Rethinking Electricity Deregulation: Does Open Access Have It Wired — Or Tangled? Testimony of Clyde Wayne Crews Before the House Energy and Commerce Committee

Good Morning, Mr. Chairman, my name is Wayne Crews and I am the director of competition and regulation policy at the Competitive Enterprise Institute. I thank the subcommittee for the opportunity to appear today. It is a great pleasure for me and for my organization. CEI is a Washington-based public interest group established in 1984 with an annual budget of about $3 million and a current staff of 35. CEI works to educate and inform policymakers, journalists and other opinion leaders on market-based alternatives to political programs and regulations. CEI also engages in public interest litigation to protect property rights and economic liberty.

When policymakers embark upon restructuring a heavily regulated industry, as opposed to deregulating it, they risk creating more regulation than existed before. This is the dilemma of popular proposals to reform the electric industry today, such as the administration bill and the Largent bill. Both call for regulated open access to the power grid, which is intended to mean every commercial, residential or industrial customer shall have a choice of any electricity provider, while the local utility would be required to distribute the new provider’s electricity.

Restructuring anticipates making a competitive business only out of electricity generation — the spinning of magnets within copper wire coils to cause a flow of electrons and current. The deregulation of transmission and distribution — the network of towers and wires and poles that make up what amounts to an interstate electric highway system — has not been brought into play. But to protect the market and consumers, it imperative that all sectors of the industry be deregulated – not restructured — together.

Despite years of effort to secure federal retail access, every fundamental question – state vs. federal jurisdiction, the role of independent system operators, reciprocity, the role of rural power, stranded costs – remains as hotly debated as ever. Thus reform will likely die again in Congress. The irredeemable problem with mandatory access is its coercive character: the desire of a transmission or distribution owner to control its wires is not compatible with the desire of others to hitch an uninvited ride — a problem for which there is no stable regulatory solution. Few will invest in grid technologies and innovations and reliability-enhancing measures if required to share the spoils with competitors. Nonetheless, regulatory authorities at the Federal Energy Regulatory Commission intend to force involuntary retail trade across what ought to be entrepreneur-controlled networks. Open access armor-plates regulators by giving them even more responsibility.

There is a better way. Reform requires that the regulated component shrink; More substantial and robust electricity competition could emerge if more precious years weren’t wasted trying to mandate it. Competition does not require granting everybody with a kite and a key uninvited access to resistant incumbents’ wires. Instead, the artificial barriers that prohibit voluntary competition — the exclusive local service territories that incumbents enjoy — should be removed. These artificial barriers are typically embodied in the “certificates of convenience and necessity” state regulators have granted a few lucky producers. And even if open access were implemented, these exclusive delivery rights would remain intact, guaranteeing that the power industry deforms as the free generation elements ooze around the regulated components, all in an era in which other network industries are building overlapping, redundant networks.

While a federal bill would likely take several years to fully implement open access, abolishing franchises could inspire competitors to cut voluntary access deals right away, or to erect or bury their own competing wires and serve captive customers if they can figure out a way to do it. For example, an independent power producer might team up with competition-minded utilities or with a Baby Bell and real estate developers to provide electricity and communications services to residential and business customers — whether on the outskirts of the grid, or defiantly in the middle of an incumbent’s territory. The thinking of the industry must change to match that of other, more entrepreneurially minded network industries.

In all likelihood, the persistent threat of entry from every direction will assure that most wires will be operated on an open access basis when franchises are ended – the very goal that open access advocates seek. Utilities that balk at relieving overcharged customers will themselves face retaliation when they seek to expand. If nothing else, interlopers could help share costs in exchange for access. Some wires, though, will be operated on an exclusive basis, and still others something in between. No regulator or strident academic can know the proper mix, which will change every day in a dynamic marketplace. Since grid developers would retain control over their wires under genuine deregulation, incentives to both expand and protect reliability are maximized. Thus all the aims of the forced open access advocates can be realized, but in a market-driven manner.

