Friday, September 28, 2007

On Natural Monopolies: Electric Deregulation Was A Trojan Horse

By Manifesto Joe

The late Molly Ivins once wrote something to the effect that after a service is deregulated, the result is that people often discover why it was regulated in the first place.

For 30 years, the "Priesthood of the Free Market" has been hellbent to sell Americans on the deregulation and privatization of damn near everything. Their progress has been astonishing. Even the Iraq war seems to have been about half outsourced.

After considering the deregulation of the electricity market, I am inclined to look beyond the "true believers" of the free market, and toward those whose only true belief is in maximization of profits, no matter the cost to anyone else. Remember the story of the Trojan Horse?

But the tide may finally be turning. It appears that many officials in states where electricity has been deregulated (about a third have done so) have come to similar conclusions as the late Molly.

The Sept. 21 online edition of the Fort Worth Star-Telegram reported:

Support for electric deregulation has dramatically fallen among the nation's utility regulators, with one-third in deregulated states expressing the likelihood of some sort of re-regulation, according to a new survey.

Conducted in conjunction with Standard & Poor's, the telephone survey of 96 state utility regulators also showed a plurality answering "none" when asked which states operate the most successful deregulated market. ...

Tim Morstad, an analyst with AARP-Texas ... said the poll should some as no surprise to anyone who pays a light bill in Texas. ...

"The rest of the country is figuring out what Texas consumers already know, that deregulation fails to deliver lower rates and better service," he said. ...

The survey also found that 43 percent of regulators in states with deregulation say it does not work well, and 37 percent said it does. Moreover, 54 percent of regulators in states with deregulation report that re-regulation is likely.

Texas is far from the only state where ratepayers have seen this kind of deception. This is from an article carried by The Associated Press in April:

BENTON, Ill. --This wasn't supposed to happen with deregulation. Electric bills were supposed to go down. Instead, Ellie Dorchincez can almost see the dollars evaporating every time she turns on the lights or opens the freezer at her small Farm Fresh grocery store.

Her electric bill, which used to be about $800 a month, has jumped to $1,800. ...

The cause of her distress is a common problem: the failure of deregulation to deliver its promise of lower electricity prices. In many states, it's had the opposite effect with sharply higher rates -- 72 percent in Maryland, up to 50 percent in Illinois.

Not one of the 16 states -- plus the District of Columbia -- that have pushed forward with deregulation since the late 1990s can call it a success. In fact, consumers in those states fared worse than residents in states that stuck with a policy of regulating their power industries.

An Associated Press analysis of federal data shows consumers in the 17 deregulated areas paid an average of 30 percent more for power in 2006 than their counterparts in regulated states. That's up from a 24 percent gap in 1990.

The idea was to move from a monopoly situation to robust competition for electric customers, with backers promising potentially lower rates in state after state. ...

But competition, especially for residential and small business customers, rarely emerged. ...

Consumer groups ... say deregulation has had a chance to prove itself. In Texas, for example, competition did develop after rate caps ended -- but the energy prices remained higher.

In Robert Kuttner's now-classic 1998 book Everything for Sale: The Virtues and Limitations of Markets, the economist wrote (p. 228):

We regulate some industries because they work more efficiently as monopolies. It would be wasteful and duplicative to have two parallel gas pipelines, two sets of telephone poles, two parallel rail lines, or two electric grids. Neither supplier could cover his costs by running at half-capacity, and both would soon have to raise prices or go out of business. Left alone, one would likely absorb the other. ...

Once we tolerate a monopoly, the producer is no longer subject to the discipline of competition. ... in principle the consumer is free not to buy the product. But in many natural monopolies, such as electricity, water, and transit, the product is a virtual necessity, and consumer demand is fairly inelastic; hence the consumer cannot discipline the monopolist.

Enter those godless socialists, the regulators. But I suspect that by now there are many God-fearing ratepayers in Texas and many other states who wish to God they had those crypto-Marxists back.

I reluctantly stuck with Reliant Energy here in the Lone Star State, in part just to see what they would do after the latest phase of deregulation. You know, like, to test the classical economic theory. Silly me. I went from paying 13.3 cents per kilowatt hour to 14.5 cents -- and the latter during the worst heat of the Texas summer. I'm certain, of course, that this was just a coincidence. I'm nevertheless switching to a "competitor" -- but not holding my breath for much improvement.

I posted this comment on a great blog, Red Hog Diary, about the health-care issue. But I think it also says a bit about natural monopolies that is salient:

A good incision sometimes works wonders. I'm going to try one.

The crucial thing so many seem to miss, and that populations of every developed country other than the U.S. have eventually understood, is that health care isn't a sector of the economy that is governed by a classical market mechanism. It's mostly what is termed a natural monopoly.

