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Let's End the Monopoly

Fortnightly Magazine - June 1 1995

that new technologies and dispersed power generators are cheaper than central station nuclear and coal units will be tested in the market. Anyone with windmills or fuel cells or cogenerated power or anything else can enter the market if they can produce at a competitive price. The folks touting exotic schemes to provide ample power at more favorable costs will have to put up or shut up.

Such competition would give us many efficiency gains. With more wholesale trading, utilities can build less capacity, cutting reserve margins. Any new capacity will be built by those who are most efficient. Inefficient, high-cost producers won't get any business.

Transmission Brokers

Short-term regional markets will make the best use of existing capacity. Distribution companies could trade power and energy to minimize their costs without the complex, hard-to-achieve legal structures of the power pools. Brokers would have a profit incentive to possess the transmission facilities that could make profitable deals possible and to operate the region at a minimum cost.

If, as I propose, the brokers share profits with the distribution companies from which they buy low-cost power, we will have created a profit incentive for distribution companies to always seek the optimal generation mix. The better they choose in contracting with generating companies for power, the more customers will gain.

True Cost Pricing

Moreover, the competitive system should prove more efficient for consumers in the sense that the electricity that they will consume will be worth as much at the margin as other products that might be produced with the same resources. That means that customers won't use electricity when they would prefer something else (em if they only know the true cost of the electricity. In technical terms, I mean that the competitive market I envision will tend toward electricity pricing at the long-run marginal cost.

In short, the market system would encourage a constant search for new and better ways of doing business. Longer-term rates would fall. Electricity shortages would be averted. Regional rate disparities would narrow. Granted, prices could rise some in the short run, because stockholders would no longer be subsidizing the price of electricity. But in the long run, electric utility stockholders will gain the opportunity to earn whatever profit efficiency and good management can bring.

Competition in power generation would foster supply-side economics in the best sense of that term. Of course, competition based on economic performance can occur only if we have a level playing field. That means that government subsidies through tax exemptions and preferential financing must end. They are not necessary. And I hear the federal budget could use the money. This condition is indispensable. Unless we get rid of subsidized financing, a competitive market will prove impossible.

I'm conscious that what I am proposing is a sharp departure, that it upsets traditional patterns of thought. But surely 200 years of economic analysis and practical experience tell us that competition, whenever it is possible, serves the interest of society far better than government control. So, to those in our industry and in government who share the