Trends toward smaller-scale generation — producing power near or at the customer’s premises and transporting it over shorter distances at lower voltage — suggest that the development of “sub-grids” or even self-contained loops could be in the offing if franchises were abolished. In the extreme, mass-produced, desk-sized units could bypass the grid altogether.

There is too often a tendency among policymakers to believe that a technocratic solution, in this case, managed access, is superior to ordinary market processes. But inefficiencies created by actual government monopolization of the grid will outweigh any potential but unlikely monopolistic abuses by the private owners of transmission and distribution. Where bottlenecks remain, reformers could consider “rifle shot” open access, but should reject the permanent universal access system proposed today.

The Artificial Origin of Utility Monopoly Power

For decades, electric generation has been argued to be a natural monopoly, a condition characterized by declining average costs, such that a single large firm can produce and sell output cheaper than two or more smaller ones. Some fear such markets will gravitate toward monopoly control. While the coercive natural monopolies of economic theory sometimes appear elusive, political monopolies, grounded in exclusive franchises that forbid competitors, clearly exist.

Today’s monopoly electricity market is the result of conscious political design, not natural monopoly characteristics. A monopoly cannot sustain itself – and hardly is “natural” — if those who prefer not to partake of its services are free to leave. Electric utilities never achieved monopoly status before the advent of the state public utility commissions.

If regulation were devised to help consumers, prices should have fallen and the quantity of power supplied should have increased after the shift to regulation. Instead, customers paid more under rate of return regulation than they had under competition. Economist Greg Jarrell found that the states in which utilities were first regulated were those charging the lowest rather than the highest prices. Furthermore, the early-regulated states underwent price increases relative to price changes in the late-regulated states.2 Also, output of electricity fell following regulation, while utility profitability and return on assets increased. Seemingly, utility regulation did not fight monopoly or protect consumers, but created artificial monopolies that sacrificed the interests of smaller, competitive producers and their customers for the sake of politically powerful but less efficient electricity producers.

Real deregulation will target these artificial impediments to market entry. There is no justification for artificially forcing competition when the absence of competition was artificially created in the first place. Deregulation is needed precisely because states and public utility commissions remain in the business of restraining voluntary trade through exclusive franchises. The “certificates of convenience and necessity” required to sell electricity in Colorado are typical of artificial market barriers:

No public utility shall begin the construction of a new facility, plant, or system or of any extension of its facility, plant or system without first having obtained from the [public utilities] commission a certificate that the present or future public convenience and necessity require of will require such construction.3

Congress’s greatest contribution at this stage would be to remove these barriers to competition. It is today’s absence of competition that requires a concerted governmental effort to sustain. Government should not impose involuntary trade over utility wires, which is the essence of forced open access, but should allow voluntary trade.

Some Ways Free Electricity Markets Can Thrive

Whether unprotected utilities see the light and open their lines, or whether parallel lines sometimes develop, whether the electrical system ultimately evolves into one consisting of small generators on minor distribution loops, or tiny household generators and no grid at all, no one knows. But consumers will be best served by a system that does not close down these electric avenues in favor of open access.

Potential Parallel Transmission and Distribution

About 600,000 miles of high-voltage transmission lines and about 2.5 million miles of distribution wires crisscross America.4 Whether that is or is not enough is a question that only the marketplace can answer. Despite the natural monopoly scripture, duplication, overlap and excess capacity are the norm elsewhere. Network industries other than utilities are spending billions rapidly building redundant networks. Optical fiber is being deployed at the rate of several thousand miles per day. Ending monopoly franchises would allow the possibility of competitors building infrastructure alone or in alliance with other network industries such as telecommunications firms and railroads to serve industrial parks and factories, commercial districts, strip malls, hospitals, universities and even residential areas. Potential allies include:

• Competition-minded utilities
• Real estate developers
• Long-distance and local phone companies
• cable companies
• water utilities
• gas companies
• railroads
• private landowners
• Interstate highways and Amtrak corridors

Clearly, two or more sets of wires up and down every street is not to be expected. But the threat is needed, because prices are best regulated by the possibility of others competing with the incumbent. Incumbents balking at those seeking access will likely face retaliation are get shut out when they try to expand. Newcomers can be creative in finding footholds in the market. For example, if customers don’t want ugly duplicate wires in their yard, newcomers can team up with a cable company and offer to bury them while installing high-speed fiber.

