Competition is Coming to the Electric Power Business

People learn new things all the time. Often, they learn that what they thought was true yesterday isn’t true any more. A perfect example of this, and one that promises to greatly affect every citizen of Michigan, comes from big changes in the electric power business.

For years, most people thought that electric power could not be a competitive enterprise with multiple providers operating in the same market. To prevent price gouging and other abuses, it was widely assumed that government would either have to own electric companies or heavily regulate the rates and practices of private ones. New technologies and new ways of thinking are now challenging this perspective all over the world. Countries including Chile, New Zealand and Great Britain are selling off public utility companies and creating free, competitive markets in the generation and distribution of electric power.

In Michigan, the debate over electricity deregulation is in full swing. Legal barriers that have prevented customers from purchasing electricity from anyone but the local utility monopoly may soon be abolished. That means customers could then choose from competing providers, much as they now choose which long distance telephone service they want.

Consumers Energy and Detroit Edison, which today provide electricity to 90 percent of Michigan’s residents and businesses, will have to prove that they can do the job better than firms from other states that will want to sell power in Michigan. New companies no one can yet envision may also spring up. Economists and policy makers expect that a new era of competition in the electric power business will bring better service and lower rates. With rates that are now at least 15 percent higher than those in nearby states, this would be good news for the Michigan economy.

It might be interesting to many people to know how the provision of electricity became regulated and noncompetitive in the first place. For an explanation, we have to journey back to the early years of this century when the provision of electricity came to be considered a "natural monopoly."

Utility monopolies were considered "natural" because it seemed more efficient if one firm provided the electricity for a given area, rather than two or three firms stringing power lines through neighborhoods. Unfortunately, the acceptance of the concept of natural monopoly did not result from careful, objective study.

Economists since Adam Smith have noted that arguments calling for government-protected monopolies are most often advanced by those who wish to be the monopolists. Competition is both the life blood and the constant irritant of industry, depending upon whether one is the new competitor or the established firm.

In the early 1900s, electric utility pioneer Samuel Insull of Chicago Edison led a nationwide public relations campaign to convince politicians (the easiest), newspaper editors (a bit harder) and the general public (the hardest) that utilities should be regulated as monopolies rather than be subject to competition. Historian Marvin Olasky has found that as president of the National Electric Light Association (NELA), a major utility trade group, Insull’s goal was to "show the public that competition in public utilities was unfeasible." Other major executives shared Insull’s view, as well as his strategies to promote regulated monopolies.

Insull’s first strategy was to "heighten fears of socialism in order to promote acceptance of government-regulated monopoly as a less-undesirable alternative." The NELA advanced its agenda, according to Olasky, with the unwitting help of the news media: "Annual payments of $84,000 from Insull’s NELA allowed Hofer [an Oregon public relations firm] to send out almost 13,000 newspaper articles annually. The articles usually appeared as unattributed, ‘original’ editorials."

In addition, Insull and other utility executives lobbied local newspapers and politicians persistently to support the idea that regulated private monopolies were good for industry and for consumers. Utility officials even paid to have chapters promoting natural monopoly included in textbooks and, reports Olasky, "moved to excise from government and economics textbooks passages opposing regulated monopoly."

One Missouri utility executive "dispatched a colleague to investigate the judging of St. Louis high school debates concerning electric railways; the debates had been won by those critical of the regulated monopoly position." This executive reported back the disquieting truth that the anti-monopoly debaters were winning because they had better arguments.

But apart from the failure to convince high school debaters, utility industry public relations efforts were generally successful. Between 1905 and 1934, 40 states established public utility commissions to protect established utilities from new competition and to regulate them as "natural" monopolies. Economist G. A. Jarrell, in the October 1978 Journal of Law and Economics, showed conclusively that utility regulation was the direct result of the utilities themselves lobbying for legislation that would protect their profits by keeping rates high and freezing newcomers out.

After decades of regulation-induced slumber however, competition began to break out in the late 1970s and 1980s in key sectors of the American economy. Successful deregulation of airlines, trucking, natural gas pipelines and telecommunications has prompted legislators to look for ways to open the electric utility industry to the benefits of competition.

Free enterprise and competition continue to advance around the world. This is as healthy a process in Michigan as it is anywhere else, a point that will soon be borne out by dramatic developments in electric power.