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A Century Behind: Our Electricity Regulations Are Stuck in Progressive Era

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A Century Behind: Our Electricity Regulations Are Stuck in Progressive Era

It's the seemingly intractable problem of modern civilization: Americans need more electricity, they want lower greenhouse-gas emissions, and they want to get rid of ugly transmission towers.

Many consider these to be mutually exclusive goals. More electricity means more emissions and more transmission towers. In the pre-An Inconvenient Truth world, meeting electricity demand was paramount; now, new emissions are verboten. Power plants that once would have been approved quickly now are being turned down by governors and judges.

There is a simple way to accommodate all these disparate preferences: true deregulation of the electric industry. The $330 billion industry has been a redoubt of state control for almost 100 years. Early in the 20th century, pro-intervention Progressives concluded that electric companies would consolidate into "natural" monopolies that would exploit consumers. This was a curious conclusion to reach at a time when electric companies were competing vigorously in many cities, but for those who put faith in the regulatory state, theory trumps observation at every turn.

The Progressives' remedy for this theoretical drift toward natural monopoly, offered without any apparent appreciation of irony, was to establish government-mandated monopolies. States created commissions with the regulatory power to outlaw competition among utilities and set electricity rates for consumers. By the end of the Great Depression, almost all Americans bought their electricity from government-backed monopolies, and they continue to do so to this day, whatever regulation advocates might say about electricity deregulation in the 1990s.

This regulation may have shielded consumers from paying energy prices set by supply and demand, but they pay a high price in other ways. Without competition, there is no spur for innovation. For that reason, the systems of electricity transmission and distribution -- the wires, towers, and poles that transmit electricity from the power plant to your home -- have undergone very little upgrading since the regulators stepped in.

Suppose that an entrepreneur invents a wind-power technology that could provide affordable, reliable electricity to 50 houses, and that a developer wants to use this technology to power a small housing project he plans to build. The entrepreneur sells his product; the developer gets affordable, reliable energy; and environmentalists get their clean energy. It is win-win-win. It is also illegal, because it would violate the local utility's government-granted monopoly. Only one company is allowed to string a wire.

Under the Progressive-era regulatory model, government sets the price of power. It was this sort of price control -- not deregulation -- that led to the California blackouts in 2000 and 2001. In a summer when hydroelectric power was down, owing to decreased water availability after a mild winter, California utilities had to buy electricity at high rates from the deregulated sector but sell it at capped rates. As a result, the utilities' creditworthiness declined, which pushed them near bankruptcy. Then, instead of removing the cap on retail rates, California imposed a cap on wholesale rates. An Econ 101 student could have foreseen the result. The generators simply made less power available to California utilities while selling the rest in other states where they could actually get a fair market rate. Blackouts followed.

Rate regulation simply defies logic. If electricity were priced in accordance with market forces rather than government mandates, demand would decrease during peak hours, when electricity was more expensive. Decreased peak demand, in turn, would diminish the need for new transmission towers and distribution poles. If energy entrepreneurs were allowed to compete in a free electricity market, the possibilities would be endless for distributed, renewable generation technologies, such as small-scale wind and solar power.

In a truly competitive market, independent power producers could team up with telecom firms and property developers to share the cost of building underground networks to carry both energy and information. Recognition of utilities' property rights -- in the form of underground and overhead rights-of-way currently occupied by transmission lines and cables -- would make such enterprises even more attractive, and the resulting competition would lower prices for consumers.

The existing regulatory regime provides no incentive for energy entrepreneurs to emulate the sort of private partnerships that have been instrumental to the growth of the next-generation fiberoptic-telecommunications infrastructure. The chance of small, innovative neighborhood generators' emerging to challenge the behemoths that date from the Progressive era is much diminished by this regulatory stranglehold.

Predictably, government continues to miss the mark. In Washington, the administration and congressional Democrats want to overhaul the system by spending a king's ransom on technologies designed to give utilities the ability to moderate consumer demand -- by, say, remotely turning down millions of thermostats during periods of peak use. Proponents call this a "smart grid," but it's a dumb policy, given that the U.S. could modernize the system without spending a taxpayer penny. This would require little more than encouraging states to dismantle the barriers to energy competition and recognizing the property rights of electricity producers. It would constitute genuine deregulation, and a genuinely innovative approach to energy policy.