Even CATO libertarians say energy deregulation does not work

In an Op-Ed that was published in the Wall Street Journal last month (and is available in full to non-subscribers on CATO's website) two CATO economists specialised in deregulation and energy markets provide a breath of fresh air in the debates on energy.

Their point is to criticize the poorly thought out deregulation in various US States over the past 15 years, and they explain clearly how energy markets work (something which is rare enough in the mainstream media), and what the consequences of various bits of deregulation are on market behavior and thus on electricity prices.

Also discussed on European Tribune

As a first point, they take the time to explain one of the most basic consequences of electricity deregulation: marginal pricing:

Under the old regulatory regime, electricity generators received their costs plus an allowed return on capital. If generators' costs differed, they received differing revenues. Prices were then established by a "weighted average" of all producer costs. Under deregulation, however, generators receive revenues based on the price charged by the most expensive generator whose output is necessary to meet demand in each hour.

While some may find such pricing to be odd, it is found in all commodity markets. Potatoes, for example, sell at the same price even though the cost of production varies across farmers. The supermarket does not price potatoes based on the "weighted average" of their acquisition costs, and producers do not sell at cost plus a modest mark-up. They sell at what the market will bear, and the market will bear the highest cost source of potatoes necessary to meet consumer demand.

Thus, in a regulatory regime, rising natural gas prices affect electricity prices only according to the percentage of electricity generated by natural gas (about 18.7% of supply nationwide in 2005). But in deregulated markets, all generators get revenues based on the price charged by the most expensive (often natural gas) plant in operation.

Does this mean that consumers are always worse off under market (marginal-cost) prices rather than regulated (weighted average) prices? Well, regulation certainly delivers lower prices than the market during shortages. But regulation delivers higher prices during times of relative abundance.

Their description is absolutely correct, and so is their conclusion, which is a fundamental insight about deregulation and abundance.

They also provide the logic behind deregulation: in the 90s, natural gas was very cheap and abundant, and thus spot prices (a proxy for marginal price in a mostly regulated market) were lower than prices charged by the traditional generators. Massive investment in what were then highly competitite gas-fired plants led to a huge increase in gas-fired power generation capacity, and in low market prices, thus in a push for users to get access to those cheaper prices.

Deregulation took place, as Van Doren and Taylor point out, but in an imperfect manner, as end-user (retail) prices were kept regulated - and high. The goal then was to protect the old style generators, which had relatively high production costs and not the consumers. The gas-power plant investors were happy, because, with their low marginal costs, they benefitted from such regulated tariffs even more thna the "old style" utilities. This led to the "gas bubble" - massive investment in gas-fired plants:

It's hard to say if there is a direct link between that boom and the subsequent increase in gas prices, but increase they did:

Which means that suddenly the situation was reversed: marginal costs went through the roof, and regulated prices were suddenly insufficient to cover the production costs of the gas-based generators. This (together with market rigging by some players) caused the California crisis and the belated realisation that deregulated markets did not push prices only down - something that Van Doren and Taylor note explicitly: "free market reformers promised rate reductions they had no business promising."

Their conclusion is worth flagging again:

regulation certainly delivers lower prices than the market during shortages. But regulation delivers higher prices during times of relative abundance.

The two authors are consistent, at least, and their logic is to say that high prices lead to high profits for some actors and thus eventually to entry of new players to balance the market back, in a classic boom-and-bust scenario.

They consider that the temporary price spikes in that regime are acceptable to consumers in that they get lower prices on average. While this certainly neglects the political price to be paid for headlines blasting electricity prices occasionally 10 or 100 times higher than usual, it also forgets to underline what these price peaks are about: they are necessary, at times when supply is insufficient, to cause demand destruction, i.e. people giving up using electricity because they can no longer afford it, even for a short while. Electricity being the vital good that we know, this explains why the peaks are so high, but it also means that markets balance because some - mostly poor - people "choose" to give up electricity for a while because they won't pay that price and cannot afford it. Balance is created by denial of service to some, via prices.

Thus the authors are certainly libertarian, in accepting that electricity be allocated, at times of insufficient supply, in accordance with ability or willingness to pay rather than any other criteria, such as social or medical needs (oh sure, they'll usually accept that special cases can be made to protect the most vulnerable people - the old, the sick, etc... but won't acknowledge that their preferred method of allocation specifically targets these, in practice).

