Deregulation: Coming to a Utility Near You

Electricity Is a Prime Candidate for Vigorous Deregulation

One of the most important policy debates of 1997 concerns deregulation of the nation’s electrical power industry. The issue, a hot topic at both the federal and state levels of government, boils down to a simple question: If this protected and tightly controlled industry is thrown to the marketplace, who will benefit and will prices rise or fall?

If deregulation of natural gas, telecommunications, railroads, airlines, and trucking are any indication at all, consumers have nothing to worry about. The experience in those industries strongly reinforces what economists have been telling us for decades: Competition is good; if allowed to work its wonders it will improve service and efficiency while cutting costs to consumers. That’s the message of a very important study circulating in Washington and in state capitals as the electricity debate intensifies.

The study, published a few months ago by the Center for Market Processes at Virginia’s George Mason University, was written by economists Robert Crandall and Jerry Ellig. Titled Economic Deregulation and Customer Choice: Lessons for the Electric Industry, it has received wide attention and high acclaim since its release. It prompted Newsweek columnist Robert Samuelson to observe that when deregulation is done right, it pays big dividends.

Take the deregulation of natural gas, for starters. Various self-anointed consumer advocates predicted that when President Reagan eliminated the last of the controls on natural gas in 1985, prices would skyrocket. They also said that the United States would experience a shortage of gas. They were wrong. Prices plunged and no one these days wonders if we’re going to have enough of the stuff. Adjusted for inflation, wellhead prices fell by 60 percent between 1984 and 1995. Residential and commercial customers saw their gas prices drop by at least 32 percent.

Consumers are also better off because of the deregulation of the trucking industry, which began in 1980. The number of carriers doubled in the first six years. Prices are down between 28 percent and 56 percent, Crandall and Ellig show.

Railroads suffered under the thumb of federal rules longer than any other American industry—since 1887, in fact. Regulations stifled competition, boosted costs, reduced management flexibility, and left railroads unable to compete effectively with alternative, and often subsidized, modes of transportation. The result of decades of regulation was widespread shrinkage of the industry and the bankruptcy of many individual companies.

Along came railroad deregulation in 1980. Since then, prices have declined 44 percent. Delivery time has improved dramatically. The industry is showing some life again.

Since telecommunications was opened to competition and market forces in the early 1980s, long-distance prices have been cut almost in half. Spurred by competition, telecommunications providers have invested a fortune in fiber optics—replacing copper wires with technology that permits far greater efficiencies and higher quality service.

Finally, airline deregulation has worked wonders, too. Far more Americans are flying today than before deregulation, largely because prices have dropped by almost one-third since 1978. Planes are safer than ever before. Now, if only governments would deregulate the airports they own, or sell them, we can cure the remaining problems that plague air travelers on the ground.

What are the free-market lessons here? Within ten years of deregulating each industry, write Crandall and Ellig, prices were at least 25 percent lower, and sometimes close to 50 percent lower.

Already, electric utility deregulation in Great Britain and New Zealand has resulted in greater supplies of electricity and lower prices. Electrical deregulation in the United States can be a certain winner too, but we may first have to expunge from the debate a longstanding myth about why government became involved in this industry in the first place.

For years, most people thought that electric power could not be a competitive enterprise with multiple providers operating in the same market. To prevent price gouging and other abuses, it was widely assumed that government would either have to own electric companies or heavily regulate the rates and practices of private ones.

Utility monopolies were once considered natural because it seemed more efficient if one firm provided the electricity for a given area, rather than having two or three firms string power lines through neighborhoods. The acceptance of the concept of natural monopoly, however, did not proceed from careful, objective study.

In the early 1900s, electric utility pioneer Samuel Insull of Chicago Edison led a nationwide public relations campaign to convince politicians, the media, and the general public that utilities should be regulated as monopolies rather than be subject to competition. Historian Marvin Olasky has found that Insull’s goal as president of the National Electric Light Association (NELA), a major utility trade group, was to show the public that competition in public utilities was unfeasible.

Insull’s first strategy was to heighten fears of socialism in order to promote acceptance of government-regulated monopoly as a less-undesirable alternative. The NELA advanced its agenda, according to Olasky, with the unwitting help of the news media: Annual payments of $84,000 from Insull’s NELA allowed Hofer [an Oregon public relations firm] to send out almost 13,000 newspaper articles annually. The articles usually appeared as unattributed, ‘original’ editorials.

In addition, Insull and other utility executives lobbied local newspapers and politicians persistently to support the idea that regulated private monopolies were good for industry and for consumers. Utility officials even paid to have chapters promoting natural monopoly included in textbooks and, reports Olasky, moved to excise from government and economics textbooks passages opposing regulated monopoly.

Greg Rehmke of the Free Enterprise Institute in Houston, an authority on the history of high-school debate competition, says that a Missouri utility executive once sent a colleague to investigate the judging of St. Louis high-school debates concerning electric railways because the debates had been won by those critical of the regulated monopoly position. This executive reported back the disquieting truth, says Rehmke, that the anti-monopoly debaters were winning because they had better arguments.

Between 1905 and 1934, 40 states established public utility commissions to protect established utilities from new competition and to regulate them as natural monopolies. Economist G. A. Jarrell, in the October 1978 Journal of Law and Economics, showed conclusively that utility regulation was the direct result of the utilities themselves lobbying for legislation that would protect their profits by keeping rates high and freezing newcomers out.

In almost every state today, the debate over electricity deregulation is in full swing. Legal barriers that have prevented customers from purchasing electricity from anyone but the local utility monopoly may soon be abolished. That means customers can then choose from competing providers, much as they now choose which long-distance telephone service they want.

The companies which have long enjoyed protected monopoly status granted by state and local governments will have to prove that they can do the job better than firms from other states that will want to enter the market. New companies no one can yet envision may also spring up. You can bet that better service and lower prices will be the result.

The world is entering a new era of global markets—highly competitive and driven not by central planners but by the forces of supply, demand, and technological advance. In that environment, there’s nothing about electricity that makes it anything but a prime candidate for vigorous deregulation.

More by Lawrence W. Reed