Academic journal article Forum for Applied Research and Public Policy

Revamping and Repowering

Academic journal article Forum for Applied Research and Public Policy

Revamping and Repowering

Article excerpt

The origins of the restructured American electric utility industry offer perspective on its future.

If you liked telecommunications deregulation, you'll love electric power restructuring. Already, telemarketers in several states are working overtime trying to convince customers to switch their power providers. Some suppliers offer low-cost electricity produced by old coal-burning plants; others strive to win environmentally conscious customers by promising power that comes from relatively pollution-free sources such as wind turbines. Many try to entice customers with discounts and premiums if they make the big switch.

For most of the 20th century, the electric power business was viewed as a natural monopoly, and customers could not choose their power suppliers. In theory, state regulatory commissions protected consumers against monopoly abuses and oversaw utility requests to construct power plants, to string up transmission and distribution lines, and to establish new rate schedules. Overall, few people complained as the price of electricity declined and as electrification appeared to make work more productive and life more pleasant. Meanwhile, utility companies and their stockholders watched earnings and dividends grow.

So why would anyone want to change an electric power system that appeared to provide universal benefits? The short answer is that the picture was not as rosy as it seemed. The seeds for restructuring actually were sown in the 1960s and 1970s, when a combination of technological and managerial problems struck the utility industry, and political forces coalesced to stimulate major changes in the status quo. In particular, the utility industry failed to continue making progress in employing traditional generation technology to lower the price of power. Moreover, new public policy following the 1973 energy crisis unexpectedly introduced a set of free-market principles to an industry that had seen few elements of competition before. In the 1980s, deregulation ideologues pointed to positive examples of restructuring in other industries, and they hoped to take advantage of new technologies to lower the cost of power, especially for large electricity users. When Congress, in 1992, passed legislation to reduce the im pact of oil consumption after the Gulf War, the stage was set for deregulation and restructuring of the utility industry. [1]

Origins of Regulation

To understand deregulation and the restructuring of the utility industry, it may be useful to examine the origins of regulation in the Progressive era of American history--about 100 years ago. During this period of rapid industrialization, American political and economic leaders came to accept the notion that certain enterprises operated most efficiently without competition. The railroad industry, which started out early in the 19th century with competition among several companies along lucrative routes, is one of the most obvious examples of such monopolistic businesses. The huge capital investment made by the railroads meant they needed huge revenues to become profitable, a situation that often did not exist when many firms vied for the same customers. Consequently, railroad companies limited competition through mergers or the creation of trusts, which resulted in less-costly service, though not necessarily lower prices to customers.

Recognizing the unusual nature of such capital intensive industries, known as natural monopolies, politicians in the late 19th century played a critical role in forming regulatory bodies. They argued that these new types of businesses could benefit society if their cost savings, derived from economies of scale and reduced waste of material and capital resources, were passed on to customers.

But the politicians also realized that the public would not accept unfettered monopoly. They therefore invented the regulatory commission to oversee these industries and ensure that the benefits of monopoly flowed to customers. …

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