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In the summer of 2001, a few months before the 9/11 attacks on the Trade Towers and Pentagon, I was invited to Hong Kong as a visiting professor and university fellow for the purpose of lecturing on electric regulation and deregulation.
My visit was at least partially sponsored by one of the foremost (electric) power companies in Hong Kong, and what they wanted me to do was to inform university teachers, journalists, students, break dancers, moon walkers and anybody else I came into contact with that electric deregulation was a crazy and unworkable concept that would bring misery into the lives of many consumers of electricity.
This needs some explanation, by which I mean why would a large power company want me to travel half way across the world to ridicule electric deregulation? The answer is that the directors of that company knew that electric deregulation was a lost cause, or to quote Jean-Paul Sartre "a fire without a tomorrow".
In Sweden though, as in many other countries, it didn't make any difference to the directors of power companies what it was, because they were primarily concerned with putting themselves in a position where they could take the money and run. For instance, deregulation made it possible for one Swedish power company to shift much of its attention to Germany, where it specializes in making absurd claims about its program for a "green" future.
Things are different in China. A deregulation failure in Hong Kong means something very different from a failure in California or Sweden. In Sweden and many other countries, deregulation miscarriages result in disparaging articles in newspapers or business magazines, but the poor consumers are left to gnash their teeth and curse. On the other hand, in Hong Kong somebody important might confront the executives responsible for the misfortune, demand an explanation, talk to them in a manner that sergeants in the American Army once talked to recruits, and perhaps ask to examine some bookkeeping and other paper work. I don't think that it is necessary to tell you how this could turn out, because the Chinese government does not make a practice of applauding incompetence.
In a privatization conference held at Södertörn University in Stockholm, where I gave a more dramatic version of this short paper, a very intelligent young Finnish woman asked me what I meant by deregulation failure, to which I replied it was obvious. Deregulation failure means that consumers and firms are promised lower prices, and instead prices increase. This can be put another way: electric deregulation may succeed in seminar rooms and conferences, but if its record means anything it has failed dismally in the real world. An extensive analysis of this topic can be found in the book by Professor Lev S. Belyaev (2011).
In case you have forgotten, in Southern California electric deregulation led to the wholesale electric price increasing by 533% in about 8 months. One of the high points of that fiasco was the California state government paying billions of dollars to firms generating electricity, with some of these firms called "out-of-the-state criminals" by California governor Gray Davis, because they played the system by pretending that they could not supply more electricity.
It failed in South Australia. It failed in almost every state in the United States of America where it was attempted, and in my former home state, Illinois, a state official -- Kimery Vories -- reported that deregulation resulted in the price of electricity increasing by forty percent, all at once.
As already noted, it failed here in Sweden, and as I told colleagues and students in Bangkok a few years ago, electric deregulation in Sweden seems to mean that the largest power company in Scandinavia has been awarded a gold-plated license to make fools of the consumers of electricity.
Electric deregulation very definitely failed in Norway, although in that country some comedy was added to the process. Consider the following exchange of comments:
"What we've seen this winter is that the deregulated market works for (electric) companies, but not for consumers" Hallgeir Langeland (Norwegian Parliament, 2003)
"I have to expect to be a scapegoat (for deregulation failure), but people know they can't blame me for the policy." Einar Steensnaes (Norwegian Energy Minister, 2003)
My comment on this repartee is that nobody with his or her head screwed on right would blame you, Einar. The people to be blamed are the outraged electric consumers who sent you letters filled with insults and undiplomatic language, and who questioned your intelligence and your qualifications for the position you held when the 'spot' price for electricity in your country escalated by a factor of almost thirty during one brief period.
I remember giving one of my sermons against deregulation in Lima (Peru), and fortunately I got out of that country just in time, because when they initiated that goofy experiment some shots were fired, as was the case in the Dominican Republic. Deregulation failed in Brazil, where Lutz Trevesso, CEO of a large power company said that deregulation would create more problems than it solved.
