No clear consensus has emerged. Should regulators hold to a hard line?
Regulators have wrestled for decades with transactions between vertically integrated monopoly utilities and their...
transfer of insider information, like utility customer consumption patterns, should be prohibited along with any other dealings that convey an undue preference and advantage. Where personnel transfers are allowed they should be of limited duration, one-time events, and should be fully compensated to the jurisdictional utility and flowed through to ratepayer accounts.
Competitor Complaints. Prompt and effective complaint procedures should be established with early involvement of the PUC and informational involvement of the office of attorney general. To discourage frivolous complaints by competitors, a fee system should be imposed for use of commission time and investigatory resources. Noncompliance with the letter or the intent of the standards of conduct would not be tolerated, and both monetary and divestment penalties should be available. A repeat transgression should result in a steeply progressive, harsher penalty. Wide publicity for actual misconduct (em regulation by invidious comparisons (em also should be employed.
Fairness and Equity. The idea that this problem will solve itself over time without intervention is not persuasive, I also question the idea that benefits from efficiencies in vertical integration, innovation, and variety in choice will outweigh these market imperfections. I find more compelling the perspective that aims its focus first on economic power, concluding that any possible anticompetitive behavior will in fact occur unless government intervenes. Fairness and equity cannot be left to themselves. I see branding and associated dealings as significant impediments to market entry by others, perpetuating meritless dominance by the incumbent. That is particularly unfair for an undifferentiated product or service like energy or telecommunications.
Learning from Experience. Regulators and utilities alike should recall the mixed results that came from the diversification of the 1980s and early 1990s. PUCs grudgingly acquiesced; holding companies were elaborated; conglomerates were formed. While the worst fears of regulators did not come true, the glowing expectations of utility companies didn't either. The result often was the pulling back into the core business and the selling off of subsidiaries, much the way that nonutility companies have done over time (e.g., Sears disposing of Caldwell Banker, Dean Witter, and Allstate; Eastman Kodak selling off Bayer Aspirin; and Pepsi Cola divesting itself of Pizza Hut, Taco Bell, and KFC).
My opting for the strict approach is influenced also by two external considerations. One is our experience to date in trying to bring workable competition to local telephone (and, to some extent our experience with natural gas) service. Here public policy wildly underestimated the power (and will) of the incumbent utility to resist and frustrate change to its own advantage. Despite the rhetoric, it has gone rather badly and so far, at least, has mostly fizzled in the case of local service and residential and small business customers. Clearly, more must be done to constrain the incumbents if we are to rely on markets to produce a public interest outcome.
Douglas N. Jones is Professor of Regulatory Economics, School of Public Policy and Management, The Ohio State University (1978 to present), and recently stepped down as director of the National Regulatory Research Institute, in Columbus, Ohio. He is currently