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Even CATO libertarians say energy deregulation does not work

by Jerome a Paris Sun Oct 7th, 2007 at 10:08:00 AM EST

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.

Their conclusions are so unexpected that other libertarians felt compelled to criticize them violently (and the authors felt the need to defend their libertarian credentials... Follow me below the fold for the gory details.


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.

Display:
A couple of comments:

  1. One of the reasons for the rapid rise in gas-fired plants was the easier licensing available. They are smaller, less polluting and don't require the type of transportation access that coal needs. If you go back to the period and read the proposals for new plants you won't find fuel cost being emphasized at all. This is still the case. Here on Long Island the power authority is pushing for new gas plants rather than more oil-fired ones because there will be less community resistance. They are also ideal for handling peak load since they have a short startup time.

  2. Vertical integration has had a mixed record. Using the logic of the authors why not extend it all the way back to the coal mines and railroads? In the 19th Century vertical integration was a common practice. Steel mills owned mines, railroads owned grain storage facilities, etc. The biggest believer of vertical integration was Ford whose original factory included foundries and machining facilities as well as the assembly operation.

The pendulum has swung the other way with firms now concentration on "what they do best" and subcontracting everything else. Even big firms now use outside personnel operations, accountants and  advertising services. In fact many firms seem to be little more than a brand. Their goal is to make nothing except money.

The reason for the organizational shift had to do with the enforcement of the anti-trust laws originally. I think the precedent in this case was the break up of the A&P grocery chain, which owned the farms, the food processing plants and the retail stores.

More recently firms have been split up because it gives more opportunity for speculation by investors. I've never understood the spin off logic. If GM was losing money on its parts division (Delphi) why would anyone want to buy it as a standalone (and mostly captive) firm? Sure enough Delphi quickly went bankrupt. I assume that the bankers who put these deals together get their fees and are thus anxious to see the breakups. But why does the public fall for it?

The breakup of generation and distribution was obviously motivated by such deal making and not by the logic of the business. The authors ignore the "Wall Street" effect and think these steps were taken because of a belief in some free-market ideology. That was just a smoke-screen.

They also ignore the evidence provided by municipal power companies, which are not only vertically integrated, but owned by the public. They provide power at a lower cost than competitors for the usual reasons: financing by tax-exempt municipal bonds costs less than corporate bonds and there is no need to generate a profit. Acknowledging that government can do a better job of providing essential services would be too much for even these renegades to accept.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Oct 7th, 2007 at 11:11:33 AM EST
  1. gas does indeed have a number of technical advantages over other technologies, mainly those you mention - its relative cleanliness (much less pollution, and half the carbon emissions of coal-fired plants), and its great flexibility to use. Indeed, gas-fired plants are pretty much indispensable these days for stand-by power

  2. re vertical integration, there are legitimate questions as to what makes sense industrially or not, but the integration between production and transport of energy is probably one of the easiest to justifiy on purely engineering grounds. In some places, integration with the fuel supply bit (such as coal mining) can also make sense - as the biggest Australian power plants, located directly on the site of big coal mines, demonstrate.

As you also point out, deregulation seems to be mostly a jobs programme for investment bankers and the assorted populations of market consultants, transaction lawyers and similar economic niches.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Oct 7th, 2007 at 11:39:15 AM EST
[ Parent ]
Excellent diary, Jerome. I wish I knew enough to put a useful comment in!
by In Wales (inwales aaat eurotrib.com) on Sun Oct 7th, 2007 at 11:28:08 AM EST
to ask any questions, especially if there are things that you're not sure you know. It's hard when you're deep in a topic to remember what's likely to be known or not by non-specialists and thus what would deserve a bit more explanation.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sun Oct 7th, 2007 at 11:33:52 AM EST
[ Parent ]
My primary quesiton would be to ask "who benefits ?".

If CATO admit that de-regulation and unbundling does not benefit the consumer in the probable future market, who is driving this ? Or is this simple ideological intertia incapable, Brooks-style, of understanding that not all free market solutions are inherently good ?

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Sun Oct 7th, 2007 at 01:30:01 PM EST
[ Parent ]
I've said it before - liberalisation is a jobs programme for investment bankers and rightwing politicians/pundits.

Yes it's ideological, but yes there is a constituency - the traders, the providers of hedging instruments, the M&A bankers and the strategy consultants that can offer plans to conquer other markets by purchase or by other means.

And the Brits trying to break EDF or E.On.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 7th, 2007 at 04:25:33 PM EST
[ Parent ]
I think answering the 'Who benefits?' question has the power to make some of the biggest changes to these narratives.

