Is Energy Deregulation Just a Fad?
In the late 1990’s, individual states began trying to introduce more competition into the energy marketplace. As we know, competition tends to drive down prices and improves choice and service. Without competition businesses get lazy and they add layers of bureaucracy and then simply tack the additional costs on to the customer’s bill. In the past, local utilities were a government sanctioned monopoly.
Originally, this system was created to promote an orderly system to install and maintain electric power lines. After all, it would be terribly inefficient to have one company run power lines to some houses on the street and another company run more lines to the other houses on the same street. So the electric utilities were formed to produce and distribute the electricity. In exchange for monopoly powers the government limited the prices they could charge by creating a panel that granted price increases on a “cost plus” basis. Of course, this created a disincentive for utilities to keep their prices low.
To introduce more competition into the utility market, states began splitting the local utilities into two components, energy producers and energy distributors in a process called “unbundling”. The distribution component is still a regulated monopoly but now customers can choose who produces their power and then they pay the distributor a fee for delivering that power. One advantage of this deregulation set-up has been the ability of customers to choose what matters to them the most. If you are concerned about the environment you can choose to pay a bit more and get power from a “green” source. If you are more concerned about the cost, you can search for the lowest cost provider. For instance, New York State began unbundling in the late 1990’s and now companies like Plymouth Rock Energy can supply electricity and natural gas to customers of Con Ed and Niagara Mohawk.
Other states like Virginia tried deregulation but then around 2007 they began reversing themselves. They decided that without the price controls investors didn’t have the financial certainty they needed to invest billions of dollars in new power stations. The following table shows which states have deregulation for Electricity or Gas which ones don’t and which states tried it and then suspended the program.
|California||No (Suspended)||Yes (Limited)|
|New Mexico||No (Suspended)||Yes (Limited)|
|South Dakota||No||Yes (Pilot)|
|Virginia||No (Suspended)||Yes (Pilot)|
|West Virginia||No||Yes (Limited)|
|Wyoming||No (Suspended)||Yes (Pilot)|
Did the Free Market Really Fail?
Although this appears to be a failure of the free market to step up and take its rightful place there may actually be more to it than that. If we look at California for example where one would expect people to be willing to pay more for green energy the deregulation has been suspended. It was faced with “rolling blackouts” which California’s politicians have been quick to blame on deregulation. According to Loyola University economist Thomas J. DiLorenzo, “Although wholesale electricity prices have been deregulated, retail prices have not, and regulation has all but prohibited the building of additional electricity supply capacity. ”
In addition he says,
“The population has doubled in the past ten years, which has caused about a one-third increase in electricity demand, whereas supply has remained stagnant thanks to the environmentalist extremists in the state government. These neo-luddites have blocked nuclear power plant construction; they have vetoed the building of additional dams for hyrdoelectric power (lest some aquatic creepy crawlers be disturbed); and are nearly apoplectic in their opposition to coal- or natural gas-fired electric power plants. Ballooning demand, restricted supply, and price controls are a perfect recipe for shortages. Complete deregulation of the electric power industry is the only way to resolve this problem.”
So, in the “deregulated” California electricity industry, the government set the consumer prices preventing electric companies from entering into long-term contracts, and hampered the building of power plants. How can this possibly be considered deregulation? Also it was only “deregulated” for a few years when it often takes longer than that just to get a permit to start a new power plant let alone bring one online. But the regulators now claim “we tried it and it didn’t work” just as if they clipped a birds wings and then threw him out the window and then said, “See I told you he couldn’t fly.”
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