Some Economic and Historical Aspects of Electric Deregulation

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. What this ended up as was a handful of lectures, taking place over several months, which left me with plenty of time to read, visit athletic facilities conveniently located in the apartment complex where I lived, and to give some thought to the delusional theories accompanying deregulation.
My visit was apparently sponsored by one of the foremost (electric) power companies in Hong Kong, and what they wanted me to do was to inform university teachers, journalists, students, break dancers, moonwalkers and anybody else I came into contact with  that electric deregulation was a crazy and unworkable concept that would bring misery into the lives of many consumers of electricity.

I’m glad to confess that nothing could have pleased me more, because the bottom line where this important topic is concerned is refreshingly   simple: electric deregulation has failed, is failing, or will fail almost everywhere, and increasing numbers of observers are now prepared to admit  that it cannot succeed in the real world, despite its occasional success in seminar rooms and conferences. For instance, in case you didn’t know, in southern California electric deregulation led to the wholesale electric price increasing by 533% in about 8 months.

The question that immediately arises is what happened to the retail price in California – that is the price charged final consumers of electricity by utilities. The answer is nothing, because to avoid the risk of a recession, and perhaps a rebellion by these consumers, the California state government paid 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 gamed the system by pretending that they could not supply more electricity.

 It may be true that something similar was experienced in Sweden last year. What many people do not realize is that in this country, where nuclear and hydro are the main generating assets, the cost of generating electricity was once among the lowest in the world. But as a result of deregulation,  the price paid by Swedish households has occasionally spiked to one of the highest in Europe, and some of us believe that that price may continue to increase. 

In my more mellow moments, I often describe deregulation as an unsuccessful attempt to rescind the laws of mainstream economics. A justification for continuing the criticism of deregulation is the large body of evidence at  variance with surviving fantasies about expected deregulation results, where by fantasies I mean academic and journalistic bunkum promising large amounts of reliable and  inexpensive electricity if deregulation (i.e. restructuring or liberalization) were allowed to proceed without the meddling of politicians or bureaucrats.

Ten years have passed since my tour of duty in Hong Kong, and in that period electric deregulation has also failed in Alberta and Ontario Canada. 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. It failed here in Sweden, which might be a reason for this conference, and as I told colleagues and students in Bangkok a few years ago, electric deregulation in Sweden seems to mean that the largest power company in Scandinavia has been awarded a gold-plated licence to make fools of the consumers of electricity.

I mentioned Canada above, so let’s take a minute or so to peruse what the chairman of the independent Electricity System Operator of Ontario had to say about her experiences with that fiasco.

“Now before you ask whether I am still asleep or dreaming or had something extra in my coffee this morning,” she told a small audience several years ago, “let me qualify my remarks by noting that I have not given a timetable to arrive at this destination”, where by “this destination” she specifically meant  a “reliable, efficient, easily understandable, transparent, accountable, and credible  supply of deregulated electricity.  That’s putting it mildly, 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  resulted in that province losing a valuable competitive advantage.

Electric deregulation very definitely failed in Norway, although in that country a little comedy was added to the process. Consider the following exchange of comments:

          “What we’ve seen this winter is that the deregulated market works
                                   for (electric) companies, but not for consumers”
                                                      Hallgeir Langeland (Norwegian Parliament, 2003)

            “I have to expect to be a scapegoat (for deregulation failure), but
                                   people know they can’t blame me for the policy.”
                                                     -Einar Steensnaes (Norwegian Energy Minister, 2003)
                                                    
 My comment on this repartee is that nobody with his or her head screwed on right would blame you, Einar. The people to be blamed are the outraged electric consumers who sent you letters filled with insults and  undiplomatic language, and who questioned your  intelligence, alertness  and  your qualifications for the position you held when the ‘spot’ price for electricity in your country escalated by a factor of almost thirty during one brief period. Ironically though, many of these same critics earlier believed half-baked  ‘commentators’  when they made the absurd claim that orthodox economic theory supports ‘liberalizing’ (strongly oligopolistic or monopolistic) electric markets, which is probably the dumbest lie or misunderstanding put into circulation during the launching of what turned out to be a deregulation gravy train for some electric firms and the Nordic Electric Exchange (NORDPOOL).

I remember giving one of my sermons against deregulation in Lima (Peru), and fortunately I got out of that country just in time, because when they initiated that goofy experiment some shots were fired, as was the case in the Dominican Republic.  Deregulation failed in Brazil, and a notable aspect of that particular burlesque was Lutz Trevesso, CEO of a large power company in Brazil, saying that deregulation would create more problems than it solved.

You’ve heard what I think of deregulation, so now let’s turn to some other opinions. 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”. Another U.S. Senator, Byron Dorgan, was more explicit. He 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!” (Financial Times, April 22, 2003). A headline in the New York Times (15 July, 1998) read as follows: “Deregulation fosters turmoil in power markets!” Personally I’m very fond of Governor Gray Davis’ judgement: “At the mercy of forces that show no mercy.” Governor Gary Locke of Washington (State) offered an important thought on the bad news resulting from the deregulation travesty, concluding that since the government caused the suffering, it was up to them to cure it. And last but not least, U.S. Congressman Peter de Fazio put it this way: “Why do we need to go through such a radical, risk taking experiment”. Fortunately, I don’t have to repeat my favourite Wall Street mantra, which is ‘It’s not the money, Ingrid – it’s only the money’ – because Congressman de Fazio answered his own question by saying “it’s because there are people who are going to make millions or billions!”

There is still two items in this humble contribution that deserve a short comment. The first has to do with  why a large power company wanted me to come to Hong Kong and ridicule electric deregulation. In a sense, I’ve already provided the answer to that. The directors of that company knew that electric deregulation was a lost cause, a waste, a scam, a lose-lose proposition, or to quote Jean-Paul Sartre “a fire without a tomorrow”.  In California though, or for that matter here in Sweden, it wouldn’t have made any difference to the directors of the power companies what it was, because although they know the difference between right and wrong, what they were mainly concerned with was – as they say on Wall Street – putting themselves in a position where they could  take the money and run. As for Sweden, deregulation made it possible for at least one power company to shift a large part of its attention to Germany, where it specializes in making  unscientific claims about their program for a “green” future.

 But things are different in China. A deregulation failure in Hong Kong could mean something very different from a failure in California or Sweden. In California – and especially in Sweden – there might be a short article in a newspaper or business magazine, but the poor consumers would be left to gnash their teeth and curse, and that would be the end of it. On the other hand, in Hong Kong somebody important might confront the executives responsible for the misfortune, demand  an explanation, talk to them in a manner that sergeants in the American Army once talked to recruits, and perhaps ask to examine some bookkeeping and other paper work. I don’t think that it is necessary to tell you how this could turn out, because the Chinese government does not make a practice of  applauding incompetence.

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. “

I’m not worried at all ladies and gentlemen, because the main issue that has been discussed in this short paper is not vertical integration. It is the supreme importance of electricity as compared to, for example, natural gas, which is a topic that I once studied in some detail. 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. I especially hope that the prime minister of Germany and her half-educated henchmen and advisers become aware of this fact in the near as compared to the distant future.

In any event, whether they become aware or not, I have concluded my brief survey of electric deregulation, and if you have any questions I will do my modest best to understand and answer them.  

REFERENCE
Banks, Ferdinand E. (2011). Energy and Economic Theory.
    Singapore, London and New York: World Scientific.

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