Some regulators appreciate the possibilities for competition in delivery. In Victoria, Australia, “The potential for competition in network facilities is already evident … where rival electricity distributors are planning to drive new lines into each other’ territories.”5 California Public Utilities Commissioner Jessie Knight notes that “Competition is coming to the provision of distribution services…It may be that there is no reason why the local utility distribution companies should be the only ones to construct and own line extensions.”6

Transmission and distribution should not be regarded as not-for-profit husks, as the open access model often does. Industry players must think of themselves as network entrepreneurs, and aggressively compete in the provision of multi-service networks. Otherwise they will be standing on the sidelines waiting for open access while potential partners whiz by.

Telecommunications and the Fiber Optic Boom: Lessons for Entrepreneurs

In contrast to the modest growth of electricity networks, telephone and cable companies have installed 25 million miles of fiber optic cable in the U.S., to which thousands of miles per day are added7, duplicating existing networks not just once, but many times. Worldwide fiber deployment hit 14 million miles in 1995, is now over 25 million miles, and will grow another 14 million miles (to 39 million miles) by 2001. That equals 4,900 trips around the equator, or 82 round trips to the moon.8

Furthermore, 80 percent or more of fiber’s costs are incurred before any customers are signed up.9 If the telecommunications industry can manage both the costs and the coordination of investors and customers, so can electric power entrepreneurs. Working together, the two industries could attain even greater successes.

One innovator is Qwest.10 Founder Phillip Anschutz, an oil and railroad man, sold Southern Pacific Railroad but retained narrow rights of way along the tracks and is now developing a 18,000 mile underground network unifying data and voice. With a foresight rarely seen in the electricity industry, Qwest uses a “rail plow” to bury two plastics conduit: one carrying state-of-the-art fiber, the other remaining empty, ready for next generation technology. Access to the fiber is available each mile along the route so that removals and installations require no digging. Wired reported that “Qwest will soon have more capacity than AT&T, MCI, Sprint, and WorldCom put together. And none of them saw the upstart coming.”11 Rival Level 3 is burying nine empty conduits.

Another firm offering the full range of multimedia services is Residential Communications Network, which provides cable, Internet and telephone with emphasis on lower middle class residential rather than business customers.12 RCN sees new apartments as an opportunity to go into debt to bury more fiber, and works with electric companies to string wire across the top tier of the pole. The company claims the Baby Bells efforts to wring more out of copper will fail because bandwidth will still be only 10% that of fiber.

Barring breakthroughs in wireless data transmission, the “last mile” to household consumers that firms like these seek may require re-wiring with fiber so that customers can download “Titanic” in a split second rather than the days it would take a 28.8 modem or even the hour it would take a cable modem. If undertaken, the rewiring job will cost tens of billions. Therefore enlisting and sharing costs with aggressive power producers now cut off from customers by exclusive franchises could be critical.

Bandwidth for telecommunications services lags the advances in computing power that rely on the telecommunications infrastructure to digitally link Americans and the world. Indeed, the computer industry is furious at a telecommunications industry still seemingly incapable of keeping up with the amount of brute computing power now streaming out of Silicon Valley and other high-tech regions. As Silicon Valley investor Roger McNamee put it, “Our industry is driven by Moore’s law, [t]heirs is driven by Moron’s Law – the morons who run and regulate America’s telcos.”13 Ethernet inventor and 3Com founder says of the telcos, “They’re stupid jerks, and they must be destroyed…I want to expose their laziness, their stupidity, and their fraudulent price structure.”14 Some still-regulated telcos are reluctant to cannibalize their existing technology in the way the computer industry routinely does. Thus, distribution line installation by hungry electricity entrepreneurs would make good piggyback partners with those intent on wiring America for a torrent of voice, data and video. Customers may not care where their electricity comes from, but it offered instantaneous video and music downloads and an always-on Internet, one may find them standing in their yard with a shovel in their hand.

