reliable electricity to their residents at less cost because they were not subject to the same taxes, regulation, and profit motive as the investor-owned utilities. Today there are 20 independent municipally-owned systems in Louisiana.

Electrifying Rural Louisiana ^4,5,8,9

Despite the rapid expansion of investor-owned utilities in Louisiana in the early years, in 1902 only 25 electric power plants existed in Louisiana, and most of them only operated for a few hours a day on certain days of the week in mostly urban areas. By the late 1920s the availability of electric service in urban areas was virtually complete, but in Louisiana and the nation less than 2% of the people living in rural areas had electric service. The investor-owned utilities were not meeting the needs of the sparsely populated rural areas because it was unprofitable for them to construct the necessary distribution system.

This problem was addressed by President Franklin D. Roosevelt when he signed an executive order on May 11, 1935, creating the Rural Electrification Administration (REA), which provided low interest loans for the specific purpose of bringing electricity to the nation's rural areas. Financed by the REA loans, distribution cooperatives were formed in the 1940s and 1950s to erect poles, string lines, and install transformers throughout Louisiana's rural areas.

Prior to the REA funding only one investor-owned utility, CLECO, had already begun to extend its lines to rural areas. When the REA loan program went into effect, CLECO was also the only investor-owned utility to take advantage of the low-interest money. The company obtained its first loan in 1939. In 1948 CLECO formed a subsidiary specifically charged with participating in the government program and providing electricity to those areas the company could not economically serve.

At first the distribution co-ops purchased all their power from the larger investor-owned utilities who owned the generating plants, but as the number of people receiving electric service from the distribution co-ops increased, the amount of bulk power needed to supply their needs also grew. A number of the state's co-ops joined together to consider methods to best meet the short and long term bulk energy requirements of their members.

This joint planning venture resulted in the formation in 1962 of the Louisiana Electric Cooperative-later to be renamed Cajun Electric Cooperative, Inc. The first tangible step toward achieving this goal was taken in late 1968 when the member co-ops submitted a $56 million loan application to the REA for funds to build what would become Big Cajun 1, a 210 MW gas-fired power plant which went on line in 1972. Since then, additional generating capacity has been brought on line and the electrification of rural Louisiana is now virtually 100% complete.

In recent years there have been efforts to abolish the REA because it is alleged that the agency's mission of providing electric service to rural areas is now complete. Numerous examples of REA loans funding projects that did not appear to have anything to do with rural electrification have been cited to support this view. Some say the agency is a prime example of a government agency that is not abolished despite the fact that the reason for its creation no longer exists.

From Boom to Bust ^4,5

As electric service became available to more consumers in the state, consumption grew steadily for many years. New uses for electricity, like air conditioning, also contributed to the increasing consumption. During the 1970s and early 1980s Louisiana's economy was booming, and electricity consumption grew 6 to 7% a year. The utilities responded by planning to construct additional generating capacity in anticipation of continuing growth of that magnitude.

But in 1973 the Arab oil embargo was imposed, which resulted in shortages of oil and gas and the price of the two fuels skyrocketed. In response, the Powerplant and Industrial Fuel Use Act of 1978 was passed. This Act prohibited a utility from constructing a new oil or gas fired generating plant. Although the Act was eventually repealed, by 1981 gas began to be displaced by coal and then by lignite and nuclear in 1986 in new Louisiana electric generating units. By 1992 only 44.5% of net generation was fueled by gas (See Tables 1 and 2).

Before the gas and oil shortages of the 1970s nearly all of Louisiana's generating plants were designed to use natural gas as the primary fuel source and fuel oil as an alternate. Since gas was plentiful and much cheaper than oil then, only a tiny amount of fuel oil was used, mainly to keep the fuel oil delivery system and combustion equipment in working order. Starting in 1973, as the price and availability of fuel oil became more competitive with gas, more fuel oil began to be used. By 1978 electricity generated by fuel oil peaked at almost 28% of all electricity generated by the state's utilities. Since then it has declined steadily, and in 1992 its share was only 0.9% (See Tables 1 and 2).

As the price of electricity rose, consumers began to conserve it. The demand that the utilities had predicted failed to materialize, and some projects were cancelled. Others continued, and several new generating plants were completed. When they began commercial operation, a sizable capacity surplus developed. While no new plant has gone on line since GSU's River Bend Nuclear Plant in June 1986, overcapacity still persists, and future demand projections indicate that new capacity will not be needed for the rest of the decade.

Louisiana Generating Capability and Generation

Louisiana's total generating capacity consists of the 37 operable generating plants within the state owned by the electric utilities plus those owned by non-utility generators (NUGs). The location of these plants are shown on the map in Figure 1. Net generation and generating capability for 1992 for each plant by fuel type are shown in Tables 1 and 3, respectively.