There are circumstances when one can make certain consumer choices. But if you've ever been picked up by an ambulance in what seemed like a life-threatening situation, you're not going to be able to shop around for the best room rates at the hospitals. Not if you want to live. Once you're in a hospital, you have to take it pretty much the way they offer it. It ain't like showing up at a flea market, haggling with the merchants like an Arab trader.

What I see is a fundamental mistake of people trying to apply classical economics to a sector that has never -- ever -- shown the appropriate characteristics for that. The rest of the world understands this. Even if they bitch about the particulars of their government systems, ask yourself why they aren't moving toward any emulation of ours.

Although I digress a bit -- these "thinkers" make the same mistake with utility deregulation. Where I live, under deregulation, I'm paying considerably more for electrical power now. It is another example of a natural monopoly. I can't play off two electrical grids against each other for lower rates, any more than I can do that between hospitals when I'm sick.

And, of course, I'm paying more for health care. Much, much more, outpacing inflation. Every passing year. And more for electricity. And more for medicine ... Get the picture?

I shouldn't leave this subject without noting that there is evidence of considerable chicanery by utility corporations left in charge of the proverbial henhouse. This is from an April 11 article in the online edition of the San Antonio Express-News:

Last week, TXU executives, facing a $210 million state fine for alleged price manipulations in the summer of 2005, threatened to withhold power by shutting down natural-gas-powered electricity plants if the allegations were not dropped.

That's so Enron. That kind of abusive management mentality went out of style with the Enron implosion of 2001. (It did? -- MJ)

The group of investors trying to buy TXU had to scold the TXU executives into withdrawing the threat a few days later. The executives' capitulation indicates that the potential buyers are deciding policy at TXU headquarters these days.

I have no argument whatsoever with market approaches that are genuinely competitive, socially responsible and deliver the goods in the best possible way. Ideally, the relationship between markets and governments is symbiotic: governments providing the infrastructure markets depend on to thrive, and strong markets supplying governments with the tax base they need in order to deliver on their end. Government entities can be maddeningly inefficient, but I've worked for large corporations that seemed to be trying to compete with them on that score.

This is how the prosperous economies of developed countries have really been built -- with a mixed system. (This World Wide Web: courtesy of the government. Look it up.)

As economist Kuttner wrote:

Faith in idealized market structures also has spawned a political jihad intent upon stripping away the community and governmental safeguards against market abuses and imperfections -- safeguards that are essential to the modern American system constructed during the Great Depression and after World War II. In addition, an overtly and proudly selfish ideology finances and propels the drive to cut taxes on the wealthy, punch holes in the social safety net, and "unchain" business from the shackles of regulation and litigation. The conservative catechism castigates those who would "reward need" by supporting public programs for the poor and, at its most radical, even rejects Adam Smith's conviction that the state must provide the bedrock of the educational and physical infrastructure of an industrialized society.

Plainly, utilities are usually natural monopolies, and Americans were ripped off en masse when the "Priesthood" sold so many on electric deregulation.

The corporate Trojan Horse is inside the gates, but it's not too late to drag it back out. It's just a shame that we the people, and more importantly our lawmakers, have to keep "relearning" these hard lessons.

R.I.P., Dear Molly. You saw this coming years ago, and you told us so.

Manifesto Joe Is An Underground Writer Living In Texas.


Marc McDonald said...

These Rush-listening, Bush-loving NeoCons want everything deregulated because they (like their beloved leader) don't read and they are ignorant of history.
I've talked to an astonishing number of NeoCons who would like to see the likes of the FDA abolished. I point out to them that, in the pre-FDA days, in the 1800s, people were routinely poisoned by mislabeled products they bought.
For example, one popular medicine sold in the late 1800s was "Mistress Bailey's Soothing Syrup." It was advertised as the perfect tonic to give to babies who were crying uncontrollably. It contained opium (but that wasn't mentioned on the label).
But my arguments on this topic with NeoCons go in one ear and out the other. The NeoCons still insist that if we "let the marketplace regulate itself" that there will be no need for the FDA, or any other federal agency.

Brother Tim said...

Deregulation only serves to fill the coffers of the already obscenely rich. You make some very good and valid points, MJ.

Molly Ivans was a feisty ole gal. I loved her very much, she is sorely missed.

Thanks for stopping by, and commenting at my place again. I am putting you on my blogroll. Red Hog is a friend of mine, as you may have noticed by some of my comments.

Manifesto Joe said...

Thank you for your kind words, and I will get on on the links ASAP.

Anonymous said...

It's been a wild ride with deregulation in Texas, but I have experienced the good and bad with a great company called Texas Power.

Even though the competition between provider has failed to lower the rates as much as we'd like, the customer service has been outstanding. You just have to try to see through the negatives and highlight the positives.