Quanta Technology Blog
Following the Railroads
Posted on: Sep 3, 2014
Perhaps the fate of electric utilities in their industry is similar to what happened to railroads in theirs.
In the first half of the twentieth century, railroads were America's transportation industry. Dozens of large inter-regional carriers like the Pennsylvania Railroad, Milwaukee Road, New York Central and the Denver and Rio Grande Railroad carried passengers and freight across the nation. A thousand smaller railroads worked locally over smaller, city-wide and intra-state systems. In Pennsylvania alone, there were over one hundred local and passenger railroads moving people and goods within cities and towns or between neighboring towns. Each of these railroads operated their system from a series of central stations – hubs that concentrated services and assured efficient, reliable operation - connected by a grid of contiguous rights-of-way. Rail lines were acquired with the support of local governments, often over the objection of local residents and neighborhood associations who didn't want those railroads in their backyard.
A lot happened to the railroad industry as the 20th century progressed. Railroads faced increasing competition from small, "distributed transportation technologies." Automobiles and trucks, while smaller and less efficient on a dollars per ton/mile basis, were more flexible and offered consumers more choices about when and where they went. Airplanes evolved from an exotic curiosity into something that could provide a useful service to those who positively had to be there the next day.
Perhaps most important, these new technologies found their own proponents. Automobile and trucking companies learned to build and operate these new technologies efficiently, to listen to and respond to customers, and to lobby politically on behalf of their interests. The railroads not only faced competition in their marketplace, but also before congress and state legislatures for the ear of policymakers. The rules started changing - slowly at first, but steadily over the decades, culminating in the Staggers Act of 1978, "leveling the playing field" as the lawmakers now saw things.
Over the middle half of the twentieth century railroads steadily lost the smaller and more local customers to those newer competing technologies and companies. The "residential" market, passengers traveling within cities or between towns, dried up almost entirely. What had been a staple for the railroads – transportation of food, materials and finished goods within states and across regions – was taken over almost completely by over-the-road trucking. Railroads were left with the industrial and heavy-duty commercial market, moving 10,000 tons of coal or 6,000,000 gallons of oil per train - or ironically, several hundred automobiles or dozens of heavy trucks at a time from the factory to distribution centers.
Smaller players found it increasingly difficult to compete. Smaller railroads failed, merged or were acquired, then merged again and again in a seemingly endless process throughout the 20th century. Continent-wide railroads like the Southern Pacific emerged where once there had been more than 50 railroads, and were then swallowed up themselves. Today just four mega-railroads dominate the U.S. rail industry: Union Pacific, BNSF, CSX and Norfolk Southern. They focus on heavy industry and bulk commercial goods transportation, and are immensely profitable doing so. A fifth, all-passenger railroad, Amtrak, kept on life support by government-subsidies, staggers on with significantly reduced services - all that remains of our once glittering passenger railroad industry.
The four companies learned to live with the consequences of change. Since the Staggers Act, no new major cross-country railroad rights-of-way have been granted and developed, and mere ownership of the rails along a particular route does not convey the right to use or control that line exclusively. But these companies became masters at efficiency and practical use of technology. By using technology innovatively and becoming increasingly efficient, they tripled throughput on their systems during the three decades after the Staggers Act.
What part of that pattern of trends is not familiar to someone who has watched the electric utility industry for the last four decades? Electric utilities operate their own type of central-stations, also always connected by vast local, regional and multi-region grids of contiguous rights-of-way. Smaller distributed generation and similar technologies are beginning to offer alternatives to the utilities' traditional paradigm. These new options aren't and probably never will be as efficient as that paradigm, but increasingly customers don't seem to care. They offer a combination of flexibility, tailor-ability and choice that many find very appealing.
These new distributed options for electric consumers have spawned companies to champion their use. Those companies are developing their own industry trade groups and lobbying organizations. They are telling congress and state legislatures what they think is important for their future, not the utilities. Meanwhile, re-regulation has opened up the electric transportation grid access to all on a common basis, even as it sets rules and regulates operation and still permits, for now, eminent domain. Finally, one consequence of all this change is that size has begun to matter a lot in utilities, and mergers of the big with the bigger seems the continuing order of the day.
Perhaps these trends will play like the railroads did, and the electric utility industry will gradually lose its millions of small, local customers to these newer, de-regulated and distributed competing technologies. Perhaps electric utilities will end up as the energy supplier to only industrial customers with truly massive needs. Perhaps new rights-of-way will become a thing of the past for utilities, as it has been for railroads. And perhaps re-regulation and mergers will play out until only a half-dozen or fewer gigantic cross-continental electric utilities are left standing: efficient, technology-intensive companies that are well-run, profitable and immensely valuable to the American economy.
There could be worse fates.
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