More on Markets as the Way of the Past
Wow—just a week after the Los Angeles Times published its analysis of how the political climate is turning against free markets, the Wall Street Journal has its own piece on the same subject. While this is, overall, a more balanced piece, it still embraces the same false dichotomy that the L.A. Times piece did. An excerpt:
On the state level, California regulators clawed back as much control as they could of the state's electricity market after a failed experiment in deregulation that started in 1998. "Excesses by markets bring the pendulum swinging back toward government," says Michael Peevey, the Democratic president of the California Public Utilities Commission.
But in this example especially, we did not see a choice between "market excess" on one side of the pendulum's swing and government regulation on the other. Most people say the California electricity market was "deregulated," which brings to mind a playing field where business people are free to act as they want. But that wasn't what happened. The deregulation was more of a "reregulation" that moved the system from public monopoly to a state-controlled monopolistic private system. Competition is the lifeblood of entrepreneurs, and there was little competition in either system.
Luckily, we don't have to choose between only those two options. We can also genuinely lift rules that inhibit entrepreneurs' ability to experiment with their businesses and figure out what works.
Has the word deregulation been so sullied that we need a new vocabulary to describe entrepreneur-friendly policies, whether it be the arena of electricity, the environment, or housing?
Tags: stock market | Wall Street Journal
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California Markets
Ironically, the term "deregulated" is a misnomer more than most people understand. California didn't remove regulation from anything. The regulations including where energy could be purchased, how it could be priced, and how much could be purchased with hedges (foward contracts) became a point of law, not of markets. A Democrat controlled legislature decided that the laws of supply and demand could be repealed and what happened was disaster. The result is that California now has almost the highest cost of electricity in the nation with a relatively benign climate; a significant amount of hydro and nuclear; and a very regulated environment. If we compare the problem of providing electricity in California to Arizona, Nevada, or New Mexico, California should be the cheapest place to buy electricty. In fact, it is the third highest in the 11 western states, behind Alaska and Hawaii that both have very hostile climates for electricty (huricanes and snowstorms). It costs 19.9% more to buy electricity in California than the average of the 11 western states. Where are the cost-savings to ratepayers in this scenario? (The answer is nowhere.)
utility deregulation is a fraud on consumers
Matthew Bandyk states that "Competition is the lifeblood of entrepreneurs" and that " "deregulated" … brings to mind a playing field where business people are free to act as they want".
What about consumers? Isn't the true purpose of competition to restrain competitors for the ultimate benefit of consumers?
Doesn't an effective free market require freedom for customers to act as they want? Of course it does.
This is why utility deregulation is a fraud on consumers and is doomed to failure. Its promoters fraudulently promised it would drive prices down. Because of the lack of customer choice it has only enabled price manipulation and sky-rocketing prices.
A free market works only when consumers have sufficient choice to restrain business from manipulating prices.
For example, car companies can't manipulate car prices too high because if they do, customers will stop buying new cars and instead continue to use their old cars or buy a used car.
Electricity consumers do not have these choices. You can't re-use old electricity and you can't buy used electricity. If a utility unreasonably inflates electricity prices, you have no choice but to pay that price every time you turn on a switch.
The only way to fairly restrain electric utilities in the absence of such customer choice is to strictly regulate prices. This is what we did successfully for 70 years. Prices were reasonably related to the cost of production and supply generally kept up with demand.
Your free market analysis is distorted when you ignore or forget the customer side of the market.
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