Electric Industry: Let the Competition Begin

Politics, the enemy of so many productive policy initiatives, is threatening another: electricity deregulation.

Retail market electricity deregulation could be one of the most significant deregulation efforts since the Motor Carrier Act of 1980 deregulated the trucking industry. But some in the Northeast are concerned that if the electricity industry were deregulated, consumers would turn to the low-cost coal-fired power plants of Ohio, Michigan, etc., for their power-generating needs.

They say all the resulting nitrous oxide, sulfur dioxide, and carbon dioxide emissions would hop on the first shuttle to the Northeast.

But perhaps the politicians and electric industry commentators from the Northeast really aren't concerned with the environmental impact of deregulation. Of the 106 counties in the United States that do not meet current standards for ground-level ozone, 36 are located in the Northeast. Instead of taking responsibility for their lackluster performance, these politicians and industry spokesmen are pointing at the West - passing the buck, in other words.

Not prepared to compete

State regulatory policies in the Northeast have left many electric companies ill-prepared to compete in a deregulated market. Further, many of the Northeast's large utilities have high average generating costs. This, obviously, isn't an advantageous starting point from which to enter a competitive market. But it is an incentive to oppose deregulation.

Enter the stranded investments issue. Loosely described, stranded investments are that portion of a utility's investments that become obsolete when a customer buys power from another utility. For some Northeastern companies, stranded investment losses are significant. Therefore, some in the electric industry claim a "regulatory compact" with the the government that entitles them to recover this loss. Others argue that stranded investments are a result of normal business risks and therefore the electric companies should not be entitled to recovery.

Such is the quandary of federal regulation: If the government steps in and allows for full recovery, the consumer will bear the burden. If no stranded investment recovery is allowed, a very large and powerful industry would bear the burden. Neither option is politically appealing.

Alas, all this worrying may be for naught. Electricity deregulation does not necessarily mean that Midwestern power plants will wheel more electricity to the Northeast. There are limitations on the transmission system's ability to facilitate such a power transfer. Even if transmission capacity is increased, it is not clear that Midwestern plants have the extra capacity to generate power for the Northeast.

What deregulation would do

Further, a deregulated electricity industry would allow "cleaner" Canadian-generated power into Northeastern markets. Hydro-Quebec has abundant reserve capacities with which to supply the New York power pool, the Northeastern pool, and the Pennsylvania-New Jersey-Maryland interconnection. Deregulation also would permit environmentally friendly gas-fired power plants to access Northeastern markets.

On average, consumers in the Northeast spend $1,840 a year on electricity. Except for Delaware, every Northeastern state has electric rates higher than the national average. In fact, the average consumer in the Northeast pays electricity rates that are almost 40 percent higher than consumers in the rest of the country.

Competition will remove the protective veil surrounding the state-authorized monopoly that is the electricity industry. Consumers will be able to choose the most efficient, environmentally conscious power producer that offers the highest-quality product at the lowest price. Inefficient, high-cost polluters - now coddled by the state - will be forced out of the market.

Whether it be the trucking industry, the airlines, or railroads, deregulation and greater competition have resulted in substantial benefits for consumers. They have allowed the innovative, entrepreneurial vigor of American industry to run its course. Hopefully, when historians look back at the debate over electricity deregulation, they won't have to say that it was held up by politics.

* William J. Michael is a research assistant at the Competitive Enterprise Institute in Washington.