They're only convincing for as long as they can appear to be value neutral. Once they're understood to be  inherently biased and partial, they lose a lot of their persuasive power.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Sun Oct 7th, 2007 at 07:47:27 PM EST
[ Parent ]
Totally agree.
by afew (afew(a in a circle)eurotrib_dot_com) on Mon Oct 8th, 2007 at 05:08:19 AM EST
[ Parent ]
One assertion could stand some explanation.

...transmission and generation are substitutes for one another

Taken 'as she is writ' this means no one has to build generating plants if they build transmission lines.  Doubtful if even CATO economics are that stupid so what are they talking about?

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 7th, 2007 at 12:34:22 PM EST
I'll second that question.
by afew (afew(a in a circle)eurotrib_dot_com) on Sun Oct 7th, 2007 at 02:38:53 PM EST
[ Parent ]
It's a good question, and I also noted that as a bit unclear.

My guess when I read it was that they meant that more power can reach the consumers either by upgrading the grid (lower transmission losses) or by increasing the output at the power plant.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Oct 7th, 2007 at 03:35:30 PM EST
[ Parent ]
I think they mean that building new high voltage lines that connect you (more directly) to existing production capacity might give you, as a consumer, another alternative supply and thus a way to get lower electricity / resp, another alternative consumer, and thus a way to sell higher.

That's probably more true in the US where you have several regional markets not connected to one another, and where generally networks cover larger areas and are probably less redundant than they can be in Europe (but that's just me guessing on that last point, maybe I'm wrong)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 7th, 2007 at 04:22:45 PM EST
[ Parent ]
ROTFLMAO!

Calling rg!  Calling rg!

STAT!  STAT!  STAT!

Bring your I Ching and Tarot Deck!

We need you to make sense of It All.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 7th, 2007 at 04:46:04 PM EST
[ Parent ]
Sorry for the snarky response.  

But if you, given your expertise and experience, aren't sure what they are talking about then the authors have a  serious communication problem, at a minimum.

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Sun Oct 7th, 2007 at 05:07:44 PM EST
[ Parent ]
That's what I'd guessed as well.  Better long-distance high-voltage lines are something frequently talked about in the US, as they would be one way to help stop things like the big midwest-east coast blackout a few years back.

The statement presumes that there are multiple power networks that are not connected, and that periodic surpluses exist within these disconnected networks.  If all zones are running close to or at capacity, though, then better transmission lines probably wouldn't help much at all.

But I know nothing about this stuff.

by Zwackus on Sun Oct 7th, 2007 at 08:56:32 PM EST
[ Parent ]
That makes an interesting input for the upcoming conference on European energy policy...

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Sun Oct 7th, 2007 at 02:27:28 PM EST
As always, Cato is a mixed bag of hacks and decent policymakers.  They got it right on this.

Regulation vs deregulation is always going to depend on how competitive the market is -- holding constant considerations on the environment and workers' rights and the like, obviously.  It, for example, makes no sense to have exclusive cable providers in this day and age, as we have in many parts of America, when services like Verizon's Fios and DirectTV have made competition in the open market perfectly feasible and, in my experience, excellent.  It would, on the other hand, make no sense to fully deregulate as discussed above in Jerome's diary.

Eventually, innovation may make deregulation a good idea, but we're certainly not there yet.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sun Oct 7th, 2007 at 07:53:52 PM EST
I certainly don't know the "quality" of everyone on the staff of Cato, but everyone who works there is compromised.

Cato was established as a libertarian think tank:

The Institute was founded in San Francisco, California in 1977 by Edward H. Crane and initially funded by Charles G. Koch. The Institute is named after Cato's Letters, a series of British essays penned in the early 18th century expounding the political views of philosopher John Locke. The essays were named after Cato the Younger, the defender of republican institutions in Rome.

Murray Rothbard was an important founding member. He was part of Cato's original three-member board and suggested its name. After he came into sharp disagreement with other members, he left in 1981.

Charles Koch has been behind many libertarian projects including given over $20 million to George Mason University to enable it to hire an economics department composed of libertarians. His brother ran for vice president once on the Libertarian Party ticket.

Given that libertarianism is an eccentric philosophical belief system and that it's economic understandings are flawed anyone who works at Cato must also be a "true believer". Anyone who thinks otherwise and continues to work there would have to be exceeding naive or craven.

When a school of thought is supported almost exclusively by an extremely small group of right wing, super wealthy ideologues it lacks credibility.

