Pulling the plug on electric power monopolies

from NewsLink, Vol. 1, No. 3, Spring 1997

There's wide agreement among economists, public-policy experts, politicians and even many utilities that deregulation of the $200-billion-a-year electric power industry will result in greater efficiency for producers and lower prices for consumers. However, there is less agreement concerning the means of achieving deregulation.

On one side are those who insist that the federal government should establish a uniform set of rules permitting utilities to sell electricity throughout the nation. On the other side are those who argue that the federal government should not preempt reforms that are already under way at the state level.

Why deregulate utilities that for years were considered a "natural" monopoly? The successful deregulation of industries like long-distance phone services and trucking has subjected the electric power industry to closer scrutiny. Further, technology has made the generation and transmission of electricity both cleaner and cheaper.

There are, however, obstacles on the road to deregulation. Sticking points such as "stranded costs," environmental concerns, and the ability of poor consumers to afford market-price electricity have some policymakers worried. Also, some cities and towns worry about property tax revenues that will be lost due to industry consolidation.

Stranded costs are utilities' costs associated with unused or inefficient plants, such as many nuclear power plants. The utilities complain that full-blown deregulation will force them to absorb such costs, which they often incurred to comply with state regulations. Conversely, some consumer groups fear that the absorption of these costs by the utilities will result in higher electricity bills for consumers.

Ultimately, those who favor state experimentation may have the stronger argument, particularly in a climate that favors devolution.

To some extent, these concerns affect the central debate over the means of deregulation: should the federal or state governments drive deregulation to resolve these issues.

Seeking to make deregulation more palatable, proponents of uniform federal rules contend that letting the states drive deregulation is, in the words of one analyst, Professor Peter Navarro of the University of California, "counterproductive, needlessly duplicative and wildly inconsistent." Ultimately, however, those who favor state experimentation may have the stronger argument, particularly in a climate that favors devolution. "While virtually everyone today agrees that electricity will eventually become a competitive market, many of the practical problems that must be solved first vary regionally," says Marc Rotterman of the John Locke Foundation. "States have distinct climates, industries and populations. Citizens of different states place varying emphases on environmental and income assistance programs. And states are better able to balance the competing equities of consumers and producers, especially regarding such issues as stranded costs."

In Massachusetts, Governor Weld unveiled a plan last February that, among other provisions, would allow customers to choose their providers the same way they now choose long distance telephone carriers. Other plans, including one submitted by the state legislature, address the stranded-costs issue by giving utilities ten years to eliminate the costs. In a bid to appease environmentalists, there are provisions to encourage the development of alternative and renewable fuels. These plans also call for a guaranteed 10% reduction for all consumers.

The Massachusetts plans for electric power deregulation illustrate the wisdom of allowing states to craft their own solutions to the problem of electricity monopolies. States, after all, can learn from each other. And in doing so, Massachusetts can improve its own competitiveness by finding a solution to its traditionally high energy costs.

The Massachusetts experience tells us that it's better to let the states pull the monopoly plugs one at a time.

NewsLink is the quarterly newsletter of the Beacon Hill Institute for Public Policy Research at Suffolk University. © 1996-1997. All rights reserved.

 

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