The Idiocy of Deregulation
Okay, markets are really useful in many places; but the ideological propaganda that weakening regulation on powerful economic actors will help consumers has been proven wrong time and again-- the recent subprime mortgage meltdown only being one example. Another is electricity deregulation that swept many states in the 1990s and early part of this decade. The result-- well let's let the socialist Wall Street Journal report ($$$) talking about another fine product of George W. Bush back when he was governor of Texas:
Texas had some of the cheapest power rates in the country when it zapped most of the state's electric regulations six years ago, convinced that rollicking competition would drive prices even lower.
This summer, electricity there is some of the nation's priciest..."We could end up doubling last year's power prices," says Dan Jones, who monitors the market for the Texas Public Utility Commission..
When then-Gov. George W. Bush signed the state's deregulation bill in 1999, he assured that "competition in the electric industry will benefit Texans by reducing monthly rates and offering consumers more choices."
Actually, according to the Wall Street Journal, the problems have a lot of similarities to the subprime mortgage mess: consumers were sold on what sounded like sweet deals, only to see market changes lock them into high-priced products that they could no longer afford:
Like homeowners unaware of the risks of an adjustable-rate mortgage, some consumers didn't realize how wildly their bills could vary if they chose plans tied to the market. Steve Schwantes, a Round Rock resident who was laid off last winter from his job as a finance manager at Dell Inc., just got his June utility bill and expected it to be similar to his May bill for $189. Instead, it was $488.From California blackouts to spiking prices in other deregulation states, manipulation and poor information by consumers has meant that deregulation has made things worse for consumers in those states. Between 2002 and 2006, prices in regulated markets rose an average of 21%. In deregulated markets, however, prices soared by an average of 36%. While Texas state government is currently too ideologically rightwing to reverse course, other states are abandoning large aspects of electricity deregulation:
Last fall, Governor Blagojevich signed a $1 billion electricity-rate relief package to provide consumers with relief from the large increases. The utility restructuring legislation, SB 1592, also abolished the reverse auction program and replaced it with a new state agency that will purchase power on behalf of the state's two largest utilities..In Ohio, stakeholders are negotiating how to end competitive pricing. Virginia's legislature last year passed a law to abolish their competitive market and restore the state to full cost-of-service regulation by the State Corporation Commission..Electing new leadership in Washington is a good first step, but the real challenge will be to clear out the ideological trash of three decades of mindless deregulatory wisdom and neoliberal economics. Despite failure after failure, it's quite amazing how resistant many leaders are to admitting it's failure. But as the old saying goes, when you're paid a lot by special interests to not understand something, then it's very hard to change those leaders minds. But we all need to keep working at it.
It is difficult to get a man to understand something when his salary depends upon his not understanding it. Upton Sinclair
July 17, 2008 12:52 PM | Reply | Permalink
Ellen says:
"It is difficult to get a man to understand something when his salary depends upon his not understanding it." Upton Sinclair
Ellen, I've been trying to remember that quote for 3 months, thanks.
July 17, 2008 2:59 PM | Reply | Permalink
Could it be that regulation has the farmer guard the hen house, while de-regulation has the fox guard it?
July 17, 2008 1:02 PM | Reply | Permalink
The problem of "deregulation" is deciding what is being deregulated.
IIRC the aluminum companies (refining bauxite eats electricity) built Montana one of the most efficient and cheapest electrical utility companies in the nation. Among its 1990s customers, though, uniform pricing had led to inefficient uses. Competition ("deregulation") offered the promise of rationalizing the costs of demand. But ---
Montana legislators didn't just deregulate rates; they deregulated the company. The owners of Montana P&L and then, its new owners, treated the company as a cash cow, sold off its assets, loaded it with debt, bought bad assets in replacement and hubristically, tried to convert an electrical utility company into a giant of internet commerce. Greed (or maybe Keynes' "animal spirits") destroyed the company.
In the end it just may be that legislative sausage makers are simply not capable of deregulating -- anything.
July 17, 2008 1:36 PM | Reply | Permalink
@ Ellen
You say
"the aluminum companies ... built [in] Montana one of the most efficient and cheapest electrical utility companies in the nation."