And, of course, their underlying assumption is that we'll always come back eventually to periods of abundance. There is no physical or practical limit to the boom-and-bust cycle. Resources will be mobilized because it's profitable to do so, and will be used up to the level that balances the market. Depletion does not exist in their world - it has no price, anyway.

But if you're trying to find ways to organise your power sector for the next 30 years, and are told that one mechanism delivers lower prices in times of abundance (of generation capacity, thus of coal and gas), and another lower prices in times of more constrained supply (by, say, depletion, or worries about carbon emissions, or worries about security of supply of the fuels used), whatshould be your preference?

That question is implicitly asked in that article. They also implicitly answer it by ignoring such risks. I obviously take a different view.

:: ::

But that gets us to a second, even more interesting point made by the two authors. That deregulation was further hampered, in the US, by the regulators' bizarre passion for unbundling:

In sum, allowing markets to dictate electricity prices is a good thing for consumers, even if they are sometimes higher than under regulation. Unfortunately — and here is the fly in the ointment — price deregulation has been accompanied by rules encouraging the legal separation of generation from transmission and the purchase of wholesale power through organized spot markets.

This was published a few days before the EU Commission made its big announcements about the necessity of unbundling, and how it was the real step that would deliver more competitive energy markets in Europe, and here we had CATO, hard core libertarians, writing black and white that it's a stupid idea that is actually detrimental to deregulation!

And they provide several (of course valid) arguments:

First, vertical integration is an efficient response to the so-called "holdup" problem. Investors in generating plants worry that, because the assets are costly, dedicated and immobile, they can be "held up" by transmission line owners. Investors in transmission lines fear being held up by generators. Vertical integration ends the fight.

Second, transmission and generation are substitutes for one another — and the right amount of investment in either is an economic, not an engineering, puzzle. Efficient investment in both may not be possible through decentralized arrangements (prices and contracts) between separately owned assets. In contrast, an organization that owns both generation and transmission assets is more likely to invest optimally in both.

Third and finally, vertical integration minimizes risk in the real-time operation of the system. The better coordinated are generation and transmission, the less chance there is of cascading blackouts and other problems. Coordination is far easier when there is one actor rather than hundreds.

These considerations largely explain why 10 of the 11 published studies on this issue conclude that vertical integration is the most efficient corporate organizational form for electricity providers. Unfortunately, the debate about utility restructuring has almost completely ignored those studies — assuming rather that vertical integration serves no useful purpose other than facilitating the market power of incumbent electricity providers.

Coordination, coherence of investment in complementary sub-sectors of the industry, security of operation - vertical integration has a lot of real world advantages that are being forgotten - or seen as "unfair" competitive advantage for the industrial giants of the sector that have so far managed all aspects of the electricity infrastructure.

And the CATO economists drive their criticism further:

Interestingly enough, the deregulators are trying to create a world that would probably never arise in a totally free electricity market. In a world of deregulated vertically integrated firms, both producers and consumers would almost certainly resist spot market relationships.

During gluts, firms would not recover the cost of capital; and during shortages, electricity consumers would be vulnerable to economic extortion, as competitive entry and rivalry can't happen overnight. Both firms and consumers would likely prefer long-term contracts, an arrangement that meets consumers' interest in price protection and firms' interest in cost recovery.

Accordingly, the equilibrium relationship between firms and consumers in a totally unregulated world might resemble that of the old regulatory regime, albeit an equilibrium achieved through contract. The only (unanswerable) question is how different the specifics of such hypothetical contracts would be from current regulatory practices.

As most participants in the industry know, most players, producers and consumers, small and large, crave stability and consistency. The industry is complex enough to manage as it is without having to worry on a constant basis about access to the grid, or access to fuels, or availability of the end product - thus long term contracts are the rule. End consumers want the certainty that they will have power when they turn the switch, and understandable (i.e. simple) prices. Producers want to be sure that prices over the long term will be sufficient to cover the investments they have to make upfront. They also want to ensure that they are able to respond to demand variations in a effective way, with the requisite technical coordination between producers and network managers on an ongoing and trustful basis.

