Electricity Competition and the Public Good: Rethinking Markets and Monopolies
63 Pages Posted: 21 Nov 2018 Last revised: 7 May 2019
Date Written: October 30, 2018
The U.S. electricity sector is engaged in a long-term experiment regarding the proper role of market competition. Historically, states relied on public utilities—vertically-integrated monopolies that own electricity generation, transmission, and distribution systems—to deliver affordable and reliable electric power. Over time, critics argued that monopoly control of electricity transmission and generation was not only unnecessary for achieving the goals of affordability and reliability, it also created barriers to the economic and environmental benefits associated with natural gas, renewable energy, and energy efficiency.
Many states that transitioned to competitive electricity markets in the 2000s are again reconsidering the relationship between market competition and public policy goals. Low natural gas prices, falling costs of renewable energy and energy storage, and improvements in efficiency are causing early retirements of coal and nuclear power plants and thus affecting environmental policy goals and economic interests. States that continue to rely on monopoly utilities for electricity are also reconsidering the role of competition, but from a different angle. Rather than focusing on mitigating the down-sides of competition, traditionally-regulated states are now exploring mechanisms to realize the benefits of competition, including enhanced responsiveness to consumer demands and improved risk management practices.
The implications for the electricity sector in restructured and traditionally-regulated states extend far beyond the particular facilities that stand to gain from new subsidies or the monopoly utilities subject to new forms of competition. Post hoc changes to market rules risk wasting resources that will be necessary to aggressively reduce greenhouse gas emissions, ensure long-term affordability, and mitigate employment impacts of a transitioning sector.
This article explores the factors causing policymakers to reconsider the role of competition in the pursuit of energy goals and identifies lessons for realizing the benefits of electricity sector competition while managing the downsides that occur during periods of unanticipated change. In restructured markets, the lessons center on strategies to address job losses and achieve state environmental goals. In traditionally-regulated states, the lessons focus on opportunities to harness competition to deliver additional societal benefits without undermining the traditional rate-setting model for monopoly utilities.
Keywords: electricity, monopolies, decarbonization, energy policy, public utility commission, renewable energy, nuclear energy
JEL Classification: K23, K32, L11, L12, L43
Suggested Citation: Suggested Citation