Deregulate This!

Great Debates
21

Despite being the leftist I am, I have to say deregulation’s one of those things that’s worth looking at on a case-by-case basis; it’s often good.

Take airline dereg. Yes, service is shitty and the seats are small, but that’s because deregulation got all of us in the air. I grew up in an era when air travel was the province of businessmen and the upper middle class, and even the upper middle class didn’t travel by plane more than a couple times a year.

Now, pretty much everyone flies, and many of us fly a lot. Dereg made this happen. I’m for it.

Dereg has also given us cheap long-distance service - although the carriers clearly need to be forced to be less confusing about the specifics of their plans.

OTOH, deregulation of the airwaves has given us corporate sameness on the radio, and a message from the adult world to our children that sex is something they should routinely indulge in, among many other things. The airwaves are a particularly interesting situation in that we own them; dereg here was the telecommunications world’s way of saying to the public, “You shouldn’t be able to dictate any standards for the use of your own property, except by your buying decisions.” Funny, we’d never dream of running the national parks that way. Or maybe we would (shudder).

In theory, in the case of electrical deregulation, competing utilities can be held to the same good-citizen standards that applied to the electrical monopolies. In fact, it’s not easy. If the electricity I buy in Maryland is being produced in Ohio, what sort of agreement will be necessary for Maryland regulators to ensure that the power generated in Ohio is being produced in the same environmentally friendly manner that Maryland citizens have required of the local power companies - and will we budget the extra money for our regulators to go up there and check on them regularly?

It’s the sort of thing that you’d like to see one or two states try, before everyone jumps on the bandwagon. After all, you’d like to know where the damned thing’s headed before you jump aboard.

22

RTFirefly:

Generally enviromental regulation of power plants is left to the federal regulators. Power plants routinely have to file air quality reports with the EPA which are public domain. Any generator that wishes to sell onto a particular electric grid has to go through a certification process whiich would include meeting enviromental impacts.

Of course under deregulation you can order “Green” Power, which generally means solar, wind, geothermal, small hydro from your energy provider.

23

I have to agree with Mattk about deregulation in the UK.

I could add another dishonourable mention to the list of de-reg failures, that of the bus companies.

We used to have bus companies that were owned by public bodies such as district councils and associations.They were all privatised and the result was a drop in sevice standards, older vehicles plying the rouutes and all operators cherry picking the profitable routes whilst quietly discouraging the use of unprofitable ones so that they could close them down under the Byzantine regulatory system.

The system fell apart in some places and has been taken back into public ownership but it is fair to say that on our overcrowded island where the bus could have been a useful contributor to less congested roads this experiment has failed.

One of the reasons that many of our privatisations have had an adverse effect on the industries concerned is that we do not have regulatory bodies with the teeth that US ones do, there is absolutely no chance that a court in the UK is likely to pass a judgement that would break up a company in order to keep competition healthy in the way US courts have done.

Our privatisations were less about business and more to do with raising money for the then Tatcher government to finance tax cuts whilst employment fell thus reducing total tax income.
Our privatisations were also about settling old scores and crushing the concerns of workers.
Our privatisations sold assets at a fraction of their true worth hence the huge rise in share values when they came onto the market thus robbing the public of their hard-earned wealth and awarding it to the friends of the then government.

Given that our privatisations had little to do with competition and everything to do with creating labour pools(unemployment) and financing a political theory in order to guaruntee the place of that hateful woman in history it is hardly surprising that it has been, with a couple of exceptions, a balls-up.

Had the motives been better and the appropriate powers given to the regulatory bodies it would have probably worked.

Oh and Mattk I admire your restraint, good on you.

I am unable to do so having seen entire towns such as Corby, Castleford, Ravenscraig, Liverpool, Sheffield and much of the north-east destroyed by the policies of the wicked one.

24

**

But, do you have any evidence that keeping it regulated would not have gotten us to the same place eventually? Is there any country that currently has not deregulated flying? Do they have lower of hihger rates of satisfaction regarding air travel. you’ve commmited a casual fallacy. Airlines were dereged, prices fell, therefore dereg leads to lower prices.

**

Again a casual falacy. I would like to see some evidence that prices would be higher if we hadn’t deregulated. Mexico deregulated theri phone company, and now has some of the highest phone rates in the world.

25

The problem is, you can’t do history in a lab. A real drag, that. :wink: So there’s no way of comparing the past 20 years with and without airline or phone deregulation.