Which means, as the CATO writers conclude, that in a really, really free market, players would end up with something that would look amazingly similar to a fully regulated market, based on long term contracts and smoothed out price formulas.

So why bother with deregulation? To be sure that the choice they make is actually that one? As they point out, deregulation has been botched, incoherent and/or inconsistent every single time it has been tried, for various reasons. The time spent to get to a perfect "free market" has actual costs in real life, and it is worth asking if they are worth paying.

Re-regulate. Even CATO points that way.

Certainly a captive consumer group poses a problem for typical free market theories.

But how will regulation handle the price surges brought on by spiking natural gas prices? In California, price spikes (while manufactured) brought the system down; what can we do to prevent this in the future, while providing a system that can respond to the variability of most renewable energy sources?

It almost appears that we need a hybrid system;
- Renewable energy providers supply whatever energy they are able to produce at the moment.
- Dispatchable providers supply the difference between renewable energy supply and grid demand. Those who do not provide a minimum amount of energy during low renewable energy timeframes are not eligible to receive rates that are higher than a 'standard' level, to pre-empt them from gaming the supply (ala ENRON) to drive up the price.
- A combination of real-time pricing and other demand-side management techniques would reduce the demand during low renewable energy generation periods.

Old school coal plant operators would likely flinch at such suggestions, but since much of our power generation is from natural gas, the demand of which will increasingly need to be met with imports from non-democratic governments, business as usual will no longer solve the problem.

In 2005, U.S. electricity providers reported total peak-load reductions of 25,710 megawatts resulting from demand-side management (DSM) programs, a 9.3 percent increase from the amount reported in 2004. See a DoE initiative at http://gridwise.pnl.gov/

Another perverse example with spot markets: sell peak hydro expensive and repurchase baseload cheap lignite power. Illustrative prices $1 vs 3c per kwh.

On a hot day everybody turns on their AC. No problem because sight unseen the extra power is coming from the fast falling dams. If it doesn't rain again for months that's no problem either because we can pump some water back up to the higher dams. The result is nobody thinks twice about reducing peak demand or whether there is a water cycle feedback via extra CO2 emissions. Maybe an annual carbon cap could change that but at the moment business people think in terms of quick dollars.

If it doesn't rain again for months that's no problem either because we can pump some water back up to the higher dams.

Does this really happen anywhere? I've heard the idea kicked around by engineers 'blue skying' when I was working, but....once the water has gone over the dam it is pretty much gone. Sure there is pumped storage but this is a totally different thing from a dam. And, in fact, the power used to operate the pumped storage may be coming from nuclear baseload.

The result is nobody thinks twice about reducing peak demand or whether there is a water cycle feedback via extra CO2 emissions.

Only a price feedback would make anyone notice this. And, even then, well-heeled lake front property owners will not notice but will protest loudly if their personal boat dock is sitting high and dry in August. Meaning that the power consumed when they crank up the AC is likely coming directly from some other source than hydro.

Well in this case when accused by the local media the company concerned admitted it. They gave as their excuse the fact they had to make profits on the spot market in order to cover the line rental cost (around $A100m pa) of a high voltage direct current cable. I know some posters on TOD think HVDC will solve all but strange things can happen.

A number of pairs of dams do do this. They must be directly below each other and the lower dam's reservoir needs to be full. Several Swiss dams do this. Another form of pumped storage.


Thanks for a well thought out article!

My worry is about the grid. It is going to be difficult enough to keep everything maintained properly when there are shortages. I would have reasonable confidence that we were doing as good a job as possible, if we had a regulated system with vertical integration. I wonder whether the grid will get the resources it needs, if our current system remains.

This article explains some of the problems that occurred as a result of electricity deregulation in North America.


a collision between the physics of the system and the economic rules that now regulate it

The previous market looked remarkably like a regulated market because it was a natural monopoly. Now, if we can be sure that each home has five or six utilities with their own poles to choose from, we may have competition, but this will be more expensive than having a single set of poles. So, we can play shell games with markets or we can decide that we are looking at the infrastructure that makes markets possible. Everyone gives up the right to purchase the land under a road because if you could just buy a patch and set up a tollhouse you hinder commerce. People won't bring the cheapest goods to market because it is not worth the arbitrary toll. We handle roads as a public asset and expense. Natural monopolies are only a short distance removed from this and in fact often we have public utilities. So, regulation of utilities is not regulation of a market because there can be none. Competition must be more expensive than monopoly owing to the obvious cost of duplication.

