The regulation of electricity markets is changing rapidly. So far, the changes affect only the generation of electricity. The deregulation of transmission and distribution is not under serious consideration because conventional wisdom says that transmission and distribution are natural monopolies that must be regulated. However, the source of monopoly power in the utility industry is the local exclusive franchise currently held by electric utilities rather than any natural characteristics of transmission and distribution.
The centerpiece of the regulatory changes is called mandatory open access, under which electricity producers have the right to sell to whomever they choose at the retail level across the wires of the incumbent utility. Although the requirement that utilities open their lines is seemingly expedient, the true free-market alternative would eliminate today’s exclusive territorial franchises and allow competitors to develop parallel distribution, provide on-site power, and negotiate voluntary agreements for access to the existing transmission and distribution system. If legal entry barriers are eliminated and economic barriers to entry are low, utilities’ attempts to charge “unfair” prices will attract new competitors, including smaller generators on customers’ premises.
The principles that should guide the restructuring of the electricity industry are the sanctity of the property rights of both producers and consumers and the integrity of the market that emerges from those property rights. 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.