The rise and fall of oil generation in the USA

The rise and fall of oil generation in the USA A study in institutional adaptability Richard L. Gordon

After 1978, the US electric power industry more than halved oil generation of electricity. This reversed a rising trend that had accelerated with the liberalization of residual fuel oil import quotas in 1966. This paper uses detailed data on inter utility sales filed with the US government and limited circulation statistical reports from electric utilities to appraise the changes. The changes reflect the capacity of a flexible, growing, integrated electric utility system to adapt to changing circumstances. Much of the reduction in oil use was effected by purchases of coal-generated electricity by oil-based companies on the east coast. Another major development was the introduction of new coal-fired plants to the westsouth-central states. This allowed coal to take over from oil as the alternative to increasingly more expensive natural gas. In New York and California, however, gas became available to displace oil. A further more modest contribution was made by having plants that had shifted from coal to oil resume coal use. Keywords:

Observers of the electric power industry have long recognized that it possessed greater flexibility in fuel choice than other energy users. The extent of this flexibility has been illustrated again by the substantial decline from 1978 to 1983 in oil consumption by US electric power companies. This reduction arose from utilization of several different options. The single most important development was the substitution of coal for oil. However, much of this substitution also involved utilization of the extensive network that allows transmission of power over long distances. East coast utilities reduced oil use, in part, by increasing purchases from utilities primarily reliant on coal. In other cases, the rise in coal use was due to the realization of plans established in the early 1970s to use The author is Professor of Mineral Economics in the College of Earth and Mineral Sciences, Pennsylvania State University, 221 Eric A. Walker Building, University Park, PA 16802, USA. Final manuscript

66

received 28 August 1984.

0140-9883/85/020066-l

Electricity

generation;

Fuel switching;

USA

coal and (to a lesser extent) nuclear power as the long run replacement for increasingly expensive natural gas. In some cases, a shift to oil had occurred as an interim step. Still another influence was that increased availability of natural gas allowed a number of utilities to increase gas use. The experience deserves attention because of its implications for debates over the optimum approach to electric power. For example, the experience clearly shows a major cost in adopting the decentralized approach Lovins labelled the soft energy path and similarly raises questions about the wisdom of the federal government attempting to legislate the pattern of electric utility fuel use. The experience suggests that benefits accrue to having excess coal and nuclear capacity to replace oil, but it would be difficult to determine whether these benefits were sufficient to repay the investments and, more critically, what the payout to further additions of capacity might be. This article seeks to review this experience with particular emphasis on the adjustments made by privately owned utilities on which data are more readily obtained. The discussion begins with review of fuel

1 303.00

0 1985

Butterworth

& Co (Publishers)

Ltd

The rise and fall of oil generation in the USA: R. L. Gordon choice conditions in the electric power industry and turns to examination of the 1946-1978 development of the use of oil and other fuel in the industry. The details of the 1978-1981 portion of the decline are then examined. An appendix discusses the nature and limitation of the key data sources.

Background on electric utility oil use From the middle 1960s to the late 197Os, oil use in electric utilities rose steadily on both a relative and absolute basis. (An early move to oil occurred from 1947 to 1950; oil use then dropped in 1951, stayed level throughout most of the 195Os, and rose a bit by the end of the decade.) Oil use went from around 600 trillion (lOU)Btu in the early 1960s to a 1978 peak of almost four quadrillion (4 x 1015 Btu). This raised the contribution to Btu use in electric utilities from 7% to 17%. The subsequent drop brought oil use to 2.2 quadrillion Btu by 1981 and 1.5 quadrillion Btu in the next two years (for heat input shares of 9% and 6%). These trends were naturally closely related to the nature and overall development of the US electric power industry. Electric power has long possessed greater flexibility in fuel use than most other energy users. Electric power utilities produce on so large a scale that they can build big facilities and enjoy economies of scale. One advantage of large scale is that it so greatly lowers the unit cost of using such fuels as coal and nuclear power that utilities find their use far more practical than do smaller scale users. The history of electric utility fuel use has been one of shifting as appropriate to use of the cheapest-to-consume fuels. As in other fuel choices, this has been affected by other operating costs and capital costs together with fuel costs. Since World War II, considerable changes have occurred in overall US electric-power fuel use. This has involved both shifts in the patterns of fuel use within different regions and differences among regions in output levels and growth. The most persistent trend has been the inability of waterpower generation to rise as rapidly as total generation (or to rise at all in the 1970s). A clear movement towards rising use of nuclear power was aborted by the Three Mile Island accident in 1978. The accident removed two units from operation and produced a regulatory climate that retarded both completion of plants and operating existing ones. The fossil fuel situation has been more complex. Nationally, the absolute levels of generation by coal, oil, and natural gas all rose persistently. Coal generation had the most substantial rise and increased since 1947 in all but four years in the 1977-1983 period. Gas generation rose uninterruptedly from 1947 to 1972, started a downtrend that lasted to 1976, subsequently rose until 1980, fell slightly in 1981, and more sharply in 1982 and 1983. At least up to 1962, the behaviour of oil has been considerably more uneven. Oil generation moved from 14 billion (109) kWh in 1946 to 34 billion kWh in 1950

