Innovative States Replace Monopolies With Competition

CALL them incubators for public policy innovation. America's 50 states have long been laboratories for reforming health care, education, and welfare. Successes in these areas are copied quickly by other states and even by the federal government. The same should be true for regulatory policy.

Rapid advances in technology have transformed markets for many heavily regulated industries. Companies once thought to be ``natural monopolies,'' such as electric utilities and telephone companies, are now facing intense competition on many fronts. In fact, many utilities should not be considered monopolies at all.

Recognizing the changes, several states are becoming regulatory innovators. Market decisions are replacing bureaucratic decisions. Efforts to encourage competition are replacing outdated rules. And consumers will be the biggest winners, having more choices and paying less for services.

Electric power is the textbook example. Not long ago, many economists argued that the electricity market was best served by very large companies under government scrutiny. The costs of setting up a duplicate power network, they argued, would make competition between two or more companies inefficient.

But the old economic rules are changing. To meet increased demand, electric utilities created a nationwide web of producers to buy and sell power in peak periods. This network grew from 20,000 circuit miles in the early 1960s to more than 130,000 miles today. Nearly all utilities are now interconnected. Although unplanned, these networks break the rationale for a natural monopoly.

Electricity is traded over the network in a process called ``wheeling.'' Any power company connected to the network, whether a utility or an independent producer, can take part in these transactions. The seller of electricity injects a predetermined amount into the network and the buyer removes an equivalent amount. A free market in wholesale electricity now is thriving.

State regulators are beginning to take notice. Last April, California regulators sent shock waves through the power industry by announcing landmark rules to create a competitive retail electricity market. By 1996, large industrial consumers will be able to shop freely for their best deal on electricity. By 2002, all California consumers will be able to buy their electricity from any supplier connected to the network.

A household in San Francisco could negotiate to buy electricity from a producer in the neighboring state of Oregon, or even as far away as Texas. And because of price competition, the household will likely pay considerably less for its electricity.

Other states may soon follow California. If trials in Michigan and New York go smoothly, millions of consumers will be able to shop for the best deal on electricity. The ``electricity superhighway'' makes it possible.

Telecommunications regulation is also changing to meet the new economic realities. This is critical if the United States is to retain its global leadership in telecommunications. With federal legislation to reform telecom regulation stalled in Congress, states are moving to fill the policy vacuum.

In Illinois, regulators are now allowing competition in local phone service. In Connecticut, interactive television trials between three competing companies have begun. And several states now are actively promoting competition in same-area-code long distance service.

The lesson from the states is simple: Regulatory policy must accommodate technological change. New avenues to deliver services -

whether for energy or communications - will create new sources of potential competition. Reacting to each individual technological advance as if it were the last usually creates a tangle of rules that chokes industry over time.

Of course, government cannot forecast technology's pace or trends. In the electricity and telephone industries, few predicted the advances that now allow competition in these former monopolies. But regulators can allow markets rather than rulemaking proceedings to determine services. Innovative states recognize this and serve as models for the nation.

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