Mandatory Open Access: Subsidizing Special Interests

Traditional public-utility regulation of interstate transmission of both natural gas and electricity has given way to the open-access era. Rather than a bundled product (transportation and the commodity) delivered at one price, the utility just charges for transmission. Third parties (independent marketers) buy and sell  the “unbundled” (gas or electricity) commodity.

Is third-party access (TPA) a step toward free markets compared to what came before? Some say “yes” given that there is a new market with the commodity where, as if led by an invisible hand, a plethora of new pricing terms and services have emerged. This is what led Ken Lay to think of open-access-dependent Enron as a pro-market, pro-competition company. “I believe in God, and I believe in free markets,” he used to say. But Enron was just the opposite, one of the most rent-seeking firms in the history of capitalism.

“Infrastructure Socialism”

Most in the free-market community have misgivings about the half-slave, half-free regime for two reasons. First, transmission is still price-regulated on cost-of-service ratemaking principles. And second: new regulation–mandatory open-access–requires asset owners to provide “nondiscriminatory” transportation at “just and reasonable” rates. Certainly the restructuring is not the free market because the vital link of midstream services is regulated–and more so than before.

What’s Yours Is Mine: Open Access and the Rise of Infrastructure Socialism, by Adam Thierer and Wayne Crews, has challenged “hyper-regulatory bureaucrats and central planners” for “increasingly commanding technology companies and industry sectors to share networks, facilities, or specific technologies with rivals.”

Thierer and Crews argued:

Genuine competition requires that firms have the ability to exclude rivals. Government seizure of existing networks and technologies on behalf of rivals means that next-generation technologies will not be created by those rivals or the incumbents…. [But] competition in the creation of networks is as important as competition in the goods and services that get sold across those networks. Competition, innovation, and consumers will suffer if forced sharing policies are not abandoned.

This critique takes on new meaning with real-world examples of open-access as a means, a vehicle, for special-interest, nonmarket programs. An example from the Southeastern electricity market follows.

Georgia Solar Power

On September 20, 2012, start-up Georgia Solar Utilities (GaSU) filed a petition with the Georgia Public Service Commission asking to be granted all of the rights and privileges given to Georgia Power. These include access to the use of the transmission and distribution systems within the state and access to capital at the same rates as obtained by Georgia Power. GaSU wants to have existing electric distributors use their billing systems to collect from its retail customers.

Needless to say, this proposal will not sit well with Georgia’s 90 or so existing electric distributors. This amounts to retail wheeling with forced access to the facilities owned and operated by others. This audacious proposal is the logical outcome of the flawed policy of forced access or what’s-yours-is-mine-and-what-is-mine-is-yours socialism.

Background Years ago, there were business arrangements for the mutual use of network systems that developed in an atmosphere that respected property rights, upheld the sanctity of contracts and required no regulatory edicts. In Georgia, retail rivals jointly owned the two pipelines that carry petroleum products because it made good business sense not to develop duplicate pipelines.

Later the electricity distributors voluntarily developed a system of joint use for the high voltage transmission system. Each of the users of the Integrated Transmission System, “ITS”, contributed the components of the high voltage system they already owned. Now the members pay jointly for expansion and use of the ITS. Because they own this infrastructure, it is not available to others without their consent. This is private property and must be respected as such.

At the time the ITS agreement was being made law and began operating, 1974, the fateful AT&T litigation began. The famous Judge Harold Greene’s decision broke up AT&T and created the “Baby Bells” and granted access to other parties to use AT&T owned facilities – hence the birth of MCI and Sprint. This policy is wrong, very wrong, but replaced the voluntary mutual use of networks developed in the free market.

The defective telecommunications open access model was followed in natural gas pipelines and electric delivery systems. Now, the blowback from the policy shows up in the outrageously presumptuous demands of GaSU.

Georgia Electricity There are a number of non-utility power generators already operating in the state with more planned. These developers sell their output to one of the members of the ITS, and the exchange takes place at the entry point to the transmission system. The ITS distributor then takes the power to customers. There is no legal reason GaSU cannot sell its generation output to one of the many power distributors in Georgia.

Georgia Power, the municipal and coop electricity sellers in Georgia are also supplied from out-of-state utilities and power marketers. These transactions, thankfully, require minimal involvement of the state utility regulators.

Even some end-use customers have access to the power marketer through their local distributor. Muni’s and particularly coops can offer to allow a customer the choice to make his own deal with a power marketer, and the distributor act as agent for the transaction. We call this a “willing buy-thru.”

So, without socializing the grid, throwing out property rights and extending the cronyism of the utility regulators to market participants, GaSU can sell power in a market environment to a party that has access to the ITS. Further, GaSU can negotiate with any of 90 distributors to sell its power retail.

A Deregulation Opportunity

The debate over open-access gets back to whether so-called “natural monopolies” exist in a free market. Those who argue that there are in fact no natural monopolies see competition as a better regulator than government mandates.

It is argued here that the removal of monopoly privileges would make the owners of energy delivery networks more amenable to sharing those networks in order to stifle the threat of entrepreneurs creating competing network infrastructure. We have a case in point where the forced access chickens have come home to roost. Mandatory carriage has created a Frankenstein’s monster of market.

We don’t need to employ government solutions to every perceived problem. Rather than spreading monopoly privileges to others we need to be abolishing them. Georgia’s oil pipelines, and its high voltage systems, were developed through market relationships. The choice is to extend the market, not the monopoly.