My subject today is regulation and competition in the electric utility industry.
You all know only too well what's happened to this industry in the last decade or so: Inflation accelerated, interest rates rose, productivity growth slowed, fuel prices rose dramatically, growth in demand stopped, and the cost of meeting environmental and safety regulations soared. For utilities that was truly a devil's brew. Unless conditions change and change soon, our financial infirmities will destroy our ability to provide reliable electric service.
But nowadays new building programs are carried out reluctantly, in defiance of economics and common sense. No unregulated business would invest in a project that will earn less than it costs, or punish stockholders by issuing stock at a fraction of book value. Electric utilities are doing so only in deference to their legal and moral obligation to serve.
Some observers believe that the underlying causes are transitory or correctable within the existing regulatory system. But I remain skeptical. The deficiencies of regulation go beyond its current effect on industry finances.
The Case for Change
Under regulation, the industry does not operate with optimal efficiency. Apart from integrated holding companies and the most highly integrated power pools, the industry is not using existing generating capacity to produce electricity at the lowest possible cost. This situation is conspicuous among independent companies outside power pools. Even in pools, the goal of completely economic dispatch is often frustrated by transmission bottlenecks and other constraints. Operating practices that are best for the pool as a whole may not be best for individual companies.