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as generation were priced at market, Granite State conceivably could price its wires to

recover its costs incurred in the past to serve customers."68 But they would be constrained

by market entry. Rather than set arbitrary levels of stranded-cost recovery, policymakers

should let firms attempt to recover by pricing their wires at levels they believe will not

induce entry.69

Stranded-cost recovery also should be avoided because it establishes a very bad

precedent for future market turmoil in the electricity industry. A likely consequence of

new electric generation technologies sited at or near customer premises is reduced demand

for transmission and distribution services. The reduced demand will affect utilities' bottom

line. The distribution portion of the industry collects about $50 billion in revenues

annually and accounts for one-third of utility assets and half of utility employment.70 If

utilities succeed in extracting stranded costs for nonproductive coal and nuclear assets

today, they will no doubt ask for bailouts again when decentralized generation technolo-

gies reduce the value of transmission and distribution assets.

Conclusion

Electricity has been called the "last and biggest of the country's regulated monopo-

lies."71 While that's debatable, given the size of the U.S Postal Service and the nation's

public education infrastructure, electricity certainly plays a central role in our industrial

society. Unfortunately, electricity would remain a major regulated monopoly under most

proposed models of deregulation.

Government's proper role in deregulation of the electricity industry is not to retool

and redirect the regulatory apparatus toward managing competition on the grid. The

common carrier, open-access model should be aggressively rejected. Rather than entrust

the care and feeding of the electric power grid and distribution system to the planners at

FERC and the various state commissions, policymakers should free the electric power grid

in a manner that eliminates all temptation to call for meddlesome regulatory oversight.

Deregulation can be principled and permanent rather than expedient.

Monopoly regulation got the electric industry into the $200 billion stranded-cost

mess it now faces. Now that reformers seem committed to deregulation, it makes no

sense to concede that the grid is special and that somehow, some way, government, this

time, despite an unblemished history of distorting markets through economic intervention,

will get monopoly regulation right. A national grid overseen by a few FERC employees,

or a state grid overseen by a few state public utility commission regulatory specialists, is

not going to improve upon market outcomes. Instead, it will cost the economy dearly in

lost dollars and innovation. Consequently, Congress, in the year 2005 or so, will need to

remedy its decisions of 1998. The fact that we will have paid stranded costs in exchange

for very little market liberalization will make the situation all the more unfortunate.