The Cato Institute has been supported by:

    * Castle Rock Foundation (formerly known as The Coors Foundation)
    * Charles G. Koch Charitable Foundation
    * Earhart Foundation
    * JM Foundation
    * John M. Olin Foundation, Inc.
    * Claude R. Lambe Charitable Foundation
    * Lynde and Harry Bradley Foundation
    * Scaife Foundations (Sarah Mellon Scaife, Carthage)

[For those in Europe and  not familiar with these names they recur frequently in conjunction with similar conservative think tanks and front groups.]

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Sun Oct 7th, 2007 at 10:45:45 PM EST
[ Parent ]
is that CATO appears more willing to stand by the less palatable political consequences of their policy proposals.

This is very basic, but in this case, they for instance acknowledge that the goal of liberalisation is not lower prices, as has been said by so many politicians trying to sell these reforms. (They don't go all the way to stating explicitly that full market prices for electricity means denying electricity to some based on purchasing capacity - i.e. the poor; but maybe that's obvious to them.)

Your wider point is noted and worth repeating.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Mon Oct 8th, 2007 at 04:04:25 AM EST
[ Parent ]
Well you know the old saying, "even a stopped clock is right twice a day".

As I pointed out originally they ignored some important factors in their analysis and the fact that they reached a conclusion that you are in sympathy with doesn't alter the fact that their methodology was (deliberately?) flawed.

Usually when libertarians find a problem with the "free market" they blame it on excessive intervention by the state. That seems to be what their ultimate goal was in this case as well.

Wasn't it the state that forced the breakup of vertical integration?

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Oct 8th, 2007 at 10:32:38 AM EST
[ Parent ]
The fact that Rothbard was an important figure is, indeed, a red flag to me, as Rothbard was both economically incompetent and psychologically out-to-lunch.

George Mason University, however, enjoys one of the few largely-libertarian economics departments that I've actually found to be decent.  I'm a big fan of Tyler Cowen, who, unlike most libertarian economists, is quite modest and fair-minded, in my experience -- taking issues like Keynesian/Monetarist intervention, for example.  Alex Tabarrok, Cowen's partner-in-crime over at Marginal Revolution, isn't bad either.  (I should note, in the interest of full disclosure, that my uncle wrote the foreword to Tabarrok's book.  They're friends, so I'm biased on your-friends-are-my-friends grounds here, although I do genuinely enjoy Tabarrok's blogging.)  I'd submit, though, that Mason is a fairly open-minded school.  If I had kids, I wouldn't get my knickers in a twist over their attending it.

The big-dog professors at Mason don't tend publish on the big topics (business cycles and the related macroeconomic issues), though, so they tend to serve me more as entertainment than education.

The Auburn University crowd is the one to keep an eye on, even though the Mises Institute has technically been purged as an official arm of the school.  They're simply insane (racist, xenophobic, incapable of divorcing themselves from the thoroughly-discredited theories of the 1910s), as I can say after dealing with some of their disciples at Florida State.

Not everyone at Cato is a true believer, so far as I can tell, and I've been reading Cato publications (along with Brookings, going back to my undergraduate public policy classes) for the better part of the last five years.  Their Social Security scheme was a joke, but mainly because of the outright lies about the state of the current system.  The actual policy was, in my opinion, mediocre, but it would've deserved to die even if it were spectacular because of the fact that they attempted to sell it with obvious falsehoods.

(That is, for the record, the main reason for why I'm not all about John Edwards's candidacy, like some here.  I can take a certain amount of lying and arrogance from politicians, but Edwards's refusal to speak to how he plans to pay for all of his proposals is incredibly offensive to me, bordering on Bush-caliber horseshit.  He could accomplish all of those things, and without a lot of pain, but he needs to tell people the truth.)

I disagree about funding sources automatically discrediting people.  Policies should be examined for what they are.  Funding sources should simply provide for a greater degree of skepticism, where appropriate.  If that's the bar each of our interest groups have to clear, everything is going to be discredited, because we're going to find that dirty money influences just about everything in the policymaking sector.  It's always been that way, and it will, unfortunately, always be that way.

All that said, I think Brookings and the NBER are the only two think-tanks worth reading, so long as one avoids those two clowns who work on Iraq at the former.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Oct 8th, 2007 at 11:25:15 AM EST
[ Parent ]
Oh gods, that bunch.

The Philosophy department is chock-a-block with people who take Ayn Rand seriously!

Skepticism is the first step on the road to truth. -- Denis Diderot

by ATinNM on Mon Oct 8th, 2007 at 11:49:28 AM EST
[ Parent ]
Yes, but philosophy departments can be that way.  And it is, after all, Alabama....

