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The case against re-regulating the electric industry.
Fortnightly Magazine - July 1 2001

change over the course of 35 years. Similarly, utilities still send an army of meter-readers to customer premises to collect their billing in formation instead of collecting it electronically. There has been no change in procedure in over 60 years.

And Lose What We've Gained

Restructuring has already made major contributions to improving the economic performance of the electric industry. In particular, it has introduced incentives into the ratemaking process and has changed the modus operandi of stakeholders, who now must anticipate the new rules that restructuring will impose.

Modest Rate Cuts. First, regulators have abandoned rate-of-return ratemaking in those states where restructuring plans have been adopted. Rates have typically been reduced modestly up front, and then fixed for an extended transition period, during which a utility's earnings are not constrained by an allowed rate of return. Consequently, the utility is allowed to retain all of the benefits of its cost cutting, instead of facing the threat that the benefits will be confiscated and turned over to ratepayers. Incentive has increased enormously, and has led utility management to strive for efficiency with an intensity that they have never shown in the past.

Greater Accountability. Second, the restructuring movement has sharply curtailed the power of the array of stakeholders that have attracted themselves to the regulatory process. There is much clearer accountability than in the past, and the governance of the utilities has taken on more of the characteristics of unregulated companies. The shareholder and economic efficiency have been the beneficiaries. The hidden agendas of utility managements are being superseded by agendas that emphasize shareholder interests.

New Thinking. Restructuring has already created a badly needed new atmosphere for the industry. There is an infusion of new thinking and vigor that portends bringing the industry's performance up to the standards of the rest of the economy.

In retrospect, we can see that traditional regulation was driven by private, political interests rather than striving for economic efficiency. It lacked incentives and stifled technological progress. Over time, it moved the industry further and further from economic optimality. The failings of regulation, of course, provided the initial impetus for the restructuring movement. The case was, and remains, compelling.

We have no reason to believe that regulation would fare better in the future than in the past. Let's go forward with electric restructuring. Unfortunately, however, it's turning out to be more difficult than we expected.


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