ABSTRACT

Much of the effort to eliminate price regulation during the past several decades in the United States has involved more or less complete deregulation throughout the entire sector. Electricity is an exception. Policymakers are opening power markets to competition, but local distribution and long-distance transmission are unlikely to be deregulated anytime soon.

Electricity is not the first deregulated industry to be split into regulated and competitive sectors. The telecommunications industry has seen a transformation from one in which regulation set all prices into one in which markets for telephone equipment and long-distance service have been opened while local telephone service has (until very recently) been treated as a regulated monopoly. Experience with that sector provided the lesson that letting the regulated monopoly continue to operate in competitive markets could subvert competition in a number of ways. The regulated firm might put one firm ahead of others in the queue for getting access to the regulated service or have the customers of its regulated services bear the costs of its competitive ventures.

These concerns led in 1984 to the draconian solution of keeping most regulated local telephone companies out of the long-distance business, a restriction only slowly changing since the Telecommunications Act of 1996. In electricity, state and federal policymakers must wrestle with a similar decision: Should regulated wire monopolies be prevented from owning generation facilities? Can other operational institutions and rules ensure that transmission and distribution monopolies promote competition without forcing utilities to divest all of their generators? The widespread use of the term restructuring to describe the introduction of power competition into the electricity industry illustrates just how fundamental these concerns are.