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Mon Oct 8th, 2007 at 12:03:51 PM EST
[ Parent ]
Drew:
I've learned from prior discussions that we will never agree on some things. So I won't try to convince you of anything.

I tend to think that the old adage "he who pays the piper picks the tunes" applies in this case as well.

I traced some of the money and connections of the Marginal Revolution bloggers and summarized it in this essay:
Charles Koch and Libertarianism - How to "Buy" a University

Your outlook is sympathetic to people like Cowen so you don't see the intellectually shoddy arguments he supplies. The most damning thing about the libertarian movement as a valid philosophical development is that it has failed to get adopted anywhere else in the world. In the US it is kept alive by the infusion of money from the wealthy backers. If it had something useful to contribute to human thought it wouldn't be on artificial life support.

The fact that it turned out to be useful to the plutocrats who run the US as a way to provide some intellectual veneer to a worldview based upon greed has allowed it to ally with the GOP and sustained it longer than would have happened otherwise. In countries where the plutocracy is not as strong there is no such movement.

On the other hand a real breakthrough like Jefferson's needs no wealthy (and secret) backers to resonate everywhere.

Policies not Politics
---- Daily Landscape

by rdf (robert.feinman@gmail.com) on Mon Oct 8th, 2007 at 12:40:33 PM EST
[ Parent ]
I've learned from prior discussions that we will never agree on some things.

Yes, that's probably true.

I'd argue that the actual libertarian movement has failed to get much, if anything, accomplished even in the United States since the time of the Founders.  Naomi Klein summarized themodern issue well last on Bill Maher's show -- this issue of libertarian rhetoric being used to promote corporatist policies.  (I was impressed by her ability to recognize that we're dealing with corporatism and corporate welfare rather than pro-market policies.  Many of her persuasion have a difficult time separating the two.)  We hear libertarian rhetoric on economic issues -- but, of course, never social issues -- constantly, yet what we wind up with is nothing like what libertarians generally advocate.

Flat taxes are one basic premise, but we instead have a system of regressive taxation in many cases.  Witness Warren Buffet discussing the fact that he pays 15% of his income to the government, while his $60k/year secretary pays about one-third of her income.

Deregulation is another, but, while regulations on energy prices and quality of service are often deregulated, to one degree or another, we often don't have deregulation of the government-provided monopoly rights.  (This is a major issue with cable providers in Florida right now, as Comcast Cable obviously doesn't want to compete with superior services like Fios.  It would, however, like to charge monopoly prices, of course.)

You're right about libertarian policymakers and talkingheads providing ammo (and cover) to the likes of the Bush administration, -- that's undeniably true -- but I hardly think that to be Tyler Cowen's fault.  That would be a bit like blaming every socialist for Stalin -- although, granted, there was plenty of that at one time, too.

I'd also submit that Jefferson -- we're talking about Thomas Jefferson, I assume -- likely had quite a few wealthy and secret backers in his time.  I'd also be curious to know of what political persuasion you'd think Jefferson to have been.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Sat Oct 13th, 2007 at 05:48:25 PM EST
[ Parent ]
To be fair, the wealthy and secret backers sound more like a Franklin thing than a Jefferson one.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Sat Oct 13th, 2007 at 05:51:58 PM EST
[ Parent ]
I went to business school when this was happening.
A classmate had an incident when a co-worker got zapped to death due to the usual capitalist method of decimating safety while mergers and acquisitions took place.  So much "change" in the industry indirectly contributed to a death.
by Lasthorseman on Sun Oct 7th, 2007 at 08:20:18 PM EST
I'm sorry to hear that, but not surprised.

"Yo, Externality, you the man!"

-----
sapere aude

by Number 6 on Mon Oct 8th, 2007 at 06:36:26 AM EST
[ Parent ]
It was a pleasure to read your critique. You've captured with droll precision many fraudulent "libertarian" assumptions which I had internalized, then criticized in my last Energize America post. That piece generally exposed the capital market's dependence on legislation to obtain excessive future cash flow, irrespective of consumption trends and cost constraints. To complement rdf's keen perspective, let's review the immediate history so there is no confusion about the operative "market" mechanism implied by "libertarians," when we evaluate Congressional bills purporting to facilitate renewable energy minima, ownership rights and generation, and derivative securities trading -- also known as carbon and renewable energy credits.

CRS RL33739 "Repeal of the Public Utility Holding Company Act of 1935 and Its Impact on Electric and Gas Utilities" (Nov 2006, 14pp pdf) as engrossed by the Energy Policy Act of 2005 (EPAct of 2005). EPAct of 2005 revoked the SEC's authority to oversee  mergers and other transactions of public utility holding companies. The PUHCA of 2005 explicitly removed and rationalized SEC authorities in the Federal Energy Regulatory Commission (FERC) but did not bar "many entities from ownership  of public utilities."