The “House That Jacks Built”

Power entrepreneurs can also meet the homeowner halfway, in a sense. John Laing Homes in Virginia is building homes with high-speed data, audio and video preinstalled during construction in nearly every room to provide enough bandwidth for any application. Cost of the wiring is included in the home. Cable runs through rooftop and attic for direct satellite, and PVC conduits are left in the walls for future wiring. The company’s motto: “Retrofits are Hell.”15 Such developers are clearly potential partners for power entrepreneurs.

Power Lines as Voice and Data Networks

Another avenue that may induce new electric firms to justify the expense of adding to or modifying wires networks is hinted at by the discovery of engineers at United Utilities PLC and Northern Telecom Ltd. This partnership has developed the capability for phone calls and high-speed Internet access to be offered through the standard electric outlet, “thus posing a serious threat to current providers of those services.”16 By ironing out disturbances, the method allows electricity and information move through the same wires like ghosts through a wall. Trials are underway in Europe and Asia, where the electrical system is better suited than in the U.S.17 The process allows two-way data transmission, local area networking through office wiring, and is ten times faster than ISDN over phone lines. Such breakthroughs can reshuffle the value of wire networks in ways regulators can never anticipate.

Sideways Directional Drilling

Scientific American and other publications recently have described the relatively new computer controlled technology allowing oil and gas companies to drill sideways, flexibly snaking under streets and buildings with no disturbance above-ground, while sensors detect available oil and other products or allow lines to be installed. Some procedures leave a four-inch opening in place. If monopoly rights are eliminated, sideways directional drilling might be employed to bury low-voltage electric distribution lines in towns, which could bring costs down for all applications. This technique can be attractive compared to digging up a crowded city or residential street. Options could include inviting firms like Qwest and cable TV operators to run their lines down the conduit in exchange for shouldering some of the costs.

Railroad Expansions

Between 1992 and 1998, railroads have invested tens of billions of dollars in track and equipment upgrades, expansions and improvements.18 Since many regard railroads’ new level of investments as unjustified given the industry’s weak projected growth, the industry is prime a candidate for partnerships with access-seeking electric providers. Railroads want the new trackage and infrastructure but can scarcely afford it, while power companies need the access to customers. Relatedly, large railroads are in an ongoing streamlining process of selling off 30,000 miles of trackage to “short-liners” – small railroad spur companies — largely in rural areas. These represent potential partnerships or exploitable rights-of-way as well.

Fiber Optic Cable in the Oceans

The potential problems in installing power lines, especially low-voltage ones, can be minuscule compared to those confronted in sinking fiber optic cable in the oceans. The Fiberoptic Link Around the Globe, a consortium of Nynex, Cable & Wireless and Sprint, is a 17,000 mile cable connecting London and Japan, longest fiber optic cable of all, and perhaps the longest engineering project in history.19 Another endeavor, the $14 billion, 30-partner Project Oxygen (a “super Internet), will install 199,000 miles by 2003, touching 175 countries. Such projects entail negotiating with regulators around the world – not just a state public utility commission and the FERC. For those who speak the language, here’s a prime example of a “natural monopoly” — yet the risk rests with these companies, not their customers, as is the case with regulated utilities.

There is no clear winner in the race to own data networks of tomorrow. The future is open, and the power industry shouldn’t seal itself off by embracing a regulatory model.

Smaller Scale and Aggressive Generation

New generation technologies that can undercut central station utility costs threaten utilities’ comfortable lock on generation and have helped inspire today’s clamor for competition. In response, utilities are employing “distributed generation” – often modular, self contained units much smaller than existing central generating plants, that can be sited closer to the end user. These typically range in size from 60,000 kW down to microturbines of about 5 kW.20 (The average giant central-station coal-fired plants is about 500,000 kW.21) Options include diesel engines, combustion turbines, microturbines, photovoltaic arrays, various forms of fuel cells and battery storage.