You've heard what I think of deregulation, so now let's turn to some other opinions. U.S. Senator Ernest Hollings brusquely abandoned the deregulation sinners who had seduced him into the ways of 'liberalization', and began to call him-self a "born-again regulator". Another U.S. Senator, Byron Dorgan, was more explicit. He put it this way: "I've had a belly full of being restructured and deregulated, only to find out that everybody else gets rich and the rest of the people lose their shirts!" (Financial Times, April 22, 2003). A headline in the New York Times (15 July, 1998) read as follows: "Deregulation fosters turmoil in power markets!" Personally I'm very fond of Governor Gray Davis' judgment: "At the mercy of forces that show no mercy." Governor Gary Locke of Washington (State) offered an important thought on the bad news resulting from the deregulation travesty, concluding that since the government caused the suffering, it was up to them to cure it. And last but not least, U.S. Congressman Peter de Fazio put it this way: "Why do we need to go through such a radical, risk taking experiment"? Congressman de Fazio answered his own question by saying "it's because there are people who are going to make millions or billions!"
And finally, when I began to study regulation and deregulation, the leading scholar in the field was Professor Alfred Kahn. Once the electric deregulation failures began, he made the following statement; "I am worried about the uniqueness of electricity markets. I've always been uncertain about eliminating vertical integration. It may be one industry in which it works reasonably well."
I'm not worried at all ladies and gentlemen, because my interest in this topic is not vertical integration. It is the supreme importance of electricity as compared to certain other energy options. For example, there may be passable substitutes for natural gas, but -- everything considered -- there are no substitutes for a large supply of inexpensive and reliable electricity, especially if we are considering modern and civilized countries whose citizens and/or voters are concerned about their futures.
I asked the young Finnish economist mentioned above, what she prefers: the choice that is supposedly one of the rewards of electric deregulation, and which a self-proclaimed, incomprehensible expert on this topic like Professor David Newbery thinks is especially important, or sustainably low electric prices? Unfortunately, she was unable to provide a straightforward answer, causing me to realize once again that I still have a great deal to do where clarifying this issue is concerned.
Banks, Ferdinand E. (2011). Energy and Economic Theory. Singapore, London and New York: World Scientific.
Belyaev, Lev S. (2011) Electricity Market Reforms. London, and New York; Springer
Invited talk for privatization conference, Stockholm, June 16, 2011, Södertörn University, and June 17, Stockholm School of Economics.
For information on purchasing reprints of this article, contact sales. Copyright 2013 CyberTech, Inc.
All one really needs to do to understand the history of present deregulation attempts is study the history of the Chicago School economists. Things like overthrowing the democratically elected government of Chile.
Carl Carlsson 8.16.11
I have very little knowledge of energy markets in general, and deregulation in particular, though the topic is interesting to me. I was hoping that one of the knowledgeable readers of this forum could answer a few questions or point me toward a source that can answer the following:
If, as stated above, deregulation failed in almost every state in the United States of America where it was attempted, is there a state or states where it has succeeded?
How many failures can reasonably be attributed to flawed implementation, such as in California where I understand only part of the market was deregulated and safeguards were inadequate to prevent manipulation?
To what extent can post-deregulation price increases be attributed to increases in fuel costs, post-deregulation?
I don't have a horse in the race, I just want to know.
Michael Marullo 8.16.11
Three things: 1) As the author points out, electricity is not just ANY commodity -- it's electricity, dummy! Some things -- very few, but electricity is at the top of the list -- need to be regulated to maintain safety & reliability -- NOT revenue & profits -- as top priorities. 2) Deregulation (and the intended competitive market) does not LOWER prices; it LEVELS them, which means that some consumer's prices will actually go up while others will go down, and some will remain the same. Guess which ones won't think deregulation works! 3) Deregulation opens the door to gaming the system... good luck trying to prevent it. Gamers are far more clever than regulators could even begin to imagine!
