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Introduction

Present regulation of the electric utility industry is built on the belief that econo-

mies of scale render the power generation business naturally monopolistic. Thus, in the

name of economic efficiency, state laws generally allow only one firm to supply power to

most residents, and state public utility commissions were established to ensure that

consumers are not victimized by the monopoly power of those firms. But rapid advances

in generation technology, the increasing costs of utility regulation, the emergence of a

national grid of interconnected power lines, and bad business decisions by a number of

major electric utility companies have convinced virtually all industry observers that the

business of generating electricity is largely competitive and that major reforms are now

necessary.1

The idea that customers should be able to choose among a large number of

competing power companies--instead of being forced to buy electricity from their existing

electric utility monopoly--is powerful and morally compelling. One study estimates that a

competitive electricity marketplace could save consumers between $22 billion and $108

billion annually.2 Yet as Phillip Cross, a contributing legal editor to Public Utilities

Fortnightly, has noted, "Whether you call it 'deregulation' or 're-regulation,' the promised

move to competition does not mean less regulation . . . at least any time soon."3 Indeed,

while reformers envision a world in which a multiplicity of power generators competes for

business, they fear that the business of transmitting and distributing that power is still

naturally monopolistic and a potential obstacle to a competitive market.

Accordingly, the most popular reform idea is to force the utility companies to turn

their wires into something akin to public streets. Any power generator would have a right

to use the utilities' wires (known in the trade as the "grid") to deliver electricity to its

consumers. Public utilities would, for the most part, be confined to the role of delivering

power produced by someone else. To ensure that utilities don't use their authority over

the electricity delivery system to discourage or inhibit competition, reformers propose to

strictly regulate the prices utilities can charge for access to their wires, the types of

services utilities can offer, and the routine operation of the grid itself.

That idea, variously termed "mandatory open access," "customer choice," or "retail

wheeling," has become synonymous with electricity deregulation. The Federal Energy

Regulatory Commission (FERC) has embraced mandatory open access as the central

component of the still-in-progress restructuring of wholesale (utility-to-utility) electricity

sales as mandated by the Energy Policy Act of 1992.4 California and other states have

adopted mandatory open access as the centerpiece of their reform of retail electricity

markets.5

The intentions of those who embrace mandatory open access to the electric grid

are good; the concept, however, is flawed. The source of monopoly power in the utility