Traditional utilities, recognizing that distributed generation lessens reliance on central generation and high voltage, are defensively exploiting these technologies to meet peak demand without building new transmission or investment in more central plants, to serve remote customers, and to improve customer relationships with new services and improved quality and reliability.22 In a sense, there already are two grids: the power grid, and the natural gas pipeline network. In many cases, it is natural gas, not electricity, that will be transported long-distance.

Weighing a few hundred pounds and often sporting only a single moving part, microturbines of less than one megawatt can furnish on-site power, such as servicing a 7-Eleven or a large home. One example is Allied Signal’s 75 kW TurboGenerator, which sells for $40-$50,000, or almost $670 per kW. Operating costs are 4.5 cents per kWh, while total costs, including recovery of capital, are 6.7 cents per kWh. New Energy Ventures is marketing the system widely in the western states, and McDonalds is one famous customer. Allison Engine, owned by Rolls Royce, and Capstone also produce microturbines. According to the Electric Power Research Institute, reliable, low-maintenance commercial applications could be available for under $300 per kW within three to five years.

Trends toward smaller scale generation are probably the most significant change confronting the power industry, and they help undercut the case for forced access.. EnergyWorks chairman Mason Willrich told Public Utilities Fortnightly “I don’t see us going back to 1,000-Mw nuclear plants, or to coal. We need to think hundreds, not thousands.”23 While capital costs are about 30% higher for gas turbines in the 1 MW to 20 MW range — though that is cheaper than central stations – labor and net fuel savings can give smaller units an additional advantage.24 It’s easy to envision hospitals, commercial firms, shopping malls high-technology firms, Internet service providers and others running sensitive electronic equipment who require uninterrupted power embracing microturbines. Single or stacked units in buildings and along new streets (perhaps ultimately displacing utility-owned distribution lines) may be in the offing, helping improve reliability.

RKS Research & Consulting finds evidence of a “major shift from the model of central station plants and poles and wires to a new paradigm of small, decentralized power and networked control system. The shift could rival the change in computing from the mainframe to the desktop and network server in social and economic significance.25 They further find that one-fourth of businesses are troubled by periodic fluctuations and outages, and one-fifth willing to pay 10 percent premiums for solutions.26 Firms other than existing distribution utility monopolies must be allowed to exploit these developments. Ending exclusive distribution licenses will prevent utilities from parlaying their monopoly power in distribution into domination of the future wave of distributed generation and microgeneration, as open access unfortunately may allow them to do. Utilities’ government-protected advantage over competitors — and over captive customers – must be revoked before mass-produced microturbines saturate the marketplace.

An extra technological and economic incentive for the adoption of smaller scale generation is the recovery of waste heat. Thomas Casten, President and CEO of Trigen Energy Corp. sees the entire electrical grid being bypassed, arguing that “The central electric generating plant without heat recovery is finished as an economically viable technology” because the typical central station plant that sends 70 percent of the energy from the source fuel up the smokestack as waste, is pouring money down the drain.27

Companies like Trigen, sensing lost value, produce standardized, mass-produced modular “trigeneration” systems, which burn fuel to make three energy products: steam, electricity and chilling for air or water. This process serves offices, universities and hospitals, tripling efficiency to 90 percent. In Trigen’s case, a key is a 3mW assembly-line produced gas-fired cogenerator that can be trucked to a site from order to operation in two months.

Improved Technological Control of Power Flows

Accompanying the claims that the grid is a natural monopoly, one reason for calls for continued regulation has been that electric power simply flows where it wants. One former Deputy Energy Secretary, in discussing the “tug of war” over deregulation by state and federal authorities, noted that “Electricity markets do not behave according to political boundaries” and that “Electrons don’t respect borders.”28

While today’s bulk power system indeed operates under constraints for which design and operation must allow, it’s less true now that electrons won’t respect borders. The development of silicon-based switches that improve technological control over power flows by switching electronically rather than mechanically can allow efficient producers to extend their reach.29 Successful control of the grid might be thought of as paralleling the control of small currents on a computer chip, which is itself a tiny grid.

