Get Ready: The Electrical Revolution Is Coming

This article appeared in Copley News Service.

At a recent carnival in Heyworth, Ill., people could take the usual tacky rides and play the usual silly games. They could also collect brochures from competing electric companies.

Some New Hampshire residents have been bombarded with offers from 30 different power producers as part of a pilot program; bills have dropped by an average of 15 percent to 20 percent. Rhode Island began allowing choice in electricity in July, while California plans on ending its utility monopoly in January.

Americans are used to choosing among competing firms for goods and services. But not for electricity. Private power companies were long thought to be “natural monopolies” and, therefore, were established as monopoly franchises regulated by government commissions.

The world has changed, however. Over the past two decades, controls were lifted or reduced in the airline, banking, broadcasting, energy, rail, telecommunications and trucking industries. Now states have begun to apply the same principle to power generation. The stakes are enormous: a 1‑cent per kilowatt‐​hour drop would save $28 billion nationally.

Observes Elizabeth Moler, chairwoman of the Federal Energy Regulatory Commission, “The future is here, and the future is competition.”

Deregulation obviously means ending the status of investor‐​owned utilities as protected monopolies. But that is not enough to level the playing field. IOUs currently face competition from public and quasi‐​public entities with even greater advantages.

The roughly 1,800 municipal utilities and 900 cooperatives (owned by their customers) enjoy a range of unfair preferences, ranging from tax exemptions to subsidized loans to other state and federal subsidies. The national government produces electricity through the Tennessee Valley Authority and five regional power marketing administrations, and provides municipalities and co‐​ops preferential access to that power.

Cities should simply sell their public power systems — collectively worth an estimated $17 billion. All of the federal enterprises should also be privatized. Doing so would bring in between $20 billion and $40 billion. At the very least, Congress should begin selling individual dams and plants, ending new taxpayer subsidies, and charging market prices for federal power.

Deregulation also requires ending federal micromanagement of utilities. For instance, the Public Utilities Regulatory Policy Act of 1978 requires utilities to buy energy from “qualifying facilities.” Among the QFs that sprang forth were “wind farms” and solar power projects, many of which are paid at well above market rates. The result is billions of wasted dollars. The regulatory act should be repealed.

The development of a national transmission network, or grid, has helped make an electricity free market possible. This electricity superhighway is privately owned by the IOUs, but the federal government often recognizes their ownership only in the breach. Unfortunately, most deregulation proposals would mandate that utilities “wheel” power for their competitors.

In the long‐​term, however, leaving IOUs truly free would likely better protect consumers than continued regulation. Alternative grids would develop: already cable TV, gas, and phone companies, railroads and other enterprises own significant rights of way that could be used to create new transmission facilities. Large customers and consumer groups would also have an incentive to develop their own grids.

If, however, legislators refuse to leave IOUs with a temporary monopoly and, therefore, mandate grid access, the government should pay compensation. Such a takeover of the utilities’ resource would effectively amount to an exercise in eminent domain under the Fifth Amendment.

Although competition will prove enormously beneficial to consumers, its impact is likely to be less benign on existing producers. Billions in past uneconomic investments will be “stranded” without compensation. Thus, argue the IOUs, for reasons of both equity and efficiency, the government should allow them to recover stranded costs as part of deregulation.

Stranded costs occur throughout the economy in the sense that competition and technological innovation constantly make some investments uneconomic. In the case of electricity, however, stranded costs would result from changes in government policy, such as deregulation.

In general, it is neither fair nor practical to turn regulatory expectations into property rights. Nevertheless, electricity regulation was perversely structured to encourage high‐​cost capital investment. Moreover, IOUs could not profit fully from those investments when regulated. On the other hand, the IOUs and their investors always knew that the law and rules could change.

A fair bottom line would suggest assessing the specific circumstances of each investment, but leaving the IOUs with the majority of the downside risk.

Finally, though Washington should leave some discretion with the states (regarding the recovery of stranded costs, perhaps), it should create the framework for a free national electricity market and ban barriers to interstate commerce. States should not be able to practice protectionism under the guise of federalism.

The electricity market is heading into a period of unparalleled change. Congress should speed deregulation along, allowing the American people to finally enjoy the benefits of competition when they turn on their lights just like they do now when they purchase the lamps that light their homes.

Doug Bandow

Doug Bandow is a senior fellow at the Cato Institute.