I also think the authors have never shopped for potatoes.


Misleading summary.

The Cato economists conclude that the "faux deregulation" seen in the US has not worked.

The thing is - deregulation has NEVER worked. But each time, somehow, proponents of deregulation say that deregulation was not properly conducted.

In that article, the CATO economists explain that the big bit of deregulation that so excites European deregulators today (unbundling) is a dangerous absurdity. They also explain that deregulation only works in situations of plentiful supply, something that markets will never provide on their own. And finally they suggest that good deregulation will bring about something that will look strikingly similar to what regulated markets do (or did).

One criterion of a free market is the freedom to NOT sell, ie withhold product. In California, any power provider who did not produce was threatened with getting "locked in a cell with Spike" by the State Attorney General, Bill Lockyer.

The net result was the bankrupcy of the state's largest generator, PG&E as they were required to sell at below their cost.

A reasonable question is whether the overall economy can afford to have shortages of electricity? The political response was absolutely not, hence the recall of Gov. Davis.

The thing is - deregulation has NEVER worked. But each time, somehow, proponents of deregulation say that deregulation was not properly conducted.

It's ironic how it's the same BS all over again!

It's exactly like how the apologists for Leninism kept on claiming that "Real Communism" wasn't "properly conducted" despite the obvious evidence that Communism hasn't ever worked---and the crimes committed in its name.

This is a difference between a "conservative" rules-based mindset (and stalinists were very conservative in their own way) and an empirical fact-analyzing data-driven mindset.

I believe the general, but not universal, success of capitalist organizations must be treated as a *testable, empirical phenomenon not an ideology*. Frankly this viewpoint isn't popular except among liberal nerd types.

And the specific physical facts about electricity generation and transmission (e.g. it is essential, and cannot be stored, and has immense multi-decadal-to-century timescale capital costs, and hourly-timescale cost and demand variations) make many capitalists "solutions" to be dangerous and unwise.

Medicine and health care are other obvious failures of markets to lead to good outcomes.

The only unanswered question remains why? Why is EC pushing for this madness? It has been demonstrated to fail everywhere, with results varying from poor to disastrous. Are these people plain stupid or have they not heard of natural monopolies? Its in Econ 101, AFAIR. Why is not the EC for example splitting water or rail utilities? Isn't this going to encourage competition too? Just separate water pumping and treatment from piping it to the consumers, sit back and enjoy the view.

The answer in my opinion is blindingly simple. Corruption. Plain ol' corruption on a grandiose scale. Regulated utilities are not very profitable. They are hard to be used as milk cows by middleman companies too. Consequently, they don't bring bucks to the "right" corporations. So... how can we make users pay up their throught and let "our" companies make easy cache? Yeap we have an easy answer for that. The mechanism has been exercised and tested extensively in the Third World, Eastern Europe and other places. Privatize, liberalize, deregulate. Split up, privatize and exploit all there is of public value. If applicable - bring it completely to the ground and then profit from rebuilding it. Oh yes, and we even have a neat ideological justification for all of this. It's in the name of free market and competition. Next round - prepare for the split up and privatization of the health system, social security, education... in the end EU will look even more "pure" than USA.

On a more personal note - you guys are going to taste the policy you've exported or coercively exercised in other countries for many years, including my own. Should I cry for you? Somehow I don't feel like it.

The question of "who profits" is an important one.

I quip that deregulation is a jobs programme for investment bankers (& market consultants & assorted "parasites") and rightwing politicians, but there is a hard nugget of truth in it.

That is not just a quip or a nugget of truth. It is the essence of the whole thing. A jobs creations programme. Just keep things churning. musical chairs with endless fees sucking the lifeblood out of the economy for consultants. German consultants make billions writing reports for the government. Privatization is propelled forward by these people to make a quick buck. This is reality.

