The (telecom) path well travelled: What does it hold for electricity?

In many ways, the potential for a dramatic transformation in the electricity industry feels like deja vu in the telecommunications industry of the 1980s. That industry evolved rapidly and radically so that what we see today is almost unrecognizable compared to three decades ago. Do we stand on the verge of a similar revolution in electricity?

In the 1980s, it was the entry of microwave transmission that threatened the hardwired long-distance network of AT&T. The combination of the MCI decision allowing competition and the DOJ anti-trust settlement that broke AT&T into the 7 Baby Bells, both in 1982, led to proliferating long distance competition.

The electricity industry had a similar transformative decision in FERC Order 888 in 1996. There was a similar first wave of opening up wholesale competition through a centralized grid through restructuring induce by the introduction of combined cycles. As with AT&T being slow to adopt new technologies, it’s hard to imagine the electric utilities building CCGTs before others forced their hands.

In telecom, allowing more players meant that they started to compete with customers using new technologies, Rapid innovation in computers bled over to phones and cell phones. The FCC facilitated this with innovative auctions of regional wireless band licenses. The entry of cable companies for local service created more competitive pressure. Yes, the industry went through consolidations, but the threat of entry and marketing innovations place caps on what these companies can charge and force more consumer options.

Long distance competition may not have benefited, but such an assessment ignores the second wave of telecom deregulation starting a decade later: the entry of cable companies, the use of the Internet for calling, the rise of messaging, and proliferation of smart cell phones. Now AT&T’s land lines are an afterthought for phone service and those companies offer bundles of services across telephone, television, Internet and cell phone. Long distance and local land line competition are but an afterthought in the industry after three decades. The better question is whether these services will even survive in the near future.

Electricity restructuring may not have delivered on its initial promise, but, as with telecom, it brought new competitors who are looking for different ways to enter market. New technologies that decentralize energy resources look like the second wave of telecom innovation in many ways. NRG is one such example of a company that focused on merchant generation but are now looking to distributed energy resources. Sempra and Duke are utility holding companies that are shifting their mission in promising ways. Will these and other innovators break into the energy services market and offer consumers the type of choices that telecom customers now have? Will the existing modes of delivering electricity lose dominance in the same way as happened in telecom?

The answer will depend in part on decisions made by regulators. The US DOJ and FCC played key parts, and the state commissions eventually backed away from close regulation. This requires support from stakeholders including the utilities. AT&T eventually evolved into a dominant player in the new marketplace although it wasn’t a smooth transition. Will the electric regulators have similar foresight? Will they avoid many of the same pitfalls?

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