Electric Visions.

• Author: Oprea, Ryan
• Position: Regulation of electric industry

Unleashing the market for power

Electricity isn't just one of the nation's largest industries. It's one of the most heavily regulated. More than a century's worth of federal, state, and local laws have straitjacketed it, stifling innovation, raising prices, and wasting resources. The industry that fuels the rest of American industry is in dire need of reform.

Congress recognizes this. But a lot of special interests are at work in Washington, pushing different ideas about what that reform should look like. Under America's complex regulatory regime, electricity has become a labyrinth of public and private sub-industries, each governed by different rules, each with its own interests--and each with its own lobby.

Outside the industry, several more lobbies have joined the debate, from environmentalists to retirees. The North American Electric Reliability Council, for instance, creates voluntary rules for the industry, and would like to make them mandatory. There's even a National Alliance for Regulatory Utility Commissioners, to represent state regulators' interests.

With so many voices, it can be difficult to discern the real issues at stake. But there is general agreement on--or reluctant acceptance of--one point: Like it or not, competition is already coming to the industry.

Small, entrepreneurial companies have found tiny cracks in the regulations where they can innovate and compete. Plug Power, for instance, is developing a fuel cell technology that could allow homes and small businesses to produce their own energy. Trigen Energy has found ways to dramatically improve efficiency in power production--and claims a competitive industry would have every incentive to follow its lead. Such enterprises represent the possibilities of a dynamic, less regulated marketplace. It's unclear, though, whether there is room in Washington for a bill that would unleash all the creativity of companies like Trigen and Plug.

It's not as though the electricity market has never been competitive before. For a long time, policy makers assumed that it was a natural monopoly--that only one firm could operate profitably in each market. But over the last two decades, Burton Behling, Harold Demsetz, and other economists have discovered that the early industry was remarkably competitive. In the first 10 years of the century, in cities across America, consumers could choose from more than one electric company. In that environment, production quadrupled and prices fell 26 percent.

In 1907, with competition eating into their profits, the oldest firms began lobbying to consolidate the industry. States passed laws guaranteeing exclusive franchises to those utilities and propping up their prices. Unnaturally large holding companies began to develop, channeling their monopoly profits (as high as 2,000 and 3,000 percent in exceptional cases) into other industries and spreading into other states (thus partially shielding themselves from state takeovers).

The federal government responded by passing interstate legislation. In 1935, the Public Utility Holding Company Act prevented utilities from entering other energy-related businesses and severely restricted their capacity for growth. (A 1995 study by Paul Carpenter and Frank Groves of the Central and South West...