In this blog I mainly share examples of how challenge - especially competition - leads to improvement. However in the spirit of learning, I feel compelled to share the bad news as well. Last week the New York Times reported that "retail electricity prices have risen much more in states that adopted competitive pricing than in those that have retained rates set by the government."
New studies show that power prices in states with regulated monopolies (where the government sets rates) are significantly lower than in states with electricity competition. In 2006 alone, "industrial customers paid $7.2 billion more for electricity in market states than if they had paid the average prices in regulated states."
It is obviously a black eye for us free market believers, and it begs the question: Why are market forces failing here while they have driven lower prices in nearly every other market imaginable?
I'm not sure what the answer is, but I believe the key issue is that electricity has many barriers to competitive entry. High fixed costs of power lines and coal burning plants, for example, mean that few can play ball. Barriers to entry mean companies can price much higher. Other industries with similar barriers are also slow to see significant competition and innovation. For example, airlines and cable TV.
The only solution may be something like a government-owned or regulated electricity transmission system, with competition for electricity generation. This would be a little like the government running the interstates, but allowing each gas station and restaurant to compete at the exit ramps.
This is yet another market where we're probably too early to call success or failure. Competition is not pretty and takes time to take hold, especially after a century of government regulation.
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