“Without a video the people perish”-Is. 13:24

I follow this here in Germany. The deregulated energy industry is just a monopoly with several companies controlling everything and nobody els has any access so prices remain extremely high and no investments are made(ancient equipment). Access is the reason for separating the production from distribution. Like with telecoms they want to force the access to lines, if neccessary by taking them away from the big prodcution companies(RWE, Vatenfall,etc.) The big companies corrupt the politicians who play musical chairs between corporate and giovernment jobs and they sit in on the govt. and write the laws
as they please at the country level. So the EU thinks they are the uncorrupted Robin Hood coming to save the day. If what is said here concerning California is true then it won't work. Loads will be sent hither and thither disregardign cpacities and cause massive blackouts.Tjhe spot market here is a corrupted joke as well apparently with manipulation behind the scenes so that energy companies all together control the prices to get the highest possible pürice regardless of generation costs. Nationalization or regulation would be best.

“Without a video the people perish”-Is. 13:24

EU required deregulation in Iceland makes zero sense. Isolated island with unique reliability issues and 280,000 people.

Landsvirkjun was the national power company with the major national grid power lines, almost all of the dams and some geothermal power. Reykjavik City Government ran a competing company (they competed over the suburbs and some energy intensive industry in the area) and most of the geothermal (2/3rd of the population lives near the capital).

A rural co-op owned a few small dams, some feeder transmission lines and rural customers. Bought most of their electricity from Landsvirkjun and talked of buying half of a new geothermal project with Landsvirkjun.

Landsvirkjun has been split between transmission & generation (bad with reliability such an issue) and everyone has been deregulated. Landsvirkjun no longer keeps a safety surplus of generation. Landsvirkjun & Reykjavik Energy still compete over the suburbs & industry in the area (no change). Landsvirkjun is no longer interested in a joint geothermal project with the rural co-op.

I really see no benefit for deregulation is such a small market with so few players. EVERYBODY knows everybody, they used to get along (2 gov't owned utilities & rural co-op).


I live in Galveston, Texas, part of the Houston Enron epicenter of the "deregulation". Our electric company was Houston Lighting and Power, but was broken up when the Texas Legislature deregulated electricity in much of Texas. Since Enron's headquarters was in this primary service provider area and Enron went after Texas first when they started pushing "deregulation", we can be viewed as a demonstration of how it was supposed to go with deregulation.

First, the fix was in. George W. Bush, the governor when all this went down, was called Kenny-boy by George W. Bush because of his campaign donations and personal favors. And the fix stayed in, Lay wasn't prosecuted for over a year after the collapse of Enron, allowing him to shift assets out of the jurisdiction of the US courts.

But how it happened was this-Houston Lighting and Power was split into 3 companies, Reliant Energy, Texas Genco, and Centerpoint energy. Reliant owned the marketing arm, Centerpoint the electric grid and service in Cities, and Texas Genco the generating assets which iclude about 20 Gas generating plants, the Pylant Coal plant and the Soth Texas nuclear plany non-operating share owned by HL&P, about 40%.

Then, Texas Genco was taken private about 6 or 7 years ago. I don't remember which investment bank, but a price that was quadrupled to about $10 billion when it wasrecently sold to a hedge fund about 1 year ago.

The result is that the Houston area pays 14.5 cents a kilowatt/hr for electricity, about 2 1/2 times higher than the part of the Austin area that wasn't deregulated. I think that California is about $0.09 cents now,this price is another comparison point. Maybe someone who live out there could post the real prices right now?

This is only the tip of the iceberg on Enron/State of Texas stealing with the aid of the Bush league. Reliant purchases all the natural gas from state leases and is supposed to give all the schools and State buildings a reduced price for natural gas and electricity as part of the consideration. Not only have they been not giving a discount, they have been paying the royalties on the price based on the actual sales price. But, they sold futures on the gas resulting in a 25% too small sa;es price. I know, its complicated but trust me on this one. They are stealing about 1/4th the royalty due the state on prices that they set through controlling the gas prices with futures and acting as if it were an arm's length transaction.
Reliant, HL&P, Texas Genco are all criminal enterprises, IMHO and they screw their employees through disappeared pensions, their stockholders through buy-outs, their royalty owners through BS contracts and anybody that gets within distance.
. Bob Ebersole

Here in San Jose, California, I get my electricity from Pacific Gas and Electric. My recent bill had me paying 22 cents/kWhr at the margin and 14+cents on average, but before taxes, fees, service charges, California energy crisis bond repayments, ad nauseum.

