This is part of IEEE Spectrum's special report: Critical Challenges 2002: Technology Takes On
All happy families resemble one another, but each unhappy family is unhappy in its own way." So runs the famous first sentence of Anna Karenina. With but a little poetic license, one might say that every regulated industry manifests the same rules, while each deregulated industry is unruly or even dysfunctional in ways unique to it. Figuring out how to fix each one's problems is in its own right a huge technological challenge--technological in the economist's sense of referring to all aspects of business organization.
In a regulated industry, services are provided by a single or a fixed few companies, monitored by some quasi-governmental authority set up to protect the public interest. In exchange for its accountability, the industry is assured of a modest yet still satisfactory rate of return, often made more attractive to investors with tax breaks. Though the authority is supposed to have an arms-length relationship to the industry, in point of fact, after working hand-in-glove over decades, regulators and regulated hardly ever see things differently. Innovation may atrophy, but everybody is happy, even most consumers, who scarcely can imagine things being any different, having never experienced an alternative.
Remove that regulatory body and plunge the industry into the bracing cold waters of competition, and good things are supposed to happen: new entrants appear, prices come down, and consumers are delighted with products and services previously unimagined. Thus, deregulation was the dominant trend in economic policy throughout most of the industrial world during the 1980s and 1990s, and initial results were often impressive. But recently, signs of trouble have been appearing all around, with some deregulated industries beginning to resemble Leo Tolstoy's unhappy families.
In electricity, even before California's debacle, reliability problems and price spikes were on the rise throughout the United States, coinciding uncomfortably with the period in which the U.S. Federal Energy Regulatory Commission (FERC) ordered the national transmission networks opened to competition [see figure, above]. Critics complained that infrastructure was not being maintained because newly competing companies seeking to cut costs were uncertain how investments would be repaid in the long run.
Even in the UK, the pioneer of electricity restructuring, there were repeated assertions that the two big generators were rigging prices. Hardly anywhere in the world did homeowners find they were getting power at much more attractive prices than before. As for product and service differentiation, well, there were "green" electrons to be had from companies generating power from renewable sources.
The U.S. airline industry, even before 11 September, was suffering severe declines in profits [see figure, above], which were bound to lead to a new round of consolidation, leaving it perhaps even more concentrated than when it was deregulated in the late 1970s.
After deregulation, fares did plummet for a while, with start-up airlines vying for passengers. But now, with congestion fouling all the busier airports, passengers are bemoaning intolerable delays, widening disparities in ticket prices, and a general sense of things going too far out of control. True, air travel is within reach of many more people than ever, but not just the rich are wondering about the price that has been paid in terms of convenience and comfort.
In communications, the U.S. public profited enormously in the 1980s and 1990s from competition in long-distance telephony, as rates plunged and new competitors offered all manner of special services. But when the 1996 Telecommunications Act tried to bring competition to local and regional markets, benefits were unexpectedly slow in appearing [see figure, above]. A host of new companies were founded to provide digital subscriber line (DSL) connections, but after a short while they went under in droves, as the Regional Bell Operating Companies (RBOCs) reasserted their strangleholds on local markets.