Wednesday, March 21, 2007

Electricity, markets and monopolies

The big news story nowadays is Ameren’s recent rate increases, permitted by the expiration of a 10-year rate freeze. Today’s Daily Egyptian details Lt. Gov. Pat Quinn lambasting Ameren’s rate hikes, dishonesty and poor service, and advocating “strict, no-nonsense laws” to remedy the situation.

Just what we need: More laws.

When I first heard about the prospective rate increases last year, it seemed to make sense: What with inflation (deliberately caused by our government...but that’s another post), enforcing the same prices for ten years is surely going to harm a company, perhaps to the point that they will no longer be able to provide reliable, quality service. Certainly, this is precisely what Ameren is claiming. However, after seeing the actual increases in people’s electricity bills (including mine!), I’ve changed my tune.

Damn them bloody capitalists! Their just tryin ta rip us off! We need more goobermint intervenshun!

Except…it’s not the capitalists’ fault. It’s ours.

Or to be precise, it’s our State government’s fault. Lt. Governor Quinn’s finger should be pointing squarely at himself, at the governor, and particularly at the legislature. Why? Because Ameren is essentially a state agency. To be precise, Ameren is a state-sanctioned monopoly.

Monopolies are bad. Enforced monopolies are worse. The justification for having enforced electricity monopolies is that power generation and distribution is something called a “natural monopoly”; in essence, it is claimed that one company can do it more cheaply than two or more, and that if you allow competition, prices would be higher than if you didn’t.

True enough, in theory. Especially for power delivery, it would seem that having two or more sets of power lines running everywhere would be more expensive than one. But this logic ignores the essential evil of monopolies, especially enforced monopolies. A monopolist has essentially no incentive to lower price or improve quality beyond a bare, necessary minimum. This is true whether the monopolist is highly regulated or left to his own devices. Regardless of how much regulation or oversight you impose on a monopolist, he will still try to get around the rules and raise prices, or if he can’t do that, cut costs while not dropping prices. This is known as the “golden watercooler effect.”

So what’s the solution? Simple: allow competition. Repeal Ameren’s state-enforced monopoly, and let other businesses provide electricity to Southern Illinois businesses and residents. Would this instantly drop prices? No. But it would have the long-term effect of lowering prices and/or improving service, even if no other company actually comes in. Why? Because the existing company, no longer having a state-enforced monopoly, will be afraid that if their price is too high or their service too poor, other companies will come in and try to undercut their business.

What’s more, a free market in any industry nearly always has the long-term effect of lowering costs, and therefore prices. In a few years, with sufficient (read: unregulated) competition, we would have the lowest sustainable electricity prices possible given the location and the existing technology, with ever-lowering prices (discounting inflation) as technology improves.

Bottom line: The only way out of our electricity problem is to cut Ameren loose from its state-privileged status, to fly or fall on its own.

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If I'm not mistaken, power companies are not true private entitites and never have been. So its not like we'd be regulating an industry that was previously unregulated.

As far as allowing competition...have you forgotten the horrors of the California deregulation? (P.S. - Ameren hasn't...they sold excess power during that time and raked it in like mad.)
I'm not sure I understand your first point. No, power companies are not truly private entities; they are essentially privately owned state agencies. I'm proposing changing exactly that.

Also..."deregulation" does not necessarily equal "full privatization," which is what I'm recommending. Poorly and incompletely done "deregulation" can cause more harm than good. Besides, although I'm not familiar with the details of the California situation, it takes time (years) for the benefits of a free market to take full effect, especially in such an infrastructure-intensive industry as electricity.

Regardless...look around you! The free market works, regardless of the industry. Serious shortages of the sort that happened in California simply don't happen in truly free-market industries, except in truly catastrophic circumstances. At worst (say a bad freeze for Florida oranges), there will be temporary price spikes, which level off by next season, at latest.
"The free market works, regardless of the industry."

Tell that to the scores of people who are unemployed, hungry, underpaid, and so on.

The free market works for some people, some of the time. But it isn't this rosy save-all that you're making it out to be.

(Deregulation in California basically meant opening up to competition.)
I offer my extended commentary on this post here:

Why are gasoline prices always the same at every station?
Englishman: Unemployment is caused by government polcies like the minimum wage.

I don't really know what "underpaid" means. Aren't we all underpaid, in the sense that we could really use more money?

As for me some truly hungry people in America. Even the lowest-paying job (ignoring the minimum wage) pays enough to keep a person fed. And we're so damned rich that charity will give good, healthy food to anyone that can't (or won't) buy it for themselves.

The market is the rosy save-all I make it out to be, in the long run. The free market system enriches all while hurting none but powermongers, leeches and thieves.
Anonymous: Obviously gas prices are not the same at every station. If you're facetiously asking something else, come out and ask it. I'm dense.

By the way, I've posted extended commentary to Bob Paul's extended commentary on his blog post.
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