Jerry Watson 8.16.11
The has never been deregulation only reregulation the California market was the work of mainly one PHD that thought he could cover all the bases. I guess with his oversized brain failed. I can’t remember his name but he made a lot of excuses about how it was the fault of the manipulators not a result of poor design.
As far as successes the Texas (ERCOT) ISO and wholesale market reregulation went fairly smoothly. However, Laissez-faire has never existed in the electric market.
A lot of the stuff about deregulation is rhetoric and other stuff is plain stupid. In a normal market withholding ones product for a higher price can be just good business. California was yelling the owners of the generation were withholding generation for higher prices like it was a crime. I think now it is a crime. California regulators made the reliability oriented regulated IOUs sell their generation assets to independent for profit corporations and then said they illegally tried to make a profit. Who would of ever suspected that could happen? Somehow this well thought out plan of unleashing massive greed for the greater good did not benefit the states populous.
If you are interested in the regulation look at FERC order 888 it was well meaning regulation to move power from lower priced areas to higher priced areas and moderate prices. Instead in the Summer of 1998 it served to move millions of dollars from the pockets of rate payers into the pockets of energy trading firms. Why? Because the regulators had a simplistic understanding of the energy market they did not consider how those driven purely by profit cold profit by it.
Michael Marullo 8.16.11
Jerry's comments are right on, which is precisely why electricity is such a bad candidate for free market forces. I don't know about you, but when I flip on my light switch I really like for it to just turn my lights on -- without someone having to first decide whether or not it's profitable to do let me do that. An extreme example? Perhaps, but that's what it all really comes down to... do you want to trade reliability for a crap shoot on rates? That is, if you live where rates are low (e.g., in the Pacific NW), deregulation will drive your rates UP; not down. (See #2 in my original post, above.)
F.Allen Morgan 8.17.11
The fundamental reason you can't deregulate electricity like other markets is that you can't economically store electricity on a significant scale to absorb shortages shocks to the system. Almost all efficient markets have the ability to store a significant portion of the market either pre sale or post sale, thereby allowing the buyer to physically hedge his supplies and thereby giving him the ability to either buy now or wait till a better price. Similarly, on the supplier side it gives him the ability to produce the electricity on his schedule in the most efficient manner.
For example, suppliers on a hot day, know the price will go high without any recourse of the buyer. If the buyer had a store of electricity, he could draw down that if the bid market price was too high.
Also, much of the current rational for the "smart grid" would go away if you had a "store" of electricity since you wouldn't have to put in very large $ infrastructure to match demand with intermittent "green" power sources such as wind and solar. In a way, the real problem with renewables is the abllity to store their production and draw from the store as the load requires it.
DSM, is really an attempt to mimic the attributes of electricity storage...and a poor one at that.
Bob Amorosi 8.17.11
F. Allen Morgan,
I think you have summed up the fundamental disadvantage of renewables as being the general lack of economical storage on a large scale. I submit to you that this is may be so today, but just wait for it, things are probably changing.
Firstly, the appearance of large numbers of electric vehicles promises to introduce widespread distributed storage in their batteries. And Sir, there is a ton of money being spent on research and development to make them more efficient and lower cost, AND to integrate them with the grid as a means of storage when the vehicle is not using them. In essence the need for consumer price regulation would slowly decrease as more distributed storage appears for the grid.
Secondly, consider why consumers have no recourse when prices go high on a hot day for example: we as consumers are all forced to buy our electricity from one supplier, our local distribution utility company. If instead Len Gould's Independent Market for Every Utility Customer (IMEUC proposal detailed on this website) was implemented, consumers would have many choices from where to buy their electricity from, at any time of the day. Sure, consumers would not be prepared to shop in real time 24 hours a day for their electricity and switch suppliers at will, but automation technology in the consumers' hands coupled with a real-time electricity grid communication system could be programmed to do so very easily.
Under Len's IMEUC system combined with automation, there would be much less need for storage and hedging of anything. Consumers could change suppliers (i.e. generators) in an instant through automation, and generators could change their prices just as quickly as they see fit to attract just enough customers that would keep their generators at maximum output as much as possible. In essence the need for consumer price regulation would disappear here.
