<<  <  >  >>

Page 3

industry is neither the electricity grid nor the vertical integration of utilities. Rather, the

real source of monopoly power is the local exclusive franchises currently held by electric

utilities, which prevents sellers and customers from cutting their own power deals to

bypass the monopolies.

While the requirement that utilities open their wires to all comers is seemingly

expedient, a better alternative is to allow market forces, not government agents, to dictate

how the electricity market is structured. Mandatory open access presupposes a great deal

about what is and what is not economically efficient and attempts to legally force those

suppositions on the economy. That kind of economic hubris on the part of government

was what caused the industry to get into the present inefficient mess to begin with.

Simply eliminating today's exclusive territorial franchises would allow market

forces to sort out the best form of industry organization. Nonutility power companies

might then opt to build their own transmission and distribution systems on private rights-

of-way, provide on-site power, negotiate voluntary agreements with the utilities for access

to the existing grid, target customers on the fringes of the grid, or do some or all of those

things. Access to public rights-of-way could be auctioned off as well. As long as legal

barriers to entry are eliminated and economic barriers to entry are low, utilities' attempts

to charge "unfair" prices will attract new competitors.

Moreover, relying on market forces rather than bureaucratic edicts to restructure

the industry has the virtue of respecting private property rights. Mandatory open access

undermines the property rights of utilities by forcing them to transform their privately

owned grid into a public highway with the tolls, services, and maintenance operations

subject to government, not private, control. Not only is that bad economics; it is constitu-

tionally questionable as well, since no compensation is offered to utilities for the taking of

several sticks from the bundle of rights associated with private property.6 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.

In a world without legal barriers to entry, the grid as currently designed (connect-

ing very few central generators with numerous customers) may or may not survive. The

partial deregulation envisioned in all federal and state proposals, however, assumes that

the current organization of the electricity industry is economically efficient except for the

lack of competition in generation. But as economist Douglas Houston has noted, "To

succeed with deregulation, the first step cannot be average--we must hurdle a heap of bad

ideas, especially the natural monopoly myth."7

This study examines the problems inherent in mandatory open access and proposes

an alternative way to deregulate the electricity industry. The first section describes how

the existing organization of the electric industry is the result of conscious political design

rather than the logical result of economies of scale. The second describes the likely effects