Deregulation
“Deregulation” refers to the trend that began in the late 1970s and early 1980s to reduce national government control of industries including air travel, trucking, railroads, and telecommunications. The perceived success of such initiatives in cutting consumer costs has led to further deregulation at all levels of the federal system. Concurrent efforts to shift policy responsibilities from the federal to the state level have reinforced the move toward national-level deregulation, but have had somewhat disparate consequences for state-level regulation.
Traditionally, government regulation takes three basic forms: social regulation that protects the safety and health of consumers, antitrust regulation to prevent monopolies, and the regulation of so-called natural monopolies. The latter are industries with high fixed costs who operate more efficiently as a monopoly, but whose prices are regulated. Public utilities are a classic example. At the federal level, regulation in all three areas began in the late 1800s and early 1900s with the creation of agencies such as the Federal Trade Commission, Antitrust Division of the Justice Department, Interstate Commerce Commission, and Food and Drug Administration. State regulation in social and antitrust areas emerged prior to (and, in some cases, paved the way for) federal action. For example, the 1877 Supreme Court case Munn v. Illinois gave states the power to regulate prices of firms with monopolistic tendencies before the creation of federal regulators.
The trend toward deregulation focused initially on industries that had been previously considered natural monopolies. Shifts in economic theory led policy elites to conclude that reducing regulations would benefit consumers. National political leaders then seized on deregulation as a way to deal with major public concerns of the time, such as inflation.
The successful federal deregulation of airlines, trucking, railroads, and telecommunications led many states and even local governments to alter their approaches to regulation. Two basic patterns emerged. In social and antitrust regulation arenas, federal deregulation often led to more aggressive state efforts to fill the perceived vacuum. For instance, state attorneys general took on the tobacco industry, leading to a landmark $206 billion financial settlement in 1998. State efforts to implement “patients’ bills of rights” or to impose more stringent emissions requirements on cars are other examples of state social regulation that occurred due to federal inactivity in an era of “devolution.” In the realm of antitrust policy, state initiatives to break up the monopoly power of the Microsoft Corporation after the U.S. Justice Department settled its case (United States v. Microsoft Corporation) illustrate a similar pattern.
Concerning natural monopoly regulation, by contrast, states have emulated the federal trend toward deregulation, most prominently in the realm of electric power. As was the case in other areas discussed above, electricity deregulation stemmed in part from changing economic theories, especially the insight that electricity generation (as opposed to transmission and distribution) was not a natural monopoly. The development of regional transmission grids that precluded every utility from having to have enough capacity to supply all the power in its service area in times of high usage reinforced this belief. Political pressure from large industrial users of power also fostered deregulation. As a result, most states have adopted some form of deregulation that allows electricity companies to compete for customers in the area of power generation, but not the transmission or distribution through power lines, which remain a monopoly.
A few general points about deregulation in the context of federalism are worth noting. First, deregulation illustrates the often-noted tendency of federal systems to promote experimentation and policy learning. The success of early federal efforts at deregulating industries formerly considered natural monopolies led Congress and the Federal Energy Regulatory Commission to encourage state utility regulators to relax their rules on generated power. States have also learned from each other how to implement deregulation effectively. For example, Pennsylvania is widely regarded as an effective model of electricity deregulation, while California is seen as a failure. The increasing importance of international accords such as the North American Free Trade Agreement may hamper experimentation by limiting how much subnational regulatory practices may vary.
Second, the nuances of deregulation depend on the level of government that is responsible. There is some consensus that federal deregulation has been proconsumer. The power of business in state politics makes it less certain that the average citizen will benefit, however, as the locus of deregulation shifts. For example, most states prohibit residential electricity customers from negotiating as a group for lower rates, leaving them less likely to reap the benefits of decontrol than industrial users. On the other hand, in some cases of social and antitrust regulation, especially those affecting industries that are not large local employers, state regulation is likely to be more stringent.
Third, states institutions vary, thereby increasing the inconsistency of both regulation and deregulation across jurisdictions. For example, state utility boards differ in their capability to oversee deregulation. More representative boards, which are often elected, tend to deregulate in a way that protects politically powerful interests, limiting how broad the impact will be. Appointed utility commissioners tend to be better educated and may have the technical expertise to support deregulation and to implement it effectively.
| BIBLIOGRAPHY:
Martha Derthick and Paul Quirk, The Politics of Deregulation (Washington, DC: Brookings Institution, 1985); Timothy Schiller, “Rewiring the System: The Changing Structure of the Electric Power Industry,” Federal Reserve Bank of Philadelphia Business Review, no. 1 (2000): 26–33; and Bruce A. Williams, “Economic Regulation and Environmental Protection,” in Politics in the American States, ed. Virginia Gray, Russell L. Hanson, and Herbert Jacob (Washington, DC: CQ Press, 1999), 434–73. |
Keith Boeckelman
SEE ALSO: Devolution; Electric Industry Restructuring; Environmental Policy; Interstate Commerce