NUGs are composed of privately-owned cogenerators and independent power producers (IPPs). Louisiana has 32 cogenerators. Fourteen sell a small portion of their output to the investorowned utilities as qualified facilities (QFs) under the Public Utility Regulatory Policies Act of 1978 (PURPA). Louisiana's only IPP is the Sydney A. Murray Hydroelectric Station on the Mississippi River 70 miles below Vidalia on the control structure that regulates flow from the Mississippi River to the Atchafalaya River.

The subject of cogeneration is examined in detail in DNR's October 1993 report Cogeneration in Louisiana. The report includes information on power sales by industrial cogenerators to Louisiana utilities and aggregate capacity and generation statistics of other industrial cogenerators that consume all of their power on site. A statistical overview of all identified Louisiana generating sources is also provided, The period covered by the 57-page report is 1986- with special emphasis on 1992 activity. For a copy of the report, please write to:

Alan A. Troy, P.E. Senior Energy Engineer
Technology Assessment Division
Louisiana Department of Natural Resources
P.O. Box 94396
Baton Rouge, Louisiana 70804-9396

At the close of 1992 Louisiana's total generating capability was 19,192 MW, almost exactly the same as 1991. Of the 1992 total 85.2% was owned by Louisiana utilities. Cogenerators and Murray owned 13.6%, and the remaining 1.2% was owned by Texas and Oklahoma utilities. A complete breakdown of generating capability by class of ownership and primary fuel type is shown in Table 4.

Net generation by Louisiana electric utilities of 55,188 million KWH was 74.6% of the 73,939 million KWH generated by all sources in 1992. Cogenerators accounted for 24.5% of the total and Murray 0.9%. The pie chart in Figure 2 breaks down total net generation by type of operator. Almost all of the power generated by cogenerators was used internally and not fed into the grid. The fuel most frequently used was gas followed by coal, nuclear, lignite, and fuel oil. Net generating statistics for 1992 are abulated by fuel type according to type of operator in Table 5. A futher breakdown by each operator and fuel type for each Louisiana generating station is shown in Table 1.

In 1992 Louisiana's total net generation available to the statewide power grid was 56,244 million KWH consisting of 55,188 million KWH generated by the utilities, 454 million KWH sold to the utilities by cogenerators, and 602 million KWH sold to the utilities by Murray. This is down nearly 4% from the 58,283 million KWH available in 1991. The state's electric utilities generated 98.1% of the power available to the grid from all Louisiana generating plants. The fuel mix of the power generated by the state's electric utilities in 1992 was 44.4% gas, 28.3% coal, 18.8% nuclear, 7.6% lignite, and 0.9% oil. A tabulation of total net generation by Louisiana electric utilities according to fuel type from 1960-1992 is shown in Table 2 and plotted in Figure 3 from 1973-1992.

In 1993 the state's utilities sold 67,599 million KWH to ultimate consumers. Electricity sales by customer sector as a percentage of total sales were 33.1% residential, 21.1% commercial, 42.1% industrial, and 3.7% other. Utility KWH sales by customer sector for the period 1983-1993 are shown graphically in Figure 4.

Out-of-State Sources of Electricity^10,11.12

Additional sources of electricity used by Louisiana utilities to meet the needs of the state's consumers are located outside the state's borders, Louisiana utilities buy, sell, and interchange wholesale power with each other, within their integrated systems, and with neighboring out-of- independent utilities, federal power authorities, and regional power pools. These transactions assure the lowest cost power and reliability of service.

Virtually all of the state's electric utilities are either members or conduct power transfer transactions with members of the Southwest Power Pool (SPP). Headquartered in Little Rock, Arkansas, the SPP is one of nine Regional Reliability Councils that comprise the North American Electric Reliability Council(NERC). NERC was formed by the electric utility industry in 1968 to promote the reliability of bulk power supplies in the electric utility systems of North America in response to the massive power failure that occurred in the Northeast in 1965. The SPP's member systems serve customers in all or part of the states of Arkansas, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, and Texas. Its power grid links bulk electricity suppliers in adjacent Regional Reliability Councils.

Since NERC membership consists entirely of utilities, no non-utility generators (NUGs) are included. But NUGs are now big players in the electric power industry nationwide, and many feel they should participate in maintaining the integrity of the nation's electric supply system. Consequently, Regional Transmission Groups (RTGs) are now being organized. The RTGs would include the utilities, exempt wholesale generators (EWGs) qualified facilities (QFs), and independent power producers (IPPs). The RTGs would primarily address transmission issues. While no RTG is actually in operation yet, it appears several will be in the near future. Once they are in place, more power sources will be accessible, and the reliability of the transmission system should be improved.

