Most of us take for granted that the lights will work when we flip them on, without worrying too much about the staggeringly complex things needed to make that happen. Thank the engineers who designed and built the power grids for that—but don’t thank them too much. Their main goal was reliability; keeping the cost of electricity down was less of a concern. That’s in part why so many people in the United States complain about high electricity prices. Some armchair economists (and a quite a few real ones) have long argued that the solution is deregulation. After all, many other U.S. industries have been deregulated—take, for instance, oil, natural gas, or trucking—and greater competition in those sectors swiftly brought prices down. Why not electricity?
Such arguments were compelling enough to convince two dozen or so U.S. states to deregulate their electric industries. Most began in the mid-1990s, and problems emerged soon after, most famously in the rolling blackouts that Californians suffered through in the summer of 2000 and the months that followed. At the root of these troubles is the fact that free markets can be messy and volatile, something few took into account when deregulation began. But the consequences have since proved so chaotic that a quarter of these states have now suspended plans to revamp the way they manage their electric utilities, and few (if any) additional states are rushing to jump on the deregulation bandwagon.
The United States is far from being the only nation that has struggled with electricity deregulation. But the U.S. experience is worth exploring because it highlights many of the challenges that can arise when complex industries such as electric power generation and distribution are subject to competition.
Unlike many other nations grappling with electricity deregulation, the United States has never had one government-owned electric utility running the whole country. Instead, a patchwork of for-profit utilities, publicly owned municipal utilities, and electric cooperatives keeps the nation’s lights on. The story of how that mixture has evolved over the last 128 years helps to explain why deregulation hasn’t made electric power as cheap and plentiful as many had hoped.
The 1882 opening of Thomas Edison’s Pearl Street generation station in New York City marks the birth of the American electric utility industry. That station produced low-voltage direct current, which had to be consumed close to the point of production, because sending it farther would have squandered most of the power as heat in the connecting wires.
Edison’s approach prevailed for a while, with different companies scrambling to build neighborhood power stations. They were regulated only to the extent that their owners had to obtain licenses from local officials. Municipalities handed these licenses out freely, showing the prevailing laissez-faire attitude toward competition. Also, politicians wanted to see the cost of electricity drop. (A kilowatt-hour in the late 1800s cost about US $5.00 in today’s dollars; now it averages just 12 cents.)
It didn’t take long, though, before Samuel Insull, a former Edison employee who became a utility entrepreneur in the Midwest, realized that the technology George Westinghouse was advocating—large steam or hydroelectric turbines linked to long-distance AC transmission lines—could provide electricity at lower cost. Using such equipment, his company soon drove its competitors out of business. Other big utilities followed Insull’s lead and came to monopolize the electricity markets in New York, New Jersey, and the Southeast. But the rise of these companies was ultimately a bane to consumers, who had to pay exorbitant prices after the competition had been quashed.