Electricity Restructuring and the Social Contract

Working Papers

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Program on Energy and Sustainable Development Working Paper #15, page(s): 14

May 2003

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The electricity sector is a major contributor to air and water pollution. Electricity also supplies vital services to modern societies-it literally powers economic growth. Given these vital roles, societies have constructed a "social contract" with the electric power industry. They have adopted a wide array of rules to regulate environmental externalities, mandated connections to low-income households, created "lifeline" tariffs and cross-subsidies to ensure that users gain at least a minimum quantity of electric service at little cost, and adopted various schemes to encourage investment in long-term innovation of improved technologies and electric power systems. It appears to have been relatively easy for governments to craft this social contract over the last century, as the electric power system has evolved, because governments have directly regulated the industry and, in most cases, major electric power firms were state-owned enterprises (SOEs). Today, a new wave of industrial organization is spreading across the industry- one predicated on use of markets rather than direct control-and alarm bells are sounding for the fate of the social contract. This paper examines the alarm.

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