A number of years ago I was invited – or to be correct, invited myself –  to a long NATO 'workshop’ in Portugal that I was anxious to attend in order to draw attention to a book 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 made any kind of eye contact with me, I would receive 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 marvelous 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 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 (or should) 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 and future 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 facsimile of a perfect-competition market, if various constraints could be satisfied.

Without going into details, as good as all this sounded at the University of Chicago when people like Professor Milton Friedman were preaching their anti-regulation sermons, and despite the respect that I had for Professor Scheppe, I was unable to buy very much of it. One of the reasons was that I pictured the deregulation being discussed at that conference and elsewhere as an academic fantasy of the type being sold by the recent Nobel Laureate in economics, Professor Jean Tirole,  who after visiting one of the advanced classes at a Swedish secondary school, described himself to a Swedish newspaper as a “rock-star”.

While I doubt whether members of the Amory Lovins fan club who were present had a great deal of use for the philosophy of Professor Friedman, the idea of local control over their electricity via small-scale combined-cycle installations might have held a strong attraction for some of those young persons, because among other things it meant that for various reasons power company executives could be harassed, and most important of all, it would be possible to belittle large nuclear power installations, or classify them obsolete.

There is nothing that I like repeating more than the indisputable fact that electricity deregulation has failed in many regions. As a matter of fact it was this failure that caused Professor Alfred Kahn – the most distinguished deregulation scholar in the world for several decades – to claim that electricity was “different”, and the attempts at deregulation should be cancelled. Quite naturally, this was a message that it was different to sell, even though in Peru and the Dominican Republic deregulation efforts reportedly involved some gunfire. On the other hand, in Sweden – and likely elsewhere in Europe – deregulation efforts went smoothly because high ranking politicians and civil servants 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 concluded that deregulation has led to higher electric prices. Any other conclusion would hardly have made any sense at all, because in the 17 districts that restructured their power markets just before I gave a long lecture in Brussels, 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 many of the latter wanted to reverse direction, but apparently allowed academic hacks to convince them that it was too late. Ohio, Illinois, Maryland and many others saw rates rise by up to 40%, 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  said, although he admitted that deregulation provided rate payers with higher rather than the lower promised they were repeatedly promised. I heard this at the Brussels conference mentioned above, and a genuine 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 an article by Ken Silverstein (2007), we were told that many deregulation ‘poster’  ladies and gentlemen in the U.S. said that the failure of deregulation was due to high fuel prices, where natural gas was been cited on a number of occasions. Although it is not widely known 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 did not turn out to be true, and as a result the beautiful deregulation experiment that New Zealanders and their foreign gurus thought that they were to experience eventually 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 intentions to undermine conventional economic theory.

“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." I discussed open access at considerable length in my energy economics lectures in Hong Kong and France, and I think that I was able to convince most of my audience that regardless of the attraction that free-marketry held for them and theirs,  open access is not even wrong. In fact, in the context of the European electric (and natural gas) markets, 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!

References

Banks, Ferdinand (2014). Energy and economic theory. Boston, New York and London. World Scientific
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)