Magazine article Insight on the News

Utilities Enter Free Market - but Not without Sparks

Magazine article Insight on the News

Utilities Enter Free Market - but Not without Sparks

Article excerpt

Tired of paying whopping bills for electricity? Help may be on the way. Technological advances and regulatory changes are chipping away at the monopolies long held by local power companies.

For decades, economists and policymaker believed that electricity was a natural monopoly - a product provided most effectively by public utilities rather than competing private enterprises. Power companies were granted exclusive rights particular geographic areas but were subject to strict regulation concerning prices and services. As the costs of generating and distributing electricity declined, this arrangement worked reasonably well.

Beginning in the 1970s, however, utilities faced rising fuel expenses and huge cost overruns in the construction of nuclear-power plants, resulting in higher electricity rates for businesses and consumers. Environmentalists expressed concern about the industry, and in 1978 Congress passed legislation requiring utilities to make greater use of "renewable" energy sources such as solar and wind power.

Such pressures created a new class of independent power producers - companies that sell electricity to utilities. With the development of more efficient long-distance power lines, a nationwide network of interconnected electric grids emerged, linking utilities and independent producers in a vast "electricity superhighway."

Growing numbers of power companies are buying and selling electricity over this network, a trend that gained momentum in 1992 when Congress passed the Energy Policy Act. The measure, which requires utilities to permit other parties to transmit electricity via the grids in their service areas, opened the way for a competitive wholesale electricity market; it also raised the possibility of competition at the retail level, with businesses and consumers bypassing local utilities.

Such developments normally would reduce prices, but a patchwork of federal and state regulations and the conflicting demands of diverse interest groups have complicated matters. While some power companies push for rapid deregulation, many seek safeguards against what they regard as unfair competition. Unions that have enjoyed job security under the monopoly system are wary of deregulation, as are stockholders who rely on utilities for stable dividends. Environmental groups fear that market forces will undermine programs that promote energy conservation and renewable energy.

Utility companies argue that as regulated monopolies they were required to construct expensive facilities that they would not have built in a competitive market. Since power plants and transmission lines often take years to pay for themselves, sudden changes in the rules may deny utilities and their shareholders a fair return on such investments. "Electricity is the most capital-intensive industry there is," says Peter Jump, a spokesman for the Edison Electric Institute, a trade group representing investor-owned utilities. "A lot of money was invested under the assumption that the customers would always be there." As compensation for such expenses, utilities are requesting permission from regulators to impose fees and restrictions on customers switching to competing power companies.

On the other hand, utilities should be held responsible for their own poor investments, says Jonathan Adler, associate director of environmental studies at the Competitive Enterprise Institute, a Washington think tank. "The reality is that a lot of bad decisions have been made, and consumers who played no part in making these bad decisions should not be forced to bear the costs."

Whether competition will benefit some customers at the expense of others is another much-debated issue. Observers worry that big industrial customers will be able to negotiate lower rates for themselves, resulting in higher bills for small businesses and households. There is little agreement on the problem; some analysts regard it as an argument for a slow phase-in of competition while others believe it provides an additional reason for rapid deregulation - to ensure that competition reaches all customers as quickly as possible. …

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