A futuristic market system such as Len's IMEUC however is fantasy to many because it is so radically different from the regulated single-supplier market systems we have in place now for consumers. But the whole concept of loads being automatically matched with a supplier of electrical energy is really not a fantasy at all. It exists in everyday products and man-made systems we use today through the use of technology. For example it is done by the grid’s electricity system operators matching grid demand with generation. It is done in your hand-held calculator that can run off its built-in solar cell or its battery. It is done by the electronics controlling that big bank of diesel-engine back-up generators that keeps the power on in your local hospital in the event of a grid power outage. The list can on and on….
Electricity price regulation for consumers is only “necessary” because consumer retailing of electricity is dominated by monopolies, and because of political barriers in implementing technology that could make those monopolies disappear.
Chew on that, readers.
Kent Wright 8.17.11
Are we to believe that in the face of a shortage of electricity, people will allow their EV batteries to discharge back into the grid? … and what? …risk being stranded with a dead battery? Let’s look at an analogous situation that we already have – stored energy in the form of gasoline in vehicle gas tanks, actually a rather vast quantity in total. When there is even the hint of a shortage or price increase, do people flock to gas stations to sell it back? No. Actually the opposite is true. They rush to the stations to hoard all the gas they can possibly get, topping off tanks in every family car and 5-gallon gas can, even if they have to wait in line for hours. Reason: pure fear of being stranded. Why would people behave any differently just because their vehicle is electric?
Jim Beyer 8.17.11
I think they are talking about peaking events; a few hours on a hot summer day when everyone is running their A/C or something. Some parked cars (in theory) could displace some charge, to be replenished a few hours later. [I admit this is the THEORY; practical reality might be something different].
I have heard the the few 10s of hours per year of peaking demand are enormously expensive for the power companies to supply.
Ferdinand E. Banks 8.18.11
I too have heard a few good things about deregulation in Texas. Needless to say, those good things may actually be lies.
One thing though is certain: the record of academics in this matter is pretty sad, and here I want to call a couple of names. David Newbery of Cambridge University (UK), and William Hogan of Harvard University - gentlemen who not only thought that electric deregulation could succeed, but when it failed continued to insist that good news would arrive. Hogan, for instance, couldn't understand why the electric generation industry in the UK had not morphed into the kind of 'competitive' arrangement that you play games with in the early chapters of your Econ 101 textbook.
Electric deregulation, and now assorted ignoramuses from every part of the world talking about doing away with nuclear. What did I do to deserve this?
Bob Amorosi 8.18.11
In spite of the talk, I would not be overly concerned about electricity price deregulation at the consumer level happening anytime soon. You are very correct, removing regulation would fail miserably as long as we have the current monopolistic local distribution company system for consumers. And the latter is not likely to change for a very long time if it ever does at all.
As for nuclear, unfortunately public passion and politics in the western world, combined with staggering government debt situations and fragile economies, do not bode well for the future of expanding our nuclear generation. And unfortunately those “ignoramuses” you refer to are the people holding all the cards and making the decisions for us, bad that they may be since we certainly need some nuclear.
Things may unfold differently for nuclear in China, but not here I’m afraid.
Ferdinand E. Banks 8.19.11
Bob, you are almost certainly right about the nuclear picture. Its amazing with the Chinese though. I still haven't gotten it - still don't understand.
James Carson 8.20.11
Fred: I have tried several times to write a serious rejoinder to your article. I can't because it contains nothing more than nonsense and ignorance. Has power market liberalization had more than its share of issues? Of course. Nevertheless, it has been highly successful.
Bob Amorosi 8.21.11
Ontario has had a deregulated wholesale market for some time now where generators are separate companies from distributors. We have regulators that set rates for customers that are the combined energy charges paid to generators and distribution charges paid to the local distributor and to the province's transmission line owner Hydro One. The latter are monopolies and must apply to regulators to increase their charges. Without regulation they would have a free hand in charging whatever they want and consumers would have no recourse.
