Regulation Policy

How Competition Can Reduce Power Outages

As the summer heats up and demand for electricity grows, blackouts are expected to spread through much of the Midwest and East. But this need not happen. Economists contend shortages are caused by price regulations that short-circuit the market's natural ability to restrict consumption through price increases.

As it takes hold, deregulation of power markets may make outages a thing of the past as the prospect of future profits attracts capital to new generating projects.

  • California, the first state fully to open its electricity markets to competition, expects no power-supply problems this summer.

  • In New England, a region with high energy costs and chronic power shortages, the prospects of deregulation have led to new power plant projects that will produce an additional 5,000 megawatts.

Three-fourths of the nation's electricity today is distributed by investor-owned utilities -- with the remaining one-fourth coming from government-owned utilities. These utilities are monopolies sheltered from market forces. However, in states that deregulate their electric power markets, the utilities face competition from independent power producers that can sell electricity to any customer through the power grid.

  • Utility monopolies have no incentive to minimize costs or provide better service, since their rates are set by power authorities, captive customers provide whatever capital they need through their rate payments and investors are guaranteed a rate of return.

  • They also tend to favor large central-station power plants, which are five times more likely to suffer forced outages than small plants.

  • By contrast, independent power producers largely rely on smaller gas turbine plants, and they have a huge economic incentive to keep running during peak demand periods.

These nonutility plants are available to produce energy more than 95 percent of the time -- in contrast to just 80 percent for utility-owned baseload plants that are intended to run all the time, and 72 percent for utility-owned nuclear power plants.

Source: Michael R. Peevey (New Energy Ventures LLC), "Lights Out for Regulated Utility Monopolies," Wall Street Journal, July 18, 1998.

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