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A Very Unfriendly Note on Electric Deregulation

Professor Ferdinand E. Banks
ferdinand.banks@telia.com
February 16th, 2011

Some years ago I was engaged in a half-serious one-man crusade to stop electric deregulation in Sweden. As with most one-man or one-woman crusades, it was doomed to failure; but I enjoyed it a great deal because it gave me the opportunity to compose some one-page comments dealing with the curse of electric deregulation, which I posted on academic bulletin boards and deposited in mailboxes throughout the university.

One day I was passing a bulletin board in the economics building and saw a young man reading one of my contributions.

"What do you think about that?" I asked him.

"I don't like it," he told me. "I'm in favour of competition."

"I suppose you know then," I said to him, "that what you call competition means that a large amount of electricity produced in this country will be sold to North Germany, which means that the price will increase here."

"It doesn't make any difference," he replied, with a kind of arrogant flourish. "If we lose, and the electricity consumers in Germany gain, it's still a good thing."

That was when I took a good look at that 'gentleman', because saying something like that is almost the same as saying that the first law of nature - i.e. the law of self-preservation - is foolishness. "Don't I know you?" I asked him.

"I was a student in a course you taught on international finance," he informed me.

"Well, if I had been aware that you feel that way about things, I might have been tempted to fail you."

"But you did fail me," he said.

Now we've got a dilemma, because I don't fail many students. In fact in Sweden I fail hardly anyone, because during the first few minutes of the first lecture I made it quite clear that I don't have a great deal of tolerance for no-win players. I think that the most beautiful thing about teaching in Sweden is that students instinctively understand this kind of language and attitude.

Professor 'X' is a highly respected energy expert in Sweden, and I sincerely doubt whether he would agree with the sentiments in this note, but on a number of occasions, some years ago, he claimed that competition and liberalisation were the only things capable of reducing what he regarded as Sweden's abnormally high electric prices. The truth of the matter is that if those prices that offended him had been transformed into a pre-deregulation average, Sweden would have been revealed as having the lowest electric prices in the world, with the possible exception of Norway. Believing that electricity would flow toward rather than away from Sweden in a 'liberalised' Europe is the same kind of loony mistake as believing that water will flow up-hill without being pumped. Of course the issue in Sweden was not and is not electricity, but the plane tickets and research grants that were (and are) passed out to deregulation shills.

Many years ago I was invited - or to be absolutely correct, invited myself - to a long NATO 'workshop' in Portugal that I was anxious to attend in order to draw attention to a book that I had just published on natural gas. To say that I was unwelcome would be an understatement, because every time the person who had organized the meeting and myself made any kind of eye contact, he would give me what is known in some cultures as 'the evil eye'. A year or so later, when the conference volume was published, my lecture was the only one that had not been included.

But that was fine with me, because in order to spend almost two weeks enjoying the conference hotel, where gratis wine flowed like water, and marvellous Brazilian sambas and bossa novas poured out of every loudspeaker, I was compelled to fabricate a military background that included the commander at that time of NATO, whom I represented as a comrade-in-arms when I was serving in the US Army in Japan - which of course he was, although we moved in very different social and professional circles.. The important thing however was that unlike most academic conferences, that one was constructed in the form of a series of overlapping sermons. It was like a revival meeting designed to promote a glorious (though fraudulent) vision of electric deregulation.

Some relief from this torture was provided by the contributions of the late Professor Fred Schweppe of MIT, but even though he understood - as most of us did not - that recent developments in gas-based combined-cycle technology were capable of changing the power-generation picture in a significant manner, he mistakenly concluded that industries (like gas and electricity) we thought of as natural monopolies, or strong oligopolies, could be turned into reasonable facsimilies of perfect-competition markets. Without going into details, as impressive as Professor Schweppe argued his case, and as correct as it might have sounded in the storefront university in Chicago from which I graduated, I was unable to buy very much of this Milton Friedman fantasy.

As things turned out of course, I was completely correct. An Associated Press examination of data provided by the United States Department of Energy concluded that deregulation indisputably led to higher prices. Any other conclusion would hardly have made any sense at all, because in 17 districts that restructured their power markets, consumers paid (on average) 30% more than in districts with strong regulation. Furthermore, in l996 at least 25 states were considering deregulation, and a number went all the way. It later appeared that most of the latter wanted to reverse direction, but allowed academic hacks to convince them that it was too late. Ohio, Illinois, Maryland and many others saw rates rise by at least 50%, which at that time undoubtedly influenced states like Arkansas and New Mexico to turn in their dance cards. Sweden also provides an interesting example here. According to Ollevik (2007) between 1997 and 2007 electric prices increased by 80% for households using 20,000 kWh per year, and 60% for the largest industrial electricity users.

"We can't put the genie back in the bottle", Governor Strickland of Ohio told the faithful, while confessing that deregulation gave rate payers higher instead of the lower prises they were repeatedly promised. I heard this kind of nonsense at a conference in Brussels, and later an expert called to Sweden from California made the same absurd statement. Why was he so sure that he would be able to launch this preposterous claim in this country? Because as Albert Einstein remarked, two things that are eternal are the universe and stupidity, although he occasionally was uncertain about the former.

"Transitioning from 100 years of regulation won't happen overnight," said James Steffas, vice president of U.S. government and regulatory affairs for Direct Energy, a subsidiary of UK-based Centrica. "The 1992 law that provides open access to alternative natural gas suppliers, for instance, went through at least seven years of revisions." You aren't trying to fool voters in the cheap seats, are you Jim? I discussed open access in a course I once gave, and I think that I was able to convince everybody that, regardless of the attraction that free-marketry held for them and theirs, open access in the context of the European gas (and electric) market could be described as 'fruitcake'. (See for example Jack Casazza (2001) and Professor Susanna Dorigoni and Sergio Portatadino (2009).) David Newbery of Cambridge University has insisted that regulation causes "inefficiencies" that annoy consumers, but as I informed Professor Newbery and other members of the electric deregulation booster club in explicit language, we consumers are not particularly interested in efficiency - we are primarily interested in lower prices, and one way to get these is to put the genie back in the bottle where it belongs!

REFERENCES

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

Casazza, Jack A. (2001). 'Pick your poison'. Public Utilities Fortnightly, (March 1).

Dorigoni, Susanna and Sergio Portatadino (2009). 'When competition does not help the Market'. Utilities Policy (Sept-Dec.). Page 245-257.

Overbye, Thomas J. (2000). 'Reengineering the Electric Grid'. American Scientist, May-

Ollevik, Nils-Olof (2007). Och det som började så bra. Svenska Dagbladet (21 May).

Wallace, Charles P. (2003). 'Power of the market'. Time, (March 3).

Watts, Price C. (2001). 'The case against electricity deregulation'. Electricity Journal.

Professor Ferdinand E. Banks
February 16th, 2011
ferdinand.banks@telia.com