7/1/2014 1:55:00 PM Time to free S.C.'s
By Shane McNamee
In South Carolina – as in most other states – regulation has almost completely divorced the energy sector from the free market. Private energy providers must register with the state as public utilities. Once registered, the state helps enforce a monopoly territory where only one utility may provide power. Regulators determine the prices energy providers can charge. All of this regulation, we’re told, is in the best interest of all parties: It keeps prices down and prevents rapacious monopolies. Only it doesn’t. Indeed, the regulators – the South Carolina Public Service Commission – have failed to achieve these goals. Over the last nine years, two of South Carolina’s largest utilities, SCE&G and Duke Energy Carolinas, hiked rates by more than 20 percent over inflation growth.
That’s because regulators haven’t prevented monopoly: they’ve guaranteed it with governmental power. It’s not clear why energy providers should be immune from competition. Competition forces businesses to innovate new ways to best serve the consumer. A privately owned monopoly with government backing is one of the worst arrangements for consumers. Consider the practice known as advance cost recovery. This allows utilities to make risky investments without fear of losses. The utility simply presents the plans for its investments to the PSC, which then approves a rate hike on consumers to cover the cost of these investments. Consumers who are forced to accept the service of a regional monopoly have no choice in the matter – they simply have to pay higher rates.
The genesis of energy regulation and the very idea of a public utility can be traced back to the early 20th century and an idea known as natural monopoly theory. This idea holds that an established producer that has already acquired a large capital stock will be more efficient and able to out-compete rivals. Because of the high start-up costs and vast economies of scale in these industries, one producer will be more competitive than any two others, and as a result these industries tend to be naturally dominated by a single firm, a “natural monopoly.” Thus if monopoly is inevitable, the thinking goes, consumers will be better off with a government-regulated monopoly than one accountable only to the market. The problem with this theory is that it doesn’t hold up in the real world.
Competition and the threat of competition tend to keep prices in check and improve services. And regulation typically does a terrible job of curtailing abuses of monopoly power. Prior to the wave of “public utility” regulation, competition was common in the energy industry. Indeed, monopoly did not become the norm in the industry until government began granting monopoly rights to certain companies in the first two decades of the 20th century. Consumers in cities where energy companies competed directly with each other enjoyed lower prices and better services than those in cities where one firm had a monopoly. What should South Carolina do? Put simply, the state should completely deregulate the energy industry. “Deregulation,” mind you, doesn’t mean price caps or slightly less government meddling.
It means the abolition of the Public Service Commission and cost recovery, the end of legally enforced regional monopolies, and legally permitted competition from all energy providers, including solar leasing companies. In addition to deregulation, all publicly owned utilities should be dissolved and their capital goods/infrastructure should be sold to the highest bidder. Bidding should also be used whenever utilities have to use public lands to run power lines or other instruments of electricity transmission or distribution. In the latter case bids would not be made with dollars but rather through promises of the lowest prices for consumers.
Public land use contracts for utilities could be maintained for limited periods for reevaluation purposes, and utilities that win the right to use public lands could have that right taken away if they fail to deliver on their promises. While state lawmakers can do little about federal energy law, the legislature can still use deregulation to give South Carolina the freest electricity market in the nation. Regulation has had a chance to prove its superiority, and it has failed. It’s time to return the supply of electricity to the market. Shane McNamee is a policy analyst at the S.C. Policy Council. For more information go to scpolicycouncil.org. This op-ed appeared originally in the Greenville News on June 21.