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Cato Policy Analysis No. 301

April 13, 1998

ELECTRIC AVENUES

Why "Open Access" Can't Compete

by Clyde Wayne Crews Jr.

Clyde Wayne Crews Jr. is a fellow in regulatory studies at the Competitive Enterprise

Institute in Washington, D.C.

Executive Summary

The regulation of electricity markets is changing rapidly. So far, the changes affect

only the generation of electricity. The deregulation of transmission and distribution is not

under serious consideration because conventional wisdom says that transmission and

distribution are natural monopolies that must be regulated. However, the source of

monopoly power in the utility industry is the local exclusive franchise currently held by

electric utilities rather than any natural characteristics of transmission and distribution.

The centerpiece of the regulatory changes is called mandatory open access, under

which electricity producers have the right to sell to whomever they choose at the retail level

across the wires of the incumbent utility. Although the requirement that utilities open their

lines is seemingly expedient, the true free-market alternative would eliminate today's exclu-

sive territorial franchises and allow competitors to develop parallel distribution, provide

on-site power, and negotiate voluntary agreements for access to the existing transmission

and distribution system. If legal entry barriers are eliminated and economic barriers to entry

are low, utilities' attempts to charge "unfair" prices will attract new competitors, including

smaller generators on customers' premises.

The principles that should guide the restructuring of the electricity industry are the

sanctity of the property rights of both producers and consumers and the integrity of the

market that emerges from those property rights. Producers should have an unfettered right

to sell to anyone, and consumers should have the right to buy from anyone, but neither has

the right to use the resources of others without consent.