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Perspective

Fortnightly Magazine - December 1996

however, the sabbath ushered in new technology and a long-term decline in energy pricesu4d that together produced 50 years of economic benefits, despite the fact that regulation probably encouraged excess investment, offsetting some consumer gains.

Then, during the 1970s, some unfortunate but unavoidable events began to occur. Global energy prices and interest rates soared. Utilities did their best to cope. The fault lay with no one in particular, but by the 1980s the hallowed "Compact" had undergone a facelift. Instead of simply providing an opportunity for a fair return, it now obligated ratepayers in all circumstances to reimburse utilities for LOSSES incurred in the event of competition. This obligation was said to grow out of a need for fair play. Economic efficiency in a static sense was said to require full recovery of potential LOSSES. How else could the honor of contracts be upheld?

This revised "Compact" drew its strength from warnings of apocalypse from high-cost utilities. Approve full recovery of all potential LOSSES, they said, or face paralyzing litigation, plus bankruptcies, loss of reliability, and other untold disasters.

Dead Sea Scrolls (origins of the "Compact")

What is the true nature of the "Compact"? From what source does it draw its authority?

From 1879 to 1907, the electric utility industry operated without price regulation. In its place, municipal regulation sanctioned multiple franchises within the same city, allowing competition, which depressed prices and profits and expanded output.

Reacting to these low prices and profit, Samuel Insull led the industry to create a state-centered regulatory regime to restrict competition through exclusive franchises, with the idea of "natural" monopoly providing a key argument. However, natural monopoly was not correctly represented in the debate. Exclusive franchises restrict competition and contestability (the possibility of entry by competitors that must be defended by setting a price that precludes entry), but do not follow inevitably from natural monopoly really existed, it would eliminate any competition without assistance. True natural monopoly should require no protection from competition. Of course, an exclusive franchise may not be completely exclusive; bad behavior may force the incumbent to loose his franchise rights. Therefore, the possibility of replacement ought to restrict the all-out exploitation of the franchise.u5d

Utilities have already received compensation for risk that includes LOSSES and even the possibility of bankruptcy.

Webster's Dictionary tells us that a "compact" is a "contract." A contract takes account of all pertinent contingencies. If the "Compact" had really existed, then surely the bondholders of the failed Washington Public Supply System would have invoked the "Compact" in an attempt to recover their LOSSES. But that proved impossible. Just try to find the clause in the "Compact" that specifies the terms of recovery of LOSSES in the event of competition.

Should fair play imply that captive ratepayers must pay for LOSSES as penance for having been denied access to competition for all these years? Does fair play imply that captive ratepayers must be left holding LOSSES as a price for competition? The obligation to serve was not matched by an obligation to purchase.

Revelations (will the lights stay on?)