A new study released by The NorthBridge Group urges policymakers to learn from history to successfully navigate today's energy challenges. At a discussion hosted by the COMPETE Coalition, a panel of experts, including the study authors, discussed the findings that compare the detrimental policy decisions made through monopoly mandates in the 1970s and 1980s with the results of competitive options for meeting the energy challenges facing America today.
"America must meet the dual challenges of energy security and environmental sustainability in a highly competitive global market. It is estimated that we may need a more than $2 trillion dollar investment in our energy infrastructure to address these issues. This study provides resounding confirmation that electricity competition fosters the innovation, discipline and efficiencies to most effectively make this investment," said William Massey, former FERC Commissioner and panel participant. "The response to the energy crisis of the 1970s resulted in a $200 billion mistake, in which monopoly mandates led to excess capacity and cost overruns which were felt for decades."
The study reveals four inherent flaws of regulation: a lack of clear price signals resulting in a reserve margin twice as large as necessary; perverse capital incentives that unnecessarily cost consumers billions of dollars; improper allocation of risks to consumers rather than investors; and a tendency for regulatory fixes to overcompensate.
Michael Schnitzer, a director with The NorthBridge Group, who participated in the panel discussion said, "We should not forget that the electricity industry has faced challenges similar to what we face right now. The 1970s was a time of dramatic increases in fuel costs, substantial capital cost escalation, serious environmental concerns, and unanticipated changes in customer demand. The industry tried to tackle these challenges in a monopoly-based administrative, command-and-control decision-making process, and it failed."
The study highlights the fact that monopoly markets allocated risks, including massive cost overruns and excess supply problems, on the backs of consumers rather than investors. It also notes that the policy failures of the 1970s and 1980s were in part a reason policymakers turned to competition in the 1990s.
"Competition provides the right price signals and promotes efficiency in existing plant operations and customer consumption," said Frank Huntowski, a director at the NorthBridge Group, who also participated in the discussion. "Plus competition provides added benefits such as increased customer choice, access to new products and services, and technological innovation."
"The decisions we make will be difficult, but decades of experience and this study suggest that monopoly structures are not well-equipped to meet such challenges," continued Huntowski. "But recent experience in restructured electricity markets and significant experience in other competitive industries suggests that competitive markets are well-equipped to meet these challenges. We should learn from this history and avoid 'deja vu all over again.'"
"This study is yet another piece of evidence that when the industry and policymakers react to outside pressures like fuel costs with outdated monopoly structures, consumers pay the ultimate price," said Massey. "As we look to the future, policy decisions should be made with a long term focus on what model will foster efficiency, reliability and sustainability over time. Competitive markets continue to prove that they are better equipped to reach these goals."
The study was commissioned by COMPETE member Reliant Energy.