ELECTRIC POWER DEREGULATION: BACKGROUND AND PROSPECTS
VERNON L. SMITH
The incentive failures of rate-of-return regulation are well known and thus raise the question of whether to deregulate electric power. The development of long-distance transmission and of alternative power sources in networks has spawned several institutions that would or could allow markets to substitute for such regulation. These include long-term contract sales, spot power exchange, contract power pooling, shared facility ownership, and economic dispatch. Because of the current surplus of power, the existence of such institutions has caused increasing competition in the electric power market and has catalyzed the movement to deregulate generators from state authority and to restructure utility assets. By encouraging this movement, regulators can further the discipline that markets already exert on prices and costs. By making counterproposals to the utilities, regulators can influence asset restructuring so that some of the capital gains inherent in such restructuring can be shared with consumers in the form of rate relief. Finally, for the future, the cotenancy agreement-which is antitrust supervised and competitively ruled-has promising possibilities for deregulating transmission and distribution. Copyright 1988 Western Economic Association International.
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