Deregulation of the Electrical Industry

Deregulation of the Electrical Industry

The roots of modern day regulation can be traced all the way back to the

late 1800's and found in the form of antitrust. By the beginning of the 20th

century, the U.S. government had formed the interstate Commerce

Commission to regulate the railroad industry, and shortly thereafter, many

other regulatory commissions were founded in the transportation,

communication, and securities fields. The main goal of these regulatory

commissions was to create a reasonable rate structure that would be

appealing to both producers and consumers.

While this system has worked for many years, it has recently come under

heavy criticism, with many people pushing for open competition among

electric power producers. Although once believed to be an impossible

proposal, competition among electric power producers is finally a reality in

a few areas. Massachusetts is just one state where legislation implemented

to create competition among electric power producers is not only favored

by the people of the state, but has also provided significant rate reductions

as well.

The attempt at regulating price in the electric industry is a troublesome

one. The objective is not only to minimize the cost to consumers, but also

to create a rate structure that will entice the electric company to remain in

the industry. The regulatory commission wants the electric company to

have a reason to innovate so that they will be able to provide cheaper

power in the future. However, if the commission captures all gains from

innovation in the form of lower prices, then the electric company has no

incentive to undertake any type of innovation. Therefore, a compromise

must be reached which would provide adequate incentives for firms to

undertake cost-reducing actions while at the same time ensuring that the

price for consumers is not exorbitant.

The term regulation refers to government controlled restrictions on firm

decisions over price, quantity, and entry and exit. Each factor of an

industry must be regulated for producers and consumers to truly benefit.

The control of price does not mean setting one fixed price, but rather

entails the creation of a price structure for purchasing electricity during

peak and non-peak times. The control of quantity refers to the

government's attempt to control the amount produced or in this case the

amount of electricity produced. For example, in the electric industry, it