But when things have had a certain stasis, then you deregulate, and the day after that, prices drop through the floor, as happened with airline ticket prices…well, that may not prove anything, but you’ve got to give that theioy the benefit of the doubt until you’ve got a lot of evidence showing that it would’ve happened anyway. I remember one airline in '82, in the early days of dereg, offering what they called ‘bus fares’, fares that were cheaper than Greyhound and Trailways charged to do the same route, only they were flying you instead of driving you. Hard to imagine that occurring in a regulated environment.

26

  1. No one challenged the overall logic that rent control has the long term effect of decreasing the housing supply. It seems to be a matter of common sense that someone conteplating building a building will be alot more reluctant to do so if there was a high likelihood that he would not be able to increase rents in accordance with market rates.

  2. No one brought this up, so I’m not responding to anyone in particular, but there is an underlying assumption that rent controls have some justification due to the fact that housing is a basic human need. In this regard, it is important to consider that housing in a specific location is not a basic human need. It would not make much sense, if applying price controls on cars in the interests of making transportation affordable, to also apply the same price controls to Rolls-Royces.

  3. Someone observed that when an apartment becomes deregulated, the prices go through the roof. It would be an error to extrapolate from this to a scenario under which all rent controls were lifted. There are few people who can afford to pay exhorbitant rents for an apartment. When only a few apartments are available, the price rises to a level that these few people can afford. Were all apartments to become available at market rates, the price would only go to a level at which enough people could afford to pay so that enough apartments will actually be rented. This is a basic principle of economics. There is no denying that removing rent controls will increase rents, and probably significantly. That’s what all the fuss is about. But it’s probably not as bad as people would think based on the preceding observation.

27

Did you even bother reading the earlier posts? Rent control only affects buildings that have already been built. There is nothing in them to discourage future buildings.

28

oldscratch:

Now why didn’t I think of that?

Actually, all “buildings that have already been built” were at one point “future buildings”. The existence of rent control on such buildings suggests that at some future point, when a proposed building has reached the status of “buildings that have already been built”, it will be subject to rent control. Any builder who would not take this into account is a fool. Any poster who does not take this into account…well, forget that.

29

You still didn’t read very carefully.

Please tell me how a new building can become a building built before 1978? thanks.

30

Oldscratch:

Details, details…

Actually, I was commenting more about rent control in general than about the specific example in SF. However, now that you bring it up…

There is nothing magical about the year 1978, though it should be noted that in that year, Reggie Jackson hit 3 home runs in a world series game (I think). If the political realities which cause rent controls to be in effect for pre-1978 buildings remain extant it is likely only a matter of time before that year is changed and later-built buildings become subject to rent control as well.

You are most welcome.

31

Oh I see. So a specific law limiting rent control to a nuildings built before a specific time is reason enough to disacourage new building because, get this, they might change the law. In fact, any liberal city could in fact enact a rent control law in the future.
So the real problem, the one that is causing a housing shortage, is liberal and left leaning cities and city councils. All we have to do is replace the government with conservative free-market advocates. Of course, that might not be enough, the people might be stupid enough to go and elect another liberal council (which as we all know, thanks to your amazing insights, will in fact cause a housing shortage). We must pass a national law immediately, one that restricts city council seats to only free-market anti-rent control advocates. Only then will enough cheap housig be available for everyone.

Get real.

32

The scenario that you sarcastically describe has some truth to it, although it is farfetched. Obviously, the more removed you are from the immediate cause, the less impact it will have. You have chosen to ignore the basic logic that I pointed out, which still stands.

I may change my mind however, after I get real.

33

IZZYR: Reggie had his 3-homer World Series game in 1977.
Just to add a few Canadian counter-examples:

  1. DEREGULATION OF THE TRUCKING INDUSTRY IN ONTARIO

Prior to the mid-1980s, all trucking in Ontario was regulated. Every cargo and route was regulated by the provincial government; a prospective new company had to prove “societal value” to get in to the industry, which in practice meant you had to know something.

The industry was deregulated in the late 80’s. Since then, safety levels, service, and prices have IMPROVED, in some cases by a lot; see Statscan “Report on Trucking” in relevant years.

  1. DEREGULATION AND FORCED COMPETITION OF THE PHONE INDUSTRY

Prior to this past decade, Bell Canada had a legislated monopoly on all phone services. That was taken away, opening the door for Sprint, AT&T, etc.; since then service and prices have improved so dramatically that even Bell, despite facing more competition, is making more money (they fought deregulation hard, though.)

