The History of Retail Energy

For most of the 20th Century, homeowners, businesses and industrial manufacturers had no choice when purchasing electricity and natural gas for their homes, companies and factories. That’s because policymakers determined that it was more efficient, and energy consumers would benefit from economies of scale if retail sales of electricity and natural gas were made by utilities with monopoly-protected service territories at regulated rates. Utilities were provided rates that guaranteed recoupment of investment dollars by the utility and a reasonable profit as determined by state regulators.

Utilities had encouraged the establishment of monopoly price regulation by noting that it was economically inefficient for there to be competition for sets of wires and pipes bringing electricity and natural gas to consumers. Price competition was increasingly difficult for utilities to make a profit. Under monopoly price regulation, utilities could keep their costs low because of economies of scale and dedicated infrastructure (wires and poles). For electric utilities, the economies of scale were particularly applicable when it came to electricity generation facilities. Large protected electric service territories led to the development of large power plants serving millions of customers.

This arrangement worked well for the first half of the 20th Century. Energy prices declined, thanks in large part to economies of scale and ever-increasing demand. But in the second half of the 1900s, this “regulatory compact” began to break down. Wellhead regulation of natural gas removed incentives for companies to speculatively drill for natural gas, impacting supplies and prices. Federal law prohibited the use of natural gas for electricity production, and monopoly-protected utilities were unprepared for the price shocks caused by the oil embargoes of the 1970s. In a rush to move away from oil-fired power plants and build large nuclear power generating plants, massive cost overruns were passed along through regulated rates to electricity customers already reeling from rising prices.

This occurred as leading economists were concluding the monopoly-protected price regulation was inefficient and needlessly imposed costs on consumers. They argued that consumers would be better served if regulated industries were exposed to competitive forces to provide strong incentives for businesses to be efficient and cut costs. Over time, competition, by way of energy restructuring, was injected into the trucking, oil and natural gas, telecommunications and airline industries, and the end of monopoly protections and price regulations resulted in billions of dollars in economic savings for U.S. consumers.