So far, this technology is best used where lines are loaded and restrict power marketing.30 A study of the Flexible AC Transmission System on the Georgia/Florida bottleneck, “found that for roughly a $25-million to $30-million investment in FACTS controllers, power transferred between these states could be increased from 3,400 to 4,100 megawatts. That’s an increase of 21 percent, which would yield roughly $130 million per year in additional revenues.”31

Note that improved grid control pulls the industry in the opposite direction from microturbines, since there enhancement of capacity, reliability and stability of central station generation will raise the value of central station generation and long-range transmission relative to the widespread adoption of distributed generation and microgeneration. Regulation will not discover the proper balance between the two approaches, but ending franchises and allowing natural market development can do so. One might reasonably argue that the grid remains largely uncontrollable today partly because it is regulated. Open access could further lessen market pressures to adopt grid-control innovations, since no individual firm’s profit is likely to urgently depend on controlling power flow. Allowing markets to find the best mix can make transmission more precise than it has ever been, rendering the existing grid increasingly antiquated.

User Ownership of Power Networks

Along with opening up competition between the competing visions of the central station model vs. on-site generation, phasing out exclusive franchises will put into play customers’ own incentives to exercise control over critical network assets. For example, large power users, such as a manufacturing plant or a consortium of businesses in a high-tech office park, could purchase portions of the grid themselves, thereby entirely eliminating any risk of price gouging.32

Threats and “Rifle Shots”

The foregoing examples illustrate that there will be no shortage of competitive pressures if franchises are ended. Deals and threats by rivals can go a long way toward opening markets. At most — as a temporary measure where bottlenecks cannot be overcome in a reasonable amount of time and if there is a legitimate threat of customer abuse stemming from the historical monopoly status of the utility — “rifle shot” requirements for forced open access might be considered by the states. But the access requirement must sunset; and private control of the bottleneck in question is urgent in order to provide the proper incentives to expand capacity.

The Market Alternative Best Protects Consumers and Reliability

Forced access advocates forget that innovation in transmission and distribution is as important as innovation in generation. Regulation is unable to mimic competition. Under forced access, entrepreneurial incentives to undertake unique wiring projects, newfangled silicon control switches, infrastructure maintenance, or non-utility deployment of innovations like microturbines are compromised because their advance remains too dependent upon what federal regulators do. Efficient, not administered, pricing and entry are necessary to guide capital, plan capacity and locate new generators and wires. As Douglas Houston notes, “A flaw in most transmission grid proposals is that they lack an explicit incentive for participants to alter capital without regulatory ‘urging.’”33 Transmission prices too low lead to skimping. Prices too high lead to gold-plating the network. It is highly unlikely that regulators will consistently hit the mark and generate efficient investment. Entrepreneurial incentives to invest in whiz-bang technologies must be maximized, which requires an end to franchises. Otherwise, optimal market development and innovation is jeopardized. For example, when would a homeowner’s association find itself in violation of a local franchise? What about a business park?

Altering the reform model would set in motion a restructuring that is as fully efficient and entrepreneurial as possible. More importantly, years would be saved and the need to revisit the industry to have its distortions legislatively ironed out, as may occur in telecommunications, would be minimized. Indeed, if today’s reformers had instead mounted a campaign to end exclusive territories, we would likely be much further along in the electricity reform debate. There is a crucial difference between mandating competition through open access/common carrier models — and simply allowing it where it is forbidden. Needed are what Alan Moran of the Melbourne, Australia, Institute for Public Affairs calls “entrepreneurial interconnects” – not their opposite, the heavy-handed, mandatory Independent System Operator, whose incentives are distributional, not profit-related. The ability to make and execute rational market strategies depends on whether the operator is an owner or not, and thus whether he profits or loses from decisions. Under genuine competition, the regulator disappears. In contrast, mandatory access assures a prosperous future for the Federal Energy Regulatory Commission and the state public utility commissions.

