Railroads provide survival lessons for struggling energy companies

As some energy companies lose their grip on monopolies and can no longer rely on customers to help finance their survival, one Columbia University researcher says they could learn from the near-disappearance and resurgence of another historic American monopoly: railroads.

A.J. Goulding, president of the consulting firm London Economics International, thinks that American utility companies need to brace themselves for the end of dominant energy providers and a world where customers have more choices when it comes to energy and how much they pay for it. In short, Goulding, who favors a free-market approach to utilities, thinks Texas offers a glimpse of the future, with some big adjustments.

“Where we are today is trying to figure out how do we continue to have a viable electric utility sector in a more dynamic environment,” said Goulding, whose report was published by Columbia’s Center on Global Energy Policy. “Most utility executives have never lived in a world where they could not raise prices. What’s clearly happening is the electric utility industry, like telecommunications, like railroads, is no longer a natural monopoly.”

Railroads were once faced with the same dilemma. In the late 1960s and early 1970s, railway monopoly was killing them. Trains across the country had been allowed to decay. Big rail companies were going bankrupt and others were shrinking. Goulding thinks the industry’s rates had been too heavily regulated and, as a result, some rail companies could no longer make money. Then, a few things happened: rail companies began to consolidate, they abandoned passenger services and the federal government stepped in to save a collection of bankrupt northeastern railway companies.

The result, Goulding says, was a new industry that a focused on what it did best: transporting.

Just as new technology took over the rail and telecommunications industry, new technology will transform how Americans get their power. There was a time when utilities could simply raise their rates to get the money they need to finance acquiring new power plants, Goulding said. Today, that is harder to do–particularly when customers have more options, including going off-grid, to chose from.

“When individual customers also have the ability to leave the system, it will require the executives to rethink their approach to the business,” he said.

That means utilities will have to relinquish monopolies and learn to operate in a competitive market with falling prices. Even Texas’ model is still has work to do, Goulding thinks, since energy transmission for much of the state is still managed by monopolies.

The bottom line, though: railroads didn’t go away and utilities won’t either. Instead, Goulding’s report says they will just have to become more basic.

“In many ways, railroad survival relied on them remaining boring.” he wrote. “No matter how exciting the idea is of running a fleet of electric vehicles— or exploring large-scale storage or pursuing a host of other technological innovations—utilities are primarily good at just one thing: moving large volumes of electricity over long distances. Focusing on this business—and building on it—is what will assure the long-term viability of existing utilities.”

 

 

 

SHOW MORE