Electric Power Industry
The roots of modern day regulation can be traced all the way back to the late

1800\'s and found in the form of antitrust. By the beginning of the 20th century,
the U.S. government had formed the interstate Commerce Commission to regulate
the railroad industry, and shortly thereafter, many other regulatory commissions
were founded in the transportation, communication, and securities fields. The
main goal of these regulatory commissions was to create a reasonable rate
structure that would be appealing to both producers and consumers. While this
system has worked for many years, it has recently come under heavy criticism,
with many people pushing for open competition among electric power producers.

Although once believed to be an impossible proposal, competition among electric
power producers is finally a reality in a few areas. Massachusetts is just one
state where legislation implemented to create competition among electric power
producers is not only favored by the people of the state, but has also provided
significant rate reductions as well. The attempt at regulating price in the
electric industry is a troublesome one. The objective is not only to minimize
the cost to consumers, but also to create a rate structure that will entice the
electric company to remain in the industry. The regulatory commission wants the
electric company to have a reason to innovate so that they will be able to
provide cheaper power in the future. However, if the commission captures all
gains from innovation in the form of lower prices, then the electric company has
no incentive to undertake any type of innovation. Therefore, a compromise must
be reached which would provide adequate incentives for firms to undertake
cost-reducing actions while at the same time ensuring that the price for
consumers is not exorbitant. The term regulation refers to government controlled
restrictions on firm decisions over price, quantity, and entry and exit. Each
factor of an industry must be regulated for producers and consumers to truly
benefit. The control of price does not mean setting one fixed price, but rather
entails the creation of a price structure for purchasing electricity during peak
and non-peak times. The control of quantity refers to the government\'s attempt
to control the amount produced or in this case the amount of electricity
produced. For example, in the electric industry, it does not make sense to have
a lot of small power plants produce electricity. However, at the same time one
company can not be allowed to monopolize the industry and set prices at its own
discretion. Another factor in this problem is the control of entry and exit in
the electric industry. By controlling who can enter the industry, the government
can control who produces the electricity and how much of it they produce.

However, the effectiveness of regulation has begun to be questioned, and created
the evolution of a more competitive market. Ever since the Public Utility Act of

1935, which in turn created the Federal Power Commission, the role of electric
utility regulation and its effectiveness has been questioned. Since that act was
passed into legislation, the question has always remained: has electric
regulation made a difference? Major studies done throughout the 20th century
found conflicting results. A study published in 1962 and conducted by Stigler
and Friedland compared the price of electricity in states with regulation to the
price in states without regulation. However, at the time all states had electric
regulation, so Stigler and Friedland had to go back to the 1920\'s and 1930\'s to
find states without regulation. Their finding was as expected. In 1922, the
average price of electricity was 2.44 cents per kilowatt-hour in states with
regulation. However, in states without regulation, the average price increased
to 3.87 cents per kilowatt-hour. While many would say that prices could vary for
reasons other than regulation, Stigler and Friedland controlled the analysis of
other variables and found that no significant difference in price existed. Other
critics felt that this study was done in a time when regulation was just getting
started, and that regulators in the present day are more effective. Two other
studies which found different results were those conducted by Meyer and Leland
and another done by Greene and Smiley. In their study, which used data from 1969
and 1974, Meyer and Leland utilized econometric estimates of demand and costs to
find hypothetical unregulated prices. Their conclusion was that the regulated
prices were significantly lower, but that even lower prices were demanded. In a
similar study conducted by Greene and Smiley, they found that unregulated prices
were 20-50% higher than actual regulated prices. Although these studies seem to
reach conclusions that support