The Southwestern Power Administration (SPA) is another source of power for Louisiana utilities. The SPA is a federal agency whose purpose is to market electricity produced from 24 hydroelectric generating plants operated by the U. S. Corps of Engineers for the Southwestern Federal Power System. The SPA was established in 1943 by the Secretary of the Interior. The dam sites and hydroelectric stations are located in Arkansas, Missouri, and Texas and have a total installed capacity of 2,158 MW. The SPA's marketing region is comprised of the states of Arkansas, Louisiana, Kansas, Missouri, and Texas. Federal law requires power marketing agencies such as the SPA to offer rural electric cooperatives, municipal systems, and other publicly-owned utilities the first option to buy at cost most of the power generated at these hydroelectric stations. Four Louisiana utilities have contracted with the SPA for a total of 143.3 MW in 1994, distributed as follows: Cajun Electric Cooperative - 91.4 MW; City of Lafayette - 18.0 MW; Louisiana Energy and Power Authority - 31.4 MW; and the City of Natchitoches - 2.5 MW. The enormous amount of rainfall during the spring and summer of 1993 enabled the SPA to provide significantly more power to utilities during the extremely hot summer that followed. The SPA is a member of the Southwest Power Pool.

Another out-of-state source of power for GSU, CLECO, and LP&L is the 80 MW (nominal rating) hydroelectric station on the Texas side of the Sabine River, which forms a portion of the boundary between Louisiana and Texas. The station is part of the Toledo Bend Project and is 50% owned by the Sabine River Authority of Louisiana. The three utilities are obligated to purchase all of the station's output according to the following proportions: GSU - 50%, CLECO - 25%, and LP&L - 25%.

Impact of Energy Policy Act of 1992 on Energy Markets

With the passage of the Energy Policy Act of 1992 (EPACT), the monopoly status of utilities was partially removed to encourage competition in power generation, wholesale markets, and transmission services. EPACT makes it easier for utilities to own unregulated independent power facilities and invest in power projects in other states and countries. The extent to which the industry moves from a regulated monopoly to a market-driven entity will largely depend on state regulators and the strategy a particular utility takes to utilize its resources to both ward off competition and take advantage of the business opportunities and risks associated with an open and competitive market environment. The burden of providing the necessary regulatory framework is still the domain of the Federal Energy Regulatory Commission (FERC) and state public service commissions as it was before EPACT was passed.

EPACT amended the Public Utility Holding Company Act of 1935 (PUHCA) by creating a new class of power producers, called exempt wholesale generators (EWGs), that are not subject to PUHCA and are exclusively engaged in owning and/or operating facilities generating electricity for sale at wholesale. They can be independent companies, or the utilities can own them. In addition, the utilities can now make foreign investments without SEC approval, within certain restrictions. The persistent capacity surplus in Louisiana discourages new entrants into the state's energy markets.

A key provision of EPACT mandates open access of the transmission systems of private and public utilities to all wholesale power producers provided they pay the entire cost of transmission as determined by the Federal Energy Regulatory Commission (FERC). This should make it easier for Louisiana's cogenerators and transmission-dependent municipal utilities to buy and sell power with whomever they choose. Although FERC is empowered to order wheeling, it is not required to do so if service to the transmitting utilities' existing customers is impaired. Since on lines are in the rate base established by the Louisiana Public Service Commission (LPSC), there will have to be some collaboration between the FERC and the LPSC on rates. A method for determining the price of transmission services has not yet been established by regulators, and is the dominating issue open access has created.

On April 20 the California Public Utilities Commission took a bold step toward unbridled competition in electricity markets when it proposed to give virtually any consumer "direct access" to electricity by the year 2002, beginning with industrial consumers on January 1, 1996. The plan leaves many important questions unanswered but could set a precedent by creating a marketplace that places a premium on being the lowest cost producer in a region. Two public bearings have been held on the proposal and a third is scheduled for July 1, 1994.¹³

EPACT also directs state regulatory commissions to look at the effects of wholesale power purchases on utility cost of capital and to consider utility investments in energy conservation and efficiency in the rate-making process so such investments are as profitable as those in new generating plants. Traditional utility regulation favors capital investment in new facilities but provides little or no reward when a utility uses its assets more productively in other ways to serve customers. The idea is to provide a financial incentive for utilities to use measures other than building new power plants to meet their customers' needs. Even without this incentive Louisiana utilities are already implementing such measures.

So far the LPSC has not taken an advocacy position on any of the issues EPACT has created, preferring to address them as they come up. However, the Commission is keeping abreast of regulatory policies and rulings in other states for possible application in Louisiana in the future.

As a direct result of EPACT, utilities are making profound changes in the way they conduct their business. Every utility is scrambling to instill a competitive corporate culture in their employees to become more efficient. Louisiana utilities are restructuring by reducing their workforce, consolidating functions, streamlining operations, and introducing innovative load management programs in an effort to reduce current operating expenses and postpone for as long as possible the need for capital expenditures to build new generating capacity. As traditional utility "service area" boundaries disintegrate, it has been suggested that this new-found competitive rivalry will result in the utilities aggressively soliciting each other's customers, price wars, retail wheeling, a merger frenzy, power brokering, and even the gradual disengagement of utilities from generation altogether in favor of transmission-only services similar to the recently deregulated pipeline industry. Some of this is already occurring in Louisiana and will be discussed later in this report.

Return to Table of Contents