A critical assessment of electricity and natural gas deregulation

Journal of Economic Issues, June, 2008 by Harry M. Trebing

Notes

(1.) James C. Bonbright (1961), Eli W. Clemens (1950), and Martin G. Glaeser (1957) typified the Institutionalist approach toward improving regulation of public utilities. This form of contribution would have been very compatible with the regulatory reforms proposed by James Landis in his on Regulatory Agencies to the President-Elect Washington, D.C., 1960. Unfortunately, Landis and President Kennedy had both died before these reforms could be introduced. The works of the Institutionalists as well as free market proponents are summarized in Pioneers of Industrial Organization (de Jong and Shepherd (eds.) 2007). George Stigler (1982, 9) prophetically argued "... the attitude of economists toward monopoly policy is strongly influenced by the corpus of technical price theory. Our present support for pro-competitive policies is due in good part to the strong virtues we attach to competitive markets and industries."

(2.) The late Ken Lay (Enron), Bernie Ebbers (WorldCom), and Joe Nacchio (Qwest) are among those receiving prison sentences. Enron and WorldCom are the two largest U.S. bankruptcies. Edythe Miller (2003) argues that this behavior reveals the failure of the three basic free market safeguards: corporate auditing, oversight by boards of directors, and monitoring by financial markets. Sarbanes-Oxley Act (2002) is an attempt to address these abuses.

(3.) In 2006, the percentage of the residential load served by competitors in deregulated states remained close to zero. Only four of these 19 states (including D.C.) had a residential load served by competitive suppliers above 5% (New York, Ohio, Mass., and Texas). Texas was the highest at 38%, while Ohio dropped from 18% to 6% (Rose 2007, Chart 8). Large industrial and large commercial loads served by competitive suppliers were higher--undoubtedly representing, in part, the incentive to exploit oligopsony buying power.

(4.) Strong asset-based firms include Southern Co., American Electric Power, Exelon, Dominion Resources, Constellation, Florida Power & Light, Mid American, Entergy, and Duke Power. Market dominance by large, asset-based firms remains high in local and regional markets and in the newly organized regional transmission organizations (RTOs).

(5.) For example, private equity firms Kohlberg Kravis and TPG are currently completing their buyout of Energy Future Holdings (formerly known as TXU) for $45 billion. (See Koons, 10/18/07, B-5). Concentration is also promoted when a private equity firm has holdings in two or more major rivals. For example, a private equity firm (Carlyle Group) had representation on the board of directors of two rivals (Kinder Morgan and Magellan) through their holdings. The Federal Trade Commission forced Carlyle to cede operational control of Magellan in 2007. Clearly, Carlyle would still have access to the strategies of each rival.

(6.) Network economies involve economies of scale, joint production, and pooled reserves as network size increases. Size can also introduce enhanced network functionality. Coordination economies involve matching diverse demand and usage patterns to a capital intensive supply network.