I don't think it is much different in other places in North America where some utility companies can own generators and be the local distributor at the same time.
Market liberalization works for wholesale markets where generators can compete with each other, but not for consumer rates, so I don't see consumer rates being liberalized for a long time if ever.
James Carson 8.21.11
Bob, I am well aware of the situation in Ontario. I have taught classes on power markets since 2007, including several in Toronto. One of my classes pertains to supplying power through the retail sector, although I only touch on Canadian retail. Fyi, my classes are universally acknowledged to be brutal. Nevertheless, students leave with a clear understanding of value, and how the power markets work.
Comprehensive and competitive retail regimes are necessary if we hope to unlock Smart Grid potential. Why? The consumer must feel the cost of their usage on the margin while capturing the value of investments they make in the technology.
James Carson 8.21.11
Bob & Fred: The problem with transmission & physical distribution monopoly has long been solved. The functions are readily disaggregated from energy production and consumption, and have been for a long time, now. ISOs handle transmission, while local wires remain controlled by the incumbent utilities. The wires are heavily regulated and insulated from market forces.
James Carson, RisQuant Energy
Len Gould 8.22.11
James. I agree with your positions as far as they go, and am left wondering. In an unregulated free market for generation, how does your design deal with the issue that incremental new additions to generation must be done in very large units of addition (eg. 1600 MW nuclear stations) but the entire station must be online before even one watt of its generation is required by the market (and thus obviously long before the new plant can ever be profitable)?
Ferdinand E. Banks 8.24.11
My goodness, James says that my article contains nonsense and ignorance. Next you will be telling me that the rumble in Libya that is about to end is not about oil.
But let's be clear on something. Your opinion on this matter doesn't count for beans with me, because I know that if we ever met in a seminar or conference I would cut you off at the knees. This does NOT mean that I know more than you about energy, but about electric deregulation, oil, and nuclear economics I have all the answers I need to hold my ground against anyone on the face of the earth.
Let me tell you why I know so much. We had some of the cheapest power in the world here in Sweden, and pretentious ignoramuses like you good self confused other pretentious ignoramuses, and now our prices are ruinous. Do you...get the message.
Jerry Watson 8.25.11
Disaggregated really, not the way I see it. The truth is the ISO’s are reregulation with a new set of market rules. ERCOT, PJM, CAISO all have clearly defined wholesale market rules. They all reserve the power to make “Out of Market Solutions” to support reliability. This is combined with “Must Run” units contracted outside the market. I believe they all balance their schedules at least day ahead. All have a price caps. None of them allow withholding and most have provisions to prevent hockey stick bidding by generators. Generation ownership is disaggregated; but the ISO's took many of the ownership rights away for the privilage of being interconnected to the grid. So it is not truly dissagregated and it is not a real market driven purely by market forces. The ISO’s still predict the load and require the generators to meet it below a fixed price cap. Do you really think telling generators if they can run they must run is transmission control? I sort of thought it was generation control. ISO’s even send out the Automatic Generation Control (AGC) signals to the generators. The ISO controls transmission and generation to meet the load whatever it might be just like its predecessor control areas these functions are not working independently ISO’s take all the rights of ownership of the lines and the key rights of ownership of the generation. Namely, generators do not have the right to withhold generation to stimulate prices or even ask for prices over a arbitrary fixed cap. ISO’s do have strengths; by turning several control areas into one larger one the dispatch order is potentially more efficient. ISO’s do a better job of incenting generation to build were it is needed with Locational Pricing. ISO’s also socialize risks by being one big control area compared to several smaller ones. Also, ISO’s can support multiple load serving entities but all that is accounting the same lines and the same generators still serve the same areas but different parties do the billing and have slightly different prices based on their structure and how they satisfy their load balancing requirements etc. The ISO is quasi owner of the whole system. Feel free to enlighten me with what I am missing or are you speaking of some not yet achieved ideal market place?