Technology, rather than regulation, best protects reliability as well, since owners in hotly contested markets have the greatest incentives to protect customers in order to preserve and expand their markets. Proper market structure lies somewhere on a continuum between central generation and long-distance transmission, and onsite generation and zero transmission. But that point must be discovered and rediscovered daily, not dictated, particularly given the pace of technology. While power is still produced by twirling magnets, just like it was 100 years ago, everything incidental to the process has changed. Reliability must be a competitive feature, not set at locked-in, regulated levels. Markets need to allow room for experimentation with both proprietary and user-owned lines to maximize reliability, for example. Consultant Mark Mills points out that the “noisy” and “dirty” grid is leading developers to design buildings with separate power systems, and argues that the grid ultimately will need to emulate the architecture of the Internet to attain necessary reliability levels.34 Mills notes that these transformations become increasingly urgent as the grid evolves from serving “dumb” devices like bulbs and motors toward more sensitive equipment that cannot withstand downtime.

Firms can be expected to offer various levels of reliability to meet customer needs. For those who encroach upon incumbent territory to attract new business in the first place, they must make credible assurances of reliability. Additionally, to the extent deregulation fosters trends in the power marketplace toward stand-alone generation units, like banks of modular microturbines, customers are less susceptible to the cascading power failures that affect thousands or millions of power users, making them essentially immune from “reliability” concerns. To the extent open access biases the market toward a system in which many rather than few customers are affected by a given power outage, it is an impediment to rather than a facilitator of reliability.

The answers to questions regarding the shape of tomorrow’s power markets are not all locked in today’s initial conditions as planners assume. Information will be created as we go along. Policymakers should commit to nurturing a system whose shape will no longer depend on any regulatory authority making the right decisions. Getting started requires removing the prohibitions against competition, not forcing it.

Why Today’s Combatants Should Support a Free-Market Alternative and Avoid Open Access

My handouts provide some brief examples of what market reforms might look like. The more practical and correct approach is to address franchises now, which will allow policymakers to avoid tearing off scabs a few years from now to iron out the distortions created by mandatory access. Open access risks continued pressures for re-regulation as well, such as price caps on transmission. Needed instead is the recognition of the vital role of private property rights in wires to prompt investment in viable, dynamic, reliable networks.

No matter how many committee hearings, Senate workshops, or technical hearings FERC has on keeping Independent System Operators independent or otherwise ensuring “efficient” regulation, the desire of property owners to control their property is incompatible with the desires of others who wish to hitch an uninvited ride under open access.

For long-term success and innovation, competing transmission and distribution owners must own the rights to future profits from innovation on the grid. Fortunately, the free market alternative of ending statutory monopoly rights rather than instituting retail access can help unite today’s warring interests. For example:

Utilities win because they: retain rights over their transmission system; can charge what the market will bear rather than a regulated price; need not surrender control to an ISO or regulator; can recover stranded costs, limited merely by the right of others to compete; gain the right to invade the territory of others; and will experience a quicker end to PUHCA and PURPA.

Industrial customers get more rapid competition without waiting until 2001 or 2003 and without basing business location decisions on waiting for distant states to implement open access. Nor should they worry over suffering from potential pullbacks in cogeneration or stand-alone power markets created by uncertainties over open access, nor should they pay undue stranded costs.

Consumers win because: the grid develops naturally, since newcomers must demonstrate competence; grid innovations become necessary, competitive features rather than regulated ones; reliability is maximized; and there is no possibility of slamming.

With the opportunity to deregulate properly and permanently before us, armor plating regulators is the wrong thing to do.

# # #

ENDNOTES

1 Douglas Houston, “Schaefer Bill Insupportable,” (letter), Regulation, 1996, No. 4, p. 5.

2 See Greg Jarrell, “The Demand for State Regulation of the Electric Utility Industry,” Journal of Law and Economics, 1978, Vol. 21, p. 287.

