A New Era of Competition in Electrical Generation
It is common sense that as much as possible of the economy should be governed by competition, and as little as possible by monopolies. Even if the monopolies are regulated, it is a rare situation in which regulation of a single supplier can give consumers the value of robust competition between multiple suppliers.
It is also common sense that when changing conditions offer a means of converting all or part of the business of a regulated monopoly to competition, the regulator, rather than sitting on its hands, should take an active role in promoting the conversion.
The field of telecommunications provides an excellent example of the benefits of such proactive deregulation. In response to rapid advances in cell phone technology, Congress adopted the Telecommunications Act of 1996, which opened many aspects of telecommunications to competition. Crucially, the Act preempted much state and local authority over the location and nature of cellular communications towers, thereby providing wireless competitors a critical tool for the development of their business.
The result has been an explosion in the use of cell phones and other mobile telecommunications devices. None of this enormous advantage would have been possible without the Act.
We are now at a point where a similar change should be made in the area of electrical power generation.
Traditionally, power plants have benefited from economies of scale: the larger the coal or nuclear plant, the greater its efficiency. And because very large plants are very expensive, only large utilities, or consortia of utilities, could secure the necessary financing for such ventures. Traditional power generation is, therefore, very much a monopoly enterprise.
Technological advances, however, have turned this situation on its head. Modern wind, solar and gas turbine generation facilities are very efficient, even in relatively small increments. And since small scale wind, solar and gas facilities are much less expensive than large scale coal and nuclear plants, they can be successfully financed by a large variety of independent developers.
This sets the stage for a transition from monopolistic large-scale generation to a diverse population of merchant power plants.
Rather than regulated utilities investing in their own facilities, and their rates being a function of the amount of that investment, utilities should be required to obtain power through a competitive bid process, with the cost of the electricity being passed directly through to the consumers. Over time, electrical utilities would be changed from generation and distribution monopolies to distribution monopolies only.
If this arrangement sounds familiar, it is. It is entirely analogous to the regulatory model for natural gas utilities. They do not drill their own wells; they purchase gas on the most favorable terms available in the wholesale market from time to time, and pass that cost to their customers without a mark-up.
It is true that the transition to competition would take time to complete; decades, in fact. The utilities and their shareholders are entitled to a return on the investment that the PRC has approved for inclusion in the utilities’ rate bases, and whether those approvals were wise or foolish, they have created legal obligations that must be honored.
But as current utility facilities are paid off or otherwise retired, they should not be refurbished, or replaced with new plants owned by the utilities. Instead, the utilities should be required to obtain all new and replacement power from the marketplace.
May the best competitors win.