Electricity Restructuring is No License for Central Planning

Deck: 

RTOs will perpetuate regional monopolies and political rate regulation.

Fortnightly Magazine - June 1 2002
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Economists sometimes get confused - especially when the real world doesn't fit into their neat boxes.

Network industries like telephone and electricity are today's case in point. Economists have viewed these parts of the economy as requiring special attention from regulatory authorities. They're viewed as "natural" monopolies displaying "economies of scope" and characterized by risky "lock-in" or "path dependency" features. That supposedly makes them prone to abuse by their free-market owners, and therefore in need of impartial regulatory oversight.

Lost in the regulation-is-essential dogma is the reality that network industries have two major elements: the network itself, and the “stuff” that flows over it. Trains and tracks, oil and pipelines, electricity and wires. An efficient network depends upon wise investment and management of both elements. But, economists have focused almost exclusively on freeing up the “stuff,” and then enacting regulations to mandate open access to the network itself.

That approach has meant that the regulatory problems are simply reshuffled to determining a “fair rate” for allowing use of the network. In practice, that determination will rarely provide the incentives needed to upgrade the network itself. And, often it is the network itself that offers the best prospects for greater efficiency.

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