III. Political Economy of Regulation

A. Dominance of the Investor-Owned Model

Within the organizational variety in the electricity industry, the investor-owned firm, subject to state regulation, emerged as the dominant model, and remains so today. Unlike most other industrial countries, the U.S. electricity industry was never nationalized. It is not entirely clear why this is the case. Clearly, the strong judicial system in the U.S. and the constitutional commitment to the enforcement of property rights prevents conversion of private property to public use without fair compensation. Yet nationalization of electric power has occurred in other countries with strong property rights (such as the United Kingdom and France). Two hypotheses suggest themselves, however; these are (1) geographical diffusion (the “wide-open spaces” theory), and (2) the relative lack of devastating destruction (the “no land wars” theory).

The geographical argument has both a technological and an institutional dimension. A nationalized industry would be operated in some sense as a single system. Whether this means "single area dispatch" or a national grid is unclear. But a nationalized system would have a central locus of decision-making that could be expected to be in the political capital of the nation state. The determination of standards and practices would emanate from such a center, with relatively little input from provincial interests. The U.S. history of localism in political decision-making is not consistent with a national scale model. Political struggles over the balance of power in the federal system are endemic in U.S. history.

Typically, it is national crises which have accelerated the centralization of political power. Indeed, the economic problems of the 1930s had this effect to a certain degree in the U.S. The federal role in hydroelectric power development grew to be an important force during this period. But even these activities had a distinctly regional character. Federal agencies created for power development and marketing were dedicated to regional economic development mandates. The municipal preference for federal power helped improve the competitive position of public utilities vis a vis investor-owned firms. But by propping up these small entities, the federal government was curtailing the consolidation of the industry into larger and larger units.

Consolidation did occur in the investor-owned segment of the industry, but there was less than could be justified on the basis of economies of scale. Table 7 shows the number of firms operating in certain individual states during the period 1938-1968, as well as national totals. The rate of consolidation appeared to have slowed after the 1950s. Christensen and Green (1976), using data from the 1970s estimate a statistical model indicating that economies of scale at the firm level were not completely exploited until firms reach a capacity of 4,000 MW. Joskow and Schmalensee (1983) raise questions about the validity of such estimates, but still accept the notion that unexploited scale economies are prevalent at the firm level (as opposed to the plant level). The source of these firm level economies has not been clearly identified, but appears to lie in multi-plant coordination to meet demand fluctuations. Accepting the notion that firm level economies exist at least up to the level of 4,000 MW implies that most U.S. electric utilities are too small.