Last weekend, a few of my friends and I were drinking craft beer together and talking about the different ones we like. It was a very millennial evening. I told them about all the different local breweries I’d visited in Albuquerque; they rejoined with stories of the brews they’d enjoyed everywhere from Portland, OR to Portland ME, from Minneapolis to Austin. Every region in the country has been experiencing an array of craft beer choices, and at a perfect time for people our age. Just as we became old enough to drink, in the late 2000’s and early 2010’s, craft beer hit its stride. Why? What made people suddenly decide it wasn’t Miller time anymore?
As it turns out, it doesn’t have as much to do with taste as it has to do with money. Specifically, it has to do with taxes. As stated by the Alcohol and Tobacco Tax and Trade Bureau: “On August 10, 2005, President Bush signed into law the “Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users,” Public Law 109–59, which permanently repealed payment of the special occupational taxes for several alcohol beverage related industry members, among them brewers.” All of a sudden, it was easier for small breweries to make a profit. Big surprise, breweries started to open up. After the early adopters demonstrated success, more and more copycat companies jumped into the game. Not wanting to lose out on the growing industry, states began to offer competing subsidies to craft beer makers, creating an even greater profit incentive. You can see the result at your local bar or liquor store.
Government Policy Brings Us Beer and Electricity
This struck me as funny. Before our discussion, it never occurred to me that my work and my play—retail choice electricity and beer, respectively—had anything in common. But once we talked through the IPA phenomenon, I realized that both industries existed as a result of government efforts to increase competition in the free market. I tried explaining this to my buddies, but by that point in the night they didn’t have a lot of interest in third-party energy suppliers. I, however, was fascinated by the comparison, and the story it tells of how slight changes in wording in Washington D.C. affect everything from the beer in my fridge to the electricity that keeps it cold.
The United States is a free market country—to a certain extent. You’re allowed to buy or sell almost anything you want. Except you can’t sell cars without seat belts, you can’t sell phones that blow up, you can’t operate on a person’s brain without a license, and in most states you can’t sell electricity unless you’re a sanctioned utility. The free market exists, therefore, within the boundaries established by federal, state, and local governments.
Government influences the market directly, through laws, and indirectly through the tax code. Even slight changes, like the changes that brought about the craft beer revolution, can have massive effects when multiplied by the scale of the nation. So, when working properly, governments influence the markets only slightly, and only to foster economic growth, to protect their citizens from harmful products or services, and to ensure that the market stays competitive by breaking up monopolies.
The reason governments seek to limit their meddling is to preserve the organic efficiency of the free market. Companies set their prices based on what people will pay. Goods are produced based on estimates of how many will be consumed. Supply and demand play out in hundreds of industries in thousands of counties across the U.S., and are constantly correcting themselves towards an equilibrium. Competition insists that the market operates as efficiently as possible–a company must make the best deal, or lose the deal to their competitor.
The Origins of Utility Monopolies
While most products and services are delivered in the most efficient way by the free market, certain essential services require governmental implementation. Prime examples include the police, firefighters, public schools, transportation infrastructure like roads and bridges, and energy infrastructure like power lines. If it needs to be done, and it’s essential for the collective good, the government will step in to make sure it happens.
The U.S. Government realized that energy infrastructure needed to be installed and maintained. The upfront cost of installing that infrastructure was gargantuan. Also, the footprint required to build tens of thousands of miles of transmission and distribution lines, not to mention pads for the transformer stations, was not only enormous, it required the right of way through densely populated areas. Having two different companies build competing energy infrastructure would not make energy distribution more efficient—it would make it a mess.
So, the government created regional utility companies, responsible for building and maintaining the domestic energy grid. While these were private companies, they enjoyed legal monopolies in order to ensure that domestic energy distribution was reliable and efficient.
This worked pretty well. The companies, as required by law, built and maintained the energy infrastructure. They bought power on the energy markets, delivered it through their grids to homes and businesses (and government offices), and charged their customers based on their usage and the going rate for electricity. Still, there was room for improvement.
Free Market Competition for Energy Suppliers Increases Efficiency
Without competition, utilities had no incentive (besides conscience) to improve their service or lower their rates. So long as they provided service that passed minimum regulatory standards, it was good enough for the government. While the government prevented them from taking advantage of their monopoly and charging their customers insanely high rates, it did nothing to ensure that they sought to offer their customers the best rate they possibly could. Imagine if the only beer available was made by a state-sponsored beer utility. It’d probably be good enough, but it wouldn’t be great. Without any competition, it wouldn’t need to be—it would just be beer. Our energy system was good enough. Which meant that it could be better.
So, in 1992, the Clinton administration decided to see if they could improve things. They got together with Congress and passed the Energy Policy Act, which allowed states to restructure the utility monopolies under their jurisdiction. One by one, states began to do so, allowing third-party energy suppliers to enter the marketplace. Less than half have restructured their markets so far, but momentum has been growing.
These states have not allowed companies to come in and duplicate energy infrastructure. That would be a mess. Instead, they have allowed companies—or in Texas, municipalities—to purchase electricity wholesale from the energy markets where power plants list their output. Then, they sell it directly to consumers. Utilities still take care of the delivery and the physical systems, and customers still pay their utilities for the cost of transmission. However, if a customer is unsatisfied with the price they pay for the electricity itself, or the quality of their metering or billing service, they can go to a different supplier. This, then, puts pressure on the utilities to lower their own prices and improve their service at the risk of losing revenue. In order to compete, they must become more efficient. The free market works.
In the state I live in, Illinois, when buying electricity, I have a choice. I can buy from the utility, or I can buy from a third-party energy supplier, like Liberty Power. I’ll let you guess which one I choose. When I go to the 7-11, I have a choice. I can buy the Anheuser-Busch vat beer, or I can take my pick from as many different local, regional, and national craft beers as they can fit in the cooler.
If you live in a state that has restructured its energy market, you have a choice. Third-party energy suppliers, like Liberty Power, offer competitive rates and quality service compared to utilities. They have to; if they didn’t, they couldn’t compete. The free market works. To learn more about what Liberty Power offers in your state, contact us. If you live in a state where you don’t have a choice, you can tell your elected representatives that you’d like one.
Photo Credit: Brandon Mowinkel