ENERGY ECONOMICS April 1985

with most of the increase in 1949 (12 billion kWh) and 1950 (5 billion kWh). At this point, concern over the threat to US oil and coal inspired pressures to limit the oil imports that were important to the rise in electric utility oil use. The record from 1951 to 1962 is of alternating periods of falls and rises in oil-fired generation. However, the net effect was oil generation of around 47 billion kWh from 1959 to 1962. Subsequently, the rise was almost uninterrupted to 1978 (a small decline occurred in 1975). By 1978 oil generation was 364 billion kWh. The fall reduced this to 206 billion kWh in 1981 and 144 billion kWh in 1983. The gas rise and fall in absolute amounts also produced increases and declines in the share of gas in generation. Oil shares too tended to move in the same direction as the absolute amounts. Coal shares, however, have more often moved in the opposite direction from the amount of coal generation. In particular, the postwar peak of the coal share, 56%, was attained in 1956. From 1958 to 1966, the share was 53-54%. Then, the share eroded steadily, reaching a low of 44% in 1972 and hovering at that level to 1975. Then a clear rise in share occurred, reaching 52% in 1981 and 54.5% in 1983 (see Table 1). Important changes also occurred in the share of different regions in total generation. Each region started (and ended) with a different fuel use pattern from other regions and each experienced differences in evolution. The nature of energy markets had made the US east coast and California the principal market areas for oil in electric utilities. On the east coast, residential fuel oil refined in the Caribbean has been the major source of oil, and oil generation has ebbed and flowed in response to variations in relative fuel prices. California is far removed from coalfields and is a significant oil and gasproducer. Oil-gas competition has long prevailed. Starting in the late 196Os, when oil prices were falling and expected to continue doing so, gas prices were rising, and environmental regulations were tightening, interest in oil spread to other regions - notably the west-south-central states, Illinois, and Michigan. Much of this interest was reflected in plans to build oil-fired plants that were not to be completed until after the first oil price shocks of 1973-74. However, other aspects of fuel market evolution were at work. In particular, utilities in the west-south-central states also responded to rising gas prices by planning (and actually completing) coal-fired units and scheduling (but less successfully completing) nuclear plants. Southern California utilities relied upon mainly purchasing shares in coal-fired plants in New Mexico, Arizona, and Nevada to meet expansion needs in the 1970s. Finally, a wide variety of conditions prevail along the east coast. At one extreme, the east of Florida has been so removed from the coalfields and so easily served by imported oil, that oil has long been the dominant fuel and coal has never been used. At the other extreme, oil use never penetrated areas not easily served - notably all of North Carolina and western Pennsylvania. Pennsylvania, Virginia, the Carolinas, Georgia, and upstate New York generally have logistics that favour coal over oil.

67

The rise and fall of oil generation in the USA: R. L. Gordon Table 1. Electricity A. Generation

generation

by fuels, selected years 1948-83.

lbillion kWh)

1946 1950 1955 1960 1965 1967 1970 1973 1978 1981 1983

112 155 301 403 571 630 704 848 976 1203 1259

Oil

GaS

Hydro

Nuclear

Other

Total

14 34 37 46 65 89 182 314 365 206 144

19 45 95 158 222 265 373 341 305 346 274

78 96 113 146 194 222 248 272 280 260 332

0 0 0 0.5 3.6 7.6 21.8 83.5 276.4 272.7 293.7

0.2 0.4 0.3 0.2 0.5 0.6 0.9 2.3 3.3 6.1 6.5

223 329 547 753 1055 1214 1530 1861 2206 2295 2310

Oil

GS

Hydra

B. Percentaga of total

coal 1946 1950 1955 1960 1965 1967 1970 1973 1978 1981 1983

50.0 47.0 55.1 53.5 54.1 51.9 46.0 45.6 44.2 52.4 54.5

6.3 10.3 6.8 6.1 6.1 7.4 11.9 16.9 16.6 9.0 6.3

8.4 13.5 17.4 21.0 21.0 21.8 24.4 18.3 13.8 15.1 11.9

Total 0.1 0.1 0.1 0.0 0.0 0.1 0.1 0.1 0.2 0.3 0.3

0.0 0.0 0.0

35.1 29.2 20.7 19.3 18.4 18.2 16.2 14.6 12.7 11.4 14.4

0.1 0.4 0.6 1.4 4.5 12.5 11.9 12.7

100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Sources: 1946, 1950, and 1955: National Coal Association, Trends in Electric Utility Experience 1946-1958, National Coal Association, Washington, DC. 1960, 1965, 1967, and 1970: Edison Electric Institute, Historical Statistics of the Electric Utility Industry Through 1970, Edison Electric Institute, New York. 1970, 1974: Edison Electric Institute. 1973, 1978, 1981, and 1983: US Department of Energy, Monthly Energy Review, US Government Printing Office, Washington, DC, March 1984. Note: Hydroelectric power availability fluctuates with water availabilitv.

Table 2. Indicators

of US electric utility

oil use.

Decline in oil generation 1978-1981 (million kWh) New England Middle Atlantic South Atlantic East-north-central West-north-central East-southcentral West-southcentral Mountain Pacific USA

4240 32294 2693 1 16111 8218 12775 22883

158105

Share of region in US oil generation (%I

9.33 38.17 30.59 63.17 87.92 85.53 85.65 87.31 54.32 43.41

1968 18.21 35.38 24.24 0.96 0.66 0.02 0.13 1.14 15.67 100.00

Share of oil in regional gerwation 1978 12.45 23.17 24.12 6.99 1.63 4.09 7.32 1.52 16.66 100.00

1881 19.19 25.38 29.65 4.56 0.35 1.05 1.86 0.34 13.48 100.00

1988

1978

1981

33.12 16.76 11.16 0.32 0.77 0.02 0.09 1.66 7.18

56.98 31.86 22.17 6.55 3.74 7.36 9.08 4.04 22.42

53.56 20.59 14.42 2.40 0.43 1.04 1.20 0.42 10.17

6.96

16.51

8.98

Source: US Department of Energy, Electric Power Annual 1981, US Government Printing Office, Washington, DC, 1982. Note: DOE has redefined oil generation to include petroleum coke, so these data using the old definition differ slightly from used for Table 1.

