Sometimes states pass bad laws. It’s unfortunate, but it’s the way of the world. But when a whole series of states pass the same bad law one after another, it’s worth pausing to consider what is going on. A current example of this involves the recent spate of state laws eliminating competition for electric transmission. The laws give incumbent transmission utilities what’s known as a “right of first refusal” (ROFR) for new projects, meaning that no one other than the local incumbent utility can build, own or maintain a new transmission line.

Restricting competition like this is sure to drive up construction and maintenance costs significantly, all of which are passed onto consumers. Research by the Brattle Group has found that competitive bidding results in a 20 to 30 percent cost savings for transmission projects.

Michigan became the latest state to enact a law restricting competition, but several others have done so, almost all of them in the past few years. Granted, most states don’t have ROFR laws, and several, such as Kansas and New Mexico, have rejected the notion, and last year a coalition of states wrote to federal regulators in opposition to efforts to restrict competition for electric transmission. Still, the question remains why any state is moving in this direction at all.

The key factor, of course, has to do with the disproportionate political power that incumbent utilities wield in many states. Economists have long recognized that in political conflicts concentrated interests tend to win out over diffuse ones. If the law says that everyone in the United States has to pay me a dollar, I have a very large incentive to see to it that the law is maintained as is. By contrast, each individual does not have as much at stake, and so probably won’t put much effort into getting the law repealed.

Similarly, when a law restricts transmission competition, it spreads increased costs over millions of consumers to the benefit of one utility. Unsurprisingly, support for ROFR laws has mostly come from the utilities themselves, while opposition has been broad. The coalition against the proposed Wisconsin legislation ranged from free market groups like Americans for Tax Reform to the state’s Citizen’s Utility Board to industry groups like the Midwest Food Producers Association and the Wisconsin Cast Metals Association. But because utilities have far more skin in the game, they are often far more intensive in their advocacy than are opponents.

The position of incumbent utilities is also strengthened by what economists call “asymmetric information.” Electricity policy can be very complicated, and it can be natural for legislators to defer to those who know most about the subject. Oftentimes that is going to be the utilities themselves. But when the issue in question is one where the utilities have a clear self-interest, relying on them to give unbiased advice is going to result in policy skewed in their favor.

The enactment of state ROFR laws can also set up a toxic dynamic, pitting states against each other and increasing the pressure from utilities in other states to follow suit. When a state passes a ROFR law, utilities from other states are cut off from the ability to build, own or maintain projects in that state. They may seek to recoup their position by getting their home state to give them a similar advantage. This cycle of protectionism inevitably leads to conflicts between states, especially for regional projects where costs are paid by consumers in multiple states. States without ROFR laws may ask themselves: why should consumers in our state pay unnecessarily high costs to benefit incumbent utilities in another state? There is no good answer. Illinois has resisted paying for the burdens of other states’ anti-competitive transmission laws for years, and if ROFR laws proliferate so will such conflicts.

Reversing this trend may not be easy, but it is necessary if needed transmission buildouts are not to be hampered by cost-overruns and delays. States should reject ROFR requirements and repeal them where they already exist. If they do not, it may be necessary for the Federal Energy Regulatory Commission to step in and restore the balance between states by preventing protectionist legislation.

Image credit: bohbeh

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