American Affairs Journal | By: Travis Kavulla:
Electricity is an input in virtually everything we do as a modern society. Few Americans remember what it was like to live without it and its attendant benefits on quality of life, labor productivity, and human health. Electricity is today largely taken for granted, yet for middle-class and older Americans utility bills often constitute a significant share of household expenses. In the manufacture of everything from aluminum to silicon to chemicals, electricity is usually the largest operating expense; for many other manufactured goods, it is second only to labor.
The trade in electricity exists at the intersection of society’s demand for the product’s affordability and constant availability. Obtaining one of these two inverse variables means trading off the other. Yet the electric sector has become still more complicated in recent decades, with the addition of environmental and social considerations from emissions and land use to employment at power plants and mines. These demands do not coexist easily, and they never have.
Conflicting policy demands have meant the heavy involvement of government in this sector, ever since its origin. Electricity has never fit the paradigm of business versus regulation. As has been since the case since its earliest days as a commercial product, it is often sold by monopolies at prices fixed by government, both in Washington and at state capitals. The utility sector clamors for government’s involvement in its business decisions, and government is happy to oblige. As a result, few products are regulated in such a command fashion as electricity in our supposedly free market society.
Understanding the sector is not just important because electricity is important; the market for electricity is really a window into the workings of the modern administrative state. The economic regulation of the sector often blurs the line between government and business, turning each into the other’s client. Even in places where competitive features exist, the marketplace is still designed by government and warped by subsidies. Today there is no genuinely free market for electricity. Ironically, many of the ideologically driven, market-oriented reforms of recent decades have precipitated a retrenchment of the monopoly problem they intended to solve. Reforming the market for such a fundamental consumer good is not impossible, however.
The market in electricity is almost hopelessly complicated to the layman. Even experts in certain places, such as New England, profess that they cannot understand the market rules for the product’s trade in, say, California. If knowledge is power, then this type of power is the one scarce attribute of electricity. The shortness of the public’s attention span for headlines dealing with energy does not help matters. A rate hike here, a pipeline there, and Earth Day once a year—beyond this, the public is ill-equipped to judge a sector that is more opaque than even finance or telecommunications. So a primer on the basics of this business, as well as a diagnosis of its systemic flaws, should precede any policy proposals to reform the government’s nearly all-encompassing relationship with the trade in electric power.
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