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Ferdinand E. Banks

Ferdinand E. Banks

Ferdinand E. Banks, Uppsala University (Sweden), performed his undergraduate studies at Illinois Institute of Technology (electrical engineering) and Roosevelt University (Chicago), graduating with honors in…

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An Invaluable Reminder about Electric Deregulation

This short paper borrows from my forthcoming energy economics textbook (2011), and consists of a part of the lecture that I once desperately wanted to present at either the Stockholm School of Economics, or at the research organization called Centre for Business and Policy Studies (SNS), which is also located in the Swedish capital. The reason is that several years ago (together with the brilliant Norwegian economist Eirik Amundsen), the president of the Stockholm School, Professor Lars Bergmann, published an article with the provocative title ‘Why has the Nordic Electricity Market Worked so Well’ – although in reality, practically from the beginning of deregulation, almost every newspaper in Sweden has expressed on its front or editorial page, or  in its business section, the opposite point of view.

As for the SNS, this establishment once organized a conclave designed to sing the praises of a failed electric experiment, apparently hoping  that their clients/audience had forgotten the time when Sweden not only produced the lowest cost  electricity in the world (thanks to an exceptionally sophisticated electricity sector consisting of nuclear and hydro), but also sold that electricity at a reasonable price, particularly to the industrial sector. Needless to say, those individuals opposed to deregulation did not make the mistake of ordering  new suits, shoes or  underwear in anticipation of being summoned to wonderful Stockholm in the near or distant future, but when several of them heard that the curse of  electric deregulation as experienced  in Norway was referred to in  a short article in Time Magazine by Wallace (2003), they made sure that a reference to that article found its way into my humble possession.        

Insofar as Sweden is concerned, the present deregulated electric price is an unambiguous  threat to many households, and perhaps ruinous for some. A blogger who calls himself INVESTOR pointed out on the important site Seeking Alpha that it is the most worrisome phenomenon in Sweden at the present time, since the Swedish macroeconomy is probably functioning as well as any in the industrial world. What we face in this country is not just a preposterous attempt to rescind the laws of mainstream economics, but the kind of lies and deceptions that electric deregulation made possible in California, and also in many other states.

For example, according to  Kimery C. Vories, an  official in my former home state of Illinois, the “fruits of deregulation”  included price increases of 40-50 percent “all at once”, lengthy electric outages, and increases in the salaries of the chief utility executives that ranged into the millions of dollars. He completed this catalogue of outrages by saying that “the role models of the corporate leaders of utilities in Illinois are the persons now serving jail time for their role in Enron’s antics”. (He failed to cite those who got away before the crash).

When I was visiting professor and university fellow in Hong Kong, I gave a series of lectures on the shortcomings of electric deregulation, the last of which was presented at the Hong Kong Institution of Engineers during that marvellous period when the cracks in Enron’s boisterous façade had begun to show. As Dr. Larry Chow, director of the Hong Kong Energy Research Centre pointed out in the discussion following this lecture,  engineers could only shake their heads when they heard economists talking about deregulation, but  at  that stage of the deregulation swindle, that  kind of mild physical gesture was far from enough  to convince dedicated deregulation crusaders that they would be unable to succeed  in  their  brazen attempt to make the impossible possible.

As discovered later, Dr Chow was not the only observer who came to suspect that a scam of monumental proportions was about to be unloaded onto electric ratepayers throughout the world.  A California legislator who was the key instigator in introducing deregulation to that state, later joined Governor Davis in his efforts to protect California consumers from what the governor called “out-of-state-criminals” –  i.e. non-California generators (or wholesalers) who were in a magnificent position to utilize their (strong) oligopoly situations. Similarly, on the East Coast of the U.S., Senator Ernest Hollings  brusquely abandoned the deregulation sinners who had seduced him into the ways of ‘liberalization’ and began to call himself a “born-again regulator”. Quite possibly the senator noticed that as the smoke was clearing from the California meltdown, one of the old sayings introduced aboard some unlucky U.S. Navy ships in World War II began to apply: “When in danger, when in doubt, run in circles, scream and shout.”

Running in circles will not help in the deregulation wars, because the issue is not gunfire or bombs, but money. A short time after deregulation in the UK, a  page in the business section of a London newspaper displayed a gallery of power-company executives whom deregulation had  catapulted into affluence. This observation might also apply to the major Swedish company Vattenfall. After deregulation its managing director – and apparently a  platoon of  his subordinates – shifted the focus of their activities to Germany, where they busied themselves manufacturing fairy tales about  their  intention to bolster the electric supply in all of Northern Europe, and to make it ‘green’ as well. The person to ask about this is an MIT graduate living in Germany, Jeffrey Michel, who first pointed out to me that highly polluting coal was going to play a key role in Vattenfall’s business strategy. This is an important reason why Vattenfall did not protest the insane decision by the Swedish government to begin their nuclear retreat.

My previous  energy economics textbook (2007) is filled with unpleasant  facts about electric (and natural  gas)  deregulation, but as they once said in the U.S. Navy, “on every ship there is someone who does not get the message”. In the case of Sweden, at the present time, that someone includes certain research establishments around the country that are paid  to provide the kind of low-level economic research that is without the slightest scientific usefulness. They and the president of the Stockholm School of Economics have never ceased to praise the success  of Swedish deregulation efforts – a success that in a normal setting would only be acknowledged after the cognac had gone around the table a large number of times, because when in the grip of sobriety it is difficult to imagine an intelligent person voluntarily describing the  Swedish electricity experiment as anything other than a grotesque mistake that has increased the financial burdens on  households and small businesses, and even some large firms.

Let’s wind this rogues gallery of electric deregulation up with a statement by an important executive in the important Canadian state of Ontario. “Now before you ask whether I am still asleep or dreaming or had something extra in my coffee this morning,” the chairman of the independent Electricity System Operator of Ontario (Canada) remarked several years ago, “let me qualify this by noting that I have not given a timetable to arrive at this destination”, where ‘this destination’ included some problems with establishing a “reliable, efficient, effective, transparent, accountable, credible and competent” supply of deregulated electricity.  That, excellent readers, was only the beginning of her miseries, because on the date when the contents of Madame Chairman’s morning coffee came into question,  Ontario had less generating capacity than it possessed a decade earlier, and according to the president of the Association of Major Power Consumers of Ontario, a bungled deregulation agenda had resulted in that province losing an invaluable competitive advantage.

By. Professor Ferdinand E. Banks, Uppsala University, Sweden

REFERENCES

Amundsen, Eirik S. and Lars Bergman (2005). Why has the Nordic Electricity Market
        worked so well? Department of Economics, University of Bergen (Norway)
Banks, Ferdinand E. (2011). Energy and Economic Theory. Singapore, London and New York:
       World  Scientific.
______.  (2011). ‘On the sunny side of the nuclear street.’ Keynote Address: STOCKHOLM.
______.  (2007). The Political Economy of World Energy. Singapore, London and New York:
       World  Scientific.
______ . (2001). Energy Economics: A Modern Introduction. Boston and Dordrecht: Kluwer
         Academic.
______.  (1974). ‘A note on some theoretical  issues of resource depletion’. The Journal of
          Economic Theory.
Watts, Price C. (2001). ‘The  case against electricity deregulation’.  The Electricity Journal.
Wallace, Charles P. (2003). ‘Power of the Market’. Time (March 3)




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