I'd like to hear more about that. How and why did they do it (I know about their need for cheap electricity but need doesn't automatically generate anything)? Was there regulation involved? How does it compare to the Tennessee Valley authority?
July 19, 2008 11:14 AM | Reply | Permalink
Montana Power Co. was created by Anaconda Copper.
My recollection is that during and after WWII there was a huge expansion of aluminum smelting in the Northwest and MPC expanded its power generating facilities, accordingly. But I may be wrong, since post-Bonneville Dam completion, aluminum smelters may have depended upon the BPA more than upon MPC.
July 19, 2008 4:06 PM | Reply | Permalink
@ Ellen
More questions. You say Montana L&P was
but after deregulation its owners
If the thing was a cash cow before deregulation then it was an enormously profitably cash cow afterwards, and, if it was tremendously efficient then it required very little maintenance.
But the people who built this gem were suddenly turned into idiots by deregulation. Are you sure that's the whole story?
July 19, 2008 12:20 PM | Reply | Permalink
Post-1997 deregulation MPC sold its four coal-fired generating plants to Pennsylvania P & L ($759 million) and the remainder of its assets to Northwestern Energy.
Northwestern Energy went bankrupt in 2003 (note the type of assets -- communication services and capital management -- among others it held at that time). It came out of bankruptcy this year and was relisted on the NYSE in May.
For some additional history, look here.
July 19, 2008 4:22 PM | Reply | Permalink
Deregulation = unbridled capitalism, which allows the sharks in the water.
July 17, 2008 3:01 PM | Reply | Permalink
You'd think after Enron, there'd be no excuse for stealing from everyone.
Let's call it what it is.
Criminal.
July 17, 2008 3:41 PM | Reply | Permalink
After the Texas energy tycoons ripped off California I must say that seeing Texans suffering today gives me a small measure of pleasure. Yes I know this is not very Christian of me and maybe the people of Texas were not directly responsible, but ...
July 17, 2008 3:46 PM | Reply | Permalink
syvanen,
in my opinion, Texas Republicans are the most corrupt people on the planet.
July 17, 2008 6:59 PM | Reply | Permalink
I think you missed the sweetest quote of the story.
July 17, 2008 6:38 PM | Reply | Permalink
Hmm let's see. In times of high energy costs, places that have regulated (i.e., subsidized) electricity systems have lower rates than places that have deregulated electricity systems. And we are supposed to be shocked by this turn of events. Of course, the places with regulated electricity systems still pay the high costs; it's just the taxpayers that foot part of the bill instead via indirect (and sometimes direct) subsidies. Deregulation isn't the problem per se, no more than it's a "problem" that an unsubsidized BMW costs $40K.
July 17, 2008 7:17 PM | Reply | Permalink
Simplistic, and you ignore the likely destination for higher payments to the utility in the unregulated state---the shareholders.
If you mean the regulated utility is paying market prices for fuel but not recovering those costs in rates, let's imagine how long that would last.
The issue is that there is no real competition among utilities inside a state. Therefore there is no market to rationalize pricing. This situation would change if many homeowners became power producers.
July 17, 2008 10:34 PM | Reply | Permalink
Tom Wright,
First, I'm glad that shareholders get some return on their investment. It's their money at risk, after all.
Second, here is one common way that electricity utilities are regulated. There is an elected board or commission that sets electricity rates. When times are good and rates are low, the board doesn't typically lower rates, instead they steer the excess "profits" into a "rate stabilization fund" such that, when times are tough and rates are high, the board can draw upon this fund to offset rising rates so that the cost passed on to the consumer isn't so high. Sounds ideal, eh? The only problem is that the net effect is a subsidy over time: rate payers of the past paid artificially high rates, so that rate payers of the future can have artificially low rates. Consider a person who paid the artificially high rates and then moved away. This person was in essence overcharged for his electricity, courtesy of regulation. Is this system really fair to this person?
July 19, 2008 3:05 PM | Reply | Permalink
If society lets the hoods run the streets "unreglulated", the result will not be in the best interest of the average person. Many of the wealthy are just as greedy, moreso, than the hoods with Saturday Night Specials. If we let them run amok, as has been the case for about 20 years, they will steal, just like the hood, except they will hire lawyers and politicians who will call it legal.
July 17, 2008 8:21 PM | Reply | Permalink