Electricity Deregulation: Wired or Tangled in the 106th Congress’s Committees?

On Point No. 45

When policymakers embark upon restructuring as opposed to deregulating a heavily regulated industry, they risk creating more regulation than existed before. This is the dilemma created by Congress’s calls for mandatory retail “open access” in electricity, several variants of which are being discussed in the House Commerce energy and power subcommittee today. Would-be reformers from both political parties intend to assure that 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.

“Open access disease.” Nearly every network industry – not just electricity but telecommunications, railroads, cable TV firms — suffers from what might be called “open access disease.” This regulatory infection is caused by dual exposure to regulators who consider themselves indispensable to competitive markets, and to economists and policymakers who cling to the idea that capitalism generates “natural monopolies” apart from a government-granted franchise.

The incurable problem with the open access concept, which nearly all of the bills being discussed by the subcommittee share, is its coercive character. In electricity, the desire of a transmission or distribution owner to control its wires is not compatible with the desire of its competitors to hitch an uninvited ride — a problem for which there is no stable regulatory solution.

Thus, despite years of effort, federal electricity reform stands a strong chance of dying of open access disease again in Congress. Every fundamental question – state vs. federal jurisdiction, the role of “independent system operators” (ISOs) who will manage the power grid, the role of rural power, stranded costs – remains hotly debated.

Dirty secret. More substantial and robust electricity competition could emerge if more precious years weren’t wasted trying to mandate it. Achieving competition does not require granting everybody with a kite and a key the right to dump their power into the grid for somebody else to manage. Instead, artificial barriers that prohibit voluntary competition — the state-granted exclusive local service territories that protect incumbents — should be removed. The dirty secret of open access is that it leaves these delivery franchises intact.

Taking the step of simply removing statutory monopoly rights would grant to entrepreneurs, adventurous electric utilities and independent power producers the clout to cut voluntary access deals, and

develop infrastructure by forming buying or sharing rights of way with network industry cousins such as telecommunications, Internet, and railroad firms. For instance, an independent power producer could team up with a Baby Bell and real estate developers to share costs of providing electricity and communications services to residential and business customers.

Emulating Qwest. Some entrepreneurs could emulate telecommunications companies like Qwest and Level 3. Each is financing fiber networks thousands of miles long that feature buried, redundant empty plastic conduits for rapid installation of next-generation fiber for high-speed data. Fiber is far faster that either cable or DSL broadband technology. Therefore, barring a breakthrough in wireless data transmission, a multi-billion dollar campaign to rewire the “last mile” to household consumers may materialize, so sharing costs with power entrepreneurs could prove essential.

Under genuine competition, incumbent utilities constantly threatened with entry will likely be induced to offer open access voluntarily; Thus the aims of congressional and state forced open access advocates will yet emerge — but in a market-driven manner.

Other competitive pressures include potential adoption of lightweight microturbines, capable of serving a 7-Eleven or a large home, which some researchers believe could rival the change in computing from the mainframe to the desktop in significance.

Second wires inevitable. Consultant Mark Mills points out that today’s “noisy” and “dirty” grid is leading developers to design buildings with separate power systems, and argues that second wires are inevitable, and that the grid ultimately will need to emulate the architecture of the Internet to attain necessary reliability levels. The ability to make and execute such market strategies depends crucially on owners and operators who directly profit or lose from decisions. If the grid is managed by ISOs as more reformers propose, those market incentives disappear.

Other potential avenues for competition include: relatively new computer controlled sideways-drilling technology that allows oil and gas companies to flexibly snake under streets with no disturbance above-ground; silicon-based switches that improve technological control over power flows, making it less true that electrons won’t respect borders and that heavy regulation is therefore needed. User ownership of portions of the grid, driven by an end to franchises, is another.

Ending exclusive distribution franchises is necessary to ensure that firms other than existing distribution utility monopolies can exploit all these options. If the delivery monopolies remain intact, a homeowner’s association or business park deploying microturbines, for example, could find itself in violation of a local franchise. As Tom Casten of Trigen Energy notes, if he crosses the street with a wire he goes to jail. Open access can similarly stand in the way of localized exploitation of alternative energy options by entrepreneurs.

Transmission innovation. Forced access advocates forget that innovation in transmission and distribution schemes is as important as any other kind of innovation. Forced access compromises entrepreneurial incentives to embrace innovations and enhance reliability because their advance remains too dependent upon what regulators do.

Altering the deregulatory approach in the 106th Congress would set in motion a restructuring that is as fully efficient and entrepreneurial as possible. Years would be saved, and the need to revisit the industry to have its distortions legislatively ironed out, as appears likely in telecommunications despite the reform act of 1996, would be minimized. Of course, if franchises are removed and competition doesn't start to emerge in some places, then the states may properly consider forced access, but only on a rifle-shot, basis.

There is too often a tendency among policymakers to embrace technocratic solutions. Under genuine competition, regulators disappear. In contrast, mandatory access risks armor plating regulators, in the form of grid overseers, at a critical moment in business history when other network industries are exploding with redundancy and overlap to serve customers better.

Inefficiencies and consumer harms created by actual government monopolization and management of the power grid will outweigh any potential but unlikely monopolistic abuses by the private owners of transmission and distribution. The answers to questions regarding the shape of tomorrow’s power markets are not all locked in today’s initial conditions. Information will be created by entrepreneurs as we go along. But not if the industry succumbs to open access disease.

The following are further articles by Clyde Wayne Crews that also deal with electricity deregulation.

    • Rethinking Electricity Deregulation: Does Open Access Have it Wired – Or Tangled? Testimony of Clyde Wayne Crews before the Subcommittee on Water and Power Resources, June 24, 1999

    • Clyde Wayne Crews, ‘Open Access’ to Electricity? What a Shocking Idea, The Wall Street Journal, August 27, 1998

    • Clyde Wayne Crews, Electric Utility Reform: The Free Market Alternative to Mandatory Open Access, The Electricity Journal v. 10, n. 10, December 1997