What Would Happen If We Fully Deregulated Utilities?

Monopolies, and arguments for and against them, have been a source of disagreement since the start of the industrial revolution. From railroads to Big Tech, the consolidation of power in the hands of a few private entities, the nationalization of large industries and all of the shades of grey in-between have been a constant push and pull.

For much of the 20th century, Ma Bell dominated telephone service in the United States. Its monopoly was dissolved on January 1, 1984, leading to increased competition and innovation in telecommunications sector. You could argue that to some extent, this competition got us to the modern internet. Interestingly, when there wasn’t a monopoly for the fiber-optic cables laid in the late 1990s, it resulted in a bubble of historic levels. Avoiding this volatility has been an historic argument for monopolies.

One of Rockefeller’s arguments for the value his concentration is that it avoided the oil industry’s notorious boom and bust cycle. When Standard Oil was broken up in 1911, the dismantling of a vast monopoly paved the way for a competitive oil industry. I recently listened to the Acquired podcast on Standard Oil, having read The Titan a few years back, and this quote they highlighted stood out:

While the old guard at 26 Broadway mourned the trust’s passage, some Young Turks at the operating companies were overjoyed… One of these extraordinary mavericks, Dr. William M. Burton of Standard Oil of Indiana, thought that Roosevelt had performed an inestimable service.

The utility sector has had a similarly contentious past. There were extended fights about excess profits in the early 20th century and the resulting actions were some of FDR’s most lasting fingerprints on American society. The landmark law was the Public Utility Holding Company Act (PUHCA) of 1935. PUHCA aimed to eliminate unfair practices by electric and gas holding companies, leading to greater transparency and accountability. It was a foundational step in regulating utilities as natural monopolies. The Rural Electrification Act of 1936 also helped bring electricity to rural America, creating regulated monopolies to ensure universal service. These monopolies were regulated to prevent excessive profits while providing reliable energy.

The landscape began to change with the Public Utility Regulatory Policies Act (PURPA) of 1978, which introduced competition by requiring utilities to purchase energy from qualifying facilities, often using renewable resources. This marked the beginning of a shift towards deregulation. In 2005, the repeal of PUHCA further altered the landscape, reducing federal control and allowing for greater consolidation in the utility industry. While there was consolidation, there was continual disaggregation as well.

As we move forward in the Energy Transition, advances in technology and the push for renewable energy are already enabling a shift towards more decentralized energy generation. Home solar panels, battery storage, and electric vehicles are turning consumers into “prosumers,” generating and storing their own energy. This trend challenges the traditional utility model and raises questions about the future of these regulated monopolies. The “naturalness” of these monopolies erodes slightly with every distributed resource that is built.

With load growth appearing for the first time in a few decades, the need for reinvestment in infrastructure offers a unique opportunity. Deregulation could drive innovation and efficiency, potentially leading to a more dynamic and resilient energy market. In the telecommunications space, you have a variety of players from Verizon and AT&T, their niche platforms such as Mint Mobile and Tracfone but also satellite communications from Iridium and the growing Starlink. At the very extreme, you still even have hobbyists with giant antennas in their backyard. In the future, you might have your traditional utility, Sunnova energy or your ability to generate your own power.

The one area where the natural monopoly is unlikely to go away is on the distribution lines coming to your home. You may need them less, but it is unlikely that someone will build another set. There may be a world where you agree to only using them to a certain load limit or during certain times, perhaps even owning your own - in the same way you have your own driveway but don’t own the streets. The tiering in road network may be an analogue: the federal interstate highways, state operated thoroughfares, city controlled streets and your own driveway which the city varyingly decrees how is built - a two track to a cabin in some places and concrete in others. The tension of these distribution costs being socialized to all consumers with different usages has already been seen to cause a problem in California where it required reforms to their Net Energy Metering programs.

With a new Republican administration, there are many unknowns. The changes in regulatory approaches could alter the utility landscape. This might include reducing the influence of historic regulatory capture, creating space for more competition and consumer choice. On the other hand, the new administration will certainly not advocate for renewables and is likely to extend the use of fossil fuels which many utilities rely on. Given the price competitiveness of renewables, a free, unregulated market may enable the natural economic changes to occur more quickly. Texas is the least regulated energy market in the country, is a decidedly Republican state and has the highest penetration of renewables.