|
The roots of modern day regulation
can be traced all the way back to the late 1800's and found in the form of
antitrust. By the beginning of the 20th century, the U.S. government had formed
the interstate Commerce Commission to regulate the railroad industry, and
shortly thereafter, many other regulatory commissions were founded in the
transportation, communication, and securities fields. The main goal of these
regulatory commissions was to create a reasonable rate structure that would be
appealing to both producers and consumers. While this system has worked for many
years, it has recently come under heavy criticism, with many people pushing for
open competition among electric power producers. Although once believed to be an
impossible proposal, competition among electric power producers is finally a
reality in a few areas.
Massachusetts is just one state where legislation
implemented to create competition among electric power producers is not only
favored by the people of the state, but has also provided significant rate
reductions as well. The attempt at regulating price in the electric industry is
a troublesome one. The objective is not only to minimize the cost to consumers,
but also to create a rate structure that will entice the electric company to
remain in the industry. The regulatory commission wants the electric company to
have a reason to innovate so that they will be able to provide cheaper power in
the future. However, if the commission captures all gains from innovation in the
form of lower prices, then the electric company has no incentive to undertake
any type of innovation. Therefore, a compromise must be reached which would
provide adequate incentives for firms to undertake cost-reducing actions while
at the same time ensuring that the price for consumers is not exorbitant. The
term regulation refers to government controlled restrictions on firm decisions
over price, quantity, and entry and exit. Each factor of an industry must be
regulated for producers and consumers to truly benefit.
The control of price does not mean
setting one fixed price, but rather entails the creation of a price structure
for purchasing electricity during peak and non-peak times. The control of
quantity refers to the government's attempt to control the amount produced or in
this case the amount of electricity produced. For example, in the electric
industry, it does not make sense to have a lot of small power plants produce
electricity. However, at the same time one company can not be allowed to
monopolize the industry and set prices at its own discretion. Another factor in
this problem is the control of entry and exit in the electric industry. By
controlling who can enter the industry, the government can control who produces
the electricity and how much of it they produce. However, the effectiveness of
regulation has begun to be questioned, and created the evolution of a more
competitive market.
Ever since the Public Utility Act of 1935, which in turn
created the Federal Power Commission, the role of electric utility regulation
and its effectiveness has been questioned. Since that act was passed into
legislation, the question has always remained: has electric regulation made a
difference? Major studies done throughout the 20th century found conflicting
results. A study published in 1962 and conducted by Stigler and Friedland
compared the price of electricity in states with regulation to the price in
states without regulation. However, at the time all states had electric
regulation, so Stigler and Friedland had to go back to the 1920's and 1930's to
find states without regulation. Their finding was as expected. In 1922, the
average price of electricity was 2.44 cents per kilowatt-hour in states with
regulation. However, in states without regulation, the average price increased
to 3.87 cents per kilowatt-hour.
|
