Electricity Deregulation: Partially Right

Washington Post columnist Steven Pearlstein gets much of the story right in his column on electricity deregulation, although he is too generous to its proponents. Deregulation can perhaps best be seen as a case of consumer fraud concealed as "free market" ideology. The basic story is that the existing regulatory structure had locked in a cross-subsidy with big industrial users paying more than the cost of providing them with electricity, thereby subsidizing residential and small business users who paid less than cost. In standard economic models, eliminating this sort of cross-subsidy will increase economic efficiency, although it will also redistribute income from resiential users and small businesses, who will pay higher prices, to large industrial users, who will pay lower prices. That may be good policy, but it was preposterous to sell deregulation as benefitting typical residential users, which is exactly what proponents did. In fact, they managed to pull off an even bigger scam when they got low-cost states like Montana (cheap hydropower) to deregulate and let their prices rise to regional levels. In response to the chaos and undersupply resulting from a deregulated market (there is little incentive to build idle excess capacity, which leads to shortages at peak demand) most states have turned to long-term contracts with utilities. This is essentially the same thing as regulation, but it makes the "free-marker" types feel better.

--Dean Baker