What Would Consumer-Regulated Electricity Look Like? | Cato at Liberty Blog
What comes to mind when you try to imagine a truly free market in electricity? Many electricity policy experts would point to the advent of wholesale electricity markets and retail choice in some regions of the United States. Some economists (me included) would go further and advocate for the complete removal of government intervention in the electricity sector.
Many of us can’t picture a free market in electricity because the laws governing the industry have been so interventionist for so long. Today’s “natural monopoly” regulations date back to the late nineteenth century and became widespread by the 1930s. Policymakers were convinced (in some cases, by the utilities themselves) to preempt the anti-competitive behavior of electricity monopolies by 1) granting them legal monopoly privilege and 2) adding significant oversight such as “rate of return” regulation to mitigate monopoly behavior.
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One solution to the monopoly problem is to allow new, private utilities to develop and compete wherever they make sense. But to disentangle these new utilities from the massive regulatory red tape that has enveloped existing utilities for decades, they would have to be physically unconnected to existing grids.
At the societal level, the obvious upside to allowing competition is that we could finally bring a dynamic market process to the electricity industry. Who knows what innovations entrepreneurs could bring to the industry if they didn’t have to ask for permission from regulators? Allowing a brand-new category of electricity suppliers also addresses the looming challenge of sharp demand growth in the slow-moving electricity industry.
For state policymakers, private grids are a no-cost economic development plan. Rather than incentivizing new industries to locate in the state through tax credits or other subsidies, just getting out of the way of new developments would be a pro-growth policy. And if a new development fails, so be it—there’s no risk to taxpayers or ratepayers, unlike with projects built by regulated utilities.
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Sometimes the state level is the place to look for new answers. And when it comes to the idea of enacting truly competitive reforms in the electricity sector, states are in control. All it would take is a modification of the statute that created the state’s public utility regulations in the first place and a clear declaration that new private utilities—if they are not connected to existing infrastructure—will not be subject to monopoly regulation.
In the worst case, no one would take advantage of the new option. In the best case, a new type of industry would develop that would be faster, more customer-focused, and more innovative than anywhere else in the country.