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Lest We Forget: A Hostile Note on Electric Deregulation

Professor Ferdinand E. Banks
Asian Institute of Technology, Bangkok; and Uppsala University, Sweden
May 22, 2007

Some years ago I was engaged in a half-serious one-man crusade to keep Sweden out of the European Union, as well as to stop electric deregulation in that country. 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 - or "letters" as persons in the faculty of economics insisted on calling them - dealing with the EU and 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 this '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. By way of contrast, in my recent course on oil and gas in Thailand, that kind of talk would never have been tolerated. Instead I notified the class that I expected them to understand certain topics "perfectly", which for the most part they did.

Before I make a few technical points, let me confess that my objection to electric and gas deregulation is not ideological, but assumes its rather special tenor because I'm against projects that increase the probability that I will find myself wearing a T-shirt with LOSER printed across the front and back in thick letters. Professor 'X' is a highly respected energy expert in Sweden - as compared to yours truly - and I sincerely doubt whether he would agree with the sentiments in this note, but on a number of occasions in the not too distant past, he claimed to be certain 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 so 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 (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 quite alright 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 trenchantly 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, to put it mildly. The important thing however was that unlike most academic conferences that I have attended, that one was constructed in the form of a series of overlapping sermons. It was more like a revival meeting than a scientific congress - a revival meeting designed to promote a mendacious vision of electric deregulation.

People like Arthur Rosenfeld - professor of physics at the University of California (Berkeley) - and a clique of Amory Lovins 'small-is-beautiful' disciples repeatedly assured the rest of us that the time had already arrived when conservation and substitution, advances in technology, and a growing number of concerned and knowledgeable politicians and civil servants made a new energy paradigm possible. I had already heard similar hogwash when I foolishly gave a short course at the Australian School of the Environment, and so on those occasions in Portugal I took the liberty of switching off my poor brain during those meaningless harangues.

Some relief from this torture was provided by the contributions of the late Professor Fred Schweppe of MIT. Both in his paper and at various times during the conference, Schweppe gave a detailed and pedagogically clear resumé of the manner in which he thought electric markets would develop under deregulation/liberalisation, or perhaps better restructuring. He envisaged a situation in which technological change was moving in such a way as to allow computer intensive electricity consumers and producers to collaborate more closely, and as a result optimize the choices made by both. He already understood - as most of the rest 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, and so after examining the beginning chapters of a few elementary economics textbooks, he concluded that an industry that we had always thought of as a natural monopoly, or strong oligopoly, could be turned into a reasonable facsimile of a perfect-competition market.

Without going into details, as good as all of this sounded, and as correct as it might have sounded in a storefront university on the south side of Chicago when people like Professor Milton Friedman were preaching their anti-regulation sermons, I was unable to buy very much of it. One of the reasons was that I pictured the kind of deregulation being discussed as a Reaganomic fantasy, and while I doubt whether those members of the Amory Lovins fan club who were present had a great deal of use for the philosophy of the former president, the idea of local control over their electricity via small-scale combined-cycle installations must have held a strong attraction, because among other things it meant that power company executives could be put in their place and, most important of all, it would be possible to belittle or classify as obsolete nuclear power.

There is nothing that I like repeating more than the indisputable fact that electricity deregulation has failed, is failing, or will fail. At the same time the details of these failures are often different. In addition, interested parties often do not know about failures or miscarriages. Peru is a little known fiasco, and I believe that there has also been some problems with the restructuring agenda in the Dominican Republic - perhaps a great many problems. There have not, however, been any in Sweden, because the former prime minister and many of his colleagues and subordinates were willing to do, say or accept anything if their inferiority complexes were temporarily relieved by a pat on the back from important EU functionaries.

An Associated Press examination of data provided by the United States Department of Energy concludes that deregulation has 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 now appears that most of the latter want to reverse direction, but have allowed academic hacks to convince them that it is too late. Ohio, Illinois, Maryland and many others have seen rates rise by at least 50%, which 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 have 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 has said, although he admitted that deregulation provided rate payers with higher rather than the lower promised they were repeatedly promised. I once heard this at a conference in Brussels, and an expert grandly called to Sweden from California made the same absurd statement. Why was he so sure that he would be able to launch this preposterous contention? Because as Albert Einstein once remarked, two things that are eternal are the universe and stupidity, although he occasionally was uncertain about the former.

In a recent article by Ken Silverstein (2007), we were informed that many deregulation poster boys and girls in the United States say that the failure of deregulation is due to higher fuel prices, where natural gas has been cited on a number of occasions. Although it is not widely know or appreciated, In the case of New Zealand electric deregulation was made to work by holding natural gas prices artificially low, because there was an assumption somewhere that new large deposits of inexpensive gas would eventually be found. This has not turned out to be the case, and as a result the beautiful deregulation experiment that New Zealanders thought that they were to experience has turned sour. Something deserves to be deduced from this: possible shortages of natural gas should and could have been predicted by the deregulation booster club, but this would have interfered with their fantasies about undermining conventional economic theory .

"Transitioning from 100 years of regulation won't happen overnight," says 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." I discussed open access at considerable length in my oil and gas course in Thailand, and I think that I was able to convince one and all, regardless of the attraction that free-marketry held for them and theirs, that open access is not even wrong. In fact, in the context of the European gas market it can be described as fruitcake. According to Silverstein, proponents of deregulation claim that regulation leads to "inefficiencies" that work to the detriment of consumers, but as I informed Professor David Newbery of Cambridge University, consumers are not interested in efficiency - we are interested in lower prices, and one way to be certain that we will not get these is to turn the deregulation tigers loose!

Professor Ferdinand E. Banks
Asian Institute of Technology, Bangkok; and Uppsala University, Sweden
May 22, 2007

REFERENCES Banks, Ferdinand E. (2007). The Political Economy of World Energy: An Introductory
Textbook. World Scientific: London, New York, and Singapore
______. (2000). Energy Economics: A Modern Introduction. Kluwer Academic
Publishing: Boston, Dordrecht, and London.
Overbye, Thomas J. (2000). 'Reengineering the Electric Grid'. American Scientist, May-June.
Ollevik, Nils-Olof (2007). Och det som började så bra. Svenska Dagbladet (21 May).
Silverstein, Ken (2007). 'Rethinking retail markets'. EnergyBiz Insider. (May)