3 Colorado Revised Statutes, Title 40, (Utilities), Article 5, New Construction – Extension, Section 40-5-101.

4 Jim Collins,”The Power Grid,” U.S. Airways Attache, November 1997, pp. 43-45.

5 Alan Moran, Submission to the ACCC: Access Arrangements by Transmission Pipelines Australia, Energy Issues Paper No. 9, June 1998, Institute of Public Affairs, Ltd.

6 “Wither distribution?” Public Utilities Fortnightly, May 1, 1998.

7 Nikhil Hutheesing, “The Last Furlong,” Forbes, October 6, 1997, p. 72.

8 As reported in “9 Things to Watch in 1997,” GaAs Net: The GaAs Electronics Industry Resource, Vol. 3, No. 1 (Internet address: http://www.gaasnet.com/CompSemi/3-1/).

9 See George Gilder, “Fiber Keeps its Promise,” Forbes ASAP, April 7, 1997, p. 92.

10 See Mike Mills, “LCI to Be Acquired In $4.4 Billion Deal,” Washington Post, March 10, 1988, p. C1. See also Wired, March 1998, p. 91.

11 David Diamond, “Building the Future-Proof Telco,” Wired, May 1988, pp. 124-126.

12 See “Stand and Deliver,” The Economist, Vol. 347, No. 8064, April 18, 1998, p. 65.

13 Quoted in Rich Karlgaard, “Digital Warriors Want Baby Bells’ Blood,” Wall Street Journal, December 8, 1997.

14 Ibid.

15 Mike Mills, Washington Post, “For the Plugged-In Buyer, a House that Jacks Built,” January 21, 1998, p. E1.

16 See Gautam Naik, “Electric Outlets Could Be Link To the Internet,” Wall Street Journal, October 7, 1997, p. B6.

17 Electricity Daily, March 26, 1998.

18 See Daniel Machalaba,”Railroads’ Big Outlays on Infrastructure Are Questioned,” Wall Street Journal, April 30, 1998, p. B4. See also. “Forced Access – Reregulation By a New Name,” White paper by the Association of American Railroads, September 1997.

19 Neal Stephenson, “Mother Earth, Motherboard,” Wired, December 1996, p. 97.

20 See Richard E. Balzhiser, “Technology: It’s Only Begun to Make a Difference,” Electricity Journal, May 1996.

21 Stuart F. Brown, “Here Come the Pint-Size Power Plants, Fortune, April 1, 1996, p. 64D.

22 George T. Preston and Dan Rastler, “Distributed Generation: Competitive Threat or Opportunity,” Public Utilities Fortnightly, August 1996, p. 13.

23 Joseph F. Schuler Jr., “Generation: Big or Small?” Public Utilities Fortnightly, September 15, 1996, p. 31.

24 Thomas R. Casten, “Electricity Generation: Smaller is Better,” Electricity Journal, December 1995, p. 67.

25 “Big Future for Distributed Generation” Electricity Daily, Sept. 30, 1998, p. 1.

26 Ibid.

27 Thomas R. Casten, 1995, p. 73.

28 Margaret Kriz, “Power Brokers,” National Journal, November 30, 1996, p. 2596.

29 Richard E. Balzhiser, “Technology to Play Hand in Future Power Market,” Forum for Applied Research and Public Policy, Fall 1997, p. 25.

30 Ibid.

31 Ibid.

32 For an important overview, see Douglas A. Houston, “User-Ownership of Electric Transmission Grids: Toward Resolving the Access Issue,” Regulation, Winter 1992, pp. 48-57.

33 Douglas Houston, “The Case for Deregulating Electric Transmission: The Virtues of Self-Governance,” Paper prepared for the Cato Institute/Institute for Energy Research Conference, New Horizons in Electric Power Deregulation, Renaissance Hotel, Washington, D.C., March 2, 1995, p. 12.

34 See Mark P. Mills, The Internet Begins With Coal: A Preliminary Exploration of the Impact of the Internet on Electricity Consumption, Greening Earth Society, (pre-release final draft), May 1999.