And before you bash deregulation of the airline industry, consider Canada. We have one airline: Air Canada. By regulation. The service is… well, it’s worse than any U.S. airline, excluding Con Air. And you pay far more, too.

NO country’s regulated airlines are any better than the U.S. airlines. And many are worse.

34

RickJay,

Thanks for the correction. In that case there’s REALLY nothing magical about 1978.

35

A couple of years back, the voters of Massachusetts were asked in a ballot question to approve deregulation of electric power. The really weird thing about this was that the larger utilities (like Boston edison) sponsored huge ads urging people to vote FOR deregulation! This made me immediately suspicious. We were promised a reduction in ouut KW/hour rates, with a slight hook-the utilities would be allowed to charge extra fees for their bad business decisions (like investing in the disastrous Seabrook Nuclear plane in NH, and adjustments for oil price increases). well you can guess the result-deregulation was approved, and now our basic electric rate has dropped=but your electric bill has all kinds of additional charges! My bil is now HIGHER than it was before deregulation-will no improvement in service!
The moral of the story-be very careful about utilities promising things-they are usually dishonest!

36

This is a fun one. “Deregulation” assumes the removal of existing regulations. “Reregulation” would be a much better term, and even that is really off the mark for what happened with the electrical utilities in California. Even if the State removed it’s Public Utilities Commission regulations the utilites would still have to deal with more than 30 other regulatiory agencies including FERC, NRC, DOE, Air Quality districts, etc.

Basically, all that changed was the ownership of the large natural gas fired generation plants, which are the biggest chunk of meat in the overall generating stew. The wire, transformers, poles, meters, vaults, and everything else are still owned and serviced by PG&E, SCE, and Sempra(formerly SDG&E). This stuff is still regulated pretty much the same way it was before, but with small changes in earnings (always between 10% and 12%) based on measured performance.

The only “deregulated” thing here are the generating plants, and they are the part that is causing big price jumps in San Diego. The issue is supply and demand, and their appears to be a bigger demand than supply, so the prices are jumping, and the new owners of the generating facilities are making good money. But everyone screams at the utilities. Why? They didn’t ask for deregulation.
They opposed it to protect their own interests.

Now that these power plants are making money one would think other investors would try to build plants and make big bucks too, but first off, power plants take a while to build, and secondly, the remaining regulatory agencies and the NIMBY principle make building new plants a real bitch.

Personally, my feelings are that before an industry is deregulated, the regulators should make damn sure that there is enough potential competition to make it work.

As far as the general question “does deregulation lower prices?” Well, that really depends on what the existing regulations are, doesn’t it? If you don’t define the existing regulations, and have a good understanding of them and why they were created in the first place then arguing about the impact of removing them is absolutely pointless.

37

I agree. Just because a proprosal is labeled “deregulation” doesn’t mean that it really is. If you deregulate but leave the monopolies, you’re going to get higher prices. I’m for deregulation in the sense that I’m for competition between providers. But sometimes degregulation is merely a sneaky way of getting a monopoly, or replacing arbitrary simple rules with hugely complicated schemes that only the industry lawyers understand.

The reason housing prices are so expensive in SF is that there is no where to go. People move to SF, but there aren’t enough houses for them. So landlords charge more. Simple, right? There are lots of places in the US where housing is dirt cheap. Just stay away from the ocean and you’ll find lots of cheap houses. If you want cheap rent, move from SF. You don’t want to move from SF? Pay high prices for housing.

There’s no way around this. If you control one variable, like price, the other variables start to change. If the price is kept artificially low, then the supply will be low. Of course there will be less construction, but the supply of open rentals will be lowered. It will be impossible to move, since no one can afford to leave their cheap apartment. And since no one can afford to leave, there won’t be empty units. If someone moves, the apartment won’t be “auctioned off” like in a free-market system. Instead it will be given as a favor, or for a kick-back.

And of course, since the landlord can’t raise rents, she has no incentive to improve properties. Since there are no open apartments, landlords suddenly don’t have to compete anymore! They can let the apartment go to hell…what are the tenants going to do, move out? Hah! They can’t afford to move out, since there are no rent-control units available, and they don’t want to move out of the city. Complain to the government? Well, sure…after a couple of years and endless heartache the tenants might force the landlord to make a few improvements. But if we had market housing, the landlord has to make improvements, or his tenants will move out.

