Public utility regulation has a role to play in stimulating R&D by energy utilities. Studies have confirmed that social returns on R&D are much greater than private returns, evidence...
The Transformation Myth
Telecom-style revolution is beyond our reach.
Midway through my career as a magazine editor, I took a detour from covering the electricity industry and went to work for the Telephony magazine group in Chicago. The year was 2000, and the dot-com boom was at its peak. New companies were going public every day, raising billions of dollars in equity capital. Growth seemed unstoppable, and I was excited to be writing about such a dynamic industry.
Then the dot-com bubble burst, erasing billions of dollars in market capitalization within several months. Dozens of upstart carriers went bankrupt, taking some industry stalwarts down with them. The hardware that companies had installed was now largely redundant. Shiny new data centers sat empty; massive fiber optic networks stayed dark. The telecom market dried up, and after less than two years covering telecom, my job was eliminated.
I left Chicago in late 2001, came to work for Fortnightly, and I’ve never looked back. But in the intervening years I’ve kept an eye on what’s happening in the telecom industry, and now it seems the dot-com bust was just a correction in an over-inflated market. Telecom services have continued growing at a healthy pace—although not along the trajectory that started in the late 1990s. Instead of competitive local exchange carriers (CLEC) taking over the world one office building or apartment complex at a time, market domination has been achieved by a few major wireless carriers, selling voice and data plans through every imaginable channel, from shopping-mall kiosks to online retailers. Their growth has been propelled by mind-boggling proliferation in value-added products and services from companies like Apple, Google and Amazon.
The telecom revolution provides some good object lessons. It teaches us that bubbles always burst, but sometimes they leave behind a more sustainable market.
And a more subtle lesson is this: In the information age, big growth doesn’t come from putting steel in the ground. It comes from innovation— i.e., creating new products and services that provide real value that didn’t exist before. Such innovation differentiates one company’s offerings from those of its market rivals, and that’s what justifies a price premium.
The question now is this: How do we apply these lessons to America’s partially and inconsistently regulated electric utility industry, which seems to be on the cusp of its own revolution? What value can we create that didn’t exist before?
Less Isn’t More
When I hear people invoke the telecom revolution as an analogy for the utility industry’s putative transformation, I always cringe, because I don’t believe the analogy works.
In the telecom market, federal-level deregulation opened the door to competition across the country. The first competitive battleground was the long-distance market, and the first value-added innovation was the prepaid calling card. The Baby Bells had never thought of selling prepaid cards, in part because they were happy charging extortionist rates for collect calls. (Remember those?) So deregulation brought innovation and drove prices down.
Next came an explosion in