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Thursday, January 20, 2011

Sunny and dark side of deregulation

10 years ago, the California energy crisis came to fruition. Blackouts and shortages rocked the state, made us a mockery of the country and brought down a governor.

Since that time, it’s been tough to find a balanced appraisal of this event. Leftists blamed evil corporations, rightists blame inept government while accounts that consider both perspectives are few and far between.

Economist Seth Blumsack of Penn State offers the rare exception, writing in December’s issue of IEEE Spectrum and posted to the public website this month. (The website comments are also helpful.)

Against the government, there was only partial deregulation which never engendered real competition. Against business, a few companies (notably Enron) were able to game the system for their own ill-gotten gains.

As Blumsack points out, electricty markets are not (and perhaps never will be) fully competitive. In this regard, the last mile resembles wireline telephone companies and other “natural monopolies.” Meanwhile, all energy markets are plagued by demand that is highly inelastic in the short run. (If gas prices double, over time I can buy a smaller car or move 15 miles closer to work, but I can’t do it tomorrow morning.)

Overall, the results are mixed. The partial liberalization has increased efficiency. On the other hand, increased pressures for efficiency have changed the energy grid from a cooperative effort to a zero-sum battle.

Blumsack contends that deregulation means higher cost of capital and thus higher project costs. It’s also possible that deregulated developers have more incentives to cut costs while regulated utilities — like a government entity — will quite freely spend money not their own.

Finally he points to the role of markets in promoting green energy. Markets can be used to buy anything, and most American states are using them to procure geen energy.

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