Retail Electric Competition and Natural Monopoly: The Shocking Truth

from the book Regulation and Economic Opportunity: Blueprints for Reform

Executive Summary

Across most of the world, electricity is provided through public utilities that are granted monopolies. Usually monopolies are discouraged by economists, but electricity service has traditionally been considered a special case. Policymakers and economists expected that it would be less expensive for one firm to operate a few large plants than for many firms to operate smaller plants. The nature of electricity markets, it was argued, encourages centralization and big companies. 

 

In this chapter, Jerry Ellig, an economist and former acting director of the Office of Policy Planning at the Federal Trade Commission, shows how improvements in technology have made monopolies for electric service obsolete. The emergence of smaller, competitive power plants and the reduction in transaction costs between consumers and suppliers makes retail choice systems possible. Retail choice is similar to how consumers choose a cell phone plan, where consumers can buy electricity from any supplier just as they would from AT&T, Mint Mobile, or Verizon. The chapter’s central recommendations for policy reform are:

  • State regulators across the country should look to Texas’s model of retail choice, orchestrated through powertochoose.org, as a model for their own states. Chapter 16 of this volume delves into how Texas’s model of retail choice works.
  • Policymakers should encourage consumer choice by reforming traditional monopolies to offer more options through retail choice. Offering more choice allows consumers to find products that better suit their needs.
  • State officials interested in reform should ensure that the monopoly on electricity service is limited to only where economic theory supports it. Monopolies may be efficient  in the transmission and distribution of electricity, but not in electricity generation. 
  • States should abolish monopoly electric franchises and allow competition to emerge if and where it is practicable.
CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.