The regional details of both the rise and fall of oil use are not easily summarized. The four central and the mountain regions, however, can be characterized as long-time minor users of oil and universally effecting percentage declines after 1978 in oil use well above the

those

national average - above 85% for all but the east-northcentral region where the decline was 63% (see Table 2). As late as 1969, these regions collectively accounted for less than 3% of US oil generation; then their total role hit about 20% in 1978 with 7% each in the east-

ENERGY ECONOMICS April 1985

The rise and fall of oil generation in the USA: R. L. Gordon north-central and west-south-central regions. Given the small absolute level of oil use in these regions, the large percentage declines produced smaller absolute declines than in three of the four remaining regions. From 1978 to 1981, each of the four coastal regions behaved differently from the other three and the interior regions. At one extreme, the Pacific region, (in which 99.9% of oil generation is in California) had a percentage decline in oil use of 54%, leading to the largest absolute decline of any region. At the other extreme, New England had the smallest relative and absolute reduction of oil use of any region. The south and middle Atlantic states had the next lowest percentage reductions in oil generation, but ranked third and second in the magnitude of the absolute decline. The South Atlantic region is one in which intraregion differences were particularly critical. The regional record reflects the net impact of oil drops in most of the region but a substantial rise in Florida (in fact, on the east coast while the Florida utilities on the Gulf of Mexico were reducing oil use). As noted, the clearest offset to the rise in oil use was an increase in coal generation - of 23% or 227 billion kWh compared to the 158 billion kWh drop in oil generation (see Table 3). Gas generation also rose 13% or 40 billion kWh. International imports of electricity rose 35%, but still only accounted for about 1% of available supply. All these changes in patterns were unevenly concentrated among regions. At one extreme the New England change in oil use is essentially a case study - the conversion of one plant in Massachusetts back to coal. (A second conversion occurred late in 1981.) All five interior regions and the south Atlantic demonstrated significant increases in coal generation over both the 1966-78 and 1978-81 periods. Particularly notable is that to offset the declining economic attractiveness of natural gas as a boiler fuel, utilities in the west-southcentral region started coal use. The other regions have long been stressing coal as the power source for new plants. Before 1978, the gas record was one of rising use in the west-south-central states and declines in most

Table 3. Coal and ges generation

in the USA, 1966,1976

end 1961

other regions. A key feature of the 1978-81 situation was a sharp rise in gas generation in California and the middle Atlantic states. Thus, the national pattern was of coal displacing oil, but in California it was gas that was the alternative source of fuel for generation. Gas was also a major alternative in the middle Atlantic states. Again, the national trend represents the average impact of quite disparate experiences of different utilities. As already suggested, reduction of oil use was effected by using many different alternatives. To study the process in more detail, the reports of the largest private utilities were examined because such reports provide fuller, more rapid reporting of generation by fuel. Data were compiled for 1978 and 1981 for almost 100 companies. As Tables 4-6 show, the great bulk - 80% - of total changes in US oil use was concentrated among 43 of the utilities viewed, and company data presentation here is limited to these companies. (They consist of all those with at least a 500 million kWh change in oil generation from 1978 to 1981, plus American Electric Power (AEP). It is the largest privately owned generator of electricity in the USA and a major supplier of wholesale power.) The full sample covers about 74% of US electricity generation; the 43 companies with large changes in oil use account for 47%. These last companies had quite small net increases in total generation from 1978 to 1981. The change was, in fact, substantially smaller than the rise in final sales. The companies increased significantly the net inflow of power from other companies. In addition, the net changes in gas supply were heavily concentrated among the 43 companies. Their rise in gas generation actually exceeded the net US change; other companies were reducing gas use. Finally, these 43 companies had a change in coal generation ,equal to about 70% of their decrease in oil use. Clearly, the reduction in oil use involved among other things l l l

an increase in reliance of wholesale purchases; a shift of natural gas to the oil using utilities; and increased direct coal use.

The

(million

Coal

remainder

of this article

1976

New England Middle Atlantic South Atlantic East-northcentral West-northcentral East-south-central West-southcentral Mountain Pacific

22748 105491 128195 220779

1966 102093 204184 295558 104719 140946 37655 82081 6212

USA

613475

92161 0 15040 0

975742

1961 4468 113330 261740 314160 129066 156717 95570 119144 8663 1203203

the

kWh). Natural

1966

seeks to examine

gas

1966

1978

745 8815 11206 7511 27591 8366 110069 13625 63005

124 205 15515 4911 13522 4286 219434 15813 29884

17595 3108 8188 6872 208695 16076 63611

251151

305391

345777

1981 796

i 8934

Source: 1978 and 1981: US Department of Energy Electric Power hnuel 1981, US Government Printing Office, Washington, DC. 1966: Edison Electric Institute. Statistical Yearbook of the Electric Utility Industry, 1966, Edison Electric Institute, New York, 1967.

ENERGY ECONOMICS April

1985

69

The rise and fall of oil generation in the USA: R. L. Gordon Table 4. Changes in US electricity generation by oil, 1979-81

(MWh except (II noted).

Change in oil generation

Company

(MWh)

Change US total Change sample Sum listed companies Sample change as percent, USA Listed companies as percent, USA Middle South Utilities Southern California Editon Virginia Electric and Power Pacific Gas and Electric Public Service Electric and Gas (NJ) Consolidated Edison (New York) Gulf States Utilities Potomac Electric Consumers Power (Mich) New England Electric System Baltimore Gas and Electric Detroit Edison Southern Company Philadelphia Electric South Carolina Electric and Gas General Public Utilities Central and Southwest Delmarva Power and Light Savannah Electric and Power Pennsylvania Power and Light Niagara Mohawk Power Commonwealth Edison (Chicago) Orange and Rockland Utilities San Diego Gas and Electric Allegheny Power System Long Island Lighting Boston Edison Tucson Electric Kansas Gas and Electric Atlantic City Electric Illinois Power Cleveland Electric Illuminating Ohio Edison Florida Power United Illuminating (Corm) Arizona Public Service Northern States Power (Minn) Kansas Power and Light Duquesne Light (Pittsburgh) American Electric Power Florida Power and Light Central Maine Power Central Hudson Gas and Electric

- 158105636 -131153524 - 126770332 62.95 80.18 - 19274501 - 13037788 -11562141

Source: total.

