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Riding a wild-West market

Look no further than the Texas power crisis last month to see the consequences of a decades-long obsession in the United States with “deregulation”.

 

Darrin Burguess

 

No other country seems to believe so fervently that laws of natural selection in an unregulated market will do what laws of the ordinary kind accomplish everywhere else.

Between February 11 and 17, Texas was hit with a once-in-a-century cold snap.

Cool weather of any kind is always something of a crisis in a place where the climate is a cross between North Africa and Louisiana, where houses are insulated to keep heat out, rather than in, and where gas furnaces are rare. In Texas, surges in demand for electricity are a summer phenomenon, when use of air-conditioning peaks. And so, as last month’s polar vortex caused temperatures to drop to their lowest level in over seventy years, some power plants weren’t even in operation, having been taken offline for routine maintenance.

The power grid was overloaded all at once by millions of electric heaters.

When too many appliances overwhelm the wiring of an individual house, a breaker flips, lest the system literally explode. In the power grid itself, is situated instead a central control office, where several engineers watch a massive screen while nervously biting their nails.

On the night of February 14, no choice remained but to cut the power for two million households, in what became the largest outage in U.S. history.

Tens of millions of people went without heat in sub-zero weather.

At least seventy people froze to death or perished from carbon-monoxide while warming themselves in idling vehicles.

Following such a debacle, fault can always be found in particular decisions of planning or design.

In this case, emergency scenarios for cold weather seem to have been based on a cold snap that occurred in 2011, rather than a more severe event of l989.

The infrastructure itself wasn’t designed to cope with cold weather, at all. Machinery at power plants simply shut down from the cold, for lack of insulation.

It’s a basic fact in power systems, however, that disruptions are unavoidable. Electricity can’t be stored on a large scale, after all. Networks are therefore integrated across regions so that in an emergency one local utility can receive power from another, purchased at reasonable rates.

Starting in the 1990s, however, that system was dismantled in several states, as a trend for deregulation reached its zenith.

As was typical in such cases, advocates argued that rules established to stabilize prices and ensure quality actually inflated prices and stifled innovation.

Indeed, electricity had been managed for years by “regulated monopolies,” as we used to say of small groups of companies that presided over regional markets, where they produced, distributed, and sold their service. It was a flagrant violation of anti-trust principles.

And yet ordinary consumers weren’t exactly complaining about the price of electricity, nor about the service, which was exceedingly reliable.

It’s difficult all the same in the U.S. to counter arguments for consumer choice and unrestricted trade. Those ideals are deeply ingrained in the national psyche.

For nearly its entire history, the U.S. has witnessed one economic boom after another, as the Western frontier unfurled and the country expanded its reach abroad.

In the twentieth century, such activity turned inwards, towards “consumerism,” where vast wealth was to be found by encouraging more individuals to part with more of their money for products of increasing variety and sophistication.

It was a sustained expansion on a historic scale, which carved into the national mindset a notion that having a way somehow to get in on the action was tantamount to a basic civil right.

“Nothing so undermines your financial judgement as seeing your neighbor get rich,” said the banker J.P. Morgan, summarizing the national spirit.

If that explains in part why environmental and labor regulations face so many more hurdles in the U.S. than elsewhere, then the rise of the notion of “consumer” as a demographic on par with “voter” and “tax-payer” explains why people in the U.S. bristle at rules that prevent them from purchasing dangerous medications and firearms and the like. People in the U.S. remain quite open-minded about easy credit and quick loans.

It was a U.S.-American, after all, who coined the phrase, “The customer is always right.”

Starting in the l970s, as opportunities for wealth began to dwindle, and inflation began to wipe out the value of returns on traditional investments, investors became hungry for more aggressive returns.

As that decade drew to a close, an inspiration seems to have arisen in the form of Bell Telephone Company, which, faced with anti-trust violations regarding its virtual monopoly over the nation’s phone service, decided to split itself into several individual companies.

What occurred in the wake of that break-up should have served as a warning: Service was disrupted, prices shot up, and consumers were bewildered by a confusing array of new choices — problems that were never entirely resolved.

Investors, however, received a glimpse of new frontier. By putting the telephone network on the open market, the service itself could be opened to speculative trading, new companies could attract more investment, contracts to manage the service itself could be auctioned to the highest bidder, bonds could be sold to manage old debt, and large utilities could see themselves expanding beyond their regional bases, just like any other company.

And so came the deregulation of broadcast media, airlines, finance, telecommunications, and electrical power, all liberated from quality standards and price controls that had stood in place for decades. Each industry was opened to a competitive feeding frenzy.

Acting as handmaiden in each case was the notorious U.S. political influence machine. In the run-up to the deregulation its power network in l998, tiny Connecticut saw over one million dollars spent on lobbyists alone.

Nowadays, we see that the end of the “fairness doctrine” in broadcasting has yielded a new age of demagoguery, while the deregulation of airlines has depressed quality and eroded the stability of the companies themselves.

In the race to profit from liberalized commodities, a new era of scandals ensued, symbolized by the collapse of Enron, a specialist in natural gas derivatives that went from $60 billion to bust in a few short years. Enron is based in Houston, Texas, as it happens.

As for electricity, people who live in deregulated markets spend more for power, on average. Disruptions in supply frequently trigger sky-high prices on the open market and glitches in delivery that make rolling blackouts a fact of life for millions. In Texas last February, the price of electricity rose briefly by four-thousand percent.

Texas is unique, in any case. They’ve declined to integrate their system with the rest of the country, so great is their concern over federal regulations. Hence, they have no recourse to surplus power, at any price. Their market is deregulated, too, in any case.

Rather than turning a critical eye towards deregulation, many Texans seem to be looking for culpability elsewhere. They blame the push towards renewable energy, for example, for having supposedly crippled energy production.

At any rate, deregulation isn’t an all-encompassing trend in the U.S. Over half of American states retain their regulated power systems, for example. Elsewhere, the clamor for accountability from social-media companies may result in something like the “regulated monopolies” of the past.

Ironically, it’s our continued economic dynamism that stymies progress in this regard. The less likely it becomes to strike it rich, the more open we may become to certain restrictions.

Hopefully, it won’t take a massive blackout to force us to change the way we think.

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