Two Utilities are Better Than One

In Lubbock, Texas, two electric utilities are competing for people's business. How does it work? Could competition be the answer to rising electric bills?

Jan Bellamy from the October 1981 issue

(Page 3 of 6)

"Competition helps hold down prices and results in better service," one homeowner offered. A petite brunette lost no time in informing me, "I like free enterprise."

"I like having the opportunity to change service. We changed because the first electric company wasn't cooperative when a check bounced," explained another while holding back an overly affectionate Doberman.

The majority agreed with one gentleman who stated, "Competition keeps rates down!" And he appears to be correct. The basic rate for residential service in Lubbock is 2.62¢/kilowatt-hour (kwh). Outside Lubbock, areas served by SPS pay 3.13¢/kwh—nearly 20 percent more. (Total electric bills in Lubbock are sometimes slightly higher because of a fuel pass-through charge—based on LP&L'S more expensive fuel—added by the city onto both companies' bills. Absent this government intervention, SPS's rates could undercut LP&L'S.)

In answer to my query, one home owner slid his hands into his pockets grinned at me, and replied, "Competition is the best thing in the world."

Kenneth May, associate editor of the Lubbock Avalanche-Journal, agrees. "I think Lubbock residents have voted their approval of the competition each time they voted to pass a bond issue so that LP&L can expand."

LP&L'S McDonald agrees, "As long as SPS is competitive [with us] it is a plus for residents. We don't wait a day or two to get out there and service a customer; we do it right away, or that customer may change his service."

Looking Back

Local residents, the media, and the heads of the two electric companies are so convinced that competition benefits the community because competition has proven itself again and again in the last 60-plus years in Lubbock, Texas.

It all began in March 1916, when then-monopoly Texas Utilities refused a rate cut demanded by the Lubbock city council. The city fathers emerged from a closed-door meeting to announce that Lubbock would build a city-owned electric utility company to compete with Texas Utilities. The city refused Texas Utilities' offer to sell its facilities, presumably because the price was too high. The city of Lubbock began operation of its utility in 1917, and the competition was on. (Southwestern Public Service Company bought out Texas Utilities in the 1940s.)

That competition continues to this day. You might even say that this west Texas city is a monument to the competition that once thrived in the electric utility industry throughout the country. That's right. Competition was once the rule in the provision of electricity. At one time, the majority of cities in America saw competition between two, three, or even more electric utility companies.

Several years ago, preparing to begin his Ph.D. thesis, Gregg Jarrell of the University of Rochester wondered why electric utility competition began dying out in the 20th century. Poring over old records, Jarrell found that in 1887, in New York City alone, six competing electric light companies were organized. By 1905, some 45 electric utilities had been granted franchises to operate in Chicago (only one of them an exclusive franchise granting the sole right to serve a territory). Prior to 1895, five electric lighting companies served Duluth, Minnesota, and four operated in Scranton, Pennsylvania in 1906—to name but a few. Competition was not only common but persistent.

What happened to this frenetic pace of competitive activity? The conventional explanation is that it proved unworkable.

By 1907, New York and Chicago had seen a wave of mergers, and most of the firms had been consolidated into single entities with de facto monopolies. It was argued that city governments, lacking technical and economic expertise, had allowed too many firms to go into the electricity business and thus were in large part responsible for the overcapacity and undercapitalization that ended up in bankruptcies, mergers, and the emergence of powerful monopolies. Once entrenched, these monopolies could cut back output and force up prices, with the poor consumers at their mercy. So the idea of state regulation of electric utilities by well-trained professionals became a common political battle cry.

New York and Wisconsin were the first to create statewide public utility commissions, in 1907. In the next several years, 27 more states followed suit. At first, utility firms fought the trend, but by 1912, Jarrell found, they had become "the main champions of the movement' for state regulation.

It was that shift that intrigued Jarrell and suggested the substance of his Ph.D. research. Why did the utilities switch sides? Could it be they expected to be better off under regulation than under competitive conditions? In short, he asked. "Was state regulation of the electric utility industry primarily motivated by a concern for the public interest, or was it a policy designed to benefit the private interests of the utilities?"