Company

reports

as tabulated

us

percentage

12.19

8.25 7.31 7.14 4.53 4.49 4.27 3.07 2.43 2.37 2.17 2.17

-3848905

-3748755 -3432564 -3423859 -3126574 -3100996 -2614178 - 2360084 -2225587

1.96 1.96 1.65

1.49 1.41 1.32 1.29 1.14 1.04 0.85

-2046723 - 1795665 - 1646427 -1351092

0.85 0.83 0.73 0.65 0.61 0.60 0.57 0.55

- 1350768 - 1305369 - 1153324 - 1020051 -959239 -946508

-B99710 -B69147 -808664 - 745986

-695377 -692734 -676287 -561283 -547915 -543635 - 504545 -214798 4911013 648367 516516

0.51 0.47 0.44 0.44 0.43 0.36 0.35 0.34 0.32 0.14 -3.11 -0.41 -0.33

and US Department

of Energy,

The second

Behaviour of coal generation in the USA, 1978-1981 The principal source of increased coal generation predictably was the introduction of new coal-fired plants. This situation is most clearcut for companies west of the Mississippi. New plants account for virtually all the rise in coal generation for these companies. In addition to the companies listed from the region, several

Percentage total us generation

74.14 47.10

80.18

-6749622 -4853618

details of the first and last developments. has already been largely explained.

per=ntage

82.95

-11285821 -7168076 - 7094484

by the author,

Cumulative

12.19 20.44 27.75 34.89 39.42 43.91

2.00 2.21 1.52 2.18 1.15 1.02

48.18 51.25 63.68 56.05 58.22 60.39 62.37 64.33 65.98 67.48 68.88

1.19 0.68 0.98 0.59 0.81 1.38 4.36 0.83 0.50 0.97 2.22 0.42 0.08 1.32 0.95 2.61 0.13 0.40 1.53 0.51 0.46 0.31 0.33 0.22 0.69 0.75 1.09 0.80 0.20 0.61 1.04 0.36 0.61 4.88 2.08 0.13 0.17

70.20 71.50 72.63 73.67 74.53 75.38 76.21 76.94 77.58 78.19 78.79 79.36 79.91 80.42 80.89 81.33 81 .JJ 82.20 82.55 82.90 83.24 83.56 83.70 80.59 60.16 79.85

Electric Power Annual 1987 for the national

others - notably in Texas and other west-south-central states - had significant rises. New plants were the major influence in the east, but shifts away from oil also occurred. Two large and sharp breaks were made by Virginia Electric and Power and the New England Electric System. The former continued a process of returning to coal Virginia plants that had converted totally to oil. The company had by the early 1970s ceased coal use except in a minemouth plant in West Virginia. New England Electric had totally eliminated coal use, temporarily resumed it at one plant in the middle 197Os, and resumed regular use at the

ENERGY ECONOMICS April 1985

The rise and fall of oil generation in the USA: R. L. Gordon Table 5. Changes in US electricity gene&ion

by source, 1978-81

(MWh except es noted).

Change in tote1

Change in coal

Change in gss generation

Change in nuclear generation

88481663 59273592 7863 182 66.99 8.89 -3686914 - 2298462 - 5080336 3008064 -630091 -2302167 188212 -3724388 661972 -1044030 - 1258567 -1801789 12638289 -3756151 -890796 -7480531 6304368 804434 -474357 -1200104 -1901192 - 706245 1 103161 334915 6451553 - 1020051 - 1879535 106520 1 -640737 - 596792 -62112 414854 3949004 229848 1 -676287 3514353 -2895136 1870512 1640106 11043235 3400677 594767 459220

227461149 164921900 88340080 72.51 38.84 4294066 1744415 3391462

40386337 35510249 51666829 87.93 127.93 7332023 12453722 74144 14445953 5298867 6107140 6937834 0 -248998 214512 324276 -465619 - 1536898 352 -67977 1575747 -3314488 343587 120055 0 681163 -627253 1497523 2015903 0 0 12619 -67056 -494349 272695 -20141 0 0 -913984 0 - 75995 18713 - 1024708 0 28933 768534 0 0

-3729567 -3765992 - 1403339 100.98 37.63 3952842 - 1503375 3719947 92 234970 -1314823 0 0 896372 0 1626684 0 1098451 223675 0 - 7447390 0 36218 0 0 -1197113 - 3538883 0 -375599 0 0 -932915 0 0 36218 0 875835 1178722 1342424 0 0 - 1404636 0 932438 3065551 - 2909044 0 0

Change US total Change sample Sum listed companies Sample change as percent, USA Listed companies as percent, USA Middle South Utilities Southern California Edison Virginia Electric and Power Pacific Gas and Electric Public Service Electric and Gas (NJ) Consolidated Edison (New York) Gulf States Utilities Potomac Electric Consumers Power (Mich) New England Electric System Baltimore Gas and Electric Detroit Edison Southern Company Philadelphia Electric South Carolina Electric and Gas General Public Utilities Central and Southwest Delmarva Power and Light Savannah Electric and Power Pennsylvania Power and Light Niagara Mohawk Power Commonwealth Edison (Chicago) Orange and Rockland Utilities San Diego Gas and Electric Allegheny Power System Long Island Lighting Boston Edison Tucson Electric Kansas Gas and Electric Atlantic City Electric Illinois Power Cleveland Electric Illuminating Ohio Edison Florida Power United Illuminating (Corm) Arizona Public Service Northern States Power (Minn) Kansas Power and Light Duquesne Light (Pittsburgh) American Electric Power Florida Power and Light Central Maine Power Central Hudson Gas and Electric Source: total.

