The Origins of Electricity Regulation: Revisiting an Unsettled Topic

Abstract

While the electricity industry is currently experiencing a regime shift from state regulation to competitive markets for generation, a number of questions regarding the change in regulatory environment in the electricity industry during the beginning of this century remain unsettled. This paper revisits some of these issues. Specifically, the paper tests the validity of the two most commonly suggested reasons for the origin of state regulation in the electricity industry. Using Census data gathered on the electricity industry during the beginning of this century, the paper models the decision to adopt state regulation as a function of the average electricity price and profit rate in the state. The results cast doubt on the commonly accepted justification that state regulation was passed to limit competition and increase the profits of electricity firms, but do not unilaterally support the public interest view, either. The paper then draws on trade publications to assess the industry's mindset during this period. Literature from the National Electric Light Association suggests that although some industry leaders supported state regulation in order to rid themselves of corrupt local politicians, the industry did not unilaterally support increases in regulation.

JEL Classification: L1, L5