The bulk of our electricity is natural gas fired, as it is in Houston. We have about the same portion of older nukes but you folks have a lot more coal and lignite power than we do. Plus, your pipelines send gas north to Yankees - we buy most of ours from Canada and Wyoming and the San Juan Basin.

I have to agree that the big changes in Texas have not worked to the customers' advantage. Texas Pacific was the name for the Texas Genco buyer if I recall.

I also understand that in Texas, the governor is very weak and the legislature is the real seat of power. Blaming Bush seems to be barking up the wrong tree but then I've got enough problems keeping tabs on California politicans.

The executives of Texas Pacific Group were heavy fund raisers for Bush 2000, and Bush 2004, I believe. It is one of the world's leading private equity firms.

Also a lot of the money from the Texas University endowment, managed by a foundation called UTIMCO, was invested in private equity funds managed by Texas Pacific Group, and by another heavy Bush fundraiser, the firm Hicks Muse (which has subsequently broken up due to poor performance). This was all orchestrated by Governor GW Bush.

One of those firms (I think Hicks Muse) made Bush a 10-millionaire, by funding the group which he headed, to buy the Texas Rangers team.

The municipality and the state then used eminent domain to expropriate the local farmers, and paid for the Texas Rangers to expand their stadium.

It's all very clubby in Texas, I guess.


my apologies if I'm skeptical about CATO, but I have sensed too strong an ideological slant in their thinking previously, so I'm a little weary.

I get an overall feeling that they want to support de-regulation when it suits big energy companies or energy investors AND support regulation, when it does the same.

Kind of like getting the best of both worlds for investors ('free market' and 'planned economy' parts), but claiming it's somehow enforcing 'free market liberalism' principles anyway.

I'm I completely mistaken?

You're definitely not completely mistaken.

Corporate/investor profits seems to be the only thing that rightwing ideologues pursue with any consistency.

What the free market guys do not understand is basic economics.

If you are in a monopsony situation with your supplier (your supplier is itself a monopoly) then a freely competitive industry just gets screwed. the profits are grabbed up by the supplier.

The European energy industry sits smack downstream from the world's largest energy company: Gazprom.

As long as Gazprom has monopoly control over Russia's pipelines and gas production, then a deregulated European energy industry is simply fresh meat for the Gazprom wolves.

Michael Porter's book 'Competitive Advantage' published 25 years ago, and read in every business school in the world in introduction to strategy, basically tells you this.

No CATO is famous for thinking the free market solves everything. They were set up by a group of right wing businessmen to promulgate free market alternatives.

They are smart guys, and they were the first political right wingers to tackle the Bush Administration on violation of privacy. They even have papers saying that invading Iraq was a bad idea. I'm not sure if they've condemned the use of torture though: that's more of a liberal-lefty concern.

Some of their economics ideas are provocative.

It's interesting when one of their economists admits that the 'natural' force in electricity production is for vertical integration, ie that electricity deregulation in the classic, UK model, doesn't work. The logical conclusion is that you have to have utility rate regulation, which is something no Cato Institute person would ever accept.

A free market also implies a free market for generators, and reasonable freedom to hang/bury cables as long as you’re doing it to some kind of standard. Without regulation, homeowners, housing developers and home owners’ associations would certainly make sure they had some backup should a larger outside utility decide to play hardball.

Since there probably are some economies of scale inherent in power generation, the ‘locally’ produced power would likely be more expensive, but it only needs to cover bare ‘necessities’ to provide bargaining leverage over a large utility dependent on regular payments to recoup investments.

The fact that California, true to form, managed to replace one regulatory regime with another one even more botched than the former, does in no way imply that the optimal way of allocating electricity to rational consumers is to follow Stalin’s lead.

People, neither here nor in the EU, are not so hopelessly incompetent that they’ll just sit there like sheep and freeze to death while some utility tries to charge them several multiples of cost for power. Of course, forcing them to do so at gunpoint, and then promising them a few watts now and then in exchange for half their salary and all their freedoms has much more appeal to any self proclaimed ‘leader’.

Cost + percentage profit sure does sound like one hell of an incentive to make sure your cost increases are out of control, though. Just the kind of organizational principle politicians and bureaucrats would understand and love.

