Power and Free Markets

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Bush Administration

Matt Stoller writes at MyDD:

All over the country, America is enjoying a series of free market blackouts. California, New York City, and St. Louis have all been hit with electricity outages due to a poor electricity infrastructure. This infrastructure is a result of a reliance on a free market and tax cuts instead of public infrastructure investment.

Ian Welsh writes at BOP News:

As of this writing there are power outages in three parts of the country – St. Louis, New York and California.

The St. Louis one looks unavoidable. The other two look avoidable.

Third world country. Some things either need to be run by the government, or need to be highly regulated. Among those things, electrical power, which is a natural monopoly if anything is, stands near the front of the line.

This is what free market fundamentalism gets you.

Death.

Remember the Great Blackout of 2003? When we learned the electricity grid is old and fragile? Has anything been done to correct this situation? Not that I’ve heard.

But then there’s Kate O’Beirne. After the 2003 blackout she said on CNN’s “Capital Gang”:

SHIELDS: … the argument that was made by — for deregulation was, it would keep the rates lower. Now…

KATE O’BEIRNE, CAPITAL GANG: Well, the cost of energy to consumers has been kept much lower by deregulation. That’s not been true of the infrastructure and the grid…

FAZIO: That’s right.

O’BEIRNE: … because that remains regulated and…

(CROSSTALK)

NOVAK: … regulate it.

O’BEIRNE: And it discourages the kind of the private investment it needs.

FAZIO: (UNINTELLIGIBLE).

O’BEIRNE: So further deregulation happens to be the answer.

I remember what O’Beirne said because it was so colossally stupid I never quite recovered. I wrote at the time (Note: some links had expired; substitutes provided where possible):

Let’s look at O’Beirne’s underlying assumptions — first, “The cost of energy to consumers has been kept much lower by deregulation.” This would be big news to folks in California. California was the first state to deregulate (in 1966) and today Californians are paying twice as much for power as they did before.

Her other assumption is that regulation discourages private investment. In the case of the electricity grid, just the opposite is true.

    Today’s grid was built up over the last several decades by individual utilities across the country going through complex proceedings with local, state and federal officials for permission to build transmission lines. Rates were regulated during most of that time, so utilities were virtually assured of getting back the money they invested in power lines.

    The financial and regulatory environment is much different now that the market has been deregulated, and the uncertainty has left utilities unwilling to make the kind of long-term commitments that are needed. [Akweli Parker, “Why Power-Grid Experts Were Not Surprised by Blackout,” The Philadelphia Inquirer, August 17, 2003]

Building infrastructure is an enormous capital investment that can take a long time to pay off, and the magic of the marketplace doesn’t change that. And deregulation puts more stress on energy infrastructure because it creates regional and national markets that require moving power over long distances.

    “We’ve got excess power in upstate New York, but there’s no way to get it to New York City because of the bottlenecks,” said Denise VanBuren, vice president of Central Hudson Gas & Electric, which supplies power to eight counties north of New York City. “It’s very difficult in this economy to get financing for a major transmission line, and we’ve been concerned for a long time about the region’s transmission capacity.” [David Firestone and Richard Perez-Pena, “Power Failure Reveals a Creaky System,” The New York Times, August 15, 2003]

If you read nothing else about deregulation today, be sure it’s this article by Robert Kuttner in yesterday’s New York Times

    But deregulation hasn’t worked, for three basic reasons. First, there is a fairly fixed demand for electricity and generating capacity is tight, so companies that produce it enjoy a good deal of power to manipulate prices. The Enron scandal, which soaked Californians for tens of billions of dollars, was only the most extreme example. California authorities calculated that a generating company needed to control just 3 percent of the state’s supply to set a monopoly price.

    Second, the idea of creating large national markets to buy and sell electricity makes more sense as economic theory than as physics, because it consumes power to transmit power. “It’s only efficient to transmit electricity for a few hundred miles at most,” says Dr. Richard Rosen, a physicist at the Tellus Institute, a nonprofit research group.

