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Razing the Regulatory Compact

Smart-grid technologies will dismantle the regulated utility business model, says economist Lynne Kiesling.

Fortnightly Magazine - September 2007

mission: electrification, safety, and controlling the ability of franchises to exercise monopoly-pricing power. The industry achieved those objectives by the 1960s in a most glorious and successful way. But the 21st century means new objectives for the utility industry. Namely, we need to sustain economic growth using the fewest possible natural resources and having the least possible environmental impact; we need to maintain the existing cost protection for low-income consumers; and we need to provide services that allow our economy to compete internationally.

One of the amazing things about the electrification of the United States in the 20th century was the amount of value-creation it enabled. So much of our economic growth wouldn’t have been possible without this industry, and as a result we are the wealthiest country in the world.

To the extent our utility industry is still analog in its technology and offers such a limited array of differentiated products and services, in the 21st century other countries may be able to compete more aggressively to attract new business and support economic growth. International competitiveness is an important part of the story.

But the environmental and low-income issues are the two prevailing concerns we carry into the 21st century. We have to take those issues into consideration any time we think about regulatory policy. But certainly we can find other ways to manage those issues without having to perpetuate retail rate regulation based on cost recovery.