Cost + percentage profit sure does sound like one hell of an incentive to make sure your cost increases are out of control, though. Just the kind of organizational principle politicians and bureaucrats would understand and love.

Indeed, a testable hypothesis.

Guess what? We have tests where nearby regions stayed regulated and some deregulated. In California, LADWP and some others stayed in a regulated regime. And just above in this thread, the same in Texas.

In nearly all of them regulated power stayed much cheaper.

Apparently the data say that making sure that your profit extraction opportunities and manipulation of the system in an unregulated regime end up much, much worse than the harm from bureaucratic cost-padding.

I guess you can't possibly steal as much money from an overly fat system compared to tooth-and-claw modern corporate macrofinance.

In the real world we have the choice between various imperfect solutions run by imperfect humans. One can imagine theoretical problems with anything.

Ideologues use these hypothetical problems---with strong emotional codewords---to bash one side of the issue misleadingly, when their clients stand to gain much more.

In addition there are strict regulations to make sure that the cost+ system is not abused. Every cost must be justified, and in an established business like electricity this is relatively simple.

This is unlike Iraq, where realistically you can hardly keep track of anything.

Without regulation, homeowners, housing developers and home owners’ associations would certainly make sure they had some backup should a larger outside utility decide to play hardball.

OK. How many homeowner associations have the technical expertise to safely produce power, not electrocute linesmen, switch from mains to local generation and back at any time 24/7, manage generation and hedge fuel costs, acquire , and of course keep emissions low? And oh yeah, build new power plants in their neighborhood. Major universities with long-term capital budgets do this. Maybe big military bases as well. Who else? Google?

All required just to make sure that it's theoretically possible that a radical free-market system doesn't result in the obvious SNAFU? (And realistically the only fuel that is easy to use for local generation is usually petroleum)

And oh yes, they have to PAY for all this too, only because their electric utility is unregulated.

There is also an economy of scale in deployment of expertise. Electricity has stiff requirements in safety and technological expertise and capital deployment. Who is going to be able to do all this? The knowledge of one well-trained full-time employed engineer in a power utility
can be deployed much more effectively than a gazillion part-time shade-tree ad-hoc 'power engineers' rounded up from the HOA.

It's been reasonably obvious since 1890 that technical facts of electricity generation favor large-scale infrastructure.

Large-scale infrastructure providing an essential which can't be stored gives a great temptation to gouge.

I don’t think there’s any disagreement about whether California’s crack at ‘deregulation’ was a failure. Even the Soviets probably managed better than that.

The thing is what was called deregulation in California in the 90’s was something very far removed from what most people think of when they use the word in common speech. It was basically splitting up vertical companies and making up all manners of rules about who could buy what from whom and when, and about what kinds of contracts people could enter into. Also, as the Cato article alludes to, what may very well be the most efficient forms of organizations and contracts for delivery of electricity, was banned. In addition, rules governing building additional capacity, both in generation and transmission, was not eased. And, at least in most parts of the state, and for most end user groups, end user prices were capped or fixed.

Using this bizarre, illogical pile of ad hoc rules, many likely to have been put in place based on customary consultation with ‘industry’ groups/(potential or actual donors) (like Enron), to ‘prove’ that people should just resign themselves to forever bow down to massa Governor (or whomever else for that matter) for something as important as electricity, is just plain shortsighted. Leaving yourself fully dependent on a single supplier for something you consider important is bad. It doesn’t magically become less so just because the supplier is sufficiently self righteous to call himself a ‘public servant’.

I don’t know what ‘deregulation’ means in the current EU debate, but the goal ought to be giving each individual citizen as much maneuverability with respect to procuring and securing their electric supply as possible. That way each of them can make whatever arrangements suits their particular situation. Self reliance, especially in matters as critical to most as electricity, is unequivocally a good thing. You don’t want to be on the hock to a bunch of Enron style sleazers. And neither to politicos pushing all manners of euro style social engineering and favoritism, just because they also happen to have maneuvered themselves into position as your sole source of electricity.

I did my first analysis of the California dereg plan as a paper for my MBA program, just after leaving PG&E in 1996. My prediction was that someone was going to make money hand-over-fist before long.

