|
|
|
|
Don't Restructure Electricity; Deregulate
By Richard L. Gordon
Introduction
Concern over the U.S. electric power industry has produced proposals for massively changing the industry. These alterations are often incorrectly described as deregulation. What actually is advocated is regulator-imposed alterations in the structure of the industry. This paper argues that conventionally defined deregulation, removal of governmental controls, is preferable. The theoretic and practical flaws of regulation preclude efficient imposed restructuring.
The argument stresses the general case against public utility regulation. The drawbacks imply an inability to develop satisfactory responses to any problem. It follows that designing a new structure for the electric power industry is a task at which regulators have been and are likely to continue to be incompetent. The issue, developing a new structure for a complex, regulation-distorted industry, is surely one for which the standard arguments for preferring a decentralized market solution to a centrally imposed one strongly apply.
Although economic theory and experience provide ample and widely recognized reasons to distrust regulation, traditional public utility economists consider regulation so fundamental that they prefer improvement to abandonment. Those who accept regulation are often unclear about whether the preservation of regulation is economically preferable or merely dictated by political feasibility. Feasibility is not an appropriate criterion for economic analysis. Economics actually has stressed determination of the most desirable outcome. The objective is to alter prevailing political views. Moreover, what is possible is certainly not an area in which economists have competence and may be unclear even to those who supposedly possess expertise. Experience with energy suggests that politicians often do not know what they can legislate. What advisers should do is suggest what seems best and persuade politicians to convince people that the changes are desirable.
The case for deregulation has three elements. First, note is taken of the arguments and counterarguments prevailing about electric power. Next, the bases for opposing regulation of natural monopoly are sketched. Finally, experience with regulation is examined. Two aspects of practice are stressed. First, the restructuring efforts initiated in the 1930s are recalled to suggest that governments have a bad record in designing an optimal electric power structure. Second, the most egregious examples of the defects of prevailing regulation are noted. Finally, questions are raised about approaches proposed in the restructuring debate.
Full Text (PDF, 32 pages, 111 KB)