Advantage: "Previously ineligible investors" subject to DOJ and FTC antitrust enforcement, e.g. private equity.

PUHCA of 1935 imposed substantitive restrictions and procedural requirements on companies that owned greater than 10% of voting securities or other controlling interest in an electricity or gas utiltiy (i.e. subsidiaries). The statute was administered by the SEC. Capital hated it: They argued "ownership restrictions and SEC filing requirements were unduly burdensome and effectively barred investment in the utility industry" and entry by new owners. What they were really saying is, PUHCA limited profit-taking available through horizontal organization (by acquisition or, God forbid, construction) and expansive geographical share of captured markets.

Disadvantage: Public investors in vertically integrated distributed utilities (DUs).

  • 1978, Public Utility Regulatory Policies Act (PURPA) et seq was the first in a series of federal legislation that created exemptions from PUHCA requirements for owners and certain types of cogeneration and renewable power plants, referred to as "Qualifying Facilities." Solar, Wind, Waste, and Geothermal Power Production Incentives Act [1990: GHWB]; Energy Policy Act of 1992, exempt Wholesale Generators [GHWB]; Energy Act of 2000 [WJC]; Energy and Water Development Appropriations Act [2004: GWB]
  • Deregulation ("liberalization") of state laws limiting price controls and siting of electricity and gas distributors.
  • 45% of the generating capacity produced only 7% of the total electricity.: [Joskow, in original] Is this a  typo?? What a claim!

Advantage: Private equity ownership of vertical public DUs, e.g. investment banks, institutional funds, MNCs

Proponents of the complete repeal of PUHCA argued "investment in the transmission infrastructure [would] facilitate competition in the industry" since adequate customer protection was charged to federal agencies DOJ, FERC, and FTC as well as petitioner's last resort, a state legislature's authorization of kWh rate changes. This proposition implies  that a holding company may exploit information asymmetries among stakeholders as well as its subsidiaries' operations to maximize profit so long  as arbitrage goes undetected. Summary, 1995-2006

The EPAct of 2005, effective  February 2006, not only indemnified interstate retail and wholesale monopoly pricing, it capitalized global arbitrage opportunities.

As of that date, all of the SEC-enforced requirements and restrictions placed on public  utility holdiing companies under PUHCA 1935 were removed. Holding companies are no longer required to meet the SEC's disclosure and registration requirements simply by virtue of their status as holding companies, although the SEC's other procedural requirements for the issuance of securities and regular reporting by public companies [investor-owned utilities or IOUs] remain in effect. The utility industry is now open to a broader group of investors who may have been previously deterred ... and conversely, public utility holding companies are now free to pursue a broader range of oppertunities, including merger with and acquisition of other utilities outside their [vertical IOUs'] geographic area and investment in non-utility assets.
The liquidity risks introduced to systemic fulfillment by that caveat alone boggles the entire academic discussion issued by these clowns.

Diversity is the key to economic and political evolution.
by Cat on Mon Oct 8th, 2007 at 10:41:39 AM EST
in sheep's clothing.

America is not Europe. I'll make no value judgment on that, but would point out that CATO's retreat from deregulation is not to be taken at face value.

There is a real threat to the utilites & pseudo-monopolies emerging in several states, called Community Choice Aggregation. It leverages deregulation to achieve some very laudable policy and clean energy objectives through existing energy infrastructure, and can not happen if the utilities control the power lines AND the generation with government-supported prices (i.e. regulation).

So I'm going to argue (with very little substance right now as I'm crunched for time) that you're wrong here, as I argued in Paris, and argue even stronger that the next few carafes of Cotes du Rhone are on you ...

by mateosf on Tue Oct 9th, 2007 at 05:58:02 PM EST
CATO's real point was to argue for more (and "better") deregulation, not against it; I'm just using their arguments for other purposes.

The trend you describe is not necessarily something that requires deregulation - it could also happen with I expect smallish adaptation of existing regulations.

The next Côte du Rhone are indeed on me.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Oct 10th, 2007 at 03:37:57 PM EST
[ Parent ]
My question is about transparency because, figures don´t lie, but elites can figure and control occurs.  Whether regulated or deregulated, company figures + industry figures + governmental reporting figures usually end up raising prices by blaming a different cost in the equation.  Can it make a difference to benefit the end-user?

Our knowledge has surpassed our wisdom. -Charu Saxena.
by metavision on Wed Oct 10th, 2007 at 06:18:30 PM EST


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