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from which innovations flow.

In an unregulated market, bottlenecks and congestion result in high prices that

ration demand to a limited supply. The high prices and excess profits then stimulate both

consumers and firms to innovate. Regulations that prevent owners from using prices to

signal supply-demand imbalance or from retaining the profits that result from such prices

eliminate the motivation to alter present practices.

Instead, under regulation, innovations come from regulators.49 And the problem

with regulator-initiated innovation is its inability to mimic the results of competition. For

example, before airline deregulation, no one anticipated the hub-and-spoke airline system

that developed.50 Similarly, because policymakers cannot know in advance how an

electricity grid would develop under competitive entry, their regulatory orders are unlikely

to replicate the outcome of competitive entry.

If we look to past regulatory orders for indications of the likely course of manda-

tory retail wheeling, we need look no further than the 1978 Public Utilities Regulatory and

Policy Act (PURPA). Supporters were convinced that the solution to high-cost electricity

was independent generators. The result was long-term contracts with generators at

above-market prices.

A current example of the unintended consequences of mandatory open access is

found in the market for smaller scale generators. A Public Utilities Fortnightly article

describing the pros and cons of small- and large-scale generation notes that "economic

factors will determine the route of new generation. . . . These factors include stranded-cost

recovery, exit fees, and wholesale and retail access to electricity."51 One energy consul-

tant, convinced that "retail access, particularly for industrial users, is coming fast," said

that he is advising his industrial clients, "Don't build cogen[eration] now. There is no

reason to build cogen right now."52 Another company's "gas-turbine and cogen equipment

work has been flat because customers are waiting to see how deregulation falls out."53

Nonregulated market pricing of transmission and distribution is necessary to

determine whether new transmission capacity is preferable because thyristor technologies

reduce its costs, or whether microgeneration technologies are cheaper and, thus, eliminate

the need for additional transmission. The answer likely lies somewhere in-between. Only

the market, not regulatory commissions, can provide the answers.

The Invitation to Litigation

Utilities are notorious for opposing competitive forces. They have mounted legal

challenges against reforms at both the state level, where they argue that states do not have

the authority to order retail wheeling,54 and at the federal level, where they argue that