Electric Deregulation Unplugged
In the summer of 2001, a few months before the 9/11 attacks on the Trade Towers and Pentagon, I was invited to Hong Kong as a visiting professor and university fellow for the purpose of lecturing on electric regulation and deregulation.
My visit was at least partially sponsored by one of the foremost (electric) power companies in Hong Kong, and what they wanted me to do was to inform folks that electric deregulation was a crazy and unworkable concept that would bring misery into the lives of many consumers of electricity.
Why would a large power company want me to travel half way across the world to ridicule electric deregulation? The answer is that the directors of that company knew that electric deregulation was a lost cause.
In Sweden though, as in many other countries, it didn't make any difference to the directors of power companies what it was, because they were primarily concerned with putting themselves in a position where they could take the money. For instance, deregulation made it possible for one Swedish power company to shift much of its attention to Germany, where it specializes in making claims about its program for a "green" future.
Things are different in China. A deregulation failure in Hong Kong means something very different from a failure in California or Sweden. In Sweden and many other countries, deregulation miscarriages result in disparaging articles in newspapers or business magazines, but the poor consumers are left to gnash their teeth and curse.
On the other hand, in Hong Kong somebody important might confront the executives responsible for the misfortune.
Theories abound
In a privatization conference held at Södertörn University in Stockholm, where I gave a more dramatic version of this short paper, a very intelligent young Finnish woman asked me what I meant by deregulation failure, to which I replied it was obvious. Deregulation failure means that consumers and firms are promised lower prices, and instead prices increase.
This can be put another way: electric deregulation may succeed in seminar rooms and conferences, but if its record means anything it has failed dismally in the real world. An extensive analysis of this topic can be found in the book by Professor Lev S. Belyaev (2011).
In case you have forgotten, in Southern California electric deregulation led to the wholesale electric price increasing by 533% in about 8 months. One of the high points of that fiasco was the California state government paying billions of dollars to firms generating electricity, with some of these firms called "out-of-the-state criminals" by California governor Gray Davis, because they played the system by pretending that they could not supply more electricity.
It failed in South Australia. It failed in almost every state in the United States of America where it was attempted, and in my former home state, Illinois, a state official -- Kimery Vories -- reported that deregulation resulted in the price of electricity increasing by forty percent, all at once.
U.S. Senator, Byron Dorgan, put it this way: "I've had a belly full of being restructured and deregulated, only to find out that everybody else gets rich and the rest of the people lose their shirts!"
And finally, when I began to study regulation and deregulation, the leading scholar in the field was Professor Alfred Kahn. Once the electric deregulation failures began, he made the following statement; "I am worried about the uniqueness of electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."
The main issue is that of electricity when compared to certain other energy options. For example, there may be passable substitutes for natural gas, but -- everything considered -- there are no substitutes for a large supply of inexpensive and reliable electricity, especially if we are considering modern and civilized countries whose citizens and/or voters are concerned about their futures.
References
Banks, Ferdinand E. (2011). Energy and Economic Theory. Singapore, London and New York: World Scientific.
Belyaev, Lev S. (2011) Electricity Market Reforms. London, and New York; Springer
Invited talk for privatization conference, Stockholm, June 16, 2011, Södertörn University, and June 17, Stockholm School of Economics.
This story has been excerpted from: http://www.energypulse.net/centers/article/article_display.cfm?a_id=2453
Comments
Electricity Deregulation
Certainly energy deregulation has had a spotty history, particularly in the years immediately after implementation. However, consumers have received significant benefits and I think that needs to be recognized. Some of the better dereg models (Texas electricity and Georgia natural gas) are, on average, delivering lower prices to consumers. All deregulated markets are offering valuable products such as fixed price commodity contracts and long term contracts which have been unavailble from local utility companies.
The deregulation experience has created winners and losers. Subsidies that State PSC's have traditionally granted residential consumers of energy are no longer available in the deregulated world. Market forces now drive prices and, therefore, prices have increased for small consumers and decreased for large commercial and industrial. The small users can still benefit from energy deregulation by agressive shopping through services such as www.energybidder.com.
Electric Deregulation Unplugged
Very interesting article. A similar view point was mentioned by a minority group of utility engineers in the midst of the deregulation battle but they were branded as "resistant to change".
Deregulation Argument: Overly simplistic
Your view of deregulation's success/failure is far too simplistic.
You state that "deregulation failure means that consumers and firms are promised lower prices, and instead prices increase."
I agree that the ultimate goal of deregulation is indeed lower pricing but you need price signals in order encourage/attract investment to attain true low prices(i.e. not padded IOU rates). This means that the rate payer will likely have to bear increased volatility of pricing and occasional short term higher pricing on the road to sustainable low prices.
Lastly, the problems you identify with deregulation are not rooted in the 'uniqueness if the electricity markets' but rather these problems are directly attributable to varied and often incomplete forms of deregulation schemes pursued.