Assessing Deregulation: The Clash between Promise and Reality

By Trebing, Harry M. | Journal of Economic Issues, March 2004 | Go to article overview

Assessing Deregulation: The Clash between Promise and Reality

Trebing, Harry M., Journal of Economic Issues

There is a general consensus that public utility services such as electricity, natural gas, telecommunications, and water are an integral part of the infrastructure of modern society. These services are typically provided by complex systems of capital-intensive networks that link centralized supply with a wide range of diverse customer classes. Accessibility to these services becomes critical if each sector of society is to realize the maximum potential gain to be derived from the employment of these services to enhance productivity, income growth, and the attainment of societal goals. While there may be agreement on the relationship between public utilities as infrastructure and the gains to society, there is no consensus regarding the appropriate organization and governance of the industries supplying these services. For more than 100 years there has been a sharp dichotomy between those who would have government play a major role through direct intervention and regulation, and those who would leave the development and operation of these industries to private initiative within the context of free market incentives and penalties.

Among the earliest proponents of government regulation were the institutional economists who played a significant role in shaping the content and form of regulation during the Progressive and New Deal eras. Institutionalists participated in developing new regulatory commissions, the methods of control, and the adaptation of the regulatory process to changing industry structures. By the 1940s, the work of the institutionalists had become well accepted as a part of the regulatory framework that had been put in place at the federal and state levels. A central feature of the institutionalist approach continues to be a belief in the need for government intervention to constrain market power and assure full access to utility services for all types of consumers. Institutionalists perceive regulation to be an evolutionary process that must change in order to be responsive to evolving industry structures, new technologies, and new corporate strategies. (1)

The critics of regulation represent a diverse group of academics and others who share a common belief in the supremacy of free markets over any form of regulatory intervention. They draw upon revisionist theories of government and regulatory history to demonstrate the impossibility of public interest regulation. In contrast to the institutionalists, the critics of regulation share a libertarian desire to limit, constrain, or reduce the influence of government. (2)

Beginning in the late 1960s, a series of major industry-wide problems arose that createdconditions that would eventually lead to public demands for a drastic change in regulatory policy. The rapid fly-up in energy prices, the continuing threat of an energy crisis, the growing shortage of natural gas in interstate markets, the massive cost overruns associated with new nuclear plants, and the bitter resistance of AT&T to new entrants employing new technologies that promised improved service at lower prices combined to create pressures for access to a greater range of supply options. Concurrently, there was growing evidence of managerial incompetence in these industries. Regulation was blamed, at least in part, for many of these problems.

Three major pressure groups moved aggressively to take advantage of this situation and actively promote deregulation. These were the large industrial buyers of energy and telecommunications seeking to extract major price concessions from utilities and carriers, a number of new entrants anxious to gain access to markets that were perceived to be potentially lucrative, and a new class of utility managers that envisioned the utility as a cash cow that could be milked to support entry into deregulated markets. For these groups, the largely academic arguments of the critics of regulation provided an ideal conceptual framework for promoting their cause. …

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