Company

reports

as tabulated

by the author,

0 0 1129230 3732496 2271266 223037 2019076 169B4362 -549501 2068345 714886 11836253 2511521 1452311 673996 30177 -1677214 0 0 7615336 0 0 2078765 753322 -36558 763741 258898 3465659 2562775 0 4151282 -891061 3438855 1231164 8491632 630174 0 0

and US Department

same plant in 1981. Several companies, notably the Southern Company and Detroit Edison, raised coal generation by increasing the proportion of coal used at plants that had been using a mix of coal and oil. (However, about half the rise in Southern Company coal generation involved raising output at existing coal-fired plants.)

The nature of wholesaling The argument for a centralized coordinated electric power network stresses its contribution to allowing

ENERGY ECONOMICS April 1985

0 975918

of Energy,

Electric

Power Annual

1981

for the national

the construction of larger plants. A larger system obviously can absorb bigger plants. Moreover, any one plant becomes a smaller part of the total system and its (inevitable) shutdown for maintenance can be absorbed without cutting off customers. The network also can allow adjustment to inherent or accidental differences among companies. Those expanding ahead of their own demand can sell fo those whose capacities grew less rapidly. Companies investing in plants to use coal or nuclear energy could in the 1980s sell to those committed to oil or natural gas. Flows can also respond to temporal differences in demand (ranging

71

me rise and fall of oil generation in the USA: R. L. Gordon Table 6. Changes in US purcheees and seles of electricity, 1978-81

Change in final eele

Company Change US total Change sample Sum listed companies Sample change as percent,

USA Listed companies as percent, USA Middle South Utilities Southern California Edison Virginia Electric and Power Pacific Gas and Electric Public Service Electric and Gas (NJ) Consolidated Edison (New York) Gulf States Utilities Potomac Electric Consumers Power (Mich) New England Electric System Baltimore Gas and Electric Detroit Edison Southern Company Philadelphia Electric South Carolina Electric and Gas General Public Utilities Central and Southwest Delmarva Power and Light Savannah Electric and Power Pennsylvania Power and Light Niagara Mohawk Power Commonwealth Edison (Chicago) Orange and Rockland Utilities San Diego Gas and Electric Allegheny Power System Long Island Lighting Boston Edison Tucson Electric Kansas Gas and Electric Atlantic City Electric Illinois Power Cleveland Electric Illuminating Ohio Edison Florida Power United Illuminating (Corm) Arizona Public Service Northern States Power (Minn) Kansas Power and Light Duquesne Light (Pittsburgh) American Electric Power Florida Power and Light Central Maine Power Central Hudson Gas and Electric Source: total.

Company

reports

as tabulated

93518000 78218699 43958663 83.64 47.01 5355836 3648793 2178130 509040 1 598402 592814 1853569 1175621

-722791 342010 1414240 -2803740 3777028 -349189 761701 749769 3630395 142959 68034 806627 71607 -1995290 44132 631940 1666510 193497 426520 947036 257691 400727 343680 -373466 451654 1764632 - 164497 1723911 1359288 13173 983670 I 984253 4545835 371551 106457 by the author,

Change in

Change in total sales

Change in

44853354 36957646

123072064 a091 6309

65270783 75603164

-4294803 1775491 661 i aa 444435 20404 466982 323368 111337 47987 -I 38485 0 -322729 3405116 1222976 -619984 -8302 1618930 4116 0 303332 436669 -816653 -110833 307910 13745245 - 34646 -29761 490162 -768819 0 294465 -483107 1901305 645382 0 751383 -2135972 59824 776 16469011 iii5184 98762 1074886

1061033 5424284 2839318 5534836 618806 1059796 2176937 1286958 -674804 203525 1414240 -3126469 7182144 873787 141717 741487 5249325 147075 68034 1109959 508276 -2811943 -66701 939850 16411755 158851 396759 1437198 -5ili28 400727 638145 -856573 2352959 2410014 - 164497 2475294 - 776684 72997 984446 18453264 5661019 470313 ii81343

4563814 7600993 800 1549 2298245 1206406 2590746 2433223 4878994 - 1334593 993636 2217196 -1440719 -4379346 4522732 1220037 8383694 -64196 -531222 544300 2160759 2551069 4494475 -191139 599389 9455761 1092771 2192745 400234 202052 1089030 639726 -1219525 - 1333993 492202 486398 -a49775 2211929 - 1a8681 8 -679014 7292685 29 17094 -219380 678457

and US Department

from sharp seasonal differences arising from whether winter or summer is the high period to fluctuations within each day). Observation makes clear that wholesaling is but one form of insuring these system efficiencies and the extent of reported wholesaling is heavily affected by the numerous institutional peculiarities of the US power industry. The principal alternative to intercompany transations is creation of larger companies. In addition, intercompany cooperation can involve several different institutional forms with identical

72

(MWh except us noted).

of Energy,

Purchase change 19s resale change

20417429 3864551 a

8858617 5825502 7340361 1853819 i i a5002 2123764 2109855 4767657 - 1382580 1132121 2217196 -1117990 -7784462 3299756 i a40021 a391 996 -1683126 -535338 644300 i a57427 2114400 5311128 -80306 291479 -4289484 1127417 2222506 -89928 970871 i 089030 345261 -736418 - 3235298 -153180 486398 -1601158 4347901 - 1946642 - 679790 -9176326 iaol910 -318142 -396429

