Environmental benefits of electricity policy reform
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Introduction
The structure of the electric industry can help shape environmental outcomes. In the United States, we have significant experience with the regulated monopoly model, which dates back to the early 19th century. Under that model, private utilities subjected themselves to tight regulatory oversight of their rates and services, based on their underlying costs, in exchange for the right to enjoy exclusive franchises. The regulated monopoly model electrified most of the country fairly quickly but created inefficiencies and failed to control pollution, while also discouraging innovation.
In the 1990s, Texas, Illinois, Ohio and most mid-Atlantic and Northeast states responded to high monopoly-utility costs and poor investment decisions by restructuring their electric industries. This broke apart the monopoly model by forcing merchant generators and transmission owners to compete in an open wholesale marketplace. The outcomes of these competitive markets determined wholesale electric rates, rather than cost-of-service regulation. Independent third parties known as regional transmission organizations (RTOs) or independent system operators (ISOs) administered these markets. Restructuring limited the monopoly-utility model to distribution services, leaving customers to choose their electricity supplier (also known as retail choice).
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