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Can Competition Be Made To Work? .,,o~.,.„, The promise of competition has been center stage during more than a decade of misadventures with electric utility industry deregulation. It has been used to rally support and chas- tise doubters. But a clear statement of what competition means was rarely offered. Moreover, the assumption that it can be made to work has not been examined carefully. A clear and appropriate definition of competition is needed to judge whether the re- sults of electricity deregulation comport with what would occur in truly competitive markets. Advocates of deregulation rarely pro- vide aclear statement of the benefits or delivery date of competition. Lower rates and more choices were touted as primary benefits, but when skyrocketing prices ar- rived instead, unproved efficiency and proper price signals became the new ra]- ly2ngcry. Competition was good, the promoters of deregulation reminded us, because en- trepreneurs working in their own self-interest are guided by the invisible hand of the market, as described more than two centuries ago by Adam Smith, and such pursuits lead to efficient pro- duction and prosperity. Usually ignored, however, was Smith's caution that rarely do people in the same industry meet that their conversation does not turn to conspiring to raise prices. Also given short shrift were the conditions under which adequate compe- tition is likely to exist. Proponents of deregulation ignored the history of pri- vate monopoly abuse. More recently, competition advocates have forgotten one of the cardinal bene- fits of competition-that it coordinates economic activities in industries so there is little or no need for government regu- lation or entry. They neglect this, perhaps because deregulatory efforts demonstrate the need for government intervention. The market has not automatically pro- vided essential facilities and coordinated www. A P PAn et. o rg activities reduired to provide electricity that is reliable, environmentally respon- sible, efficiently produced and efficiently priced. The industry is plagued with nagging problems of adequacy of reserve capacity, construction of new transmission facili- ties, reliability of day-to-day operations, future generating capacity, and collateral harm to the environment If markets are in fact competitive, these problems would not exist. These problems, along with the Califor- nia fiasco, Enron scandals, manipulation of price data, skyrocketing wholesale prices, and the wave of industry mergers, indicate something was fundamentally wrong with initial assumptions about com- petition in electric power markets. There are no such things as pure mo- nopoly or pure competition. These are theoretical concepts at opposite ends of an economic spectrmn. Consumers and enterprises live their real economic lives somewhere between these extremes. The notion of "workable competition" at- tempts to bring real-world practicality to the economic notion of competition. More formally, economist John Maurice Clark defined y~~orkable com- petition several decades ago as a "rivalry in selling goods, in which each selling unit normally seeks maximum net rev- enue." But he emphasized that the prices each seller can charge are effec- tively limited by the free option of the buyer to buy the same product from a rival seller. This necessitates "an effort by each seller to equal or exceed the at- tractiveness of the others' offerings." Clark conceded that his definition may not be complete, but "it focuses attention on a crucial point which is sometimes ne- glected, namely the nature of the option actually open to the buyer." ("Toward a Concept of Workable Competition," Tl~ie American Econor~nic Review 30, Issue 2 (June 1940), 242.1 Clark's definition captured the essen- tial attributes of competition and implied other attributes that further define it. The rivalry he described implied that suppliers do not have effective control over market prices-they are "price tak- ers." 7~here is a true rivalry for customers and sales so goods and services will be produced efficiently and market prices will reflect the minimum cost necessary to attract suppliers. There is also the im- plication that enterprises are responsive to consumer demands. Following Clark's lead, other econo- mists have studied industry behavior and performance to determine if the results are consistent with what would be ex- pected in workably competitive markets. The behavioral and performance criteria for such markets were smnmarized by economist Frederic Scherer. As for be- havior, enterprises do not collude to keep prices high and maintain excessive profits, nor engage in exclusionary, predatory, oe coercive tactics. Neither do they persist in harmful price discrimina- tion. Information helps customers make better choices about what and how much to buy. Competition leads to: efficient produc- tion; output levels and quality responsive to customer demands; profits sufficient to attract and reward investment, efficiency and innovation; prices that reflect costs; opportunities for introducing technologi- cally superior new products and processes; promotional expenses that are not excessive; and success for sellers who best serve customer wants. Clark's definition of competition is an appropriate standard against which to judge whether competition is present in electric power markets. Scherers criteria provide practical standards for judging. Tuning to the question of whetl~rer competition can be made to work requires looking at the conditions necessary for it to flourish. Important influences include raw materials, prevailing technologies, storability of JANUAFV-FeeRUaav 2005 15