Your energy most likely comes from a monopolized power grid. Monopolies, in economic theory, are patently bad for a market, its consumers, and everybody except the one doing the monopolizing. But in the case of electric utilities, a natural monopoly, it’s not quite that simple. Defenders of monopolies in the case of electricity actually have some solid ground to stand on. But so do the detractors.
In the United States, conventional utilities fall into the category of “natural monopolies”. This means that they “naturally” arise because of existing circumstances, in this case, both the industry’s incredibly high barriers to entry and the economies of scale which mean that only goliaths can have any success in the field.
The cost of starting up an electric utility is so great -- thanks to the enormous amount of infrastructure it requires to generate, transmit, and distribute energy to your home and place of business -- that most utilities have little to no competition. While this means that utilities can be price-setters (a big red flag for consumers) it also means that utilities are able to produce and distribute energy to you at a lower and lower cost the bigger they get.
For this reason, nearly 3 dozen of the 50 states have given legal permission to utilities to operate as monopolies without facing any punishment or repercussions under antitrust laws. This has historically been allowed and accepted on the basis that this model provides cheaper energy than a competitive market. Advocates also argue that this system is more reliable, pointing to deregulated Texas’ power grid debacle.
Last winter, extremely low temperatures across the south led to widespread grid failures resulting in critical shortages of water, food, and heat. Overall, tragically, the death toll from the storm and the ensuing power failures was at least 111 people in Texas. The Lone Star state’s aversion to federal regulation led the state to eschew traditional utilities and electricity markets and to isolate the state’s power grid from the rest of the country, forming an “electric Alamo,” in the words of United States Circuit Judge Richard D. Cudahy, and making it extremely difficult for Texas to import energy from other states when their own energy production and distribution failed. This tragedy has lent a lot of credence to the argument that conventional utilities and their electric monopolies are a better, safer bet for consumers. This argument, however, is deeply flawed. Just because the Texas grid is deregulated and the Texas grid failed does not mean that a non-monopolized, competitive market is less reliable. The Texan power grid didn’t fail because of competition; it failed because of inadequate infrastructure and “weatherization” and isolation from other markets as a failsafe mechanism.
“Power markets aren’t ‘deregulated’ for reliability purposes and the data show that competitive markets have a superior reliability record to the monopoly utility model,” RealClear Energy reported back in March in their “Five Truths About Grid Reliability and Deregulation.” And, in fact, there is evidence to support the counter-argument that utilities that operate monopolistically in their local economies are patently worse for reliability and for the consumer in general.
“When utilities are granted local monopolies, they operate on a cost-plus basis,” Forbes reported this week. “Businesses operating on a cost-plus business have no incentive to implement innovations that will reduce customers’ costs or improve service – in fact, the easiest way to earn revenues is to operate with bloated costs and then apply a percentage margin to this unnecessarily large cost structure.” This means that utilities frequently incur costs far over what was budgeted or quoted, and it is all too often consumers who are expected to pay the balance.
At a time when the United States desperately needs to update its power grid in order to keep up with technological innovations and to stay functioning and relevant, the last thing we need is a market that lacks the incentive to do so and is happy with business-as-usual.
By Haley Zaremba for Oilprice.com
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