Policymakers failed in their public responsibilities by fostering ill-considered deregulation policies in the electricity and telecommunications sectors, according to a report released today by the Consumer Federation of America (CFA).

“The rapid disintegration in competitive telecommunications and electricity reflects the fact that these utilities sell basic necessities to consumers by building long-lived, costly networks,” said Dr. Mark Cooper, CFA’s Director of Research and author of the report. “These services are completely unsuited to the short–term commodity market transactions that policymakers imposed in the late 1990s,”

“The boom and bust cycle unleashed by deregulation of these utilities has grave consequences for money markets and the economy. These are capital intensive infrastructure industries whose performance is critical to a wide range of other activities,” Cooper added.

The report identifies five ways deregulation of electricity and telecommunications destroyed the critical balance that U.S. policy had struck between private incentives and public obligations.

• Public Infrastructure: Deregulation undermined the long-term perspective necessary to finance utility investment and create stability, resulting in a dramatic increase in the cost of capital, needlessly paid for by the American public.
• Public Resources: Electricity and telecommunications are “wires” industries, dependent on public rights of way and use of common resources (air, water and airwaves). Deregulation largely ignored the need for management of these public assets.
• Public Responsibility: Deregulation diminished the incentives and relaxed the obligations to provide just, reasonable, and nondiscriminatory access to these vital networks, imposing substantial costs on the public by disrupting the flow of services.
• Public Participation and Cooperation: Deregulation short-circuited the cooperation (seamless interconnection and smooth operation) necessary to run highly complex, integrated networks, thus raising transaction costs.
• Public Information and Knowledge: Deregulation made it difficult to gather and share information, further increasing transaction costs.

“Our analysis has immediate applicability to policy decisions that will be made in the fall, when Congress returns from its August recess,” Cooper noted. “Congress and the regulatory agencies overseeing these industries were headed in the wrong direction before the magnitude of the meltdown became clear.”

The report argues if the Public Utility Company Holding Act (PUHCA) for electric utilities had been vigorously implemented, the market manipulation that afflicted California never would have happened. But, the Senate has voted to repeal PUHCA, rather than strengthen it. The FERC has proposed to force huge, wholesale markets on the country, without having built any institutions or confidence that trading will be honest and retail consumers will be protected from abuse.

The report notes the House has passed the Tauzin-Dingell bill that repeals the public interest and common carrier obligations of the Communications Act for advanced telecommunications services and the FCC has half-a-dozen rulemakings that would accomplish the same goal. This enhances market power and rewards the local telephone and cable monopolies that worked so hard to kill competition in the first place.

“During the 1990s, the stodgy, old economy utilities, with their slow growing but secure, dividend-paying stocks, were reviled on Wall Street. Now that the bubble has burst, investors will flock back to a ‘dull’ sector that offers a solid total return, provided that public policy rediscovers the principle that electricity and telecommunications are building blocks for the rest of the economy that need stability and long-term commitments,” Cooper pointed out.

“Instead of radically transforming the essential facilities at the heart of these industries, these two agencies need to set their deregulatory agendas aside and focus on their responsibility to protect the public interest,” Cooper concluded.

The report is available at: www.consumerfed.org/publicint.pdf

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The Consumer Federation of America (CFA) is the nation's largest consumer advocacy group, composed of two hundred and eighty state and local affiliates representing consumer, senior, citizen, low-income, labor, farm, public power and cooperative organizations, with more than fifty million individual members.