    Third, under deregulation the local utilities no longer have an economic incentive to invest in keeping up transmission lines. Antiquated power lines are operating too close to their capacity. The more power that is shipped long distances in the new deregulated markets, the more power those lines must carry. [Robert Kuttner, “An Industry Trapped by a Theory,” The New York Times, August 16, 2003]

Yes, Kate O’Beirne, further deregulation is just the ticket. Spoken like a true pundit.

In his post today (linked above), Matt Stoller apparently caught some wingnut comments. He added:

Update: I’ll clarify a bit for the idiots who think I’m against a free market and cleverly call me comrade. Markets are good things in areas of society where there’s a private resource allocation problem, like consumer goods. Privatizing public services – like transportation, electricity, water, disaster relief, warfare, and some parts of telecommunications – is not only stupid, it’s extremely inefficient and leads to people dying and suffering in all sorts of needless ways. Also, the idea that privatizing public services and underinvesting in public infrastructure is free market anything is stupid, but then, I’m not the one who’s been abusing the free market language for forty years. Anyway, enjoy your blackouts.

Like I said in the “Child’s Play” post below, righties tend to “gravitate toward simple, magic-bullet solutions that will perfectly solve problems.” And then they cling to that solution with blind faith, never mind it’s not working.

Update:
I just heard on NBC news that 38 people have died from the California heat wave.

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7 Comments

6 Comments

  1. Doug Hughes  •  Jul 25, 2006 @5:46 pm

    Generally, a free market economy works to the advantage of the consumer. When computer manufacturers, for example, compete the product improves and the price decreases. If you did not grow up through the computer age, you might not be aware thet computer systems cost a fourth of what they did in the 80’s and have memory, storage, and speed a hundredfold. Increased competition in phone markets has caused the cost of long distance to be inconsequential.

    The free market system fails the consumer when a monoply exists (as in utilities) or a functional monopoly exists (as with insurance companies & oil companies) or when the profit motive is in direct conflict with providing services to an impaired client class (day care and nursing homes).

    Government needs to apply a different standard to these groups, and that won’t happen until the voters recognize WHERE the free market system must be regulated ruthlessly and requires representation for the consumer.

  2. maha  •  Jul 25, 2006 @6:56 pm

    If you did not grow up through the computer age, you might not be aware thet computer systems cost a fourth of what they did in the 80’s

    I grew up in the manual typewriter age, actually, but you’re talking apples and I’m talking oranges. Consumer products are one thing; aging utility infrastructure is something else entirely. The “profit motive” works against infrastructure maintenance because such maintenance is pure cost. That’s why it doesn’t happen unless government does it.

  3. Doug Hughes  •  Jul 25, 2006 @9:17 pm

    My point (poorly expressed, perhaps) was that a free market economy can work wonders in SOME areas, but not with utilites. Legislators & lobbyists have attempted to apply that distorted reasoning – not me.

    On the subject of lobbyists – I looked it up on opensecrets.org. The electric utilitis contributed about 6 million in 1994 it was up to 21.5 million in 2002, the last year figures are complete. Not all this was for deregulation; they are also buying exemptions in environmental regulation; they are in denial of global warming.

  4. emel  •  Jul 25, 2006 @10:55 pm

    I know it is off topic but the girls under 18 just lost their rights , had them taken away by the US Senate. Not the boys, just the girls- so now they are Daddy’s property until 18- the US Senate just said so. When will they take away women over 18’s legal right to make any decisions like traveling?

  5. Eric  •  Jul 26, 2006 @1:19 am

    Stoller is dead on. Free markets only work where there is sufficient competition.

  6. dday  •  Jul 26, 2006 @12:47 pm

    Over 50 are dead now.

    This should be an Angelides position paper. His failure to capitalize on the situation is astonishing. It’s why he’s nowhere right now.

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