Perspective

Two Cato analysts suggest a return to the past-vertical integration, but now with no state regulators.

The defeat of the energy bill in the Senate last year has thrown electricity restructuring back on its heels. There clearly is no consensus among politicians or academics regarding how this industry ought to be organized or how it might best be regulated. Finding our way out of this morass requires a reconsideration of how we got to this dismal point in our regulatory journey. Doing so suggests a surprising series of conclusions about what has gone wrong and where to go from here.

The Case for Restructuring

What, in theory, are we supposed to get out of restructuring? From an economics standpoint, there were two major problems associated with the old system.

First, because investment in capital received a guaranteed return, total generation investment was excessive and skewed toward capital-intensive facilities. Couple that with the one-time enthusiasm for nuclear power (once thought of as a progressive energy source that would be "too cheap to meter") and the growing hostility to coal-fired generation, and it's no surprise that some states moved strongly toward nuclear-with costs generally much higher than antici-pated.¹ Introducing market forces into the utility industry would eliminate the bias for capital-intensive projects by introducing uncertainty about returns.