Electric Power Annual 1981 for the national

substance. At least three methods exist to insure construction of.a large plant to serve the needs of several companies - one company can be the owner operator and sell to the others. A separate jointly owned corporation can be established. An alternative is for each company directly to own part of the plant. In the first two cases, movement of the power is wholesaling, but in the third, it is an intercompany transaction. The distinction is most important in New England. The first four nuclear plants in the region were built for jointly owned corporations; later reactors were sole

ENERGY ECONOMICS

April

1985

The rise and fall of oil generation in the USA: R. L. Gordon ventures; the reactors under construction as of 1983 have shared direct ownership. Utilities in New England have sought to use the nuclear plants as fully as possible to reduce the area’s heavy dependence on oil. Thus, the participants in the jointly owned companies report net inflows of power of which receipts from the joint venture are a substantial part. The companies owning a nuclear unit outright end up being net sellers. Other major influences are public power and the publicly stimulated cooperative sector. All US government-owned, power-generating facilities and a large state-owned operation in New York engage only in generation and transmission. The federal government is required to give preference to public and cooperative power in its sales and New York state must give priority to municipal power companies. (That this confuses form with substance was made clear in debates in the late 1970s over disposition of federal power in the Pacific northwest. The preferences were seen to favour industry supplied by public power over households supplied by public power, and a special allocation was made of the cost saving to access to federal power to the household customers of privately owned utilities.) Conversely, historically many municipal and cooperative utilities relied on outsiders for the bulk of their power. In many cases, the municipal or cooperatives engaged in distribution grew up in response to the availability of federal power. In other cases, private companies were the suppliers. However, a tendency has developed for municipalities and cooperatives to develop their own generating capacity. Often, joint ventures are established by consortia of municipalities or cooperatives. Alternatively, municipals and cooperatives have been participants in joint ventures with private firms. (At one time, municipals were fighting for inclusion under antitrust provisions of the Atomic Energy Act, but by the late 1970s financial problems had made private companies desire cooperatives and municipalities to participate.) Another point is that in New England, New York state, and the portion of the eastern USA called the Pennsylvania-New Jersey-Maryland (PJM) area, a central power pool handles most of the interchanges (see Gordon [4] for details). In the process, data on the net flow between the pools and the companies become difficult to trace. A review of the characteristics of exchanges in the different reliability council regions into which the USA has been divided suggests some of the key aspects of the interchange pattern. New England and New York find Canada a more feasible source of power imports than other regions. Dealing between the two north-east pools is desirable mainly to take advantages in temporary differences in power availability and the same is true of dealing with the PJM pool. In New England, receipts from the Yankee plants tend to exceed receipts from the pool, but the latter dominates non-Yankee transactions. Similarly, power from the Power Authority of the State of New York (PASNY) tends to outweigh pool transactions which in turn dwarf all else. Curiously, in 1981, both the New York and New England pools delivered (to the included companies) more than they

ENERGY ECONOMICS April 1985

received; the New York deliveries were, in fact, more than double the receipts (and no companies are missing). A reading of the pool’s annual report suggests that the discrepancy can be explained by substantial imports from Quebec. The PJM pool was close to a balanced exchange in 198 1. As discussed below, the PJM pool has also become a substantial purchaser of power from the east-central area. In the last area, the companies range widely in their situations. At one extreme, the American Electric Power and the Allegheny Power System are very large net sellers to private companies and to a much lesser extent to cooperatives and municipals. Detroit Edison and Consumers Power are large net purchasers. Two large companies - Ohio Edison and the Public Service Company of Indiana - also sell significantly more than they buy. The south-eastern companies tend to be net sellers largely because of substantial sales to cooperatives and municipals. However, Virginia Electric and Power (now Dominion Resources) has also become a substantial net buyer. With a few exceptions, utilities in the central regions tend not to maintain significant net flows in either direction. Private companies in the west tend to be buyers from Bonneville and other public authorities. The exceptions are companies in Arizona and New Mexico, which have extra power to sell to southern California utilities. The necessity to supply municipalities and cooperatives, as noted, depends on both the existence of such entities and the supply alternatives available. Municipals in New England, for example, have no such public alternative and rely on private companies - mainly New England Electric, Northeast Utilities, and Boston Edison. PASNY serves these needs in New York. In the PJM and east-central regions, the Carolinas, and Virginia, private companies again are major suppliers of cooperatives and municipals. In fact, all but one PJM companies have significant sales to municipalities or coops. Several of the Ohio private companies have significant flows to municipalities; all the Indiana companies have significant sales to cooperatives as does American Electric Power (AEP). The majority of resales by south-eastern and west-south-central companies are to municipals and cooperatives. Significant sales to municipals and cooperatives also occur in the central states. In the West, such sales are rarer; the key exceptions are municipalities in the Los Angeles area depending heavily on Southern California Edison. The most important use of purchased power to reduce oil use occurred on the US east coast. The buyers consisted mainly of the members of the Pennsylvania-New Jersey-Maryland (PJM) pool and Virginia Electric and Power. The principal suppliers were American Electric Power (AEP) and the Allegheny Power System. Due to peculiarities in the reporting system, the role of AEP must be inferred. The PJM pool companies report the Cleveland Electric Illuminating Company and Allegheny as the chief outside sources. Cleveland’s reports to DOE show the sale and large purchases from

