<<  <  >  >>

Page 5

Jarrell compared states that were regulated between 1912 and 1917 (early-

regulated states) with those that were regulated after 1917 (later-regulated states). He

found that "in 1912 [before state regulation], prices in early-regulated (ER) states were,

on average, 46 per cent lower than prices in later-regulated (LR) states. . . . By 1917

prices in ER states were only 20 per cent lower, on average, than prices in LR states.

Thus, between 1912 and 1917, ER states experienced a 26 per cent increase in prices

relative to the price changes in LR states."13 The return on assets in the early-regulated

states also increased. Those outcomes are consistent with the conclusion that electricity

regulation was a pro-producer rather than a pro-consumer undertaking.

Regulation did not fight monopoly; it fostered monopoly. As economist Vernon

Smith notes, "It was the industry, whose profits suffered from open entry, that vigorously

lobbied for entry restrictions and for state regulation of prices and profits."14 The leader in

that effort was early industry baron Samuel Insull, president of the National Electric Light

Association, who urged and secured "fair profit" regulation and exclusive licensing of

utilities.15 Regulation raised prices, decreased output, and transferred wealth from

consumers and efficient producers to politically connected producers.

Today's utility monopoly cannot be sustained without exclusive territorial fran-

chises. Thus, Congress should abolish such artificial barriers and let nature take its course.

The Mirage of "Gridlock": Bypassing the Bottlenecks

The standard new view of the industrial organization of electricity is that competi-

tion in generation is possible but that transmission and distribution are still natural

monopolies.16 The natural monopoly conclusion flows from the physical difficulty of

obtaining rights-of-way; the savings that result from one rather than several parallel grids;

and the belief that cross-subsidies should be used to lower prices for rural customers,

conservation projects, and renewable sources of power. The policy prescription that flows

from that view is to treat the grid as a common carrier. Under such a regime, nonutility

generators would be able to use a utility company's grid to transmit power at regulated

rates.

That line of argument, however, is seriously flawed. First, the physical difficulty of

obtaining rights-of-way is overemphasized. Second, new developments in engineering

allow generators to actually control the movement of the electricity they put onto the

transmission grid. Third, in an unregulated world, electricity users could organize to form

user-owned transmission grids to counteract the market power of incumbent grid owners.

Fourth, an exclusive focus on the transmission of electricity misses the role that natural-

gas lines and gas turbines can play in the decentralized generation of electricity. Finally,

mandatory open access to the grid is an uncompensated taking of private property.