DEREGULATION OF ELECTRICITY: A VIEW FROM UTILITY MANAGEMENT

Abstract

Significant structural changes already have occurred in the electric power industry due to the Public Utility Regulatory Policies Act. The industry has not, however, faced the same degree of deregulation as has some other industries such as natural gas and telecommunications. This is not mere happenstance. In many ways, the electric power industry presents the toughest case of all for deregulation. In fact, deregulation—in the usual sense of the term—probably is both unlikely and undesirable. Government is involved in the industry directly and is unlikely to withdraw. The production, transmission, and distribution of electric power is characterized by physical interdependencies potentially giving rise to externality problems as well as economies of horizontal and vertical integration. Any initiative to deregulate or substantially restructure the industry must address fairness in transition rules, the exact nature of the utility's obligation to serve customers, the potential loss of integration and coordination efficiencies, and a host of issues surrounding market participants' transmission access. Similarities as well as important differences exist among the electric power, natural gas, and telecommunications industries, suggesting that their respective benefits and problems associated with deregulation may be different. Policymakers must not draw hasty parallels among these industries.