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The rise and fall of oil generation in the USA: R. L. Gordon AEP - both of which are absent from the total purchases and resales reported in the company’s Uniform Statistical Report - explained in the Appendix. Clearly, the power was transferred through Cleveland from AEP to the PJM pool. In addition, Allegheny greatly increased purchases as well as resales. The bulk of the increased purchases were from AEP; most of the sales rises were to PJM companies. Thus, Allegheny both provided its own power to PJM and acted by a conduit for AEP power. AEP, in turn, also increased its purchases, notably from Indianapolis Power and Light, and thus itself was a conduit. The next most important change in sales was effected by the Southern Company - the second largest US private generating company. In 1978 its resales were predominantly to municipals and cooperatives. Almost all of the 1978-81 rise in resales was to privately owned companies. The two biggest private customers were in Florida; the next largest buyer was the Carolinas based Duke Power. Savannah Electric and Power and Middle South Utilities, which operated mainly in Louisiana, Arkansas, and Mississippi were other significant buyers. Middle South, in turn, experienced the largest change in net inflow of purchased power of any US private company. The main change appears to be that cooperatives and to a lesser extent municipalities shifted from relying on Middle South as a seller to selling it power from newly built coal-fired plants. (Again discrepancies prevail between the Middle South reports to DOE and its Uniform Statistical Reports. The last for 1981 seems to include a major purchase from a cooperative with purchases from private power.) A similar rise in purchases from cooperatives occurred for Middle South’s neighbour - Gulf States, operating in Louisiana and Texas. Gulf States also increased purchases from its neighbour - Central and Southwest, based mainly in Texas and Oklahoma. Another big rise in purchasing occurred on the west coast. Southern California Edison greatly increased its purchases. The great bulk of the rise was provided by three suppliers. First, an increased flow from Bonneville was possible. Second, power was imported in greater amounts from the publicly owned utility in British Columbia. Third, the Salt River Project, legally classified as publicly owned but administered by its principal users, in Arizona increased its sales. The final significant use of purchased power to assist in the reduction of oil use was effected by Chicago’s Commonwealth Edison. Examination of the data indicates that a far-reaching central states change in behaviour permitted Commonwealth to increase purchases from two downstate Illinois utilities. Both were able to cut back their sales to other utilities, notably St Louis based Union Electric. Union, in turn, itself reduced resales. A principal consideration was that new coal and nuclear plants in Iowa and Kansas lessened the need for an inflow of power. New plants were major causes of changes in flows elsewhere. Thus, the participants in large new plants in western northern Kentucky (whose Pennsylvania, owners were both Ohio companies), Indiana, Arizona,

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New Mexico, and several south central states allowed lower purchases or higher sales. The two large companies in Michigan cut their imports from Ontario Hydro.

The recession and reduced oil use Concerns are often expressed that depressed economic conditions hold down energy demand and should there be economic recovery, much of the decline in oil use will be reversed. Some argue that high oil prices are a prime cause of depressed economic activity and thus implicitly conclude only reversal of high oil price would cause oil use to recover. Those seeing a less direct relationship between oil prices and macroeconomic behaviour expect economic recovery and some rise in oil use. The most pronounced impact of the recession on electric power was the sharp drop in final sales by Detroit Edison and Commonwealth Edison. Both companies offset much of the decline by reducing generation, much of it from coal and nuclear. Economic recovery need not require that output expansion involve considerable rise in oil generation. The unused capacity and new coal and nuclear plants in advanced stages of construction will allow Commonwealth, Detroit, and many other companies to avoid significant rises in oil use. Perhaps the most interesting problem case is whether Florida Power and Light can (or should) turn from its pattern of continuing to increase oil generation. The company originally proposed two coal-fired units and participation with the Jacksonville municipal utility in the construction of two others. Only the joint ventures remained active in 1984. Consideration has also been given to long-term commitments to buy from new plants to be built by the Southern Company. The critical questions are whether such new plants are economically justified, and if so, whether regulators in Florida will allow their construction.

Conclusions on adaptation The review of electric power industry presented here provided indicators of what has long been claimed but little documented. The normal workings of the established network have permitted a formidable response to high oil prices. The nature of these reactions, moreover, is so straightforward that they can be deduced directly from scanning the data tabulations. Questions, of course, remain about history and prospects. The key issue about the past is why oil use continued to rise from 1973 to 1978. Much of the explanation is implicit in the prior analysis. Oil use reductions heavily depended upon increasing coal-fired capacity and in reallocating natural gas supplies. The construction took time; the reallocation required a shift in policy perspectives. The reduction in oil use could have been accelerated had the electric utility industry not slowed down its expansion activities. There are a few examples - namely those few clear cases, four or five plants, of nuclear plants subjected to severe delay due to massive intervention - where the slowdowns appear quite unreasonable. Otherwise, the case is much less clearcut. The

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economics of replacement investments remain, as noted above, quite unclear. Given the nature of OPEC, even its members cannot accurately forecast oil prices. This leads immediately to the key question about the future - how much more can and should be done. The greatest opportunities for oil reduction lie in the northeast, Florida, and California. It would clearly be advantageous rapidly to resolve problems associated with the completion of two long-delayed nuclear units in California and settle state level disputes in New Hampshire, New York, and Pennsylvania. Whether de novo ventures such as those discussed above of Florida Power and Light also are desirable is less clear. Although none of this occurred during 1983 and the US economy recovered, oil use in electricity continued to decline. The experience, in summary, does confirm that the electric power system possesses the flexibility its advocates claim for it. Whether this is the optimum degree of flexibility is not the subject of this study, and the literature on the subject is inconclusive.