My own nucleocentric analysis of deregulation can be found here:


Taylor and I have been exchanging emails for years on this issue. We're probably closer here than on nuclear power in general but his prediction of a utopian free market coming to resemble classic utility regulation still requires an understandable path from today to his predicted outcome. In other words, I doubt one can get there from here.

My reading is that the EU is hot to unbundle so that countries that have foresworn new nuclear (Italy in particular) can get lower rates and better access to nuclear generation in France. Secondly, I suspect that Schroder's connections with Gazprom is also playing a role. The Russians want to buy up the gas distribution companies that would be spun off so that they in turn can make them captive of their gas export pipelines. However, this is not my area of expertise.


Unbundling is indeed a way to try to grab the French surplus capacity (which is shrinking anyway, as, for some reason, investment in extra capacity never seems to be the main priority of companies in a deregulated market) - and also to try to break companies like EDF and E.On (more a rightwing ideologue goal than an Italian one - the mere existence of State-owned companies that are highly competitive is enough to make their blood boil)

On youe second point, it may be Gazprom's idea, but the consumer countries are already pretty much captive (though the dependency goes both ways) of the Russian pipelines. There are no alternatives on the same scale, simply. I fail to see the use for Gazprom to purchase the downstream assets. But they do seem keen. Schröder has little to do with this - it is not unreasonablr for Germans to have high political representation in such a major project - the Russians certainly do it, and expect the same on the other side.

Ayn Rand was so cool when I was 16---
You were a hero for being a complete azzhole. Is anything cooler than that when you are 16?
You mean to tell me that the free market in not The Chosen Path?
Capital is not God?
Next, your going to tell me we are running out of oil, and the planet is getting warmer-- now that is a liberal plot to deny me my Divine Right to prosperity.
Ronald Reagan told me that, and I believe it!

I'm surprised that no one has mentioned Naomi Klein's current book The Shock Doctrine as a template as to why deregulation/privitzation is bad. ISBN-13:978-0-8050-7983-8

OLD senior citizen gave young bill [only 70] a lecture on his perspective of future energy and his view on amount of diesel to move coal for one mile at the Harvey House museum in Belen, NM on Tuesday October 9, 2007.

OLD senior citizen reported to bill

1 Belen, NM fuels trains with about 180,000 gallons of diesel per day.
2 Trains refuel in Winslow, AZ which about 300 miles distant.
3 180 tons of material [including coal] is tranported through Belen each day.
4 Moderate average train climb and descent.
5 5,000 gallons of diesel on board each dash 9
6 4,400 HP for Dash 9
7 415, 000 lb weight
8 About $1.25M for each locomotive.
9 Anti-slip wheels
10 Can pull 30% of weight

Old senior citizen reported that BNSF plans 5 more diesel tanks [see below] once Abo Canyon is double tracked.

Old senior citizen concluded the future next 20 years of energy in the US looks grim.

regards from young senior citzen

I recall it being rather windy down there (there's wind farms all the way from Weatherford to just east of Roswell, as my photojournal of last year showed).  So how would things change if the track was electrified and wind farms sprinkled along the ROW to take advantage of the transmission path?

Quit trying to make sense. And whatever you do, do not mention how many trains are diesel generators/electric motors so the only change would be adding a 3rd rail.

A great idea. One concept I have wrestled with is a rail mounted crane. Problem is overhead wires when in use (21' clearance in transit should be OK).

Design crane that can operate around wires ? Remove section of over head wire every time crane is needed ? Install 3rd rail for a section ? Put in very short rail spur for every WT ? Build low quality 2nd rail line in parallel with frequent cross-overs ?

Crane size limits WT size. Barge mounted cranes can install bigger WTs than road cranes. Rail cranes should be bigger than road cranes, although they have limits that would make them smaller than the largest barge crane.

Best Hopes for cost efficient Wind Turbines,


Jerome, thanks for this. It is slightly encouraging to see a light going on. Deregulation/unbundling has some other real problems:
It provides a disincentive for timely maintenance, or at least an incentive for increasing risk from delayed and/or minimized maintenance.
It leave a system where the only way to make more money is to sell more, so ensures that nobody will sell efficiency. In a regulated system, suppliers can be rewarded for selling efficiency.
It makes coordination over a large system more difficult, thus impedeing wind, which needs large system coordination to minimize the effects of variable input.