Michael Keller 8.25.11
Ontario's power markets are deregulated? Really! That undoubtedly explains why the "un-regulators" are forcing the hapless consumers to pay for renewable energy, such as solar power, in a region with dismal levels of sunshine. If Ontario was "de-regulated", there would be no reason to build additional capacity, as the hydro, nuclear and coal plants are quite adequate. Oops, the "un-regulators" just put the kibosh on the coal plants, telling them to shut down so the bureaucrats can sleep at night, knowing they are saving the planet.
Ever try to build a power plant in Ontario? I have and the "un-regulations" in the "de-regulated" province are mind numbing, extremely expensive and never-ending.
Deregulation in Texas is going well. Well, mostly well. Except they ran out of power over the winter and are having trouble during the recent heat wave on account of not enough power plants. But the "un-regulators" did cause the installation of several thousand megawatts worth of wind turbines that performed exceptionally poorly during the power shortages. Texas would have been better off to install natural gas combined cycle plants, except the "un-regulators" said they should build unreliable wind turbines that pretty much only work when you really do not need the power.
My point: there is no way in hell electricity markets can be "deregulated" because the government politicians and bureaucrats are incapable of keeping their hands off. Therefore, stop with the "deregulation" myth and make sure industry and consumers have affordable power when they need it.
PS As to ISO's, they simply add literally thousands of "middlemen" and I'll be dammed if I can figure out how those folks decrease the price of power. Strange, we seemed to do just fine without them in the past.
Ferdinand E. Banks 8.26.11
Please excuse me, but the comments of Jerry Watson and Michael Keller will be cited in my new textbook tonight. Speaking of doing fine without ISOs and the like, I wonder who in Sweden was dumb enough to think that the Nordic Electric Exchange (NORD POOL) would mean lower electric prices.
Bob Amorosi 8.26.11
I must agree with (most of) the comments from Jerry Watson - and of Michael Keller. The generators in Ontario may be bidding their outputs to the ISO in the guise of a deregulated wholesale market, but in fact they are still subject to government mandated rules and regulations. Consider for new generation to be built also, the Ontario government contracts the builds using taxpayers' money, so generators are not really allowed to function in a true free market and do whatever they want.
At the consumer retail level, all Ontario consumers are subject to tightly regulated prices set by the Ontario Energy Board. None of this is ever going to change until some revolutionary market system could be implemented like Len's IMEUC proposals, in combination with much more distributed private generators. Perhaps this will happen in the distant future, but for now there is no way our government(s) will let go of their grip on regulation.
Geez, even in the face of a substantial average increases in electricity bills in Ontario last year with the introduction of Time-Of-Use billing for all customers, the public outcry and additional costs to businesses and the economy was so loud it prompted our Ontario politicians to implement a 10% rebate to everyone's bills this summer for a period of many months to help us get used to TOU billing.
Don't kid yourselves, as long as our economies are so sensitive to energy prices particularly electricity, don't hold your breath for our governments to take their hands of price regulation in its various forms.
Jerry Watson 8.26.11
Feel free to use any of my comments as you see fit, I actually feel a little flattered that you would even consider using them in a scholarly text.
Michael Keller 8.30.11
Professor Banks, Ditto!
Chris Scanlon 6.1.12
As someone who generally finds your columns insightful and a trustworthy source, I was surprised to read, "It [deregulation] ... failed in almost every state in the United States of America where it was attempted, and in my former home state, Illinois, a state official -- Kimery Vories -- reported that deregulation resulted in the price of electricity increasing by forty percent, all at once." Any consumer in Illinois (I am one) can look at their bill over the last 10-12 years and see a change from ~ 10 cents/kWh to something in the range of 6-8 cents. The current low price is, no doubt, temporary, but it is clearly wrong to say consumers have not benefited by the changes in the regulatory framework in Illinois. "Deregulation" is not a magic bullet or end state condition, like any complex policy issue the restructuring of the electricity markets and related state regulatory compacts is subject to constant give and take between the stakeholders and the characterization that it failed "all at once" is silly.