India Blackout Shows Government Failures in Energy Policy

August 13, 2012 RSS Feed Print

Michael Lynch is the president and director of global petroleum service at Strategic Energy & Economic Research.

Aside from hearing "On, Wisconsin!" played thousands of times, the choice of Paul Ryan as a vice presidential nominee means a revival of the old debate between big government and minimal government, as usual with Democrats supporting the former and Republicans the latter. Well, kind of, or at least rhetorically. Republicans in recent years have too often honored their commitments for small government as they have fiscal rectitude: in the breach. Democrats vary their approach with budget realities (mostly). Addressing this issue has already taken books, but let me make a small effort to clarify one aspect.

The recent huge electricity blackout in India, affecting roughly 600 million customers (that's America times two) demonstrates the effect of extreme government intervention in the power industry. Whereas utilities in the United States have some regulatory oversight which affects investments and prices, the political control is often indirect, in the form of choosing regulators.

In India, the entire system is heavily politicized, with favored classes and customers getting serious price breaks, which not only starves the utilities of capital but is effectively a type of graft not seen in this country since the days of political machines like Tammany Hall. Although lower prices are supposed to be intended principally for farmers, there are numerous reports that government officials steer them to supporters, whether for cash or votes.

[See a collection of political cartoons on energy policy.]

But the real story is the invisible cost of the mismanagement of the industry, which is that the extremely low reliability results in fantastic economic losses, as businesses either shut down for hours a day or buy generators, fired with diesel, one of the most expensive forms of energy available. Estimates of costs vary, but clearly a significant amount of money is wasted and economic growth is reduced by both the lack of power and discouraging foreign investment.

Which contradicts one of the age-old aphorisms in the government versus markets debate, namely that industry is short-sighed and focuses on quarterly profits, whereas government is farsighted and plans for the long term. As energy policy in most countries has shown for decades, the government's vision into the future is no better than anyone else's, and usually far worse.

But also, policy is frequently made by politicians reacting to immediate crises, not long-term expectations. Vito Stagliano, who was a senior Energy Department official, wrote an excellent book describing how bureaucrats' policy proposals were ignored by politicians when there were no problems with energy, and then ignored when crises arose in favor of spur-of-the moment decisions.