References 1 Walter G. Dupree and James A. West, United States Energy Through the Year 2000, US Department of the Interior, Washington, DC, 1972. 2 Edison Electric Institute, Statistical Yearbook of the Electric Utility Industry, annual, New York to 1976, Washington since 1977. 3 Edison Electric Institute, Historical Statistics of the Electric Utility Industry Through 1970, Edison Electric Institute, New York, 1974. 4 Richard L. Gordon, Reforming Regulation of the

Electric Utilities: Priorities for the 198Os, D. C. Heath, Lexington Books, Lexington, MA, 1982. 5 Amory B. Lovins, Soft Energy Paths: Towards a Durable Peace, Ballinger, Cambridge, MA, 1977. Coal Association, Trends in Electric 6 National Utility Experiences, 1944-l 958, National Coal

Association, Washington, DC, 1960. 7 New York Power Pool, Report of Member Electric Systems of the New York Power Pool, 1982. 8 US Department of Energy, Electric Power Annual, US Government Printing Office, Washington, DC, 9 10

1981 and 1982. US Department of Energy, State Energy Data Report 1960 Through 1980, US Government

Printing Office, Washington, DC, 1982. US Department of Energy, Monthly Energy Review, US Government 1984.

Printing

Office,

Washington,

DC,

Appendix Notes on the data Historically, one US government agency, the Federal Power Commission (FPC), was responsible for gathering electric power data. Another agency. the US Bureau of Mines (USBM), had responsibility for fuel use data. Neither agency felt it necessary to provide compilations of data. FPC, in fact, had no systematic method of issuing key data; USBM reported on one year at a time but did collect many key data in a one-time report by

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in the USA: R. L. Gordon

Dupree and West. The Department of Energy (DOE) has provided more systematic reports but nowhere has published a complete, consistent set of the data needed for use here. Thus, the time series are composites developed by combining material from various sources. In particular, the total Btu data use Dupree and West for 1947-59, a special DOE report on energy consumption by state for 1960-72, and the Monthly Energy Review for 1973-83. For electric power, the best continuous source has been the publications of the Edison Electric Institute (EEI). However, gaps in the collection of reports in the Pennsylvania State library system caused use of a 1960 National Coal Association Report for the years 194658. A gap in FPC reporting caused omission of regional generation by fuel figures for a few years in the early 1970s. However, DOE made available computer printouts of the 1970-75 data. These were used, as were published 1976-82 data in Electric Power Annual and national data for 1983 in Monthly Energy Review. The company data come from Uniform Statistical Reports. The figures were entered in spreadsheet files, and a spreadsheet programme was used to calculate changes, percentages of total, and various checks on the consistency of the numbers. The tables of company data shown here in turn were prepared by rearranging and printing out selected portions of the files. The peculiarities of spreadsheets caused the showing of hundredths of a percentage point; it is the best alternative to showing rounded percentages. Reporting on power sales among companies proved the subject of a difficult to obtain and difficult to use set of reports. In particular, FPC and now DOE require private utilities annually to file a massive report on a form (Form 1) designed originally by FPC. Each company report is to provide detailed information on the wholesale transactions with the customers and suppliers and data on the dealings provided. Published reports, however, only list the totals for each company. The accounting system used has several intrinsic peculiarities, and further problems are created by the companies adopt variant way in which different approaches to interpreting the rules. In particular, the system distinguished between interchange and other wholesale purchases and sales. Reported sales are supposed then to consist only of non-interchange sales. Reported purchases, however, are the (algebraic) sum of non-interchange purchases and the net inflow of interchange power. The primary number of concern - the net inflow or outflow of power to other companies - can readily be calculated from the data produced. However, a better feel for gross magnitudes would be secured if the reporting presented the total of both actual inflows and actual outflows. Moreover, companies differ radically in what they define as interchange power. The clearest discrepancies are that all members of the PJM and New England pools and one member of the New York pool report pool dealings as interchange but the other New York companies report such dealings as other purchases and sales. Some companies choose to report net trans-

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The rise and fall of oil generation in the USA: R. L. Gordon actions on the non-interchange purchases and (less commonly) sales. Were this not confusing enough, there are also instances in which negativegross numbers are reported; eg one component of the gross receipts on interchange will be a negative number for some utility. In any case, through the assistance of DOE’s EIA, virtually complete reports on wholesale power were obtained for the leading companies in 1981. Similar 1978 reports were also obtained, but there were several gaps. The difficulties created by the gaps and the complexity of the calculations limit what can be said. Nevertheless, the coverage is sufficiently complete and the checking was sufficiently extensive that the broad outlines of behaviour can be determined. The overall accounting system defines companies in terms of regulatory rather than corporate entities and the choice seems undesirable for present purposes. The method provides individual reports for each unit of a holding company (and no report for the parent) and separate reports for parents that are operating companies and subsidiaries. Dealings between affiliates then is reported as wholesaling. While these intracompany flows are of some interest, serious problems of interpretation arise. Under the best of circumstances, these flows are

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conceptually no different from movements within equally large systems that are legally a single regulatory entity (or for that matter within parts of a large component of a system). A further problem is that, in several cases, including three of the four holding companies in New England, the corporate form is designed to increase the reported level of interutility dealing. Separate generating and transmission entities are established within the same parent. Under the prevailing system, these parents appear to do more wholesaling than companies maintaining only one regulatory entity. The company level analysis was supplemented by examination of generation and fuel purchases at individual plants. The Uniform Statistical Reports list the total generation by plants and are supposed to report capacity expansions. EIA has both a report listing all units at US power plants and a report on fossil fuel receipts. The list of units gives the startup date and fuel use capabilities of each unit. Master lists presenting 1978 and 1981 company data on capacity and generation were prepared for all steam plants for the included companies; the 1981 fuel purchase data from EIA were also tabulated for each fossil-fuelled plant. The power plant list and company reports were used to track capacity additions.

ENERGY ECONOMICS April 1985