Date: Thu, 12 Oct 1995 09:54:48 -0400 (EDT) From: Competitive Enterprise Institute To: Recipients of the CEI List Subject: CEI List: Electricity Monopolies Ending the Electricity Monopoly by Clyde Wayne Crews, Jr., fellow in Regulatory Studies at CEI. appeared in *The Journal of Commerce,* 9/1/95 Americans stand to save billions of dollars in energy costs if regulators eliminate the monopoly power that electricutilities enjoy. The average price of electricity in the country -- includingindustrial, commercial, residential, and other users -- is about 7 cents per kilowatt-hour. But price varies widely across regions, from just over 5 cents to 10 cents per kwh. This points to extraordinary inefficiencies. If customers could bypass the local utility and gain access to powergenerators located elsewhere, billions could be saved. A mere 1 cent per kwh drop in the average cost of 7 cents would save industrial, commercial, and residential customers $28 billion per year. Thats a major portion of the electric utiliy industry's annual sales, which reached $198 billion in 1993. While consumers have much to gain from competition, they have much to lose if utilities succeed in imposing so-called"stranded costs" on them -- a demand that state and federal regulators are unfortunately accommodating. These costs, estimated by some to exceed $200 billion, represent the value of non-competitive generating facilities that will be rendered idle by competition. Consumers should not be liable for these costs. Unfortunately, though, they are sitting ducks in the sights ofregulators and utilities. If utilities secure a governmental guarantee of stranded cost recovery they will be able to do exactly what regulation issupposed to prevent: charge the public more than the competitive price for electricity. Ratepayers will not pay those costs unless forced to by regulators. Yet, residential consumers have no well-established forum at the Federal Energy Regulation Commission. Since consumer well-being is the goal of federal regulation,the FERC should announce it will not contemplate stranded cost appeals and leave the matter up to states. That would encourage utilities to shoulder their own stranded costs out of necessity, through a realization that FERC does not (or shouldn't) exist to make them whole, but only to protect customers subject to a monopoly seller. Utilities argue that they are entitled to stranded cost recovery because they bear an "obligation to serve" everyone in their region. But utilities won that "obligation" by eliminating competitors in their exclusive territories. Their obligation to serve is a euphemism for government-guaranteed market share. Utilities also argue their obligation to serve is part of a larger "regulatory compact" -- an unwritten agreement with consumers to build generating plants as needed, in exchange for fair rates that allow the utilities to recover their costs. But this so-called compact is one-sided; rated-payers were never asked if they wanted to take part in it, nor did they ever sign such an agreement. And even if ratepayers had signed such a deal, a rational contract would have included the right to opt out once cheaper service became available. For their part, regulators say the compact protects consumers customers from potentially exploitative utility companies. But the historical record shows that competition, had it been permitted, would have achieved the same purpose. In the early days of electric utilities, competition thrived. Economist Burtin N. Behling notes that six electric light companies were organized in a single year, 1887, in New york City. In 1907, 45 electric light enterprises operated in Chicago. Prior to 1895, Diluth, Minn., was served by five electric lighting companies, and Scranton, Pennsylvania had four in 1906." If state regulation of utilties had been conducted in the public interest, electricity rates would have declined over the decades. But economist Greg Jarrell has found that customers paid more for electricity after the transition to a regulated monopoly system than they did when competition was the rule. Apparently, the purpose of regulation was not to fight monopoly but to foster it, to the detriment of customers andsmaller, competitive power producers. The danger today is that in the transition back to competition, the interests of customers may again be sacrificed -- in the form of a ransom demand labeled "stranded costs." Customers -- no matter the product or service and no matter the regulatory environment -- owe no allegiance to any manufacturer. No seller has the luxury of assuming he is entitled to customers. There can be no unchosen obligation by consumers to pay for a service or product they do not wish to buy; otherwise the exchange is not a trade at all but a robbery. Utility investors, by contrats, have always enjoyed choice in dealing with the utility, just as customers have lacked it. Under the circumstances, it is only fair that investors bear the cost of uneconomic facilities. Besides, the alleged strandings may not be as bad as utilities claim. Utilities have flexibility to lower rates to retain customers who threaten to leave; they should use that flexibility as much as possible to protect themselves from losing customers. No other business, in fact, has ever enjoyed a right to be compensated by customers for assets rendered useless by competition. On the "strandings" theory, we should all send the U.S. Post Office 32 cents every time we bypass it when sending an E-mail message. At the same time, customers have no right to demand that utilities stand ready to serve them. Accomodating the flows of multisource electricity on the power grid will require ardous scheduling, and planning efforts. Utilities deserve to be fairly compensated, and to be released from most governmentally imposed constraints on their decision-making, such as state-imposed social programs and laws that prevent utilities from diversifying into other businesses. The goal of preventing stranded cost recovery is not to punish utilities, but to protect consumers from the ill effects of decisions they had no part in making -- decisions by an industry that should not have been given monopoly power in the first place. _______ ________ __________ / | | | |_______ | | | | \ _______ |_______ __________ COMPETITIVE ENTERPRISE INSTITUTE 1001 Connecticut Ave. NW #1250 Washington, DC 20036 202-331-1010, fax 202-331-0640 Permission to reprint must be obtained from the publishing journal listed above. Permission to copy granted as long as these lines are left intact. To subscribe to the cei list, send a message to CEI@digex.com. "The Virtual Hand: CEI's free-market guide to the information superhighway" is available for $5. CEI's monthly newsletter, "CEI UpDate," is free to contributors of $25.