The point is that SF can’t have it both ways. If it wants more people, you have to build more units. More people means higher prices. If you want housing prices in SF to drop, try destroying the economy so no one wants to live their anymore. Your rent will go down. Of course, you’ll probably be out of a job, too…

38

Actually, what a lot of people in SF hope for is an earthquake. That is one variable garaunteed to lower prices. After the loma-prieta rent was dirt cheap. There’s even an agit-pop group called seizmac solution.

39

Engineer Don is on target for the price rise in electric rates under deregulation in California.

If re-regulation had not occurred over the past 10 years, California utilities would have invested in new power plants funded by 30 year debt secured by the old monopoly. (Remember, the old regulated utility was allowed to make a return on the assets they built.) But with the uncertainty of re-regulation, none of the big three built any plants and California now has to import power from the Arizona nukes and Columbia River’s hydroplants just to get by.

And as it turned out the big three electric monopolies were right - the “deregulation” law forced them to sell off their own fossil and hydro plants to the highest bidder. They kept their nukes but these plants were already expensive albatroses due to the regulations put in after Three Mile Island and their own cost overruns.

But everyone felt great when the CA PSC reduced rates during the transition while the old utilities paid off their debts - mostly for their high priced nukes. When San Diego’s Sempra Energy paid of theirs, San Diego started getting a taste of the brave new world of unregulated generation prices.

While no new generation was being built in CA (or the rest of the U.S.), electric demand had been rising at 2% each year not counting unusually hot summers like this one in the Western U.S.

There are many plans througout the U.S. to build new “merchant” (i.e. unregulated) generating plants to take advantage of deregulation. And many are coming on-line. But - all these new plants are designed to provide power only during peak periods of demand when the deregulated price is going through the roof (btw, they’re called peakers). If they don’t get their price, they don’t start their gas-powered engines.

So prices are rising and fingers are being pointed but as Don said, the ultimate responsibility lies with the politicians and commissioners that utterly failed to understand the California generation market.

IMHO Deregulation works best when it releases market forces that drives down costs and hence prices.

For example, the deregulation of the trucking industry allowed any Tom, Dick and Harry to move goods. They proceeded to blow away the old slothful companies, creating unheared of variations in distribution and logistics. Since entry was cheap, no oligopoly formed to fix prices. Since shipping managers held the real market power, they got what they wanted - lower rates, while maintaining safe delivery of their goods. Even the unionized rail industry was swept along, lowering their costs, improving their service, to partner with the truckers. But all this didn’t come free, Teamster drivers, and their good wages, were blown away. Railroad boxcar service finally gave up the ghost.

In California’s electric market, rising demand combined with limited supply controlled by just a few players spells higher prices.

Greater supply will occur when new baseload (i.e. big) plants are built - and I believe that the number is zero. Lower demand would help but the cost of putting new meters in every house and business in California (to measure demand during high cost periods) makes this very unlikely.

So prices will rise up to where enough incremental new peaking plants will choose to come on-line to satisfy demand. Over time, as Don noted - this could be years - enough peaking plants will join the market and drive down prices. But I wonder whether San Diego (and the rest of the state in 2002) will have the patience.

There’s an old saying that was ignored in CA and soon throught the rest of the country - “If it ain’t broke, don’t fix it.” And I could add - “You get what you pay for.”

40

Actually it is more like a shocking 6% load growth due to the booming economy and the increasing digital age. When deregualtion was approved it was approved with a belief that load growth would be just 2% and there fore capacity was going to be fine while new generation wa built. Remember the bill was proposes in 1994 by the legislature, the details worked by the PUC in 1996 and the market finally opened in 1998. That’s a lot of time that passed and those assumptions proved quite innaccurate.

The load growth outside of California (Arizona, Oregon, Nevada, Washington) has also been impressive leaving less available energy for California to import.

And the generators have learned to “game” the system, albeit quasi-legally, to really squeeze the state. I say quasi simply because I am not a lawyer.

Senator Stever Peace from San Diego had an interesting comment yesterday at the ISO board meeting (the ISO is a non-profit public agency that controls the grid and is resposnible for ‘keeping the lights on’). Since I don’t have the direct quote, it was something to the effect either it is broken (i.e. suppliers exerting undue market power) so we need to fix it, or the high prices are simple supply and demand responses and in that case deregualtion is history, because politically people won’t put up with it.

Believe me, the political furor in San Diego has been intense and the economic effects are already happening. Companies are already laying off employees because of unforseen high electric bills.

The ISO Board voted to lower the cap on the maximum price they will pay for power to $250/MWH from $500/MWH.